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EarningCall_900	Good morning. Welcome to the Trane Technologies Q4 2022 Earnings Conference Call. My name is Lisa, and I will be your operator for the call. The call will begin in a few moments with the speaker remarks and the Q&A session. Thanks, operator. Good morning and thank you for joining us for Trane Technologies fourth quarter 2022 earnings conference call. This call is being webcast on our website at tranetechnologies.com, where you'll find the accompanying presentation. We are also recording and archiving this call on our website. Please go to Slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for a description of some of the factors that may cause our actual results to differ materially from anticipated results. This presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release. Joining me on today's call are Dave Regnery, Chair and CEO; and Chris Kuehn, Executive Vice President and CFO. Thanks, Zac, and everyone, for joining us on today's call. Let's turn to Slide 3. Before I dive in, I'd like to spend a few minutes on our purpose-driven strategy, which is drives our differentiated financial results and long-term shareholder value. Our strategy is aligned to powerful megatrends, like climate change which has serious and far-reaching effects on the environment, the economy and human health. 2022 was again one of the warmest years on record, and we continue to see extreme weather events. Urgent action is needed to accelerate our transition to a low carbon green economy. That's where Trane Technologies is uniquely positioned to lead. Our innovation is transforming the industry and accelerating decarbonization of commercial buildings, homes and transport. We're helping our customers advance their own sustainability goals. While contributing to our gigaton challenge, a pledge to reduce customers emissions by 1 billion metric tons by 2030. Our purpose driven strategy, relentless innovation and strong customer focus enables us to deliver a superior growth profile, strong margins and powerful free cash flow. The end result is strong value creation across the board, for our team, our customers, our shareholders, and for the planet. Moving to slide 4, our global team delivered strong performance in 2022. As we compare our results to peers and the broader industrials, we're confident organic revenue and adjusted EPS growth will again rank in the top quartile for both the fourth quarter and for the full year. Our global teams have demonstrated resiliency and tenacity navigating persistent inflation, supply chain and a myriad of other macro related challenges globally. They've executed our business operating system which is designed for operational excellence, and delivered record results across virtually all key metrics. Throughout 2022, and building on extraordinary strength in 2021. We are continuing to see our relentless year in year out rain or shine, reinvestment and innovation paid dividends through unprecedented levels of customer demand. While this demand has been broad based, we're seeing particular strengths in our nonresidential businesses led by commercial HVAC, global commercial HVAC, organic bookings were up nearly 40% in 2022 on a two-year stack. Americas commercial HVAC bookings were up more than 40% on a two-year stack. The tremendous growth we've delivered over the past two years has driven absolute bookings to record levels. We continue to encourage investors to look at absolute bookings levels, in addition to growth rates to gain a more complete understanding of the strength of our businesses and our backlog. As an example, our commercial HVAC organic revenues were up more than 20% in the fourth quarter, while organic bookings were higher by about half that level up 11%. Still the book-to-bill was over 105% further adding to already record backlog. Likewise, while enterprise organic revenues were up 16% in the quarter, and organic bookings were flat total book-to-bill was still 100%. Customer demand, absolute bookings and absolute backlog have never been higher. We disclose absolute bookings and revenues each quarter by segment in our earnings release. 2022 bookings of $17.5 billion exceeded 2022 revenues by $1.5 billion for our book-to-bill 109%. Backlog entering 2023 is $7 billion well over 2x historical norms. Further, we expect backlog to remain elevated throughout 2023 and anticipate entering 2024 with backlog in excess of $6 billion. At our guidance midpoint revenue growth rate of 7%, 2023 revenues would be approximately $17.2 billion when compared to bookings of $17.5 billion in 2022, bookings would need to decline by over $1.1 billion in order for backlog to fall to the $6 billion number that I referenced heading into 2024. That would equate to a decline of about $275 million per quarter. For backlog to return to more normal levels of approximately $3 billion, bookings would need to decline by over $4 billion or more than $1 billion per quarter. While we recognize that we have difficult comps in 2023, we have a high degree of confidence that bookings will remain robust, and that we will enter 2024 with backlog of $6 billion or more. Turning to our guidance for 2023. We expect continued strong revenue growth, EPS growth and free cash flow. We have a proven strategy to outperform end markets and our business operating system enables us to deliver consistent strong execution despite challenging macro environments. We have a multiyear track record of delivering differentiated financial performance for shareholders and are well positioned to deliver strong shareholder returns over the long term. Please turn to slide number 5. As I discussed at the outset, I am proud of our global teams for delivering strong performance in 2022 despite persistent macro challenges, we significantly exceeded our revenue and EPS growth targets while delivering solid leverage and free cash flow and returning significant cash to shareholders through dividends and share repurchases. While free cash flow was strong at 91% of adjusted net earnings for the year, we fell short of our target of 100% free cash flow conversion. We drove an exceptional volume of shipments in the month of December in our commercial HVAC and Thermo King businesses to meet customer demand, which shifted the timing of approximately $150 million in receivables into the first quarter 2023. We also invested about $40 million in safety stock inventory in the fourth quarter to ensure continuity of supply in this dynamic environment. Net of these two areas free cash flow would have been 100%. Please turn to slide number 6. One of the most important elements of our long-term strategy is fueling our high-performance Flywheel through relentless investments and innovation to solve our customers most complex problems. Leading customer innovation drives consistent and profitable market our growth, which in turn drives more cash to reinvest back into the business to further accelerate growth. This Flywheel as we refer to it is one of the key differentiators between Trane Technologies and our competition. We are unwavering in our commitment to invest heavily in our business, year after year, in good times and in bad. It's this ongoing focus that has enabled us to drive differentiated financial performance for shareholders over time. Over the past five years, including the pandemic in 2020, we delivered a 7% revenue compound annual growth rate, 250 basis points of margin expansion and free cash flow conversion well in excess of 100% and since 2017, we've deployed more than $13 billion in capital, with $8.3 billion return to shareholders in the form of dividends and share repurchases. Looking forward, you can expect us to continue to consistently reinvest in our business. And we'll talk later in the presentation about some of the ways in which we are accelerating investments in 2023, leveraging the strong outlook we see entering the year. Overall, we are exceptionally well positioned to continue our strong track record of performance and capital deployment over the long term. Please turn to slide number 7. As I discussed earlier in the presentation, customer demand for innovative products and services is at record levels, with particular strength in our nonresidential businesses, which comprise approximately 80% of our portfolio. Americas commercial HVAC was again a standout with low teens bookings growth and mid-teens revenue growth, including another quarter of high single digit services revenue growth. Bookings were up nearly 40% on a two-year stack, resulting in high absolute dollar bookings. And a book-to-bill ratio of over 110%, backlog continued to grow from an already high base and is now at levels that are 3x historical norms further adding to our visibility and confidence in our guidance for 2023. In residential, bookings continue to normalize, and we're down mid 20s in the quarter. The decline was expected against a very high prior year comp, as two year stock bookings were still up double digits. Residential revenues were up low single digits in the quarter and sell-through is up mid-single digits reflecting healthy end market demand. We continue to have historically high backlog in our residential business. And in the fourth quarter we work closely with our Independent Wholesale Distributors or IWDS to help them manage their inventory positions and mix as they entered 2023. Our goal was to mitigate the risk of stranded inventory across the channel. I'm pleased with the approach we took and the partnership with our channel. We believe our IWDS are in a good inventory position, entering 2023 as a result. Our America Thermo King business had another very strong quarter with 30% revenue growth. This follows growth of more than 60% in Q3. We've included our traditional transport refrigeration market overview slide near the back of the presentation, which shows the strong share gains for our Thermo King businesses globally in 2021 and 2022. Bookings were down modestly as expected, but still up more than 40% on a two-year stack. Backlog in this business remains at historically high levels, providing good visibility into future revenues. Overall, Americas backlog is unprecedented at 3x historical levels. Turning to EMEA, results in the quarter were also very strong. In our commercial HVAC business, we've highlighted acute supply chain challenges that have been impacting revenues and more importantly leveraged throughout 2022. We were able to overcome many of these challenges in the fourth quarter and delivered revenue growth in excess of 40% with strong leverage. Services growth was once again robust up double digits. Bookings were also robust up low teens with two-year stack bookings up more than 20%. We're seeing tremendous demand for Thermal management systems which are three to four times more efficient than conventional heating and cooling. Our transport refrigeration business in EMEA also delivers strong performance with low single digits organic revenue growth in the quarter in a market that was down double digits. We discussed the transport refrigeration business in detail on slide 16 of the presentation. Overall EMEA backlog remains elevated 40% higher than historical norms. Turning to Asia Pacific, the commercial HVAC team delivered another very strong quarter in Q4 with revenues up more than 20%. And services up mid-teens. Asia bookings were down as expected related to tough prior year comps and large bookings in the high-tech sector outside of China. Two-year stack bookings were still up high teens. China was resilient in the quarter with bookings up high single digits and revenue up double digits. Overall, Asia backlog remains elevated approximately 50% above historical norms. Thanks, Dave. Please turn to slide number 8. This slide does a nice job encompassing our overall performance in the quarter, which was strong across the board. Organic revenues were up 16%, adjusted EBITDA margins were up 100 basis points and adjusted EPS was up 34% versus prior year. We delivered strong organic enterprise growth in both equipment and services of high teens and low teens respectively. Services growth was consistently strong throughout 2022. And our services mix is approximately 32% of enterprise revenues. Strong services mix bolsters the company's resiliency in virtually all market conditions. Please turn to slide number 9 to discuss the key revenue dynamics for the quarter. So I'll focus my comments on margins. We delivered strong margin expansion in each of our business segments. The key margin drivers are the same for each of our businesses. So we've consolidated the highlights on the right side of the page, robust volume growth, positive price realization, and modestly positive productivity more than offset persistent material and other inflation in the quarter. We also leverage strong margin expansion across the businesses to accelerate investments in innovation across a number of key initiatives. As mentioned previously, we are pleased with the significant progress we've made over the past two quarters, mitigating acute supply chain challenges in our EMEA businesses, which led to strong volume growth coupled with significant margin expansion in the quarter. Thanks, Chris. Please turn to slide number 10. As we discussed throughout the call, underlying demand for innovative products and services has never been higher, with historically high levels of bookings and backlog across our businesses. Relentless innovation, leading brands with strong market positions, customer focus and operational excellence are hallmarks of our market out growth over time. In the Americas, our commercial HVAC business is driving strong demand and share gains as demonstrated by our full year 2022 order growth that is more than 40% on a two-year stack. And we've exited the fourth quarter with elevated backlog that is 3x historical norms, providing us significant visibility into future revenues. The nonresidential markets remain strong and we are bullish on the outlook for commercial HVAC. Demand continues to be robust in datacenters, education, healthcare, and the high-tech industrial verticals, where we have strong customer relationships and market positions. Our commercial HVAC business is underpinned by long term secular tailwinds of energy efficiency, decarbonization and indoor environmental quality which are only growing stronger. We also see tailwinds from new and ongoing regulatory and policy related drivers such as the Inflation Reduction Act, Education, Stimulus, and the CHIPS and Science Act. Our commercial HVAC business is well positioned as the premier franchise to capitalize on the significant market opportunities that lie ahead. The residential market outlook remains dynamic. Near term we see the market continuing to normalize across bookings and revenue and the process is well underway. As we saw in the third and fourth quarters. For 2023, we believe this normalization process results in market units likely down in the mid-single digit range. With tailwinds from elevated backlog, pricing, supportive regulatory and policy initiatives and share gains, we believe our revenues will be relatively flat. Our guidance encompasses scenarios for residential in the plus or minus low single digits range. We don't see a cliff scenario and residential is about 20% of our business. So a 10% decline would present a 2% headwind to the enterprise. Longer term, we continue to see residential as a GDP plus business for us. Turning to Americas transport refrigeration, our diversified portfolio of products and aftermarket significantly outperform the end markets in 2021 and 2022. Act is calling for low single digit growth in trailer in 2023. And for weighted average transport refrigeration growth to be flattish. Consistent with our strong track record, we expect to outperform the end markets in 2023. Longer term, we continue to see transport refrigeration as a GDP plus, plus business. We'll talk more about the transport refrigeration outlook in our topics of interest section. Turning to EMEA, commercial HVAC, the market growth picture remains muted with macroeconomic and geopolitical challenges weighing. Given our innovative and leading sustainability solutions, we've been able to significantly outgrow the EMEA HVAC markets over a long period of time. We see continued opportunities for market out growth going forward, aided by thermal management systems, which are three to four times more efficient than traditional heating and cooling solutions and are gaining momentum in the market. Turning to EMEA transport refrigeration, the removal of the Russian market was a key driver of the market decline in 2022. Thermo King EMEA outgrew the end markets up high single digits for the year. As return to 2023, we expect the market to be down low single digits to mid-single digits, mainly related to economic uncertainty in the region. Our innovative products and solutions continue to provide us with strong platform to outgrow our end markets, which we expect to do again in 2023. Turning to Asia, the environment remains dynamic and COVID continues to add complexity and unpredictability to the market forecasts. We see continued strength in datacenter, electronics, pharmaceutical, and healthcare verticals. And if these markets continue to perform well, we could continue to see relatively stable growth in 2023. Asia continues to be one of the more dynamic markets. So we're cautiously optimistic on this segment, which represents about 10% of our portfolio. Thanks, Dave. Please turn to slide number 11. Dave provided a good framework for how we're looking at our key end markets for 2023 and our guidance reflects these views. Embedded in our guidance is our philosophy around our value creation Flywheel, which builds in high levels of business reinvestment in innovation out growth across our end markets, and strong leverage. Regarding 2023, to 6% to 8%, organic revenue growth, and $8.20 to $8.50 in adjusted earnings per share, or approximately 11% to 15% EPS growth. Through the back half of last year, we talked about ending 2022 with $6 billion or more in backlog. And we're sitting at a record level of $7 billion as of the beginning of 2023. This gives us good visibility into 2023 revenues. We have approximately 1% of growth from M&A in 2023 from bolt-on acquisitions completed in 2022. And we expect FX to be neutral on a full year basis. We're targeting organic leverage of 25% plus for the year. There are a few key factors that play into our organic leverage target. So I'll spend a couple of minutes covering these factors to help frame the guidance. First, we're expecting modest incremental price and solid volumes to offset material and other inflation and drive strong incremental margins. Second, while we're expecting slow and steady improvement in a supply chain, as we've seen throughout 2022, we're not expecting it to be fully normalized until well into 2023 at the earliest. This will continue to put pressure on the realization of strong productivity, which is where our business operating system really thrives. Third, the environment around prices for Tier 1 metals remains dynamic. In the third quarter and early part of the fourth quarter last year, we saw a deflationary trend for base metal prices. However, pricing has increased over the last two months on copper, aluminum and steel, negating much of the potential deflationary benefit in 2023. To update you in a question from our earnings call last quarter, our Tier 1 spend on these metals is approximately $750 million split roughly a third each for copper, aluminum and steel. We are seeing modest deflation in freight and logistics costs. We're also seeing inflation from Tier 2 suppliers, as they incur higher than normal wage increases and energy costs. Net we're not baking in significant inflation or deflation into our guidance at this early stage in the year. Fourth, we're using the favorable environment we see in 2023 as an opportunity to double down on key investments across the business in advanced manufacturing and automation, digital and electrification platforms, among other key programs. We are targeting 20 to 30 basis points of incremental spend across these areas, which will be embedded in a segment P&L. This is above and beyond our average incremental spend of approximately 40 basis points per year. So we're targeting 60 to 70 basis points of incremental spend in total. We've highlighted that business reinvestment is how we win over the long term. And we're confident we can make these investments in 2023 while hitting our guidance range. We have additional investments earmarked in our corporate and CapEx guidance as well. Lastly, while our M&A transactions I referenced earlier will have a strong payout over the next several years, they will add about 1% to our revenue at approximately 3% leverage in the first year, inclusive of integration costs. The net effect cuts about two percentage points off of our enterprise reported leverage versus our organic leverage that excludes M&A. It's not a huge amount, but it's something we wanted to highlight as a factor to consider in our guidance, as organic leverage will be stronger than reported leverage simply on the math related to M&A. We'll highlight organic leverage each quarter to provide transparency. Turning to cash, we expect 2023 to be a strong cash collection year, we have about $150 million in receivables that shifted from December into early Q1. And barring persistent supply chain issues all year, which we do not anticipate, we expect to bring working capital levels down specifically around inventory. Net free cash flow conversion should be 100% or better. Please go to slide number 12. We remain on track to deliver $300 million of run rate savings from business transformation, including an incremental $60 million in 2023. We continue to invest these cost savings into high ROI projects to further fuel innovation and other investments across the portfolio. And I discussed a number of targeted investments for 2023. To be clear, our continuous improvement mindset is an integral part of our business operating system and continues well beyond the transformation program that we started in 2020 when we launched Trane technologies, our business operating system is designed to drive gross productivity each year to offset other inflation. While it's been impossible to realize that level of gross productivity over the past three years, given the tumultuous macroeconomic backdrop, productivity has been improving as supply chain slowly recover and is contributing to our 25% plus organic leverage target in 2023. Please go to slide number 13. We remain committed to our balanced capital allocation strategy focused on consistently deploying excess cash opportunities with the highest returns for shareholders. First, we continue to strengthen our core business through relentless business reinvestment. Second, we're committed to maintaining a strong balance sheet that provides us with continued optionality as our markets evolve. Third, we expect to consistently deploy 100% of excess cash over time. Our balanced approach includes strategic M&A that further improves long term shareholder returns, and share repurchases as the stock trades below our calculated intrinsic value. Please turn to slide number 14. And I'll provide an update on our capital deployment in 2022 and our outlook for 2023. In 2022, we executed strong and balanced capital allocation of $2.1 billion, including approximately $1.2 billion to share repurchases, $620 million to dividends, and approximately $250 million to M&A. We are targeting $2.5 billion in capital deployment in 2023, and expect to deploy 100% of excess cash over time. Our M&A pipeline remains active and we continue to exercise discipline in our approach. Our shares remain attractive trading below our calculated intrinsic value, and we have approximately $3.2 billion remaining under current share repurchase authorizations. Our strong free cash, flow liquidity and balance sheet, continue to give us excellent capital allocation optionality and dry powder moving forward. Thanks, Chris. Please turn to slide number 16, our Thermo King businesses have significantly outperform their end markets in both 2021 and 2022 as illustrated on the table on the right-hand side of the page. In 2022, the North America transport refrigeration markets were up 12% while Thermo King Americas was up more than 20% The EMEA transport refrigeration markets were down 9% in 2022 while Thermo King EMEA was up high single digits. We are very pleased with the share gains we've achieved over the past two years. In 2023, we expect the markets to be flat to modestly down and for Thermo King to once again outperform consistent with our strong track record. We also added additional information to the slide this quarter to help investors and analysts gain a better understanding of the size of the businesses. We've included a footnote that global Thermo King has approximately 50% of our enterprise revenue and the split between the Thermo King segments is roughly 60%, Americas 35%, EMEA and 5% Asia. Please turn to slide number 17, Act has updated their long term forecast for refrigerated trailers through 2027. The data supports the view we've been highlighting for some time. Now that this is a mid-40,000-unit market plus or minus about 10%. The chart plots the actual and forecast but the key takeaways is that the market is expected to be flat at 45,000 units in 2023. Dip to 40,000 units in 2024 rebound back to 45,000 units in 2025. And to continue growing low single digits from that point forward to 2027. Additionally, our transport refrigeration businesses are a diversified portfolio with a healthy aftermarket business. We have strong positions in large and small trucks, APUS, bus, air, and rail and a proven track record to outperform the transport refrigeration markets. We believe this is a GDP plus, plus business for us over the long term. Please go to slide number 18. In summary, we are positioned to outperform consistently, energy efficiency, decarbonization and sustainability mega trends continue to intensify, driving increased demand for innovative products and services. We are delivering leading technologies and innovation to address these trends and accelerate the world's progress underpinned by our engaging uplifting culture. The strength of our business operating system, the power of our global team, unprecedented backlog and continued high levels of customer demand, give us confidence in our full year revenue and EPS guidance. We believe we have the right strategy, the best team and a solid foundation in place to deliver strong performance in 2023 and differentiated shareholder returns over the long term. And now, we'd be happy to take your questions. Operator? Good morning, and maybe just the first question around any thoughts on sort of the cadence of the organic sales trend? The 7% through the year, any sort of particularly waiting early versus late in the year, and also that 25% plus core leverage goal for the year? Again, is that -- is there anything in kind of price cost or the investment spend waiting that skews that first half versus second half at all? Hey, good morning, Julian. This is Chris, I'll start and then Dave may jump in. But as we think about the cadence throughout 2023, let me start with the first quarter. Q1 is typically around 11% to 12% of our full year earnings. Right now, we would project Q1 to be a bit stronger than that than our historical average, it's probably in the 15% to 16% range of full year earnings. And we see that around, really between $1.30 and $1.35 in adjusted EPS, I think the revenue growth in terms of the first quarter, it's roughly in line with how we see kind of a full year at this point. And we see leverage being really 25% plus, really throughout the year, itâs roughly balanced. The investment spends, it really is going to be ratable throughout the year. We started, we've been many years, of course with investments and leading in innovation. But I see that spin really being roughly equal throughout the year. Anything you want to add? I just think, hi, Julian, how you doing? First of all, Chris talked a little bit about our leverage of 25 plus, could there be a quarter where that's higher? Sure, absolutely. Based on where we see opportunities, but I would tell you, from my vantage point, we love to reinvest in our business, we love to find opportunities to drive differentiated revenue growth on the top line, the Flywheel that I referred to in my opening comments. It's something that has a proven track record for us and as an innovation leader in the industry, we plan on that continuing well into the future. That's very helpful. Thank you. And if we're looking at the sort of markets of residential and then transport on a global basis, are we assuming that the resi weakness is more sort of first half? And the transport weakness more pronounced in the second half? Is that the right way to think about those two pieces? I mean, let's start with residential. I think we're pretty clear in our comments there, we think residential for the full year will be down to mid-single digit range. We think that based on some of the tailwinds that we have in our own business being strong backlog, strong price. We'll see some tailwinds probably later in the year, with some regulatory changes, specifically around IRA, we see that as we will be plus or minus 1%, and residential. On Thermo King, if you look at the Americas, and you look at x specific data, right now, they have that as a stronger first half for second half. But that assumes Julian that the trailer OEMs will actually be able to hit the production rates. We haven't seen them demonstrate that. So my belief is that some of that volume will actually push towards the second half from the first half, but we'll see how the year plays out. As far as in Europe, Thermo King we think the market will be down a lot of that's the economic conditions there. But in both cases, whether the Americas or in Europe, we plan on outperforming the markets as we've demonstrated our capability over the last two years. Good morning. Thanks, guys. Thank you. Hey, I just wanted to ask you about any, are you seeing any evidence of weakness in the forward project pipeline on the commercial HVAC in that domain? Yes, I got this in the foreword. Yes, no, we're actually, if you look at our commercial HVAC businesses on a global basis, right, lots of strength in the Americas, really, across many verticals, okay, which is always a good sign. We don't see that slowing down. In fact, we see some tailwinds towards the back half of the year with regulatory changes as far as IRA, as well as with the CHIPS Act. Okay, that's all-in front of us. So those will be nice tailwinds. With a book-to-bill of 110%. We have a lot of backlogs in our commercial HVAC, Americas business. In Europe. just to be really blunt about it, we're winning in Europe with our innovations. And just a really strong fourth quarter, we had been faced with some supply chain issues there throughout 2022. A lot of those challenges improved dramatically in the fourth quarter. You see that with our revenue growth, I mean, revenue growth in the fourth quarter was up - was over 40%. And our bookings continued to be strong as they were up in the high teens, so a lot of strength there. And then in Asia, I mean, Asia was a surprise. And our revenue growth was 20%. About five points of that was kind of a hangover from the COVID problems we had in the second quarter, but still 15% very strong, and order rates remain strong. In China, specifically, our order rates were up close to double digits, revenue was up double digits. So we're cautiously optimistic on Asia as it reopens China then. Thanks for the thorough answer. And then just lastly, could you quantify how much price you have embedded in the sales guidance this year? Hey, Gautam, this is Chris. Yes, I think we have modest price carryover going into 2023. Certainly we're going to be comping against tough comps in 2022 with record levels of pricing. You think about the full year â22, we had close to 10 points of price. It's actually 9.5 points of price on the full year. Right now we're not planning on multiple price increases in 2023. But we do remain nimble to react to how we see input costs playing out during the year. It's a strength in our business operating system we've remained price costs positive. These last two years of highly inflationary environments. So we're going to remain nimble. Could it be in the 2% to 2.5% range? Yes, that's probably the range that it's in for carryover. Hi, good morning. I guess just wondering if you can give us any detail on how you're thinking about some of the stimulus items? I think you mentioned, there's probably more of a second half phenomenon. So maybe more of a â24 story, but what do you think that can be worth in terms of growth? Is â23 really just a bookings year? And when you think about Dave that sensitivity you gave on the backlog conversion versus maybe the cushion you have on the orders front? would IRA be a potential kind of further source of cushion that you think about in that? Okay, nice question, Josh. I think that first I'll start with what we're seeing right now in stimulus, we're seeing a lot of demand, obviously, within the education vertical. If you're looking at our education vertical in the Americas, the equipment business, in 2022, it's up close to 40%. Okay, and that's going to continue for some time now. I believe the change in that was, if an order booked, I think itâs September 2024, you actually have until 2026, to have it installed. So we see that continuing to happen. And you see that in our very, very strong absolute booking dollars that we're able to generate. IRA, obviously that's still being worked through the funds are going to flow from the Fed to the states, and then the states will operate in a framework, and we'll work with the different states to make sure that we're very clear on how that's going to happen. We see that as it's certainly in the back half of the year, both in the commercial space, as well as in the residential space. The key to being successful, really, with IRA is, how do you take something that's pretty complex right now and make it really simple for the customer? And that's exactly what we did with the education funding that was available. And we'll do the same. We're really good at that with the IRA. As far as the CHIPS Act go, yes, that's going to be back half. I mean, we, that's all-in front of us. And it's certainly going to be an opportunity, we have a lot of strength in that vertical, we had great customer relationships. But some of that bookings could happen in 2023. But that's really all in front of us. I think the applications are just being opened up here in the first quarter so that they can start applying for these funds. So that's really all in front of us, given the duration time it takes to actually get a bad plan from planning up to operations. Thank you. I just wanted to start by following up on the prior commentary around some of the IRA benefits potentially coming through in the back half of the year. I mean, how do you feel about capacity and available supply to meet the expected pickup in heat pump demand into the back half? Yes, it's a good question. I think I'll start with the supply chain. I think the supply chain continues to improve gradually. The fourth quarter was better than the third quarter, I'm sure in the first quarter, we've done in the fourth quarter. But we see that is a several quarters before the supply chain gets back to what I would call normal. As far as capacity is concerned, we don't have capacity concerns. As a company that embeds lean thinking in our operating system, we're constantly looking to, for ways to expand our capacity with our own four walls. So we're very comfortable, we'll be able to meet the demand. That will happen and hopefully it starts to happen in the fourth quarter. Thank you. Appreciate that. And for the follow up I wanted to ask on transport bookings, specifically in the Americas, which seem to drive a good chunk of the sequential slowdown. As we look forward, should we expect bookings there to pick up as the back half 2023 order bookings opened up. Thank you. Hey, Chris, this is Chris, I'll start with that answer. We've been selective with opening up the backlog in our Thermo King businesses now for the last couple of years. And what it means is we haven't opened up the second half of 2023 orders at this time. We are talking with customers; we are getting strong insights from them on what units they need. We're just not pricing that at this point at the end of the fourth quarter, and therefore it's not making its way into bookings and or into backlog so. For the Americas business, we're seeing that transport markets being slightly favorable. The trailer market being one to two points up on a year-over-year basis so very solid. Dave commented about the cadence throughout the year that may shift a little bit more into the second half, depending on how the OEMs get through their fleets and get their output up. But I will tell you that really strong business, we have a lot of innovation in that business, it is a diversified business as well. And so while we've been able to outgrow the markets for the last several years, we have those plans to do it again in 2023. Yes, Chris, the only thing I would add is if you look at the Thermo King Americas business on two-year stack, order rates are up over 40% and a very large backlog going into 2023. So it's a business that has performed extremely well, in 2022, and will continue to outperform the markets in 2023. Thanks. Good morning, guys. Doing great. Thanks. Dave, I really liked the way you teed up the backlog discussion earlier today. There's been a lot of focus on order rates decelerating. And it seems like the trends in your business, particularly on the commercial HVAC side remain really strong. I know it's probably too early, but as you kind of think about what's occurring today from the stimulus perspective, nonroad construction, supply chain still a bit of an issue. I mean shouldnât your backlog exit the year, like well above normal levels as you kind of think about the growth rate even just beyond 2023. Yes, I think you're spot on, Joe, I think a normal backlog for our business at the end of any years, probably in the $3 billion range. And we'll end 2023 and enter 2024 with a backlog that could be $6 billion or greater. And we do -- we believe our backlog will be elevated for a long period of time, which gives us a lot of visibility not only to future revenues, but also allows us to help our suppliers and to make sure they have plenty of visibility as to what our requirements are going to be. That's great to hear. And I guess maybe my one follow-up is really to some commercial HVAC in EMEA, that was really strong this quarter, much stronger than we anticipated. Can you maybe just provide a little bit more color? What you're seeing there specifically, is that heat pump demand? Like, what drove that growth rate this quarter? Yes, it's a great question. And I'd say I'm so proud of our team in commercial HVAC EMEA, yes, we had 40% plus revenue growth in the quarter, we had some supply chain issues earlier in the year that we highlighted. Okay, a lot of those, so many of those got rectified in the fourth quarter. So that helped us get the volume out. But I look at the order rates as well. And the order rates are up mid-teens, two-year stack up 20. We are seeing tremendous demand for our thermal management systems. So our growth rates in Europe are really a function of our innovation that we've been able to deliver to the marketplace. And we are winning share in Europe, and we are winning with our customers. So it's a really great story with our business in EMEA. I've been with that business for a long time. And I was in the days when it was not such a great business. But it is very, very strong today. We have such a great leadership team there that's constantly pushing the envelope on innovation, so expect more in the future. Hey, good morning. Good. Can you just provide a little bit of color on the difference in Americas between unitary and applied just on the revenue side? And then maybe orders as well? Sure, let me put my glasses on here so I can see. We were strong, really on an equivalent basis. The Americas was strong, really in both. I mean, our unitary revenue was up was north of 30%. Steve, and our, the Applied Business in the Americas was mid-teens. So both very, very strong. Our bookings -- go ahead. Got it. And then how do you kind of see just the high-level profile of these businesses? You said the revenue growth is going to be pretty consistent in throughout the quarter from a cadence perspective? How do you see the businesses, each of those businesses performing just at the high level of commercial HVAC, TK and resi, relative to the annual guidance? Steve, as we think about commercial businesses, I'll speak for Americas and EMEA really just our plans right now up high single digits in terms of revenue on the full year, the significant backlog just gives us really strong visibility to the revenue profile. And then Dave talked about the stacking effect from a bookings perspective. Could we see 10% growth in some of these businesses and pockets? Possibly, it really depends on the maturity of the supply chain, which we've seen gradually get better over the last several quarters, and we've got embedded in the guide, a gradual improvement in 2023. But if it got stronger, could that output be stronger on the top line? Yes, it could be. But let's see how the year kind of plays out. I think for Asia, we're calling it dynamic. We're calling right now for stable growth as you work throughout the year, but itâs a dynamic market, and we're watching it closely, but very strong backlog entering into the year. Sorry, I mean for first quarter, I don't know if that's who you're talking about just the first quarter high level on the three businesses. Yes, I would say first quarter overall, [inaudible] enterprise, like I mentioned earlier, I see the revenue growth in Q1 in line with how we see the full year. That 68% kind of range, commercial HVAC, I would expect to be stronger as we work throughout the year, just given the profile, we've got some backlog, but certainly carrying into the first quarter. We'll open up the bookings here for the second half shortly. But I would expect that to be at the enterprise level and that 68% range, and we'll see how that plays out. Hey, good morning, guys. Good, how are you? So Dave and Chris, I know you mentioned not too much carryover pricing in 2003. And that you might not get as much deflationary benefit as you first thought given the rise in -- recent rise in commodity prices. But I think just in the last couple of weeks, you've continued to raise prices, commercial HVAC call it mid to high single digits and up to 10% on resi HVAC. So are the recent price increases, really, because commodities such as copper have been rising in lately or should we read into the fact that demand is still quite good for Trane and so the ability to raise price is still there in â23. Hey, Andy, it's really a mix of all the above, we are trying to get within the lock, just one price increases, we start the year that's been our cadence prior to the last two years of this highly inflationary environment. So we're trying to set the stage for where we see pricing for the year inclusive how of how we see these commodity costs playing out over the last couple of months. And the goal is we don't have three rounds of price increases as we work through 2023. So right now, it's really baking in all of that information today with that price increase entering 2023. And just add to that, obviously, we are seeing, Chris talked about materials, but labor is certainly inflationary as energy costs. So if you look at all the cost inputs, which are product growth teams look at in a lot of detail. It allows them to have visibility as to what to see in the future. Got it, that's helpful guys. And then you talked about Thermo Kingâs increasing ability to out performs end markets, it seems like as you talked about, you're suggesting Thermo King to grow again in â23, despite the primary markets being flat to down but did it secular tailwinds that we all know about such as the electrification and that's going on in Thermo King raise the probability that it just becomes less cyclical. So as you go into a year like â24 where ACT is talking about its forecast is down a little bit that you could still not be that cyclical or even go up in 2014. Yes. I mean, the cyclicality we could arm wrestle over. Okay, if you look at the trailer market in the Americas, it's been in that 40,000-unit range for a long time plus or minus 10%. So very strong market. As far as the electrification, we'll wait and see on that. I would tell you that we are, that's one of the investments that we're really doubling down on, is how do we expedite what we're doing there on electrification, we are seeing demand from our customers, especially in the shorter distances. So think of the truck aspect there. So our team is doing a great job meeting their expectations, but more to come we're, I'm very excited about the innovation pipeline specifically in our Thermo King business. Thanks. Good morning, everyone. So I think I came on bit late, but I think you mentioned backlog moving down from $7 billion to $6 billion, still a very healthy level. I'm guessing most of that would be in commercial HVAC. But I'm just wondering how much TK would come into that backlog conversion as well. But my real question here is what is the key gating factor to an even stronger backlog conversion? I am thinking your supply chain, construction, labor, skilled labor in the field. Versus maybe customers don't want the equivalent today? I'm guessing they do. But what is the gating factor to getting even more backlog converted? I think you got the answer, Nigel, there's a couple of things, right? First of all, the backlog of $6 billion, I was kind of using that as an example. I think we're going to end 2023 with a backlog of $6 billion or more. Okay, so there's, for us to burn $1 billion in backlog will be a lot. As far as why can't you burn it faster? A couple of reasons you hit on, right. One is supply chain, it's improving, it will continue to improve in the future, our teams are doing just a fantastic job working with our suppliers, giving them visibility and everything we can to make sure that we improve their performance. And that's happening. The second is that lead times, especially in our commercial HVAC businesses, and the applied side of it, for sure, have extended. And that's not unique to Trane Technologies that's really across the industry, in fact, we're very competitive with our lead times. But so that means that customers don't want an order early, right, you're not going to ship an order, especially on the applied side to a customer before their job site is ready. And so that's elongating the backlog as well. Okay. I was kind of hoping you might delineate between, okay, labor is a real problem, supply chain getting better, but it's okay. And then on the 25%, or better incremental margins for this year. I mean, that's pretty impressive when you think about commercial HVAC are growing residential and TK. And we've all been trained to believe that resi, TK better margin commercial talks about businesses low margin, is that the wrong thesis? Or are you absorbing mixed headwinds within that 25% plus? Nigel, it's Chris. So we're aware of that thesis. And I think, with our focus on our business operating system, we're ensuring all of our businesses are growing margins. I would say in the commercial HVAC businesses really been impacted the last couple of years of the supply chain challenges, lots of inefficiencies, the inability to drive productivity, lots of increased costs to serve customers and expediting freight, buying components on the spot markets, we've incurred a lot of costs in the business just to get the revenue out. And that's presenting a nice opportunity, as the supply chain normalizes as we can drive productivity in the plants, and ultimately, get our team members focused on both productivity and solving the supply chain issues, which they're doing outstanding jobs, solving the supply chain issues throughout the last two years. But I see all of our segments next year having very strong leverage. And I think that some really nice opportunities there for us to go drive. And when we eliminate some of those inefficiencies. We're also baking in incremental investments. So I think we can do both next year. We can drive 25% or better organic leverage with also incrementally under 20 to 30 basis points of investments, allows us to do both and really drive for market outgrowth. Nigel, just to follow up on the labor concern. That's not a concern for Trane Technologies. We've done a great job being able to track the right labor, we're doing a great job. Our human resource department is doing just a fantastic job of training, creating career ladders for hourly associates, so we really want to be that destination location, not only for our salaried employees, but also our hourly employees and we're doing a great job there. Maybe I'll add one more thing is just our Asia business, right as majority call it 90 plus percent commercial HVAC, and it's driving high teens EBITDA margin. So I think it shows that we can really drive there for our businesses globally. Thank you. Good morning, everyone. Doing really well, thank you. There's a lot of discussion on backlog here just struck me is what happens on past due like, do you have to set realistic expectations with the customers on when they'll actually get deliveries? Yes, that is exactly why there's elongated lead times right now. You do not want to disappoint a customer with delivery. Think about it. I mean, some of our products will use air handling as an example, if you're constructing a building, okay, you could end up holding up an entire job if you're late. And trust me, you don't want to be on the other end of a phone call that has the whole building being slowed up because of your product. So we're making sure that we're providing realistic lead times to our customers, doesn't mean we don't have our past dues, we do, we track that very intensely, our plant managers drive that on a daily basis. But for the most part, you really have to give realistic dates as to when a customer can expect the product and you need to hit it. And that's one of the key operational metrics that we look at it at a high level. And I could tell you, it happens at a very detailed level within our business. That's real helpful. And as a follow up, I was really interested in your comment, just saying you're trying to avoid situations with stranded inventory. How does that happen? And any comment on the whole new CA rollout? And I think that there's a little bit more complexity this time, we're depending on where you're located in the country. It's an installed date for some manufacturing date. So we really worked with our independent wholesale distributors in the south, okay, because that's really where the, for non-heat pump product where that was installed date, so we don't want them to get stranded. So we help manage that situation. And we're pretty good at this. I mean, we implement so many new products that phase in phase out as we refer to it, it is the second nature to us. So we just really helped our IWDS work through that process. Hi, good morning, all. Hey, I just want to come back to the transport business, you guys have been outperforming there for quite some time. Looks like â23 you got a lot of innovative solutions, new products coming to the market. I was hoping you could just put a finer point on the outgrowth expectation there. And then specifically on some of these new product launches, are you simply cannibalizing older equipment technology? Or are you actually increasing the total addressable market with some of these electrification offerings? A bit of both on that. I think that you obviously are going to cannibalize any combustion engine that's out there with your electric solution. But there's also opportunities, you think about, I guess, like best example, that would probably be think of home delivery, right? That's it's a realm. I mean, it's a relatively new market. Okay. It's expanding quite quickly. I think with some of our new electrified product, that higher capacity, you're going to be able to create different market opportunities. And I won't be more specific than that. But we're pretty excited about what we see there. And your other question was just â Yes, I won't get too specific on that. But I think you could see that we've obviously taken share for the last couple of years, and we anticipate taking more share in the future, right. I mean, our team just does a great job there with working with our dealers, creating value propositions for our customer that are very compelling. I mean, I use Europe as an example. I mean, if you have a product that's able to get 30% better efficiency than the best in the market, I mean, you're going to have a very compelling opportunity to talk to every customer about the value proposition that we bring. And that's what we do. And we see these innovations and Thermo King use innovations in residential, these innovations in commercial really hitting the mark with our customers. And it really allows us to create that differentiated revenue growth that we're seeing on the top line. It's that Flywheel that I referred to, and we're going to continue to make sure that we save plenty of dollars to reinvest in our business to keep that Flywheel very vibrant. Yes, makes sense. Thanks. And just one follow up regarding the incremental investment. Could you just spend a little more time on those priorities. I think you said factory automation, anything on paybacks or what do you think the structural benefits might be there? Yes, I'll start, Brett. So generally what I'd look at is focused on our factory of the future and automation. We're spending time and cost around digital and also around electrification that Dave spoke to, specifically. And not only that Thermo King portfolio, but also in our commercial HVAC portfolios as you think about electrification and heating. So they're great investments to make. Some of them are driving revenues and backlogs immediately. On the automation side, the factory side. This is the opportunity for us as we see the productivity coming back into the business and allows the features for us to go drive more their productivity when you can drive some more automation, get more volume through the factories, and it's been an investment we've been working on for several years. And it's also going to be a little bit of an increased investment in 2023. But very strong paybacks. And look, I think it helps contribute over the long term to that target we have in incremental as a 25%, or better. Hey, guys, thanks a lot for fitting me in. Hey, good morning. Just a question very interesting discussion about the fact that the industry is changing. So do you think that these extended lead times and much more visibility in the cycle is becoming more of a permanent feature of the industry? Because it seems you and others are training the customers to live with the lead times? And maybe you've given them some flexibility in terms of deliveries? But it seems that perhaps it's the future of the industry that's here to stay? I was wondering if we could push that discussion further. Thank you. Yes. I mean it's a provocative question, Andrew. And I don't see it that way. I think that as supply chain improves, you'll see lead times contract, does it go back to what it was post pandemic? Maybe not, maybe it's a little bit longer. I think that everyone sees the value in the visibility. And we've done a lot of work with our customers setting up some of those more visibility in that space so that will stay. So could they extend a bit? Sure. I don't expect, I expect them to improve from where they are today. And if I went back a year, I would tell you, they've dramatically improved from a year ago. So we'll see how it plays out. But it's a very provocative question. Thank you. And just a follow up. Can you just, the safety stock investment? What specific area is that related to? Thank you? Yes, I mean, I'll be very specific. It was, very nervous about what's coming out of Asia. And so we want to put additional safety stock for anything that's coming out of Asia. And we think it's very prudent. It's about the $40 million range and the reopening there of China specifically, although we're cautiously optimistic. We just want to make sure that we were reading the tea leaves correctly, and that we did not get caught short of supply. And that concludes the question-and-answer session. I would like to turn the call back over to Zack Nagel for any additional or closing remarks. Thanks operator. I'd like to thank everyone for joining on today's call. And as always, Pat and I will be available, along with Susan to take any questions that you may have in the coming days and weeks. We look forward to speaking with you then. And also, we're going to be on the road quite a bit here at conferences in February and into March. And we look forward to seeing you on the road soon. Thanks and be safe.
EarningCall_901	Welcome, everybody. Wolvertem calling, like they say, in the newspapers. Letâs look together once for the last time shortly to '22 and try to look forward to '23 and further on. 2022 was the year with the biggest increase of the cost of capital, our beloved WACC in nearly 40 years as mentioned in a study by Citigroup, and this has had an enormous impact on the real estate sector. We had to rethink models and profitability. But yes, we adopted with team WDP, supported by structural demand for warehouse space as a part of the global supply chain. WDP is ready for the new reality. Letâs look into the details. We made again a fantastic presentation with all the details. But, as usual, we will not go through in detail through the whole presentation, but we will focus first on some hot topics. And afterwards, you can ask all your questions on the presentation, and others by chat in the Q&A, which will be organized by Alexander. But first, let's go back for the last time to '22. I think we can be proud that we realized a further growth of our earnings per share of 13%, up to â¬1.25, based on a very nice and very good balance sheet with a loan to value of 35% and a full house 99% occupancy rate together with the pipeline of realized and project in realization, we are again able to raise further our earnings per share up to â¬1.35 or 8%. So, let's say very nice figures for '22 and '23. But if you go back one year, exactly one year, we were together here to present you a new strategic plan. And that started with our slogan from external growth to external growth plus. Well, the way to that goal, the long-term goal of '25 changed completely. But we still can realize the end goal, the â¬1.5 earnings per share by '25. And we stated from external growth to external growth plus, but the plus had no time for a childhood. We have now three drivers for growth instead of one and two in preparation for the next plan. It's about structural external growth, which is still there. But we still will do the value of the existing portfolio and also our new business line, WDP Energy. All shoulder-to-shoulder are supporting together our growth and our profitability supported by a very strong and liquid balance sheet based on a brand new rating, BBB+ with stable outlook. Yes. Thank you, Joost. So first to add further on our business plan which we started one year ago, as soon as we launched it, the war in Ukraine came, you had the inflation backdrop, the macro environment changed. And in fact all the parameters changed; some plus, some in minus. And then the critical thing is as a company, how do you react to this? And that is by adapting and taking into consideration the new parameters of the new operating environment. And therefore, today, the main challenges to safeguard the profitability on new investments because of the strong increase in cost of capital, like Joost mentioned, and building costs, which continue to be elevated. But still, we adapted very quickly by changing first of all our hurdle rates for new developments and to take a step back. What we originally foresaw in the business plan was 5% yield on cost for new developments in Western Europe, 7% for Romania. Then in Q1, Q2, the new business originations, the new deals were around those levels, even within a challenging context, but were also funded still at 1.5%. Then, in Q3, we changed to minimum 5 and 7 plus indexation during the construction period. And as from Q4, our new realizations are minimum 6 and 8 and that is achievable. But we think profitability should still be a bit higher today considering the cost of capital. And we, therefore, would like to push for 7 and 9, I say, deliberately would like to push, because it's not yet fully possible automatically on every project today, because of the fact that we would need to push rents even a bit further and do not yet see building costs decline. But we have a lot of in-house knowledge, good boots on the ground, and we need to be creative and selective. But what's for sure is that in our view, the investments need to be calibrated on today's parameters. And so we put profitability first. And whereas, yes, the â¬500 million of new business volume, new developments per year was a target originally in the growth plan to achieve the â¬1.50 earnings per share target in '25, that is no longer necessary and we can also live with, for example, 250 million new business developments per year, but focus on higher profitability. Because the good thing is that we have been -- despite the fact that we have been 20 years reliant on solely external growth as a driver, we now have multiple drivers. We have organic growth mainly through indexation, but also through upgrade opportunities within the existing portfolio at higher yield on cost, of course, and we have the accelerated deployment of our energy business for which we have already concretely identified â¬150 million of projects to be executed in '23, '24 at an IRR of 8% and targeted yield on cost of 10%, 15%. So what we're trying to say here is yes, we will still continue to grow, but more balanced and with an utmost focus on profitability. And we have always mentioned that there is no single path towards â¬1.50 per share. We are open for business, but we take into consideration the parameters of today and how do we think we can achieve the â¬1.50. We have a very strong development pipeline, profitable pipeline of â¬600 million, with â¬300 million cost to comp. To that, we will add new developments and be the focus on profitability. Then we have another layer of organic growth, mainly through indexation, which is higher than in the past. And then we had another layer of profitable energy projects. So, yes, we will need to be more selective in deploying capital considering the higher cost of capital. But it's not just about making the development gain. It's about cash flow generation. That's where our focus is. That's what matters. And within this context, we can confirm our targets of EPRA earnings per share in '25. When we look at property valuations; first, where do we stand? You can see that overall in '22, we posted a 2% valuation decline in the portfolio, and that was actually being composed of a 50 bps upward yield shift. So the input discount rate applied by the property experts and some higher transfer taxes in the Netherlands and then partly offset by ERV growth of plus 11% and the development gains on our pre-let development schemes, and that was around a 20% development margin. And of course, the valuation was positive during the first three quarters and then mainly the yield shift came in Q4. But overall, our portfolio is today valued at an EPRA net initial yield of 5.0; and excluding Romania, that's 4.6%. And that is based on a value per square meter of around â¬900 euro, which is roughly where back of the envelope replacement costs would be. Now, obviously, we have received many questions. What is your outlook for property values and for yields? We do not have a crystal ball, but based on what we see today in the market, the macro environment, inflation rates and what we see in terms of potential deals and indicative pricing in the market, we believe the yields will go towards 5%, but that's let's say also excluding further other positive elements like further ERV growth and inflation, which are also forecasted. But aside from that, I think what we can say is that we are, in any case, prepared for a new cycle. We have a very strong position, as you can see on Slide 40. And, yes, today, even with the valuation decline in Q4, we still have only an LTV of 35%. And even when we do a stress test, it would take another 13% hit or â¬800 million to even get to 40%. And that is -- the underlying reason for that is that we have never only focused on LTV, but we manage already for a long time, the capital structure based on true leverage on the business, through net debt to EBITDA, which comes in at 7x which we believe screens good in a wider European context. And as a result of focusing on that metric, we now have balance sheet room, we have a stress tested balance sheet, because we never leverage actually on portfolio revaluations. And we will continue to act like that as well. And even more importantly, also our liquidity is very solid. We have 1.7 billion of undrawn confirmed credit lines, which largely cover all our committed investments plus refinancing. So over the next two years, plus leaving a buffer for any potential investment opportunity. And we can talk also about LTV, of course, but net debt to EBITDA matters. And what will also matter more in the future is your interest coverage ratio, because all costs of that have been based on very low base rates. So it's important to judge how that will increase going forward. And I think there we can say, today, our debt book is fully hedged. We have limited debt maturities in the next year. And even for the next five years, our hedge ratio stays on average 87%. And this allows us to really capture inflation, because indexation of rents, increasing your revenues is one thing, but your cost base also needs to be protected to be able to feed that through to the bottom line. And that is the case for us. And even if we would draw the next â¬500 million of debt on the existing credit facilities, then our cost of debt of today of 1.9% would only go to 2.1%. So think our cash flow is well protected from that. So that's it on the details of the growth plan, property values and our balance sheet. So indeed, we can have, let's say, the best company and the best balance sheet, but we need, let's say, a good real world. And there we can still [indiscernible] the supply chain is still very, very good. There is still a structural demand for warehouse space based on, let's say, the same strategic points as last year. First of all, outbound. Yes, there is still e-commerce. Yes, e-commerce is still growing but, let's say, in a more normalized way. The extreme growth of e-commerce has stopped, but we see further investments in the outbound strategy of every company. And it's more about omni-channel today than just e-commerce. And for example, there you see a lot of investments in the food e-commerce and more broad companies are investing in their omni-channel. Today, they have to deliver at home, tomorrow in the office, Saturday in a shop and on Monday, they have to be able to take it back. So their people and companies stay investing in; the same at the inbound side, strategically, even when today, it is a little bit more difficult, business cases are more difficult, there can be a little bit slowdown in decision making. But strategically, let's say that deglobalization has to continue and people think about their strategic supply chain. For example, the investment of Intel in Europe can be postponed a little bit, but they mentioned they will come. So we will not continue to make and produce chips only in Taiwan. We will make them in every continent. But that takes time. And yes, it can be postponed a little bit due to high construction costs, or scarcity of land. But it stays there. People are thinking about strategic stocks, about how they have to handle that by postponing a little bit production, doing it in a later phase in the production, doing it closer to house, or having a more strategic stock, even one that has a cost today. So the strategic investments are the inbound side and the outbound side of our warehouses, stay there. And indeed, of course, you also have today new investments. You have to take care of the warehouse. You have -- there are no possibilities, everything is full. So you have to take care of what you have. And then you will also adapt your buildings, make them better, make them more sustainable. Also, think about electricity. Is there enough electricity? Do we have to automate to make our warehouses more efficient? So there those structural trends stay there and make that, let's say, there is almost no vacancy of warehouses in Europe. Above that strategic demand, there was also a temporarily more short-term demand for warehouse space, due to let's say the recession, too many goods were ordered and not sold. But that was within our warehouses, because in the financial crisis, there was empty space. And then we had, let's say, 3%, 4% of extra short-term demand by which we could fill our warehouses. But now, the warehouses were already full before the recession. And so our clients had to find solutions on their own by having a higher internal occupancy or putting and keeping goods into containers on the yard. But let's say today, we have on our behalf, no temporarily demand. So let's say one, this will flow away during '23. The normal occupancy rate within our warehouse will go to more normal levels, but it will have no impact on our occupancy rate. So therefore, I think we are still positive about the structural demand for logistics space in the places where we are. So then it's time now for all your questions. I hoped that we discussed the hot topics. And now it's up to you. And we give the floor to Alexander for the Q&A. To all participants, you can use the live chat to address your questions and we'll take them one by one. We have a first question coming in. How is Ukraine today affecting the position in Romania? Well, let's say it's making Romania a better place to invest. Romania is the safe haven of the region. It's part of NATO. And it's part of the EU. So it's a safe place also, let's say, protected by naval, but especially also strategically by the Americans. And so, let's say, we see investments coming over from Ukraine or from even Russia to our warehouses, to our production units, and we see more investments than, let's say, one year ago. And then we have another question from Wim Lewi from KBC Securities on the high construction cost inflation. We now see that the material prices such as steel is declining and so are the order books. Is there any idea why the construction costs for logistics are not coming down? Well, let's say we hope that construction costs will and can come down in the near future. But there is also inflation and indexation of the wages and some materials are still high. And besides this, let's say buildings were also becoming better with higher standards. So we hope that there will be a little distress and that prices will come down a little bit by midyear, we think, but we don't calculate really big discounts in the construction prices for this year. But at least we have stabilization at the high level. And we can, again, fix fixed prices and a fixed timing. Yes. In a normal cycle, when you look at the cycle, they should come down. But we want to be cautious because we don't see it yet because 50% of the construction costs is still made up of labor, and that is increasing also nowadays. So too early to judge. Okay. And then another question, a follow up from Wim on the yield expansion, specifically in Q4. Interest rates have been very high since the start of the year. Is there any specific reason that you see why the yield shift has been moving since the fourth quarter and not in the second quarter or the third? Because of the fact that in the first two quarters, people were still finalizing deals from the old cycle because they initiated negotiations in the end of last year. And then as the war started, there was a stop in investments and not because there was no interest, there is still a lot of interest and also a lot of interest from equity buyers, but the markets needed to recalibrate. And in the equity markets, that happens immediately on a spot basis. But in the direct property markets, there is a lag in which markets adjust. And now we believe that over the next quarter, there should be a new equilibrium. And that's the only reason. And then we have another question from Rob Virdee of Green Street, specifically on the 300 million capital increase of October '22. Have you deployed any of this capital for additional growth over and above the CapEx penciled in before the capital increase? Well, we would not look at it like that. What we have said is that in the 300 million capital increase we did as we said, we have several reasons to ask for that capital to our shareholders. First of all, we had a very strong and profitable development pipeline. We added because we identify them concretely another material layer of energy projects of â¬150 million. And on top of that, we also want to be ready for new opportunities when they come. And the reason was also that in this type of markets, it would not be wise to first invest and then raise capital. You need to also not over leverage yourself and have a prudent stance on your balance sheet. But we have a good run rate of new investments, like were added in Q4. We had another volume of 100 million of new projects added. But the message we want to give is that we are open for business. We have good teams, boots on the ground, but we need to maintain the profitability on our project so that we have sufficient earnings per share accretion. And then another question coming on the solar panels. Can you give a bit more insight on the profitability and the future of WDP Green? Yes. On WDP Green and WDP Energy in itself, so there we believe that with our warehouses and our sites that we have 50 million square meters of land, we have 7 million square meters of buildings and so also of rooftops, and we believe we can play a material role with that in energy transition. But to do that, first of all, you need production capacity. So that is the first thing we need to do. We need to add production capacity. So we aim to go from 100 megawatt peak installed to 250 megawatt peak installed. So on the profitability, we target an internal rate of return on a project basis for those solar projects of around 8%. And the yield on cost will then be higher than 15%, a bit higher in the beginning, a bit lower towards the end. And that needs to be a bit higher, because it's a bit more front loaded because of the fact that you don't have a terminal value for the solar panels. So that's something we need to do in the first instance. And that's the start, because those are profitable investments. And then we can really start to do other nice things on our sites, for example, adding batteries to have a better management of the energy consumed locally, but also in combination with a further electrification not only of the buildings and the equipment inside, but of the electrification of the fleet of our clients really and that is decarbonizing and making the transport more efficient. And that is the real game changer, because our clients are now starting to look, obviously, towards electric vehicles for the cars, but the game changer will be the electrification of the trucks, and that is where our clients are looking at. And then that's a whole new ballgame. Because then, for example, in the pilot, we are doing in Zellik the green mobility hub we are building there, so with a full rooftop solar plant, batteries, plus electric vehicle chargers for cars, vans and trucks there, the energy consumption of that site as a result of that, as a result of the electrification of the fleet will grow at least 3x. So there we believe there is sufficient potential for the years to come. And maybe just to follow up on the profitability of new investments. Could you also elaborate on the assumptions taken into account to reach the 1.50 in terms of inflation and on new developments? Yes, on inflation, so we use organic growth of 5% for '23 based on the outlook for inflation and thereafter, the 2.5% for inflation. And then on the assumptions for the investments is executing the 600 million development pipeline, of which 300 million still needs to be spent. â¬150 million of energy projects in execution in '23, '24 with full impact in '25. And then per year another â¬250 million added to our development pipeline. Those are the main assumptions. And then we have a few questions on the client payment behavior. Is there first any change in client payment behavior up till today? And do you expect it to come? Our client behavior is very good and follows a really stable pattern. We have around 15 day sales open, so that's very good. And 99% of rents collected there. We believe that for the foreseeable future, it will remain stable. So we do not see any change in behavior on that. And that is also in the guidance, stable client behavior. What is always a risk that's what we have always said already for 20 years, one of the most important operational risk is if a client falls bankrupt, because then you have abruptly and unforeseen temporary vacancy in your portfolio. So there in a recession and it's still high energy prices what could be a risk there. We analyze that and the risk mainly sits in recession sensitive sectors, like industrial, non-food, retail, and wholesale. But the good thing is that most of our clients and all the clients having rent above â¬1 million versus rent below of almost â¬350 million. These are all big international companies. So when you really look at the weaker segments between brackets, that's mainly the SME segment within those sectors and that's around 5% of the portfolio where we need to be a bit more attentive but also these clients are being very well. And you could also see it as -- let's say, we would not like it, but you could also see it as an opportunity because the market is still strong. And when there would be a vacancy, it could have a temporary effect. But we could then also re-let the building at a higher price afterwards. Well, today the portfolio is based on the ERVs we publish and based on which the property valuations are based versus our contractual rent, the portfolio still 5%, 6% under-rented. And there is still also upward pressure on ERVs. And then we have a general question on the Netherlands. First of all, can you give any update on the future of the FV [ph] regime? Well, there the Dutch Ministry of Finance has indicated that they would now -- that the intent now to abolish the regime starting from January 1, 2025. And in our guidance and in our business plan, we take into consideration a provision as if we do not have the status. But for the short term, meaning for the years until they abolish it, meaning for '21, '22, '23, '24, we are still in discussion with the Dutch tax authorities to be able to maintain it, but it's still in discussion. And to stay in the Netherlands, there is another question with regards on the permitting, given the nitrogen regulation. Is this expected to cool down the investments or the new developments going forward? Not specifically, let's say, the nitrogen laws. But in general, I think in the Netherlands, there are -- the scarcity of land is very important and there is still big demand for new warehouses, but there is no land. So there we can say that it's not the permits even when it's more difficult and when it takes longer. It is not the permits who are the problem, but it is the availability of land. And then another question on the valuations. Is there any specific significant difference between the countries in terms of movements in the fair value? Yes, there have been some differences according to the valuators in the countries and the Netherlands has seen the biggest yield shift. So it ranged from plus 20 to plus 80 basis points and the most was in the Netherlands, where it's our biggest and most liquid market. And then there is another question coming from here from Francesca [ph] from ING regarding the 40% LTV guidance. What investments have been taken into account? The 40% is not the guidance. We say it will still stay below 40%. And as you will see in the detailed balance sheet we will publish in the annual report what is in there. It's like over the years, it's the execution of the committed investment pipeline. So the development pipeline plus the solar projects and both are scheduled in '23, '24. But for the path of this exit will be executed in '23. That's around â¬400 million and that will have an effect on the LTV of plus 1.5%, also taking into consideration that we have each year the retained earnings and the scrip dividend, of course. Well, I think you can say distress it's probably too early but they are at least nervous I think because indeed they made projects based on a certain profitability. And now what is the exit value at which value will they be able to sell? So let's say if it was possible, they postponed the projects and waiting to see where yields are going. But today -- and the market is frozen. There are almost no activities in the investment market [indiscernible] cooling down speculative projects. Then we have another question on Romania. CTP, your competitor, is very active in Romania just like WDP. Yesterday, they announced a large project. How is competition and yields looking like in Romania today? Well, it's indeed -- it was a very nice project that CTP won. It was an existing client of us, LPP, very nice project of 60,000 square meters. But in the end, the client has chosen finally the price. And there we said, this is too low for us. Finally, it came at a net effective rent of â¬2.65 per square meter per month, which gives â¬32 per year, which gives us, let's say, a profitability of around 5%. And there we say, no, thank you. And there we concentrate on quality and on profitability more than just on quantum. And maybe just to stay in Romania, another question from Steven [ph]. Could you please elaborate how the current macro environment impacts Romania differently from the Western European markets? Do we see any specific difference in terms of demand and also the valuation in that market compared to the Western European portfolio? I think demand is very strong. And I would say there is even -- or there was even more demand than last year due to the fact that let's say it was the safe haven, like I mentioned in the beginning, some projects that were first foreseen for Ukraine and for Russia, like the LPP project that we just mentioned [indiscernible] safe place to invest. So no. And we have seen also in our production units that production is driven up due to the fact that it is indeed a good place. It's a big, stable country. So demand is very healthy. And on, let's say, the valuations, I think there everybody was waiting for valuations going up. But it didn't happen. So they did not have to come down too, because they stayed rather flat and stable. Because the market is more in fixed and the market is taken by the likes of CTP, WDP who are developers and the end investor. So there has not been a real downward yield shift, and now the upward yield shift is rather limited. And then another question from Rob. You mentioned that the investment market deteriorated during the second half of '22 with large bid-ask spreads and the yields increased. Do you already see any signs of recovery or at least stabilization? And do you expect to see any distress in the market in the near future? I think not yet. Probably, who knows? We have to wait for MIPIM within one month. But for the moment, we don't see new deals yet. Some people are looking, trying let's say if they would go or not. But yes, the spreads are still too high and market stays frozen for the moment. And we think it still can take a while. There is no pressure to sell with most of the investors, because the warehouses are full. They are generating cash flow. So even when they have high loans against it, the loans can be paid back, because there is cash flow. Our sector is generating cash flow. So there is most of the times no pressure. So we don't see -- we think it could take a while. And we, of course, hope that there will be opportunities, but we are not sure and we don't think it will be before summer. And then a question from Peter from Cantor [ph]. If you want to derive the yield on cost to 7% in the Netherlands or Belgium, what rents would you need or would anything need to move to obtain that 7%? And is that achievable today in the current environment? That's a difficult thing, indeed, because construction costs stayed high but stable, land prices also, cost of capital went up. So those are the three elements that went up. And so, indeed, if you want at that moment a higher profitability, then the rents have to go up. And then yes, today, you are I think between â¬70 per square meter per year; â¬70, â¬80 depending on the kind of building, on the location, on land price. And that's the difficult thing today that markets and clients are not there or are almost not there. And when you look at the investment markets, any assets coming up to sale in the market? What yields are you receiving or seeing? Not yet. I think there are no real investment memorandums yet. I think I've read in some newsletters of the analysts today that Blackstone went with some portfolios to the market or will come with some portfolios to the market, but I've not seen any investment memorandum this year yet. And then a final question. Currently on the solar panel strategy in the revenues, do you expect any increased regulatory risk? Yes. Well, the risk is already there, I would say, and identified. So what good is for all the new investments in solar panels is that we are profitable on an autonomous basis without green certificates. And in the most of the times, they do not exist even anymore. So that's a very positive thing. And yes, there is a regulatory risk for the solar panels that the Flemish government is working on a plan on a draft legislation to abolish the green certificates on existing schemes, which were delivered between 2008 and 2012, which had a green certificate duration of 20 years. And they intend to cancel those certificates as from '24 for the remaining six years. So that's a risk that is something they are working on concretely. They have an agreement in the Flemish government. So they will likely push through and then we will need to see what legal actions we could take and our colleagues will also take. And that represents a risk of 2% of our revenue and 3% of our EPRA earnings. And just looking if there are any other questions. There are a few detailed questions that will be taken offline and we will address them later. Maybe just one more question. Is there any update on Catena that you can give on the strategy? For that you have to listen to the publication of the year results of Catena, I think 22 of February. But no, it's a very good company in very good shape. And let's say also with a low loan to value with possibilities to invest and to grow further. But for that, let's say, wait and see and we hear you 22 of February. Thank you. Thank you all for the questions. If you have still questions later on, don't hesitate. You can always call us. You know that we will answer as quick and as good as possible. So to conclude, I would say never waste a good crisis. It forced us to be creative and innovative. We call it to be and to work with warehouses with brains. And finally, I should like to say thank you all and thank all our stakeholders and clients to support us. And especially a special thank you for team WDP for the fact that they have been so adaptive and the agility that they showed last year in order to be ready for the new reality. Thank you. Have a nice weekend.
EarningCall_902	Good morning, and welcome to the Allied Properties REIT fourth quarter and year end 2022 financial results conference call. All participants are in a listen-only mode. After the speakersâ presentation, we'll conduct a question-and-answer session. [Operator instructions]. As a reminder, this conference call is being recorded. I would now like to turn the call over to Michael Emory, Chief Executive Officer. Thank you. Please go ahead, Mr. Emory. Thank you, operator, and I am delighted to be starting this conference call on time, unlike the last conference call. So, good morning, everyone, and welcome to our timely conference call. Tom, Cecilia, and Hugh, are here with me to discuss Alliedâs results for the fourth quarter and year ended December 31, 2022. Nanthini, our incoming CFO, is also with us today. We may, in the course of this conference call, make forward-looking statements about future events or future performance. These statements, by their nature, are subject to risks and uncertainties that may cause actual events or results to differ materially, including those risks described under the heading, risks and uncertainties in our most recently filed annual information form, and in our most recent quarterly report. Material assumptions that underpin any forward-looking statements we make, include those assumptions described under forward-looking disclaimer in our most recent quarterly report. Allied's operating performance in 2022 was strong. Our AFFO per unit was up 4% from the prior year, underpinning our 11th consecutive annual distribution increase, and providing a takeoff point for our 2023 outlook of low to mid-single digit growth in same asset NOI, FFO per unit, and AFFO per unit. Cecilia will summarize our financial results. Tom will follow with an overview of leasing and operations. Hugh will provide a development update, and I'll finish with our current thinking about Allied's future. So, now over to Cecilia. Good morning. Iâll highlight key operating metrics, our financial position, and progress on ESG. Our operating metrics remain healthy. In our workspace portfolio, we had increasing average in-place net rent per occupied square foot of $23.10, up from Q3 2022, and up 5% from $21.98 a year ago. We also continued to see strong rent growth on renewing space in the quarter, which was 6.1% on an ending to starting basis, and 15.6% on an average to average basis. The seemingly contradicting data around leasing activity that we mentioned last quarter, materialized more positively than could have been expected. Tom will provide details on that. We're pleased with our financial position. We allocated $264 million of capital in the quarter to revenue-enhancing activity and development completions, which is what we'll continue focusing on for the foreseeable future. Assuming we're successful in selling the UDC portfolio, we will allocate a majority of the proceeds to pay off debt, pushing our debt metrics back within our targeted ranges. We do not intend to allocate any capital to discretionary activities, including acquisitions in the coming year. On to ESG. We're committed to the continuous advancement of our ESG program in 2023. This year, we're continuing to evaluate our possible pathways to net zero carbon, and are in the process of finalizing an internal shadow price of carbon. We're also implementing a new process to review the environmental performance of our portfolio on a quarterly basis to more proactively address potential performance deficiency issues of our assets. And we're advancing our physical climate risk assessment framework to include site-specific climate risks and adoption opportunities, progressively expanding this evaluation across our portfolio. We'll continue to disclose our climate-related risks and opportunities against the Taskforce on Climate-Related Financial Disclosures, or TCFD, recommendations in our ESG report, which is expected to be released by July of this year. We'll also continue to work to support Alliedâs users in achieving our shared ESG goals. We recognize the tremendous potential of our community to advance ESG by learning and working in partnership. Across the country, we're focused on serving our users and completing upgrade and development work to propel operating capabilities. Our team and our operating platform has never been stronger. With that, I'll pass the call to Tom. Thank you, Cecilia. We had a good Q4, leasing 520,000 square feet of space, and totaling 1.9 million square feet of space leased in our rental portfolio in 2022. We leased another 210,000 square feet over the course of the year in our properties under development. Average rents achieved in the quarter on renewals were 15.6% higher than average rents in the expiring term, and 13.2% higher over 2022. Average in-place rents in the rental portfolio have increased every quarter for 13 consecutive quarters. Activity is good in each of our markets, particularly in units under 10,000 square feet, which have been built out. We have created separate leasing strategies for every building in the portfolio, and we have just the right brokerage team for each of our buildings listed, and a very motivated in-house leasing team heading into 2023. I will now provide an update on leasing activity and our 2023 leasing priorities for our major markets, Montreal, Toronto, Calgary, and Vancouver. I'll also provide an update on some retail leasing initiatives. Montreal continues to be our most active market, with the team completing 42 transactions in Q4. Our focus in 2023 will be leasing 111 Robert Bourassa, 1001 Robert Bourassa, as well as Place Gare Viger. We expect to finalize a 60,000 square foot deal at Place Gare Viger in the next few days, getting the year off to a good start. In Toronto, we completed 32 transactions totaling 214,000 square feet over the quarter. Upgrade work at 185 Spadina and 468 King, is nearing completion, and now underway at 135 Liberty. Leasing these three properties are a high priority for the Toronto team this year. Planning work to reposition 175 Bloor and 110 Yonge, is progressing nicely. In Calgary, the team has done an excellent job maintaining an 88.2% leased area, which relative to the market, is solid. Our focus for this year will be to lease the Lougheed building and to complete the leasing at TELUS Sky. As for Vancouver, we're 94% leased, with only 62,000 square feet available for lease, comprised entirely of small units. Our focus for 2023 will be leasing the Landing, Sun Tower, and 1040 Hamilton. Turning to retail, I thought it would be useful to highlight some recent initiatives. Amenities can make the difference in an office user's decision to lease space, and we've always made an effort to provide unique offerings in the retail portion of our portfolio. In Montreal, we're finalizing a deal with a global food and beverage company who are trying something different. 26,000 square feet of space at CCMM, will be transformed into multiple independent chef-operated food specialty units, together with an event venue utilizing a large portion of the common area of the building. This will become a great amenity to our building and the neighborhood, but it will also become a destination for tourists and downtown residents. Projected opening is spring 2025. Also, in Montreal, we are planning the remerchandising of the retail offering at 1001 Robert Bourassa, to include food, fitness, and upgrade service uses. Projected completion, fall 2025. In Toronto, we continue to upgrade the amenity offerings on King West, and King Toronto Retail will be a huge addition to the neighborhood. We are negotiating a 40,000 square foot food and beverage restaurant, entertainment, and event venue, a unique offering in Canada, and sure to become an anchor for this neighborhood. The balance of the 120,000 square feet of retail space will be leased to upscale retail restaurant and service amenities. Interest in this project, not surprisingly, is very high. Projected opening is Q2 2025. While these uses are not imminent, the leasing and planning will all happen this year. We'll keep you apprised of our progress. Thanks, Tom. This quarter, we have been able to make progress on both current construction projects, as well as our planning for future projects. I will begin by giving an overview of our major project, and then will follow that with an update on work we have done in our development pipeline. Beginning in Montreal, the team has been able to advance the rehabilitation work at both 3575 Saint-Laurent, and the RCA building, and the transformation of 1001 Robert Bourassa. With the close on 700 700 Saint-Hubert, part of the Gare Viger complex, we have begun the landlord's work component of the work. This work will further distinguish the space available in the building. We hope to have the work complete in Q2 of this year. In Toronto, we have made progress on all of our active construction projects. We were able to achieve a significant milestone at both our Adelaide and Duncan, and expansion of QRC West projects. In December, we achieved the first phase of occupancy for the office tower at Adelaide and Duncan. The second phase should occur in Q2 of this year, and the phased residential occupancies will occur in late 2023 and early 2024. At QRC West, just subsequent to year-end, we poured the last floor. Glazing and masonry work has begun to enclose the building. The team is gaining momentum on the project, and should be able to turn the space over to our tenant in Q3 of this year. We continue to make progress at The Well and King Toronto. At King Toronto, we have poured up to the fourth floor. With progress onsite, we are beginning to have discussions with potential tenants for some of the commercial spaces, as Tom just alluded to. In Vancouver, our joint venture partner, Westbank, continues to advance work at Main Alley. We are climbing out of the hole, and anticipate reaching grade early in Q2 and topping off by the end of the year. This quarter, the team has been focused on execution of active development and redevelopment projects, and work on our vacant suite upgrade program. Overall, the team has made solid progress across all of our development activity. The team has taken advantage of the work done in previous quarters on our new development approvals to focus advancing work on the vacant suite upgrades, redevelopment projects, and major development projects. Thanks, Hugh. Allied has proven from its inception to be resilient, and we have every reason to be confident that this will continue. In the past three years, we deepened, strengthened, and integrated the numerous and diverse members of the Allied team across the country. We continued the renewal and diversification of our board of trustees. We implemented a longstanding succession plan for senior leaders. We made significant and measurable strides in improving our ESG practices, and we took decisive steps toward reaffirming our mission and maintaining our commitment to the balance sheet. These elements of resilience signal our strategic and tactical direction going forward, and establish a solid foundation for our future. The last element of resilience that I mentioned, involves the sale of our UDC portfolio. I believe we've done a good job of explaining our reasons for making this decision. The comprehensive sale process is being launched today, and will extend over three to four months. We will not be able to comment further on the process until it's complete, but we'll obviously advise you as soon as the outcome is known. Now, many of you on the call know that I can easily be enticed into talking too much about Allied's affairs. What I would ask you in this instance, with respect to our UDC portfolio, is that you not ask me or any other member of the Allied team about the progress we're making until we have a concrete result to report on. I would really appreciate that, and I will not be enticed into speaking too much in this circumstance. I hope this has been a useful and comprehensive update for you. We'd now be pleased to answer any questions you may have. First question, just on the leasing done in the quarter, and you guys haven't given this data for a long time, but the average term to maturity of three and a half years on new leases and two and a half years on renewals, is the lowest since you guys started reporting that, and seems a little low to me. Can you maybe give a little bit of color on that? It's probably some short-term deals done to facilitate longer term leasing. We've done a lot of shorter term deals in the Montreal portfolio to facilitate longer terms - longer planning at El Pro, at RCA, at 3575 - there's a number of buildings where we've done these shorter term deals to plan for our future. Okay. So. Itâs not a function of tenants kind of just sort of kicking any space decisions down the road in a softer market? Okay. And then secondly, just on The Well, a couple of questions there. First, maybe can you give an update on retail leasing? We will leave it to RioCan to do that, Jonathan, in its upcoming conference call, which I'm sure they will do. Good progress continues to be made, but RioCan is leading that effort. We're very pleased with the progress, but I think it's best that they report to the market on that specifically. Okay. Figured as much, but thought I'd try. And then just on the Shopify sublease space, how do you see that playing out, and do you think that's something that sort of comes to fruition at some point in 2023? We have long experience dealing with good customers who need or want, for various reasons, to sublease their space. And we've worked collaboratively and successfully with almost all of our customers in that regard. We consider Shopify to be a valued long-term customer of Allied, and we will work with Shopify in its effort to sublease its space at The Well. It's highly probable that anyone subleasing for a very long term, will want direct privity of contract with the owner. And again, we have in many instances, been able to accommodate our users in that regard, and we fully expect to be able to do that here, although we've got to address it on a case by case basis. But we are committed to work with Shopify in achieving its goals. They have a real advantage, in my opinion because of the very low lease rate they have the benefit of, which was established in 2018 as part of a lead tendency. That, I think, is going to assist them in their efforts greatly. And as I say, we will collaborate fully in an effort to help them get out from under this particular obligation. I don't want to predict, Jonathan, whether it'll get done this year, next year, or the year after, because there's nothing but downside for me in making that prediction. Fortunately, for us, there is no economic implication to the timing. But if I had to guess, I think what Shopify has to offer, is very desirable to a significant number of potential users. And I would expect them to be successful, but I certainly don't want to predict a timeframe, especially in this uncertain environment. Okay. Now, do you think having that space out there on the sublease market impacts any of your other leasing initiatives in the same area? Okay. And then just lastly, you had the - you have Shopify down as 1.1% of total revenue. Does that - are you now counting The Well as part of that or? Thanks very much, and congratulations, Cecilia, and Hugh, as well as Michael for his new role, although I'm not sure how new it will be on the strategic side. But anyway, just turning back to The Well, you've done a good job on talking about the Shopify. Just wondering if besides Shopify and Torstar, are there any other users putting space back to the market? Index exchange, I think they may be, but again, it's kind of soft, and it's kind of vague at the moment. Okay, thanks. So, including that, other space available at The Well, do you have a current figure for the percentage of the portfolio that is available for sublease? I would estimate it's closer to 5%. We had 3.3. No, you know what, it'd probably be about 4% because our share of the space at The Well is only 50%, Scott. So, closer to 4% than closer to 3%. Right. Okay, thanks. That's helpful. So, it's not really that significant. And just on the debt refinancing, what - I mean, I suppose it really depends on what happens with the UDC sale, but in the absence of that being monetized within the calendar year, your availability on the unsecured facility is kind of running a bit low. Do you expect to refinance - to up that or are there other plans for refinancing, including the $200 million choice note? Thanks. Good morning, and congrats everyone. And I know Nan got left off, so I'll send a congratulations over there. Maybe just sticking with the debt side of things, are you guys able to prepay any unsecured ventures in the coming year? There's a lot we can prepay without penalty and we will. I don't think any of it is unsecured venture finances. Okay, great. That's very helpful. And then on 700 Saint-Hubert, I think it was 24% leased, and I believe that's sort of where it was when you guys made the announcement. What's sort of the outlook for getting that asset leased up? The outlook is extremely positive. We are days away from 60,000 square feet being completed, and there's a 40,000 square foot tenant that we're negotiating with as well. So, that building, we're hoping to get leased up before halfway through the year. Oh, wow. Okay. Great. and then maybe just flipping over, or I guess sticking with leasing, what kind of demand - like what sort of groups are you seeing demand from right now? It's a mix. We have tech tenants. We have academic institutions. We have gaming. We have media. We have advertising. We have professional services. Itâs a real mix. And it all falls within what we consider to be knowledge-based organizations. That is our core constituency with respect to using urban workspace and continues to be. Of course. And then maybe just last one from me, I know there's no expectation to undertake any significant acquisition activity. I'm assuming that doesn't include 400 West Georgia, correct? Yes. I mean, that is simply completing a process that was started a long time ago, and in all likelihood, will represent a net return of capital to us, as opposed to a net outflow. So, yes, it does technically include 400 West Georgia, but as we say, we don't consider that a discretionary acquisition. We committed to that four years ago or so. But rest assured that we have no intention of making material acquisitions in 2023. And indeed, I think it's highly unlikely we'll make any of consequence at all. We're not even seeing the small infill acquisitions right now that we saw in such magnitude during the pandemic, and which we took advantage of. But no, discretionary acquisitions are off the table for 2023. That is one way to make it- yes, I think you made yourself extremely clear. Okay. Thank you so much. I'll turn it back. Yes, thank you, and good morning, everyone. I wanted to initially focus on the occupancy. It was flat quarter over quarter, but if we back the UDC reclass, it was up 30 to 40 basis points quarter over quarter in Q4. So, based on kind of some of the leasing discussions, Tom, that you referenced in terms of how diverse it is, do you internally feel comfortable labeling Q3 â22 occupancy as a trough in this cycle? Hope so. We've gotten lots on the go. We do have some non-renewals that we're facing. We know about them. We're aggressively addressing them, but I hope that Q3 2022 was the bottom. Great. Okay. And then Tom, your comment on that 60,000 square foot deal at Gare Viger in Montreal, is that - just to clarify, is that net new 60,000 square feet? Right. Okay. And then when I look at the guidance for â23, what's kind of the embedded occupancy range in that low to mid-single digit growth guidance? Mario, we are not going there again. I did that in 2022, and I lived to regret it, but we are not going there again. We stand by our forecast of low to mid-single digit growth, but we're not going to extract and isolate other metrics that are embedded in that forecast because the metrics will change over the course of the year. Some will get better, some will get worse, but we are confident of our ability to deliver within those parameters. And I would add one more thing. I think the market's obsession with occupancy and/or vacancy, depending on how you want to express it, misses the point radically. But I do understand, it is a concrete number to which people can attach their view. But itâs only minimally reflective of the underlying reality of our business. But having said that, I think most importantly, we are just not prepared to establish a target for occupancy gain in 2023, but we stand firmly behind our outlook with respect to same-asset NOI, AFFO per unit, and FFO per unit. Got it. Okay. Just out of curiosity, just putting back of that comment, Michael, if you think that, or if you feel that the markets were overly obsessing with occupancy metrics, what do you think the market is underappreciating in terms of internal key performance metrics today? Well, really the market doesn't understand and can't frankly appreciate the reality of operating a portfolio like ours. It can only be understood at the ground level. It can only be understood in relation to the demand. It can only be understood in the context of our continuously upgrading our asset base. And frankly, it can only be understood in the context of us being in a preferred or advantageous position relative to whatever is occurring in the office market. As you know, I have a very clear view that nothing secular has changed with respect to the use of urban workspace. Others disagree, and that's perfectly fine. But thinking that a number like they can see expressed numerically, tells a story in and of itself, is just wrong. I noticed, for example, that people talk about, they can see across the country. Well, that's almost comical because it doesn't segment the different markets within the urban environments, and just isn't in and of itself indicative. You really have to look at downtown west in Toronto, downtown east in Toronto. You've got to look at Mile End in Montreal. You've got to look at Old Montreal and so on and so on and so forth. Those are numbers that tell more, and more accurately reflect what's actually happening in our portfolio because we're dominant in all of those submarkets, if you will. So, generalized vacancy numbers, I mean, they can't be ignored. They are indicative of something, but they certainly are nowhere near sufficient in understanding what's going on in our portfolio. And frankly, in fairness to the market, and I'm not trying to be critical, I'm really not, but you've got to live and breathe this on a daily basis to understand what's happening. And that's our job, and we're doing it to the best of our ability. And based on that, we have continued confidence in the viability of the kind of office space we provide to the market. And we know from the experience we're dealing with on a daily basis, that our buildings not only are viable going forward, but indeed maybe more differentiated and more preferred going forward even than they were pre-pandemic. And they very definitely were pre-pandemic. So, again, I mean no criticism or give no offense, but a vacancy stat is an empty number out of context. Okay. Thanks, Michael, for the whole answer. Just two more really quick ones on my end. Maybe one for Cecilia, and then just a clarification on the Shopify. Just within the guidance, in terms of expected capitalized interest in G&A for â23, is that - is there a range that you can provide for each, or is that something that maybe we take offline with some additional details pending? The interest will be impacted by the timing of the UDC sales, so I can't totally comment on that. And on G&A, there would be a modest increase in G&A from 2022 to 2023. Okay. So, a modest increase in the G&A as opposed to a modest increase in the capitalized G&A, is that right? Okay. And then just lastly on the Shopify, Michael, I appreciate your comments in terms of how that may evolve. In the past with sublet space, I believe Allied mentioned that kind of any excess in kind of achieved rent in relation to the contractual rent, would go to Allied. Is that the case here? Is that something you can comment on? It is, but we don't expect to profit in that way in this instance. We think the smart move for Shopify, which we fully support, is to offer to the market the very favorable net rental rate they have the benefit of, and that will increase or optimize their ability to get out from under this obligation. So, while we have in the past profited from rent escalation sooner than expected through subleasing, we don't expect that to happen here, and we're happy not to profit here. We want to help Shopify get its space out as efficiently as possible. And that means basically offering the face rate, the very favorable face rate to sub-users or subtenants, if you will, or tenants that ultimately go into contract with us. And we're not going to try and extract anything additional from those tenants. We're going to be attentive to their covenant. If they have a great covenant, we will enter into contract with them, which will be helpful to Shopify. But we don't expect to profit on the sublease of the Shopify space. Hey, guys. Just quickly on the guidance, did I hear correctly, I think in your answer to one of Mario's questions, you indicated that it may contemplate the sale of the UDC portfolio in that FFO figure, or are you assuming that you hold the UDC portfolio for the entire time? No, it does contemplate closing on that transaction in 2023. That doesn't affect the same-asset NOI guidance because that doesn't include UDC, but it would impact the FFO and the AFFO per unit. Right, because the UDC, there was a potential transitory vacancy, I guess in that portfolio that would've impacted things, but will it impact things while you hold it and not thereafter? And I guess it's a question of how you deploy the proceeds ultimately, but all of that is figured into your guidance at this point for AFFO? Okay, fair enough. And then on the interest income this quarter, the rate, at least based on what we imputed, has gone up. Are those - is that because there's a variable component to that, or was there something new or additional in terms of interest income associated with those loan receivables? Yes, there was one loan receivable in particular that the maturity was extended, and based on the terms of the agreement, it was at a different rate than the original term. Okay. On 700 Saint-Hubert, for the 60,000 and 40,000 square feet that are in negotiations, are those similar sort of biopharma type tenancies, or is there a broader appeal that you're getting for that new property? Okay, that's interesting. And then on 3575 Saint-Laurent, we've discussed the asset in the past. I think there was a known vacancy and it was a project that you've slated to do some work at. Do you have a tenant at this point to take the new space, or is this going to be sort of a spec repositioning? And is the idea - do you - is it fully - is it going to be fully vacated or could you find a single tenant for the whole thing, or is the idea to find some smaller individual tenants to take some of the space that's being repositioned? It'll be multi-tenanted. Some of the space is coming back to us already, and some of the spaces will be coming back while we do the work, but there will be tenants that will live through some of the upgrade. Thank you and good morning, everyone. A couple of quick questions at my end. So, firstly, when you're looking at the sales cycle and leasing tours, have you seen any change in sentiment from the last quarter as far as new potential tenants are concerned? Actually, the tours have been pretty consistent, averaging around 250 tours a quarter. And it's been pretty consistent, and that seems to be taking place now in 2023 as well. There was a little bit of a lull at Christmas and the first week or two in January, but tour activity is pretty good. Okay, fantastic. And then just lastly, last quarter you also discussed adding approximately $82 million to the EBITDA line over the next few years once the developments in the pipeline are completed. Now, does the - do the proceeds from the proposed UDC sale potentially shorten that timeline? No, because it's really based on the completion of the development, that it wasn't dependent on us accessing capital. So, no, that timing wouldn't be impacted. Thanks. good morning. Just maybe on the back of the last question there on tours, I think last quarter you mentioned that leasing traction, or sorry, the lease commitments were taking longer. Just curious, has that changed at all, or are you seeing those timeframes kind of consistent, or has it narrowed a bit as it does seem that traffic has picked up across markets in terms of actual foot traffic and return to the office? I think itâs probably accelerated a little bit into 2023 only because as it happened, there was a few deals that actually just got pushed into 2023. Coming close to the year end, okay, let's deal with this in January, February. So, I think the cycle's been a little bit compressed early this year. But itâs still taking longer than we want to get deals done. We always want them to be done at top speed. The trick for us is to have lots going so that we get our share. Got it. Just maybe coming back to the same property NOI guidance, does the guidance incorporate any shifts at all in terms of the properties, like the income producing to developments or anything of that nature, or is this apples to apples, this portfolio that you close a year with is really what is in the guidance outlook? So, the guidance on same-asset NOI is on the rental portfolio only, and even with things moving in and out of the rental portfolio between the development portfolio, because it wouldn't be a full year, it wouldn't impact the same-asset NOI from a rental perspective. So, I think it's pretty apples to apples. Okay. Got it. And then just I guess your comment there, Cecilia, just to clarify that the same property NOI values do not include the data centers in there. Got it. And then just in terms of the incentives and allowances, can you just talk about what you're seeing there and how - maybe it's still a bit early in the year, but I'm just curious how your - what your thoughts are in terms of how those will trend over the course of the next 12 months. I don't think they're going to be much different than they were last year. I think they're up a touch, but rents are also up. NERs are more or less the same. Okay. Got it. And then just lastly, I don't know if this going to fall into the spectrum of no-no questions, but in terms of the data center sale or the planned sale of the portfolio, are there any tax implications that a sale could trigger? Sorry. Our - well, we certainly have done our homework with respect to special distributions. And we are very conversant with structuring opportunities that exist in that regard. We can't make a definitive comment about it until we know exactly what kind of deal we're going to do, with whom, under what circumstances. But we feel very confident of our ability to manage that implication of selling the UDC portfolio in a way that will be at least neutral to our unitholders, including ourselves, all of whom are unitholders and very interested in that implication. Got it. And then just last one for me again, on the data centers. the messaging has been pretty clear that the proceeds will be directed toward reducing debt. I guess is it fair to say that unit buybacks are at the lower end of the perhaps probable uses at this stage? I don't want to curtail our flexibility with respect to that option at all. We used the words may elect very deliberately, and I can imagine a series of circumstances where we might be more inclined to elect to do that. And I can imagine a set of circumstances where we might be less inclined, but I can't predict now what the circumstances will be when we expect to close this transaction. So, I wouldn't take it off the table, and I wouldn't consider it a certainty. It really will be something management and the board will decide upon depending on the state of circumstances once the outcome of the process is known to us. We have no further questions in queue. I would like to turn the call back over to Michael Emory for closing remarks. Thank you, Operator, and thanks to each of you for participating in our conference call. I hope this has been helpful, and we look forward to keeping you apprised of our progress on all fronts at appropriate points in time. Talk to you soon.
EarningCall_903	Good afternoon, everyone. Thank you for standing by. My name is Francis and Iâll be your conference operator today. I would like to welcome everyone to Genâs Third Quarter Fiscal Year 2023 Earnings Call. Todayâs call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakersâ remarks, there will be a question-and-answer session. At this time for opening remarks I would like to pass the call over to Ms. Mary Lai, Head of Investor Relations. Miss, you may begin Thank you, Francis. And good afternoon, everyone. Welcome to Genâs fiscal 2023 third quarter earnings call. Joining me today to review our Q3 results are Vincent Pilette, CEO, and Natalie Derse, CFO. As a reminder, there will be a replay of this call posted on the IR website along with our slides and press release. Iâd like to remind everyone that during this call all references to the financial measures are non-GAAP and all growth rates are year-over-year unless otherwise stated. A reconciliation of non-GAAP to GAAP measures is included in our press release which is available on the IR website, at investor.gendigital.com. Todayâs call contains statements regarding our business, financial performance and operations including the impact of our business industry, that may be considered forward-looking statements and such statements involve risks and uncertainties that may cause actual results to differ materially from our current expectations. Those statements are based on current beliefs, assumptions and expectations and speak only as of the current date. For more information, please refer to the Cautionary Statement in our press release and the Risk Factors in our filings with the SEC, and in particular, our most recent report on Form 10-K and 10-Q. Thank you, Mary. Good afternoon, everyone, and welcome to our Q3 earnings call. To start, I want to first thank each Gen employee for their contributions in 2022. Merging two companies is never easy, and I'm proud of their dedication and the tremendous progress we have made. Quickly getting the integration done right, creates the foundation for Gen to keep empowering millions to live their digital lives safely. We are at the intersection of a digital transformation that touches all aspects of our lives and an ever-evolving threat landscape that threatens our digital security, identity and privacy. Although malware is still one of the biggest threat vectors, hackers and scammers continue to shift to attacking individuals and their data, not just the device anymore. The shift to the individual means that your information needs to be protected in all the digital places where it leads. In today's world, protecting the device for malware is often not enough. Information as a usage, [ph] discovery or manipulation is more damaging financially and to reputation that malware has ever been. The threat volume landscape and sophistication have grown, not reduced, whether it is test identity, fraud, privacy or fake news, people's financials, their reputation and overall digital safety are under threat. We are committed to fulfilling consumers' immediate needs and giving every person connected to the digital world, a path towards total cyber safety. Gen brings together trusted brands such as Norton, Avast, LifeLock and combines many capabilities. Our combination of technology, products, marketing and sales channels, creates a strong foundation for Gen's long-term growth plan. It strengthens our product innovation efforts, diversify our business, increases global scale, and opens new go-to-market opportunities. We set a strategy to be the best cyber safety platform for consumers and we have the growth levers to get us there. As we shared on the last call, the growth levers are extending global reach by leveraging our omnichannel strategy, increasing value for customers expanding to identity and privacy solutions, and growing loyalty from customers by improving user experience and retention. Before I highlight our Q3 results and pass it to Natalie, let me share the progress made on the integration. As you would expect, we've hit the ground running fast. In the first three months, we've integrated our back-end systems and processes and deployed a unified go-to-market structure, enabling us to optimize our investments across all brands. We identified and eliminated about 700 duplicative jobs or activities. We are in the process of deploying our new location strategy, leading to facility reductions. And this week, we're integrating our code-to-cash processes. Product integration will be the long pole where we are striving to not only maintain but accelerate our pace of innovation, which supports our revenue synergies and broader growth objectives. In this case, we are strategically driving the integration of our technology and engineering teams to ensure that we continue delivering innovative products that address the dynamic threats people face every day. Overall, you can see our progress in the expanding operating margin. We are on track to achieve the $300 million plus annual cost savings exiting fiscal year 2024. Our integrated teams are now coming together across continents, sharing knowledge and adopting best practices and technological know-how with a focus on driving customer loyalty, platform adoption, cross-selling activities which are at the core of our revenue synergy plans for the next two years. Let's turn to Q3 results. The market trends we saw in Q3 were consistent with what we have been seeing in the last few quarters, persistent pressure on global e-commerce traffic and lackluster overall consumer demand and inflationary pressures. We believe that consumers have taken a more cautious approach to their spending in this challenging environment. Despite the macro factors, we delivered our 14th consecutive quarter of growth and when we look at our direct and partner business combined, which we call now cyber safety, our Q3 bookings and revenue were both up 4% in constant currency when including a vast historical results in the base. Growth was spread across regions, brands, and product lines. We expanded our operating margin by three points year-over-year and four points sequentially. EPS grew 2% with the negative impact of currency and interest expense, masking the strong execution and operational strength of our business. Our direct business grew 3%, similar to last quarter's growth rate. In this soft environment, we continue to strategically deploy our marketing spend to achieve the highest returns and efficiency, prioritizing higher ARPU and customer retention but not taking our eyes off the ball on the top of the funnel. Growth was supported by strong cross-sell, especially with double-digit growth in our privacy offerings and slight sequential improvement in Avast retention, while our direct cyber safety customer count declined by slightly over $200,000 quarter-over-quarter. On the partner business side, we continue to make strong traction with our diversified and omnichannel approach, delivering another double-digit growth quarter or this quarter was primarily driven by wallet share gains from existing partners as we continue to demonstrate our value proposition. As you've heard me say many times, the core of Gen success is product innovation. And the integration of the two companies will only accelerate our combined capabilities. In Q3, we introduced several new products. We launched Norton Executive Benefits program, which is a product that includes both LifeLock and reputation defender solutions and is designed for employers that want personalized, concierge support for their C-suite executives and other high-profile individuals. We continued to expand our Identity business internationally with the launch of credit monitoring features in the UK market. In the US, we launched two new products. Avast Identity Secure was launched in December, which includes identity test protection, alerts assistance and loss reimbursement. Additionally, LifeLock added an industry-first feature called Utility Alerts, which monitors new utility or telco accounts that are opened in customers' names. In privacy, we have launched a mobile app for our Norton anti-truck product to extend our reach. And we've also expanded our global reach with the launch of Norton Privacy Monitor Assistant to Canada for the very first time. Our strategy in the short and mid-term is to expand the value offered to our current customers through new product launches and an improved user experience that comes within our platform that we've developed. We believe these focuses will grow loyalty and retention. Innovation is a top priority, and we will continue to invest to have the strongest portfolio that keeps our customer fiber sales. Let me wrap up my comments here by saying that our growth strategy remains intact. We will continue to execute to drive profitable growth in this challenging environment and create long-term value for all stakeholders. Thank you, Vincent, and hello, everyone. For today's call, I will walk through our Q3 results, give an update on synergies and wrap up with our outlook for Q4, who will focus on non-GAAP financials and year-over-year growth rates unless otherwise stated. Our Q3 results reflect another solid quarter of performance and consistent execution. We came in above the midpoint of our revenue guidance and at the high end of our EPS guidance. We drove our 14th consecutive quarter of bookings growth, supported by a resilient customer base and expanding product portfolio and our channel and geographic diversification efforts. We grew Q3 bookings 29% in USD and 35% growth in constant currency. When including Avast historical financials, cyber safety bookings grew 4% year-over-year in constant currency. Our major contributors to growth in Q3 included ARPU expansion as we scale our cross-selling efforts, stable retention with our existing customer cohorts, growing double-digits with our partners for the ninth consecutive quarter and driving our direct business to mid-single-digit growth supported by several new product launches. Q3 non-GAAP revenue was $936 million, up 33% in USD and 38% in constant currency, which includes a full quarter of Avast contribution. This also includes an unfavorable FX headwind of $34 million year-over-year or five points of growth, the highest it's been all fiscal year. When including a vast historical revenue, cyber safety revenue grew 4% year-over-year in constant currency. Now, let me walk through our cyber safety key operating metrics for the quarter. Direct revenue of $818 million grew 31% in USD and grew 3% when including a vast historical financials. Considering the continued macroeconomic pressures persisting in the market, we are proud of our performance in driving higher value and loyalty with our existing customers as measured by ARPU expansion and retention improvement this quarter. Direct monthly average revenue per user or ARPU was $7.9, an expansion of $0.11 quarter-over-quarter. We drove growth through our expanded cross-sell and upsell efforts, just like we said we would do back in November. Our scaling privacy offerings have strong traction with our existing customers who choose to attach these incremental services to their existing subscriptions, driving high double-digit growth in the quarter. Cyber safety membership adoption has increased again this quarter as customers choose the incremental value and services we offer through our integrated platform versus stand-alone offerings. Direct customer count ended at 38.4 million, a decline of $219,000 quarter-over-quarter as we continue to face into a challenged macroeconomic environment. Traffic to our e-commerce sites is lower than last year and is impacting our new customer acquisition funnel. We continue to invest in a diverse mix of marketing spend to help drive more traffic to our site, while optimizing the channel mix and dynamically adapting to market shifts in efforts to drive higher customer acquisition. We strive to delight and retain our existing customer base, and it's working with direct retention sequentially up and landing above 75%, with pockets of improvement in different cohorts. One of the primary synergy opportunities we shared in November was the Avast retention improvement. In a short period of time, we made early inroads with the Avast retention rate sequentially and while the improvement was nominal, we are encouraged by the early progress. Looking ahead, we expect traction with revenue synergies to be measured directly through ARPU and retention improvements over the coming quarters. Moving on to partners. We drove partner revenue to $95 million, 40% growth year-over-year as reported in USD and 11% growth when including Avast historical financials. This was our ninth consecutive quarter of double-digit revenue growth across our partner channels, a result of our growing international product portfolio, enabling us to sign new partnerships and capture more new business with existing partners. We continue to leverage existing telco and retail partnerships to drive the distribution of our expanded product offerings. Our employee benefits channel is a differentiator in the market with a strong growing pipeline, spanning across small, midsized, and large employers. With our broad reach and distribution, we will continue to invest and are well-positioned for growth in this channel. Turning to profitability, Q3 operating income was $526 million, up 41% year-over-year. We expanded operating margin to over 56% as a result of our continued cost discipline, our accelerated integration efforts, and our strong execution of cost synergies. Through Q3, we have reduced our overall operating expense profile from 35% to 31% of revenue. Synergistic workforce reductions from approximately 4,500 employees to roughly 3,850, facilities rationalization from a hybrid workforce strategy and early consolidation of duplicative enterprise IT contracts are structural contributors to our lower operating costs. We are making inroads to the 60% plus margin framework we've outlined last quarter. At the end of Q3, we achieved approximately one-third of the annual cost synergy target from an exit rate perspective, and we remain on track to achieve cost synergies of over $300 million as we exit fiscal year 2024. As planned, this creates more operating leverage to reinvest in product innovation and sales expansion as we move forward in our growth efforts. Q3 net income was $291 million, up 12% compared to last year. Diluted EPS was $0.46 for the quarter, up 2% year-over-year or 9% in constant currency, including $0.03 of currency headwind. Interest expense related to our debt was $148 million in Q3 with a negative EPS impact of $0.17 from total cost of debt in the quarter, $0.14 worse than last year. We anticipate the currency headwinds to continue and the interest rate conditions to remain volatile with a projected rise in SOFR in the near future. Turning to our cash flow and balance sheet. Q3 operating cash flow was $306 million and free cash flow was $305 million, which includes approximately $150 million of interest expense payments for this quarter. This brings our fiscal year-to-date free cash flow to a total of $428 million. Our ending cash balance was over $800 million. We maintain a balanced approach in our capital deployment. In January, we made a $250 million prepayment of our TLB. In Q3, we deployed $500 million of opportunistic share purchases -- repurchases, the equivalent of 23 million shares, and we have approximately $870 million remaining in our current buyback program. We also paid $80 million to shareholders in the form of a regular quarterly dividend of $0.125 per common share. For Q3, the Board of Directors approved a regular quarterly cash dividend of $0.125 per common share to be paid on March 15, 2023, and for all shareholders of record as of the close of business on February 20, 2023. We are well positioned with over $2 billion in total liquidity and we have no near-term maturities due until April 2025. With our strong cash flow generation and disciplined capital deployment, we will continue to utilize our capital to deliver EPS expansion and target net of approximately three times with a balanced approach to pay down debt and deploy opportunistic share buybacks. Now turning to our Q4 outlook. For Q4, we expect non-GAAP revenue in the range of $935 million to $945 million, translating to low to mid-single-digit growth in cyber safety expressed in constant currency. We expect Q4 non-GAAP EPS to be in the range of $0.44 to $0.46 per share as cost synergies are partially offset by increased interest expense based on current SOFR forward curves. Beyond Q4, we remain focused on our long-term objectives and are still targeting to achieve $3 annualized EPS exiting fiscal year 2025 with the following underlying key assumptions. Our cyber safety business continues to grow mid-single digits, post synergy structure of 60% plus operating margin, free cash flow deployed towards debt paydown and share buyback. The SOFR curve trends indicate rates below 3% exiting fiscal year 2025 and our diluted share count expected to be around pre-Avast merger levels. In summary, this was a solid quarter and in line with our long-term plan. We are proud of our continued growth, the level of execution across our teams, and the accelerated achievement of synergies. Amidst the headwinds we face, we remain focused on delivering the best products and services to our customers, both current and future, and we remain committed to driving incremental shareholder value with our robust business model high ratable revenue streams, healthy customer base and strong cash flow generation as we take advantage of the huge secular growth opportunity in front of us. As always, thank you for your time today. And I will now turn the call back to the operator to take your questions. Operator? Thanks for taking my questions here. Vincent maybe just to start with you, kind of longer-term questions. To start with the longer-term question. I know that revenue synergies are a little bit more of a multiyear process, but I guess with the first full quarter of Avast under your belt, how do you feel about what you've seen for synergy opportunities, right? Whether that's processes around retention or cross-selling Curious how you feel about those revenue synergies, again, kind of having more time as a combined entity? Yes, it's a very good question. We said on the last call that we will first really focus on fast integration of our operations than of our products to put in the best position to grow the value for our customers. On the last call, for those who were not on the call, we identified about $200 million of revenue synergies to be realized over the next two years. Half of those revenue synergies were about improving retention. Northern Life Log before the acquisition of Avast had a retention of about 85% on the customer side, when we merged with Avast, or brought Avast portfolio in, the aggregate portfolio dropped to 75%. And based on our initial assumptions, we felt we can improve that retention by about five good points on operational activities that we had identified at Norton LifeLock, including moving more customers to a membership level and making sure that they benefit and use all of the functionalities of the platform. After 90 days in, I think Natalie mentioned in her script that we improved Avast retention nominally, so not enough yet to make it a trend or mature, but it gives us good confidence that we're on the right path, having identified the right operational plan to improve over the next few quarters. The next big revenue synergies, it's all about cross-selling opportunities. Three quarters of our customers being more security focused, still device-centric and offering them the opportunity to grow in the identity and privacy space. In the quarter, the launch of new identity features or privacy products give us confidence that those would be well received. And I think over the next few quarters, we're going to accelerate that cross-sell, up-sell activities. One of the conditions is to have the product strategy fully defining the product integrated so we can do in-app identifications of the weaknesses for the customers and helping them being fully protected. And then the remaining other activities is between e-commerce, optimization, marketing recalibration across the business models we diverted a little bit of our marketing spend on the free-to-pay conversion so good results. So I think all in all, I would say today, I would reconfirm our $200 million estimate. The timeline does not change, but our confidence in getting there is there. We know in the short-term that we mentioned some macro level changes on global traffic and others. But when we based our the next two-year model and come in to the $3 EPS. We're confident we can rely upon a mid-single-digit growth rate to get there. Half of that growth rate is coming from those revenue synergies. Got it. That's very helpful. Natalie, maybe for you. Great to see the $500 million in buyback in the quarter. I think you said it was $250 million of a little bit of delevering here early in Q4. Can you just talk to us a little more broadly about how you're factoring in capital return into maybe the Q4 guide? And maybe longer-term, I mean you mentioned some nuggets there just around the $300 in EPS. How should we sort of think about that kind of mix of share buyback and delevering. Yes. Hi, Saket, thank you for the question. To answer your question very specifically, for the Q4 guide, we have nothing factored in there in that model beyond the mandatory debt pay down. But as you know, very, very consistent with our capital allocation priorities. We'll continue to strike the right balance across accelerated debt paydown and opportunistic share buyback as we all know, there's financial benefits to both of those as we maximize return back to our shareholders. We've stated delevering as a priority. It is. And as the cost of debt, you've heard it now a couple of times in today's call. The cost of debt for us is a major hurdle, one that's going to get worse before it gets better. So you can count on us that as we continue to generate strong cash flow and we continue to repatriate our international cash, we will be very, very active in deploying capital allocation in the most advantageous way. As we look into the long-term model, it does -- our capital allocation priorities stay very, very consistent. We s till -- we have a large amount of outstanding debt SOFR curve that anybody can see doesn't seem that it will get much better until fiscal year 2025. So as we navigate through not only Q4 but fiscal year 20024, you'll see us strike that right balance across opportunistic share buyback and accelerated debt paydown. We got to do both. Absolutely, absolutely. Vincent, maybe just one last one for you, a little bit more shorter term. So obviously, a much more challenging macro backdrop. We saw that in the net add metric. I'm just kind of curious if you could parse that out a little bit. And maybe that's just a focus on kind of the log piece. How did gross add to how did sort of churn do? How are you kind of thinking about that in the coming quarters? Yes. So, when you step back at a high level, three growth drivers. One is the revenue we get for users, which really is about adoption of some of the products or the full portfolio; the retention activities so more customers being retained satisfied with our values; and then the total customer adds not just the direct customer that we report. On ARPU growth sequential on retention, slight improvement driven by Avast, mainly and we continue to work on those behind that. Many investors ask me, okay, how do you do that? Obviously, we have a lot of operational know-how, but product innovation and membership adoption are the two very important driver there. And I think you've seen that we have a good cadence there. Then comes total membership. We look at membership as a total, including from partners, even though they're not a direct customers, they benefit from our overall membership. And so we'll continue to invest into that partnership, you've seen double-digit growth, and we're pretty happy about the performance there. We continue to work on the funnel. When it comes to direct customers with a stable retention across all lines and across regions and slightly growing ARPU. It's all about the net gross adds, so the new top of the funnel, if you want. A trend we have seen now for a couple of quarters, right? So, it's no different this quarter than it was last quarter or slightly more robustness on the identity privacy combined pillar if you want a little bit more weakness the security when you may be closer to the device. Same dynamic, whether it's Europe or Americas. And I think for us, it's all working on that marketing spend optimization as we continue to innovate the portfolio. Good evening. Thanks for taking my question. So, I wanted just to follow on the net add question because I think that's probably what folks might be picking on a little bit. But it sounds like the overall environment was pretty consistent with your expectations for this past quarter. But I think last quarter, we saw that the net adds coming in a little bit more stable, at least on the Northern LifeLock side. So I'm curious, was there anything throughout the quarter, perhaps what you saw towards the end of December where the consumer maybe got a little bit weaker as it relates to Gen Digital. Yes, I understand the question. So, actually, Q1, Q2, Q3, the trends were somewhat in sand dynamic, the same. And you're right that last quarter, it was the Norton and LifeLock lines, if you want, that were sequentially slightly more under pressure -- sorry, less under pressure versus Avast and this quarter is actually the reverse. I would not indicate that as like 1 quarter change within the proportion of what we're looking at, it's not mature enough. And I think overall, you can say about the same dynamic slightly worse in Europe and Americas, but same dynamic across the two continents and slightly worse in security closer to the device than identity and privacy. And I think when we guided back in November, we had said, hey, we don't see a change in that trend. And I think for the next few quarters as we close the fiscal year, we see similar trends and that's why we're right now really focusing on integration, product integration, increasing ARPU and retention as we continue to optimize between the different brands and business models we have. Got it. And just maybe a quick one for Natalie. The dollar has gotten quite a bit weaker year-to-date. Just curious how you're thinking about FX headwinds in relation to the fiscal Q4 guidance and perhaps any commentary you get beyond that? Hi, Hamza. Yes, from a guidance perspective, we just assume no change to currency rates. We don't guide based on projected impacts of currency fluctuations in the market. And also change Hamza only a few percentage points. So it's sorry, I just wanted to add Hamza that between dollar versus euro at 106 versus 109. Yes, it may change in big views, but it's not materially different for us to change how operationally we drive. And inside the company, we drive all of our teams in constant currency and each sales team and direct-to-consumer teams are managing their business on the bookings in constant currency. Soâ¦ Thank you for your questions. There are currently no questions registered. [Operator Instructions] At this time, there are no more questions remaining. This will conclude today's Gen Q3 Earnings Call. Thank you for joining, and have a great rest of your day.
EarningCall_904	Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to Primis Financial Corporation Fourth Quarter Earnings 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] Before we begin, please note that many of our comments during this call will be forward-looking statements, which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Further discussion of the company's risk factors and other important information regarding our forward-looking statements are part of our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has also been posted to the Investor Relations section of our corporate site, primisbank.com. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measures can be found in our earnings release. When we started 2022, we were determined to grow our new lines of business alongside the community bank to finish the work that we'd started on the digital bank, and to somehow diversify away from just spread income, wanting to build some strength and opportunity and non-interest income, which our company had not really benefited from. Looking back over the last 12 months, we've invested so hard in the bank that we envision. And the question, or one of the questions that we all have is basically, will it pay off and win? I'm going to answer that in a minute, but first, a few items to highlight in the quarter and in the year. First was the loan growth we experienced. I knew Matt was conservatively estimating our growth potential. He's chuckling right now, as we started 2022, and we did come in very strong with about 25% growth in loans when you exclude the effects of PPP. And this was from all areas of the bank, just like we had predicted evenly from the community bank, from Panacea and from Life Premium Finance. For almost five years really through the middle of last year, our bank had just not grown loans organically that's we were not known for that. And I think we've turned that around in a really big way and I'm really proud of the engine that we have built here from scratch. Two of these engines are operating lines of business. Panacea started the year with only about $50 million of loans, all consumer and about $1.3 million of recurring revenue. We grew our doctor base to about 3000 doctors doing business with us all across the country. We've invested in production and credit administration and customer support and technology. We spent all this money to build the brand and as we progressed through the year, results at Panacea progressed nicely. We finished a year with about $7 million of recurring revenue and the prospect of a material boost to that number as we move to start splitting our production between gains -- between -- excuse me -- between gain on sales and portfolio. The credit here is outstanding. Our commercial book has debt coverages in the -- over 2% -- or excuse me -- over two times. No past dues ever and incremental yields honestly that are close to or exceeding traditional bank CRE. Like Premium Finance ended with just $200 million, just under $200 million of outstanding loans and about $800 million underwritten. In less in a year they've built a brand and all the infrastructure and can take this to something much more sizable with where the only real incremental operating expense is hiring incentive pay for the producers. This division also moved yields higher on loans that are entirely cash secured, and in the fourth quarter we are getting incremental variable rate yields within 30 to 40 basis points of fixed rate CRE. Another area we invested in was the mortgage business, and our total investment in the Mortgage company, including the losses associated with recruiting the teams, stands at just under $6 million, which is considerably less than our former investment in Southern Trust. Looking at our production teams, our restructured comp plans, the level of administrative -- excuse me -- the level of administrative staffing and the current rate and housing environment, I feel confident that this investment has a payback of about four or five quarters. We are not so heavily invested in this space that we can't maneuver or pivot if conditions worsen or recruit and build if conditions for this space improve. I mean, I really believe we're ideally positioned for this year and this division will improve our earnings and ROA in 2023. The last thing I'd mentioned -- next to last thing I'd mentioned really before turning this back to Matt is in regards to credit quality. During the quarter we took a very large provision for a single asset, one that we had put in non-performers I think in the third quarter. When this loan got wobbly, we got new appraisals and we felt pretty confident in our position, but we reappraised the properties in the fourth quarter and aggressively wrote them down to the 90-day liquidation value and levels that I'm hopeful will move the property as soon as we're able to do so. The other material MPA on our books is the first mortgage on the largest state property. We have a 40% or so LTB there, three junior lien holders behind us, and right now that loan is current, but we have left it in non-performers for the time being. So outside of these two credits, we only have about 20 basis points of non-performers, and our credit quality in 2022 would have improved dramatically, almost about 50% and to the near -- and nearly to the top of our peer group. And none of that, actually -- none of that excuses our actual results. We finished a year with about 119 basis points of non-performers, and I'm just trying to illustrate to you how determined we are to move these two assets out of the bank as fast as we can and restore credit quality that you'd expect from a top performing bank. That can -- how I started about investing in the bank. It is not easy to grow a bank this size organically, especially at the pace that we're trying to grow. It's, gut wrenching actually. It takes about 18 months to conceive a strategy, build it out, suffer some operating losses that us CEOs like to call investments, stay the course while you make small adjustments here and there while you're second guessed, and then finally come out on the other side with something that drives value. The outset for me here about three years ago, I saw some issues that I thought were standing in the way of us creating long-term shareholder value and we've invested a lot of our dollars and operating results. And honestly, a lot of myself personally, building engines that I know unquestionably drive value in this industry. We needed a safe way to grow loans. We needed reliable sources of non-interest income. We needed more deposit strategies. We needed more expertise in every area of the bank. We needed better regulatory reputations relationships. We needed a better brand. And just saying all that leads me out of breath. The good news for 2023 is that we don't have a lot left to invest in. What we've done over the last three years, and especially in 2022, is enough to produce outsized growth and profitability for some time. In 2023 we need to let all of that come to fruition. And I believe that we'll see all of this build and start to pay off and I'm determined with Matt's help to not be distracted with any other -- with anything else other than getting the payback on these investments and honestly illustrating how great a value our stock is at these levels. Thanks Dennis. I will provide a brief overview of our results before we turn to a Q&A. But as a reminder, a full description of our fourth quarter results can be found in our earnings release in fourth quarter earnings presentation, both of which can be found on our website. Earnings from continuing operations for the fourth quarter were $3.1 million or $0.12 per diluted share versus $5.1 million or $0.20 per diluted share in the third quarter. Excluding one time items, earnings in the fourth quarter were $0.03 per diluted share versus $0.21 in the third quarter. As Dennis mentioned, as I'll discuss further, earnings were impacted by a large provision and mortgage related losses in the fourth quarter. Total assets were $3.57 billion at December 31 versus $3.36 billion at September 30. Excluding PPP loans and loans held for sale, loan balances grew 32% annualized in the fourth quarter, both was primarily driven by Panacea and Life Premium Finance again in Q4, but we did see growth in the core bank as well. Given the rate environment, we did not expect this level of loan growth to continue at this pace in 2023. Deposits were up approximately 2% annualized in Q4. Non-interest bearing deposits declined to 21.4% from 25.4% last quarter as depositors began looking for yield. Our loan to deposit ratio increased to 108% in the fourth quarter, which is higher than we prefer, and we are singularly focused on bringing that ratio down in Q1 of this year. Excluding accounting adjustments, net interest income increased to $28.2 million from $27.5 million in Q3. Excluding these same adjustments plus effects of PPP, our margin was 3.51%, down 7 basis points from the third quarter. Adjusted yield on earning assets expanded 35 basis points, while cost of deposits and cost of funds increased 30 basis points and 48 basis points, respectively from Q3. Excluding accounting adjustments and one time gain, non-interest income was $5 million versus $4.4 million in the third quarter. Large originations were up 36% in Q4 in the face of substantial industry headwinds and on top of normal seasonal lows for mortgage. The additional teams we added late in the third quarter are fully onboarded and building pipelines. We're projecting originations of $1 billion in 2023 including and taking into account the current environment and up from roughly $300 million in 2022 and with meaningful additions to non-interest income and profitability overall. Non-interest expense included a number of items this quarter, including $1.2 million of non-recurring expenses, $36,000 for unfunded commitment reserve and increase mortgage expenses of roughly $2.2 million from a full quarter of the production team buildout that we started late in Q3. Excluding these items, non-interest expense was $21.2 million up from $20 million last quarter. While we intend to moderate them in the first quarter, marketing costs remained high in the fourth quarter. Turnover in the organization continues to cause inflationary pressures and salary and benefits. We also had approximately $500,000 of year-end true ups for various accruals. As we look to the first quarter, we expect cost controls to push expenses down slightly from Q4. Excluding non-recurring accounting adjustments and the impact of mortgage, our operating efficiency was just under 70% in Q4. Mortgage improvement, which is expected to be breakeven in the first quarter, plus increasing operating leverage from Panacea and Life Premium Finance will drive this efficiency ratio lower in 2023. As Dennis alluded to the provision for credit losses was $7.86 million in the fourth quarter versus $2.89 million in Q3. Excluding accounting related adjustments, the provision would've been $6 million in the fourth quarter, with the increase largely due to the impairment of the relationship that Dennis discussed earlier. We also had net charge-offs in the fourth quarter of $3.7 million excluding accounting adjustments, again largely tied to the relationship discussed previously and offset partly by $1.3 million of recoveries in the quarter. Taken all together, the allowance for credit losses to gross loans, excluding PPP was flat at 117 basis points at December 31. Non-performing assets net of SBA guarantees decreased to $34.9 million in the fourth quarter from $36.1 million last quarter. The relationship we've previously discussed along with the other loan that Dennis mentioned combined are 78% of our non-performing loans. We also now have no OREO as of December 31. Pretax, pre-provision operating ROA was 78 basis points in Q4, down from 105 basis points in Q3. Excluding the investment in Mortgage, this ratio would've been approximately 110 basis points versus 115 last quarter. Similar to the efficiency ratio discussion above, we expect meaningful contributions from our newest business lines, including Mortgage, Panacea, and Life Premium Finance in 2023 that will materially increase profitability and drive us to our 1% ROA goal. Maybe I thought we'd start just to touch on expenses. So, it sounds like you've got the mortgage work done, and as you go into 2023, do you have your, I guess, starting point per quarterly expenses somewhere around like $27 million, $28 million or am I off there? And then, I think you just answered this, but just safe to say, there are no other chunky sort of investments that might come in over the next few quarters at least that you're expecting at this point. So that's sort of the runway to go off of. Okay. Okay. And then just looking at Primis Mortgage, I mean, you talk about the $1 billion in production, is that enough to breakeven there? Are we assuming some pickup and the gain on sale margins in that space, or sort of -- is it a little too optimistic to think about that in the first quarter? Are you talking more just sort of throughout the year, or maybe just walk us through sort of the evolution to get that towards profitability timeline? Sure. I'll start it. Dennis can add to it, or correct me where I go wrong. We're expecting $1 billion dollars of production for the year. That is enough to more than breakeven. We expect mortgage to contribute to profitability for the full year. The comment I was making earlier was, as you know, mortgage is very seasonal. The housing season really starts in the spring. As production ramps in the first quarter, we expect them to be breakeven for the first quarter and then materially more profitable in the second and third quarters. Fourth quarter is usually, again, breakeven, sometimes slight loss depending on seasonality. But taking overall, we're expecting mortgage to contribute $4 million to $5 million after tax in 2023. The fourth quarter had a considerable amount of sort of in -- of draws that didn't have any associated production with it. Some of that's because it's a fourth quarter. Some of that is because people bringing over pipelines. All of those -- almost all of those 90% or of them are more expired on 12/31. So, really as we go into the first quarter, for the most part, almost all of our -- all of our producers are on commission only. So, I would also say -- and one other thing, so just said a little bit differently. So, the $27 million, $28 million, probably closer to $27 million for the first quarter, with mortgage is fair. But remember, as their production increases, that expense line's going to increase, but their turn -- it's because of commission expense. Right? So that's -- they're generating revenue on the other side. You're saying that the expense side may stay the same, but we expect an extra million five or so revenue. You know what I'm saying, excluding mortgage should -- I mean, the expense with mortgage will go up through the year and probably come back down to the fourth quarter as production decline. But I don't want you to be surprised if in the second and third quarter expenses are a little bit higher, because it's the peak of the mortgage market. Does that make sense? That does. There's going to be a piece of the expenses that will be tied to production. Okay. There was a lot of noise around a third-party service portfolio this quarter. I guess, can you just dumb down what's going on there? Should we be assuming the 350 margin is sort of the better starting point or, the 370 or whatever that you reported, 367 you reported. The -- so we're going to, as we go forward, continue to kind of strip out some of the noise from that portfolio. So, we have a portfolio of loans that we originated with a third-party. They come on our balance sheet directly, but they're managed and serviced by third-party. And when it was smaller, we were just booking the net revenue from the portfolio. But now that it's bigger, the accounting requires us to run more of the adjustments from the portfolio through various line items. So, booking yield at a gross level instead of net booking the charge-offs that are on the portfolio, but that are covered by the third-party. And then there are offsets for all that in non-interest income and non-interest expense. The net profitability that we're making on these loans is -- has not changed. The only thing that's changed is we have more of the effects from the portfolio running through various lineup. So, it's really the -- where it shows up in our income statement has changed, but the impact on net income has not. So, from a core basis, I would encourage you to focus on the 351, which is really apples-to-apples versus last quarter, kind of where we -- how we think about our margin going forward. This portfolio -- the accounting for this portfolio is going to create some margin effects on a reported basis, but we'll do our best to adjust for all that and keep it apples-to-apples going forward. Okay. I guess, I would just ask one last question. Obviously, a lot of noise this quarter. You guys got a lot of stuff done last year. Just if we think bigger picture about sort of the profitability outlook and how quickly we can build the ROA, I guess what kind of sort of outlook can you guys give us over the next few quarters into next year to the extent the environment stays somewhat like it is today? I would say -- well, Matt's got a slide that sort of -- that shows where the improvement's coming from, some is from obviously Panacea and the Life Premium Finance, growth in the core bank. Little more expense marketing, the digital bank mortgage and I think gets us to right at $1.50 of earnings per share. I mean I would say â¦ â¦ for 2023. Yeah. We have -- the slide he's referring to builds up pretax, pre-provision, starting with our run rate in the fourth quarter shows the impact of mortgage improvement that we just talked about, the improvement in Panacea and Life Premium Finance and builds us up to a higher run rate or a higher full year pretax, pre-provision for 2023. And if you assume a reasonable level of provision for more moderate loan growth in 2023 and then tax effect that, you could get to $1.50 a share for the year. That's about -- that's -- that will be -- we will be very delighted with that. But really that just sort of shakes out to just over a 1% ROA. And clearly that's -- and that's not our goal. I mean, we need -- I really believe that Panacea, Life Premium Finance and Mortgage will be meaningful contributors to the ROA honestly in 2023. But, but more so in the out years. I think the core community bank, I mean, is hard really to grow that beyond or to improve the profitability there, say beyond -- say 1.10% or 1.15%. And so all these other items -- all these other businesses are important. I think long-term we're still sort of believing that we should be in the 1.25% to 1.35% range. Our goal in 2023 is just to be 1% on the bottom line. Hey, Dennis. Hey, Matt. Thank you for hosting the call today. I'm just going to follow up on the last point about the pretax, pre-provision kind of run rate that you put out. That slide was very helpful. Do you think that that's possible to be at a run rate by the end of 2023? I just want to get a little more background on timing and kind of what's realistic. I think we follow what you're trying to do. Just want to know kind of what the timing we should expect. I haven't been trying to think about the ROA on a quarterly basis when we put that together, because that includes mortgage contribution, which is only going to be breakeven in the first quarter, but more meaningful contribution in second and third quarter and then you get the ramp for Panacea and Life Premium Finance over time. So, I have a perfect answer to your question there, Chris. We're trying to think of it more on the full year. I think probably if I had to -- I don't think we'd be -- I mean, fourth quarter obviously is not the best quarter for mortgage. I mean, I think it'll be accretive to the ROA in the fourth quarter, but I don't think it'll be meaningfully accretive to the ROA. I think if you look at the first half of the year, Chris, versus the second, I think we have a few things teed up. I mean, Panacea, like we said in the reports, looking at some loan sales and we've got a little bit of momentum there. I'd say the first half probably is closer to 90, and the second half is probably closer to 110, even with mortgage dipping a little in the fourth quarter, I still think second half of the year -- probably 110 and maybe the fourth quarter like a 105, probably what I had to guess. So, again, slide seven is more than aspirational. It's really kind of what you're trying to do for this year and it's just a question of when those -- it all falls in place. I wouldn't -- yeah, I wouldn't call it 10% aspirational. Yeah. I mean, I think some of the stuff that we're looking -- I mean, no, there's -- I think there's science behind all of this. I mean, the core bank improvements of 2.6, I don't want to go into that. I know exactly where the 2.6 is and on the mortgage pretax of 4.9, I know how to get to that 4.9 with $700 million of production and I know how to get there with $1 billion of production. So, in Panacea, I know how much in loan sales we've got to have and how much we've got a portfolio. And so, I don't think it's aspirational. I think it's -- and I know you didn't mean that word sort of in a negative sense. But I kind of go back to my comments at the end of my prepared comments is, I mean, this is what we've been working towards. This is really what we've been working towards. And -- yeah. I would just say -- I mean, you all don't get to see this obviously, but when we were -- when we work on our multi-year projections, when we were working on our projections last year, we had 2022, somewhat basically coming in. There were more moving parts that we experienced this year than we anticipated, but we ended up netting out around where we thought we would be this year with the various investments we were planning. And we anticipated 2023 seeing meaningful improvement in EPS and profitability as a result. That -- with that slide seven and that buildup, that's not inconsistent with what the plan was a year or so ago. And Dennis said, we're increasingly confident that we can get to those numbers just based on kind of what we're seeing with the improvement in these business laws. Great. That's helpful for both of you. I appreciate that clarity a lot. My only other questions just goes back to deposits. I know you've made a lot of progress on deposits as you cited within Panacea specifically, but just as a general kind of question about opening new deposit accounts and that -- what do you see organically ahead of you this year? I know it's a challenging environment with rates, but you want organically focused and so just want to get a sense of what you think is possible on kind of new deposits coming across the company. In the core bank, out of the branches in our markets, I think staying flat's going to be pretty magnanimous. I mean, in the whole industry -- I don't -- I find a CEO, bank CEO that believes they're going to be able to grow their poor deposits and now you can. But you're obviously paying up for every new deposit coming in the bank. Our advantage -- and we have got to exacerbate this advantage, our advantage is this digital bank that honestly is as good in Phoenix, Arizona, and I always say Minnetonka then as it is in our core footprint. And so, being able to use the digital bank to raise those deposits in places that we aren't and that won't affect, are really valuable core deposit franchise. I mean, we have an advantage that not every other bank in the country has, very few banks have disadvantage. And so, we've got to exacerbate that, really help us. I mean, because honestly, if it wasn't for that and we were trying to grow loans like we are, or had all the opportunity, we would basically be faced with sacrificing the real value in our core deposit franchise and making it more rate sensitive. And we don't have to do that because of the opportunity we have with the digital bank. And we're just hitting the stride on the digital bank. Really, we are. And we've got some places that we're about to market that at reasonable prices. And that's going to work. I mean, in our delta or what we need to be impactful here is, is really not a big number when you consider it's got a potential national reach. If I was trying to raise this number in Hampton Roads or Richmond, it would be daunting. We would be having a different conversation here. But when I know that I have the whole country, I feel better about it. The other thing I would add and we've talked about this or highlighted it in our investor presentations previously, we're -- with the digital platform, we've been growing in the fourth quarter with one hand on our back. It's only got consumer accounts so far. In the first quarter, business counts will go live. And at the same time, we have an upgrade of the mobile experience for both consumer and business, that will take place. That's a meaningful improvement, and for business accounts, a meaningfully improved user experience and functionality for small business customers. So, we're very excited about that. We're -- I mean, our CIO will tell you we are pounding in every day on updates on when we're going to have all that live because we think that's -- I mean, consumer's important, because you can market broadly and move the needle with a lot of accounts. But we really need this business piece live, because we can then move the needle with some larger balances and fewer accounts. And we haven't had that delivered yet. Good. I follow you there and I thank you for that. And it sounds like the digital bank is going to influence both total deposits as well as core deposits. Just back to kind of the way that you explained it on the slide 20. So, that's good. Thanks again for taking the question this morning. We have no closing remarks, but we are available if you have questions or comments or want to call us directly. Matt and I are both around. Thank you and have a good weekend.
EarningCall_905	Good morning or good afternoon all and welcome to the Berkshire Hills Bancorp Fourth Quarter 2022 Earnings Conference Call. My name is Adam, and I'll be your operator for today. [Operator Instructions] I will now hand the floor over to Kevin Conn to begin. So Kevin, please go ahead, when you are ready. Good morning, and thank you for joining Berkshire Bank's fourth quarter earnings call. My name is Kevin Conn, Investor Relations and Corporate Development Officer. Our news release is available in the Investor Relations section of our website berkshirebank.com and will be furnished to the SEC. Supplemental investor information is provided in an information presentation at our website at ir.berkshirebank.com and we will refer to this in our remarks. Our remarks will include forward-looking statements and actual results could differ materially from those statements. For details, please see our earnings release and most recent SEC reports on Forms 10-K and 10-Q. In addition, certain non-GAAP financial measures will be discussed in this conference call, references to non-GAAP measures are only provided to assist you in understanding our results and performance trends and should not be relied on as financial measures of actual results or future projections. A comparison and reconciliation to GAAP measures is included in our news release. On the call today, we have Nitin Mhatre, President and Chief Executive Officer of Berkshire Hills Bancorp; Sean Gray, our Chief Operating Officer; Brett Brbovic, our Chief Accounting and Interim CFO; Greg Lindenmuth, our Chief Risk Officer; and Stephen Finocchio, our Treasurer I'll begin my comments on Slide 3, where you can see the highlights of the fourth quarter and full-year 2022. Overall, this was another solid quarter, continuing the momentum and capping a strong year with robust improvement across all key financial metrics. Adjusted revenues were up 8% quarter-over-quarter and up 31% year-over-year, driven by a strong net interest income growth. This strong growth in revenues was driven by solid loan growth and improved margins, which more than offset the headwinds in non-interest income. Adjusted expenses were up 3% quarter-over-quarter and 6% year-over-year, resulting in positive operating leverage of 5% quarter-over-quarter and 25% year-over-year. Resulting adjusted PPNR of $45 million was up 16% quarter-over-quarter and up 112% year-over-year. Adjusted earnings per share of $0.64 was up 2% quarter-over-quarter and up 52% year-over-year. This quarter was the highest quarterly adjusted earnings per share since 2019. Adjusted return on tangible common equity was 9.83% and adjusted return on assets was 100 basis points, both of which are close to the lower end of the BEST program targets we set for mid-2024. On the capital front, our balance sheet continues to remain strong. We ended the quarter with a common equity Tier 1 ratio of 12.4% and a tangible common equity ratio of 8%. We continue to have ample capital to both fund our loan growth and continued stock repurchases. We increased our dividend in the fourth quarter by 50% from $0.12 to $0.18 and we'll target a prudent dividend payout ratio of 30% to 40% of net income over time. We returned about $28 million of capital to shareholders this quarter via dividends and stock repurchases and we have authorization for a new $50 million share repurchase program in 2023. As we remain vigilant, our overall asset quality remains strong, charge-offs and provision expense for this quarter increased primarily to absorb additional charge-offs from the same credit that we partially charged-off in the third quarter. This was and remains an isolated credit and does not reflect any broad deterioration in credit. In fact most of leading indicators on credit are remarkably strong and our loan delinquencies and classified assets to risk-based capital are at a 10-year low. Separately, an accelerated through our BEST program launch, we have been actively de-risking the balance sheets for the last few years. We've continued to run-off non-strategic credit books, including indirect auto and aircraft lending, both of which are down 50% year-over-year. At mid-last year, we also de-risked the balance sheet further by announcing the run-off of Firestone an Upstart loan books. Credit in both of these books is tracking ahead of plan and we've included data and the appendix page, which details how we have de-risked our loan book over the last several years. While it is an uncertain environment, we feel reasonably good about credit for 2023 based on the leading indicators, proactive credit management, and high quality of new originations in recent years. Brett, will review our credit metrics and provide overall 2023 outlook in more detail in a moment. On the BEST strategy front, we made significant progress in 2022. We continued optimization of our physical footprint, accelerated our programs to enhance our digital banking capabilities, tracked ahead of BEST Community Comeback program goals, issued a sustainability bond in the second quarter, and along with improvements in our financial performance have significantly improved our ESG ranking, customer experience and employee engagement. We started the BEST plan with a guiding idea to get better before we get bigger. With resumed loan growth, we have now transitioned our guiding idea to getting bigger while getting better. What this means is, we will not sacrifice credit or pricing to grow. We will continue to be focused on organic growth that is differentiated, profitable and responsible. Central to responsible growth is a durable lower cost deposit base. We are well positioned with very high deposit shares in six out of eight of our MSAs and we are in many relatively less competitive smaller city and rural markets. As part of our BEST strategy, we also changed incentive plans to encourage deposit generation, as well as loan generation. We also have several niche deposit strategies, including our MyBanker program and our digital banking platform enhancements. While it is an uncertain environment, we feel good about our relative deposit volumes and cost in the coming quarters. We continue to add talented frontline bankers to bring new customers and relationships to us. We have also recently hired three seasoned executives to supplement our talented leadership team. David Rosato, who many of you may know, will join us as CFO in early February. David was in finance team at People's United for 15 years and served as their CFO for the last nine years. Prior to People's, Dave was the Treasurer at Webster Bank for eight years. We also replaced two senior executives, who have been planning on retiring. George Bacigalupo, our Head of Commercial Banking; and Georgia Melas, our Chief Credit Officer. We thank them immensely for their many years of service and significant contributions to Berkshire Bank and wish them the very best for their future. Jim Brown, has joined us as our Head of Commercial Banking. Jim successfully ran Commercial Banking at Boston Private where he was instrumental in growing Commercial Banking business from less than $0.5 billion in loans and deposits to over $5 billion in loans and $6 billion in deposits. He brings over 30 years of commercial Banking experience to Berkshire. Phil Jurgeleit, has joined us as our new Chief Credit Officer reporting to Greg Lindenmuth, our Chief Risk Officer. Phil, also brings over 30 years of banking experience including his last assignment as Senior Vice President of Credit Risk at Santander. We've included short bios in an appendix page for each executive. We're excited to have the seasoned executives joined our leadership team. David, Jim and Phil welcome to the Berkshire team. Slide 4, shows our BEST program North Star chart, which details our progress on five key performance metrics. We'll are happy to report that we've achieved three of our five targets well ahead of plan. We are at the low end of our target range on return on assets at 100 basis points and our fourth quarter PPNR of $45 million annualizes to $180 million also at the low end of our 2024 target range. We've achieved our top quartile ESG score back in 2021 and ended 2022 in the 17 percentile, a steady improvement and solidly in the top quartile. We just a bit under the lower end of our 10% to 12% ROTCE target this quarter at 9.83% and are encouraged by the momentum in this critical performance metrics. As we mentioned on our prior earnings calls, we are working on our Net Promoter Score rating process with JD Power and expect to show improving NPS over time. In summary, we are pleased with our momentum through 2022 and are energized about the momentum that will drive further improvements. As I always do, I would like to thank all of our Berkshire Bank colleagues for their continued hard work and commitment to our vision of becoming a high performing leading socially responsible community bank. Their commitment to our strategy and dedication to our customers is what is driving our ongoing performance improvement and continued progress. I would also like to thank Brett Brbovic for his 10 years of service at Berkshire and for his leadership of the finance team as the Interim CFO during this transition. Slide 5 shows our annual income statement. Please see the appendix for a reconciliation of GAAP and adjusted financials. My comments will be on an adjusted basis and non-GAAP. 2022 revenues were up 9% versus 2021. Net interest income grew 18% due to loan growth, increased asset yields, and modest growth in funding costs. Fee revenues were down about 22% primarily driven by lower SBA gain on sale and lower wealth management fees driven by market declines. We maintained our spending discipline with expenses flat year-over-year and improved our efficiency ratio to about 64%. Adjusted EPS was up 30% and average fully diluted shares declined by 7%. Slide 6 shows our quarterly income statement. Revenue was up 8% quarter-over-quarter and 31% year-over-year as net interest income strength offset a decline in fee revenues. Expenses were up 3% quarter-over-quarter and 6% year-over-year and as Nitin, mentioned we had positive operating leverage on both a year-over-year and quarter-over-quarter basis and our efficiency ratio for the quarter was about 58%. Provision expense for the quarter was $12 million and our credit allowance remained relatively stable at $96 million. I'll discuss revenues, expenses and credit in more detail in a moment. Slide 7 shows our average earning assets. We had another quarter of broad-based loan growth with a 2% increase in average loans versus the third quarter and a 19% increase in average loans year-over-year. On an end of period basis, loans were up 5% quarter-over-quarter with strength in both commercial real estate and C&I up 5% and 3% respectively. Mortgage balances continued to grow even in a difficult environment, largely driven by the season loan officers hired over the last several quarters. Loan yields rose 74 basis points versus the third quarter and continued to benefit from the shift in mix from lower yielding investments into higher yielding loans. Slide 8 shows our average liabilities. Average total deposits rose 1% versus the third quarter and declined 2% year-over-year. Our cost of total deposits was at 69 basis points, up 36 basis points from the third quarter. Our total deposit beta for the fourth quarter was 25% and our cumulative total deposit beta is 15%. While we benefited from a strong deposit base in 2022, we do expect deposit cost to increase over the coming quarters and we still expect total deposit betas through the cycle to be in the 30% to 40% range. Slide 9 shows more detail on our net interest income and margin. Net interest income grew 11% quarter-over-quarter and 47% year-over-year. Our net interest margin was up 36 basis points versus the third quarter and we're happy to report that our adjusted and reported NIM are essentially the same this quarter at 384 basis points. Turning to Slide 10, we show our fee revenues which were down 7% versus the third quarter. This is primarily due to the timing of tax credit deals which closed late in the quarter and accelerated the full amortization into the current period. This resulted in fee -- other fee revenues being down due to $2.4 million of tax credit amortization, this is a contra revenue item related to our tax credit business and is more than offset by the benefit received in our tax credit expense, which lowered our tax rate this quarter to about 14%. Loan fees were higher on more swap revenues, loan agent fees and a sequential improvement in our SBA gain on sale. On Slide 7, we show our expenses. Expenses are up 3% versus the third quarter and 6% year-over-year. I note that compensation expenses benefited from one less working day in the quarter and a reduction to the acquired executive benefit plan expense. Occupancy and equipment was up seasonally on higher heating and snow removal expenses and we continue to invest in technology and as a result, the expense was higher as we continue to rollout our digital banking platform. Other expenses were up from increased reserve requirements for our unfunded commitment reserve, which is a function of doing more business. Finally, our merger and restructuring costs were a negative $2.6 million, which included a favorable reversal of a prior period expense, as estimated lease termination costs were trued up. I'll show -- I'll share more on our expense outlook in a moment. Slide 12 is a summary of our asset quality metrics. As Nitin mentioned, we had $11.7 million of net charge-offs this quarter, largely driven by one middle market loan to a corrugated box manufacturer that was impacted by customer receivable defaults and filed for bankruptcy in the fourth quarter. Including the prior quarter charge-off, we've charged-off about 60% of this credit and the remaining exposure of about $7 million is collateralized. We will continue to monitor this credit in 2023. Delinquent and non-performing loans were down 14% versus the third quarter and down 36% on a year-over-year basis. Delinquencies and non-performing loans at 60 basis points of loans are at a 10 year low, while we are monitoring credit closely we are not seeing any broad-based portfolio credit deterioration and are encouraged to that our accruing delinquent loans or early stage delinquencies are down 8% versus the third quarter and 55% on a year-over-year basis. Slide 13 shows details of our liquidity and capital positions. Our loan-to-deposit ratio was 81% this quarter, below our BEST target of 90%. Our common equity Tier 1 capital ratio ended the quarter at an estimated 12.4%. Our TCE ratio ended the quarter at 8% and included a cumulative OCI bond mark of $176 million on an after-tax basis, an improvement to the third quarter, given a modestly lower rate environment. The bond mark includes a $7 million after tax improvement booked in the fourth quarter. Those bonds will pull to par over time and the marks are not included in regulatory capital ratios. Our tangible book value per share ended the quarter at about $21. I want to be clear that this is a non-GAAP adjustment, but excluding the AOCI mark, the total tangible book value per share would increase by about $4, making it the highest TBV per share historically for Berkshire at about $25. We provided a GAAP to adjusted TBV reconciliation in the appendix. Our top priority is to deploy capital to support organic growth. Given our continuing excess capital position, we repurchased about 661,000 shares for about $20 million in the fourth quarter. We are biased to opportunistic stock repurchases given our relatively low stock valuation to tangible book value. As Nitin mentioned, we grew our cash dividends by 50% in the fourth quarter to $0.18 per share per quarter and announced a new $50 million stock repurchase authorization. Slide 14 shows our outlook for 2023. We plan to share guidance once a year on our fourth quarter call, unless the operating environment changes meaningfully. As many banks do, we based our outlook on the Moody's baseline forecast and our outlook is based on Fed funds at 4.75% for most of 2023, which may be conservative and provide modest upside to our net interest income. We expect average loan growth of 11% to 12% and average deposit growth of 3% to 5%. With a full-year of higher rates in 2023, we expect the net interest income to be up 15% to 16%. Fee revenues are forecast to continue to face headwinds and be down 10% to 12%, but I know that, of that decline most of it is due to tax credit amortization. We are targeting $7 million to $9 million of credit provision expense per quarter, which is largely a function of our expected loan growth. For context, our 10 year average provisions to loans is about 30 to 35 basis points. We expect to maintain positive operating leverage with approximately 4% growth in expenses in 2023 driven by wage inflation, technology investment and higher deposit insurance costs. We believe this expense growth will still differentiate our disciplined expense management versus our peers. Our tax rate is expected to be above 17% to 19% and we expect to opportunistically execute on the new $50 million share repurchase plan. I'll close my remarks with comments on the economy and our positioning. We are fortunate to be operating primarily in steady Eddie New England market, which remains on a relatively solid footing. As we talk to our customers, we are seeing a bit more caution, driven by tight labor market, inflation and supply chain concerns, but at the same time, activity levels and corresponding demand is supported by the recovery from the pandemic doldrums. In markets like Syracuse, we're excited about investments being made through local government and private companies like Micron, that will be investing over $100 billion in creating one of the largest microchips plants in the nation. As I said at the beginning of the call, we are well positioned to navigate through an uncertain environment. We are focused on responsible and profitable growth and are confident that will get bigger while getting better. Good quarter here. First, I guess, can we speak to the drivers of your deposit growth in your outlook. I know you mentioned a little bit of it in your prepared remarks. Yes, I would say, broadly speaking, the growth was broad-based. Our interest-bearing deposits relatively remained at the same levels at below 28% to 30%. The growth predominantly came through NAV accounts and money market, and we expect to continue that trend. We do believe that the CDs will probably grow at a faster rate in the coming months and quarters, but beyond that, I think we're very satisfied with the momentum that we have. The next question comes from Mark Fitzgibbon from Piper Sandler. Mark, your line is open. Please go ahead. Mark, your line is open, please ask your question. Let's go to the next question is from David Bishop from Hovde Group, David, please go ahead. Your line is open. Me too. Please stand by while we rectify the issue. Apologies for the issue there. We will return to our previous Q&A order. Okay, super. Good morning. First, I wondering if you could just add any color on that one commercial credit that filed for bankruptcy this quarter. Is that completely charged-off, there is no residual exposure there and maybe what happened that caused the company to end up filing for bankruptcy? Yes Mark. Yes, it's the same credit that we partially charged-off in the third quarter and now have charged-off more in this quarter. So we've written it down to its collateralized value at this quarter time. So it's 40% residual, so that's about $7-ish million that's left on the books. And what caused it is, there is a disruption in the business model that this customer is experiencing and it's linked in some ways to supply chain and some way that's not, but it's a fluid situation we're tracking it. But we've been proactive and marking it down based on the facts on the ground. Okay. Great. And then, Nitin, in terms of those merger restructuring charges, both positive and negative. Are those pretty much behind at this point? Should we expect that to be gone in coming quarters? Yes, this is Brett. We may see a little bit, but I would expect the majority, the significant piece to be gone right now. Okay. Super. And then can you help us think about the trajectory of the margin over the next couple of quarters? Yes, Mark, I think, we did post 384 as NIM this quarter. For next year on an average basis, we believe that NIM would be modestly higher, we do believe that somewhere in the first half the NIM will peak. Okay. And then lastly, do you worry about growing loans at a double-digit rate this year in what arguably will be a deteriorating economic environment? I guess how do you get comfortable with doing that putting that much in loan growth? Yes. No. Great question. I think the reason why we're comfortable is, because we haven't changed our credit box at all, in fact, we've tightened it a little bit in some pockets. And the momentum that we're seeing is really a reflection of the investment that we started making back in 2021 in terms of the producers and the productivity measures and the incentive plan. So it's really reflected in that. Our credit quality remains strong as we talked about, our delinquencies and criticized and classifieds are at historic low levels, which is a reflection of some of the new originations that we've seen. So we feel good about where we are. And as I said in my remarks, we will continue to stay vigilant, but just in trajectory on the new originations remain strong. Yes, we can now. Hey, Billy before we start, I just want to make a correction. I think, we lost you halfway through your question and I was talking about how we are at 28% to 30% on non-interest bearing. I hope you heard that right. I guess just to kind of a follow-up on Mark's question on loan growth. How do we think about, where do you think your primary drivers are for growth for this year? Yes, obviously, resi mortgage has been a big driver of growth in the last few quarters, but you did see a nice bounce back in through this quarter. So how should we think about the composition for 2023? Yes, I think the competition is going to be similar. We will see a balanced growth, we would see commercial growth and resi growth in parallel. The growth rate percentages might differ, because the baselines are different for both of these portfolios, but we expect to keep the similar mix commercial as percentage of total loans in about low '60s. So that mix doesn't change significantly. Low 60s, perfect. Thank you. And just switching over to your expenses. The outlook looks pretty controlled from here compared to what we've seen from peers this quarter. I guess, can you just speak to some potential -- where do you see some potential pressure points on cost for 2023? What are your expectations from hiring going forward given all you've done in the last few months and also your confidence and your ability to kind of hold the efficiency ratio at these levels going forward? Hi, this is Brett. I think we're expecting to see technology as we continue to reinvest in our digital platform. We are expecting to see some increases in deposit, insurance expense as well. I think those are going to be primarily our drivers. Yes and I would say, the compensation technology like Brett talked about and there are some that continue in the bucket of optimization that was part of the BEST program. So there is items related to occupancy equipment, real estate and some elements of technology that actually improves our run rate. So those will be the offsetting factors, but it's still leads to about 4% growth in overall expense, while maintaining a good positive operating leverage. Hi, just a housekeeping point. The guidance, the loan guidance that's for average loans, correct, that 11% to 12% not in the period? Got it. So that probably implies mid-single-digit growth rate, which I think, has been your expectation or guidance for the past couple of quarters above, correct? Got. Question -- appreciate the color on the new hires, a lot of good to England banking experience. Just curious as they hit the ground there, does that make you change -- does that provide any opportunities to start banking any new loan niches or geographic expansion or maybe the types of commercial credits you could target? Just curious if there's -- do you foresee any change in the strategic outlook for the company with the new personnel on board? Yes, I think the geography doesn't change. I think we stay within the areas that we operate in, but it will potentially create more opportunities are increasing our strength into some of the specific sectors, not for profits being one of them. There is some more leverage or experience that we would get through private equity, venture capital sponsored deals and there is also a family business kind of vertical that we're looking at. So I think on the margins. Yes, there will be some new areas, but otherwise, we remain consistent with the strategy of going after high quality clients and more importantly, addressing the needs of the existing clients which is we're still about 60% of our business comes from. Got it. And then, don't know if you have this number disclosed that, the numbers of new relationship lender hires this year, do you know that and maybe what you're budgeting for 2023? Yes. I don't have it in front of me, Dave, but we did say that on a gross basis, we were looking to hire about 40% as compared to the baseline that we had in pre-BEST and we're tracking to that number at this point of time. Got it. And then you noted the capacity on the balance sheet, still relatively low loan-to-deposit ratio. As you look at the balance sheet, just given the competitive pressures on deposit pricing, just curious how you're thinking of a funding loan growth, is that a combination of deposits and borrowings or maybe use some of the cash flow from the securities portfolio? Thanks. Yes, good morning. This is Stephen. So I think broadly will continue to work on deposits. We do have a little bit more -- we tend to have a bit more wholesale funding next year, but not a lot opportunistically in that market on more of a latter basis as opposed to having to jump in later on. So I think, I'm obviously watch the loan growth versus the overall deposit growth. I don't -- I think, we're still at a good spot around where we are right now and probably will grow a little bit on the loan-to-deposit ratio during the year. Just hoping that you could give a little bit more color here on the charge-off, so the $11.8 million you had in charge-offs. I guess how much of that was commercial, how much of it was C&I versus CRE? And then, what specifically was related to that one middle market loans C&I charge-offs? Yes. This particular credit, Laurie, was about $7 million and the rest was distributed as part of the regular. I think our regular charge-off, historically, have been around $5 million to $6 million. So if you take the commercial credit, that single credit out, we were at about $4.8 million and that includes a mix of commercial and consumer. Got it. Okay. And then just remind me, how big was the credit to start with, is it like $20 million or something? No, it was $18 million and we took about $4 million in the third quarter and $7 million in this quarter. Perfect. Okay. Great. And then, sorry to ask this granular detail, but some of the hotter loan categories and I really appreciate the disclosure that you gave on Page 17 of the deck, where you give some of the balances. But I'm looking for charge-offs and non-performers at those categories, namely Firestone, the $133 million what were charge-offs this quarter and non-performers upstart, you gave $140 million, what we were charge-offs the non-performers? And then if you could give an update on two more categories and then on guaranteed SBA? Thanks. Yes. So we could -- I don't have it in front of me, but we could provide those numbers, but they are performing better than what the expectations of the model numbers were, and upstart is about 134 basis points of loss rate annualized. $100,000. Okay. Great. And then, do you have any details around office, the last office refresh I had was a year ago. You had office at round numbers $850 million or so of which that $400 million piece was the lower risk sort of education, health care, medical. You guys have a refresh on that? And Laurie -- sorry, Laurie, this is Kevin. On the office exposure, I just point out that 70% of it is suburban office space. So it's not central business district and the central business district space is predominantly Class A space. And also, just one other point on office is, about 65% to 70% of the office portfolio, the leases don't expire after 2025. So it's -- it doesn't. Even though, there is very uncertain environment on office, but so the book position relevant given marketplace. That's super helpful. Okay. And then one last question, just shifting gears totally back to margin. Do you guys have the December spot margin? No, we don't. But the trend along with the rates has been going up and as I said in my, I think, one other response earlier. We expect the full-year average margins to be higher next year, but the NIM to peak in the first half. Right. Got it. And just one more funding question so far and then I'll leave it here brokered CDs. I have those that $164 million last quarter. Do you have a number for this quarter and just maybe how you're thinking about using those? Yes. Right now. The end of period balance for brokered CDs is about $120 million and on average was about $136 million. Just hoping to circle back to the loan portfolio. And wondering if you could just provide what the origination yields coming on the resi consumer versus the commercial buckets at this point? And then if you could also provide, what the current yields are on those four run-off portfolios? And maybe just an update on the expected timeline before run-off there? Sure, I can take the first part for the -- we're seeing commercial coming on about 60 basis points higher than prior quarter with a six handle and then residential we're seeing come on, again, about 50 basis points higher with a four handle. And I think you were looking for the yield on the Firestone an upstart portfolios. Firestone was around had a seven handle and then upstart was around 11. Okay. Got it. And if you guys could provide an update on how long those are expected to take before run-off? Okay. Great. And then just on the fee guide down, it seems to be driven by the tax credit investment line. Does that -- how does that line look going forward? Is it mostly flat or is there going to be some movement in '23? So with tax credits that can be lumpy, depending on when they close during the year or even during the quarter, depends on how much you're amortizing in over that period. So it can be lumpy. And we believe we really the -- Yes, then I think the important point Chris there. I think that's where you're going is, the core fee business actually goes up modestly. I think net of tax adjustments. I think it non-interest income goes down as we've outlined in the outlook, but the core business and core fee income actually goes up pretty broad based stents. Yes. Hi. Thanks, good morning. Just wanted to circle back on this one item, because I know you normally don't disclose it. SBA unguaranteed, what is that balance and how are you guys thinking about growing that? Thanks for taking my follow-up. Laurie. Hey, it's Sean. So it was down about 1% year-over-year. The balances are $261 million and US for charge-offs to 67 bps fourth quarter. Got it. And how are you thinking about growing that book going forward. Are you going to kind of hold the line? How do you think about that? I think we're holding the line. I think this year is indicative of what we'll continue to do going into next year. And like I said it was down about 1%. Thank you, Adam and thank you all for joining us today on our call and for your interest and investment in Berkshire. Have a great day and be well. Adam, you can close the call now.
EarningCall_906	Good day, and thank you for standing by. Welcome to the Ashland Inc. First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. And I'd now like to hand the conference over to your speaker today, Mr. Seth Mrozek, Director of Investor Relations. Sir, please go ahead. Thank you, Chris. Hello, everyone, and welcome to Ashland's first quarter fiscal year 2023 earnings conference call and webcast. My name is Seth Mrozek, Director Ashland Investor Relations. Joining me on the call today are Guillermo Novo, Ashlandâs Chair and Chief Executive Officer; and Kevin Willis, Senior Vice President and Chief Financial Officer. We released preliminary results for the quarter ended December 31, 2022, at approximately 05:00 PM Eastern Time yesterday, January 31. The news release issued last night was furnished to the SEC in a Form 8-K. During today's call, we will reference slides that are currently being webcast on our website, ashland.com, under the Investor Relations section. We encourage you to follow along with the webcast during the call. Please turn to Slide 2. As a reminder, during today's call, we will be making forward-looking statements on several matters, including our outlook for fiscal year 2023. These forward-looking statements are subject to risks and uncertainties that could cause future results or events to differ materially from today's projections. We believe any such statements are based on reasonable assumptions, but cannot assure that such expectations will be achieved. Please refer to Slide 2 of the presentation for an explanation of those risks and uncertainties, and the limits applicable to forward-looking statements. You can also review our most recent Form 10-K under Item 1A for a comprehensive discussion of the risk factors impacting our business. Please also note that we will be referring to certain actual and projected financial metrics of Ashland on an adjusted basis, which are non-GAAP financial measures. We will refer to those measures, as adjusted and present them to supplement your understanding and assessment of the financial performance of our ongoing business. Non-GAAP measures should not be considered a substitute for, or superior to financial measures calculated in accordance with GAAP. The most directly comparable GAAP measures, as well as reconciliations of the non-GAAP measures to those GAAP measures are available on our website and in the appendix of today's slide presentation. Please turn to Slide 3. Guillermo will begin the call this morning with an overview of Ashland's performance and results in the fiscal first quarter. Next, Kevin will provide a more detailed review of financial results for the quarter. Guillermo will then provide additional commentary related to Ashland's financial outlook for fiscal year 2023. We will then open the line for your questions. Now, please turn to Slide 5, and Iâd like to turn the call over to Guillermo for his opening remarks. Guillermo? Thank you, Seth, and hello, everyone. Thank you for your interest in Ashland and for your participation today. As stated in our earnings release last night, Ashlandâs results in the fiscal first quarter were consistent with the earnings update we issued last week. During these times of continued global uncertainty, we will strive to provide transparency and timely communication on company results and performance. As we planned for the December quarter, we recognized that several external dynamics could impact demand and performance. The impact of central bank actions to combat inflation, the war in Ukraine, and the China, and the COVID reopening in China. Our forecast was based on a more recessionary environment developing and did not include factors that we could not control or forecast. The drivers of our results for the fiscal first quarter are a great example of how uncertain events significantly impact market dynamics in a very short period of time. I'd like to spend a few minutes providing my perspective on the overall results. First, disciplined pricing led to price versus inflation cost tailwinds in the quarter as we had expected. Our commercial teams moved quickly last year to recover the increased costs we experienced in energy, freight, logistics, raw materials and other input costs. They continued with this discipline in this quarter. On a constant current basis, that pricing carryover and additional new pricing resulted in double-digit percentage price improvements for all segments compared to Q1 of last year. In addition, our three consumer focused segments Life Science, Personal Care and Specialty Additives realized strong mix improvements, which supported the company's overall margins. Second, the results in Life Science segment was particularly strong. The team saw strong global demand in our leading pharmaceutical ingredients and was able to capture additional market share at leading pharma customers. As you saw in the video, at the beginning of today's call, Ashland continues to expand its leadership position in some of the world's most important pharmaceutical applications. And third, Ashland serves resilient end markets and geographies across the globe. The U.S. consumer and our U.S. customers continued to demonstrate resilience in demand in the face of global economic uncertainty. Many emerging markets also demonstrated growth. The historic long-term resilience of the end markets we serve gives us confidence in our financial outlook for this year and beyond. In contrast, we also experienced several headwinds during the quarter that yielded overall results that were below our original expectations. First, global macro factors certainly impacted demand in China and Europe during the quarter. The changes in government COVID policies and the resulting acceleration of infection rates clearly impacted demand as well as business and living activities for everyone in China. The speed and impact of these developments was much greater than anyone expected. As a result, sales in China were significantly below our expectations. And although, we expected some level of economic downturn in Europe, driven by both recessionary trends and general uncertainty, on the impact of the Russia, Ukraine war, demand in Europe was below our expectations. Second, inventory management and destocking primarily by distributors in Europe and China was real and it happened quickly. While sales to distributors only represent about 20% of Ashland's overall sales, distributor inventory destocking actions were a significant driver and roughly 50% of our revenue gap versus prior year. The vast majority of this was in China and Europe. We also saw certain customers take similar inventory management actions. Though these were isolated and we believe very company specific with no specific market patterns. The weaker demand in China and Europe as well as a destocking impacted mostly specialty additives and Personal Care -- and our Personal Care business. It's important to note that while Ashland's overall margins remained in line with prior year, margins in our Specialty Additives segment were impacted by plant turnarounds, both planned and unplanned during the quarter. We are thankful that our team in China is healthy and are grateful for the resilience they demonstrated following the outbreak of COVID in December. And while the U.S. freeze did impact operations at several plants during December and January, the financial impact will mostly come through in the second quarter. Our teams are working on actions to offset the impact of the unplanned shutdowns and the freeze including plans to rationalize some of our planned maintenance work companywide in the third and fourth quarters. I will discuss a bit more -- I will discuss a bit more when we review our outlook for fiscal 2023 later in the call. However, all indications lead us to believe that the China reopening will have a positive impact on demand. But the pace and breadth of the reopening should be an important factor in our financial outlook for the remainder of the year. Finally, foreign exchange rates again had a negative impact on Ashland's overall results. The impact of the strong dollar continues to be realized on our business overseas, though current exchange rates are improving, when compared to our original forecast at the beginning of the year. Please turn to Slide 6. Before I ask Kevin to discuss our quarterly results in more detail, I would like to sum up the key takeaways. Despite global uncertainty, and macroeconomic volatility Ashland delivered consistent results in the quarter. Sales growth, EBITDA growth, EPS growth were delivered along with nearly flat EBITDA margins compared to prior year. While there are many puts and takes, delivering consistent results is an important component of our long term strategy. Please turn to Slide 7. As you can see in the chart on the left, year-over-year sales growth in Life Science was very strong. While the top line for Personal Care and Specialty Additives was below prior year due to the factors referenced earlier. Overall margins for Ashland remain healthy and generally in line with our expectations. While there are many global uncertainties in the horizon. The Ashland team is performing well and executing on the actions that are within our control. I look forward to discussing the outlook for fiscal year â23 and reviewing broader progress by the company later in the call. Thank you, Guillermo, and good morning, everyone. Please turn to Slide 9. Total Ashland sales in quarter were $525 million, up 3% versus prior year, driven by continued inflation recovery and mix improvements. Sales increased by 7% on a constant currency basis. Gross margin remained consistent at 31.4% as cost recovery and mix improvement actions by the commercial teams offset increased input costs and the turnaround expense at a number of our global facilities, which Guillermo previously discussed. When excluding key items, SG&A, R&D and intangible amortization costs of $116 million were essentially flat compared to the prior year. In total, Ashland's adjusted EBITDA for the quarter was $108 million, up 2% from the prior year adjusted EBITDA of $106 million. It's important to note that unfavorable foreign currency negatively impacted adjusted EBITDA by $14 million while the planned facility turnarounds resulted in $12 million of incremental cost during the quarter. Ashland's adjusted EBITDA margin for the quarter was 20.6% and consistent with the prior year. Adjusted EPS excluding acquisition amortization for the quarter was $0.97 per share, up 10% from the prior year quarter. Ongoing free cash flow was a negative $21 million for the quarter, a reduction from the prior year primarily reflecting an increase in working capital driven by increased inventory balances globally. Now let's review the results of each of our four operating segments. Please turn to Slide 10. As Guillermo referenced at the beginning of today's call, Life Sciences delivered very strong results in the quarter, driven by our global pharmaceutical ingredients business. Pharma demand remained strong. Product mix was favorable. The team executed on disciplined cost recovery, all contributing to margin expansion. Unfavorable currency impact was a partial offset to the strong performance in Life Sciences. In total, Life Sciences sales increased by 22% to $207 million, while adjusted EBITDA increased by 44% to $52 million. Adjusted EBITDA margin increased meaningfully to more than 25%. Please turn to Slide 11. Personal Care sales were down by double-digit percentage in China due to COVID policies. Inventory destocking by distributors, particularly in Europe, also negatively impacted sales. As with Life Sciences, the team continued to realize disciplined cost recovery through pricing and favorable product mix. For the quarter, Personal Care sales declined by 6% to $138 million, while adjusted EBITDA declined 11% to $32 million. Adjusted EBITDA margin also declined to roughly 23%. Unfavorable currency impact was also a headwind to Personal Care results in the quarter. Please turn to Slide 12. Specialty Additives also felt the impact of reduced demand primarily related to inventory destocking among distributors and certain customers in China and Europe. Sales outside of these two important regions were up by mid-single digits versus the prior year quarter. The reduced demand more than offset improved cost recovery and mix for the segment, particularly within the architectural coatings end market. For the quarter, Specialty Additive sales declined by 8% to $143 million while adjusted EBITDA declined by 39% to $23 million. The cost impact from both planned and unplanned facility shutdowns was about $7 million and represented nearly half of the year-over-year decline in EBITDA. Adjusted EBITDA margin also declined to 16% for the quarter. Please turn to Slide 13. Intermediates reported sales were $54 million up 2% compared to the prior year, driven by higher merchant market pricing and improved product mix management of higher value derivatives. Intermediates reported adjusted EBITDA of $23 million, an increase of 21% compared to prior year and adjusted EBITDA margin improved to 42.6%. Please turn to Slide 14. As we discussed at our last Investor Day, capital allocation discipline continues to be an important component of Ashland's value creation strategy. The actions we have taken over the past year have improved Ashland's financial position and provide for increased flexibility. Last night, we announced plans to execute a new $100 million share repurchase program under Rule 10b5-1. This program will be executed under the existing $500 million evergreen share repurchase authorization that was approved by Ashlandâs Board of Directors last year. We expect to begin executing trades under the new program in early February. With the strength of our balance sheet, our growth outlook for the year and the fact that we continue to believe that Ashland shares remain significantly undervalued, now is the right time to begin the new open market purchase program. As of the quarter closed on December 31, we had cash on hand of more than $530 million with total available liquidity of roughly $1.2 billion. Our net debt stands at $784 million, which is about 1.3 turns of leverage. We have no floating rate debt outstanding, no long-term debt maturities for the next four years and all of our outstanding debt is subject to investment grade style credit terms. We are investing in our existing business to grow organically and continue to pursue our strategy of enhanced profitable growth through targeted bolt-on M&A opportunities focused on pharma, personal care and coatings. Against the backdrop of global uncertainty, Ashland has a strong balance sheet with the flexibility to pursue our targeted growth strategy. Thank you, Kevin. Please turn to Slide 16. I'd like to take a few minutes to provide some perspective on the current fiscal second quarter and the second half of our fiscal year outlook. For the second quarter, first, regarding demand. Our global pharma business continues to demonstrate strong resilience in our order book for personal care ingredients and architectural coatings additives is rebounding so far this quarter. Although, most of the regions are experiencing demand strengthening, demand in China remained weak in January. We expect to see the demand pickup following the Chinese New Year. Additionally, during January, we began to see the regional destocking dynamic stabilizing, notably in Europe. While volume demand levels have not returned to prior year levels, the sequential improvement has been meaningful. As we exit January, our sales and open orders were slightly above prior year with price up and volume down. Relative to prior months, both volume and revenue were significantly up even with a weak demand in China. Second, as previously communicated, the winter storm that impacted much of the U.S. in December and had significant impact in our facility in Calvert City, Kentucky as well as several other facilities in the U.S. Fortunately, Calvert City and other locations have been back online and fully operational for most of January. While the storm did not have meaningful impact on results in Q1, we expect to recognize approximately $15 million of incremental cost in the March quarter. These costs will most directly impact results in Life Science and Personal Care segments of the business. However, we expect the timing of the offset actions will be mostly impacting our third and fourth quarter. And finally, for the next few months, there continues to be an elevated level of uncertain globally. What happens over the next two months from China's reopening to geopolitical and economic developments in Europe, to central bank actions across the globe, will have important implications for the global economy and Ashland results. All these factors could further influence our modeling and outlook for the remainder of fiscal year â23. As we move into March, we expect to have increased visibility into many of these factors and the actions that our customers are taking heading into the second half of the year. For the second half of 2023, as we look at the back half of our fiscal year, some of the key issues that we look at are, the expected magnitude and impact of the recessionary momentum. Will there be more recent impacts? As we move from a high demand and tight supply to a more recessionary environment. And the uncertainty around the impact of China's COVID reopening and potential changes in Russia -- in the Russia Ukraine war dynamics. With regards to the recessionary environment, in the absence of new data, we believe that the markets our business serve will continue to perform in line with their historic resilience. Our question is more about the reset developments as we move from the 2022 tight supply demand dynamics into a more recessionary 2023 environment. This reset driven by China's COVID reopening and destocking clearly impacted demand in the first quarter, but should be transitory. Note that several of our key technologies, -- several of our key technologies capacity for the industry and Ashland remain tight with operating rates above 90%. While I'm not ready to say that destocking is over, trends in January show significant improvement. Unless there are new developments, we expect them to pay it off by the end of the second quarter. The impact of China's reopening or changes in the Russia Ukraine war dynamic is more difficult to forecast given the lack of clarity on how they will develop. For China's COVID reopening, we do expect improved demand developments in China. What broader impacts could develop will depend on the pace and the magnitude of the reopening. Uncertain environment -- in this uncertain environment, we will continue to focus on what we can control while planning and building resilience to react quickly to developments similar to what we did in 2022. Notwithstanding our current outlook, as we did during the uncertain times of COVID, we will continue to look at a more conservative outlook for our internal assumptions that will drive our actions and plans. Our priorities will be on, while, we do not ultimately control demand, we will remain nimble to react to positive or negative developments and we'll continue to focus on innovation and share gain activities to support growth. We will maintain focus on disciplined pricing, mix and cost management to support -- to sustain margins. We demonstrated this ability in a very challenging inflationary environment in fiscal '22 and we will maintain this discipline in fiscal '23 and beyond. We will drive actions to offset incremental costs from unplanned shutdowns and the freeze. We will monitor market developments and take appropriate actions to maintain inventories in line with developing supply demand dynamics. Please turn to Slide 17. Consistent with our earnings update from last week, we are maintaining our financial guidance range for sales and adjusted EBITDA margin for the fiscal year â23. As indicated, our current models put our EBITDA outlook below the midpoint of our range. We expect to have better visibility on the impact of China's reopening, post winter Europe and Central Bank actions to combat inflation at the end of the second quarter. Critical deliverables in our models are clear to sustain price margin management discipline. To offset the unplanned shutdowns and freeze impact in Q3 and Q4 and to continue to invest in our innovation pipeline and capacity to drive growth. Critical assumptions in our model are, we assume that the reset items like destocking are transitory. We assume that demand in our core markets perform in line with historic recessionary resilience. We assume that demand in China picks up and normalizes with the ongoing reopening. And as we did in â22, we continue to build resilience to react quickly to uncertain and unplanned external developments. Our outlook for the year takes into the account the known macro operating environment and Ashland's unique position within that landscape. Speculation on the potential impact of highly uncertain macro factors that are out of our control or ability to forecast are not factored into our models. Please turn to Slide 19. Overall, the last decade, Ashland's journey of transformation has sharpened our focus as an additives and specialty ingredients company. As we systematically identify and tackle the thorniest problems, we concentrate on areas, rich in opportunities to innovate and drive value for our customers, where innovation and expertise in one business unit can be leveraged in others. In closing, I want to thank the Ashland team again for their leadership and proactive ownership of their business in an uncertain environment. We have solidified our portfolio as a global additives and specialty ingredients company with exceptional businesses that have leadership positions in resilient, high quality consumer driven segments. I'm pleased by the resilience and execution demonstrated by our people and our business and look forward to the opportunities that lie ahead. Great. Thank you so much. Guillermo, can you just give us a little bit more color on your remarks in January and how you see the quarter shipping up on the destock, kind of that focusing on Europe and China? And perhaps just as important, the U.S. seems to be holding in on a relative basis, can you just also hit on your expectations there and where you would assess inventory levels with your distribution and as well as direct customers? Thank you. Well, let me start with the general markets and then I'll comment on China and Europe and some of the headwinds we saw and how they're changing. Overall, if you look at it, we did a lot of analysis in the first quarter and looking into January. For most of the world, the U.S. and a lot of the development -- demand actually remained pretty solid, especially if you look at our core customers. Any -- it was softer than we had expected overall, so demand but relative to prior year, they were able to hold up. And if you look at by market segments, it was pretty general. A lot of the destocking actions at our customers were very specific to customers. And in a specific market, one customer brought down inventories but others did not. Even in -- I would say, even if you look at coatings and some of the Specialty Additives business that we get a lot of questions. In the U.S. we saw softness in the DIY market, but in other areas, we saw strength in some of our major customers. So again, we sell additives. We're not the major high volume ingredients, so some of the dynamics that happened to us a little bit different than other players. For China, obviously, the reopening has had a big impact. I don't think we're any different than anybody else. We saw it with our plants, at one point in time, 95% of our team in a [indiscernible] plant reported, infected. So we shut down for an extended period of time. I think that happened to our customers, to a lot of our suppliers and even distributors. So I think what's happening in China is more about the COVID. There was some destocking, but I assume that even across the chain, everybody had the same problem. We did in terms of shutting down operations and we continue to see that in January. We saw significant improvement in demand in our orders and sales in January, but China was down significantly. So we're hopeful that as we get now on the Chinese New Year, we'll see that pickup. And then the same thing in Europe, we're seeing it stabilize especially the distributor destocking. I think most of that should be behind us. And again, the demand at the customer level was customer by customer. So I think if you look at the core market resilience this is why we're talking about what's the resilience of the market versus these reset items? Obviously, the reset items were the bigger driver. And cloud a lot of the underlying dynamics in many of the markets. So our take is that the things have slowed down, but the dynamics are solid in many of the markets. It's just an issue of where each player was in terms of how they were managing last year with tight supply, demand and their inventory positions and that should be transitory as we said. Understood. And just a little bit more of a long term question. Just what's your -- obviously, there's been a little bit of noise in results due to storms and outages, maintenance, so on and so forth. But you've been pricing well. It seems like you're growing in the right areas in terms of being a beneficiary of mix? And then it seems like some of the inflationary headwinds that the entire platform is facing throughout the last fiscal year are beginning to ease and in some cases improve. So if you could just give us a very quick update on your latest assessment of the margin potential across the entire portfolio and your confidence there within? Thank you. Yeah. I think the team has been very focused on that area. That is, as we highlighted, a critical deliverable for our models in terms of outlook. Remember, we don't have a lot of capacity. So volume was never a big driver. Obviously, we're looking at it on the negative side, what could happen as if volumes come down a little bit, but they were never a big driver on the upside just because of where we are. Most of our capacity will be coming on in 2024. We need it. Even with the slowdown, the production rates in many of the key technologies are still very high. So we need that capacity to drive growth. So pricing, and pricing and margin management is a critical, critical deliverable, and I think we're in a good place because we've captured everything that we needed to, both from the carryover from last year and actions that they took during the first quarter. So the issue really now is how prices develop. I think this is where there could be some noise with the China reopening on how that impacts global demand, and that's probably where there's more uncertainty. I think we see just the reopening will drive better demand in China, but the pace and magnitude, obviously, could have other implications around the world, which we're going to monitor. So I think we're in a good place on that pricing margin side. The freezes did not impact our revenue or sales. We had inventory, where it was more of the financial impact of the shutdown maintenance and those kind of things that did impact the margins, but the underlying margins, even in Specialty Additives are expected to rebound. They were fine in the quarter. It was just that added costs that came through. So in the things that we can control, we feel good. I think the issue now is, as we said, we're not immune to the external dynamics. Our biggest issue right now is making sure that we perform in line with our peer group. I mean we're all selling to the same -- if you're going to sell into product X, whatever, cosmetics as an example, we sell different ingredients. We should perform in line with our peers that are also focused on these resilient market segments. And I think we're confident that we are doing that, and our issue is going to be like last year. If you look at our results last year, they were very good, but versus what we expected at the beginning of the year, a lot of different actions. We reacted very quickly to changing dynamics, and I think as has been the case for the last three years. It's about being nimble and assumptions change very quickly in this uncertain environment. And I'm confident, the team has performed well and will continue to perform well as we move forward. Thank you. One moment for our next question. Our next question will come from Josh Spector of UBS. Your line is open. Yeah. Thanks for taking my question. Just on the mix improvement, it's a big, big part of your earnings growth over the last year. You talked about markets remaining tight. They were tight last year. You had limited capacity. Just wondering, given the double-digit volume decline, I think, you saw in some of your segments this quarter, if we see more of a prolonged destocking or a longer period of weaker demand, does that change that mix dynamic? Do you give some of that back or how do you react to that? I think in some of the areas, it gives us some flexibility. We have to go back to some markets if volumes come down, that's flexibility that we have. But for the majority of the key ingredients, if you look at the [Indiscernible] line, things are still really tight for the foreseeable outlook. Producers in Europe are still very challenged, and we're in a very strong position there. ATC remains tight in the market even with this lower demand. So it's going to vary by segment and product line, but our critical ones, I think, remain. We see a lot of that strength. Our issue, I think, is going to be looking at if volumes come down and we need to take actions to maintain inventories, we're not going to be building unnecessary inventory just for absorption. We need to take actions to bring that down. I think what we're holding is, as raw materials come down a little bit, that we can offset that with raw materials. So in general, the â although, we -- our outlook is based on that resilient market profile that these markets have historically had, our planning and the actions that we're taking internally around costs around how we manage our plants is taking a much more conservative outlook and saying, look, we need to be ahead of the curve as we did in 2022, and 2021 and in 2020. Plan ahead, be conservative, but don't start changing our outlooks on speculative information. React and -- plan and react as needed based on developments. Thanks, Guillermo. And if I could just ask specifically on Personal Care. I mean it was interesting double-digit pricing. So that stepped up from where you were. I think a lot of other specialty markets, we've seen pricing more level off. I guess, is there any risk that you're losing share going after that additional pricing? No. I think if you look at the numbers and we're seeing it already in January, again, we can't -- our initial -- like everybody else, initial view was, look, quarter was down. It must be the market. We try to align the first explanation to the narrative of the market. The markets are down. Therefore, it must be that the markets are down. As we did our analysis, what we saw is, well, no, it's China and Europe distributors with the majority. So 50% -- probably the gap was China and 50% was distributors. I mean there's an overlap on the two. But it's -- these reset items, obviously, were the big impact, I would say, versus prior year. Versus expectations, we have seen some softening in demand. But if you see in January, the orders have bounced back for Personal Care. If we look at demand and we put control -- upper and lower control limits. We're just not looking at one number. But demand has bounced back to the midpoint of our control limits in terms of demand for Personal Care in January. It contrast that in Specialty Additives, we have seen an improvement, but demand has bounced back into the control limits, but they're more at the bottom end of the control limit. So our view is, pharma remains strong, Personal Care normalizes as we move forward, these reset items get more behind us and perform more in line with historic parameters. And our Specialty Additives, it's going to be a little bit of a mix, depending on the segments that we're on, but it's going to continue to improve, but probably will be a little bit softer than we expected at the beginning of the year. Thank you. Again one moment please for our next question. Our next question will come from David Begleiter of Deutsche Bank. Your line is open. Thank you. Good morning. Hi, Guillermo. Just on price cost tailwinds, what were they in Q1? What do you expect for Q2 and what's embedded in the guidance for the full year? Okay. So our assumption is that we will continue to recover any inflationary pressures that we get. We did it last year, I think, in the first quarter. More -- it wasn't broad-based like last year, more specific to product lines. Like we said, cost for example, is a significant cost increase for us in the first quarter, and we took action on those items. So I think, as we move forward, it's going to be much more surgical. If needed, we probably will see things slow down from an inflationary pressure, but again, we'll have to react as that moves forward. Most of the inflation has been around energy, especially in Europe and specific raw materials where the supply demand imbalances had a big impact. And again, a lot of that has mostly been driven in Europe. So I think we're starting in a good point. We don't have to recover. We're not behind the curve. We're on the curve. And as we said, last year, we took actions to protect our margins. We didn't improve through inflationary pricing. We just did what we need to do to stay whole, and the improvement was driven more by that mix improvement. And we will continue to -- the mix improvement is not just because of the supply demand dynamics, that's part of our strategy, of which areas we want to focus on long term, where are we going to be investing. That mix improvement is driving our portfolio to the areas where we're making all the capital investments in the coming year. Thank you for that. And just on your outlook slide, you talked about the potential need for more inventory control and absorbing actions. Could you give a little more color on what you mean by that? Yeah. I think although we're forecasting that we're still in demand, this quarter, for example, as we said -- I think we said in the last call, we weren't going to take -- we were not going to take significant destocking actions because we were -- there was a lot of uncertainty, and we didn't want to get caught into a situation like 2021, where something happens and suddenly things get very tight. So that was sort of our position there. So the issue is going to be more if demand comes down. The one thing that's not in our model is, if we had to reduce production to meet us up, that would be a headwind for us that is not in our model. And we didn't want to highlight it for everybody that, that's just one of the risks. Everything we're trying to do now is, given what the uncertainty is, make sure that we're transparent. We don't know where it's going, but let our investors decide if they want to -- what perspectives they have on some of these areas. And I would say, absorption would be a potential headwind if things continue to be or get softer as we move forward. I don't think that -- that's not our current model right now, but it's something that we continue to monitor. We are not going to rebuild. We're not going to drive absorption by building inventory. Working capital discipline is something that's very important to us that we're going to maintain. Thank you. One moment please for our next question. Our next question will come from the line of John McNulty of BMO. Your line is open. Yeah. Thanks for taking my question. Guillermo, I know last year, a lot of the big issues you had were around freight and logistics, and it looks like those channels or those issues have largely been resolved. Can you speak to what kind of cost relief you're seeing there? I know we've seen the availability of things like freight to improve, but on the cost side, I guess I'd be curious how much of a tailwind that actually might be for you at this point. So definitely, we've seen improvement into the last quarter of last year. We were starting to see improvement throughout this quarter. Our first quarter, we continue to see that. So I think that's stabilizing our inventory and that's allowed us to rebuild a lot of our inventory levels. There are still -- I mean it's not back to normal. It's still that on-time shipments are still catching up, and it really depends on which lines you're talking about, but clearly, a big improvement. On the cost side, we're also seeing some improvement. Just a reminder, as we did -- our shipments are from Europe and the U.S. out. So some of the ultra-high costs from exporting from China out were not the big driver for us. Our bigger problem was the on-time, the reliability of the supply chain was a bigger challenge. So it is an improvement area, but it's not relative to maybe other companies, it's not the same size, given where our channels are of flow are going to. John, those costs continue to ramp through a lot of '22 just based on energy prices, et cetera. So for our Q1, freight logistics was still higher than prior year. Probably, call it, around $10 million, give or take. So that was -- that continued to be a negative from a cost perspective. But again, obviously, that's slowed down. As the year progresses, those comps should get better. Got it. Okay. No, that makes sense. That's clear. And then I guess with regard to the buyback that you guys have in place, the $100 million 10b-5, I guess can you help us to think about the timing or how -- like the duration of that buyback? And how much you're kind of committing to for your fiscal 2023? How should we be thinking about that? And just given higher rates at this point, given the market's unwinding a little bit over the last, whatever, nine to 12 months in terms of valuations, do you see more opportunities at this point to put capital into M&A? I know it's a target for you, but I guess, can you help us to think about whether it's a more target-rich environment at this point or maybe not? Let me comment on the M&A side, and Kevin, you can comment on the buyback process. I think our focus right now is driven with bolt-ons. I think we're in a good position to do that in terms of our cash position and our overall capital availability. So this does not change the interest or opportunities. I think the reality is, it takes a little bit of time for the valuations to reset, and we're looking at specific opportunities that we continue to work on, but we're going to be patient. Our view is, we got -- organic growth has to be the big driver. Innovation, the capital has to be where the engine is, and we want to do these bolt-ons to augment our portfolio. But donât want to be -- we donât want to be in the mode of having to do it or going and paying prices that we will not create value in the long term. So we're going to be patient. We're going to be disciplined as we move forward. And I do think the environment will improve as we move into the back half of 2023 from an M&A perspective. So I don't think we're changing our ability or interest to do that. Sure. So in terms of the value, we are committed to the $100 million. I mean strictly speaking, these plans can be turned on and off, but our intention is to spend the $100 million. In terms of how long it will take, it will be a function of price and the volume of Ashland shares that are traded. The way these programs work is, we will have an agreed grid -- price and volume grid with the bank that's executing this buyback for us, and they'll be in the market each day, and the amount of shares that they buy will be dependent on how many shares are trading and at what price. I would expect us to be able to complete this by the end of the quarter. That would be my expectation, but will remain to be seen. And if not by the end of the quarter, certainly, by early in the June quarter. Got it. Okay. Thanks very much for the color. That's actually a bit faster than we were thinking, so good to hear. Thanks very much. Thank you. And again, one moment for our next question. Our next question will come from Mike Harrison of Seaport Research Partners. Your line is open. Hi. Good morning. I was wondering, if you can give a little bit more color on the strong demand that you're seeing in the pharma business. Is this increasing penetration or share of wallet with existing customers, as new customers, new products? And I guess, maybe what are you seeing in terms of underlying market growth? Really just trying to get a sense of whether this growth that you're seeing there or strength is sustainable through the rest of fiscal '23? Yeah. The underlying market has remained resilient. So it's not that the overall market is growing at the same pace. We clearly have gained share. And this segment, as we said last year, we did not expect a lot of reset there. Significant concerns, still about availability of product, both supply chain was a headache prior year, but obviously, the situation in Europe and specifically, in Germany, has had a lot of impact on availability of product, reliability of supply. So as in a broad base, that entire industry has been focused on reliability, given the products and the importance of their products to society and to the health -- welfare of people. That's been the big driver, and we saw that as we move forward. Now looking out, we expect demand to continue to remain strong. We probably will not see significant resetting of stocks or things of that nature, and I think we will continue to do well as we look out. Will things normalize in Europe and supply? I'm sure, towards the back end of the year, there could be some improvement, and will normalize some of our growth rates towards the back end of the year. The question is going to be, what's going to happen in Europe, and I don't think there's a lot of certainty. So we've made commitment to our customers and them to us to make sure that we're guaranteeing as best we can the supply reliability. All right. And then a question on the Calvert City disruption that you had. Is part of the $15 million impact related to winterization or backup power or other measures to help make sure that, that facility is more resilient in future cold weather? And then do you expect any insurance recoveries associated with that outage? Most of it -- and Kevin, you can comment a little bit more, but it's maintenance to repair, bring it up to speed and the absorption impact. This plant is not a new plant. It has been in that weather. This weather was not the worse. It was a very unique problem we had in one of unit that had later on implications with others. And that's why the maintenance and the downtime was much more significant than expected. So it was really very specific to a unit that in our compressed air that you think of in freezing weather about liquids and things like that. Air is probably not the area that you're more concerned, and there was just a failure in a specific area that had a downstream effect in boilers and other areas. So that's really the big driver. The plant historically has done very well in this kind of weather. So it's more of a unique situation. But Kevin, if you want to give a little bit more color on the numbers. Yeah. The biggest chunk of it is lost absorption. Repair costs are going to be smaller -- a smaller piece of the equation. From an insurance perspective, we actually maintain pretty high deductible to keep our rates as low as possible. We have historically been very, very comfortable with that simply because we just haven't had that many issues over the course of time. And so we've banked a lot of saves premium as a result of that, but it's probably three to five of the total impact is going to be repair cost and the rest is going to be lost absorption. And this is where, for the third and fourth quarter, we had plant shutdowns, obviously. Since we had shutdowns, we try to do as much other maintenance as possible, too. So that's what the team is working is what work was completed, what do we -- what can we avoid in terms of future shutdowns. And that's why the timing of the offsets will be not in the same quarter, it's going to be more around when we had some of those other activities planned. The Calvert plant, specific -- Mike, for the Calvert plant specifically, we typically do a kind of a June turnaround there that often typically last several weeks. And so part of what we're working on right now that Guillermo just mentioned is, what can we avoid later in the year as a result of what we've been doing at the Calvert City plant to make these repairs not only these repairs, but also some of the things we would have done in June as well. I'm sorry, go ahead, you got another question? Yeah, sorry. I just wanted to clarify on the insurance recovery. Are you saying that the deductible is so high that you're not going to get any recovery or it will just be very modest compared to the $15 million? Yeah. There's no expectation of recovery. There are multiple categories of deductible involved in an event like this. So you've got the property piece, and you've got business interruption and you've got to hit those limits on both. It's not an either or kind of thing. So we don't expect any insurance recovery from this event. Thank you. One moment for our next question. And our next question will come from John Roberts of Credit Suisse. Your line is open. Thank you. Well, most of the business saw destocking, do you think pharma ingredients saw any restocking activity? I know you had some logistic issues last year, and do you think there was any timing issues that help pharma? Because sometimes -- I know sometimes the shipment falls one quarter or the other, and these are large high-value shipments that occur. If we look at just January, I mean, we continue to see strong demand. I think it's more of that share gain was the bigger impact. I don't think there was overstocking. It was more ensuring our customers ensuring that they have the stock in the right place. I think between COVID and the European situation, there is a lot of uncertainty around supply in some of these areas, and for this type of industry, their risk management has been a top priority. I think in the last call, I mentioned that when I was in Europe in November at one of the big events for the pharma industry, it was very clear that most customers were very focused on for 2023 risk management in terms of supply, given all the uncertainty that existed then, and I think still remains now with some of the developments. But we're monitoring that closely, and we haven't seen any change in January. On Slide 5, under the resilient U.S. demand, you listed architectural paint additives. I believe most of the paint companies reporting so far have had weak architectural volumes. So how do we reconcile that? Again, itâs several things. We did see weakness in the DIY space. I think the contractor space remained more resilient, and we don't necessarily follow 100% dynamics with additives. When you see a lot of destocking, we're not the main ingredients to drive inventory levels and things of that nature. So there's just unique situations. And again, we're working with a lot of our customers. Supply remains tight around the world even with the softening. So we're working to make sure this is not just about a quarter, it's for the whole year of how we work to ensure that they have the right products. The issue without it is, if you don't have them, it doesn't matter what you have with the other raw materials, you can't produce. So they are very focused to make sure that they don't have the same problems they had last year. Thank you. And one moment for our next question. Our next question will come from Jeff Zekauskas of JPMorgan. Your line is open. Thanks very much. In your press release, you said that currency negatively affected your EBITDA by $14 million, and I think your current -- the effect on sales was about $24 million, $25 million. Why wouldn't the effect on EBITDA just be $4 million or $5 million consistent with your EBITDA margin? Why would it be so large relative to the sales impact? And second, can you comment on the trends in your -- in the margins of your Intermediates and Solvents business? Is that business getting weaker or stronger or staying the same? Okay. Well, let me comment on the intermediates and then Kevin, you can comment on the currency. So Intermediates has held up -- a reminder, most of our Intermediate business is the downstream products, NMP BLO, BDO, we have the captive, and we have a use and maybe of our merchant business, maybe 20% of -- it varies 20%, 25% of our merchant business is BDO. So I would say, in BDO, clearly, the markets are long. Prices have been coming down. Internally, for us, our Pharma business has been strong and the Personal -- even in Personal Care, our core business with customers versus distributors continues to hold up. So volumes -- internal captive volumes were good, although transfer pricing not so much in this quarter, but we are forecasting them to be coming down just because markets are longer. That will be a negative for Intermediates, but a positive for our downstream businesses as we go through the year. We don't see that BDO dynamics are going to change that much in the near term. I think it really will require markets to start picking up probably in the second half of the year for things like fibers, polyurethane. There's a lot of these other bigger markets that will drive that part, but that's not the biggest part. But on the margin, we'll see some impact in the next quarter. If you look at NMP and BLO, there are different products driven by different markets. We are not pricing as maybe the markets were in the past. Just assume it's all a commodity and move it, these downstream products are very valuable. NMP is going into semiconductors and to the EV market for battery production. Huge investments going in in the U.S. and in Europe. We're focusing our portfolio more in the U.S. and Europe, less on Asia. Demand is going up. There is not enough product. So we are working with all our customers and people that are investing in both regions to make sure that we have the product they need as they ramp up the construction of their plants and increase production. So the pricing and supply-demand dynamics are a bit different. And similarly, in the BLO market, these are going into active ingredient production for pharma, for Personal Care, very specialized applications in the semi and the electronics industry too. We're the only Western merchant player, and again, the dynamics there are different. Markets have been tight, and we're pricing each product on their own, not just trying to move BDO. In the past, remember, we were a big BDO house, and it was just moved like most commodity companies. You want to load the asset and just move it through across. We're not a big BDO house anymore. Most of our production is for captive use and to support our downstream. So we have a very different strategy. And so far, precedent has been holding up what we're trying to see is more of that demand. I think on the margin, we will see softness in BDO, and the other ones, I think we'll have to see how markets develop, especially in Europe. And I think also with the China opening up, a lot of excess product that may be just trying to find homes outside of China now that there's no demand, all that will be pulling back into China as China reopens. Kevin, if you want to talk about FX. Sure. Just the impact is a little counterintuitive on the surface. As you look at it, our manufacturing footprint is pretty U.S. centric, especially for our higher margin products. So not only do you have a lower selling price on a translation basis outside the U.S. because of the strong dollar, we also have higher COGS, and because we're U.S. dollar based manufacturing for a lot of those products. So you kind of get hit on both sides of the equation. So you have an outsized impact on the gross profit and ultimately, the EBITDA piece of the equation. That's why the numbers don't necessarily on the surface make as much sense. I don't know if that answers your question or not, but it has to do with the fact that we're more U.S. centric on the manufacturing side. And then lastly, you said your planned maintenance cost in the quarter was $12 million. Is that a lot or a little? What are your planned maintenance costs on an annual basis? Is this a year of larger planned maintenance costs or smaller planned maintenance costs? From a plan perspective, it's pretty consistent year-to-year. What can differ, what can vary is the timing. So this year versus last year, we're heavier -- we're much heavier in Q1, especially in the Specialty Additives area than we were prior year. But on an overall basis, it's pretty consistent. The impact typically is around $40 million a year in total, give or take. The big variable with that one, Jeff, would be the Lima, Ohio BDO plant. We do that one about every three years, and that one brings some number up whenever we have to do. But otherwise, it's very consistent from one year to the next in total. Thank you. One moment for our next question. Our next question will come from Michael Sison of Wells Fargo. Your line is open. Hi. Good morning. Just one question. You talked about adding a lot of capacity this year. How much how much growth does that provide you over the next couple of years in either sales growth or EBITDA? And depending how quickly that fills up, when will you need to add more? And so we're adding capacity in our core segments. So HEC, which is very tight globally not just for us, but for the industry. So that will come on. We're expanding in hope well, and that will be significant capacity increase. Of course, we probably won't need new capacity there for several years. We're expanding capacity in our Benecel lines and that's more targeting our mix towards pharma and nutrition, a lot of the plant-based protein type applications. Klucel, which is pharma driven and Aquaflow on the coating. So we need the material, the capacity. The next tranche will vary by each of the product lines, but this will cover us for several years. So it's a significant number of important projects. There are other areas where we're not investing where we believe we have plenty of capacity. And as our mix changes and focus changes, we're going to be focusing on strategic areas that are higher growth, higher value, higher differentiation areas. Yeah. Like we said, last year and this year, volume is not the growth driver. We don't have any more product to sell. I mean any hiccup and we're short again. I mean even with the softness, HEC as an example, the capacity utilizations for the industry will remain pretty high. So I don't think the reset -- again, a lot of what we're looking at is what's going on the core demand, is that behaving per historic levels on resilience and things of that nature. We haven't seen any data that changes that. Even if we dig into our numbers, the core businesses have actually been resilient. We cannot make a statement based on what happened in Q1. We cannot say, these segments are falling abnormally versus history. So really, it's about this reset, and I think this is why the next two months are very important, and we've really -- having a few months, a month or 1.5 months of the China reopening is very important. Also the Europe post winter to see how the energy situation and supply-demand dynamics in Europe will turn up. Those are big issues because they impact this reset notion that is different. If you look at historic recessions, you went from a normal demand supply into a recessionary environment. We're not coming from a normal position, we're coming from a very tight supply demand where people were behaving in a certain way. So this reset probably is not something we've seen. So it's not normal versus history and that's where we're getting the noise. But as we put that behind, we do believe it's transitory. We should see then the underlying performance of the markets, and the capacity we're adding should put us in a good position starting 2024 to really drive volume growth, which is -- has to be our number one priority. Thank you. One moment for our next question. And our next question will come from Laurence Alexander of Jefferies. Your line is open. So good morning. So just to expand on that notion of the reset. I guess, first of all, is it right that the volume in most of the business lines were down more than 10% in the quarter outside Personal Care and Oral Care. And what do you think -- given that the inventory just -- given what you've seen with the European Nation inventory adjustment, what is your benchmark based on your historical analysis for what this portfolio should do if there actually is a U.S. recession? And then I guess just lastly, after 2024, when you have ample capacity, what do you see as a reasonable range of lumpiness quarter-to-quarter given the kind of swings we're seeing in inventory positions? I think just to go through in the order that you mentioned, we still see demand holding up. If we look at underlying historic demand, we're not immune. There is -- when you start a recession, you could get some slowdown, but in general, we are in Personal Care. We're not in home care in our markets. Those tend to be resilient. You could see markets go down single digits to stay up in the middle-digits. So that's really where we see a lot of the history. We're selling -- we're tracking right now absolute versus relative. We want to make sure that in the absolute that we're staying flat to our longer-term goal of 200 basis points to 300 basis points over market, which would put you in the middle single digits, and you're going to vary in that level of range. And relative, we're looking at our peer group. And many of you have coming in, you know the companies that we're trying to compare to, which is our the additive ingredients company and that tend to be very resilient. And I think we're seeing our performance pretty much in line with what many others in this area. Again, if we both sell a different ingredient into the same product, we should both feel the same relative performance relative to demand. So I would say, pharma, Personal care, obviously, is the more resilient. Architectural coatings, there's a little bit more reset. It's higher volumes at the beginning of the transition, but our history has been that, that recovers very quickly because of just it's much more of a consumer driven type portfolio. And I think so far, we're seeing that in the recovery in January. I think, as I said in the numbers, pharma continues strong. We're seeing demand -- underlying demand in Personal Care normalized. And in the Specialty Additives, where coatings is our biggest market, it is not... [indiscernible] Mr. Novo has left the call for a second. Mr. Willis, will you be able to take over? [Multiple Speakers] Yes. So just looking at the current situation, the bigger volume issues -- revenue issues for that matter were China and Europe. I mean China is -- I mean, in its own way, compartmentalized. A lot of that, we believe, is COVID related. Early in this quarter, January certainly is less COVID, probably more Chinese New Year. So as we finish out the quarter, I think Guillermo mentioned this earlier, we'll have better visibility about what we believe is going to be the future trend in China. Guillermo, you're back. Technology, yeah. I was just mentioning, China and Europe, we're really -- the volume and revenue [indiscernible], where Guillermo, as you mentioned, the distributor impact was a huge chunk of that. And I think as we get through the quarter, we'll have better visibility about what that's going to look like going forward. Thank you. And this will conclude the Q&A session of the call. I would now like to turn the conference back to Mr. Guillermo Novo for closing remarks. Okay. Well, thank you, everyone, for your participation and questions. I hope you're seeing, I think, the core things that the company is focused on and controlling around pricing, around innovation, about driving our core business. The team is performing very strong. I think as we look at this transition, this reset part is creating some challenges, and we're working through them. But I think still a lot of the fundamentals as we look forward we feel confident that we have a strong portfolio, and our portfolio itself, I think, is one of the big changes that we've had in the last few years that position us well servicing very resilient, high-quality markets that should provide us significant growth opportunities and a degree of stability, not immunity, but stability relative to other areas. So we will continue to communicate openly and transparently during this period of higher uncertainty, and we look forward to connecting with all of you in the coming weeks. So thank you for your time, and thank you, everybody. Bye.
EarningCall_907	Good morning, ladies and gentlemen, and welcome to The Bancorp Inc.'s. Q4 and Fiscal 2022 Earnings Conference Call. [Operator Instructions] This call is being recorded on Friday, January 27, 2023. Thank you, operator. Good morning, and thank you for joining us today for The Bancorp's fourth quarter and fiscal 2022 financial results conference call. On the call with me today are Damian Kozlowski, Chief Executive Officer; and Paul Frenkiel, our Chief Financial Officer. This morning's call is being webcast on our website at www.thebancorp.com. There will be a replay of the call available via webcast on our website beginning at approximately 12:00 P.M. Eastern Time today. The dial-in for the replay is 1-877-674-7070 with a confirmation code of 735961. Before I turn the call over to Damian, I would like to remind everyone that when used in this conference call, the words believes, anticipates, expects and similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties which could cause actual results, performance or achievements to differ materially from those anticipated or suggested by such statements. For further discussion of these risks and uncertainties, please see The Bancorp's filings with the SEC. Listeners are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Bancorp undertakes no obligation to publicly release the results of any revisions to forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Thank you, Andres. Good morning, everyone. The Bancorp earned $0.71 a share in the fourth quarter, driven by 28% revenue growth, while expenses were approximately flat year-over-year. GDV, gross dollar volume, transaction growth accelerated to 30% year-over-year, driven by continued double-digit growth in most categories. Core loan growth, which excludes loans previously generated for securitization, was 4% quarter-over-quarter, led by floating rate CRE multifamily with 12% growth. Year-over-year core loan growth was 45% with 168% growth in CRE multifamily; 22% growth in Institutional, which includes SBLOC and IBLOC, plus IRA financing; and 14% growth in commercial, which includes fleet leasing and SBA loans, excluding PPP loans. Net interest margin grew dramatically quarter-over-quarter from 3.69% to 4.21% compared to 3.51% in the fourth quarter of 2021, driven by the impact of Federal Reserve rate hikes. Efficiency and productivity continues to be a key focus of management, with expenses approximately flat year-over-year. ROE rose significantly over prior periods to 24%. 2022 was another year of strategic and financial progress for The Bancorp. We continue to improve our ecosystem for our fintech partners while investing across our platform to improve functionality and efficiency in all business lines. 2023 should show continued financial and operational improvement with a focus on continued rigorous risk management and credit oversight. In addition, our focus in '23 will be determining our next strategic steps as a company. After having established exemplar performance, we are now turning our attention to major initiatives, which will sustain profitability and growth as we approach the regulation II, Durbin balance sheet limit of $10 billion. We believe that TBBK's unique capabilities can be monetized more broadly and that the $10 billion limit will not limit our ability to generate increased profitability. This incremental profitability will be generated from fees by distributing both assets and liabilities. GDV growth and the sale of unique technology services and other platforms that will drive sustained EPS growth and ROE. For 2023, we are confirming our guidance of $3.20 a share, not including the net impact of share buybacks of approximately $25 million a quarter or $100 million for full year. We will update our guidance as we learn more in the coming months. However, we believe our guidance is attainable even, even with significant economic ambiguity and potential stress in the macro environment. I now turn the call over to Paul Frenkiel, our CFO, for more details on the fourth quarter and full year '22. Thank you, Damian. Return on assets and equity for Q4 2022 were respectively 2.1% and 24% compared to 1.7% and 17% in Q4 2021. These increases were significantly driven by a 47% increase in net interest income. In addition to the rate sensitivity of the majority of our lending lines of business, management has structured the balance sheet to benefit more from a normalized and higher interest rate environment. Accordingly, over a period of years, it is largely allowed as fixed rate investment portfolio to pay down while limited purchases were focused on variable rate instruments. Additionally, the rates on the majority of loans adjust more fully than deposits to Federal Reserve rate changes. Accordingly, in Q4 2022, the yield on interest-earning assets had increased to 5.9%, while the cost of deposits had increased to 1.7%. These factors were also reflected in the 4.2% NIM in Q4 2022 which represented a significant increase over prior periods. The provision for credit losses was $2.8 million in Q4 2022 compared to $1.6 million in Q4 2021. The $2.8 million included an upward adjustment of approximately $900,000 in the qualitative economic factor in our CECL model, which is forward-looking, to the extent that economic uncertainties resulted in the future, a reversal of that provision component would result. Conversely, deterioration in the economy could result in additional forward-looking provisions. Prepaid debit and other payment-related accounts are our largest funding source and the primary driver of noninterest income. Total fees and other payments income of $22 million in Q4 2022 increased 10% compared to Q4 2021. Noninterest expense for Q4 2022 was $43 million, which was comparable to Q4 2021, a decrease in legal reflecting the resolution of various matters and a decrease in salary expense offset increasing FDIC insurance and travel expense. Book value per share at quarter-end increased 10% to $12.47 compared to $11.30 a year earlier, reflecting retained earnings, partially offset by fair value adjustments to the investment portfolio resulting from the higher rate environment. Quarterly share repurchases should continue to reduce shares outstanding. Wondering if you guys could -- good strong quarter on GDV growth year-over-year. I guess, really, you have been guiding to something along these lines but just your thoughts on runway from here? And how much of that translates through to card fee income growth? Yes. I think this was a very good, normalized quarter. We had the stimulus. We never gapped down and we've been building all year back to trend. So we had 1%, I think it was 5% and now we're at 13%. I think you're going to see this range, 12% to 15% GDV growth going forward this year. I think you're going to see around 9%, 10%, maybe even 11% translation into fees year-over-year. And that was before -- that was kind of the trend before the big stimulus bump. So very encouraging. When we look at our pipeline, we've got some real successes in corporate payments that have ramped up very quickly. So it looks like it's going to be at that level. Hopefully, we'll get a bit more, but it looks like it's going to be a strong year. Great. And then just on loan growth, the SBLOC, IBLOC portfolio growth has slowed a little bit, certainly over the last couple of quarters. And I just wondered if you could talk about your outlook for growth in that portfolio? Yes. That is what is likely to happen, what we've seen it before. When you get this rapid -- I mean this is historic but I mean you get a rapid change in -- on liquid borrowing so quickly that people get a little thicker shock. So it's a little bit encouraging that we were only down 1% to be honest. And there were more payoffs but were offset by more originations. So that should, by the middle of the year when interest rates stop, people normalize and then you'll get -- people just not lending for needs rather than just lending for liquidity. So it won't be -- and we're -- obviously, we're coming closer to that balance sheet limit. It won't be -- we won't have like historic 20% growth, but we'll have some growth, but it won't be as dramatic as we previously had until things really normalize. Once they normalize, we'll go back to the previous trend, likely. Okay. And then finally, I just wondered if you could talk about things that you're doing to protect margin here as we perhaps come to the peak of this rate cycle. And what sort of margin reaction do you expect if we get a rate cut or two at the end of 2023 or into 2024? Yes. So as Paul was saying, we've totally opened our balance sheet to the variable side. And we thought there would be -- this was more dramatic than we expected but we really thought there was going to be a rise -- ultimately a rise in interest rates. But we've left and are pivoting very quickly. We have a project in place called Project Flex. So we're going to put on a lot of fixed rate exposure. We have a fixed rate program now in our CRE business. We're putting on more fixed rate exposure in our commercial business. And then we -- once again, we haven't bought a bond. One easy way to do it is simply to lock in forward rates through 3-, 5-, 7- and 10-year agency securities. So we're very aware of the situation and we're going to significantly lower the variable part of our balance sheet as we peak out at rates. I think we came into this. When we started this process, we were more like 55% variable and that's -- with the growth of those variable rate businesses, it went up and we didn't buy any fixed rate exposure. So now we just have to turn that around. And the good thing is, as rates drop, of course, balances will go up in things like the IBLOC, SBLOC area. So we run those models. We're going to soften the impact of those interest rate changes. And we're in a really great position because we've got plenty of room to do that. So we're forecasting that and we'll be able to lock in, I think, an increasing amount of fixed rate exposure. One thing to note, our financials today do not account for bond purchases. So one thing to note that we haven't even built that fixed rate exposure on the bond side into the 320 earnings per share estimates. Okay, all right. That's helpful. And just as you're thinking about fixed rate exposure in the loan book, can you talk about what sort of products are you looking at? Or are you thinking about permanent financing on the multifamily side? Not perm, but there is a market because of -- for the fixed rate side and the CRE transitional loans. So especially at lower dollar numbers because interest rate caps have become very expensive. So we require interest rate caps on our loans to protect against the volatility in interest rate and usually have reserves. So we've -- there's not a lot of programs out there on the fixed rate side for these transitional loans. So it's been -- we've already done over $50 million and we just launched it just recently. So that will give you a three-year cushion. And I'd also remind you that we have floors on all our -- one of the great things about our portfolio, it's variable on the upside, but a lot of it is not variable on the downside. So we have floors in all the loans on the CRE side. So even if we do get a significant downdraft on the Fed side, those rates won't be significantly affected. I wanted to follow-up on that kind of margin line of questioning a little bit and maybe drill down on the liquidity position a bit more specifically. Damian, I know you mentioned some high-level stuff. But so would you guys say it's fair for us to assume that over the next 6 months or so, the excess cash position you guys will probably start putting to work a bit more on the bond book side? I mean I think it's been what, like three years since you bought a bond which obviously looks really good now. But just curious kind of functionally how we should think about the investment portfolio? Does it kind of trough out here in the next quarter or two and then start growing? Or what you guys are thinking there? Yes. Well, we -- we're really -- it's almost a daily thing. We're watching everything, the yield curves, everything. We have so much flexibility in our balance sheet because we have plenty of ways to get deposits and we have plenty of room up to the Durbin limit. So we really are deciding exactly how much fixed rate exposure we're going to take and when we're going to take it to lock in. We might give up a little margin but we're not going to give up a lot. And we also have, like I said, floors on all the CRE loans which protect us for three years. So we're really dealing with that SBLOC portfolio, which is the one without floors that really adjusts very quickly with interest rates. And those are -- if you recall, those are all demand loans on top of it. So not that we're going to demand loans. It's just that in every scenario, we've got an incredible amount of balance sheet flexibility to put on fixed rate exposure. So -- and if you look at our loan yields, that's the lowest yielding portfolio. And in our higher coupon portfolios, we actually have fixed rate protection in there. So we're in a very good position and able to flex the balance sheet in order to put on a lot more fixed rate exposure. That's very helpful. And then on -- just on loan growth, where are the pipelines kind of act today in the various business lines? And was any of the slowdown this quarter, I don't want to say intentional, but I think there was some good catch-up on the deposit side. The balance sheet looks a little bit better positioned here to support some growth in 2023. Just curious kind of what some of the dynamics were there and your near-term expectations around loan growth? Yes. Well, we did have some catch-up, you're right. And that's actually economically helps us. It wasn't purposeful though. We're not stretching though. I mean, we're not stretching at all on credit quality. So when you get in times like this when volumes get low, people get a little bit to -- there's been some announcements about people getting into commercial and that's not the time to do it probably. We're just being very, very careful. We're underwriting to the standards we've always underwritten to. The market is being affected by rates, but we still have -- we had strong growth in leasing. There is a big backlog in car delivery still for the commercial side. You're being very careful on -- while we have the government guarantees on the SBA, that's has slowed down because the interest rates have jumped so much and people don't know if they want to invest in new businesses. But even if we went through 2023 with even a flat or up 5%, 10% that really will still meet our expectations at the earnings per share. So I think we're in a really, really -- there's a lot of upside potential. If we get trend growth, obviously, there would be significant upside potential. We've been very careful with our guidance. We've scenario planned it out and looked at a lot of -- we've left a lot of things out by historic growth. We've left out bonds. We're obviously getting -- I mean, I talked a few earnings calls before and we were kind of in the 4% range where we thought this would top out on our NIM. And we've flown right past that. And during this quarter, we've had increasing -- significantly increasing net interest income, while our GDV has restored to trend. So there's a lot of green lights here. And we're going to have a lot more information in January. And by the end of the first quarter, we're going to know a lot. And then if we have to adjust guidance and take a hard look at, we'll also know a little bit more about rates. So I think it's going to be an exciting quarter and I want to know what it is and I know you do, too. And then just lastly for me. I mean, you guys have held expenses flat for almost 2-plus years now. Obviously, you guys kind of have a structurally higher profitability outlook with this NIM, north of 4%. I know you have initiatives you're working on. I think there has been a little disruption on the customer side because there's some regulatory actions to competitors. Just curious, is there any -- as we think about the rate of investment and the OpEx growth, I mean, is there room for that to grow a bit more this year than it has in the past 2 years. Did you guys see some opportunities? Or how should we be thinking about that? Well, we're always focused on efficiency productivity but the one thing -- there is core inflation, there's no doubt. And that's -- that will affect us next year. One of the area is just employee cost. So we've been -- I mean we've got now 4, almost 5 years, basically with flat expenses. I mean, if you look on a historic basis and that's all been the restructuring of different things that we've done on the operational side. I think you'll see from a historical perspective, we're not going to be zero. We're not going to be at 2%. We really want to continue to invest in our people. And while the regulatory side isn't our issue because there's been so much investment in that side of our business, that's not where the cost is going to come from. It's going to come from the embedded core inflation. Now we're obviously benefiting from rate price and inflation in our GDV and everything else. So I think this is a year that you'll still get a big differential. You're going to have a big differential between revenue growth and expense growth. But you'll have above what our trend has been which has been flat, above that trend. We'll have at least 10% jaws between revenue and expense, will probably be significantly more than that but you won't see flat expenses this year due to -- mostly due to employee costs and core inflation. [Operator Instructions] There are no further questions at this time. I will now turn the call over to Damian Kozlowski for closing remarks. Thank you, operator. It's been -- it was a really good quarter for us. We made a lot of progress. As I said, we're looking forward to the next quarter to really tell us a lot more about 2023. So as we get information, we will continue to talk with everyone on the phone. And when we get to the end of the first quarter, I think we'll have a lot more information to share about how 2023 might ultimately end on the metrics in which we measure this business. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
EarningCall_908	Ladies and gentlemen, thank you for standing by, and welcome to the First Citizens BancShares Fourth Quarter and Year End 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakersâ presentation, there will be a question-and-answer session. [Operator Instructions]. As a reminder, todayâs conference is being recorded. I would now like to introduce the host of this conference call, Ms. Deanna Hart, Senior Vice President of Investor Relations. You may begin. Thank you. Good morning, everyone, and thank you for joining us for First Citizens Bankâs fourth quarter earnings call. It is my pleasure to introduce our Chairman and Chief Executive Officer, Frank Holding, as well as our Chief Financial Officer, Craig Nix, who will provide an update on our financial results and outlook. We are also pleased to have several other members of our leadership team in attendance with us today who will be available to participate in the question-and-answer portion of the call, if needed. During the call, we will be referencing our investor presentation, which you can find on our Web site. An agenda for todayâs presentation is on Page 2 of these materials. Following the completion of our presentation, weâll happily take questions. As a reminder, our comments will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. We assume no obligation to update such statements. These risks are outlined for you on Page 3 of the presentation. We will also reference non-GAAP financial measures in the presentation. Reconciliations of these measures against the most directly comparable GAAP measures are found in Section 5 of the presentation. Finally, First Citizens is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. Thank you, Deanna, and good morning to everyone. We appreciate all of you joining us today. And I'll make some comments about the year and then update you on our 2023 strategic priorities. And then I'll turn it over to Craig Nix to highlight our financial results for the fourth quarter and the outlook for 2023. Starting on Page 5, 2022 was a great year for First Citizens. In addition to the completion of our merger, we delivered solid financial results marked by strong top line growth, low credit losses and well controlled expenses. We were pleased with the performance of our lines of business, achieving robust loan growth in both the general and commercial banks. And despite a challenging year for deposits driven by unprecedented quantitative tightening, we experienced modest growth in non-interest checking accounts and only a slight decline in deposits during the year. Our merger integration is substantially complete. And we're now focused on creating positive operating leverage by growing revenues and optimizing our operations. We remain on track to achieve our $250 million cost savings goal. During the third quarter, we announced a share repurchase plan to optimize our capital levels, and we completed the plan early in the fourth quarter, repurchasing 1.5 million Class A common shares. This plan allowed us to return excess capital to our shareholders while exceeding our CET 1 target, and is expected to be approximately 10% accretive to earnings per share in 2023. Our capital position remains strong relative to our risk profile. And we believe that we will have the ability to resume share buybacks in the second half of this year. From a profitability standpoint, we finished right in line with our guidance and are pleased with our financial results for the fourth quarter and full year. Strong loan growth and rising interest rates drove a 20% increase in net interest income over the prior year. This strong margin growth combined with solid non-interest income growth and well controlled expenses drove a year-over-year 45.5% increase in pre-provision net revenue. Earning asset yields increased by 68 basis points. And we were able to manage rising deposit costs despite a challenging and competitive environment. The pace of rate hikes did begin to put pressure on margin as we entered the fourth quarter. During my tenure at First Citizens, we've been through several tightening cycles and we've always grown and prospered through them. Looking at non-interest income, our fee income producing lines of business provided continued support to our net revenue led by growth in rental income on operating lease assets, as our rail portfolio saw increased utilization and positive momentum from higher lease rates. We also saw growth in areas such as wealth and card despite a challenging market environment for wealth. You'll remember that we announced the elimination of certain NSF and OD charges that took place in the second half of 2022 reducing deposit service charge income. But we've had strong growth in commercial service charges to help offset some of this NSF, OD impact. Despite inflationary headwinds, we maintain prudent expense discipline which resulted in positive operating leverage for the full year, as well as an improvement in our efficiency ratio, which we expect to maintain in the low to mid 50s on an annualized basis moving forward. We're pleased with the growth in loans we saw in 2022 with total loans increasing by $5.6 billion, or 8.5% over year end 2021. We saw growth in the general bank and within the commercial bank and industry verticals and business capital. While we experienced an increase in non-accrual loans in the fourth quarter, net charge-offs remained well below historic norms. Overall, credit quality remains strong and we are not seeing broad based signs of stress in our loan portfolio. Now turning to Page 6, I'll quickly highlight a few of our strategic priorities moving forward. Investing in our core businesses to achieve profitable organic growth. We're pleased with the momentum in many of our core lines of business, including our branch network, wealth, business capital, the industry verticals and middle market banking. And we're going to continue to add revenue producers and enhance our capabilities in these areas to remain competitive and expand market share. Optimize capital and focus on core deposit growth. A key foundation to our strategy is our focus on full long-term banking relationships, which in addition to making loans includes the deposit relationship. Our goal is to fund earning assets with low cost stable deposits, and this remains a significant component of our go-to-market strategy. In terms of capital allocation, our number one priority is focus on our customers. But to the extent we have excess capital after funding internal growth, our strategy is to redeploy it into share repurchases at attractive prices. A focus on talent acquisition and retention. We're going to continue to be proactive in adding talent to support our continued growth. In addition to our focus on talent and our associates, we will remain focused on our customers to make sure we're aligning our products and services across all segments in ways that meet their financial needs. As we move into 2023, we will continue to work on distributing the capabilities we have as a firm across our lines of business more broadly, which will help create additional revenue synergies as clients have access to a wider variety of products. Capitalize on the benefits of shifting from merger integration to operating as a combined company to boost our operating leverage. While we are in line to achieve our cost savings goals, we're going to continue to focus on further optimization and efficiency as we believe there is an opportunity to build upon the efficiency we have recognized to date. And we will continue to assess processes and capitalize on revenue synergies and opportunities. Manage risk effectively. We're committed to strong risk management and regulatory compliance. In 2023, we will continue to build out and execute on our new regulatory capabilities to ensure we meet the requirements of the large financial institutions framework. We have made great progress on our readiness to comply with heightened regulatory standards, and we worked hard to develop the capabilities and planning needed to ultimately satisfy the regulatory standards. In the coming year, we will be intently focused on executing upon these plans. To conclude, while we acknowledge certain concerns in the broader economy, we enter 2023 with solid capital and liquidity positions, and are well positioned to continue to build customer relationships and grow our balance sheet profitably. We will remain focused on our client-focused model and committed to delivering solid results regardless of the market conditions. I want to thank our associates across the company for working so hard to make us successful in our transformation to a large financial institution and at the same time supporting our shareholders, customers and communities. Thank you, Frank, and good morning, everyone. Turning to Page 8 of the deck, fourth quarter GAAP net income to common stockholders was $243 million, or $16.67 per common share. Our fourth quarter GAAP results were impacted by the strategic decision to exit $1.2 billion of bank-owned life insurance policies, resulting in a tax charge of $55 million. Favorable market conditions prompted us to exit this long-term liquid asset. And as we receive proceeds from this surrender, it allows us to invest in high quality liquid assets at higher yields resulting in minimum capital and liquidity accretion. On an adjusted basis, net income to common stockholders was $306 million, or $20.94 per common share, yielding an annualized ROE of 13.89% and an ROA of 1.15%. EPS was in line with the guidance we provided on our third quarter call. Comparable EPS, ROE and ROTC shown on this page for 2021 periods offer First Citizens BancShares on a standalone basis. ROA, PPNR ROA, NIM and the net charge-off and efficiency ratios are presented as if the company were combined during the 2021 historical periods. I'll dive a little deeper into these components in a moment as we look at the underlying trends that produced our results. On pages 9, 10 and 11, we provide two condensed income statements and commentary. The table at the top of the page represents our reported GAAP results. And the table at the bottom supplements those results showing net income adjusted for notable items. Commentary for quarter-to-date GAAP results is included on Page 9 and for adjusted results on Page 10. Page 11 discusses year-to-date results with GAAP commentary at the top part of the highlight section and adjusted at the bottom. All income statements are presented as if FCB and CIT were merged during the 2021 historical periods presented. The section in the middle of the page summarizes the impact of notable items to derive the adjusted results from the reported results. The most significant notable items in the fourth quarter included the reclassification of 135 million in depreciation and maintenance expense on operating lease equipment for non-interest expense and non-interest income, the $55 million tax charge I just mentioned related to the BOLI surrender, and $29 million in merger-related expenses. Focusing now on Page 10, adjusted net income available to common shareholders was 306 million for the fourth quarter, down from 326 million in the third quarter, and from 291 million in the fourth quarter of the prior year. The decrease during the linked quarter was due to an increase in provision for credit losses and slightly lower pre-provision net revenue. The provision build was primarily due to an increase in reserves on loans individually evaluated for impairment, slightly higher net charge-offs, net loan growth and continued deterioration in the economic outlook, all partially offset by change in portfolio net. The increase over the comparable quarter a year ago was due to $171 million or 51.7% increase in PPNR, only partially offset by a $157 million increase in provision expense. Page 12 provides detail with respect to notable items for the relevant quarterly and year-to-date periods. During the fourth quarter, these adjustments had a net impact of adding $4.27 to GAAP EPS. Turning to Page 13, net interest income totaled $802 million for the quarter, up over the linked quarter by $7 million. As we anticipated in our fourth quarter guidance, rising deposit costs and an increase in interest-bearing deposit balances caused net interest income growth to decelerate. Our cumulative deposit beta increased from 6% to 14% during the quarter, in line with our expectations. Interest income increased by $134 million over the linked quarter due to loan growth and a higher yield on earning assets. Interest expense increased $127 million due to higher funding costs and interest-bearing deposit balances. An analysis of the comparable quarter and year-to-date periods is provided at the bottom of the slide for your reference. Turning to Page 14, net interest margin was 3.36% in the fourth quarter, a 4 basis points decline from the third and increased by 80 basis points from the fourth quarter a year ago. Before I discuss the key components of the net decline in margin from the linked quarter, it is important to note that with the pace of the share repurchase program that began in early August, we more fully felt the impact of the reduced earning assets in our margin this quarter, which was essentially tied to the foregone cash, which would have continued to increase in yield given the Fed rate hike this past quarter. This had a 4 basis points negative impact on the margin during the fourth quarter. While the yield on earning assets continued to benefit from repricing, which occurred during the quarter, deposit repricing caught up amidst the competition for deposits. Combined with deposits going slightly more than was on the quarter, it had a slight negative drag on margin. Additionally, a reduction in non-interest-bearing deposits during the quarter also contributed to this slight decline. Moving forward, we believe the strength of our balance sheet will enable us to weather these interest rate headwinds favorably, as we expect to continue to benefit from increasing asset yields, while deposit costs are expected to level off in the back half of 2023. Turning to Page 15, the line graph on the left hand side of the page indicate we continue to be asset sensitive, albeit slightly less than prior quarters due to reduced cash balances. We have and will continue to take a measured approach to interest and market rate risk management to position our balance sheet to benefit from higher interest rates while at the same time providing some downside protection against lower interest rates. We estimate that a 100 basis points shock in rates would increase net interest income by 3.4%. And a 100 basis points ramp will increase it by 1.5% over the next 12 months, unchanged from the prior quarter. The main drivers of our asset sensitivity are our variable rate loan portfolio, which represents 45% of total loans, our cash position and expected modest deposit betas driven by our strong core deposit base. Turning to Page 16, we provide some additional information on our actual and expected deposit betas. In terms of our deposit base, 56% of our deposits exhibit lower betas and 44% exhibit moderate to higher betas. The 56% of deposits shown on the slide that exhibit lower betas are non-interest income bearing deposits and branch network checking with interest and savings accounts. Branch network, money market accounts and CDs representative of about 26% of total deposit exhibit moderate betas. And finally, Direct Bank money market, savings and time deposits representative of approximately 18% of total deposits exhibit higher betas. Our cumulative beta through the fourth quarter was 14%, which was in line with our projection last quarter. We expect cumulative beta to increase to 22% by the end of the first quarter as deposits continue to catch up from recent rate increases. Over the interest rate hiking cycle, we forecast our cumulative beta will be approximately 25%. However, as Frank mentioned earlier, we are in unprecedented times with respect to Fed tightening. Our through the cycle deposit beta will ultimately be dependent on whether we continue to grow our loan portfolio as expected, whether the current rate forecast come to fruition and the impact of the competitive environment for deposits. Turning to Page 17, we show GAAP non-interest income for the past five linked quarters and for the comparable year-over-year periods. Non-interest income as adjusted is shown in the blue bars for the same periods. I will focus my comments on adjusted non-interest income. Adjusted non-interest income increased by $2 million from the linked quarter to $290 million. While the total change was not significant, we did see a $9 million improvement in rental income on operating lease assets net, and that's net of maintenance and depreciation, driven by higher gross revenue from continued strong utilization and higher lease rates, as well as lower depreciation and maintenance expenses. Maintenance expense on operating leases can be more idiosyncratic, with this quarter more favorable. However, we do expect it to move higher in the coming quarters. Our fee generating lines of business also had another great quarter. And we saw increases in service charges on deposit accounts, higher factoring and insurance commissions, increased cardholder income and higher fee income and other service charges. These changes were partially offset by a decline in other non-interest income spread across several smaller line items. Non-interest income was up 26 million over the prior year quarter with the largest driver being improved adjusted rental income on operating lease equipment for similar reasons I just discussed for the linked quarter. Turning to Page 18, we show GAAP non-interest expense for the past five linked quarters and for the comparable year-over-year periods. Non-interest expense as adjusted is shown in the blue bars for the same periods. And I'll focus my comments on adjusting. The primary drivers of the $13 million increase over the linked quarter included a $6 million increase in marketing costs due to efforts in the Direct Bank to maintain and attract new deposit balances. Net occupancy expense increased by $3 million, primarily due to increased repairs that were episodic in nature and utilities costs primarily attributable to inflation. Personnel costs were up by $2 million. The adjusted efficiency ratio of 54.08% remains in our target range of low to mid 50s. While we will continue to make expense management a priority for 2023 and beyond, we feel that our continued recognition of cost save is helping maintain expense growth in the low single digits than otherwise would be in the 5% to 6% range given inflation headwinds. Page 19 outlines our adjusted non-interest income and expense composition, which remained relatively stable compared to the prior quarter aside from changes to rental income on operating leases and other income explained just a moment ago. Page 20 shows balance sheet highlights and key ratios. I won't spend time covering these as I've cover the significant component with subsequent pages of the debt. Turning to Page 21, we had another good quarter of loan growth with loans increasing by $1 billion over the linked quarter, or by 5.6% on an annualized basis, as our team continued to deliver for our customers and we benefit from reduced prepayments due to the higher interest rate environment. Loan growth for the quarter was primarily driven by the branch network, which grew by $1 billion, or 14.7% on an annualized basis. Within the branch network, growth was concentrated in business and commercial loans. Mortgage loans grew by $355 million, or 15.4% on an annualized basis. The growth was primarily due to slowing prepayment rates, but production was up in our ARM loans, which we kept on the balance sheet. We continue to see our mortgage pipelines naturally flow given the right environment. And during the fourth quarter, approximately 90% of our funded mortgage loan volume was for purchases compared to an approximate 50/50 purchase versus refinance split in the fourth quarter of last year. Total loans in the commercial bank declined by $523 million during the quarter, driven primarily by lower factoring balances which declined $448 million due to expected seasonal decline following the third quarter high mark. This decline was partially offset by $193 million in growth and business capital loans. On a year-over-year basis, loans increased by 5.6 billion, or about 8.5% primarily due to increases in the branch network, which grew by 3.5 billion and mortgage channel grew by 1.6 million; and in the commercial bank, industry verticals grew by 1 billion led by strong growth in healthcare and TMT, business capital was up 632 billion over '21 and all of these increases were offset by $742 million decline in real estate finance loans. As we look back on both the quarterly and full year results, I would like to recognize our sales teams for the hard work and excellent execution following the merger, as well as for the resulting strong performance that these efforts have spread across our many lines of business. Page 22 shows our loan composition by type and segment for reference. Turning to Page 23, deposits increased by 1.9 billion, or 8.4% on an annualized basis from the linked quarter. The main driver of the growth was a $3.5 billion increase in interest-bearing deposits due to increases in time deposits and savings accounts partially offset by a decrease in money market deposits. A large portion of this growth is delivered through our Direct Bank. As you'll remember from our previous call, we have worked diligently to leverage this channel to increase balances to help fund our loan growth. We do anticipate continued deposit growth in the Direct Bank in 2023 to help support loan growth. While this channel is higher costs compared to the traditional branch network, it will enable us to reduce more expensive FHLB borrowings than we have added in the past few quarters. Our cost of deposits increased by 43 basis points during the quarter to 78 basis points, in line with our guidance. The increase is representative of the impact from the Fed rate hike and our need to raise rates to stay competitive with our peers. But our cost of funding has quickly caught up with our yield on earning assets. Our cumulative deposit data was well controlled at 14% despite the Fed funds rate increasing by 425 basis points since the end of 2021. While we expect continued increases in deposit costs in the first quarter, we expect them to moderate then flatten in mid '23 as the Fed reduces its pace of increases and begins to lower rates. For your efforts, we have included our deposit composition by type and segment on Page 24. Turning to Page 25, our balance sheet continues to be funded predominantly by deposits, representing over 93% of our funding base. As I mentioned last quarter, the FHLB borrowings we initiated had quarterly call features and you'll note we decreased those borrowings by approximately 1.6 billion this quarter, which is reflective of the deposit growth I just spoke to a moment ago. We believe the non-deposit concentration metrics will continue to flatten as our deposit balances continue to increase in the first quarter. Continuing to Page 26, you'll see that credit quality continues to be strong even though we did see a small uptick in that charge-off and an increase in non-accrual loans during the quarter. The 14 basis points net charge-off ratio remains well below historic levels and beat our guidance. Provision for credit losses increased by $19 million due to a higher provision build and a $6 million increase in net charge-offs. Moving to the bottom of the page, the non-accrual loan ratio increased 2.89% this quarter from 0.65% last quarter, but remains below the fourth quarter of 2019 pre-pandemic level of 0.97%. The increase in non-accruals was driven primarily by our non-owner occupied commercial real estate portfolio and more specifically related to general office exposure in the commercial bank segment. You may remember, we discussed potential concerns in this portfolio last quarter and some of these changes have now pushed through to the portfolio. We have been closely monitoring this portfolio since the start of the pandemic and are continuing to see market disruption due to hybrid work models which impact vacancy and leasing rates. We have also seen an uptick in charge-offs and credit quality metrics in our small ticket leasing portfolio within business capital as borrowers continue to face inflationary pressures and supply chain disruption. We are also monitoring this portfolio closely and have modified our credit risk appetite for new originations during the recent months. While we do not believe these two portfolios are necessarily predictive of trends in the broader portfolio, we are actively monitoring them to ensure any potential trends are identified early. Our allowance ratio increased by 4 basis points to 1.3% during the fourth quarter. Moving on to Page 27, we provide a roll forward of the ACL from the linked quarter. For our CECL modeling, we start with the Moody's baseline scenario and then wait to both the upside and downside scenarios depending on market conditions. This quarter, baseline estimates reflected a continued slowdown in the economy, the elevated interest rate environment and meaningful reduction in real estate values, all of which impacted our allowance levels. As we have now begun to see our baseline forecast more closely aligned to the downside scenario, we adjusted our scenario weighting this quarter given that our baseline reserves now incorporate more recessionary risks. Our current weighting is 30% to the upside, 30% to the baseline and 40% to the downside, reflecting a 10% shift between the downside weighting and the baseline weighting from the previous quarter. The ACL increased by $40 million over the third quarter, now totaling $922 million, or 1.3% of total loans. We did have a net reserve build in the fourth quarter and are operating our company with the expectation for a mild recession in 2023. Our reserve build for the quarter was due to the net growth in loans, an increase in specific reserves on individually evaluated loans, as well as a slightly more negative macroeconomic outlook than in the prior quarter. These negative impacts were partially offset by a decline related to a mix shift during the quarter to portfolios with lower reserve rates. The ACL provided 9.3 years coverage of fourth quarter net charge-off on a portfolio with a weighted average life of approximately 3.5 years. Turning to Page 28, our capital position remains strong with all ratios above or in the upper end of our target ranges. At the end of the fourth quarter, our CET 1 ratio was 10.08% and our total risk-based capital ratio was 13.18%. The 29 basis points decline in our CET ratio was primarily the result of our share repurchase activity, which concluded in October. Net income growth continued to outpace loan-driven risk weighted asset growth and a decrease in CET 1 helped to optimize our capital ratios closer to our target ranges, whereas before our share repurchase plan, we were well above them. As Frank mentioned in his comments, we plan to pursue another share repurchase plan in the second half of 2023. I feel confident in our ability to execute on this plan while remaining within our target capital ranges. During the fourth quarter, tangible book value per share increased modestly due to strong earnings performance, which more than offset the impact of AOCI in the share repurchase plan. Turning to Page 29, we summarize our BOLI surrender strategy as well as with its financial benefits. Much of our investment activity during the fourth quarter was a result of this decision. And while this resulted in a $55 million tax charge in the fourth quarter, we anticipate the payback on the strategy to be approximately two years. This is in line with our long-term view of the business and emphasis on driving tangible book value growth. We were able to pre-invest the additional liquidity and high yielding investments which should help to meaningfully increase our investment portfolio yield in the first quarter of 2023. The impacts from this surrender are reflected in our financial outlook that I will share next. Turning to Page 31, I will conclude by discussing our financial outlook for the first quarter and full year 2023. The first column is our fourth quarter 2022 results. The numbers for non-interest income expense are adjusted for notable items. Column two provides our guidance for the first quarter of 2023 and column three for the full year. There are a lot of variables that can impact this projection, and this guidance continues to assume recessionary impacts are mild. Okay. For loans, during the fourth quarter, loans grew an annualized rate of 5.6%, down from the high double digit percentage growth rate in the second and third quarters. We expect flat to low single digit percentage annualized loan growth in the first quarter, as the absolute rate environment puts downward pressure on customers' lending appetite and given seasonal patterns typically witnessed during this period. For the full year, we believe the mid single digit percentage growth in the fourth quarter is more indicative of where it will be for the full year 2023. While the absolute rate environment and economic uncertainty is tempering our clients' appetite to borrow in some segments, we still have strong pipelines in many of our core areas, and coupled with low rates of prepayment, this will lead us to mid single digit loan growth in 2023. We think loan growth will be driven by continued momentum in business and commercial lending in the branch network. Our middle market business due to continued additions to our sales force, continued expansion of our wealth business through adding bankers and expanded presence outside of the Carolinas market and further growth both in our industry verticals and business capital segments. Offsetting this growth, we do expect to see continued declines in real estate finance, as the client appetite to borrow is diminished in the current rate environment and we remain selective on the terms to extend new credit. We do acknowledge that uncertainty around the external environment, especially regarding economic risk and the pace of continued interest rate hikes, could cause actual growth rates to deviate from our expectations. Moving on to deposits, during the fourth quarter, we actively took steps to curb some of the higher price deposit attrition we experienced in the second and third quarters and successfully grew balance in the fourth quarter at an annualized rate of over 8% led by the Direct Bank. Our expectation for the first quarter is high single digit annualized percentage growth based upon momentum in our Direct Bank and the seasonality in both our branch network and homeowners association banking business. Our expectation is that this heightened growth in the first quarter will enable us to pay down some of the outstanding FHLB advances we currently have on the balance sheet. On the full year, we expect mid single digits percentage growth with non-interest-bearing growth also in mid single digits. While the high interest rate environment is a headwind here, we believe the client acquisition and our relationship-based approach that emphasizes no loan alone [ph] will help drive our deposit growth in 2023. From an interest rate perspective, our outlook assumes that rates follow the implied forward curve. We forecast two interest rate hikes in the first quarter of 2023 and one in the second, with the Fed funds rate peaking at a range of 5% to 5.25%. In the back half of the year, we forecast two 25 basis points reductions in the Fed funds rate ending the year at a range of 4.5% to 4.75%. The expected timing of the cut leads to a reduction in the inversion of the yield curve in the back half of '23 which helps moderate some of the pressure on net interest margin. Now on the net interest income, for the first quarter, we expect flat to a slightly negative annualized percentage decline compared to the fourth quarter primarily on reduced day count. We expect net interest margin to be stable relative to the fourth quarter. On a full year basis, we expect net interest margin to be stable to modestly increasing and year-over-year net interest income growth to be in the mid teens percentage growth range largely on the heels of improvement that we achieved in 2022. Our forecast includes some lagged pricing impact on deposits and we project our cumulative deposit beta will increase from 14% to 22% in the first quarter. However, our variable loan portfolio will help temper the impact of increased deposit costs. And throughout 2023, we expect to benefit from the large favorable gap between new production yields and existing book yields on fixed rate loans and investments. This continued repricing of fixed rate loans and investments will help us achieve moderate margin expansion starting in the second quarter and in the back half of 2023. However, it's important to point out that most of the benefits of margin expansion are behind us. The net interest income outlook remains uncertain and changes to our interest rate assumptions could have meaningful impacts to deposit product and pricing decisions as well as customer behavior and competitive dynamics. While we don't expect meaningful disintermediation of our non-interest-bearing account, itâs something we will continue to monitor. From a credit loss perspective, we are not seeing broad concerning trends in our portfolio with the stress related to a few smaller portfolios that I mentioned earlier. We are actively monitoring these portfolios and have taken proactive steps to limit our exposure. We do expect net charge-offs to continue to uptick in the next quarter in the range of 15 to 25 basis points and begin to return to more historical levels. For the full year 2023, we expect net charge-offs in the 20 to 30 basis points range. We continue to expect strong credit performance in our general bank segment and in many areas of our commercial segment and again have not seen signs of deterioration broadly. On the non-interest income compared to the fourth quarter, we expect flat to low single digits annualized percentage decline, primarily due to the reduction in BOLI income and seasonal factoring declines being partially offset by continued growth in our wealth and payments lines of business. In terms of full 2023 guidance, we expect flat to low single digit percentage growth. While we project mid to high single digit growth in net operating lease income for the full year, we do expect a slight quarterly decline in the first quarter based upon the lower maintenance expense in the fourth quarter of '22. We expect continued momentum in our wealth and payments businesses as a result of organic growth which we believe will be offset by the year-over-year impact of lower service charges, the reduction in BOLI income and a decline in factory commissions resulting from slower consumer demand. After the full year impact of NSF, OD changes and the BOLI reduction, we will project closer to mid single digit percentage growth in non-interest income. Moving to non-interest expense, we expect mid single digit annualized growth in the first quarter. We expect a slight increase in our efficiency ratio during the quarter primarily due to seasonal employee benefit increases. Looking forward, we expect to continue to feel the pressures of inflation especially as it relates to wages, professional services, and contract costs. Despite this, we feel confident in our ability to maintain our efficiency ratio in the low to mid 50s in the coming quarters, as we remove an estimated $50 million out of our cost base helping to neutralize natural non-interest expense growth. We expect the remaining cost base to be stacked towards the back end of 2023 and will have a more pronounced impact on 2024. All said, we expect mid single digits percentage growth in adjusted non-interest expense in 2023. The expense growth will be led by inflationary factors in salaries and wages, the increasing depreciation impact from the closeout of many strategic and optimization projects, higher marketing costs for the Direct Bank, the impact of the industry-wide increase in FDIC assessment rates and higher marketing costs in the Direct Bank, all partially being offset by the cost saves. Without the change in FDIC expense and the impact of the Direct Bank increase in marketing expense, we expect expense growth to be at the low single digit percentage range in 2023. And finally, on the income taxes, we expect our corporate tax rate to be in the range of 24.5% to 25% for the first quarter and the full year '23, which is a slight increase over previous guidance due to the surrender of the BOLI policies. In closing, we are pleased with our fourth quarter and full year results in 2022. As Frank mentioned in his comments, we remain confident in our ability to grow profitably and deliver on our commitments. We are positioned to perform well in a broad range of economic scenarios given our capital and liquidity positions, our talented associates, focused on our customers, our diverse business mix, and strong risk management culture. So I wanted to start with the increase in the non-performing loans. Can you just give us a little more color? Was that just one or two loans, or was that a lot of loans? Was that legacy First Citizens or legacy CIT? And can you tell us what the total size of your office CRE loan portfolio is at the end of the year? It was concentrated in large loans. I'm going to let Marisa give a little color on all that. Marisa, are you on the line? I am. Good morning. The increase in non-accruals was specifically a handful -- less than a handful of names, so a couple of large names; commercial bank, legacy CIT real estate portfolio, Class B office to drill it down as close as I can. The overall office portfolio in our non-owner occupied or investor commercial real estate is about 2.5 billion, 2.6 billion. It's equally split between the commercial bank and the general bank. The general bank is not seeing any deterioration in that office portfolio. It's a very granular portfolio, much more community based. And the few larger loans that are in the general bank typically have a very strong investment grade credit tenant. So the office portfolio in commercial is about 1.3 billion. It's centered in repositioned bridge. That means it's relatively short tenured. And it is in Class B office. It's broad based in terms of geographies. And obviously as things move into non-accrual, the credit and special assets team evaluate those four impairments. And we feel comfortable that we've done our job in terms of determining where we need specific reserves. But it is, obviously as Craig mentioned, a portfolio that we're watching closely. We are not in that business originating new office. Okay. All right, that's very helpful. And just to be clear, the 2.5 billion to 2.6 billion, that's the total office CRE than the commercial bank and the general bank? That's correct. And as I said, the 1.3 is the commercial bank portfolio that has the Class B office that we've been referring to. Okay. All right. And then just a question on guidance. I know last quarter, you guys gave some specific EPS guidance for the next quarter and the next year, specifically I know 2023 was guided to $95 to $100 a share. That was not in the slide deck this time. Is that still the expectation for '23 earnings to be 95 to 100 per share? Or is it hard to tell just given the uncertainty of what the provision line could be this year? Okay. And then finally for me, is there any scenario where the share buyback could begin before the back half of this year? You guys are making good money. You clearly have excess capital. Like is there any scenario that the buybacks have come earlier than the back half of '23? Brady, not really. Our capital planning process is ongoing, but really comes to a head in the first quarter. So we will align the share repurchase with that capital plan and our capital actions and our submission to our regulators of that plan. So it's really that timing dictates the ultimate timing of the share repurchase plan. So we do not anticipate starting that prior to the second half of the year. Thanks, everyone. Maybe just following up on that share repurchase question and kind of the procedural structure of that, had there been any changes to who you would need to request from a regulatory perspective that repurchase authorization from your request last year? Would you foresee any incremental difficulty given the size changes and maybe any regulatory changes? Stephen, we're not expecting any changes in the approval or the process that we'll go through. And we're also assessing it the same way that we did last year, so no changes at all in any of that. Stephen, this is Tom Eklund. We believe our -- so we will be subject to the capital plan rule starting in 2024. And we believe our first CCAR submission being a Category 4 bank will be in 2026, unless we are asked to participate sooner than that. It's obviously at the discretion of the regulatory bodies. Okay, got it. That's helpful. Thank you. And then I guess, as I'm thinking about your net interest margin guidance, a little surprised but encouraged to hear you think you can move that potentially higher, especially in the second quarter. It sounds like, Craig, from your comments that maybe that's due to your back book of loans, repricing faster than the back book of deposits? Is that kind of the main phenomenon that would lead that higher? Okay, great. And then can you give us an idea of what you're seeing from a spread perspective today in terms of maybe new loan yields and incremental deposit costs and how that compares to your current margin? Right now, if you just look at new loan yields that are coming on, our new loans are coming on the books between 5.5% and 6%. The marginal cost of our deposits when you consider the various deposits that we have out there, weâre savings money markets in the 350 range. So spreads 254 [ph], so spreads are around 200 basis points. Tom, do you have anything you'd like to add to that? No. I think that's accurate. Obviously, rates shift as the market shifts and we pay close attention to both Fed hikes and also sort of how the curve behaves, I suppose. Yes, definitely. Okay. And maybe just one last thing for me is just on the non-interest-bearing deposit growth. I know you said you think you could grow that mid single digits as well. Anything to note there in particular in terms of customer acquisition plans or otherwise that would lead to that, because I think that's industry-wide where we've been seeing the most pressure especially this quarter, is that maybe negative mix shift away from the non-interest-bearing deposits? Yes. I think if you look at just mix of deposits, we are forecasting non-interest-bearing to remain consistent as a percentage of total deposits. And I would just anchor back to our go-to-market strategy, the no loan alone strategy always has emphasized growing non-interest-bearing deposits and we've been able to do that through various rate cycles. We will acknowledge that quantitative tightening and potential disintermediation can be headwinds there. But we feel like a 5% growth goal there is achievable and reasonable. Hi. Just going back to the 95 to 100 of EPS and maybe focusing more on the low end of the range, I should be able to do the math. But I mean, is that just because of the nudges on the fee expense and tax rate or is that also because of more uncertainty or higher potential provisions that you're contemplating? Brian, look, just comparing the previous guidance that we gave in the third quarter to the current guidance, we have increased our deposit growth from low to mid single digits to mid single digits growth. We have changed our non-interest income from low single digit growth to flat to low single digit growth. We have increased our non-interest expense guidance from low to mid single to mid single digit growth. So with all that, when you total that up and run it through the model, it just puts us at the lower -- it leaves us within that range of 95 to 100 that puts us on the lower end, and it obviously does not incorporate share repurchases in the second half of the year. So Iâll say all that is a lot of moving parts. That's very helpful. And then the Fed cuts you're incorporating, do those really affect NII at all or do they happen like in December of '23 in the model, and so they're not really -- I guess do the Fed -- the 50 basis points of Fed cuts have been impacted the third and fourth quarter NII? This is Elliot Howard. I would say one of the cuts kind of back in the third quarter, so that has a marginal impact. But the last one is certainly at the very end of the year, so very minimal impact on '23 for that one. Thanks. Good morning. I wanted to ask about the deposit beta and kind of the roadmap to 25%. How much of that also spills over into kind of some business account activity beyond what you're doing with the CIT Bank? Yes, it was business account activity as well as just the kind of interplay between deposit raising within your online channel, as discussed earlier versus kind of business opportunities within some of your core business accounts? Yes. The majority of the beta, as Craig covered sort of the beta categories, where we see the highest beta is obviously in the direct channel. It's a lower fixed cost channel, but higher variables, higher interest expense there. So that is really sort of the main driver for the overall beta for us. Yes, that represents 18% of our deposit beta. If you look at the branch network, we did have a mix of lower beta and moderate beta, that's 71% of deposits. So those two channels are around 90%. So the branch network really smooth that beta out, lowers it in total. Yes. I'd say overall, we're experiencing beta similar to historical experience out of the branch network. It's really sort of the online and those deposit gathering channels that are driving the beta up. 18%. Yes, I think itâs -- but not significantly. If you look at sort of where we're projecting things to shake out, I think that the Direct Bank might increase marginally, maybe by a percentage point or two, but we anticipate that the branch network is going to be close to that 70% level going forward. Got it. That's helpful. Thank you for that clarification. And then just on the CET 1 ratio over time, what would be the lower bound that you're comfortable with? And is that at all changing from what you may have thought a few quarters ago? Our low end of CET 1 is 9% and that's consistent with prior quarter, and we don't anticipate a change there. Hi. Just two quick ones or I guess maybe one has a couple of parts, but on capital just following up on that. So absent the buyback, what you would accrete kind of 30 to 40 bps of CET 1 a quarter, does that sound about right? And then you said the low end is 9. Is it 9 to 10 is the full through the cycle range, or what's the range of capital? Just remind me what the capital target is? Okay. And then I just want to come back to the front book, back book new loan pricing. So you're saying it's 5.5 to 6 for new production. And was the message that's good, because the existing portfolio yields 5 or was the message that's less good, because it's 200 basis points above the marginal cost of funds, or I just didn't know which to lean on in terms of the takeaway? Brian, this is Elliot Howard. I think we would view it as positive. We look at 5.5% to 6% pricing. Specifically in the branch network, we're a lot more into fixed. Current yield on that portfolio is a little less than 4%. So we've got a pretty favorable gap when we look at that. Some of the fixed repricing will kind of be a win that are back in the second half of 2023. That's right. And that's where the pricing differential -- I mean variable pretty much prices to [indiscernible] moves up and down with the variable rate index. And just remind me the fixed rate piece is half of the book or a little bit more than half the book? Okay, so relative to like a lot of other banks. I guess every bank has this dynamic, but it's a bigger piece of your loan book. And so just in terms of the puts and takes into next year, it has a little bit more of a tailwind for you, because you got a little bit less of the immediate Fed funds benefit in '22 than a typical regional bank. But next year, you get a little bit more of the trailing front book, back book kind of ratcheting up than the average bank would? Yes, I realized that wasn't even a question. I was just like making a statement. Okay. Thank you. That's helpful because I was thinking you are comparing it to the entire loan book and the marginal cost. So that's helpful. That clears it up. Thank you very much. Iâm not showing any further questions at this time. I'd like to turn the call back over to our host for closing remarks. Thank you. And thank you everyone for participating in our call today. We appreciate your ongoing interest in our company. And if you have any further questions or need additional information, please feel free to reach out to the Investor Relations team. I hope everyone has a great rest of your day.
EarningCall_909	Good morning, and welcome to the Principal Financial Group Fourth Quarter 2022 Financial Results Conference Call. There will be a question-and-answer period after the speakers have completed their prepared remarks. [Operator Instructions] Thank you, and good morning. Welcome to Principal Financial Group's fourth quarter and full year 2022 conference call. As always, materials related to today's call are available on our website at investors.principal.com. Following a reading of the safe harbor provision, CEO, Dan Houston; and CFO, Deanna Strable, will deliver some prepared remarks. Dan will open the call for questions. Others available for Q&A include Chris Littlefield, Retirement and Income Solutions; Pat Halter, Global Asset Management; and Amy Friedrich, U.S. Insurance Solutions. Some of the comments made during this conference call may contain forward-looking statements within the meaning of Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most recent annual report on Form 10-K filed by the company with the U.S. Securities and Exchange Commission. Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures. Reconciliation of the non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. Our 2023 outlook call is scheduled for Thursday, March 2, where we will share enterprise and business unit 2023 and longer term guidance. On Wednesday, March 1, we plan to release a recast fourth quarter 2022 financial supplement. It will include the impacts of the targeted improvements for long-duration insurance contract accounting guidance, or LDTI, which goes into effect with our first quarter 2023 reporting. Dan? Thanks, Humphrey, and welcome to everyone on the call. This morning, I will discuss the milestones we achieved in 2022 as we executed on our strategy, along with key highlights from our fourth quarter and full year 2022. Deanna will follow with additional details on our fourth quarter and full year 2022 financial results, our current financial and capital position, as well as an update on LDTI. In 2021, we outlined our strategic path forward, one balanced with a focus on a higher growth, more capital efficient portfolio and a commitment to return more capital to shareholders. This guided our successful execution in 2022 despite a challenging macroeconomic environment. We've made meaningful progress towards our goals and continue to invest in our long-term growth drivers of retirement, global asset management and benefits and protection. In January, we announced an agreement to reinsure our U.S. retail fixed annuity and universal life insurance with secondary guarantee blocks of business. The transaction closed in May and was a key milestone reinforcing our strategic focus on continuing to evolve into a higher growth, higher return, more capital efficient portfolio while improving our overall risk profile. We delivered on our strengthened capital deployment strategy and our commitment to rightsize, return the excess capital that we have built up during the pandemic with $2.3 billion returned to shareholders in 2022 through share repurchases and common stock dividends. We've continued to adapt to the volatile and uncertain macro environment and have taken appropriate actions to manage our expenses with pressured revenue while continuing to serve the needs of our customers, invest for growth and deliver strong total shareholder return. Starting on Slide 2, we reported $1.7 billion of full year 2022 non-GAAP operating earnings, or $6.66 per diluted share. Excluding significant variances, earnings per share increased 2% over 2021, a strong result given the pressured macroeconomic environment. As shown on Slide 3, we reported $422 million of non-GAAP operating earnings or $1.70 per diluted share in the fourth quarter. We ended 2022 with $635 billion of total company managed AUM. Unfavorable equity and fixed income markets pressured AUM throughout 2022 and $23 billion was transferred out in the second quarter as part of the reinsurance transaction. Turning to investment performance on Slide 5, our long-term performance remained strong, particularly in our specialty fixed income strategies. The volatile markets impacted our short-term investment performance throughout 2022 as our investment style, which is focused on high-quality growth stocks was out of favor for much of the year. During a volatile and pressured year for asset managers, we generated a positive $3.9 billion of full year total company net cash flow. This was $1 billion higher than our 2021 net cash flow and included $4.4 billion of positive PGI managed net cash flow. This was a very strong result during a period of outflows across the industry. The positive net cash flow in 2022 was driven by strong institutional flows across equities, real estate and specialty fixed income highlighting the value of our diversified distribution through our institutional, retail and retirement channels. Fourth quarter total company net cash flow was negative $3 billion. Net cash flow is typically negative in the fourth quarter for both PGI and RIS-Fee. Similar to other asset managers, we experienced retail platform outflows during the quarter as customers moved cash to the sidelines. While market volatility can impact the timing of when new mandates fund, we are seeing positive momentum with our institutional clients. Early in 2023, we have meaningful commitments for several of our fixed income and special equity strategies, which are expected to fund in the first quarter. The committed pipeline for our real estate products is healthy, which will likely start funding in the second half of the year. Turning to our growth drivers and some additional highlights for the year. In Retirement, we continue to solidify our position as a top retirement provider as we completed the integration of the IRT business in early 2022. The acquisition provides us with new capabilities, additional revenue-generating opportunities and expanded distribution relationships. RIS-Fee contract lapses contributed to negative account value net cash flow in the quarter. The fourth quarter is typically the highest quarter for lapses as plans often change providers at the end of the year. Roughly one-third of the lapsed account value was related to a single, low-fee large case with no principal managed assets. Looking ahead to the first quarter, we anticipate positive net cash flow in light of our sales pipeline. The underlying fundamentals of the Retirement business were strong throughout 2022. Compared to full year 2021, total recurring deposits increased a very strong 26% with a 14% increase on our legacy block. This was driven by employment growth and wage inflation, as well as increases in participant deferrals, company matches and higher incentive compensation. We also saw great opportunities in the future with the passage of SECURE 2.0, a bill for which we advocated. This legislation expands the U.S. retirement market overall, creating greater access to retirement savings plans for businesses and improving long-term savings in financial security for Americans. While it will take time and won't have an immediate impact, we expect that the bill will drive increases in new plant formations employer matches as well as employee participation in deferrals, all of which will help support better retirement readiness and long-term growth in our business. We're uniquely positioned to benefit from SECURE 2.0, thanks to its focus on small and midsized businesses and its support for more cost-effective start-up plans. We're already leaders in this market and applaud the additional options for workers to save more for retirement. Outside the U.S., we continue to focus on markets with compelling growth opportunities where we can leverage our local and global asset management capabilities and lean into established local partners. During the fourth quarter, we extended and strengthened our asset management partnership with CIMB in Southeast Asia. And at the end of the year, we closed our transaction with China Construction Bank Pension Management Company, acquiring a minority ownership stake in the pension company. This is expected to be immediately accretive and grow over time. Both opportunities expand our existing partnerships of more than 17 years with these market-leading wealth management, mutual fund and pension distributors. In Global Asset Management, we continue to unify our investment footprint across more than 80 markets we serve, demonstrated by the launch of Principal Asset Management in October and increasing integration with Principal International. We continue to expand our specialty offering in 2022. As an example, our direct lending team doubled its committed capital and increased their foothold in the middle market throughout the year. Principal Asset Management has once again been named the Best Place to Work in Money Management by pensions and investments. This is the 11th consecutive year we have earned this recognition, and it's a testament to the work of our employees to create a positive culture and deliver results for our customers. In Benefits and Protection, our focus on the small to medium-sized business delivered strong results in 2022. The businesses we serve prioritize providing benefits to attract and retain employees throughout the year. Record sales, strong retention and employment growth is evident in Specialty Benefits results. We deepened our relationships with existing customers, attracted new customers and expanded our market share. In Specialty Benefits, premium and fees increased a robust 11% year-over-year, exceeding the top end of our guidance range, with over half of the growth coming from net new business. Full year sales increased 19% compared to 2021 with continued strong momentum early in 2023. Our focus on business owner and our diversified set of solutions continues to drive results in Individual Life insurance. Full year business market sales hit record levels up 73% year-over-year. This growth included record non-qualified COLI sales. Approximately 50% of these sales were with our retirement plan customers, highlighting the value of our integrated business model. Weâre delivering on our go forward strategy, transforming our portfolio businesses, resulting in a higher multiple and increased shareholder value. We have de-risked our portfolio, reduced our balance sheet risk and our less capital intensive. We have sharpened our focus on higher growth markets, investing in our business and leveraging our competitive advantages all while returning more capital to shareholders. While 2023 presents its own challenges, we have a good line of sight and confidence in achieving our long-term financial targets. Deanna? Thanks, Dan. Good morning to everyone on the call. This morning Iâll share the key contributors to our financial performance for the quarter and full year, our current financial and capital position, as well as an update on LDTI. Full year reported net income attributable to principal was $4.8 billion, excluding income from exited businesses net income was $1.5 billion for the full year with manageable credit losses of $48 million. Fourth quarter non-GAAP net income, excluding exited businesses was $504 million with $12 million of credit losses. As a reminder, the income from exited business is non-economic and is driven by the change in the fair value of the funds withheld embedded derivative. Importantly, it doesnât impact our capital or free cash flow and can be extremely volatile quarter-to-quarter. We also had positive credit drift during the year further demonstrating the quality of our balance sheet. We reported full year non-GAAP operating earnings of $1.7 billion or $6.66 per diluted share including $422 million or $1.70 per diluted share in the fourth quarter. Excluding significant variances full year non-GAAP operating earnings was $1.7 billion or $6.77 per diluted share, this included $420 million in the fourth quarter or $1.69 per diluted share. Compared to full year 2021, we increased earnings per share 2% as the benefit from share repurchases and strong customer growth was partially offset by macroeconomic pressures on earnings. As detailed on Slide 15, we had several significant variances that virtually offset and had a slight net positive impact on non-GAAP operating earnings during the fourth quarter. On a pre-tax basis, benefits from lower DAC amortization higher than expected Latin American Encaje performance and favorable Brazilian inflation more than offset lower than expected variable investment income. These had a net positive impact to reported non-GAAP operating earnings of approximately $5 million pre-tax, $2 million after tax, and $0.01 per diluted share. While variable investment income was positive for the quarter, we experienced lower than expected alternative investment returns, prepayment fees and real estate sales. Macroeconomic volatility continued in the fourth quarter and pressured earnings in our fee-based businesses. The S&P 500 daily average decreased 3% from the third quarter of 2022, 16% from the fourth quarter of 2021 and 4% on a full year basis. Relative to our 2022 outlook, the full year 2022 S&P 500 daily average was 17% lower than we expected heading into the year and fixed income returns were approximately 18% lower. This unfavorable market performance negatively impacted AUM, account values, fee revenue margins and earnings in RIS-Fee and PGI throughout the year. Headwinds from foreign exchange rates pressured reported pre-tax operating earnings by a negative $5 million compared to the fourth quarter of 2021 and a negative $21 million for the full year. It was immaterial compared to the third quarter of 2022. Throughout 2022, we took actions across the enterprise to manage expenses as fee revenue was pressured as we have during previous periods of unfavorable macroeconomics. Our efforts have paid off, on a full year basis, compensation and other expenses excluding significant variances were 3% lower than 2021 and fourth quarter expenses were 8% lower than the fourth quarter of 2021, despite approximately $15 million of elevated severance and restructuring expenses across the fee-based businesses in the quarter. Some expenses naturally adjusted throughout the year like incentive compensation and other variable cost, and we took actions to reduce other expenses while continuing to balance investments for growth. As a result, we didnât see the typical 7% to 10% increase in compensation and other expenses this fourth quarter relative to the average of the first three quarters. Turning to the business units, the following comments on fourth quarter and full year results exclude significant variances. RIS-Feeâs margin improved in the fourth quarter, but end of the year below guidance as the benefit from IRT expense synergies was more than offset by unfavorable market performance, which pressured fees and net revenues throughout the year. Through the end of 2022, weâve realized more than $80 million of run rate expense synergies and are well on track to realize the full $90 million in 2023. RIS-Spread net revenue growth and pre-tax margin exceeded our post-transaction guidance for the full year. Favorable investment income, a benefit from rising short-term interest rates and growth in the business helped offset the impacts of the reinsurance transaction. We completed $1.9 billion of pension risk transfer sales in 2022, including more than $750 million in the fourth quarter. The PRT pipeline remains very strong as we head into the first quarter. PGIâs pre-tax margin was 39% for the full year and at the low end of our guidance range despite significant macro headwinds throughout the year. The overall management fee rate of approximately 29 basis points remain stable. And Principal International pre-tax operating earnings were pressured throughout 2022 as underlying growth in the business was masked by the regulatory fee reduction in Mexico and foreign exchange headwinds. On a constant currency basis, full year pre-tax operating earnings increased 5% over 2021 with strong growth in Brazil and Chile. In Specialty Benefits, pre-tax operating earnings and premium fees both increased the strong 11% over full year 2021. This was fueled by record sales as well as strong retention and employment growth while maintaining disciplined expense management and a stable loss ratio. Turning to capital and liquidity, despite the volatile environment, we remain in a strong financial position heading into 2023. We ended 2022 with $1.5 billion of excess and available capital. This is above our targeted levels as we felt it was prudent to be disciplined due to the uncertain and volatile macro environment. This included approximately $1 billion at the holding company, $200 million above our $800 million target, $425 million in our subsidiaries, and $80 million in excess of our targeted 400% risk-based capital ratio estimated to be 406% at the end of the year. Our leverage ratio is low at 22% and within our 20% to 25% targeted range. We have the financial flexibility, discipline, and experience necessary to manage through this time of macro volatility and uncertainty. As shown on Slide 4, we returned $2.3 billion to shareholders in 2022, including nearly $1.7 billion of share repurchases and more than $640 million of common stock dividends. We also deployed $300 million to debt reduction and approximately $200 million towards M&A bringing our full year capital deployments to $2.8 billion. In the fourth quarter, we returned more than $400 million to shareholders with $250 million of share repurchases and $156 million of common stock dividends. Last night, we announced a $0.64 common stock dividend payable in the first quarter in line with our targeted 40% dividend payout ratio. We remain focused on maintaining our capital and liquidity targets at both a life company and the holding company and will continue with a balanced and disciplined approach to capital deployment as we head into 2023. Our investment portfolio is high quality and a good fit for our liability profile. The commercial mortgage loan portfolio is very high quality with an average loan to value of 46% and an average debt service coverage ratio of 2.5 times. We have a diverse and manageable exposure to other alternatives and high risk sectors, and importantly, our liabilities are long-term and we have disciplined asset liability management. Additional details of our investment portfolio are available in the appendix of the slides. As a reminder, LDTI goes into effect in the first quarter. Importantly, this doesnât change our underlying economics, free cash flow generation or our capital position, but it will have an impact on our reported financial results. We plan to release a recast fourth quarter supplement on March 1, the night before our 2023 outlook call. The most notable impact to total company non-GAAP operating earnings is a change to the geography of some variable annuity fees, moving the hedging related fees below the line. This will reduce our operating earnings by approximately $60 million on an annual basis with no corresponding impact to net income, free cash flow generation or our capital position. In addition, there will be impacts to segment earnings that will largely offset at a consolidated level. More details will be shared during our upcoming outlook call. Moving to equity, the transition impact from the adoption of LDTI will decrease total stockholdersâ equity by approximately $5.3 billion as of January 1, 2021 with nearly all of the impact in AOCI. Sitting here today, we expect the impact of stockholdersâ equity from LDTI to be slightly positive as of the fourth quarter of 2022, as interest rates have risen significantly from where they were at the beginning of 2021. 2022 was a transformative year for Principal as we completed the reinsurance transactions mid-year, executed on our go-forward strategy and strengthened our capital management and deployment approach. Weâre focused on maximizing our growth drivers of retirement, global asset management and benefits and protection, which will drive long-term growth for the enterprise and long-term shareholder value. Thank you very much, and good morning. Other asset managers have announced employee count reductions given lower assets. No. Principal always has expense discipline approach with expenses down enterprise wide and there was a comment about severance in the Fee business. Can you maybe talk about how youâre viewing staffing levels in PGI and maybe more color on that severance in the Fee business, please? Yes, good morning, John, good to hear from you. Just at a high level, as I said in my prepared comments, this is something we do every day, every quarter, every month, and to align our expenses with revenues, and again, credit goes to Pat and Kamal for their discipline within PGI. And I think what heâll talk about is not only steps weâre taking in right-sizing, but also places where weâre investing, adding talent to build out organic capabilities to meet investor demand. So Pat, please. Yes, John. Thanks for the question. So maybe just to kind of set the stage, as Dan mentioned, weâre very focused on operating margins and as you saw in the fourth quarter operating margin tipped a little bit below 37%, 36.8%, which is down from the third quarter of 38.4%. And that was clearly pressured as you highlight in terms of the volatility, investor risk aversion and resulting in lower average AUM in terms of fee generation. And we focus on that, absolutely in a very sort of a purposeful way as we think about managing our organization. We think our management team continues to be very, very disciplined in terms of, as you suggest, expense management, and itâs really aligning those revenues and those expenses. And clearly the fourth quarter required us to align the revenue with expenses, given the challenging and marketplace. Weâre going to continue to be, I think, very focused on looking at activities that frankly are not producing growth and revenue contribution for the organization. Thatâs our main focus in terms of our expense management proposition. I want to make sure we clearly are staying focused on client interest and serving our clients very, very well. So our teams continue to be focused on that, that is very important. But also itâs very important, John, to highlight that weâre continuing to make sure that we are absolutely investing and challenging our teams to invest where we can maintain long-term growth and long-term, I think, revenue for the organization. So weâre going to continue to be very focused on expense management, but weâre going to be very focused also on investing in talent where we need talent and in terms of capabilities so that we continue to be relevant as investor interest shift and as capabilities shift in terms of their desires. Weâre going to continue to invest in our distribution which we have, which is very important to our growth and weâre going to continue to further develop our private investment capabilities. Thatâs very important to our growth going forward also. So I really want to make sure that we highlight the growth centric â centricity about weâre going to continue to do and our management team is focused on that. In terms of expenses, we had some severance expenses in the fourth quarter, around $5 million of the severance expenses. For the year, our expenses were up around 2% year-over-year. And thatâs obviously something that we are very conscientious of to make sure that those expenses stay in a very reasonable level in terms of our ability to continue to invest for growth, but continue to be very focused on margins. It is very helpful. Thank you. And my follow-up question, exciting news in early January about the pension joint venture. Can you talk about maybe how thatâs going to impact your business prospects in China? Thank you. Yes, so thanks for calling that out, John, really appreciate that. Weâre excited about expanding our relationship with China Construction Bank. As you know, weâve had a 17-year relationship with China Construction Bank, including asset management and retail funds, so adding retirement and all four pillars by the way of the China retirement scheme is included as part of that JV. As I said in the earlier comments, the transaction will be accretive and we look forward to deploying resources against that opportunity, and again, establishing Principalâs positioning as being a global retirement player along with asset management. So thanks for the question. Hey, good morning. So first just had a question on flows in the asset management business. If you can talk about to what extent are they being affected by the overall environment that the asset managers are facing versus maybe your performance getting a little worse over the past year? And then I had a question similarly on your outlook for flows in the retirement business obviously this quarter feed retirement flows were pressured because of the lapse of a large case, but whatâs the â whatâs your outlook in terms of deferral rates, matching contributions and just flows in that business in the current environment? Well, thatâs a great question. I appreciate that, Jimmy, and Iâll have both Pat and Chris respond. But before I do that, just maybe at a high level, I think whatâs interesting is the way we report, and again, thatâs on us on how we do this. But it reflects the Morningstar retail funds of which thatâs a minority share of our overall asset management capabilities. And we actually have very strong performance in particular around the fixed income, which as you knowas in very high demand and Pat will cover a lot of that. And then secondly, just to note that, itâs â some of the most sophisticated investors out there are actually buying third quartile performance, because they have confidence in the manager and the strategies themselves. And we have a very positive outlook on whatâs in the pipeline today and some commitments that have been made. So I know the correlation between investment performance must yield net cash flow, but I think there are instances of where you find a growth strategies like ours maybe a bit out of favor and therefore the commitments come in, in spite of not having one-year performance. But a reminder, our long-term performance remains very strong. With that, Iâll turn it over to Pat. Yes. Jimmy, maybe just to start off with sort of the fourth quarter. Fourth quarter always is challenging, typically, thatâs a very challenging seasonal quarter. But it was even more challenging because of the investor sentiment that we experienced in the fourth quarter. It was a sentiment of basically being risk off and positioning their portfolios with a waiting of concern. Concern about the fed, concern about the path of inflation, nervousness around the economic growth and related company earnings. So this risk off sort of impact was amplified, particularly in the mutual fund investor base in addition to being sort of focused on accelerating their holdings for tax management reasons, which offset some of the capital gains in this period. So we definitely saw lower sales, but also elevated withdrawals in our retail mutual fund business. And weâre not unique in the industry as a result of that. We definitely have seen outflows in fourth quarter. They were in equities predominantly, but also in fixed income. We also experienced in the fourth quarter, Jimmy, I think, a slowdown in real estate for the first time in terms of new investment activity. But I rest assured we have a very deep strong pipeline of committed capital in real estate. But given market conditions, we did not deploy as much of that new capital into the markets in the fourth quarter. Just for framing, for net cash flow for the full year, we continue to see a very strong net cash flow picture. And I think thatâs a better view of a net cash flow in terms of trends, we are very pleased to see that managed net cash flow for the year, about $3.9 billion, Jimmy. And this is up about $1 billion from 2021, which net cash flow of around $2.9 billion. So we continue to see, I think, some strong longer term, I think expectations toward our ability to generate net cash flow. Dan, as we highlights beginning of the year, we definitely are seeing a change in sentiment. Investor behavior is becoming, I think, a more sort of positive in terms of tone, both in the equity particular in the fixed income markets. And I think one area that I think weâre going to be, I think, quite well prepared and well, I think, equipped in terms of the [indiscernible] is in terms of fixed income investments in the flows towards that. We have a great lineup of fixed income investments, where itâs preferred high yield emerging market debt, and all those fixed income investments are in the first quartile in terms of Morningstar performance on one, three and five-year basis. And I think weâll continue to see flows in the real estate debt and the private credit space where we still have, I think, some very strong performance. So I think as we kind of look forward in terms of 2023 I think weâre well positioned in terms of our ability with the investment performance that we have to continue to attract capital. Weâll probably see our real estate flows be a little bit more second half orientated, because I think we need to have some of the, like, [indiscernible] evaluations. But Iâll just suggest to you Jimmy that performance is absolutely on our focus list. But it really requires us to be more deeper when we talk about investment performance to look at the type of investments we are absolutely seeing money in motion toward. And the trend relative to that is definitely in our direction in terms of our capabilities. So very constructive, I think we have a strong off-season lineup in terms of investment capabilities and look forward to capturing the shifts in the investor sentiment, which is quite positive at this point. Yes, great. Yes. Thanks for the question, Jimmy. So I think as Dan mentioned, as we've indicated in the past, the fourth quarter is a high outflow quarter for us as plans change a lot. And similarly we see the opposite effect in the first quarter as sales come on. The other thing I'd noticed that when we have institutional large plans flows, those can be volatile and lumpy in a quarter, both on the deposit side and withdrawal side. And we certainly saw that in the fourth quarter with that single low fee large plan, which was about $3 billion in assets, none of which were managed by Principal. So we definitely saw that volatility. I mean, I think as we've talked about it, net cash flow is one lens, but we also look at the underlying fundamentals of the business and how we're doing in earning Principal investment management mandates. And if we look at how we're focused on profitability and driving increased revenues, we have very good trends in earning Principal managed assets throughout 2022 across all segments. We saw significant fewer investment changes out of Principal managed investments in the fourth quarter, and we're seeing significance to assess winning mandates from existing customers who came over from IRT, all of which are very healthy. If we look at our historic strength in SMB for the full year, just looking at SMB flows, net cash flow was over $2 billion for 2022. So also health in that core part of our market. If we look at the fundamentals, I think Dan mentioned recurring deposits where we see healthy recurring deposit trends. The number of participants deferring are up, the number of participants receiving a match are up. The average match dollars are up and the number of participants with account value are all up. So healthy trends there and specifically with respect to the first quarter, again, we do see seasonality. It tends to be a higher inflow quarter for us. We think that trend will continue. We expect to see positive net cash flow due to higher sales and healthy recurring deposit trends in the first quarter. So feel overall good about the overall business. Thanks. First question, just on capital as we think about 2023. I think Deanna in your comments you talked about having some prudence in terms of managing capital. But can you give us a sense of just capital return for next year, what your thoughts are and maybe couch it as a percentage of earnings? I know it's all going to change under LDTI, but maybe under the current accounting construct if you could just help us with that. Yes. Suneet, what I'd say is we plan to give more color on our 2023 capital deployment at Outlook, but I think you can go back to kind of what we've talked about. We continue to feel that 75% to 85% of net income is a really good free cash flow percentage given our portfolio of businesses and how we think about very high bars relative to organic deployment of capital. We are rolling over a slightly higher excess capital as we go into 2023 and we'll assess whether to deploy that as we go throughout the year as we get more clarity on the economic environment. So that's how I would think about it. But again, we look forward to discussing that more in early March. Got it. Yes, I did have â just one that just jumped out at me a little bit was the LDTI disclosure. The $60 million impact is not big for the overall company, but I think it's a decent percentage of RISV or certainly larger than I thought. So maybe if you could just â can you just tell us like how much of RISV earnings come from variable annuities? Yes. That isn't something that we disclose. What I would say is, as you're aware, we have about $9 billion enforce block of VA business. That business has consistently performed very well and contributed to our overall retirement franchise. We've always managed that on a net income basis because we knew there was some differences between the geographies of the fees and where the hedging gains and losses do. As we went through the LDTI process, which we've been working on for many, many years we got a better information that allowed us to split the fees between hedging and non-hedging fees. And even though there's not a consistent treatment of this across the peers, we think this is a better alignment of those fees as well as where those hedging gains and losses go. So again, we like our VA business, it's a key part of our retirement franchise. It's performed well given how we've managed that in a very disciplined approach. And ultimately we continue to think that'll be a part of a contributor to our retirement franchise going forward. You didn't ask it, but I did want to just mention the other impacts of LDTI. Even though the $60 million is what we think is the enterprise impact, we actually do see some other impacts to operating earnings with items such DAC. The reason that we didn't include those is they virtually offset at a enterprise level â very immaterial at an enterprise level. We do expect to see some positive impacts in RIS offset by some negative impacts in individual life. But we plan to give you much more clarity on that when we recast our fourth quarter supplement the night before our Outlook Call in early March. Thank you. I also have some capital questions. So 4Q buybacks, it came in lower than what you shared with us in the third quarter of that $450 million range. I mean, you did say the level of buybacks would depend on market conditions and market recovery came in later in the quarter. So my question is, should we expect to catch up in 2023 for coming in below your annual plan of $2.5 billion to $3 billion for the year to shareholder? Yes. Tracy, it's a good question. Hopefully you can appreciate given this volatile economic environment that we're in. This isn't a matter of conservatism, it's a matter of just being incredibly prudent and understanding how these businesses are going to perform. But with that, I'll ask Deanna provide you with additional clarity. Yes, I think it's important to go back and think about the underlying market conditions that underpinned our $2.5 billion to $3 billion at Outlook. And as we went throughout the year, obviously we saw equity market daily averages be 17% lower than what would've been included in that outlook and as impactful fixed income values were 18% lower. And obviously that range of $2.5 billion to $3 billion didn't contemplate that level of macro pressures as we went through the year. I actually think if you fast forward and look at our full year results, $2.3 billion to â relative to that $2.5 billion to $3 billion range, and the fact that even if you just look at the excess capital in our holdco and our lifeco, which was virtually $300 million at the end of the year. If you would've deployed that and again, going back to Dan's comment, given the volatility and the uncertainty on 2023 we made the decision to be prudent, we would've been at $2.6 billion. So while within that range, despite the macro pressure that we saw through the year and that macro pressure is on those fee businesses that have a higher level of free capital flow. So as we go into 2023 we're going to continue to be prudent. Obviously as we thought about fourth quarter, I'd say our excess capital ended the year slightly higher than what we thought. But there's always timing between when you put your share buyback plans in place and when you see some of that free capital flow actually materialized during the quarter. And as you mentioned, markets were actually throughout the quarter got more positive toward the end. So as we move into 2023 and we'll talk about it more on Outlook Call, we'll continue that. If things go well, there is a path to bringing down that level of excess capital. But our approach to capital deployment and capital management will be consistent with what you've seen throughout 2022. Yes. And just sticking with the macro, and you may touch upon this on your 2023 Outlook Call, if we enter recession this year, even a shallow one what type of credit risk and impairment scenarios are you thinking about? I remember back at the onset of the pandemic, you thought about $400 million to $800 million of losses that didn't end up materializing. Yes. A couple things I'll put into perspective there, Tracy. The first thing I would say is our balance sheet is different than it was when we went into the pandemic. So, the first thing you'd saw is we did reinsure $20 billion to $25 billion away. And so just on a dollar amount perspective, the credit losses that we would see in the drift impact would be lessened relative to that. I'd also say and point you to our investment portfolio that we gave a highlight of in our slides today. And if you look across that you can continue to see that we have a very high quality balance sheet that is also very well fit with our liabilities that we sit here today. We ended full year 2022 with actually positive impacts of drift and very little net income or capital gains and losses and so a very modest impact. We'll give more color on the dollar amount for 2023. But as we sit here today, we do think it'll go back to more of a normal level thinking that $100 million range but obviously very, very manageable when you think about capital. And we'll continue to make sure we update you on that as we go forward. Thanks for the questions, Tracy. We really do feel good about the quality of that portfolio. Even in a challenging time it is truly been positioned to weather this sort of challenging environment. So appreciate the question. Next question please. Hi. Thank you. So we've seen a number of companies announced layoffs recently and it seems like more of this is coming from large employers. I was hoping you could talk about what youâre seeing in terms of employment trends from your clients? And how this affects your outlook for both retirement recurring deposits as well as specialty benefits premiums? Yes, Iâll try to make a couple of high level comments then throw it over to Amy to provide it. And you may have already seen Erik, I picked up in the Wall Street Journal a couple of weeks ago and it was January 26, but they had actually gone back to February of 2020. And in that period of time since February of 2020, SMBs under 250 employees had actually hired 3.67 million individuals and that was net of layoffs and quits. Likewise on employers more than 250 employees the large businesses if you will, they had cut net 800,000 jobs. Our focus is not on hospitality, itâs not on retail, it is really around the professional businesses. And Amy is really truly one of our experts around the SMB. So Amy, howâs it impacting our business? And then maybe weâll get Chris to make a couple of comments on the retirement side as well. Yes. So, youâve done a nice job, Dan, talking about kind of the broad macro conditions. When we look at our block, and again, thereâs going to be no surprise in this, our block is performing really well from an employment growth perspective. So, what weâre seeing and what we would extrapolate to kind of the larger small business is that the sector, and Dan pointed it out, that really is holding up very strongly in terms of employment growth is that under 200 employees, under 250 employees. Weâre still seeing 4.8% growth in that employment growth in that marketplace. So, I think our message has been small employers will keep hiring and the facts have been small, employers are keeping hiring. So, when we look at that, what Iâd consider sort of heading into the mid-size, it does begin to taper back just a little bit. So instead of that 4.8%, weâd see something thatâs closer to that 4%, 4.3% in that, letâs call it mid-size 200 to 1,000 employees. Once you pop above that 1,000 employees, that is definitely where youâre seeing some of the noticeable employment deterioration. Now, I would note that does skew a little bit even towards jumbo. Again, our block begins to tell us less, because we just donât have as much in that segment, particularly for group benefits. But what weâre seeing is, is you hover around still those mid- sizes of having 1,000 and 2,000 employees, the impacts on employment still are not as pronounced as the ones weâre seeing happening in that really larger jumbo marketplace. Well, I mean, I Think the trends are very, very similar. So, we see good growth and momentum in the small-to-mid, and weâre watching for the large and jumbo markets as we head into 2023. Dan, thank you for the caller there. Itâs just one follow-up on capital. Your excess capital increased about a $100 million quarter-over-quarter despite deploying $600 million, that implies you generated about $700 million in the quarter, which I think is more than a 100% of earnings. Itâs a good, just hoping you could talk a little bit about the drivers of the capital growth this quarter. Deanna? Yes, just a couple of comments. We do tend to see a little bit better free cash flow towards the end of the year. Some of that is just more due to movement in some of our unregulated businesses, and when we actually dividend up some of that capital. But again, we saw a continuation of just really good trends with all of our businesses really focused on holding the right amount of capital and only deploying capital when we could get the returns that we did. And so again, obviously that the fourth quarter deployment did include that approximately $200 million toward M&A. We had obviously earmarked that coming into the year and then made that weâre very pleased to make that deployment in fourth quarter, but there is some seasonality that makes fourth quarter a little bit higher relative to free cash flow. Hi, good morning. My first question is on the net investment income and just overall sort of sensitivity to interest rates. I know, you all disclosed some sensitivities and, itâs fairly low, but thereâs sort of two components to that, sort of the lost earnings from AUM declining when rates go up. But then also the benefits that youâd get in net investment income and the two things, the timing may not always match up and it struck me as a pretty strong quarter from a net investment income standpoint. So, I just want to understand like how we can expect that to unfold from here? What are the underlying elements within fee and retire â in the spread business in retirement that are benefiting from rates and to what degree should that continue as rates remain elevated? Yes, Iâll make some comments and then see if Chris has anything to add relative to RIS on lines of business. So first of all, I think it is important to understand that that sensitivity that we give is a trailing 12-month basis that kind of assumes the interest rate happens kind of at the beginning. We see very obviously negative pressure on our fixed income values that impacts our revenue in both RIS and PGI. And you kind of see that continue and then as you start to invest some new money, see some cash yields go up, youâll see that the benefits start to offset that to then get to a pretty muted overall impact in the trailing 12 months. And so again, you did see that transpire in the fourth quarter. I do think itâs important when you look at our total company net investment income and compare it to last quarter, thereâs kind of two dynamics I want to point out. One dynamic is obviously variable investment income was not as negative in the fourth quarter as it was in the third quarter. And then you also, because of equity method accounting for our Brazil joint venture, the strong earnings that we saw in Brazil partially due to inflation, itâs flowing through that line of business as well. So you need to kind of take that part out. And then what youâre getting to is, you are starting to see some impact from the higher interest rates. Youâll see that our new money that weâre investing in is earning a higher rate. Weâre also because of increase in treasury rates, youâre going to see that what weâre earning on cash, what weâre earning on escrow and PGI is seeing some benefits from that. I do think itâs important to point out, especially in RIS, is that some of that increase you see in that investment income then gets credited back out to our customers in our BC&S line. And so it doesnât fall to the bottom line as you think about that, But specifically to the bank and trust business in RIS, I think those are the businesses that are benefiting from those higher levels of interest rates. But Iâll see if Chris has anything to add there. No, I think you captured it well. I mean we certainly are seeing, I think the thing to step back is we do look at RIS as a single business fee and spread together, particularly post IRT and the lines of blurring between fee and spread. And so we get the diversification benefit by managing those businesses together. The resilience of the spread businesses when with really compelling returns and the lift they get from short-term interest rates helps offset the pressure that we see from down equity markets. So, we definitely saw some rising short-term rates in fee. We saw rising rates, we saw growth in our retained business and higher investment yields in spread. And some of the net revenue beat was really largely macro driven, which is really strong equity performance during the quarter. The open to close was up about 7%, which helped drive overall separate account returns. So, I think thatâs an explanation for the quarter. Yes, that was very helpful, thank you. Follow-up, I had, just to go back to variable annuities for a second to make sure I understand. So, when you all took a portion of the fees, and move it below the line, and considering that the cost associated with some of those riders and hedging, could you unpack, how you did that in terms of, is it relative to attributed fees that under LDTIs so youâre sort of included enough fees below the line to cover the attributed fees at this point or? Is there anything about that dynamic thatâll be below the line that I should be thinking about particularly, as it relates to the attributed fees and how theyâll compare to the actual fees that are being put below one? Yes, Alex, thatâs exactly what you talked about is, we went through the process of LDTI, it actually allowed us to attribute the fees to how much is coming relative to the hedging cost of those â of how we manage that business and how much of the fees are other fees more relative to the non-hedging aspects of that product. And so again, that dollar amounts that we charge our customers for those hedging costs, weâll move down below the line. Those are pretty stable quarter-to-quarter and they will then more offset the hedging gains and losses that always have shown up below the line in our realized capital gains and losses. So itâs exactly what you talked about. It had nothing to do with market value adjustments or any of those types of things that also could have arisen out of LDTI really, ours was really just that geography and attributive fees. Hi, good morning. I have a question on more on consolidated G&A expenses, given that you took action, and didnât have the normal higher seasonal 4Q expenses. I guess my question is like, as we look forward into 2023 like should we actually expect expenses to come down from the fourth quarter run rate given that there are, I assume still some seasonal things that impacted the fourth quarter? Or is that kind of a decent level to just think about going forward? Yes, Dan will handle it, but I would just simply say this, we are going to continue, as I said earlier, to liner expenses with our revenues and we donât have a crystal ball on what a full 2023 looks like except to say weâre going to be incredibly disciplined and always look to be opportunistic about taking out expenses while at the same time making sure we donât starve the businesses and invest for growth. Maybe Deanna would like to add some additional color. Yes, a couple things that Iâll say there, we did say in our prepared remarks that we had about $15 [ph] million of severance and restructuring cost in the quarter. We did not identify that as a significant variance, partially because we saw, again as you mentioned, our normal fourth quarter seasonality of expenses did not materialize. And so even with those severance cost in there, our overall fourth quarter expenses actually were very aligned with what we wanted them to be. We have severance in every quarter, but obviously it was a little bit more elevated as we go in we went into the fourth quarter. As I think about 2023, you have a lot of moving parts, right? One moving part is some of our incentive compensation kind of resets and ultimately that could have an increase in some of our expenses as we go into 2023. But having said that, weâre going to continue to focus on all of our expense experts across the enterprise. You have highlighted kind of the alignment with revenue given macro, but as youâre also aware, we continue to make very good progress on the realization of our synergies in the RIS business as well as trying to manage through the stranded costs that came out of us exiting our retail fixed annuity and our ULSG lines of business. On both of those, weâre actually in line to slightly ahead of where we thought we would be at this point. And then we again have added in the efforts to also make sure, weâre aligning with the macro pressures while continuing to make the right investments to drive long-term growth. And so, itâs really hard to say where macroâs going to be as we go in. Weâve obviously had a really good start to January. I think all we know is that we think thereâll be continued volatility and weâre going to continue to do what weâve done in any period of volatility and pressure is to make sure we align that expenses with revenue. Whereas if you look at both fourth quarter and full year, you can see our change in comp and other is very aligned with our change in net revenue, which I think is testament to that alignment. Thanks. Follow-up was on the investment portfolio. I appreciate all the detailed updates that you provided in the slides. I guess â just on commercial mortgage loans that the LTV looks, continues to look very favorable. Can you give any color just on to what extent youâve attempted to, I guess, reappraise the portfolio and reflect potential downside, the property value maybe particularly in office? Yes, we look at that constantly and again, credit goes to Pat and his team, Todd Everett, for having really put together a very competitive and high quality commercial portfolio. Pat, additional color? Yes, Ryan. Great. Sort of follow-up question, I think from a bottom up perspective, we are absolutely always interrogating our commercial mortgage portfolio and in our fixed income portfolio to make sure that we really understand what the macroeconomic environment is doing to each one of our investments. So, we have a very disciplined bottom up perspective to both our fixed income and our commercial mortgage portfolio relative to its position and resilience to what we believe would be a recession environment for 2023. But we also do a top down sort of model sort of stress analysis of our portfolio and on both sides of the analysis, both the bottom up and the top down, our commercial mortgage portfolio continues to hold up very, very well Ryan, and you highlighted some of the material that we already provided, but we continue to see very strong resilience in terms of the income durability of the investments we have in commercial mortgages. The area that you would imagine we take extreme sort of I think vigilance on right now is our office portfolio. We have about a 100 loans for about $3.5 billion in our office portfolio. But even there, as we do our sort of bottom up and our top down analysis, our office portfolio has a 52% loan-to-value debt service coverage about 2.7 times. Itâs 90% occupied. That continues to hold up quite well. But as you can imagine, weâre doing again, a lot of bottom up on scenario analysis on tenant rollover, lease maturities, how much some of the properties are giving back space to the markets. And that will continue to be a very strong vigilance for us as we go into 2023, but weâre not seeing any sort of major problems surface yet in terms of our overall portfolio or in that office part of our portfolio Ryan. Yes, thank you very much. Just following up a little bit on Jimmyâs question, I understand that a lot of the assets in the portfolio are institutional and not rated by Morningstar, but youâve probably done a lot of work on the retail side. Can you talk about how quickly from the moment you get great Morningstar results, you see funds flow in and to the extent when the results arenât as strong retail funds flow out? I wish it were easier than it is, because as mentioned Josh, we actually have some third quartile performance thatâs seeing large net cash flow and new sales a lot of attention. So the correlation sometimes, is very difficult. Youâd think theyâd be highly correlated, but the reality is, theyâre not necessarily correlated and a lot has to do with its whatâs in favor at any given time. But Pat, you can clean that up for me. Yes, Josh clearly, Morningstar benchmarking is utilized to inform advisors, gatekeepers, individuals in terms of how well our capabilities and our strategies are doing relative to other investment managers. But itâs more complicated to that because decision makers, gatekeepers are really looking at not just the one year performance; theyâre looking at three year, five year since and session performance. Theyâre also looking at, things such as the investor style, the approach they take in terms of their actual investment portfolio, pricing in the portfolios. In terms of portfolio construction, thereâs a lot of other things that multi-strategy solution providers look at outside of performance in terms of diversification to their overall mix of performance. So itâs much more nuanced in terms of just performance relative to the movement of capital toward a capability away from a capability. And as Dan mentioned, there really is no sort of direct correlation between a timeframe as to when a Morningstar rating is X versus Y in terms of an net cash flow. Itâs informative for us to have that because itâs very important in the eyes of advisors to continue to evaluate our sort of capabilities, but it doesnât have a direct correlation as you suggest. Yes, on the institutional fixed side, are you seeing any changes in the strategies that youâre winning mandates for given views about recession or given views about inflation or whatnot? Have these styles that you engage in change on the fixed side? Yes, itâs really great sort of follow-up too. Weâre seeing the fixed income side some real strong interest, particularly right now auto blocks and 2023 and high yield. Weâre seeing also a pivot again toward the emerging market debt space and we continue to see private debt, private credit interests from institutional investors. So institutional investors are engaged and fixed income in a very clear, purposeful way right now. And I think weâll continue to see very long-term trends from institutional investors towards alternative investment classes, including real estate and including the debt capabilities in the private space. Yes, thanks for joining the call today and again, apologies for those in the queue that we did not have a chance to get to Humphrey and his team will follow-up accordingly. From our perspective, 2022 was a transformative year. We de-risked our portfolio, reduced the balance sheet, and our businesses are less capital intensive and theyâve been historically. Weâll continue to focus on investing in our growth drivers, managing our expenses and revenues and returning excess capital to shareholders. Weâll share more about our 2023 outlook and long-term guidance on March 2 outlook call. Thank you for taking time out of your valuable day to be part of this Q&A. Thanks so much. Thank you for participating in todayâs conference call. This call will be available for replay beginning at approximately 12:00 p.m. Eastern Time until end of day March 23, 2023. 1373-5216 is the access code for the replay. The number to dial for the replay is 877-660-6853 for U.S. and Canadian callers or 201- 612-7415.
EarningCall_910	Hello and welcome to today's Provident Financial Services, Inc. Fourth Quarter Earnings Conference Call. My name is Bailey [ph] and I'll be the moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Adriano Duarte, Head of Investor Relations. Please go ahead. Thank you, Bailey [ph]. Good morning, everyone and thank you for joining us for our fourth quarter earnings call. Today's presenters are President and CEO, Tony Labozzetta; and Senior Executive Vice President and Chief Financial Officer, Tom Lyons. Before beginning the review of our financial results, we ask that you please take note of our standard caution as to any forward-looking statements that may be made during the course of today's call. Our full disclaimer is contained in this morning's earnings release which has been posted to the Investor Relations page on our website, provident.bank. Thank you, Adriano and good morning, everyone. Provident finished the year strong by delivering another solid financial performance in the fourth quarter. We produced record interest income and record non-net interest income, resulting in earnings of $0.66 per share. Our performance was driven by loan growth, the stability of our deposit base that continues to exhibit good betas and sound balance sheet management, all of which resulted in an expansion of our net interest margin to 3.62%. The expanding net interest margin drove a 4.2% increase in net interest income over the trailing quarter. This resulted in an annualized return on average assets of 1.42% and a return on average tangible equity of 17.51%. Our solid earnings performance continues to positively impact capital which remains strong and comfortably exceeds well capitalized levels. As such, our Board of Directors approved a quarterly cash dividend of $0.24 per share, payable on February 24. At Provident, we remain focused on our mission of delivering a best-in-class customer experience and deepening the emotional connections with our customers, thereby creating advocates for life. We believe this is essential to build and retain all of our businesses. Our emphasis is commercial lending. And in the fourth quarter, we closed approximately $574 million of new commercial loans which increased our production to $2.4 billion for the calendar year. Our line of credit utilization percentage increased 1% in the fourth quarter to 34% but still trails our historical average of approximately 40%. Given the rise in interest rates, prepayments decreased 33% to $176 million as compared to the trailing quarter. Of those payoffs, about 50% were due to the sale of the underlying collateral and 14% were associated with loans we chose not to renew. As a result of our production and the reduced levels of prepayments, we grew our commercial loan portfolio, excluding PPP, at an annualized rate of 9.7% for the quarter and 10.1% for the year. The pull-through in our commercial loan pipeline during the fourth quarter was as expected and the gross pipeline remained strong at approximately $1.3 billion. The pull-through adjusted pipeline, including loans pending closing, is approximately $714 million and our projected pipeline rate increased 61 basis points from the last quarter to 6.76%. For the year, we had record commercial loan production and growth, despite a competitive market and rising interest rates. We are also encouraged by the activity that has replenished our pipeline. And while we are mindful of a potential economic slowdown, we expect normal pull-through in the first quarter which should result in good commercial loan growth. The stability of our core deposits is a valuable component of our franchise. During the quarter, the average balance of our core deposits increased $76 million, or 3.1% annualized. On a spot basis, core deposits decreased $89 million, or 3.6% annualized which we attribute to normal business activity and some outflow of excess liquidity. The total cost of deposits for the quarter increased 32 basis points to 67 basis points. For the fourth quarter, our deposit beta was 26%, while the rising rate cycle to date deposit beta was about 11%. The stability of our core deposits and relatively good betas combined with the growth in improved yields in our earning assets, particularly commercial loans helped drive an 11 basis point improvement in our net interest margin. Given our moderately asset-sensitive balance sheet, our stable core deposits and our prospective loan growth, we expect the net interest margin to remain stable in the near term. We continue to focus on building our fee-based businesses. Our insurance agency, Provident Protection Plus, had a solid fourth quarter, with a 4.5% increase in revenue and a 24% increase in operating profit as compared to the same quarter last year. The unfavorable conditions in the financial markets continued into the fourth quarter. And as a result, Beacon Trust experienced a decline in the market value of assets under management and related fee income. Beacon's fee income decreased $398,000 or 6.5% as compared to the trailing quarter. On a positive note, our team of wealth advisers has successfully retained clients and generated positive net funds flows to Beacon. As we move into 2023, the macroeconomic outlook appears challenging to the industry, specifically liquidity, funding costs and credit quality may come under pressure. As we move forward and organically build our business lines, we remain conscious of this potential -- of the potential for these market challenges and are committed to strong risk management culture. We will intensify our focus on sectors we believe to pose heightened risk in a period of declining economic conditions. Regarding our previously announced merger with Lakeland Bancorp, our team continues to work diligently towards obtaining stockholder and regulatory approvals necessary to combine our 2 companies into a powerhouse super community bank. We are excited about this combination which will enhance our ability to serve our customers and our communities. Business combinations increased anxiety levels in an organization. I am very pleased and impressed with the professionalism and collegiality with which our teams are working towards combining our 2 companies. Provident has accomplished much in 2022 which culminated in strong financial performance and a prospective merger with Lakeland Bancorp. These achievements cannot be possible without the tireless effort of our talented team. The Board of Directors and I are incredibly thankful to our team for their commitment to our goals and guiding principles. Many thanks to the Provident and Lakeland teams for the incredible amount of effort preparing our 2 companies for a successful combination. In the new year, we look forward to growing our businesses and integrating the merger with Lakeland Bank which we believe will create value for all of our stakeholders. Thank you, Tony and good morning, everyone. As Tony noted, our net income for the quarter was a record $49 million or $0.66 per diluted share compared with $43.4 million or $0.58 per share for the trailing quarter and $37.3 million or $0.49 per share for the fourth quarter of 2021. Current quarter results included $1.2 million of nontax deductible charges related to our pending merger of Lakeland Bancorp. Excluding these merger-related charges, pretax pre-provision earnings for the quarter was $70.3 million or an annualized 2.03% of average assets. Revenue totaled $132 million for the quarter on the strength of record net interest income of $114 million. Our net interest margin increased 11 basis points in the trailing quarter to 3.62%. The yield on earning assets improved by 46 basis points versus the trailing quarter, as floating and adjustable rate loans repriced favorably and new loan originations reflected higher market rates. Meanwhile, increases in funding costs continue to lag the improvement in asset yields, with the average total cost of deposits increasing 32 basis points to 0.67%. This represents deposit basis of 26% for the current quarter and 11% for the rising cycle to date. The average cost of total interest-bearing liabilities increased 46 basis points from the trailing quarter to 1%. These betas were in line with our expectations. While we believe that our net interest margin is likely at or near its peak, we expect the margin to stabilize in the 3.50% to 3.60% range for 2023. Excluding PPP loans, period-end commercial loan totals increased $209 million or an annualized 9.7% versus September 30. Net of runoff in consumer loans, total loans excluding PPP loans, grew $205 million or an annualized 8.2% for the quarter. The allowance for credit losses on loans decreased $600,000 for the quarter as a result of a $3 million provision for credit losses on loans and $4 million of net charge-offs. The charge-off activity was expected and was primarily attributable to the write-off of specific reserves established in prior quarters on impaired commercial loans. Asset quality and the economic forecast were largely stable versus the trailing quarter. As a result of the charge-off of specific reserves on impaired credits, the allowance coverage ratio declined slightly to 86 basis points of loans from 88 basis points of loans at the trailing quarter end. Noninterest income decreased $10.2 million versus the trailing quarter, driven by an $8.6 million gain on the sale of REO realized last quarter and lower insurance agency income prepayment fees, gains on loan sales, wealth management income, partially offset by an increase in bank-owned life insurance income in the current quarter. Excluding provisions for credit losses on commitments to extend credit and merger-related charges, operating expenses were an annualized 1.79% of average assets for the current quarter compared with 1.89% in the trailing quarter and 1.81% for the fourth quarter of 2021. The efficiency ratio was 46.88% for the fourth quarter of 2022 compared with 47.11% in the trailing quarter and 54.74% for the fourth quarter of 2021. Our effective tax rate was stable at 27.1% versus 27.7% for the trailing quarter. Excluding nondeductible merger-related charges, the effective tax rate was 26.6%. Tom, I wonder if you could help us understand the thinking around taking a provision for off-balance sheet credit exposure in the third quarter of $1.6 million and then reversing it out this quarter. Why was that? It really depends on the composition of the pipeline markets, the approved pending closing loans. We had some pretty strong closing activity during the quarter. And as you saw, the pipeline decreased a little bit. So that wasn't replenished. And in addition, the line of credit usage ticked up a little bit, so there was less unused lines. So the commitments that are subject to that reserve were lesser during the course of the quarter. I think in terms of the loss rates, they were pretty consistent from one quarter to the next. So it was really just volume. Okay. And I apologize. I missed, Tony, your comments on what were assets under management at Beacon and net flows this quarter? We closed the year AUM -- I'll take this one [indiscernible] $3.5 million -- $3.5 billion, sorry, in AUM. And sorry, Mark, what was the second part? Net flows were -- I have said the year-to-date, $66 million positive for the year. That excludes -- so that's new business increases from existing clients, less closed business. It does not contemplate the withdrawals that are made in the normal course lifestyle maintenance. Okay. And I know itâs still uncertain on the closing date of Lakeland but when are you sort of roughly targeting the systems conversion on Lakeland? So right now, on our calendar, I think we have it for October. Hopefully, things continue to go as planned and we would have a closing in the second quarter earlier the better. And then, just two last little modeling things. Tom, maybe share some thoughts on your expense outlook and the effective tax rate as well. Sure. Expenses, I would say, are likely to be -- in the first part of the year, it's always higher. We have some seasonal costs around payroll taxes, potentially weather kind of events. So I think in the $66 million to $67 million range. We had a favorable adjustment in the fourth quarter of '22 related to employee medical expenses. We saw claims activity coming lower than anticipated. Some of that carries forward into our own rate for 2023. So we do get a little bit of benefit for that but there was some nonrecurring adjustment to that. So you really can't build the run rate off of Q4 '22, just one other question on that. Just first on your margin outlook, the 3.50 to 3.60 for the full year, what are you kind of assuming in terms of the Fed funds rate and potential Fed actions there? Fed funds rate, probably with most everybody else, I guess it's the 225 basis points in February and March and then stability thereafter. The margin for the month of December was about3.60. So I think we'll slow down a little bit over the course of the year but the first quarter should be pretty consistent with where we are for Q4. Got it. Got it. And given the uptick in deposit betas this quarter, I think you had said it was 26% in 4Q. Are you still pretty confident in your through-the-cycle beta rate of 23%? We are, yes, that uptick was right in line with our expectations. I think it will remain a bit elevated in terms of percentage on the next 2 hikes as well. But we're pretty comfortable when we look at the trends in our deposits -- core deposits, excluding municipal deposits and brokered very stable for the entire year really. Got it. And just a separate topic. Any color you can add on some of the drivers of the uptick in charge-offs this quarter. I know it wasnât a big number but are you seeing any trends in any particular asset classes or sectors there? No, no deterring trends in asset quality at all. I would say very stable. In fact, if you look at the specific metrics, they're like a point or 2 better across the board. Those charge-offs were really related to very specific credits that were previously reserved for the most part. Okay, great. And just one final question. Just how are you thinking about the securities book going forward in terms of management this year? And can you just quantify how much that portfolio is cash flow in each quarter? Sure. I don't see us adding a lot of leverage unless we get a curve that makes sense. So I expect we'll continue to see the securities book run down a little bit and be used to fund loan growth at improved spreads. I'm sorry, Bill, you asked us about funds flows. It's come down some with the mortgage-backed security portfolio rates rising. So it's probably more in the $15 million, $16 million a month at this point. So call it $40 million to $45 million, $50 million a quarter. On the drill down on the margin, I think, Tom, you said that the kind of the exit margin in December was about 3.60. I wonder -- I mean, what's the kind of the spread you guys? Like if you look at the commercial lending pipeline and the yields you're getting there versus incremental funding, where are spreads kind of today as you guys see it? As I mentioned, our pipeline rate was, I believe, I said 6.76% was the number. I think a lot of our activity thatâs coming in, weâre still growing -- having some inflows on deposits, especially when itâs attached to our treasury function for our commercial lending group. So I would say the spreads are still in a place where we -- thatâs why we say the margin can stabilize. But we also declared that we think that itâs close to peak and that we may anticipate the funding costs rising a little bit faster as the year progresses, then the loan yields can keep up, particularly with two more Fed hikes. When you think about incremental funding costs, as you said, the portfolio rates, what, 67 basis points for the quarter, that's pretty reasonable in terms of a new deposit overnight funding on the wholesale market is considerably higher. Right overnight borrowings yesterday were 67 [ph]. Yes. I think the other thing we have to point out and maybe Tom can give some more color on that is that not all of our growth is going to be funded by loan growth -- by deposit growth. What -- do you know what the estimated kind of cash full -- cash flows are from the securities book for the whole year for 2023, Tom, by chance? It fluctuates, obviously, with the performance of the mortgage-backed portfolio. The large part of that is just government agency mortgage-backed securities. So we've seen as high as $25 million to $30 million a month and sometimes. And I think like I said, we're down around $15 million -- $12 million to $15 million currently. Yes, yes. Makes sense. And then for loan growth for 2023, Tony, I mean, I think you said in your prepared remarks, the pipeline is about $1.3 billion, I think you said and you expect to kind of pull through rates to normalize. I mean, are we right to think roughly kind of a mid-single-digit rate is a good starting point for next year? Or do you think there's some room with payoffs probably being lower, I imagine, to do a little better? Yes. I would expect production to be down a little bit given the market cycle. But prepayments are going to be down substantially as well. So a good guidance for us is correct -- you're correct in that 6% range is something that I would say we would die to. And given conditions, we could outperform that. But I would not like to guide beyond 6%. Yes, that makes sense. And then just lastly for me, you mentioned kind of the Lakeland merger moving as expected. And I think next steps are regulatory approvals 2Q close. It seems like the teams are working well together. Any -- obviously, I imagine that's taking up a lot of your management Board's kind of human capital at this point. But any other investments or strategic initiatives that we should be mindful of for this year? Or is the focus kind of largely on closing that and getting it converted and then kind of moving from there? I think our primary focus is getting the Lakeland merger and combination together and getting the 2 cultures clearly aligned. That's job one. Job two with our new CDIO in place, getting him to evaluate the technology stack for a $25 billion organization and I think that's a priority in the evaluation phase. Decommission some things, commission new items that are aimed to digitize our customer experience and improve our data analytic ability for a bank that side. So those are our priorities. I donât think those are going to require massive amounts of capital spends to get there. I think itâs -- but those are our focuses as we roll through the year, in addition to building all of our business lines. There are no additional questions waiting at this time. So I'll pass the conference over to Tony Labozzetta for any closing remarks. Please go ahead. Again, I just want to thank everyone for being on the call and we look forward to a really good year in 2023. And be safe and we look forward to talking to you on the next call.
EarningCall_911	[Call Starts Abruptly] Stora Enso's Q4 2022 Report Presentation. Our purpose, do good for people and the planet is more important now than ever before. We need to look after our people, the communities in which we operate and the company. And by replacing fossil-based materials with our renewable products, we can leverage on this opportunity for long-term earnings growth and can at the same time positively contribute to mitigating climate change. Sustainability is deeply embedded in our strategy and corporate culture. This is what drives both our underlying performance and our opportunities for innovation and growth. I will now give you an overview of our fourth quarter and full year 2022 performance. So today I'm most proud of that we have delivered the best full year financial performance in 22 years, despite all market disruptions and challenges that we see around us. At the same time, we have been proactive and continue to deliver on our strategic roadmap. As we're all aware, the inflationary cost pressures escalated towards the end of the year, and we could only partly mitigate them in Q4. If we look at our divisions, they give a mixed picture where biomaterials was the star performer, while we saw continued market slow down in both containerboard and sawn wood, a trend that really started in the middle of last year. We have also been busy with the reshaping of the business and positioning it for future growth to drive outperformance over the cycle where our target is to grow more than 5%. Some examples of progress on recent key initiatives are that this month we have completed the De Jong acquisition and have started the integration process. We also completed the majority of divestments and dissolved the paper division and started a process to divest the consumer board packaging site and forestry operations at our Beihai site in China. After a positive outcome from the feasibility study at our Oulu site, we are investing to build a cost leading consumer board line for â from a paper machine conversion. We continue also our collaborations and partnerships and have recently partnered with Polestar to contribute to their project to create a climate neutral car for 2030 with our Lignode product. And to create further shareholder value, the board is proposing an all-time high dividend of â¬0.60 per share. Let's take now a look at the financials, and let's start with a full year of 2022. Sales increased by 15%, which was the highest annual sales since 2007. The positive impact from significantly higher sales prices and active mix manager â management was partly offset by the adverse impact from structural changes such as closing of two major paper sites and our exit from Russia. Operational EBIT grew by 24% to nearly â¬1.9 billion, and as I just mentioned, the strongest since 2000, and with an all-time high EBIT margin of 16.2%. The operational return on capital employed, excluding forest [indiscernible], which is well above our long-term target of more than 13%. Looking now at the fourth quarter, sales increased by 5%. We had the highest sales prices in all divisions except in wood products, and the top line was also supported by active mix management and stronger U.S. dollar. The operational EBIT of â¬355 million, however, decreased by nearly 17% with an EBIT margin of 12.4%. And there are several reasons behind this drop. To name a few we have the exit from our Russian operations, which reduced the result by â¬20 million, while the escalated variable costs, especially in energy, chemicals and logistics, had a negative impact of almost â¬270 million, lower volumes, which reduced operational EBIT by â¬72 million, and then we had fixed cost increased by â¬85 million, mainly due to the scheduled annual maintenance shutdowns. We had the two major sites of packaging materials being shut down this quarter. The operational return on capital employed excluding forest was 13.2%, just above our target of more than 13%. And I will now show you a year-on-year comparison for the second half of last year on the following slide. As you can see in this slide, we show the third and fourth quarter combined in a year-on-year comparison for 2021. You can see that the development during the second half of last year showed a similar trend as in 2021. The maintenance costs in the second half of 2021 were â¬314 million and just slightly higher at â¬330 million in the second half last year. The main difference is that in 2022, the third quarter was exceptionally high, while the fourth quarter was exceptionally low in comparison to 2021 when both quarters were more stable quarter-on-quarter. In the second half of 2022, this had the effect of a lumpiness quarter-on-quarter as many variable costs such as energy and chemicals escalated, while at the same time we have four of our largest packaging material sites in annual maintenance shutdowns, including two of our largest consumer board sites. In Q4 2022, the maintenance impact was â¬30 million higher than in Q3 2022 and year-on-year the maintenance impact was â¬34 million higher in Q4 2022. The situation in the fourth quarter therefore impacted negatively with both higher costs and lower volumes. However, the impact on EBIT over the second half was relatively flat. Let's now move into some of the strategic parts that we've been working on. The acquisition of De Jong Packaging Group was announced in September last year, and I'm pleased that we have now completed this month â this acquisition and can welcome them as part of Stora Enso. We have started the integration process. We are full focus on that and it is proceeding according to our plan. This acquisition will accelerate revenue growth and build market share in renewable packaging in Western European markets and key consumer and customer segments, and double the sales from Packaging Solutions division. De Jong Packaging Group, just to remind you, is based in Netherlands and is one of the largest corrugated packaging producers in the Benelux countries with 17 sites across Benelux, Germany and the UK. De Jong sales were approximately â¬1 billion and approximately â¬114 million EBITDA in 2022. Once ramped up our corrugating capacity will increase by approximately 1,200 million cubic meters to more than 2,000 million cubic meters. And sales for the Packaging Materials Division will nearly double â Packaging Solutions Division will nearly double. We expect to achieve â¬30 million of annual synergies over the business cycle built up over the coming three years, and an additional annual EBITDA increase of more than â¬40 million from 2025 from these ongoing projects. And the two projects that we are currently working on are expansion projects, one in De Lier, Holland and one in UK. Furthermore, the acquired business has an excellent fit with a possible conversion of a paper machine line that we have in Langerbrugge to recycle container board line in Belgium, which is currently in a feasibility study mode. We have also for some time now communicated that the structurally declining paper business is not a key area for our long-term growth agenda for Stora Enso. So we have instead focused our financial and operational resources, and also capital allocation on growing in renewable packaging, sustainable building solutions and biomaterials innovation. In spring last year, we announced that four of our five paper sites were entering a divestment process, and we have agreed divestment for a total enterprise value of â¬378 million. We have completed the NymÃ¶lla siteâs divestment, which was sold to Sylvamo; and the Maxau site will be divested to Schwarz Group and the Hylte site to Sweden Timber. Both of those are expected to be completed during the first part of this year. The divestment process for Anjala site was discontinued and is retained in Stora Enso continuing with its paper production and serving its current customers. The Langerbrugge site, as I mentioned on the previous slide, was not included in the divestment plan, and the ongoing feasibility study of that site is expected to be finalized during the first half of this year. We have also started a new divestment initiative and let's take a closer look at that. As you are aware, we started a sales process at the end of last year to divest or Beihai site in China. This divestment would include both the industrial site and the forestry operations. And just as a reminder, Beihai has an annual capacity of mechanical pulp of 250,000 tons and 550,000 tons of consumer board. The forestry operations consists of 73,000 hectares of leased eucalyptus plantations. Stora Ensoâs ownership of this site is approximately 80%, and we have at this point not any committed timeline for this divestment process. The reason for this decision is that we want to focus on long-term profitable growth, where economies of scale can be achieved. We see that we have better options in other opportunities within the company, so we will be able to allocate capital and resources for growth in other existing sites such as the Oulu site in Finland for instance. China and other Asian markets are important to us both on kind of our existing and also new customers in this market. We will continue to serve them from our other global sites, and we still have three packaging sites in China in the Packaging Solutions division. I will now talk a little bit more about how we further can strengthen our growth strategy and also learning, and reach new markets through collaborations. And it is important in order to innovate, to have strong ecosystems with collaborations, and partnering and joint development. And these are becoming more and more critical for companies not only to expand business, but also to share knowledge, speed to market and influence the development of different innovations. In Biomaterials Innovation we are actively developing our value chain ecosystem to build a path for green batteries. The latest one being the announcement of our partnership with Polestar, an electric performance car brand where Stora Enso will contribute to their Polestar 0 project, which is a climate neutral car for 2030 using our Lignode product. We are also progressing with the ongoing feasibility study for the first industrial scale production of Lignode at our Sunila in Finland, where we have our current pilot facility. And we are, of course, constantly monitoring the development of battery technologies within wood-based materials. I've already mentioned our investment in a new consumer board line at our Oulu site. And we are now moving ahead with the investment of around â¬1 billion to build the most cost competitive folding box board and consumer board machine in Europe. The targeted end-use segments are food and beverage packaging, for mainly Europe and North America. And this production is estimated to start in early 2025 with an expected annual sales of approximately â¬800 million. In Building Solutions we have launched our construction solution, Sylva. Simply explained, it is a pre-fabricated and custom-made building kit delivered just in time to a building site. And these modules that help builders to enable faster construction, reduce cost, more efficient use of raw material, and of course less CO2 emissions than concrete, and steel and other available applications on the market. And you can see here on a picture an example of a prefabricated element being lifted and ready to go on at top of a building. Let's now take a short look at our financial targets. All long-term group level targets were exceeded in the fourth quarter and for the full year of 2022, including the dividend. In the quarter, it was only biomaterials and forest division who outperformed their targets, packaging materials and wood products division had the biggest drops. For the full year, biomaterials, wood products and forest outperformed their targets while packaging solutions and paper underperformed and packaging materials was with a small improvement not far from their long-term target. Thank you, Annica. And let's look at reach between Q4 2021 and Q4 2022. And as you can see we had higher prices during the quarter, but they were offset by increased variable costs, especially energy logistics and chemicals. Also, maintenance cost played the role here, as Annica already mentioned earlier, and maintenance cost were 34 million higher year-on-year, and that is feasible in fixed costs as well as in the volume development for the quarter. We have put in place number of actions to mitigate when it comes to inflationary pressures that is cost control, pricing actions, capacity management, as well as working on sourcing and logistics. Then let's move to the divisions and let's look at the packaging materials division first. In consumer board division, we have our consumer board business, we have implemented price increases to mitigate cost inflation, but containerboard market demand has remained weak. Sales were up 6% year-on-year, reaching â¬1,127 million, mainly driven by higher board prices. Operational EBIT was down â¬ 102 million year-on-year at â¬31 million lever. There we could see increased short-term operating costs due to annual maintenance shutdowns as mentioned earlier and we had maintenance shutdowns at our four large sites, which is good to keep in mind and looking at the result. On top of that, we had variable cost inflationary pressures during the quarter. At this variable cost, our lower volumes had an effect on margins that were squeezed during the quarter. An operational return on capital was at 3.6% for the quarter. Then Packaging Solutions division, the sales and profitability were impacted by the exit from Russian operations that was visible in the previous quarters already. And we had some high inflationary pressures there as well. Since we are down 16% year-on-year at â¬179 million level affected by like mentioned Russian units divestments and we had higher sales prices in the corrugated packaging operations despite the software market conditions. Operational EBIT was down 30 million during the quarter became negatively impacted by exit from Russia and higher costs relating to investments in growing to new businesses that we have today in packaging solutions division. That is something when it comes to segment reporting that we are planning to move to segment Other going forward in order to improve transparency in Packaging Solution division business. And operating return of capital at negative 1.4%. Then Biomaterials division where we had all-time high quarter sales and profitability reach through record high pricing and effective good operational performance. Sales were up 32%; reach an all-time high for the quarter at â¬649 million driven by strong prices and deliveries and good performance in byproduct sales and operational [ph] performance. If it was up 49%, also at all-time high, it comes to the quarter at â¬249 million that was reflection of higher sales prices and positive foreign exchange impact, fully offsetting higher growth that we've seen in the business and input prices. Operational return on capital at 35%, that is also clearly about a long-term target of 15% for the division. In Wood Products division, there was a rapid market decline in sawn wood, but continuous stability in building solutions business. Since we were down 7% year-on-year at â¬471 million, construction market was impacted by market slow down. We can see fewer building permits and projects that are started currently. And lower sales mainly were impacted also by lower prices in sawn wood and exit from the Russian operations earlier last year. And like said, good and positive thing is the stable demand in building solutions has continued despite the challenging market conditions. Operational EBIT was down more than â¬3 million year-on-year at negative 14 million and lower sales prices and increased cost for logistics, electricity and raw materials were affecting the profitability and margins in the business and operating return on capital negative at 7.5% for the quarter. In Forest division, woods demand and prices remain on a high level and sales were up 11% year-on-year driven by increased wood demand and higher prices. Sales were up â¬664 million level. Wood markets were tight both in Finland and Sweden, but they were mitigated by flexible sourcing and our strong sourcing organization in Baltic countries, Finland and Sweden. Operation EBIT was up 30% year-on-year, which is â¬62 million supported by good operational performance as well as positive impact from land sales in Sweden. Operating return on capital at 12.4% above long-term target of 3.5% despite the higher fair value of the Nordic forest assets. Then Paper division where we are significantly improve profitability due to business turnaround of the restructuring that we implemented the year before. Since we have 9% year-on-year reaching â¬424 million, we had higher sales prices for the products and strong performance continue throughout the year. Volumes were impacted somewhat by scheduled maintenance shutdowns during the quarter. Operational EBIT was up â¬59 million year-on-year reaching â¬49 million, and we had good high sales prices that were that more than offset higher variable costs. Our cash flow after investments was negative by 0.7% impacted by restructuring provision payouts and transaction costs related to the announced divestments, restructuring relates to Kvarnsveden and Veitsiluoto closures a year earlier. And also you have seen the release that we are now stopping reporting papers a separate segment going forward as we are ready with the divestment process. 10 couple words on fair variation of the forests and like indicated earlier, we had now changed the market transaction based fair valuation also in Tornator in Finland. Fair value of the forest were increased by â¬8.3 billion from â¬8.1 billion at quarter earlier, and this is equivalent to â¬10.52 per share. Change in the valuation method from discounted cash flow to market transaction based method in Tornator in Finland resulted reaching a â¬265 million positive impact quarter-on-quarter. There was also higher market transaction prices in Sweden, but that FX was offset by negative development at foreign exchange rate between Swedish krona and Euro. And their value for plantations decreased due to the higher discount rates used. Energy self-sufficiency is moving up with [indiscernible] coming closer to operational states now. And we expect the total energy wise we are 75% self-sufficient going forward and electricity is increasing from 68% to 79%. Then related to CapEx for the year that has now started, CapEx is up from slightly below â¬800 million levels to â¬1.2 billion to â¬1.3 billion range and CapEx increases is driven by consumer port investment in all in Finland that also Annica was referring to earlier. We have started now to move forward with the investment that was communicated and decided earlier this year. Dividend and dividend proposal, so we had now proposal from the port to increase the all time high dividend of â¬0.60 per share, and this is bringing our dividend back to growth track that we have been showing since 2008 after two years of global dividend due to COVID-19 pandemic that was affecting the economic globally. Then segment reporting changes that we have announced earlier today as well. So as of January 1 this year, we are first of all discontinuing paper division as a separate segment, Maxau and Hylte paper sites that are divested and where the deals are signed will be part of segment other until completion of the divestments. And this is expected during the first half of this year. And Langerbrugge and Anjala sites that we are retaining in Stora Enso they are reported now as part of Packaging Materials division. Then the new businesses that we have earlier reported and had as part of Packaging Solutions are moved to segment after this we are doing in order to input transparency of Packaging Solutions division going forward. Also, now that De Jong is part of Packaging Solutions and restated figures shall be issued for the new structure prior to first quarter report. Thanks, Seppo, and letâs take a look at the year ahead. If we look at market conditions and inflationary pressures, they are expected to be more challenging in 2023 than we experienced in 2022. And therefore, the variable cost inflation is also expected to remain high. So we expect the operational EBIT for the full year of 2023 to be lower than the record high full year of 2022 that ended up in â¬1,891 million. We have been and are continually taking actions to manage volatility and as Seppo mentioned, we work diligently to protect our margins working with pricing, managing our product mix, inventories as well, of course as actions in sourcing and logistics. We have also reinforced our cost control across the company and will continue to take active actions also going forward until will recover our profitability. As weâve mentioned before, we benefit from our high self-sufficiency relative to other companies. In wood, we are 30% self-sufficient and in energy, we are 72% self-sufficient, well hedged for the coming years. And since I joined as the CEO of Stora Enso now some three years ago, we have taken extensive steps to also reshape our â the business that we have. The company is now financially, operationally, and strategically in much better shape to handle market fluctuations. At the same time, we have the muscles to invest for growth in renewable packaging, in sustainable building solutions and in biomaterials innovations. Moving over now to the outlook, and if I go into a little bit more details around each division. For Q1, we see that in Packaging Materials, the overall demand for consumer board is expected to remain stable. While the overall containerboard demand is expected to remain weak and this has to do with the consumer consumption. Packaging Solutions demand for corrugated packaging is expected to weaken in Europe. While pulp demand is expected to be more or less on par with the previous year. In Wood Products, the demand for sawn wood is expected to be on par with the previous â is expected to be significantly weaker, especially in Europe with the overseas market remaining stable. And lastly, for the forest division, the pulpwood demand is expected to remain stable, while demand for sawlogs is expected to decrease in the first quarter. So weâre now coming close to the end of the presentation, but I will first just take a chance to summarize and then Seppo and I look forward to taking your questions. Our performance in 2022 demonstrates of course the strength of our leading market positions and our ability to be proactive and agile. Quarterly, all time high results weâve experienced in biomaterials, weâve continued slowdown in containerboard and sawn wood. We are investing in organic and acquisitive growth and entering partnerships all to drive outperformance over the cycle. And the Board proposes an all-time high dividend of â¬0.6 per share. So all in all, Iâm very happy that we are delivering the best of full year financial performance in 2022 despite that the Q4 market challenges were more difficult comparably to previous quarters. Thank you. Iâll just start with inflationary pressures. It feels as if the marginal costs for your competitors are starting to come down, but youâre talking about more challenging pressures in 2023 over 2022. So if you can sort of elaborate a bit what that is happening, is that due to catches rolling over or is this really focused on the wood cost that weâve seen rising sharply in the Nordics in particular â well, I guess in Europe. Also on the pricing component, considering now we are in softer markets, where do you see opportunities to move prices? And then if I just move very quick to the De Jong Packaging, appreciate the strategic move, the growth ambition in that business though, I just wanted to ask how do we get to a nano growth rate around 20% to enable you to utilize that incremental volume in a market that maybe growth â grows at 3%? How quickly do you believe youâre going to be to fill that machine? All those incremental capacities. And the final point, I guess, on bee hive [ph] of course in the day, this is a high profile project. China has a growth market. I appreciate you need potential capital release to invest in other projects, but what is really going in bee hive that wants you to get out of it? And Iâll pursue that growth that is within that country. Okay, thanks, Lars. And if I start with the inflation drivers before I hand over to Annica to cover your other questions. So we see pressures especially on energy side, itâs also leads to pressures and quest and the increases on chemicals. I think those are the two biggest drivers going forward. And obviously in energy price and energy market is very volatile as you know and that is having an effect, even though that we have pretty high self-sufficiency rate, but still we are exposed. And then wood market is a third element when it comes to inflation pressures, where we see that the lock market is more sort of corn, but especially pulpwood market, we see pressures from energy would use it's as an effect on the market. Yes. Well, if we look at kind of â we donât comment on pricing in general, but where there is good and stable demand, we are able to have discussions with our customers to compensate for the inflationary pressures that we have. And we do that. If we look of course that the market is weaker than itâs more difficult to push through price increases, and then we need to work with products with balancing inventories and making sure that we run our capacities according to market demand. So this is the general kind of comment. And if we look at containerboard for instance, there we could see that the market was significantly weaker in quarter four. We expect a weaker also quarter one on containerboard side, there are a lot of inventories out on the market. So there the possibility to do adjustments on pricing is harder. Other areas like consumer board is more stable. So there we have the constant discussions and weâll negotiate our contracts as they expire with our customers. Generally, we have all contract, most contract discussions in Q3, Q4, but of course we have some also for Q1 and going forward. In wood product, if we look at the market there, demand, as I mentioned, was very weak with significant price decreases in Q4 on European market, it was 30% on some â 20% on some good and overseas almost 30%. So of course you understand that it is a quite challenging environment for wood products, and thatâs why we did not deliver a satisfactory result for that segment. And on paper, there have been quite a good pricing situation. For quarter four, we have been able to increase pricing. There is a balance in the market, but going forward, that situation also becomes more difficult if the macroeconomics impact and demand starts decreasing. Now looking at â and lastly of course, pulp prices, if I may comment on that. We see that mostly as we all know, pulp is guided by how the Chinese market operates. We expect of course the opening of the China as a country to contribute to increased consumption and then also continued good demand on pulp. We have seen some decreases of pulp prices during quarter four. And if I look at kind of the demand going forward on pulp, we see continued strong demand for tissue and fluff where we are main producers in Europe and then a stable demand for the other grades. Here also, of course, the U.S. dollar has a big impact on the results. And then if I say a few words about De Jong. As you know, they are very a very successful company in the region that they are operating. Itâs also a very good synergetic asset to have in combination with our site in OstroÅÄka already. So we can also make choices about how we integrate our own containerboard production together with the De Jong new corrugating capacity. Then of course, I think itâs a good market situation to do investments and build the machines now when the cycle is a little bit slower and then we can start up once the cycle turns. So I expect the segments where we operate with De Jong, which is an agricultural sector, for instance, serving all the Netherlands or majority of Netherlands agricultural sector thatâs picking up seasonally. Itâs stronger in springtime and summertime compared to quarter four for instance. So I think this is the acquisition that is very synergetic to our existing assets. And as I mentioned, we have the opportunity also with the forward-looking Langerbrugge conversion to do more. Yes. And then if we look at Beihai, the investment as such has delivered on the capacities on the kind of product mix on the machine. Yes, it is a growing market in China, but we also believe in economies of scale for the sites. We would see that in order to be able to build a much stronger position in China and reach economies of scale that we would need to invest more there. And when we have done our analysis, we have come to the conclusion that we have better options elsewhere. So this allows us to focus on better optionalities that we have inside of the rest of the company. Thatâs why we have taken the decision to exit Beihai. And as I mentioned, we will continue to serve our customers from our other very cost competitive and global sites that we have within the company and capture the growth in that sense. And you have to make strategic choices. You have to remember that we are investing â¬1 billion in all, we have feasibility study going on in Langerbrugge and we need to also take care of the balance sheet where we put the capital and where we can release capital for that quote. Just finally on that one, is there a pain level that you need to exceed to essentially go ahead with the Beihai mill? Iâm thinking about Anjala, you keeping that mill because I think that thereâs no bidders for that asset at a reasonable price. Do we have a similar situation at Beihai? Yes. Iâm saying if thereâs a minimum price level essentially at the Beihai for you to be willing to let go of the asset, similar to Anjala, which youâve also decided to keep because lack of demand at a reasonable price, I would assume. Yes. Now I heard your question, sorry. I believe there is quite a big difference between Anjala and Beihai in terms of how new the assets are and what prospects there are of good buyers. So they are not really comparable. But of course, we will make sure that we get the best value out of that divestment process with Beihai. Good morning everyone, and thank you for taking my question. I have three actually Iâd like to ask please. The first one is looking at the latest performance of wood products, what are the measures you are taking to bring EBIT back to a positive level? And have you implemented any production curtailments in Q1 at this stage? The second one is on Beihai, very clear message in your previous answers. The only question I have left over on this one is what would be the estimated EBIT generation delta between the future Oulu site and the current Beihai site? If you can guide us on that, please, that would be super helpful. And then the third question is on Lignode, could you update us a bit further on the feasibility study and the current customer interest you have there? Obviously we saw the pulse or partnership, did you receive any firm orders from this partnership yet for the Sunila pilot plant for example? Thank you very much. Thank you for your questions. On Wood Products we could see the decline in the market starting already during Q3. So, we have already been taking a lot of actions on that. As I said, inventory management taking down costs. We have had four loan negotiations with the unions to also close down when the capacity is not needed to reduce cost levels. We've done this in several countries where we operate. And we continue of course to try to adapt to the change reality of the inflationary pressures. So, I believe that Q4 and Q1 are probably some of the bottom levels that we see in kind of construction industry and so on. Normally many countries â many companies choose to take down their inventories during the end of the year. And that was something that we saw happened during Q4 in Wood Products. But all the actions that we mentioned in terms of cost reductions and so on are constantly taken. And you have to remember that Q1 is always low when it comes to construction business and Wood Products. So that is obviously having effect as well. But as we also mentioned, we could see that the two different businesses building solutions longer projects where they kind of have longer horizons, that pipeline stayed relatively stable comparably. And then the business that decreased very quickly was the traditional strong good business. And we have to remember that we had exceptional years the latest years in this area with some tremendous results. So a normalization was in the cards sooner or later. But this also I think shows the strength of the building solutions maybe are investing and see the growth opportunities. It's less volatile business, as we have said all the time. It's still relatively small share of the total, but that's stabilizing factor going forward. Yes. And that is why our strategies to grow that part of the business with, for instance, these pre-fabricated modules in the silver concept. On the Beihai question, we don't comment between individual sites. Sorry, we cannot help you with that. If we look at Lignode, then we have several ongoing partnerships. Our focus on Polestar and Northvolt, as we've mentioned before, are the ones that we can make public. What we focus now is in parallel that we are doing our feasibility study using the knowledge that we get from these customer trials that we are doing, because we're using the pilot material to deliver customer product to these and test them and make sure that we get the qualification rights. This information goes into the feasibility study, so we can make the design of the factory according to tailored needs of customers. And the focus is now up until we actually build the site or make the decision for the first site in Lignode that we build up the customer to off-take agreements. So, we know that we have enough volumes to ramp up the new production site once decision is taken. Thank you very much, Annica and Seppo for the answers. And then just a quick follow up on Lignode, I was wondering if Polestar would eventually participate in a joint venture with you as this was your initial plan for the for Lignode? Thanks. We have not discussed the joint venture at this point with them. Our main target, as I say right now is to make sure that we fill up the pipeline of volumes so that if and when we start up the new factory we will be ready to start producing. So this is what we put our main focus right now, and we have parked the JV question for time being. My question, I'd just like some clarity on the Packaging Materials division. Could you give us an estimate of how much the maintenance impact was in that division, either quarter-on-quarter or the benefit that we should see into Q1? I'm just trying to get the run rate of what the underlying profitability of the Packaging Materials division should be? And I know you called out that there was more maintenance in Q4 than you originally kind of guided to. So just wondering how big that impact is? So, I can start with the general comments and then hand over to Seppo, but the plant maintenance was not different than we originally had planned. So the sites that were down were Skoghall, it was Imatra, Varkaus Fors and the Maxau. Now the four first sites, they are Packaging Material sites, Imatra and Skoghall for those of you who know, are the two big consumer board sites. So of course having annual plan shutdowns with them in the same quarter had a big impact for the quarter. Actually, itâs quite good to have your shutdowns in quarter four, especially when energy prices are high. But of course the effect for the division as a whole is big when these two sites have shuts. If you remember also we announced capacity investment in Skoghall. So, the shutdown in Skoghall was longer than usual. What happened was that the startup after these annual shutdowns was more cumbersome than we have thought. We had some issues in Maxau and we had also startup issues in Skoghall after the rebuild, which made the performance worse from a kind of cost perspective and also from volume perspective. Thatâs why the initial â¬125 million of cost for the quarter was in fact 180. And as I showed you in the slide, if you look at Q3 and Q4 combined for last year and 2021, the total maintenance cost is the same. So itâs an effect between quarters. And usually we have Skoghall and Imatra in two different quarters. This year it happened to be in the same. On the effect quarter-on-quarter [indiscernible] regional 40 million more maintenance cost in Q4 and year-on-year roughly 30 million. So that gives you some flavor. And then when it comes to Q1 this year, so actually, no port mills are down for maintenance Anjala mill, which is now part of the Packaging Solutionsâ¦ And then just following up on this, youâve called out that youâve been renegotiating some of your liquid packaging board contracts which should help with the kind of price cost spread. Anything that you can give on what this means for kind of incremental profitability on that liquid packaging board? Is this youâre going to need further step ups in pricing to kind of reset the profitability levels or how should we think about the margins? And then link to the liquid packaging board, the Beihai mill, youâve over the years qualified that mill on liquid packaging. I imagine that when you dispose that mill will still be able to sell liquid packaging as per normal. Thereâs no kind of tied to the Stora Enso, it â I mean, it would go with the mill right when you dispose it. So whoever acquires it would get that benefit of having a qualified liquid packaging board mill. Well, if I answer the first question on pricing, we constantly of course monitor how we work with pricing. And as I said, liquid and the aseptic packaging is a stable part of consumer board where we have a constant and ongoing discussions with customers and how we set up the contracts. I canât give you, I know you want to know how weâre doing it, but I canât go into more details and answer that as you can probably understand. Regarding Beihai, yes, the site is qualified for producing liquid packaging. Of course, itâs for a customer who they choose to collaborate with is a choice not only based on the product and quality, itâs also based on innovation capabilities and other value added services. So ultimately itâs a choice of the customers who they want to collaborate with. But yes, the site is qualified for liquid. Yes, thank you very much. Hello, everybody. My first question is related to China and you alluded to the opening of that country after several years, so quite [indiscernible] measures there. What are you seeing at the moment in China? And what do you hear from your customers about the outlook for this year in China? Well, I think the expectation is at least that some of the consumption that has been stifled during the last three years of COVID closures would come back and that the market would grow. Then of course long term, the market of China is probably not going to grow as fast as historically. That is also have to do with other factors such as demographics and so on. And specifically then, if we look at kind of our products and the packaging is a good prospect in China with a growing population and organization. And the pulp used for different end users is still going to be â the global demand for pulp is going to be driven by the Chinese growth. We donât have a lot of business in Wood Products. Thatâs not one of the key end use markets in Asia. There we focus more in Japan, Australia, Southeast Asia where we have a more prestige type of wooden construction for us. And then if we look at kind of the other grades that we have in, in paper and so on, Asia is not or China is not a big market for us where we focus. So that is what we see. Yes. Perhaps what sort of â what I aimed that to get sort of feel for the general demand when it comes to perhaps pulp and paper boards [ph], because those are other market that you should probably know the best. Just sort of thinking whether you can see a pick-up in sort of activity levels there or more positive customers or essentially not? Yes. So I can just share then in packaging side, and one of the grades of course, which is that we are delivering. Liquid is as I said, it's a stable grade, so that is a little bit different. But if you look at folding box board for instance, in Q4 the demand for folding box board was down 5%. And we expect the demand in Q1 to pick-up and be around 3% to 4%. So this is kind of one testimony that, that the packaging is kind of picking up in China. If we look at softwood and hardwood pulp and demand in Q4 we had about 3% increase in demand for softwood and hardwood; and we expect a demand between the same levels also for Q1 in pulp side. All right. Thank you. I understand. Thank you for the detail. Now, I know you don't like to comment about pricing, but I guess the up or down is something that you can sort of share with us to get some kind of view where we are going in this sort of volatile market, consumer board prices up or down going into 2023? Not more than we already said that we successfully implementing price increases when it comes to renewing the contracts that we have renewed now around the New Year as typically start. I understand that is fair. And the final question I have, you said Annica stronger position going into perhaps more challenging times. What do you mean with that? Is that sort of related to the divestment of the paper business or is it the cost base or could you just sort of explain so we understand, how do you look at this, this sort of potential downtime help? Yes. First of all, I think three years ago and so on we had a much higher net debt position. So now even though we are doing these investments in growth, we have a very strong balance sheet and I think a balance sheet and strong liquidity is some of the key positions to have, if you enter a market that's more difficult. So we will continue to work with reducing our debt position and have a strong liquidity; so that is one parameter. Then of course we did restructures and close down the most unprofitable sites like Kvarnsveden and Veitsiluoto. They were also the sites that consumed a lot of electricity and energy, so they would've been in a quite difficult position and wood of course. So they would've been in a much, much more difficult position if we would have still had them. And of course divesting the paper assets to other owners, we make sure that we find good homes for them with other players out there that will continue to run the business. But we also take away risk of a quality and a segment that has historically been very volatile having quite difficult and poor performance in difficult times. If we look at kind of strengthening the position in our growth segments are Skoghall, Imatra, we have made continuous investments in our â in Oulu now, in our renewable packaging. So we make sure that the profitability and cost position of the sites that we have is leading cost positions; and of course in downturns and so on you benefit from that. In wood products, we have also made sure to cut down costs where necessary, but also invest on sites with CLT factories that can kind of handle the volatility in wood products. And last but not least cost position; if you remember we did a cost or a profit protection program of 400 and something million Euro â â¬420 million that we started 2019 with, and we followed through on that the coming year and implemented on that. So our general cost structure is, is much more competitive and in shape. But this is of course something that we always adapt. When circumstances change we need to make more decisions and look at what more possibilities we have. Hello. Thank you very much. First question is on variable cost, Annica, you said that they remain high, should we understand that as Q1 variable costs going up compared to the fourth quarter? And if you, in that context also could breakdown for us the variable â the various variable costs, how wood is progressing, how energy is progressing, how chemicals cost are progressing, logistics et cetera, Q1 on Q4 please? Yes, obviously energy cost is one of the key drivers here, like I said earlier, and key also for the full year inflation. And in short-term obvious, I think itâs more, more around energy, energy and chemicals. And on the wood side, itâs a sort of mix mixture. So lock prices are more stabilizing, but on the park side, the [indiscernible] are, theyâre because of the, of course, steady demand for power, but also increasing need and use of the energy, wood as such. But I think for the full year outlook, the key thing is that how energy costs develop. And as you have seen, itâs very volatile out there and thatâs why itâs very difficult to keep very strict or sort of clear comment of the full year. But I think itâs very uncertain market in general. The visibility is of course more challenging and yes, well, as we all know also as market cools down also, of course, this will have an impact on other variable costs such as logistics or chemical costs and so on. But so far we have not seen that coming through. Right. Thatâs very helpful, thank you. And with chemicals, I mean, thatâs been a cost driver now for a few quarters in the industry, is that peaking out? Is it starting to come down or where are we in the chemicals cost cycle? It depends a bit on what chemical it is, but in general, I would say that that is very much linked also to energy prices as you, in many cases, they use natural gas as one of the input materials for the recipes, and that is driving the chemical cost development as such. In some cases it easing, but in some cases going up. So it is a bit mixed bit out there. Logistics are getting better now. The constraints are easing compared to how they earlier last year have actually last couple years, but, so that looks somewhat easier, but obviously fuel costs are effective by energy cost, how oil developed. So these surprises develop, theyâre actually going up currently as you on the market. Oh, thatâs very helpful. Thanks for clarifying. And then just jumping back to the discussion on Beihai, Beihai has been a growth generator, not least for liquid packaging board, which is part of the product mix on that paperboard machine. How do you see your liquid packaging board market strategy going forward? Are you able to transfer some volumes within your system to mills that you intend to keep? Or should we expect very limited growth for you in liquid board on your existing? Or your remaining platform in the couple years ahead? Very good question. As you know, Oulu second step now is focusing on consumer board grades, which are primarily within food and beverage and liquid. This of course is an investment that we are doing in combination with the other consumer board sites. So, we will have the possibility to do products and transfer mixes between the sites of Imatra, Skoghall Fors [ph], and Oulu and optimize the system. And all of these sites are leading cost positioned sites with good availability of fiber and very good energy solutions ports and so on. So, we see that we have the opportunity with the Oulu investment to optimize the consumer board sector and continue to drive growth. Great. Many, many thanks for that. And then just finally on the integration of the young what kind of contribution should we expect in the first quarter? If you could say something about the Youngâs performance on the full year 2022 or even better, the, the fourth quarter and also how that will come into your P&L, whatâs the, the split between divisions? Yes, thanks. We tell you, all you have to remember, we just took it over early January, so we are at early stages of integration and that is going well as planned and integration streams are there in place and in that sense, in full speed going ahead there. I think we are running out of time now. We actually repeat of all time compared to schedule. So thank you for the good questions and I know there might be more questions that are unanswered still, but donât hesitate to contact our IR and Iâm available there to get some more help and answers. Thank you all.
EarningCall_912	Thank you very much, and good morning, everyone. Welcome to Tele2's presentation of the results for the fourth quarter and the full year of '22. So with me here in Kista today, I have Charlotte Hansson, our Group CFO; Hendrik De Groot, our Chief Commercial Officer; and Stefan Trampus, our Head of B2B. So let's turn to Slide 2. So when summarizing 2022, there are some points I want to highlight. First, our strong performance during a year that turned out to be very challenging. Despite a lot of unexpected events, we have delivered on our 2022 guidance set out a year ago with a steady growth in revenues and results. Excluding increased energy costs, underlying EBITDAaL grew by 4.9%. The turnaround of B2B, which proves our ability and strength to make necessary changes. We have taken important steps to strengthen our TV and B2C operation with a new entertainment offering. Our Baltic operations have shown a remarkable ability to adapt to new external conditions and continued to deliver strong and stable results. We have also secured important spectrum in the Baltics that will enable us to grow our business for many years to come. And at the same time, we have managed to continue our internal efficiency measures in line with the business transformation program and realized savings of over EUR 800 million so far. We have also completed the sale of T-Mobile Netherlands and have made great progress within sustainability. Among other things by having our science-based targets approved as the first company in Sweden. Our Board of Directors proposes an ordinary dividend of SEK 6.80 per share, an increase from SEK 6.75 last year to be paid in 2 tranches in May and October. And let's turn to Page 3. When looking at the development during the fourth quarter, I'm very pleased to see that we are able to continue delivering profitable growth despite the challenging environment. The strategy we have implemented is proving very helpful in navigating this new landscape that provides challenges to both businesses and society at large. During the fourth quarter, end-user service revenue grew by 3.2% on an organic basis, and it's great to see that we continue to make good progress in all our markets. Although we've seen a significant increase in energy prices and inflation during 2022, we have been able to convert the strong end-user service revenue growth, coupled with the execution of the business transformation program through an underlying EBITDAaL growth of 3% for the group. And adjusted again for the increase in energy costs, approximately SEK 35 million higher in the fourth quarter. The growth in underlying EBITDAaL would have been around 4.3% in the quarter. Sweden B2C saw solid growth in net intake and end-user service revenues in core services, offsetting the decline in legacy services. Viaplay is now implemented for all eligible customers and is positively contributing to our digital TV business. In Sweden B2B, we saw continued commercial momentum with solid end-user service revenue growth and strong net intake of mobile postpaid across segments. In the Baltics, we experienced yet another quarter of good performance, both in terms of top line and bottom line growth. We are also focused on rolling out 5G services as quickly as possible across our Baltic markets. So let's then move to the Swedish Consumer segment. Mobile postpaid saw a continued strong net intake in the quarter, driven by FMC bundling and Comviq, while ASPU declined slightly. However, the commercial activities in the market have been more competitive lately and showing signs of slowing customer demand. In fixed broadband, we see continued good growth driven by volume and a stable ASPU development. In the digital TV, cable and fiber business, we are seeing positive impact from the migration of TV customers to the new entertainment packages that include Viaplay. Most important, the new package has been very well received among our customers and even contributed to an increased customer base during the quarter, breaking the downward trend from earlier quarters. We've also seen a new TV proposition contributing to the overall performance, which shows a 5% increase in ASPU during the quarter. Mobile end-user service revenue grew by 1% in the quarter, driven by the larger postpaid customer base. Also in fixed broadband, end-user service revenues increased by 1%. Thanks to the growing customer base. Total end-user service revenue for digital TV was flat in the quarter as the 3% growth in Digital TV was offset by a decline in the legacy DTT TV service. And then let's move on to B2B. Commercial momentum continued to be strong in the quarter, with both extended and new customer contracts, including the recently announced agreements with fuel company OKQ8 and food retailer Axfood. Mobile net intake amounted to 26,000 RGUs driven by improvements across segments and notably, in the large segment. Mobile ASPU remained stable. End-user service revenue increased by 6% in the quarter, including a positive one-off deal of EUR [indiscernible] million related to Solutions business. Adjusted for this, end-user service revenue grew by 4%. And then looking at the combined Swedish operations, end-user service revenue increased 1%, driven by a solid performance within B2B. International roaming had a positive year-on-year effect of SEK 16 million. Underlying EBITDAaL remained at the same level as last year as higher end-user service revenues and positive effects from the Business Transformation Program were consumed primarily by higher cost for energy, external handset financing and content. Cash conversion remained strong at 66% in the quarter. And then move to the Baltics. Across our Baltic markets, the number of mobile postpaid customers continue to increase, whereas number of prepaid customers fell in line with a normal fourth quarter seasonality. We have continued to see organic ASPU growth across markets during the quarter. The focus has been on price adjustments, combined with data monetizing through our more-for-more strategy. As for the financials, ASPU volume growth in mobile postpaid led to organic end-user service revenue growth across markets in the quarter, resulting in 11% growth for the Baltics as a whole. Despite soaring energy cost and inflation, we have so far managed to adapt to the new environment by adjusting prices and executing the more-for-more strategy. In the fourth quarter, underlying EBITDAaL grew by 16%. We continue to see a high cash conversion for the Baltics due to the strong performance and relatively low CapEx levels so far for the ongoing 5G rollouts. Thank you, Kjell, and good morning, everyone. Please turn to Page 13 in the presentation. During the fourth quarter, we saw a 3% organic growth in underlying EBITDAaL. This was mainly driven by high end user service revenue in all countries and positive effects from our Business Transformation Program in Sweden. At the same time, we have continued to see pressure on the margins due to the sharp increase in energy prices and rising inflation. Associated companies and JVs shows the decrease compared to Q4 2021 as this no longer includes results from the divested T-Mobile Netherlands. Net interest and other financial items increased to minus SEK 181 million due to higher interest costs. And net profit discontinued operations includes a release of a tax claim of SEK 363 million. In December, the administrative Court of Appeal ruled in favor of Tele2 and accepted our claim for a deduction of exchange losses related to our former operations in Kazakhstan. So let's continue with the cash flow on Slide 14. CapEx paid was higher in Q4 2022 compared to last year, mainly due to higher network investments. Changes in working capital was negative in the fourth quarter as well as for the full year. And to follow up on what Kjell said earlier, I would say this is mainly explained by 3 items impacting the full year. Firstly, we temporarily suspended part of our external handset financing arrangements as we have renegotiated agreements with our third-party providers. Secondly, we saw inventory increase related to network equipment primarily linked to the 5G rollout. And lastly, we also saw our handset inventory rise from unusually low levels because of the supply chain challenges we were facing end of 2021. An improving working capital is one of our top priorities in 2023. However, this is not going to be a quick fix, and we expect to take a couple of quarters to come back to more normalized levels. Taxes paid increased in Q4. This is mainly explained by a large repayment of preliminary tax in Q4 2021. And equity free cash flow from continuing operations amounted to SEK 3.5 billion in 2022, corresponding to SEK 5 per share, which were lower than in the previous years. The main explanation for that is the negative development in working capital. However, this is, as I mentioned, something we expect to gradually improve during the coming quarters. So please move to Slide 15 to go through the capital structure. At the end of December 2022, economic net debt amounted to SEK 25.6 billion. During fourth quarter, the second tranche of the ordinary dividend of SEK 2.3 billion was paid. And in total, we have distributed some SEK 13.6 billion in cash dividends to our shareholders during 2022. And leverage was at 2.5x at the end of December, which is in the low end of our target range of 2.5 to 3x. And in December, we issued a SEK 1 billion 3-year bond. We also signed a EUR 700 million sustainability-linked revolving credit facility with a tenor of 5 years and those arrangements were signed in attractive conditions. And please turn to Slide 16, where we'll update you on the progress of the Business Transformation Program. During the quarter, we continue to execute on the Business Transformation Program and made improvements primarily within our combined IT and tech organization, both in terms of network optimization and savings in external spend. This led to an annual run rate savings of SEK 825 million by the end of 2022. The P&L effect of this was SEK 195 million in the quarter, with a net effect of SEK 80 million compared to Q2 -- Q4 2021. Thank you, Charlotte. And then let's move to the Page 17 for our guidance. So our guidance for 2023 is to continue to grow end-user service revenue by a low single-digit number alongside a similar growth rate for underlying EBITDAaL as inflation will weigh temporarily on results. Energy is part of inflation. And while it had a significant impact in 2022, the current benign price levels would say -- would show a more limited headwind in '23. However, we all know that energy prices could change significantly. In 2023, CapEx is expected to remain in the upper end of our midterm target range of SEK 2.8 billion to SEK 3.3 billion. As the rollout of 5G is accelerating alongside the upgrade of the fixed network in Sweden with Remote PHY. We also reiterate our midterm guidance with low single-digit end-user service revenue growth mid-single-digit underlying EBITDAaL growth and CapEx in the range of $2.8 billion to SEK 3.3 billion. So please turn to Page 18 for a summary. To summarize last year, I'm happy to conclude that we delivered on our 2022 guidance. With the dividends paid last year in total SEK 13.6 billion we were able to significantly remunerate our shareholders in accordance with our financial policy. For 2023, our Board proposes another SEK 4.7 billion shall be paid out to our shareholders. On the back of this, I want to reiterate what I said at the time for the Q3 report that we are prudent in the way we look at our balance sheet as we've done historically and make sure that we keep our financial strength going forward while keeping our current leverage and dividend policy in the long term. In Sweden, we continue to roll out 5G at a high pace and are committed to our goal of covering 90% of the population by the end of 2023. Also in the Baltic states, we are now rolling out 5G in all 3 countries after securing important spectrum last year. Similarly, on the fixed side, we continue to roll out Remote PHY devices in Sweden in order to gain the benefits from the investments as soon as possible. Both projects are key to us in order to increase customer satisfaction and being able to provide new services, which will support our more-for-more strategy for years to come. In 2023, we have an important spectrum auction coming up in Sweden. With regards to that, I want to highlight Tele2's built-in network efficiency that will be further capitalized as net for mobility will become the only sharing vehicle in the market when a current 3G network is closed out. We will also continue executing on the Business Transformation Program to deliver the SEk 1 billion of savings by mid-2023. However, the ending of the program doesn't mean an ending of our cost focus. That for sure will continue. When we integrate the full Comviq business to our new common IT platform by the end of 2023, we will have a simplified IT structure, allowing us to develop more of our resources to giving our customers a digitalized service experience with even more focus on the market as we spend less time fixing legacy issues. In Sweden Consumer, we will continue to balance value and volume in order to build sustainable growth while gearing up our capabilities to address the 1.3 million non-FMC households. We will also continue to build our premium brand in order to increase customer satisfaction that we can monetize through reduced churn or price adjustments on the back of product improvements. The improved entertainment offering, including Viaplay is a key part of this strategy to regain our position in strengthening our customer offering. In Sweden business, we have seen an uplift in numbers since the new strategy was launched in 2021. The steady development during 2022 is encouraging, and we see further potential to develop and grow our business. We have recently secured a number of new and renewed customer contracts, further meriting our strong offer within networks and security. It all comes down to a focused work that aims to support our customers long term. Although fluctuations should always be expected, we are now witnessing a very important and sustainable shift within B2B. In the Baltics, we experienced more pressure on the cost side than in Sweden due to the exceptional high electricity prices as well as general inflation rates that have actually been well over 20% in recent months. So far, we've been able to mitigate this from the incredible top line growth, which filters down to underlying EBITDAaL. Going forward, we will build on this momentum while we are conducting nationwide rollout of the 5G network. Our leading role in sustainability is something we can capitalize on, as this is increasingly important to our customers. As such, we see potential to further develop circular economy solutions to meet customer demands. We are now looking at the year to come and beyond. I have expressed many times before that Tele2 is a growth company at heart, and we continue to show this quarter after quarter as we execute on our strategy to reach our guidance for 2023 and in the midterm. [Operator Instructions] Now we're going to take your first question. And the question comes from the line of Andrew Lee from Goldman Sachs. So I have 2 questions. One on the Swedish Consumer outlook. And then secondly, on -- just to dig a bit more into your working capital outflow or working capital expectations for 2023. On Sweden, you mentioned, Kjell, a slowdown in customer demand and increasing competitive intensity through the fourth quarter. That's the odds with Telia management commentary that suggests there hasn't been a major change. So I just wondered if you could give us a bit more color on your thoughts and what scope you see for higher price rises in 2023 than in 2022 to offset the inflation headwinds that you laid out. So that's on Swedish Consumer. And then secondly, on the working capital outflows we saw in 2022 in the fourth quarter, thanks for laying out the drivers of that. I just wanted to get a bit more color on what exactly should we be expecting in 2023 when you said you recovered to normalized levels. Does that mean stable working capital for 2023 and no headwinds or a reversal of some of the effects and therefore, some tailwinds? Just a bit more of an understanding about direction of travel for working capital would be great. So working capital is the result of very deliberate choices, almost 1 year ago to make sure that we could roll off 5G and sure that Stefan would have enough routers and other equipment so that he could pursue the growth that he has been delivering in B2B. And of course, we make sure we have handsets for our business. We came into 2022, where I wouldn't use to word completely empty shelves, but we have the very low inventories. And then we needed to make sure with the supply chain disruptions that we actually could support our business. And that has played out very well. We have had a good development of 5G rollout, and we've been able to sustain strong deliveries in the B2B. So what can you expect going forward? Well, as interest rates started going up, we had to renegotiate our relationship with the factoring that we typically do on selling handsets. So we took for a limited amount of time, some of these handsets on our own balance sheet. We are not going to take more of this on our balance sheet going forward. And all the decisions were made actually back in November. So how we're going to deal with this? We have a good relationship with our factoring partner. So that's going to work well. So what you have seen in terms of handsets will then gradually be paid back as the customers pay back the financing over the next, say, 2.5 years or so. So that's happening by itself. Then when it comes to the -- build-out of the 5G network. As you know, we have probably the most efficient network structure in Europe, where we are building the network together with Telenor. And those who have partners in 3G, Telia with us, and Tre with Telenor in the past, will no longer have those benefits when 3G gets shut down. So the vehicle we have with Net4Mobility is unique and a great thing to have. And we need to accelerate the invoicing procedures through there. But we have already come to a level of working capital that now with more predictability on supplies, we can start optimizing working capital within Net4Mobility. We have big volume, but now it's time for that optimizing. And the third thing is that Stefan, sitting next to me here, he's going to be selling a lot of the goods that he took into storage last year because of its good growth and gradually we will wind down some of what has come in, in the bulk orders that we placed last year. Just as an information point, some orders that were made in March we were even told in October -- in September, October that they wouldn't be delivered until '23. And then all of a sudden, they start coming in October, November. So it is basically repercussions of a 2022 that was hard for everyone to predict. But you shouldn't expect to see that we will unwind gradually the increase that we had in working capital through 2023 for the improved end of year showing. Kjell, that was really helpful. Can I just follow up just before we move on to the Swedish Consumer. Just -- so it sounds like an unwind. So on a net basis, we should expect a kind of positive working capital move in 2023. That is clearly the ambition and the target that we set in front of ourselves. And I can say to you, like I said in an interview this morning. I would have done exactly the same thing again if I had the same choice, knowing what I know today, because it was really the right thing to do to secure that we can grow our business and build 5G and support Stefan's efforts to drive growth. So I'm actually quite happy with the decision, but I understand and it's fair that we should defend it to you why does it play out like this for that specific year. Andrew, on your question, when we sort of look at the market, we, of course, look at a number of factors, right? So we take into account the consumer sentiment from the external reporting, which we've seen quite a slowdown in the consumer confidence index. We look at the market factors -- and of course, we look at our customer touch points and sort of the feedback we're getting in the sales channels, but also through our customer operations and our interactions and any sort of customer service we're doing. And I think if you sort of take all that together, we are seeing, of course, that the inflationary pressures, energy prices and general inflationary pressures on consumer pricing, is affecting the consumer sentiment. And the way we're seeing it in our business is that markedly on device sales and handsets, we have seen a more careful customer and also a slowdown in the fourth quarter. As you can see our numbers, we were 6% of lower on equipment revenues. Now that is, of course, also first to say very strong quarter we had last year, but we still see an overall slowdown. And what I would also want to mark there is that we're seeing basically also a more sensitive customer to promotions. So customers are easier switching. I think there's been on a comparable basis, a higher number of porting in the market. And of course, it also drives a little bit of pressure on us as customers are of course, hunting for deals. In our numbers, we still feel and see that, that mainly pertains to the mobile side. So on the fixed side, it's actually been quite stable, both on broadband and TV, both on sales and on churn. So we had very low churn numbers. But on the mobile side, we've seen a bit more market movement. Now how does that relate to our overall outlook for going into '23? We believe so far, the market will still be very sensitive to -- and the consumer to pricing. At the same time, we will move to offset some of the cost increases we've been running into our business into the market. And in Q4 and in 2022 full year, you have -- you'll recall that we've mainly focused our portfolio innovations on entertainment, and that also came with quite a bit of price adjustment on the entertainment side, but we've been lowered in doing price adjustments on the core connectivity side in mobile and broadband. But we will, of course, take that into 2022 -- 2023 as we move forward now. Just from my side on the guidance. You've guided, of course, you reiterated the midterm guidance of medium mid-single-digit EBITDA growth, but this year it's low. Could you just spell out what you're assuming in terms of energy hedging, energy pricing? Just so we can get a sense of the headwind that you're assuming for that? I'm sure in your guidance, you've assumed some sort of conservative element given what we saw in 2022, you sort of hinted as much. And then just on the spectrum side, it's probably hard for you to comment too much ahead of the spectrum auction you would definitely seem to be signaling. But given it's mostly renewal, maybe you can just give some views in terms of if you're happy with your current spectrum portfolio. You don't have a burning need to acquire a lot more or get rid of a lot less. Any thoughts in terms of your high-level thinking about spectrum given the Net4Mobility structure would be helpful. So on the guidance, the way we have chosen to go about this is not to talk so much about energy numbers as such because, quite frankly, we don't have any better crystal ball or understanding of energy prices than anyone else. We do have some element of hedging but I'm very glad that we didn't do too much hedging in September, October last year to lock in the high prices that were there. So the way we see it now, if trends continue like you have done in the beginning of the year and it's very early days, then we don't see energy as a massive impact on our business. Of course, if we end back with the September, October prices again, it will play out. And as you, of course, remember, for 2022, it amounted to an extra bill of 1.5 percentage point at EBITDA level. So we have made sensitivity scenarios for modeling our business for the next year or 2 with energy. And that is, of course, part of the prudent approach to dividends and other things. So what I can say to you is that we expect to deliver low single-digit EBITDA growth, irrespective of what happens to energy prices. Of course, if they are benign, like we see in January, it will be a nicer low single-digit number than the case would be, if they are at September level, where it be a lower -- low single-digit number. But it's not only about energy. There are multiple other things that are coming into. I -- in an interview this morning, we talked about the wage discussions for this year, where will they land. And we see the equipment cost for -- for example, Stefan selling his routers to our customers because of the Swedish krona going down and general inflation. So these things have gone up and we are basically absorbing all of these things, including energy in 2023, but we are absorbing them to a level that doesn't take us quite to the mid-single digit. Our ambition is to get back there again in the medium term, and we're going to work very hard to make that happen. So I'm afraid, during this year, we have to live with that. We were not able -- we are not able to say in more detail where we will end up because we don't know the energy component. And it's been very, very volatile. And on spectrum, I think you're right. It's not too easy for me to speak about the spectrum. I'm very happy that we bought good spectrum in the Baltics at what I would call, low prices. And that has secured our business for many years ahead. In Sweden, we have a very good spectrum portfolio. And we will just have to go into that auction with our partner with a view to secure the spectrum that we think is the right for developing our business forward. But I think whatever I say beyond that, we'll probably not at this point to say. I've got just a follow-up in terms of the B2C outlook in Sweden. So just in terms of the unlimited intake. Is it still the case that you're seeing more than 50% of gross adds coming in on the SEK 399 tariffs that you were highlighting last quarter? And then also in terms of price increases, specifically, have you seen [ 2020 ] you didn't do anything on the fixed side because of the -- on the fixed broadband side, the specifics because of the TV repricing. So is this something that will be your focus to help in early 2023. And then a follow-up in terms of the -- or just a question rather in terms of free cash flow going into 2023. So CapEx I think you previously said would be somewhere around the midpoint of the guidance, perhaps even at the low end of the guidance is actually at the very high end for this year. And then in cash terms, it's quite above the high end of the guidance. So I was wondering in terms of cash impact of CapEx and just guidance in general for '23 and '24 do you expect some kind of easing relative to '22? And then specifically, also in terms of the factoring, I think the other 2 components that you mentioned around inventory should be some almost mechanical unwind. But in terms of the factoring, can you just explain a bit better what you're doing there and the impact that you see specifically from this account and if there's free cash flow, therefore, benefits from both CapEx and working capital, is it rational to expect an extraordinary dividend sometime around maybe 2Q results. I think I'll start with the things around free cash flow and factoring, and then Hendrik will take B2C. So CapEx 2022. We said throughout the year that we were kind of hoping to come in the upper end because we really want to build 5G and Remote PHY. And I'm glad to see that we managed to keep up the pace towards the end so that we came somewhere between the mid and the higher end of the CapEx guidance. That is actually a good thing. And in 2023, we expect to be in the upper end of it because this is going to be the year that we're building 5G to most Swedish Consumers and businesses. So that's going to be a big push. So it will be in the upper range. And then without guiding on this, I would say that in '24, at some point, we will come to the point on the curve where the 5G momentum will gradually be taken down. I don't want to say at what point of time in '24, I think it's too early to say that, but it will be in '24. And then how much Remote PHY we build is actually something we can, to some extent, throttle. We are very happy that we've been able to triple the speed of it because now it works so much better than it did 18 months ago. So now it's in our hands to choose the speed that we want to have. So '23, we're going to continue building our business and then, of course, we start optimizing this. And in terms of the free cash flow, of course, it's a component of multiple things. First of all, is the residual of revenues going through EBITDA to EBITDA minus CapEx for operating cash flow, which is growing year-over-year, also in '22 and that's the ambition to do going forward. So the operating cash flow is growing. That's what we're going to live from in the long term. Our working capital increased in '22, as you correctly pointed out, that's going to be worked on in '23 gradually to take it down. And that brings us to the factoring that you bring up. We stopped doing factoring for a short period of time while we renegotiated. Took it on our balance sheet. And clearly, those customers, let's say, they bought a handset with a 3-year financing from us in November last year. Then throughout '23, '24 and some -- at some point in '25, they will have repaid that. So it comes back naturally as they pay month-over-month back to us. So this -- all these decisions have been made. It's just a matter of the time and the repayment for that one, it will come back. And we're talking almost 1/3 of the working capital increase relating to that specific component. So that is, of course, going to be helpful. I hope I answered all the parts with you because you had many things in there. If not, let me know, after Hendrik speaks on B2C. Thanks, Kjell. Yes. Andrew, let me just address your question around the 5G portfolio in context of the mobile performance that we're seeing in the fourth quarter. So on revenues, you see a growth of 1%. And you've also noted in the commentary that we had a one-off SEK 10 million correction. This is an underlying netting off of premium voice revenues that typically occur in the December period of last year, we only netted off in January. So in that sense, the December '21 or Q4 '21 numbers are SEK 10 million higher than they normally should be. And against that, the mobile revenues grew by 1.7% versus 1%. And if you translate that to ASPU, we've seen minus 2% in the presentation, which if you go into the details, the numbers is minus 1.5%. And if you take the netting off out of that, then our ASPU has declined by 0.7% or SEK 1.5. And if you then sort of go into that, that is mainly due to movements on the variable side, not on the core subscription side. So there have been a better roaming and better add-on data, but we've had to add-on also some offsets on variable revenues on voice and content from lower MBB and also some allocations to our hardware bottom line that sort of bringing the net debt minus 0.7% on the ASPU. And in that context, if you look at the 5G portfolio that we've introduced in August and as we said, we've only introduced it to the market. We have not done any back book pricing yet. So the state of play at the moment is, as I've been also speaking in earlier quarterly results call is that the portfolio is doing very well, that I said that 50% plus of the intake is on to the higher end of the portfolio. So into the unlimited part of the portfolio, and that is still the case as we speak today throughout the fourth quarter. What we are seeing -- of course, at the same time, is a little bit of an orientation also towards the lower prices and the limited tier. So it is still 50-plus percent, but there is a couple of percentage points lower than, for example, it was in the third quarter. The new portfolio is now sub-20% of our total base. So that's just for you also as an orientation. As we move into 2023. And as part of our price adjustments, we will, of course, start to look at the back book pricing and moving customers on to -- fully on to the new 5G portfolio. We are also looking at areas around our fixed broadband that we basically have been not pricing up that much in 2022. A part of that also is that we have seen a lot of the access pricing in the Swedish market to go up quite substantially. So if nothing else, we just need to onward price some of this into the market. And then Kjell was addressing the factoring side. And as we move into 2023, we do -- we will also offset or at least ask customers to contribute to some of the financing costs. So as we move into the next month, we will introduce a handset financing charge on all of our device sales for both of our brands into the market. No, Kjell. Yes, exactly I guess follow-up on the free cash flow that you were essentially translating if it improves this year, then potentially translating into an extraordinary about something you're targeting this year. And then maybe a follow-up in terms of the commercial aspect just I think -- I guess that's many questions but the bottom line would be that, do you expect consumer service revenues and mobile in Sweden to therefore, kind of improve in terms of the trends from here on out. Well, I would say, of course, we are looking at doing the necessary pricing adjustments into the market and introducing the handset financing figures that you said. At the same time, we have a very sensitive market. We have still a subdued consumer sentiment. And we do hope and believe that also in terms of that comparatively, we will get into a more benign sort of promotional market again. But yes, given that context, we do believe that we can, of course, put some of the growth back into the market on the mobile side. And then to answer about the potential for a one-off dividend. I think there are a couple of ways to look at this. If you take pure math and the spreadsheet and the communicated dividend policy, and set a midpoint in it. Clearly, there is the capacity in the balance sheet to do an extraordinary dividend if that was all the determining factor. What we have said consistently over the last quarter is that we want to be a little bit extra prudent going through this period of massive turmoil, keeping our powder a little bit dry. There is also a spectrum auction coming up in Sweden that is going to cost some money. So we would rather get a couple of things sorted out before we entertain that discussion. But the balance sheet is quite strong, as you can see from our leverage. And we just are being a little bit cautious going through a period of historical turmoil in Europe. Yes, a couple of more follow-up questions. So first of all, despite cost savings, Sweden delivers flat EBITDA growth and we're coming towards the end of the SEK 1 billion cost saving program. So can you talk a little bit on how you're going to get Sweden back to EBITDA growth if it's more pricing and more cost savings, et cetera. And then just on pricing. Telia just announced back book price increases from both mobile and fixed broadband. And now you talked about also doing back book price increases. Are that -- are those planned for already first half in order to get growth back up? I will probably invite both Charlotte and Hendrik here. But I think it's clear that the whole world around us now experiences price increases. In some areas, dramatic. We're talking about what people pay for -- well, interest is a kind of a cost for their loans. We are seeing pricing for food and these kinds of goods going up, energy prices we've all seen. So I think it's completely natural that there will be some price increases in this industry, just like in the rest of society. And you can expect that in this business, we will be making some price increases in a way that fits to the market realities, but it shouldn't be a surprise to anyone. It's completely natural at this stage that, that will happen. Yes, I can do that. And like you mentioned, we are still working on our SEK 1 billion in savings. And so we are still fully committed to that. But then also, I have to mention here before that, it doesn't mean that we're not going to look at cost going forward. Of course, we will always make sure that we have an efficiency in our business. And also when we roll out these -- or come further in our digital transformation that will also give us a new possibility without necessarily setting a cost-cutting program. But that is -- what we say here is that, it's part of our DNA to actually be very cost aware and working on efficiencies all the time. So I'm not going to really point out any things in particular that they are -- we see there are many possibilities, of course, making more things, more digitalized as well. Can add a little bit too. You saw last -- 2 years ago, we put together Tele2 and Com Hem into one brand. Last year, we put them together as one IT infrastructure. This year, Tele2, Com Hem and Comviq will be one IT infrastructure. We will still keep the Tele2 brand. We still keep the Comviq brand, but they will all be on the same platform by the end of this year, which simplifies our life, makes it easier for us to work with the market and less with fixing the legacy. That is very, very important for us because the industry spends way too much money on physical distribution, on third-party retail, and relatively long targeted advertising. So that's where the buckets are for savings. We can, of course, also work on our churn. We still have a potential to improve there. So when we are finished with the business transformation program, we're not going to come with a program that has a specific so-and-so many kroner targets in it. We're going to have a value creation program and then as a consequence of this improvement, savings will come. So you will not hear me saying that x amount of people are going to leave Tele2. That is not what we're going to say. We're going to say, we're going to improve this, and this area. We're going to go more digital, and we're going to set KPIs and targets for it. And that's going to deliver the EBITDA going forward. That's sustainable revenues over time. And then just on pricing, Stefan, the price adjustments for us are front loaded in the year. And actually, they are already in execution. Of course, they don't go all in one, but they will go, as I said, front loaded in that sense, both for mobile and our fixed broadband. And just to remind you from the 1st of February, so that's tomorrow, we'll be introducing the handset fee into the market as well. Question in line with many of the others on the growth drivers for next year. You talked about pricing and you talked about the sentiment in the market. So just curious how you manage your customers so that to prevent them from as you stated, orient themselves down to the lower end of the portfolio. What tools do you have to make sure that they enter and stay also in the mid- to upper end of the portfolio? And also, if you can talk a little bit about what you see in terms of market behavior. Yes. I think I'm going pass this in a second -- your question is a little bit tilted towards B2C and Hendrik can, of course, answer that very, very well. But it's not only a B2C question. There is also the B2B element. And you can see that the progress we do in B2B is based on close -- more intimacy to customers. We understand customers more. One of our key values is to be insight-driven. And that means taking our customers seriously, listening to them and help them conducting their business in an efficient way. And that actually means a lot because our business, our delivery to our customers in B2B is usually a fraction of the cost components of their value chain. But it's an area that is incredibly important for them to get right. So when you come there with a solution, rather than just trying to push a volume on to them, that becomes a very strong relationship that we can build on and build more business, sell more products. That's super important in that area. I will speak a little bit to the Baltics where we have a very strong mobile-centric offering and where the business is thriving, and we are able to execute on a regular basis on compensating for inflationary tendencies. So hats off for a great performance there. And of course, in the Swedish B2C, which you are alluding to, I will just briefly say that we do see some of those things that you would expect to see in 2010 happening from time to time. And that's the nature of a market with quite a lot of competition. But we don't think it is the right solution to deliver a 5G product with the same kind of go-to-market as we did in the 3 and 4G world. We have gone to the market with a pricing structure that reflects the fact that 5G is a broadband product. It's not a product that stems out of the voice world with a bundle. It is something where you don't count the gigabytes, you look at the speed, the quality of service, and that's the way it should be. And I think the market will gravitate towards that over time. Over the fourth quarter and in particular, also this year, we've seen quite extensive promotional periods, and I think that is part and parcel of course, of the fourth quarter in the Swedish market for sure. We're all trying to offset things in the market and create value in the market at the same time, of course, there's also this value and volume trade off constantly happening. I do believe we all have a shared interest in the market to move into this year and really drive the market and confidently up across -- in particular, across our campaigns and promotionally the promotional side. To your question, Andreas, the -- for us, the core of what we're doing in our portfolio is basically I would say, is value loading. Value loading sits at the core, of course, as Kjell was saying, our new 5G mobile portfolio because to provide the unlimited proposition right, to a wider part of the market as we have been doing and introducing the speed tiering. We still very strongly believe that, that is the way the market will go. And I think I'm very happy to see that all of our competition has also moved in that way, although I think there's still a lot of potential for them to explore the speed tiering to its fullest extent. And we see that the market wants to move there. We've seen that our portfolio and the tier mix has substantially changed. Even though, as I said just before, there's, of course, a balancing versus affordability at the same time happening. The value loading is key. And for us also, what's also key to retain customers is that all the work we've been doing on the quality side and the innovation side. What I said, what we've done on the entertainment side with Viaplay on broadband with the quality programs we've been running, we've been hitting all-time lows on churn, both -- on both our fixed side of portfolios. And we are still working quite a bit, but a little bit under the radar on all of the convergence. And convergence to us, that's, I think, the landing spot for us, ultimately, that we can build value load in terms of a multiplay portfolio for consumers that they really want to hold on to. We've done a lot of the cross-selling introduction, but as Kjell was saying, we still need to complete our IT transformation to really be introducing full multiplay as part of our proposition set later on this year into the market. But that will sort of give us some good protection to go along with the price adjustments we're moving forward with. It was a -- couple, please. One on Remote PHY, firstly Kjell. Could you give us an update, please, on the number of homes that you've upgraded on Remote PHY so far and how many are to go? And I think also you mentioned in your comments, you were seeing increased access charges. So is it possible to give us an idea of the cost -- the incremental cost as you move from the HFC to the fiber access network, please? And then the second one was on a more sort of Hendrik's consumer stuff, but it sounds like Telia's in the right mess in terms of which wafer coverage and just TV overall. Do you see any opportunities there? I mean, I think you said in the past, you didn't really see much of an impact from Telia bringing in new wafer coverage in the first place. But is there anything there you think you can exploit or you're watching out for. No. It was just really to say, I think you'd said in the past Hendrik that you hadn't really benefited -- hadn't really been impacted a great deal from Telia taking on the new wafer rights in the first place. So just to check that -- or if you've seen -- or any other opportunities really because it seems like they're in a little bit of flux in terms of what to do with our TV products. Yes. Should I just start with it? So on that last bit, as we said before that we have not seen a huge impact in terms of customer losses or whatever. And I do believe that with the rights coming up this year for -- to the market, let's see where they end up going. Ultimately, what we see is that as part of the core portfolio, customers are choosing a bouquet of entertainment service that they really just want to keep holding on to. And of course, there are -- is a big segment growing up that is only streaming oriented. But I think for us, still a big part of the market is what I call this hybrid segment, where people do like linear. They like their linear on any device in combination with streaming movies and series and live sports. And that's, of course, one of the key reasons for us to choose Viaplay, right, because we have a very good combination with live sports, that is absolutely a customer attraction factor. Now -- and what you don't have Champions League as an element of that. I think we've -- that is not good enough to really draw the crowds at least not as we have seen it so far. And I guess that will be somehow also Telia's own experience, I would guess. You also had sort of questions on Remote PHY, right? So we have been rolling out Remote PHY now to over 150,000 households. So we still have a bit to go. This is clearly a part of a program that is, as Kjell said, part of our core rollout and acceleration also for this year. And what it basically gives us, as we've been saying, it gives us a direct fiber connection to the basement of the house. And ultimately, it helps us in cost savings, right, from the -- on the operational side as we don't have all the active equipment in the network that we typically have on the coax side. Exactly -- and of course, it allows us also to move to the higher speeds on a symmetrical level, not to forget. And that's clearly also part of a more-to-more strategy as we move with our broadband portfolio from 100 megabits more to 1 gig. And we've seen also this year already with the propositions we have in the market and the tier mix is shifting to the higher ends of the speed range. And there was also a component of increased access charges. -- which I don't have from the top of my head. I think we'll have to take that back by IR, so that we can answer correctly. And thank you for elaborating on the free cash flow and the working capital movements. Obviously, for the reasons you've discussed, the free cash flow falls way -- well short of covering the ordinary dividend for '22. The outlook for '23, Kjell, if I understand you correctly, whether you will cover the dividend by the -- through the free cash flow will depend to a high degree on your success on reverting the working capital trends and also where we come out on the spectrum. Is that correctly understood? And then Charlotte, just a quick question. I think you previously discussed your interest rate sensitivity. Could you give us an indication Charlotte on what we should assume for interest cost on a full year basis for this year? So we basically expect to cover the dividend from our operating cash flow. And then, of course, because you see our operating cash flow is increasing year-over-year as our EBITDA grows, and we stay within the range and maybe potentially in the medium term can adjust the CapEx maybe downwards a bit, which I'm not guiding at this stage. But as our EBITDA growth, our operating cash flow growth, it covers our dividend. And then, of course, we can optimize the working capital. And then you correctly point out, of course, that how much the spectrum will cost will, of course, impact the 2023 equity free cash flow number. Yes. And then talking about the interest cost, and I think we actually alluded to this before that a 1% increase of the interest rates would be approximately SEK 100 million, SEK 110 million or so. And of course, we don't know exactly what it's going to be at the end of the year, but we have -- the majority of that part is fixed rate somewhere between 60% and 70%. We have a fixed rate on that interest. Just one quick follow-up on the medium-term outlook on CapEx. And I understand that beyond 2023 and potential '24 as well with high investments, it's difficult to guide for you. But the question is mainly coming from Telia last week, for example, giving a bit more color on what to expect in the medium term after the high investments are over? Is there any way to split up maybe 5G CapEx or Remote PHY CapEx from the current envelope for the next year? Just to give us a little bit of an impression of how much is spent on those upgrade compared to the underlying run rate? Well, yes, I don't think we want to detail it completely out. But what I can tell you is since we all love to play around with single-digit, low, mid, high and all these things when they do guidance, that the Remote PHY is definitely a single-digit percentage of our CapEx, whereas the 5G is significantly higher. So once we get beyond the peak and our 5G that will start all other things being equal, to be helpful towards having less pressure on CapEx. Remote PHY is something that we, as Hendrik correctly pointed out, we do it both for the customer experience, but then also there are cost savings in this. So we get away from all of these no fit and the active equipment there. So there are 2 sides -- 2 positive sides to that point in a way. So we kind of like to do that. And then there are other CapEx components in here. Some of this is related to the work we do on fixing our legacy. We already have started optimizing that a bit in terms of external consultants. But for the 2 points that you brought up, Remote PHY is a much smaller component than the 5G. I have 2 questions, please. The first one is a follow-up on Maurice's question on the guidance. Can you please clarify what is the hedging you have as a percentage into 2023 and into 2024 as well, please? And can you let us know what is the assumption that you are building into the guidance for wage increases into 2023? And then specifically to Swedish EBITDA, you were mentioning that there was some content increases probably related to the Viaplay deal. Can you let us know as a percentage of the EBITDA, what was the drag in Q4? And what are your expectations into 2023 from content drag? So I don't think we should give you a number on the wage increase because that will be a little bit tricky since we are also -- it's going to have the internal negotiations that will be -- but I think you can follow the discussion that happens in Sweden. There has been an offer from employers at 2%, then there has been a demand request from employees for around 4.4 million and they're going to meet somewhere there within those -- that framework for sure. And I think they're going to sort it out, but it's going to take a bit of time. In terms of hedging, we are -- we have hedged quite a lot in Estonia up until the end of first quarter this year. We have limited hedging in the other countries in Latvia, we have a couple of hedges that we've done. But they are for just a part of the energy cost. In Sweden, we've had a policy of rolling hedges. So quite a bit is under hedging now, Charlotte, exactly where we are now, can you tell them? Yes. So we are exposed, but I think also there is a risk of trying to hedge everything, especially on high prices. So right now, we're okay with not being fully, going fully into the market last year, for sure. Okay. And a follow-up on the hedges. The rolling basis policy is a 3-year rolling, is it a 1-year rolling basis? Or is it more multiyear. No, it gradually increases as we go along. So it's the majority in the first quarter and then gradually increases. Sorry, decreases... If you look at our profile now, then actually all other things equal, based on where we are now, we would have energy costs start coming down for Sweden a bit in the second half of the year. But lots of caveats. I mean the world can change, all things can change. We've seen that in short term. But where we are now, given the combination of hedging and spots, we will see that this starts easing off a bit in the second half. So either way, it doesn't have a dramatic impact on the business where we are -- from where we are now. And then just briefly on your question about the content. And the content costs came in Q3 last year. So you can expect us to be on Q3, Q4 level also beginning of this year. So it's going to be stabilizing on the level that we are in Q4. Yes. I guess we can say so that we had a little bit benign content position in the first and second quarter last year while we renegotiated with Viaplay. And that was added back in. So we had a good phase negotiation going with them. So exactly like Charlotte said, what you saw in the third and the fourth quarter will be more of the -- of a natural run rate. There are no further questions. I would now like to hand the conference over to our speaker, Kjell Johnsen for closing remarks. Yes. And I would like to thank you all for spending this time with us today to go through where we are in our business. I would summarize '22 saying that I'm very satisfied that we have been able to deliver on our guidance in a tough year that started in one way and ended in a completely different way, for reasons that we all see: with a war in Ukraine. And we are a stable company that is able to grow. I think 3% growth is pretty good in the telecom industry. We're growing consistently our EBITDA. And adjusted for energy, we were at close to 5%. And we will absorb the costs that are coming our way in 2023, not fully back to the mid-single digits. But our ambition is clearly to move back to that in the medium term. So I think we are in a quite strong position. '23 will take us through the last stage of the big IT transformation. We have visibility on the end dates, and we're going to deliver on that. So we can be even more focused on the go-to-market in '24 and on our customer base. So I think we're in a quite good spot. '23 will probably throw curveballs just like '22 did, but we are ready to take them on. So I am ending '22 on a positive note. And we're going to keep on pushing in '23. And thank you for coming. Thank you for joining.
EarningCall_913	Greetings, and welcome to HTLF 2022 Fourth Quarter Conference Call. This afternoon, HTLF announced its fourth quarter earnings, and hopefully, you had a chance to review those results. The earnings release is available on HTLF' website at htlf.com. With us today from management are Bruce Lee, President and CEO; Bryan McKeag, Executive Vice President and Chief Financial Officer; and Nathan Jones, Executive Vice President and Chief Credit Officer. Management will provide a summary of the quarter, and then we will open the call to your questions. Before we begin the presentation, I would like to remind everyone that some of the information provided today falls under the guidelines of forward-looking statements as defined by the Securities and Exchange Commission. As part of these guidelines, any statements made during this presentation concerning the company's hopes, beliefs, expectations and predictions of the future are forward-looking statements and actual results could differ materially from those projected. Additional information on these factors is included from time to time in the company's 10-K and 10-Q filings, which may be obtained on the company's or the SEC website. Thank you, Twanda. Good afternoon, everyone. This is Bruce Lee, President and CEO. Welcome to HTLFâs 2022 fourth quarter earnings conference call. I appreciate you joining us today, as we discuss our continued strong performance and ongoing momentum. For the next few minutes, I'll discuss HTLFâs highlights for the fourth quarter and year, then turn the call over to Bryan McKeag, Chief Financial Officer, for more on our results. Also joining us today is Nathan Jones, Chief Credit Officer, who can answer questions regarding the excellent credit quality across our portfolios. HTLF had tremendous success and significant growth in 2022. We are driving momentum, executing our strategy and delivering strong results that exceed expectations. This month, our Board of Directors approved a record quarterly cash dividend of $0.30 per share on the company's common stock, a 7% increase from the previous quarter. The dividend is payable on February 28, 2023. This increase reflects our strong performance for the quarter and year and our confidence in our strategies and ongoing results. In 2022, revenue was a record $726 million, an increase of $37 million, or 5% for the year. Total revenue increased $10 million, or 5% from the linked quarter. For the year, we delivered net income available to common stockholders of $204.1 million and EPS of $4.79. For the quarter, net income available to common stockholders was $58.6 million and EPS of $1.37. For the quarter, we saw notable expansion of our net interest margin on a tax equivalent basis, rising 20 basis points to 3.65%. Our efficiency ratio decreased 15% from a year ago to 54.33. For the year, we reduced our number of employees by 11%. We're driving efficiency while investing for growth. And total assets grew to a record $20.2 billion, up $970 million, or 5% from a year ago. Assets increased $561 million or 3% from the linked quarter. Asset growth was driven by strong momentum in commercial and consumer loans, and we continue to see growth in deposits and service fees. Let's start with loan growth highlights. In 2022, we saw tremendous loan growth of $1.6 billion, or 17%, excluding PPP across our portfolios. In the fourth quarter, loans grew $505 million, an increase of 5% from the linked quarter and greatly exceeding our guidance for the quarter. This includes approximately $105 million in increased credit line utilization, primarily in Agribusiness and approximately $100 million of loan growth which we previously expected to close in the first quarter. This was an exceptional quarter, and our commercial loan pipeline remains strong at over $1 billion. We expect total loan growth of $150 million to $200 million in the first quarter. In the fourth quarter, we saw significant strength across our commercial portfolios. From the linked quarter, commercial and industrial increased $185 million or 6%. Owner-occupied real estate decreased $20 million or 1%. Non-owner occupied real estate increased $111 million, or 5%. Construction increased $80 million, or 8%, and our Ag portfolio increased $139 million, or 18%. Seasonal line utilizations were up, and we expect this to normalize in the first quarter. For more on line utilization, please see Page 24 in the investor deck. In the fourth quarter, we saw commercial loan growth in eight of our 11 bank markets. We added 303 new commercial relationships, representing $296 million in funded loans and $229 million of new deposits. On average, new originations were higher credit quality than the overall portfolio as measured by risk ratings and credit scores. And 79% and of these loans have variable rate structures compared to 69% last quarter. The depth and breadth of our products and services is expanding relationships and developing new ones. We have made strategic investments in specialized industry verticals and capital markets expertise, including loan syndications, interest rate derivatives, trade finance and foreign exchange and we're driving business in fee-generating products. Service charges and fees increased $2.1 million, or 14% for the year and 1% for the quarter, driven primarily by our growing credit card business. In 2022, HTLF reached a significant milestone surpassing $1 billion in purchase volume as a commercial card issuer. HTLF continues to be one of the fastest-growing Visa commercial card issuers. For more on the growth of our commercial non-interest income, please see Page 20 in the investor deck. Our consumer loan portfolio saw significant growth in 2022, increasing $87 million or 21%. Consumer loans grew $11 million, or 2% from the linked quarter. Residential mortgage increased $24 million, or 3% for the year and was flat from the linked quarter. Turning to deposits. Non-time deposits increased $302 million, or 2% for the year. Non-time deposits decreased $448 million, or 3% from the linked quarter, mostly due to balanced declines that occurred in our commercial operational accounts for seasonal needs and year-end distribution and not as a result of account attrition. We expect these account balances to rebuild over time. Time deposits increased $793 million, or 77% for the year and $694 million, or 62% from the linked quarter. The increase in time deposits for both the year and the quarter was primarily driven by an increase in wholesale time deposits. Overall, total deposits grew to a record $17.5 billion, an increase of $1.1 billion, or 7% for the year and $245 million from the linked quarter. We maintain our favorable deposit, 90% of deposits are in non-time accounts, 36% of total deposits are in non-interest-bearing accounts and our deposit pricing strategy continues to serve us well. In the fourth quarter, core deposit costs were 44 basis points and total deposit costs 74 basis points. For detail on our deposit beta, please see Page 23 of the investor deck. Turning to key credit metrics. Our disciplined credit approach is delivering excellent credit quality across our portfolios. Delinquency ratio is at a historic low of 4 basis points. Non-performing loans represented 51 basis points of total loans. Non-performing assets as a percentage of total assets remained low at 33 basis points. Non-pass rated loans decreased to 4.7% from 5.3% in the linked quarter. Lastly, in the fourth quarter, we had net loan recoveries of $1.7 million. We continue to take a conservative credit approach given concerns around the current economic environment. Despite some headwinds, weâve sustained momentum, we're executing our strategies, and we're delivering record revenue, record organic loan growth, record customer acquisition, improved credit quality, expanded net interest margin and a lower efficiency ratio. We're doing all this while consolidating our bank charters. In 2022, we successfully executed five bank charter consolidations with our banks in Arizona, California, Colorado, Illinois and Minnesota becoming divisions of HTLF Bank. Transitions have been smooth, and the project continues on schedule and on budget. We expect to finish charter consolidation early in the fourth quarter of 2023 and delivered $20 million of annual savings and capacity after the project is complete. Bryan will share more details in his comments. We also continue to optimize our branch network. In 2022, we reduced our number of total branches by 8% to 119 total locations. In alignment with HTLF Banks Colorado Charter, as of January 1, HTLFs corporate headquarters is now in Denver. Geographic diversity is a strength of HTLF. We have 11 markets in 12 states with Denver as our largest market. HTLF's corporate headquarters in Denver reinforces our presence and commitment to global markets. We are committed to our strong and sizable presence in Dubuque, Iowa, where 17% of our employees are located. HTLF operational and administrative functions will continue to be largely staffed and run from Dubuque. As I look back on 2022, it was a year of significant growth and tremendous accomplishment for HTLF. We continue to execute our strategies, grow our business operate more efficiently, deliver strong results, and most importantly, serve our customers and communities. This is all the result of the hard work and dedication of HTLF's employees. I want to recognize and thank them for their continued commitment to delivering strength, insight and growth to our customers, communities, investors and each other. We move forward together because together, we are HTLF. Thanks, Bruce, and good afternoon. As Bruce just outlined, this was another strong quarter for HTLF with earnings per share of $1.37, loan growth of just over $500 million, revenue growth this quarter of over $10 million and stable clean credit performance. Included in this quarter's results were three large notable items. First, $2.4 million of losses on the sale or write-down of assets [Technical Difficulty] related. Second, charter consolidation restructure costs of $2.4 million; and third, shareholder dispute resolution costs of over $1 million. Together, these items decreased pretax net income by more than $5.8 million and earnings per share by $0.11. Before I go into more detail, I want to remind everyone that our fourth quarter earnings release and investor presentation are both available in the IR section of HTLF's website. So I'll start my comments with the provision for credit losses, which totaled $3.4 million, that's up -- that's a $2.1 million decrease over last quarter. This quarter, the provision reflects our strong loan growth, continued stable, healthy credit performance and an economic outlook that anticipates a moderate recession developing over the next 12 months. In addition, the provision benefited from $1.7 million of net loan loss risk (ph) recoveries. At quarter end, the allowance for related for lending-related credit losses, which includes both the allowance for credit losses on loans and unfunded commitments increased $5.1 million to $129.7 million or 1.13% of total loans. In addition, at quarter end, unamortized purchase loan valuations on the balance sheet totaled just over $10 million or 9 basis points of loans. Moving to investments. Investments remained flat at $7 billion, representing 35% of assets with a tax equivalent yield of 3.45% and will generate cash flows exceeding $1 billion over the next 12 months. We continued to actively manage the portfolio by taking several actions during the quarter. First, we utilized nearly $65 million of cash flow this quarter to fund loan growth. And second, we took advantage of some mid-quarter market disruption and reinvested $115 million cash flow into a AAA rated security with a purchase yield of nearly 9% and a duration of less than a year. With regards to capital, regulatory capital ratios remained strong with common equity Tier 1 at just over 11% and total risk-based just over 14.75%. The tangible common equity ratio reversed a several quarter decline, increasing 27 basis points to 5.21% at quarter end. The rise in market value of investments this quarter contributed 15 basis points of the increase. Moving to the income statement, starting with revenue. Net interest income totaled $165.2 million this quarter which was $9.3 million higher than the prior quarter. And the net interest margin on a tax equivalent basis rose 20 basis points this quarter to 3.65%. The main drivers of the increase were our strong loan growth and asset-sensitive balance sheet and the Fed's short-term interest rate increases. This quarter, the net interest margin includes 3 basis points of purchase accounting accretion, which is unchanged from the prior quarter. Non-interest income of $30 million this quarter was $800,000 higher than the prior quarter. Excluding security losses, core non-interest income was $30.1 million, which was at the high end of our 28 -- $29 million to $30 million forecast. So in total, quarterly revenue grew $10 million or 5% and exceeded patients. Shifting to expenses. Non-interest expense totaled $117.2 million this quarter, that's up $8.3 million from last quarter. Excluding restructuring, tax credit costs and asset gains and losses, the run rate of recurring operating expenses increased $3.1 million to $109.1 million compared to $106 million last quarter, and exceeded our forecast of $105 million to $106 million. Operating expenses were higher than anticipated in Q4, primarily due to legal and other cost reimbursements related to the resolution of a shareholder group dispute and higher incentive compensation accruals due to stronger than expected revenue -- quarterly revenue and loan growth. As a result of the strong revenue growth this quarter, the fourth quarter efficiency ratio improved to 54.33% from 55.26% last quarter. Now looking ahead to 2023. HTLF expects to see continued success and improvement, highlighted by expected loan growth of 6% to 8% next year with $150 million to $200 million expected next quarter. Deposit growth is expected to be 3% to 5% next year, with Q1 expected to show nominal growth. Investment cash flow will be utilized to fund the gap between loan growth and deposit growth. Net interest income for Q1 will be down versus Q4 due to two fewer days in the quarter. Full year net interest income will be much higher than 2022, that reflects our higher net interest margin and larger balance sheet. However, magnitude of the increase will be dependent upon future Fed rate moves and deposit pricing, which are difficult to predict at this time. Provision for credit losses are projected to range from $4 million to $6 million per quarter, given projected loan growth and assuming credit trends began to normalize from their current levels. However, declines in economic conditions and projections could significantly impact future provisions, if a worse than moderate recession develops. Core non-interest income, that is excluding investment gains and losses is expected to be $28 million to $29 million next quarter, and is projected to raise 4% to 5% on a full year basis, as persistently weaker mortgage revenue is offset by growth in other income categories, primarily commercial fees. Recurring operating expenses are expected to be $108 million to $109 million next quarter, and show a 2% to 3% increase on a full year basis. This includes the impact of an increase in FDIC costs of $3 million to $4 million for the full year. Charter consolidation and restructuring costs are expected to be $2 million to $2.5 million next quarter. In total, we estimate the remaining costs to complete the project will approach $10 million over the next four quarters. And finally, we believe a tax rate of 22% to 23%, excluding new tax credits, is a reasonable run rate. Thank you. We will now conduct a Q&A session. [Operator Instructions] Our first question comes from the line of Terry McEvoy with Stephens. Your line is open. Hi, Bryan. Thanks for the all the financial outlook. Maybe if I could just ask a question, the $20 million of benefits from the charter consolidation, could you remind me, is that all on the expense side? And then maybe if we just take a step back, could you give us a few real world examples of the benefit to the charter consolidation outside the numbers? And maybe just to finish the thought or has there been any impact on local decision-making or even the perception that things have changed there? Thank you. Yeah, Bryan, let me maybe answer -- give some comments on Terry's last question. There is absolutely no impact on local decision-making, not only the perception, but there's actually no impact. The decisions that our local CEOs and leadership teams were able to make pre-charter consolidation and post-charter consolidation are exactly the same. So there's absolutely no change there, and it's actually gone very, very, very smoothly. Bryan, why don't you talk a little bit about the real world, examples of not just the expense side, but the actual changes because your area has a lot of that benefit? Yeah. I think there's certainly internal efficiencies that we'll gain Terry, for example, not doing as many call reports. That's a simple one, right? But we also manage multiple investment portfolios will eventually only need to manage one. Same with liquidity, maintaining liquidity at 11 banks versus one. So there's a lot in finance. There's -- throughout the operations side, Rego (ph) doesn't have to be reported as much. There's some compliance things that help as well. So there's lots of those things. I think for traditionally, for customers, it will be easier for them to bank at any one of our locations across the footprint, easier than it is today and so there are customer benefits as well. In terms of the $20 million efficiency gain in terms of dollars, it's really in a couple, maybe two or three places. The predominant place is expense savings. As you can probably see, our FTE count is down already. Whether we have to replace some of that, but we certainly won't have to replace it, I don't think, all back to the levels that we were before because it will become more efficient. So there's some cost takeouts for not having to do certain things, but there's going to be efficiency gains as well, where we won't have to add back people even if we continue to grow. And maybe the third, and this is probably the smaller one, is there's probably some efficiencies in the treasury area just with when we do exercise some of our trades, they're probably bigger blocks and we can maybe get a little bit better execution. So one other thing that -- one big benefit that we get internally is, we don't have to participate loans back and forth between banks. And we spent a lot of time in the operations area and in the finance area kind of sorting that out and we put it all together, but then keeping the bank separate. Bruce, anything else to add? Yeah. Just two other things, and I want to piggyback on what Bryan just said about the internal loan participations between our charters. One of the real benefits of the banks that we've already consolidated is that their balance sheet and, therefore, their income statement now actually reflects the work that they've done, where before, if they had made a loan and it was participated only the amount of the loan that was not participated remained on their balance sheet. So they're actually now getting the full benefit for everything they're doing, whether it's originating loans or on the deposit side. They're getting the benefit of the deposits if others are using those deposits to fund loans. So that -- and then also we had to manage capital at 11 different charters in the past where now you don't have to do that. So those are just some of the kind of the non-expense side, but the real benefits in how we operate going forward, Terry. Thanks for all the color there. And then as a follow-up on the deposit side, what's it, $800 million of brokered CDs at $3.95, can you just talk about how long you expect those to be on the balance sheet? Is it kind of a one year type product and maybe what's your deposit beta going forward from here, it's been relatively low so far? Yeah. So I think the $800 million of CDs, brokered CDs, I believe, are all less than a year, and I think they're predominantly less than six months, so they're not long CDs, Terry. And then our deposit betas and you probably can see in the deck that they're about -- there's been about 14 basis points or 15 basis points or beta in the fourth quarter. I think those will move up a little bit. It wouldn't surprise me if we saw another five to 10 ticks on that beta, just we're going to do a little bit of catch-up, but we moved it pretty close to the market, but we're going to move a little bit more to stay with the market. And on the consumer -- our commercial side, we have been making decisions all along that we need to make, to make sure that we maintain our customers and are open to what relationships we have to customers to price properly. Thank you. Please standby for our next question. Our next question comes from the line of Damon DelMonte with KBW. Your line is open. Hey. Good evening, guys. Hope you guys are all doing well today and thanks for taking my questions. Just wanted to ask a little bit about the margin, Bryan. I heard the commentary that NII will be down on a lower day count in part. Just kind of wondering, where you see the margin peaking, if you think at the first quarter event or a second quarter event and kind of how you look at the cadence of margin throughout the year? Yeah. That's probably the toughest question I'm going to get today because [Technical Difficulty]. Let me take it in chunks. I would say the first quarter here on margin, I would say would stay -- without any Fed moves, we would probably stay just slightly below the 365 that we posted. I think there is, as I said, there's some latent data catch up here that I think happened in December and maybe even in early January. So I think we'll fight without any Fed help to stay there. Now, if the Fed raises, like, everybody thinks 25 basis points in a couple of days, we'll get a little bit of benefit from that, but not nearly like we were getting before. And I think the deposit betas are going to continue to ratchet up a bit. So we might get a tick or two there. So I would say, all in, we're going to stay somewhere in the first quarter between $3.60 for sure and maybe $3.65 on the top end. For the full year, if the Fed doesn't reduce rates in the last half of the year, maybe we get one additional, so we'll get two bumps instead of one. I think we can stay above $3.60. But we probably are close to topping out. Now, we might go up a little bit with the Fed move, but I think we're going to slide back down. So we might touch a little bit higher, but I think we're going to bounce around this $3.65 to $70 maybe once in a while. But then I think long term, we're in the $3.60s. Okay. Thatâs helpful. Thank you. And then with regards to the outlook for loan growth, I think you said like 6% to 8%. Are you seeing greater opportunities on the C&I side or the security side or is it kind of equally weighted? Yeah. This is Bruce. Let me take that, and then I'll ask Nathan to weigh in since he sees everything. I think there's more opportunity right now on the C&I side. And our Agribusiness group is also generating a lot of opportunity. There's some activity clearly on the real estate side, particularly in the industrial space, some of the warehouse some distribution and a couple of the markets still has some multifamily activity going on. Yeah, Bruce, I would fully concur. I think the opportunity is really to show themselves on the C&I side and then where we're seeing opportunity on CRE and being very strategic. We do see some good opportunities there as they're coming about, but they're just not as prevalent as they had been historically. Currently, because we're just watching a little bit tighter now and taking precautions appropriate for sizing and doing sensitivity to make sure that they'll perform through the cycle. Just to add maybe on to that office close, Nathan, you might add where those offices are typically located because I think office can be a very general term. Is it downtown high-rise office space? Is it more low-rise suburban. Could you give a little bit of that color? Nathan, I think that would help everybody on the call. Yeah, absolutely. Just by nature of kind of where we are located in our footprint, we really see kind of more focused outside of the potential business districts and more focused kind of in the suburban office kind of really looking at more of a granular portfolio, multi-tenant nature, amortizing, and we think they're well underwritten. So far, we feel very good about where we're at, but we are walking in very diligently and kind of continuing to stay in front of them talking with our customers and making sure that we understand kind of where they're at, and so we can make those decisions earlier. But from that perspective, we do feel the performance today still looks pretty good. Thank you. Please stand by for next question. Our next question comes from the line of Jeff Rulis with D.A. Davidson. Your line is open. Thanks. Good afternoon. Maybe one for Nathan. Just wanted to the type of loans that were, I guess, resolved out of non-accrual in the quarter, I think it's $6 million net. But I just wanted to kind of get a sense for what was recovered. Yeah, absolutely. We -- it's certainly -- there wasn't any area of significance. The recovery was really on a credit that we had in agriculture from really several years back just due to the really great work done by our special assets group to stay with it. It was really to see through and get some recoveries there. From the non-performing perspective, kind of how that's going. We just continue to work it down. I wouldn't say there's any one area of specifically you could call out as being a systemic as we were working through it. It's just the overall book itself. We continue to work hard to make sure we're getting ahead of those credits and getting them either A, back into our performing line of business or helping find for bank or opportunities for them going forward. No. I was just going to provide a little more color. Jeff, the recovery was on a loan that had been previously fully charged off. So it didn't have any -- that was not connected to the decrease in our non-accrual loans. Right. Yeah, if I kind of clubbed the question there. I was really looking for the direction of non-accrual, I got you. But I think, Nathan, kind of not anything overly specific. It's been just continued work. And kind of the follow-on was there's no change in aggressiveness. It's not as if this mild recession is upon us. You didn't change gears or anything. It's just work in those credits and just got, like you said, non-descript reductions in non-accruals? And just a follow-on, maybe for Bryan. Did that recovery impact the margin at all? Was that -- was there anything in there that you'd say that kind of non-core, the $3.65? Yeah. No, there was no interest recovery. It was all principal recovery. This one, Jeff, just for a little bit of color, this one was -- one of the loans that we charged off coming into the COVID. We had a couple of big charge-offs as we entered COVID. I think it was back from that time. So it's been like three -- almost 2.5, three years since we took the charge off. Okay. Got it. And just jumping over on topics to the expense side. I wanted to make sure I got the $108 million to $109 million. Bryan, you said 2% to 3% full year growth, correct? Correct. Yeah. It excludes those items. I always exclude the charter. We can restructuring any tax credit costs from last year and any gains and losses that are in that expense line item. If you back those out of last year and put a 2% or 3% increase on top of that, that's why. I probably could get it. I don't have it here. I need to do some math and sometimes doing math while everybody is on the call. It is pretty easy though, Jeff. If you go to our income statement, if there's three line items specific to those three items I talked about. Following up on the expenses here. Just looking in once the charter conversion is complete, consolidations complete you have the cost savings in there. Has there been any -- have you looked out and seen on other investments in the franchise you expect to make? Are any of these savings going to be redeployed or do you think they're all going to follow the bottom line. Yeah, Andrew, I think that's a really great question, and I would anticipate that as I'm thinking about it, over half of them will probably redeploy into the charter with products or potentially some geographic expansion, but it's really where the opportunities are, at the end of the day. Yes. And one of the things that we've been talking about, as you know, we'll probably reinvest in our consumer deposit platform. That's one of the things that we'll probably reinvest in during maybe the back half of '23 or early in '24. Okay. Got it. That's helpful there. And then on the growth for this year, 3% to 5.5% deposits, growth, because where is that deposit growth coming from? I would imagine itâs not on the wholesale side that you had here this last quarter, but what's giving you the confidence that 3% to 5% is achievable in this tougher environment? Yeah. We think it will come from the commercial side and the small business side, where we've been generating a lot of new business and new opportunities. We think the consumer side honestly, it will probably be flattish as we're just now starting to see the average balances in our consumer accounts start to decrease. You've heard us talk in the past that those extra balances during the pandemic, they were holding steady. We just saw them start to decrease for the first time during the fourth quarter. So our goal is to generate enough new business to offset that decrease on the consumer side, and we think that we'll be able to grow the commercial in the small -- in the business banking and small business side on a go-forward basis. And we would have done that this year, except we did have a significant commercial operational outflows in the quarter that I referenced. Thank you. Please stand by for our next question. Our next question comes from the line of David Long with Raymond James. Your line is open. I wanted to circle back to the discussion on the deposit base. And Bryan, you gave some good color, so I appreciate it. But just as you're looking out to the rest of this year, non-interest bearing, I think we're at about 32%. Where do you think that ends the year? And do you have a rough deposit beta all in that you're using for your outlook for this year as well? Yeah. I think our DDAs are 36% the way we calculate it. I know if maybe you've got average balances or something, Dave. But I think it's 36%, but that's down a little bit from where it was. So that has moved a little bit this year with the way deposits have flown. So I think -- we think that, that can probably solidify and some of that outflow that we saw at the end of the quarter was out of DDA in the commercial side. So hopefully, some of that will flow a little bit and build back. And I think the new customers that Bruce was talking about, if we're successful in bringing in C&I customers, which we have been, those tend to be more DDA and non-interest-bearing accounts. So I think there, we can hold our own and maybe grow just a little bit on the DDA side and certainly grow the non-maturity deposits in total. Betas that weâ¦ Go ahead, Bruce. I'll finish with the betas and then you can jump in and add some color. I was just going to say, our betas that we model are typically around 25% to 30% on the non-maturity and probably around 80% on the CDs, kind of blends together for something in the mid-30s for overall betas. Now we've been doing better than that. Particularly, we did better than that in the first probably 200 basis point, 250 basis point move where we didn't move much, if any. So I still think we have some catch-up, which is why I think our margin is not going to go a lot higher and it's going to kind of tread water here because we're probably going to be having some catch up on those betas here going forward. Yeah. And David, I was just going to mention on that commercial deposit growth, that will also help us on the treasury management fee side because those operating accounts of all those new relationships, we're able to provide them with our products that we have on the treasury management side as well as those C&I customers are using more of our capital markets products, whether they're swapping their floating rate loans, which this quarter, 79% of our loans were floating, which is an all-time high for us. Got it. Thanks for the additional color. And then just the last thing I wanted to ask, back to the deposit side. Within your footprint, very broad-based footprint, do you notice any material differences in deposit pricing within your footprint? Are you getting better pricing out West, maybe in the Midwest, maybe Texas? I guess the question maybe specifically would be where do you see the least amount of deposit competition and where do you see the most competition? I think the Midwest always has had more competition than the West. I mean that's been the history and you've heard us talk about that in the past. But I would tell you, the one market that probably we do the best in, is in New Mexico. That would -- and it's not so much that there's no competition. It's just we've got a great team out there. They've been there a long time. And there aren't as many credit unions as an example, out there. Where we are seeing the highest competition is where there's significant credit union activity, which also tends to be in the Midwest. Thank you. As there are no further questions at this time, I would now like to turn the call back over to Mr. Lee for remarks. Thanks, Twanda. In closing, HTLF had a strong fourth quarter and an outstanding year. In 2022, we delivered record total revenue of $726 million, a 5% increase, record loan growth of $1.6 billion or 17%, excluding PPP. Our fourth quarter efficiency ratio decreased 15% from a year ago to 54.33%. Our credit quality continues to be excellent and improving. And we have increased the dividend on our common stock to a record $0.30 per share, all while seamlessly executing charter consolidation to deliver improved customer experience, efficiency and unlock capacity for future growth. Our strong momentum continues into 2023 and we are well positioned to continue driving growth. Thank you for joining us tonight. Our next quarterly earnings call will be in late April. Have a good evening.
EarningCall_914	Good morning, and welcome to the Spire First Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity ask questions. [Operator Instructions] Please note this event is being recorded. Thank you. Good morning, and welcome to Spire's fiscal 2023 first quarter earnings call. We issued our news release this morning and you can access that on our website at spireenergy.com under Newsroom. There's also a slide presentation that accompanies our webcast and you may download that from either the webcast site or from our website under investors and then Events & Presentations. Before we begin, let me cover our Safe Harbor statement and use of non-GAAP earnings measures. Today's call, including responses to questions, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although our forward-looking statements are based on reasonable assumptions, there are various uncertainties and risk factors that may cause future performance or results to be different than those anticipated. These risks and uncertainties are outlined in our quarterly and annual filings with the SEC. In our comments, we will be discussing net economic earnings and contribution margin, which are both non-GAAP measures we use when evaluating our performance and results of operations. Explanations and reconciliations of these measures to their GAAP counterparts are contained in both our news release and slide presentation. On the call today is Spire's President and CEO, Suzanne Sitherwood; Steve Lindsey, Executive Vice President and Chief Operating Officer; and Steve Rasche, Executive Vice President and CFO. Also in the room today is Adam Woodard, Vice President, Treasurer and CFO of our Gas Utilities. It's our pleasure once again to provide our quarterly update on Spire's performance, recent developments and our outlook for the future of the industry and our company. Last quarter, I spoke to you about our long-term strategic priorities and commitments, while being mindful of the vital role natural gas plays in ensuring a sustainable, reliable and affordable energy future. As many of you may know, this year, I've taken on the role as Chair of the American Gas Association. I'm honored to lead AGA at this critical time in our industry as the debate over energy policy and climate change intensifies. It's the debate I welcome. It gives us -- our industry the opportunity to share the remarkable story of natural gas and the long-term viability of natural gas as a vital part of America's energy future. The vision for our industry does not change, it's about protecting the people, preserving the planet and picturing a potential for natural gas. During my year as Chair, we are focused on ensuring that policymakers understand the unique and critical role natural gas plays in driving our economy, ensuring energy security and providing safe, reliable and affordable energy to 187 million Americans, while achieving a cleaner energy future for our nation. In fact, natural gas is the best way to deliver affordability and reliability today and emission reductions tomorrow. As an industry, we are confident in achieving our vision based on the abundance of natural gas in this country and the extensive and advanced infrastructure we continue to invest in that will deliver essential energy at affordable prices for decades to come. Customers need reliable energy to fuel their lives and businesses and our industry works hard every day to ensure they have the energy they need when they need it. Reliance on natural gas continues to grow as more and more people [who owns] (ph) homes and businesses come to understand all the benefits from using this abundant domestic resource. Every minute another customer signs up to receive natural gas service from an AGA member company. More than 5.7 million businesses already use natural gas and realize the incredible savings over other energy sources. Nearly 30,000 new business sign up to use natural gas each year. As increasing energy costs and overall inflation impacts consumers, it's important more than ever that people have the right to choose the most reliable and affordable source, and that's natural gas. In fact, households that use natural gas for heating, cooking and clothes drying save over $1,000 per year compared to using electricity. Natural gas utilities in the U.S. make significant investments in infrastructure upgrades and energy efficiency innovations that make our systems even safer and more reliable, while reducing emissions. This investment totals more than $95 million every single day. At Spire, we also remain committed to safety, reliability and service quality, while protecting our planet and supporting our customers and communities. These are commitments we take seriously. Steve Lindsey and Steve Rasche will have more to say about Spire's operations and finances in a moment, plus they'll share what we're doing to minimize the impact of commodity costs on customer bills and provide more assistance to those who need it. Steve Lindsey will also share more about this year's regulatory environment. I'm pleased to note that we have reset rates across our utility footprint and are entering a quiet period from an overall regulatory perspective. Based on the strong first quarter earnings of $1.55 per share, driven by outperformance at our non-regulated gas marketing business, we are raising our guidance range for the full year. I'll begin by acknowledging the outstanding performance of our employees who continue their focus on maintaining safe and reliable gas delivery operations and excellent service to our customers. Their efforts and dedication are especially important and greatly appreciated during the winter heating season. I would note that during the severe cold weather in late December, which included an all-time peak day in the Kansas City region, we met customer demand and kept essential energy flowing to the homes and businesses that count on us to keep them warm. Our ability to consistently and reliably serve our customers on the coldest day is no accident. It reflects all the advanced supply plan we do to ensure we have the resources needed to deliver essential energy at peak demand times. Let me start with an update on our capital investment. For the first quarter, our CapEx totaled $155 million, with 95% going toward our utilities. This [amount range] (ph) accounted for about half of that utility spend, another 25% attributable to extending natural gas service to additional homes and businesses. For FY '23, our expected capital investment remains $700 million, reflecting an increase in gas utility spend, focused on safety, reliability and emissions reduction, as Suzanne noted. While it's early in the year, we're already seeing the benefits of these investments in our key operating metrics. We plan to continue our robust investment in new business as well as innovation and technology, most notably with further rollout of advanced meters. We've replaced over 300,000 meters across our footprint to date. I'd note, this effort is much more than just swapping out an old meter for a new one. The technology in advanced meters provide a number of benefits, including enhanced safety, improved efficiencies and the ability to use data to better serve our customers. As we noted previously, our expected fiscal 2023 spend includes a substantial investment in the expansion of Spire Storage, which remains on plan. Suzanne mentioned, we concluded a number of regulatory matters last year and that has substantially cleared the deck so to speak, allowing us to focus our time and effort on our businesses and serving customers. Let me provide a quick recap. As you know, we recently concluded our Missouri rate review with the settlement amounting to $78 million in additional revenue. This includes $19 million of ISRS revenues already being collected and new rates were effective December 26. In addition to recovering updated costs and investments, the rate settlement also resolved the treatment of overhead costs, and these costs being expensed or capitalized effective October 1st in accordance with our study. We began collecting the amounts previously deferred starting December 26. One important element in the settlement was the approval of our request to increase funding and expand eligibility for customer financial assistance, including Spire's DollarHelp program. This allows us to provide greater support for more households impacted by higher natural gas costs. We deferred a substantial amount of gas costs in order to lessen the impact to our customers. We are now set to recover these costs pursuant to effective gas cost providers in both Missouri and Alabama. We expect to recover these costs over the next 12 to 18 months. We filed a new ISRS request for $8.8 million upon the conclusion of our latest rate review. This finally includes recovery of ISRS eligible investment on system upgrades from the October to February period. [On] (ph) Gulf, a reminder that the reset of the RSE parameters was completed late last year and new rates based on their 2023 budgets were effective January 1. And finally, as previously announced, Spire STL Pipeline received a new permanent operating certificate in the FERC in December. Thanks, Steve. Good morning, everybody, and thanks for joining us today. Let's start with a brief review of our quarterly results and then I'll update our outlook. For our fiscal first quarter, we reported net economic earnings of $85 million, an increase of $22.5 million over last year, driven by strong results in Spire Marketing, which was well positioned this quarter to take advantage of basis differentials to optimize storage and transportation positions. Our Midstream business also delivered results ahead of last year, as Storage was able to optimize its operations and withdrawal commitments. And Gas Utility earnings lagged to last year as higher demand was more than offset by the timing of new rates and higher costs. Slide 8 provides more detail on key variances for the quarter. [Hitting] (ph) a couple of the highlights. Gas Utility margins were higher as we benefited from the full-year impact of last year's rate increases. It's important to remember that our most recent rate increases in both Missouri and Alabama had [Technical Difficulty] impact this quarter given their effectiveness in late December and January 1st, respectively. Usage was also higher this quarter as temperatures were colder than the last year. Margins for Marketing and Midstream were higher for the reasons I spoke to a second ago. And looking at operations and maintenance expenses. Gas Utility expenses were up, net of pension reclassification by $14.6 million due to: first, roughly $6 million in Missouri overhead costs that were deferred in the prior year, but expensed this year; second, higher bad debt expense by $2.6 million, reflecting higher commodity costs; and lastly, higher non-employee costs, especially third-party contractor expenses as we focus on high customer service levels this winter. Overall, Gas Utility O&M costs, net of bad debts, are trending as we expected and we remain focused on opportunities to offset the headwinds of inflation the rest of this year. Spire Marketing costs were also higher, representing mostly costs driven by the higher margins, including employee-related costs. Interest expense reflects higher short-term debt levels, driven by gas costs and higher interest rates. As a reminder, we do get recovery on most of our utility interest expenses, either in new rates in Alabama or through credits in Missouri, which show up in the income statement in the other income line. I would also point out that a portion of the higher interest expense supported our Marketing and Midstream businesses that had a strong quarter. Turning to our outlook. We remain confident in our long-term net economics earnings per share growth target of 5% to 7%, starting from the midpoint of our initial fiscal year '23 guidance range of $4.15 per share. This growth is driven by our utility rate base growth and we also reaffirmed both our current year and 10-year CapEx targets. We are raising our '23 guidance range by $0.10 to $4.15 to $4.35 per share given Gas Marketing's Q1 results combined with the change in how we report the impact of Spire Storage West expansion. Looking at the segments, we are raising Gas Marketing range to between $25 million and $30 million due to strong results this quarter. We are adjusting our full-year Midstream earnings range to reflect both: first, Q1 results; and secondly, the impact on the Spire Storage West expansion project. This project had no impact this quarter due to capitalized interest. And its forecasted impact for the full year has been revised downward as we refined our estimates for capitalized interest and overall project cash flows and funding. As a result, we will not adjust our net economic earnings calculations for the project's impact and we've reflected that in the forecast, the impact for the revised range for the Midstream business. We will continue to provide project and earnings impacts each quarter. A couple of quick observations on financing. We have ample liquidity as we hit our peak borrowing. And to supplement that capacity, we funded a nine-month term loan for $250 million in January. As Steve mentioned earlier, we have a clear path to recovery of the underlying gas cost over the next 12 to 18 months, which will also provide a big boost to our cash flow beginning this quarter, our second fiscal quarter. We have not changed our long-term financing forecast, but I would observe that we're a bit lower than the target range for equity due to the higher earnings from Gas Marketing. So, in summary, we have started the year well, much like our Kansas City Chiefs, I'd be remiss if I didn't mention that. We congratulate the team and the Chiefs Kingdom and we will be cheering for them in the Super Bowl. In closing, we're off to a good start in 2023. We are poised to grow and deliver stronger overall performance for our customers, communities and investors. As always, I would like to express my gratitude for each and every Spire employee as well as extend my thanks to all who work in this remarkable industry. We look forward to updating you as the year progresses. Until then, we thank you for your continued interest and investment in Spire. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Richard Sunderland with J.P. Morgan. Please go ahead. Just to start off with the guidance revision and the commentary around Spire Storage, is that just a change for '23 in terms of how you're reflecting Spire Storage in the results, or is that a move to include Storage in 2024 as well? And then, just alongside that, just to be clear, so the $0.10 change is both marketing outperformance net of the Spire Storage change and then everything else is kind of on track with original expectations? Yes. Hey, Rich. This is Steve. Let me take a shot. Yes, after refining our calculation, the impact this year, which is roughly a third of what we had originally guided, we originally guided $0.09, really made the numbers so immaterial as to not really want to deal with it as an adjustment to net economic earnings. So that's a final decision that will impact all years going -- all quarters and all years going forward. And you can expect the dilution in the out years to go down just a little bit. Also, we'll speak to the next year as we get through this year, unless at least get through the winter heating season this year. It will impact the bottom-line. As I said, this quarter, Storage had no impact whatsoever in our results of operations, because the capitalized interest -- the interest was the only one and it was capitalized, so there was no particular impact. And as we go forward, especially into '24, we will see some pull-through from margins. We'll see the full impact of the dilution of the equity that we will raise in order to keep a 50-50 cap structure on the project. And I think those all balance out, but they balance out in a much better spot than we had originally estimated. Got it. Understood. What are the drivers behind those revised expectations for Storage? And could you just walk through, I guess, the financing side and how that's changed versus, I don't know, construction schedule or revenue timing expectations? Yes. Nothing has changed on the project in terms of its timing, the total spend, they're at $185 million, or how we would roll out the capacity as we get through the project. So that's all very good news. What has changed is our ability to fully capitalize the interest component of the financing, which has -- which took out about half of the dilution this year, as we talked about earlier before, we came to that realization. We also took a really hard look at the underlying cash flows for the business, the timing of the actual spend, and when we would ultimately issue the equity to finance the equity component of the overall project, and that traded in our favor, in addition to our shares trading at a little bit different range than they were when we were making the initial estimates last summer. Okay. Understood. That's very helpful. Just one last one for me. You mentioned some of the O&M trends, and if I followed your commentary there, it sounds like it's tracking expectations, expect for bad debt. If it's the case, then just how much of a headwind is bad debt? Yes. At this juncture, it's hard to tell, Rich, it's really all driven by gas cost. And if you -- if -- like everyone else in the gas space, our customer bills have gone up fairly significantly because of the higher gas cost, which is a major component of their bill. So, as a matter of caution and mechanics, when you see higher amounts of receivables, we generally raise our bad debt reserves in potential anticipation of there being more bad debts. At the same time, as Steve Lindsey mentioned it, we're doubling down in our assistance to our customers. So, I wouldn't take that dot and draw a line off into the stratosphere. But given where we are now, we want to remain conservatively positioned. And we'll continue to monitor that as we get through the heating season and really through the spring season, which is when a lot of the collections come in that may be hung up, especially if we have some cold weather late in the winter heating season. Hey, good morning. Thanks so much for taking my question. I was wondering, what are you seeing in terms of market conditions in the second quarter here for the marketing business? I'm wondering if there's more opportunity for strong marketing contributions? Hey, David. This is Steve. I'll take a shot at that. Yes, the conditions that we saw in the first quarter continued into January. You can look at the very basis differentials in the markets that we operate in. Equally though, if you look at the price of natural gas, which traded at the Henry Hub in the mid-$2s yesterday and has been down in that level here for a little while, we haven't seen that level in a long time, it does present a little bit of caution from our standpoint, especially as we exit the heating season and start thinking about what the back half of the year is going to be from two standpoints. One, what will the demand for gas-fired electric generation be? And it's impossible to tell that now, but there's always a small bit of demand that we get the opportunity to serve there. LNG, and that continues to be an area that we're watching closely, especially the operations of the LNG facilities. And then lastly, how we look at the next winter? Yes, believe it or not, we're already starting to think about the winter of '23, '24, and how do we position ourselves for the next winter, which could present some economic drag as we get to the latter part of the year, especially if we ramp up Storage. But all of that is in the opportunity set that we haven't yet looked at. So right now, our focus is on as it is in the utility to focus on serving our customers and optimizing everything we can do this winter. And when we get to that March-April timeframe, then we really start turning our focus to the remainder of the year to make sure that we're positioned not only to serve our customers this summer, but also position ourselves for the next heating season. Great. Thanks. That's helpful color. And I was just curious -- and maybe following on to that, it was such a strong quarter in terms of results and it sounds like the Spire Storage drag is quite a bit smaller. I know you've baked that into the '23 guidance here for the segment. But I was just wondering is there any natural offset. I would have expected the full year to be higher just based on how strong this quarter was. So, is that partly conservatism or are there natural offsets, natural potential losses or reversals coming in the rest of the year in the marketing business? Well, there clearly are -- or could be natural offsets depending upon how we see the summer play out, how the market actually plays out, because we've enjoyed a period of geographic volatility and basis price differentials that we've been able to capitalize on, but those can go away fairly quickly depending upon the flows of gas, demands, the pipeline capacity and a bunch of other factors that we cannot control. So, it is something we're going to have to watch. The way we view our marketing business is we know what our [base level of] (ph) expectations for that business should be, and if we're well positioned, like we were this quarter, we can capture a lot of value, which, ultimately, we can recycle into investments in the utility and reduce our equity needs. And we will clearly provide an update when we get through the winter. And if that means that we were able to create more value, we'll upgrade our forecast there, but take a holistic look at the entire rest of the business. Hey, good morning. Thanks everyone. I was just wondering if we could turn to the kind of FFO to debt number. The general sense of where you are there outlook for the year and where the short-term debt is kind of playing into that? I think we've talked about before, like some of that might roll off in the near term. Just an update on that. Yes. Chris, this is Adam. Right now, our calc on FFO to debt, there's always some puts and takes in that calc is about 13.5 at the enterprise level. We do see us trending into our target range in 2024. As Steve mentioned -- or both Steves mentioned, we have recovery at place on those gas costs that should boost cash flow substantially here starting this quarter and feel like we have a pretty good path forward on that. Great. Thanks. And then, more of just a confirmation, but the $6 million expense versus deferred this quarter, is that kind of an outlier to this quarter, because there was just timing differential of the rate case, or should we kind of expect a similar cadence throughout the year? Just real quick, just maybe shifting to the 5% to 7% CAGR. Obviously, look, the rate case is kind of behind you guys. You guys are growing the transportation and storage segment. There's some pushes and takes. There's, obviously, some macro pressures. I guess how do we think about the profile of the 5% to 7%? Should we assume kind of the midpoint of the CAGR, so something more linear as we're modeling forward? Or are there just some items that may impact the shape of the growth in the near term? Hi, Shah. This is Steve. Thanks for the question. Yes, hopefully, the base for our growth is clear, not with everybody, after all the discussions [indiscernible]. And as much as we would love to be able to claim absolute linear growth, I think that would be pollyannish given our scale and our jurisdictions. We strive mightily to tap on growth year-over-year. But as you know, the regulatory compact does create some variances year-over-year. We're dealing with high commodity costs this year. Not sure whether we're going to deal with that year, so that create some ripples. And who knows what other things will be in our sites going forward, including inflation. I think we've got a plan to address all of those. So, I think we are very comfortable that the drivers of our growth are -- and begin with as they should, our Gas Utility business [indiscernible] rate base growth of 7% to 8%. And we're lock stock on, as Steve mentioned, our capital plan for this year and our 10-year plan, which should give you and the investors a lot of comfort in our ability to grow the business. There are clearly always going to be pluses and minuses around the edges. There's the stuff we have to deal with every day and we'll do the best we can. And the only thing that is certain is we will continue to inform you and the market of what those pushes and pulls are, so you can fully understand how we're driving the business. Perfect. And then -- yes, and I'll echo your comments that growing off the '23 original midpoint is very well received, and obviously, very constructive. So, kudos there. Just on the STL Pipeline, while FERC has, obviously, given you a permanent operating certificate, looks as though EDF may try to take the matter to the circuit courts. Do you anticipate any kind of protracted legal battles in appeals court? Or is there a reason to believe the matter could soon be finished once and for all? Just a little bit of an update there. Thanks. Good morning, Shah. This is Mark Darrell, Chief Legal Officer. At this point, EDF has just asked for rehearing at the FERC. So, I think I would just wait and see what EDF or what the FERC ultimately does with EDF's petition for rehearing, and then we'll see what EDF does after that. I don't know, I can't predict at this point whether there would be litigation in the court of appeals yet or not, we just don't know. And this is Steve Lindsey. Just on the operation, I would go back and reiterate value of the pipeline. We've now gone through multiple winters. We just saw with this recent winter event, we were able to deliver both reliable services as well as excess commodity that we didn't have years ago on the eastern side of the state. So, I think anything that goes or extends, we continue to have more evidence of the value of this pipeline for the customers on the east side of Missouri. Thank you all for joining us. We'll be around the rest of the day for any follow ups. Take care, stay warm.
EarningCall_915	Good morning, and welcome to Spotify's Fourth Quarter 2022 Earnings Conference Call and Webcast. All participants are now in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Bryan Goldberg, Head of Investor Relations. Thank you. Please go ahead, Mr. Goldberg. Thanks, operator, and welcome to Spotify's Fourth Quarter 2022 Earnings Conference Call. Joining us today will be Daniel Ek, our CEO; and Paul Vogel, our CFO. We'll start with opening comments from Daniel and Paul and afterwards, we'll be happy to answer your questions. Questions can be submitted by going to slido.com, S-L-I-D-O.com and using the code #SpotifyEarningsQ422. Analysts can ask questions directly into Slido, and all participants can then vote on the questions they find the most relevant. [Operator Instructions]. If for some reason you don't have access to Slido, you can e-mail Investor Relations at ir@spotify.com, and we'll add in your question. Before we begin, let me quickly cover the safe harbor. During this call, we'll be making certain forward-looking statements, including projections or estimates about the future performance of the company. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed on today's call, in our letter to shareholders and in filings with the Securities and Exchange Commission. During this call, we'll also refer to certain non-IFRS financial measures. Reconciliations between our IFRS and non-IFRS financial measures can be found in our letter to shareholders, in the financial section of our Investor Relations website and also furnished today on Form 6-K. All right. Hey, everyone and happy new year and thanks for joining us. We had a great Q4 and ended 2022 strongly. Our user and subscriber numbers continue to climb, showing the value of our investments in the platform over the past few years. We're now in an even stronger competitive position, and I'm confident in our future prospects. And I'll let Paul fill in on more of the specific details. However, a notable call out in the quarter was our eighth annual Wrapped campaign, which was a big contributor to our Q4 success, and we broke all sorts of records and reached several all-time highs with an increase of over 30% in user engagements. Wrapped was trending all over social media, but it wasn't just about Wrapped. So, by the end of the year, we had more than 100 million tracks on our platform and more than 5 million podcasts and more than 300,000 audio books being enjoyed by almost 0.5 billion listeners. In 2021, we said that 2022 would be an investment year, and it was. And in light of our recent news on cost and staff reductions, I'm sure some of you are wondering if we believe that, that investment was a mistake. And the answer is, no and yes. I still believe it was the right call to invest, and I would do it again. So, for instance, in the last 12 months, we grew our users substantially, enhanced our capabilities, developed a better product and brought more content to creators and users around the world. And we also made tremendous strides in setting Spotify Park from everyone else in our space. In addition, my expectation was never that these investments would have a great impact in the short term, yet they have. But more importantly, for our share owners, I fully expect that they will continue to pay dividends in the months and years to come. But things change, and the macro environment has changed significantly in the last year. And in hindsight, I probably got a little carried away and overinvested relative to the uncertainty we saw shaping up in the market. So, we are shifting to focus on tightening our spend and becoming more efficient. This remains consistent with the plan we outlined at Investor Day, but you should expect us to execute on it with even greater intensity given what I just said. However, to be clear, this doesn't mean we're changing our strategy. We will continue to work to build the platform of the future, and that will take investment in new opportunities that we outlined like podcasts and audio books. And if anything, thanks to our position in users and subs, this should allow us to both increase revenue per user over time as well as improve our stickiness with consumers even more. But going forward, we will do it with an intense focus on efficiency, and that marks a pretty big shift in how we will act. And to meet this objective, we are also rethinking how we operate. We've set up a new org structure that streamlines decision-making and prioritizes speed and efficiency. 2023 marks a new chapter for us, but our commitment to achieving our goals remains the same. And I'm really optimistic about the direction we're headed in, and we'll continue to focus my efforts on guiding the long-term success of the company. And with that, I'll hand it over to Paul to go deeper into the numbers, and then Bryan will open it up to the Q&A. Thanks, Daniel, and thanks, everyone, for joining us. I'd like to add a bit more color on the quarter and then touch upon the broader performance of the business and our outlook. Let's start with Q4. User growth was very strong in the quarter. Total monthly active users grew to 489 million in Q4. This was 10 million ahead of guidance, up 33 million quarter-over-quarter and the largest Q4 net additions in our history. Moving to premium. We finished the quarter with 205 million subscribers, 3 million ahead of guidance, thanks to broad-based strength across several regions, particularly Latin America. Our revenue grew 18% year-on-year to approximately EUR 3.2 billion in the quarter. Reported results were aided by a 600-basis point currency benefit. However, this was 200 basis points less than forecast. So, while reported revenue was a touch below forecast, our organic growth on a currency-neutral basis modestly outperformed due primarily to advertising. Turning to gross margin. Gross margin of 25.3% was above guidance by 80 basis points due primarily to lower podcast content spend, along with broad-based favorability in our core music business led by strength in Marketplace. Moving to operating expenses. Growth in the quarter was lower than forecast due mainly to currency movements and to a lesser degree, lower marketing spending. When combined with our better gross profit, our operating loss was ahead of guidance by EUR 69 million. As we previewed last quarter, free cash flow was negative in Q4 due primarily to timing shifts around certain payments. However, we continue to generate roughly $200 million in free cash flow on a trailing 12-month basis and we expect to be free cash flow positive for the full year of 2023. Looking ahead, we are pleased with our momentum into 2023. When combined with our increased focus on speed and efficiency, we are confident in our ability to continue our double-digit top line trajectory in conjunction with improvements in profitability. With respect to first quarter guidance, we continue to see strong momentum in MAU and anticipate reaching half a billion users by the end of Q1. On the subscriber front, we expect to add about 2 million net subscribers, bringing total subscribers to 207 million. We're also forecasting EUR 3.1 billion in total revenue, a gross margin of roughly 25%, excluding severance charges and an operating loss of EUR 194 million with the latter reflecting EUR 35 million to EUR 45 million in severance charges within our operating expenses. While we no longer give full year guidance, full year 2023, we see strong growth for both users and subs. So, we are feeling good about the momentum exiting 2022. Gross margin and operating expenses are expected to improve throughout the year, as we have mentioned previously, while free cash flow is expected to be in line with historic averages. Given many of the adjustments we made at the start of 2023, including our decision to reduce our workforce by 6%, we see our operating expenses growing slower with a material improvement in our operating loss compared with 2022. This is according to plan. As Daniel mentioned, we are entering a new area with even more focus. Thanks, Paul. [Operator Instructions] And our first question today is going to come from Matt Thornton on subscribers and pricing. Has Spotify seen any lift to subscribers from recent competitor price increases? If not, does this give Spotify increased confidence to take price? And what are the reasons, if any, Spot would not take price? I'll take this and feel free to chime in, Paul. So, I think the most thing if we kind of up level this is our priority is to grow revenue as fast as we possibly can. So, when we look at a market, there's generally two strategies we can do that. One of those strategies would be to grow the number of people that we can attract to join our platform. And the second strategy would be to increase the revenue per user that we already have on the platform. So generally, our approach when we're early in a market is to try to grow the number of participants on the platform. And the usual way to do that is not to try to increase prices too early, but keep a competitive price that attracts the most amount of users onto the platform. And then as the market matures, then obviously, it will shift more so that most of the revenue growth comes from price increases. So, to put things in context, in 2022, we increased our price point in more than 40 markets around the world. So, it's definitely something that we're doing, and we're looking at it as a balanced portfolio approach where in some markets, we're selectively increasing prices because we're in a more mature place. In some markets, we're mostly focused on growth. So that's our general approach. And I don't have anything specific to announce at this point, but we are constantly discussing with our rights holder partners around various price increases that we would be doing. So, we would always look at what's net beneficial to our business in growing the revenue and growing the profitability in each market we're in. Yes. I would just add in terms of just the subs outperformance in Q4, it was pretty broad-based. So, it was broad-based globally. It was broad-based by product. We had strength, family plan and Duo plan. We outperformance of EUR 3 million. There was outperformance in pretty much every region. So, it was pretty broad-based. And we had success with our holiday campaign, which we do every December and Wrapped was a huge success as well, sort of driving traffic to Spotify. So overall, the overall subs performance was pretty broad based. All right. Our next question is going to come from Michael Morris on music economics. Universal CEO recently called for a change to the streaming music business model, citing an increase in lower quality content, diverting economics away from artists. Do you believe this is happening on your platform? And what do you see as the path forward with your music label partners on this topic? So first off, we have great relationships with all of our music partners and are in constant dialogues with them about their performance and our performance in all the markets around the world. But I think the most important thing to perhaps note is that much like platforms and media, one of the most interesting changes that's been happening is obviously, that people's music taste is becoming more personalized. And as people's music taste becoming more personalized, you're seeing two things happening. The number of artists that are mattering for users are increasing materially. And the other change is that unlike in the early areas of streaming, we're seeing a notable increase in local repertoire. So, for instance, if you look at many of the local geographies now, you're seeing a lot of take France as an example, you're seeing a lot of French music actually being very impactful in Poland. You're seeing a lot of Polish music being very impactful as well. So, I think the -- there is a lot more artists that are mattering now than perhaps ever before. And obviously, the big sort of counter to that would be does it mean that you can sustain yourself or is it more one-hit wonders? And I think you're seeing a little bit of both happening in the music industry at present moment. I think some of these trends are very powerful and very good, I think, for consumers with more choice and more artists making their way. And then you need to balance that, obviously, with having the ability to have sustainable artist careers on the back of that, too. And that's a constant dialogue that we're having with our label partners. But I would mostly say that most of what we're seeing is quite encouraging because of all the response that we're seeing from artists around the world and their ability to grow their audience. All right. Next question is going to come from Doug Anmuth on gross margin. As you move beyond the 2022 investment year, do you still expect gross margin to expand in 2023? And can you talk about the key drivers? So, the short answer is yes. We think Q1 will be the low point in terms of gross margin for the year, with gross margin improving throughout 2023. So that's still the plan. When we look at Q1, in particular, sort of our core margin, when we look at sort of music and podcasting is improving. Some of the investments we made in the back half of the year are still slightly impacting Q1. We think those will sort of continue to moderate throughout the year, which will help -- partly help gross margin. We've talked about the improvements in podcast gross margin as well as we expect that to get better throughout the year. So, we do expect that Q1 will be the low point for gross margin, and we do expect for it to improve throughout the year, with hopefully a nice trajectory heading out of 2023. All right. Next question comes from Mario Lu on operating income. You mentioned in the deck an expectation for meaningful improvement in operating income in fiscal '23 and beyond. That being said, is there a rough time line with regards to when we should expect overall operating income to reach breakeven? Yes. We haven't given a timeline on that. I would say, first thing is I think you can expect to see a meaningful improvement in the operating loss in '23 relative to '22. So, we expect that to be pretty significant. Again, as Daniel mentioned, we invested a lot in 2022. So, we'll get some of the leverage on top of that investment in 2023, along with higher revenue growth and more gross profit dollars. So, we expect that to improve and improve throughout the year. Exactly when we break even, we haven't said yet, but we feel like we're on a good path, and we feel like we are in a good position right now to have that speed and efficiency that we want to have in 2023. All right. Another question from Matt Thornton on margins. Do you still expect 2022 to have been the peak drag from podcasts? And podcast, do you still expect podcast to reach breakeven within several years? And three, do you still expect the consolidated gross margin to reach 30% within five years? And then you can chime in because I think some added context here might be pretty good as well. So, I think the big thing that I just want to highlight again is we mentioned, as Paul said before, that 2022 would be an investment year. And we broke out the various verticals where you would see that music have been making steady improvements, but obviously, our podcasting business had been a drag to our gross margin profile. And we also then announced that 2023 would be a year where you see the reversal of some of those trends. So, I just wanted to add that context that, that's still very much on the top line for us that you should expect music to be meaningfully improving with things like Marketplace playing an important role. And then podcasting, both as it grows in size with advertising revenue, but also more efficient spending will mean that you'll see improvements there as well. And then, Paul, maybe you can chime in on the detailed questions. Yes, I can be quick now. So, the answer is yes to 2022 being the peak drag from podcast. Yes, the podcast reaching breakeven within several years. And yes, we still believe our consolidated gross margins can reach 30% in five years. Okay. Our next question is going to come from Justin Patterson. This is for Daniel. As Alex takes on responsibility as Chief Business Officer, how should we think about his priorities and leadership for content and advertising, how those might differ from Dawn's? I don't think from a strategy point of view that it will differ all that much from Dawn's. However, again, the primary reason why we did this reorg was to drive speed and drive more efficiency. So, speed will come in having more decision-making and faster decision-making. Essentially, Spotify is a lot more complex of a business than it was several years ago. And so, to have both Gustav and Alex help me in the day-to-day in this much more complex business, I think, will materially mean that we'll have more brains thinking about these things. We'll be having more decision-making so that we can make decisions faster because that honestly is one of the biggest blocker at this point. It's not that we can't execute on the ground. It is actually making real sort of material decision-making at the top. That's been one of our -- things that we need to speed up when we look at sort of the internal feedback. And then we're going to holistically now look at the business rather than looking at things bit by bit. So, marketing was under Alex preview previously, but not advertising and not content. And now we're holistically looking at it as one P&L and focus on driving efficiency across the board by readdressing resources to where it's most needed. And that will be a big improvement from prior org setups. All right. Next question from Doug Anmuth, users and subscriber growth in '23. How would you think about 2023 net adds for MAUs and premium subscribers relative to your performance in '22? What are some of the puts and takes here? So obviously, we don't give 2022 guidance anymore. I think what we said in my outset is we expect really strong growth. Obviously, on the MAU side, '22 was a real outlier in terms of how much we outperformed. But we see this often where we have some years where we over-index on MAU or we over index on subs, and it can change even throughout the year in terms of how we're trending. I would say, in general, any time we're growing MAUs, the way we are, it's always a really good sign of the business, the health of the business and the health of the future subscriber growth for Spotify as well. So, we're not giving guidance, but I would say we feel really good about the momentum as we exit 2022. We feel good about the guidance for Q1 and how we're trending. My only addition to that would be, again, to note that much of the investments we've been making over these past few years that culminated in 2022 was making platform improvements. Improving the number of contents, we have on our platform, improving the tools for creators and consumers alike, and that has led to better acquisition, better retention of the consumers really across the board. So, I feel really good about that. And as I mentioned in my opening remarks, -- some of these things we expected to take longer on seeing the benefits, but we're seeing them already in 2022, and I think that's a real positive news for the years to come. Okay. Our next question is going to come from Michael Morris on advertising. How is advertising revenue been trending in the first quarter of 2023? Do you expect the relative performance of podcasting and music growth to persist in 2023? And how far forward do you have insight into demand trends? So, if you kind of take a step back and you look at sort of just advertising in Q4 overall, it's definitely continued to be very up and down. So, in Q4, we outperformed our expectations. Admittedly, those were lowered expectations. So, we had kind of lowered expectations coming into Q4. We actually outperformed those by about EUR 50 million or so, plus or minus. And even within that, we had two months that outperformed and one month that underperformed. So even within Q4, it was pretty up and down. So, I think Q1 probably we expect more of the same. We feel really good about the ad stack we're building. We feel really good about some of the acquisitions we've made, obviously, at the high-level megaphone, but chartable and pod sites and our ability to improve measurement and attribution across all of advertising. And so, we feel good about that and where the tech is going, and then it's really going to somewhat depend on just how the macro rolls out over time. And so, it's been uncertain. I think we've done pretty well. Like I said, we slightly outperformed in Q4, and we'll see how the year unfolds. Okay. Next question from Benjamin Black on Marketplace. You had expectations for approximately EUR 200 million in Marketplace revenue for 2022. How did you track versus expectations? And how should we be thinking about the trajectory of Marketplace in '23? So, we outperformed that EUR 200 million. I think we had said at the Investor Day that we expected Marketplace to grow at least 30% in 2022. It exceeded those expectations pretty nicely. So, we had really strong Marketplace growth overall in 2022. And again, we feel that product has a lot of momentum behind it as well and expect good things in 2023 as well. Okay. Next -- another question from Michael Morris. Can you share detail on investments that have impacted Premium gross margin? What types of products are being invested in? When do you expect them to be released? And what is the projected path to contribution? So, there's a number of things that go on there. A lot is things that we test and learn. We don't always talk about them, some of the things that come out 6, 9, 12 months later. And so, when we talk about an investment year, some of that is part of what was going on. It's things that we think are going to drive -- improve engagement, improve users, improve subscribers. And some of it, we have to absorb the cost as we're testing. So, we don't go through all of them. We do sometimes 10, sometimes hundreds of those within quarters. But again, I think we believe we'll get the benefits of some of those moving forward into 2023, and you'll see the incremental investment slow and the benefits kind of hit in '23. Okay. Next question from Rich Greenfield on audio books. Is audio books as a category working? Was it a mistake? And how has it impacted your thinking about new categories, some of those new categories you teased at the Investor Day? Yes. I mean its early days on audio books. That's kind of what I can say. We're seeing some encouraging signs. We're definitely seeing people take up the offering but we're nowhere done from where we want to be and where we believe the category can be doing. But I would just -- rather than perhaps giving any specifics here or preannounced things, I think that the most important thing I can do is kind of give a context in that there's two types of companies. There's the company that waits until it gets things perfect the first time and then it tries to launch something that's perfect. And then there's the company that releases something that it knows needs work and then rapidly improves from there. We're definitely the latter. It's hard for people to understand when they're looking at us because it looks like it's an inferior product or an inferior strategy. We have the same notion around podcasting. How is this thing going to win podcasting these many years ago when we announced that and yet now four years later, we're the leader in that space. So, I think as you're looking at our strategy now, you shouldn't draw any two big conclusions that we are -- that's our full intent of what we want to do in the category. So, we're encouraged because we think fundamentally that audio books has a massive opportunity and that there are very few consumers that are currently participating in the ecosystem. And if you look compare to our other verticals, music and podcasting, we thought pretty much the same thing. So, nothing has really changed when we look at the space and what the potential is, and now we're just heads down focused on executing. And during 2023, you'll see a lot of new things roll out in the audio book category from Spotify. All right. Our next question is going to come from Deepak on user choice billing. Were there any noticeable benefits to subscribers from the rollout of Google user choice billing in the fourth quarter? And are you seeing any conversion uplift? It's still early days. So, it's tough to really know. I would say, in general, I think we're just overall, very excited about the opportunity. The join flow is better, giving users the choice on payment methods and how they want to work with us and purchase from us. And so, we're excited about user choice building. We think it's going to reduce friction and improve conversion over time. Still early days in terms of how it's impacted at this point. All right. We've got another question from Rich Greenfield on podcasting. Investors remain skeptical that podcasting is a good business and that it has meaningfully moved the needle for Spotify. Can you help them understand why you believe in the investment to date, especially in the context of your recent management changes? Yes, I think the most important thing here is to kind of go back on context. four years ago, we entered into podcasting. The major player in podcasting had been doing it for 20 years and was considered the sort of unassailable leader. So, we wanted to tackle this heads on. And we realized, again, as I mentioned in my comments around audio books that this was a nascent space that was growing, albeit still was under consumed to what we believe the potential was in the industry. And we took the medium and pretty much have grown overall globally now the audience by a huge margin to what was true four years ago. So, it wasn't just that we took audience from another platform, but we actually grew the pie meaningfully for podcasters. And as a result, now we have 5 million creators on Spotify, so a massive increase in the number of people who are creating podcasts, you being one of them. And this is true across the world, really at this point. So, net, net, I think we went from being almost nowhere four years ago to now being the leader in many markets around the world in this space. And that adds several benefits to Spotify. It adds the benefit that it makes our business more defensible because now it is meaningfully contributing to our advertising story. It is also so that from a competitive lens, when we've added this content, what we're seeing is that consumers are not just consuming music on the platform, but they're consuming music and podcast to a great extent. And the number of users on our platform that are consuming, podcast keeps growing as well. And as that's happening, their retention increases. And as that happening, it is impacting our business. Now what you're probably asking underneath all of that is that it's been a drag on the gross margin side. So, what does that mean future? Well, we've been making many investments. Some of them have been working greatly, and you should expect us to double down on those. And some of them, not surprisingly, haven't worked out. And there are certain shows that work really, really well for us, and there shows that didn't perform as we expected. And I think that's a sign of maturity that you go for the growth first and then you seek the efficiency. But generally, what you should expect us is across the board now to be focused more on that efficiency and creating more leverage and that's certainly true in podcasting too. And the management changes really had nothing to do with the change of strategy in podcasting. It's more around increasing the speed of decision-making and increasing the focus on efficiency across the board because the next era of Spotify is one where we're adding speed plus efficiency, not just focused on speed or growth at all costs. And that is a big shift, but it is also what we said during the Investor Day in June. And now we're going to have to live up to that. And I know some investors don't believe that we're serious about it, but hopefully, my remarks today shows that we are really, really focused on driving efficiency going forward. Another question from Benjamin Black on pricing. Last quarter, you alluded to a potential win-win with respect to the conversations you're having with the labels around price increases. What are some of the concessions you're looking for from the labels? Yes. I can't comment on sort of individual negotiations with our rights partners. But as I mentioned before, we're thinking obviously how we can grow our business the best possible way. Sometimes that is keeping the price low and grow the number of users on the platform. Sometimes it is increasing the revenue per user. Sometimes it is increasing our margin per user and sometimes it's all of the above. The important part is what's pretty amazing with our Spotify story is that this is something that creates win-wins with our label partners too. They -- if Spotify does well in the market, it generally increases the revenues for the labels as well. And we've seen that time and time again that this close partnership generates material benefits for both companies over time. And that's what we will expect going forward, too, as we're driving more benefits for all of our creative partners and Spotify. All right. We've got another question from Doug Anmuth on marketing. How are you thinking about sales and marketing spend for 2023 following the ramp in spend over the past two years? Yes, we definitely increased marketing a lot or significantly in 2022. It was definitely a driver of the outperformance in MAU and very intentional. We had a plan and a focus at the beginning of the year to really invest, particularly in some of our newer markets to grow there and make sure that we have the foothold that we wanted to have. And by all accounts, it was extremely successful, if not more successful than we even thought. I do think you'll see '23 being -- we'll be more efficient with our marketing spend into 2023. As Daniel said, we're going to be more efficient. We're going to be more thoughtful about all of our spending into 2023. So, no specific guidance, but yes, there was a big ramp in 2022. And I think you'll see us be more efficient with our marketing spend into '23. Okay. Another question for Ben Black on ticketing. Could you give us an update on your ticketing business? Is this an area of focus? And how should we be thinking about the business model and the market opportunity? Yes. And just to level set on context. Long term, I think it's absolutely a business model and market opportunity for Spotify, too. But our strategy is to be an open platform, and we want to enable as much as possible, and we are very partner-friendly when we're doing so. So, think about, for instance, how we're working with our label partners, think about how we're working with merchandise and other things, too. It is not offering our own solution and locking people in. It is opening up the platform so that creators have as much choice as possible in choosing whatever options they want to do. So, the primary strategy is very simple. We see a double-sided win-win here, which long term will translate into business opportunity. But our creators are trying to grow their audience on Spotify. They're trying to engage more with that audience, and we're obviously trying to help them monetize that audience even better. A huge part of that, especially for the music audience is obviously touring. So, if we can be a partner to creators and help them sell more of their tickets, that is a meaningful increase to many artists' livelihood, which is great and something we're focused on. But the separate part is on the user side, the same is true as well. One of the big things we're seeing is users are asking us, help me find more great things to go watch. And we saw a tremendous uptake in the number of people who are visiting the Concerts tab on Spotify in 2022. But the strategy isn't to go compete with the ecosystem, but rather to enable the ecosystem. And then from there on, there will be opportunities for us to play as well. And you can see that already today where there's lots of concerts from all the big vendors being available, and we'll add more and more of inventory. And over time, that will translate into business opportunities for Spotify as well. Okay. Next question from Mario Lu on cost savings. Can you help quantify the annual savings from the headcount reduction you announced last week? And any specific areas of the business to call out that were impacted more so than others? We're not going to quantify the savings. Obviously, you can do the math. It's roughly 600 employees that were affected. The 6% was actual employees. We -- so are looking closely at open headcount to see which of those we want to backfill and which of those we will also eliminate sort of, as we've mentioned a number of times as we try and be more efficient with deploying capital and employees moving forward. And there wasn't really any specific area. It was pretty broad-based across most of the divisions within Spotify. We've got another question from Rich Greenfield on the product. Spotify recently began testing a Friend's tab on the bottom strip of the app. Can you help us understand your thinking here? Well, we do a lot of experiments on the product side in many different areas. So, what you probably have seen is one of those experiments. And since we're not committed to rolling that out, I don't really have much of a sort of comment, but to say that overall, we're committed to creating the best audio experience for consumers and creators in the world. And obviously, social could be a meaningful driver of creating an even stickier and more engaging experience. We've got a follow-up question. I'm from Doug Anmuth on subscribers. You typically see MAU to Premium subscriber conversion in the 12 to 18-month range. Do you expect any change to that conversion or to churn given the large MAU cohorts over the past couple of years? So, I'd say, look, at a high level, we've said this repeatedly for a while, any time you're seeing accelerating growth in MAU, that always tends to be very good for our business and lead to subscribers over time. At this point, we don't see any reason why any of our historical trends would change. It's always tough to know. But again, given the outperformance in MAU this year, that's always a good harbinger for sub growth in the future. And with respect to churn, we don't obviously give those numbers out. Year-over-year churn, though, was pretty consistent with where it was at this point last year. So even with the strong growth, we're not seeing any uptick in churn at all. The one addition I would probably just make is that it's generally been true over the entire existence at Spotify that the longer a person stays with us, the higher the likelihood is that they'll end up being a Premium subscriber over time. So again, country mix changes, maturity of those market changes and so on. So, when you look at the core behavior, it may take longer in some developing markets than it does in mature markets, et cetera. But the trend is the same, which is the longer they stay, the more likely they are to convert. And of course, the better the engaging experience, we make the more likely they are to stay. And therefore, the more likely it is to lead to positive business results for us long term. All right. We've got time for one to two more questions. We're going to go to the next one from Benjamin Black on margins. I think you classified 2022 as an investment year. So, could you break out -- break down which investments are falling off that will drive the positive gross margin inflection in 2023 and 2024? Yes. I think there's -- look, there's a number of factors that are going to -- that improve gross margin. I think we've talked about a lot of them. We're going to continue to see Marketplace growth, which will help our music gross margin. A lot of the investments that we did in 2022 that were investments with no real sort of benefits to the revenue will start to hopefully bear fruit in '23 and beyond. We've talked about podcasting that 2022 was going to be the peak year in terms of the drag that podcasting had on our gross margins. So, we expect that to get better in 2023 as well. So pretty consistent with what we've said in the past in terms of what the impacts were in 2022 and how that will change in '23 and beyond. All right. And we're going to take the last question from Rich Greenfield on competition. Does Spotify need to figure out music discovery knowing that TikTok appears to be ramping up to launch a music subscription service in the U.S. and Europe later this year? Well, I mean, again, we have what I think is a pretty decent music discovery already, which works pretty well. Now that said, of course, we're always looking at how we can make that better. And you're right to point out that TikTok obviously, is a formidable competitor, I think, to any platform in the world today, no matter what field you're operating in. But we feel pretty good about the improvements we made in the platform already. And obviously, I look forward to sharing more on Stream On, sort of wink-wink around all the updates that we're planning throughout the year as well that I think will mean a lot for both music and podcasting and beyond. So, we're focused on having the best possible platform we can have for both consumers and creators and that remains true. But I feel, candidly, that -- we're in a better position competitively than we've been in many, many years. For throughout the existence of Spotify, we have always heard of competitors, and it was always the sort of big scary wolf, whether it was Apple or Amazon in the past, et cetera. Now it's perhaps YouTube and TikTok, et cetera. But with both all the improvements we've been making in music, but also with the addition of podcasting and audio books, it is a much more resilient consumer experience. And I feel really, really good about our competitive differentiation. And I think when you look at already our 2022 results on both the MAU side, the improvements in the Gen Z, our audience, in Southeast Asia, those are showing that our products and platform is very, very favorable in the competitive marketplace. All right. Thanks, Rich. And that's going to conclude our Q&A session for today's call. And I'm going to turn it now back over to Daniel for some closing remarks. All right. Well, thank you, everyone, for joining the call. I'll just once again want to reiterate my confidence in the business now as we're entering the next phase. And while it was really great to close out 2022 on such a high note, the fourth quarter is -- I think we just really one of many proof points that shows that the investments we made over the last few years are really paying dividends. And when I look at the totality of what we've done, one thing that stands out to me, and it is that it's not always linear. We try to draw these linear dots, but that's not how the world works. And what we've been going through has really been a multiyear approach that really culminated with what we presented to you, the community, at our Investor Day in June. And that's the plan we're tracking consistently against. So, I look forward to sharing more about our evolution and all the things that we're building at our upcoming Stream On event on March 8. And in the meantime, please check out our webcast for the record for more details about the quarter. Thank you, everyone, for joining us. Okay. And that concludes today's call. We'll be available on our website and also on the Spotify app under Spotify Earnings Call Replays. And thanks, everyone, for joining.
EarningCall_916	Good day and welcome to the Melexis Full Year 2022 Results Conference Call. This meeting is being recorded. At this time, I would like to hand the call over to Mr. Marc Biron, CEO. Please go-ahead sir. Hello everyone. Welcome to the earnings call related to our Q4 and full year results. Today, we have two speakers, Karen Van Griensven, our CFO and myself. Let's cover some topline and financial background first after which Karen and myself would be happy to answer any question you may have. Our revenue in 2022 has increased by 30% compared to 2021. This increase was supported by the dollar effect, the price inflation, the improved product mix, the cap sales increase and the content growth. Our growth in '22 was severely constrained by the supply, but it was also clearly driven by the car electrification as well as by a significant increase in body chassis and safety applications. Those trends are also visible in the outperforming product line. First of all, the revenue of the current sensor product line has doubled in '22, thanks to high demand in investor, on-board charging, DC/DC converter applications. The sales of the embedded drivers which are supporting thermal management in electric vehicle has also increased by almost 50% in '22. And the increase of the sensor content in safety application has contributed to the highest growth in absolute value of our magnetic sensors. We have launched 16 new products in '22 and those launch also confirmed those trends. Just as an example, we have launched embedded driver which are used to position the activator or the thermal valve and therefore, those embedded driver has key element to increase the range of electric vehicle. We have also launched a current sensor which is used for the battery monitoring of the electric vehicle. And we have launched multiple magnetic position sensors that are used in steer-by-wire system but also in the thermal valve of the electric vehicle. For 2023, we anticipate the continuation of supply chain constraint for the innovative applications that are used in the electric car and also high-end car. While for the other application demand and supply are moving to a healthier balance. Hello everybody, a bit on the financials. So the sales was already mentioned, a 30% increase. We reached â¬836 million. Then there was an impact of 5%, a positive impact because of the strength of the U.S. dollar. The growth result was â¬374.7 million or 44.8% of sales, which is an increase of 37% compared to 2021. R&D expenses were 10.8% of sales, G&A was at 4.9% of sales and selling was at 2% of sales. The operating margin, our results was â¬226.5 million or 27.1% of sales, an increase of 53% compared to â¬148.4 million in 2021. The net result was â¬197.2 million or â¬4.88 per share, an increase of 50% compared to â¬131.1 million or â¬3.25 per share in 2021. The Board of Directors also approved a proposal to the Annual Shareholders meeting to pay out over the result of 2022, a total dividend of â¬3.50 gross per share. This amount contains an interim dividend of â¬1.3 per share, which was paid in October '22, and the final dividend of â¬2.2 per share, which will be payable after approval of the Annual Shareholders meeting. We'll go to the outlook. So Melexis expects sales in the first quarter of '23 to be in the range of â¬225 million to â¬230 million. For the full year '23, Melexis expects a sales increase between 11% and 16% with a gross profit margin around 45% and an operating margin around 26% at the midpoint of the sales guidance, all taking into account a euro/U.S. dollar exchange rate of 1.08. For the full year 2023, Melexis expects CapEx to be around â¬70 million. Hi. Good morning. I have couple of questions, if I may. The first one is maybe coming back to your outlook. I mean, if we look at your Q1 guidance, it implies 24% growth year-over-year. And I mean, your full year is on 11% to 16% year-over-year. So I was wondering it would imply significant slowdown or even no growth in the second half of the year. So I mean, are you being conservative here or in light of the macro environment or is it something that you see and the slowdown and any drivers you could provide for this implied slowdown would be helpful. Yes. Thank you for the question. Yes, we are more cautious by the supply aspect because all the -- or the vast majority of the growth is coming for innovative products or for innovative application, electrification, ADAS and also premiumization. And yes, those new products needs to ramp up, and it's why we are a bit cautious on the supply aspect for the full year. What is your supply incremental that you get from your partners? How much you can increase your capacity in '23 versus 2022? Yes. It's difficult because any hiccup in the supply will have immediate effect on Melexis. It's very difficult, therefore, to predict already now what the supply will be. Yes. And I repeat, we are ramping up those new applications, those new products. And we know that the ramp-up is always a bit sensitive. That's why we want to be cautious. So you don't see any inventory impact or demand-driven impact in the second half of the year. So it's really only supply that would justify the H2 implied outlook, if you know what I mean. Okay. Thank you. The second question is on current sensors. I mean you have been talking about that for a while now. Can you help us understand how much is it as a percentage of your revenues, current sensors at the moment? Yes. As I mentioned verbally, it has doubled if we compare '21 and '22. And it was indeed a small product line at the beginning and now the product line is growing. And it's, I would say, in the average of other product lines, but we don't give exact number, but it's for sure not a small product line anymore. So is it like mid-single-digit percentage, high-single-digit percentage of revenues, low-single-digit still? Just trying to understand because it's obviously a very important driver for your growth. So I understand how big it is. So that's where we can have more visibility on this new product line. Well, again, we don't give exact numbers on this. But yes, actually, overall, yes, the electrification products is a substantial part, but then that's more than current alone. So there, we speak of a very important portion already of Melexis. But again, we don't want to give, and then I'm talking of the motor drivers and other application like X, Y, Y-ish type of applications. If you take this into account, you come at least 30% of our sales. Okay. Great. And maybe last one for me, if I may. On the OpEx; OpEx has been quite high this quarter. I mean is it a new run rate or any one-off in this OpEx? Just trying to model for the year. Yes. There is the wage inflation that is -- or inflation in general, but certainly wage inflation that had the full impact for the first time in Q4. There are a few exceptional items as well. So it could be that Q1 is again a bit lower. But on the other hand, yes, we plan to do volume hiring for R&D. So yes, in that respect, throughout the year, we expect R&D as we managed to execute. So it's R&D to further go up first versus Q4 as a percentage of sales. But at the beginning of the year, it might still be a bit lower. Yes. Thank you. First question, the ICs per car for Melexis, stable at 18. Can you maybe explain a little bit what's behind there? Is that the shift in maybe a little bit less premium cars? The shift was maybe linked to that, how many ICs does Melexis have in electrical vehicle? Yes. In fact, last year, it was a bit less than 18. It has been rounded up to 18. This year is a bit more than 18. And we keep it, that's why we mentioned 18 plus because we have almost 1 IC per car more versus last year. In fact, indeed, our revenue has grown by 30%. But those 30% were due to some dollar effects on price inflation. We have improved the product mix, thanks to the allocation. And then, in terms of volume, the cash sales volume has increased, and our content growth has increased. It's why out of those 30%, only part of it is really a volume growth or content growth, and this is corresponding to a bit less than IC per car. I would say in general, yes, because in the electric vehicle, there is the electrification aspect of the vehicle, but also those vehicles come with a much modern platform. And the much modern platform also contains much more comfort and safety application with a lot of electronic. Then I would say, in total, the electric vehicle is much more than 18 IC per car. If you remember last year or the year before, we mentioned some IC per car for some modern car like the Tesla or the EQS, and we were, yes, 40 plus in such a car. And it is because the electrification is coming with a more modern platform. Overall, the car is much more modern, meaning with much more electronic. Okay. Then the second question I have is on the long-term agreements of the forecasted revenue growth. How much of that is on those long-term agreements? It's still the case, yes. Yes, we have added some long-term agreements recently, but it does not change really the needle. I think, overall, it's 50%. Okay. Thanks. And final question, in the growth guidance, sorry to miss this, how much of that is a price component? How much is for raw material price? Yes. I would say that the situation is similar to the previous quarter. We have 10% of the revenue, which is related to the non-automotive. And, yes, I would say there are 2 reasons why it does not increase. The first reason is linked to the allocation. During the full '22, we have always given clarity to the automotive business, meaning that we have, let's say, derived some wafers from non-automotive to automotive customers. This is one aspect. And the second aspect, which came throughout the end of the year, is indeed we have also seen some reduction of demand for the non-automotive which was healthier for us because we have been able to derive even more wafers to the automotive business. And then, all in all, the 10% remains stable throughout the year. And as automotive is stable or still growing in a quite difficult climate for other semiconductor segments, do you see new kids on the block are still the usual suspects in the competitive landscape? Yes. Already in '21, the design win was very strong, and we were wondering can we beat '21, but we have beaten '21 largely in '22. But it was a very strong design win. And last question is on this trend, like you benefit from electrification at a user experience. Which of these trends do you expect to be more important in the shorter run and which will be more, let's say, for 3 to 5 years out? If we look, let's say, the projection of the growth for the next 5 years, let's say, clearly, the highest growth is coming from the electrification of the car. I think, yes, IHS, for example, expect that between 2022 and 2027, the CAGR will be 28% for the electric vehicle, and this is for sure the highest contributor and then the premiumization is the second one in terms of contribution. And the ADAS, I would say, 5 years ago, the goal was to reach Level 5 in ADAS. But now I think everybody is much more modest. Level 5 is not for the near future, but we see that more and more cars are moving to Level 2 and to Level 3, which is also good for Melexis because to reach Level 2 or Level 3, you need much accurate products. You need also a product with more safety. Sometimes to create the safety, you need also 2 products in parallel. Then I would say this is the third in terms of contribution. Yes. Hi, good morning. I guess my first question would just be around the Malaysia fab issues that X-FAB experienced. Did that affect you in Q4 or Q1? And would your revenue have been significantly higher or was it not that material? And I have few follow-ups. Yes. In fact, indeed, you are right. Our supply in Q1 is affected by this problem. And this problem happens, I think in October. And given the supply chain lead time, in Q1, we have some supply limitation due to this problem. Yes. In a way, yes, because we have received less. I mean the supply chain was a bit empty at one point in time, then it creates some delay in the overall supply chain. Okay. Just coming back to a previous question regarding the contribution of price to the growth in 2023. I just want to clarify what you meant by; did you say low double-digit? So pricing is up low double-digit, very low double-digit. Is that what you meant or something else? Okay. So if you're guiding in the teens, then 2/3rds is driven by price. Am I interpreting that the correct way, yes? Okay. So more than half. Okay. And then, in terms of LTA enforcement, obviously, there's going to be a challenge going forward when we have this correction in 2024. So X-FAB has been very clear that they will strictly enforce LTAs. How does it feel for you guys in terms of strictly enforcing take-or-pay type terms? Is it a bit more tricky for you guys given that some of your competitors will have better supply than you and will likely start undercutting you? Or is this something and will you enforce these LTAs strictly in 2024? Yes. With your customers, will you insist on pre-agreed pricing under contract? Or do you think that given that, that's a repeated negotiation that you may have to give ground on some of these pre-agreed terms? I think that the LTA is the new reference, meaning that we have indeed LTA with our suppliers. We have LTA with our customers, and this will be the reference in any discussion, I would say, for the next 2 years. And yes, the LTA that we have agreed with our customers are fully synchronized with the LTA that we have agreed with our suppliers, meaning that we have a good balance in between. And we feel comfortable, let's say, on this side. Last question, just on current sensors. Who was driving the decision to choose your sensors over another? Is it typically the OEM? Or is it typically Tier-1s like, I don't know, Vitesco or something like that? What is the typical situation that gets you designed in the OEM-led or Tier-1 led? I would say we have a mixed situation because, indeed, some OEM want to control directly the IC supplier. Then for some of the OEM, we have a direct contact with them and they define themselves the current sensors that they need because they want to control the overall electric per train. We have other case which is more the traditional case where indeed it's the Tier-1 who designed the current sensor. The modern OEM has a direct contact with Melexis. Got it. And there's no role for reference designs from other companies like larger semiconductor companies like ADI or NXP in terms of -- Yes. Hi. Thanks for letting me on. I am just trying to understand. I mean you've had 2 consecutive years of 25%, approximately 30% growth. And you're guiding to this year where 2/3rds of the growth is coming from price. How was the pricing in the last 2 years? And can this kind of pricing trajectory be sustained? Yes. For sure, a good and important question. Yes, indeed, we said last year, the price increase was high-single-digit. This year, it's a bit similar. Yes, I think as a matter of fact, those price increases are linked to investment. The overall volume needed for the electronic of the car is increasing. And in order to finance those volume increase, we need to increase the price. And the main reason of the price increase, there is indeed the inflation, as Karen mentioned. But most important is the need for investment in order to be able to cope with the volume required by the automotive industry. But is this not different from the investment -- why is this different from the investments you were making in the last 10 years as such, really? I mean when one looks at your spending over the last 10 years, clearly at the moment, maybe you're spending say, â¬70 million. But you were spending â¬70 million in some years even in, say, 2018, you spend 50 -- average of â¬50 million before. So it's not a big change in the spending. But there is -- the big change versus, let's say, 5 years ago or 10 years ago is that there is no available capacity. All the capacity is used by -- So I mean maybe the question to ask is, as the capacity ramps up, we can see, I mean in terms of the companies, they're getting very strong orders. As the capacity ramps up, will this pricing change? Because I mean, normally, with cyclicality in the semiconductor industry, I mean the industry has held capacity very tightly over the last decade. And now it's spending a lot of money on capacity. Normally, it goes the other way. And does that have a risk to pricing or it doesn't have a risk to pricing? First to finish the answer to the previous question, it's not only our investment. It's really also the investment of the overall supply chain of our suppliers. And there is now really a big shortage at the supplier side. This big shortage did not exist 5 years ago and that's why the investment is key. I mean we cannot move without those investments, and those investments must be financed. Hi, good morning. Thanks for taking my question. I wanted to linger for a second on the R&D expenses. They came slightly higher than expected. I was wondering if you could share some insight on where that money is going, what you are cooking up? We have over 10 product lines. It's spread over the product line, but we did make some -- we put attention relatively speaking more on the electrification, the big growth drivers, like, for instance, current sensors proportionately. There, we plan to increase even more than what we do today. So it's an ongoing process. It's not something that is just in Q4. This will continue over the next quarters with proportionally more going into the high-growth drivers like what Marc already mentioned. Yes. I mean the current sensors, embedded drivers for the thermal management because thermal management is really key for the electric car, thermal management of the cabin. But what is new is the thermal management of the engine or the battery. And we need to heat up the battery in winter and we need to cool down the battery in summer. And this thermal management requires specific products for Melexis. This is the position sensors and the embedded drivers. And as Karen mentioned, the investments are also related to those thermal management products for the electric car. Okay. Thanks. And then, maybe second and last question from my side. It's on dividend policy, you're paying out more than last year. I was just wondering if this is like a template for years to come, what your policy is on the dividend side. We don't have a written policy, but we have history. The dividend as the past has shown, we've always paid out a high percentage of the profit to the shareholders. That's what we did now as well. Yes. So with growth in profits, we also increased the dividend basically. Yes. Good morning. First question I have is on your average selling price. It went up by 16%, and about 5% from that is from currency. So that leaves 11% for price mix. Did I hear it correctly that your price increases last year were about 8%, 9%? Correct. And indeed, there is also another component that influences the average selling price, and that is the product mix. When there is supply constraint, you try to maximize sales and profit per wafer. And that's the effect you see there as well. So supply constraint has made us take decisions to rather favor more -- to have more sales per base basically. Okay. And you also commented that you shifted some wafer allocation to automotive which has higher ASPs. What are your plans for 2023 with respect to the wafer allocation, the same mix as last year or will you push even more towards automotive versus the other segments? Okay. Good. And the second question I have is, there's currently a price war going on in electric vehicles in the U.S. and China. And that may be good or bad, it depends on the reason for the price war, if it's because of slowing demand or because of too many factories not being fully utilized, et cetera. But lower prices are generally bad for profits and may give some pushback on pricing. Can you give us your view on what's happening and what kind of feedback you get from your clients in electric vehicles? Yes. I would say for the time being and especially for the client with electric vehicle, we discuss much more about allocation and supply than about price. For those kind of products, we still have a supply challenge and not a price challenge. Okay. And the reasoning for this price war is this -- the feedback you get on that is that simply to gain market share or to fill idle capacity? Anything to say about that? Okay. Yes, well, it started only recently. So perhaps next quarter, there will be more insights. Good. That's it from my side. Thank you. Sorry, just a quick follow-up. So you're saying you're going to grow 13.5% at the midpoint and pricing is going to grow in the low teens. So your units are not really growing at all despite X-FAB's significant capacity expansion. So what is going on there? It doesn't seem to make sense. And given that you've got supply constraint, I mean you're now growing units in line with automotive production. So are you constraining, I mean, you're basically having to prioritize strategic products over others. I mean to put it another way, what is your unconstrained revenue guide in 2023? I mean, yes, it's difficult to disclose this. Yes, for the time being, indeed, we have been a bit cautious, especially on the low-end of the guidance because of those supply aspects. But yes, for sure, the order book is much higher than what we have guided. Well, it's difficult to say because there is more -- where it was across the full line in '22. Now some products there, it's very much constrained, others not. Yes. I think we have some headwinds, and we have some tailwind. The tailwind is what we described, the premiumization, the electrification, the ADAS, those are all tailwinds. But yes, the headwinds are also what we know in terms of geopolitical aspect, the fact that the world become complex, the fact that the supply is very, very limited and still a big challenge. That's why we believe that the guidance is a good balance between the headwind and the tailwind. So to put it another way, the number of escalation calls you are getting is not less than it was 6 months ago. If anything, it's going up because you are still massively constrained. I think for the innovative products, for the innovative application, meaning electrification, comfort and safety, the number of escalation call did not reduce indeed, yes. But as I mentioned verbally for the other type of application, I think we are moving to a healthier balance between supply and demand. [Operator Instructions]. As there are no further questions in the queue, I'd like to hand the call back over to Mr. Marc Biron for any additional or closing remarks. Over to you, sir. Thank you. Thank you for the discussions. I think it's always important to get a good challenging question because it helps us to stay at the top of the wave. And we are going to meet you again in April for the Q1 results. Thank you.
EarningCall_917	Good day, ladies and gentlemen, and thank you for standing by. Welcome to the J&J Snack Foods Fiscal 2023 First Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Thank you, operator, and good morning, everyone. Thank you for joining the J&J Snack Foods fiscal 2023 first quarter conference call. We'll start in just a minute with management's comments and your questions, but before doing so, let me take a minute to read the safe harbor language. This call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact, should be considered forward-looking statements, including statements regarding management's plans, strategies, goals, and objectives and our anticipated financial performance, industry-wide supply constraints, and the expected impact of COVID-19 on our business. These statements are neither promises nor guarantees that involve known and unknown risks, uncertainties, and other important factors that may cause results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors discussed in our annual report in Form 10-K for the year ended September 24, 2022 and other filings with the Securities and Exchange Commission, could cause actual results to differ materially from those indicated by the forward-looking statements made on this call today. Any such forward-looking statements represent management's estimates as of the date of this call January 31, 2023. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so even if subsequent events cause our views to change. In addition, we may also reference certain non-GAAP metrics on the call today, including adjusted EBITDA, operating income, or earnings per share, all of which are reconciled to the nearest GAAP metric in the company's earnings press release, which can be found in the Investor Relations section of our website. Joining me today on the call today is Dan Fachner, our Chief Executive Officer; as well as Ken Plunk, our Chief Financial Officer. Following Management's prepared remarks, we will go ahead and open the call for a question-and-answer session. With that, I would now like to turn the call over to Mr. Dan Fachner, J&J Snack Foods' Chief Executive Officer. Please go ahead, Dan. Thank you, Norberto, and good morning, everyone. We appreciate you joining us this morning to discuss our fiscal 2023 fiscal quarter results. We are pleased to report the seventh consecutive quarter of double digit top line growth and remain confident in our plans to continue growing sales. We are investing in our brands, accelerating the cross-selling strategy with our customers and across our channels, expanding our production capacity and building a strong pipeline of product innovation. We have hit the ground running with our Dippin' Dots business having already gained placement at Regal Theatres, the second largest movie theatre chain in the United States. In fact, we increased unit sales in our Dippin' Dots business over 14% in the first quarter. Also, we recently launched Hola! Churros brand and are seeing strong momentum, including over 30% sales growth in the first quarter. This positions us well to grow our churros business, including the introduction of new products and entry into new channels. These are just a couple of examples of the opportunities ahead of us. In the first quarter, our industry experienced some softness in spending and traffic across retail, restaurants and food service as consumers adapt to the changing economy. Also, the historic winter storm that hit most of the country during two key selling weeks prior to Christmas did impact volume sales, especially in theatres and outdoor venues. Despite these challenges, many of our strategic categories including ICEE, Dippin' Dots, and Hola! Churros grew volume during the quarter. As it relates to our income performance, ongoing inflationary pressures and the softening consumer environment impacted our year-over-year bottom line results. Our recent pricing actions help deliver improved gross margins of approximately 100 basis points above Q1 last year and we are confident that this will continue throughout the year. However, we continue to manage cost pressures on the expense side when compared to prior year, most noticeably our distribution expense. We expect to see improvement in distribution expenses as we cycle through these high inflationary periods later in the year. Also, Dippin' Dots is a seasonal business and as expected, it negatively impacted our results in the first quarter. This business will drive most of its profitability in the second half of the year. Ken will provide some more insights to our financial performance in just a few moments. Swapping to our three business segments, starting with foodservice. Q1 revenue was up 13% even as we managed through the challenging winter weather events in December. This combined with a weaker slate of movie releases had some impact on our sales. Soft pretzel sales increased 4% this quarter. We see expanded growth opportunity throughout the year as we introduce pimento nuts and pretzel bites, focused on the entertainment, theatre, QSR and convenience channels. We also saw continued strong momentum in our churros business, with sales increasing 32% as we introduced our new Hola! Churros brand a Food Service. The sales team expanded placement of churros with major distributors, large regional QSR, and fast casual restaurants. We are confident that there are still significant growth opportunities across QSR, fast casual, convenience channels and with major distributors, including a significant opportunity with a major QSR burger chain going into test in the first half of 2023. Hola! Churros will have a full selling and marketing support plan throughout the year. Frozen novelties was relatively flat in Q1 excluding sales from Dippin' Dots. The first quarter is a slow seasonal period for this category, and was further impacted by the challenging weather conditions. We have strong incremental sales plans in place starting in the second quarter and remain very confident in growing this category throughout the year in theme parks, healthcare and convenience channels. We have also added two new production lines to support these growth opportunities. Transitioning to our bakery business, sales increased 1% driven by strong growth of Handhelds and cookies with a major club customer and we expanded business with a strategic convenience store customer as well. Looking forward, we see additional growth opportunities for our ICEE cookies and our frozen cookie dough. Our strategy to improve margins in the bakery business is working as we shift the mix to more profitable products and customers and rationalize less productive items in our portfolio, very pleased with our Bakery Group. Lastly, we continue to forecast added gains in key items such as Handhelds and funnel fries. Moving to our retail segment. Sales increased 1% for the quarter as the industry started to experience softness and macroeconomic spending for consumables. In our soft pretzel segment, we thought continued strength in our flagships SuperPretzel brand, driven by distribution gains and organic growth. However, overall pretzel sales declined 11% in the quarter, primarily in licensed and private brand products as we executed planned SKU rationalization of lower margin items. As the year progresses, our strong focus on SuperPretzel brand, including new SuperPretzel pretzel bite flavors, launch of SuperPretzel knots, and SuperPretzel Bavarian pretzel sticks is expected to lead a full year revenue growth in the soft pretzel category. In frozen novelties, we saw a 1% sales increase for the quarter. As we enter the second quarter we are planning for incremental growth in this category, including the launch of ICEE and SLUSH PUPPIE pots, Whole Fruit and the Luigi distribution gains and further expansion of our Dogsters brand in grocery. We are also confident with our plans to bring Hola! Churros to retail later this year. We added capacity this will be a big growth opportunity for this category. Regarding our third segment, Frozen Beverages, Q1 revenue was up 9% driven by a 15% increase in beverage sales, and an 8% increase in service sales. This was partially offset by 11% decline in equipment revenue, due to the timing of customer installations between the years. However, we're excited to communicate that we have secured a contract with Checkers to buy approximately 800 machines, and these will be installed over the second half of the year. This business also includes a service contract as well. ICEE branded tests, continue with large QSR customers, and we are in the process of rolling out ICEE across the most stores nationwide. In regard to Dippin' Dots business, our pipeline is strong. Not only has it performed very well thus far, including a 14% increase in unit sales in the first quarter, but it holds significant potential for added growth, both in food service where it's predominantly today, as well as an expanding into the retail sector. As an example, we recently signed a deal with Regal Theaters, which, as some of you know, is a second largest theater chain in the United States with over 540 locations. The initial placement will cover over 230 locations with the rest to come thereafter. The initial sales results are really encouraging. We also recently introduced ICEE cherry and Blue rasp and Dippin' Dots flavors, a new product launch with promising Q1 sales, which demonstrates our ability to leverage our strong brand portfolio across business channels. I would now like to spend a few moments reviewing our strategic priorities as we remain focused on transforming the business. We have taken aggressive measures to offset the challenges facing us as we operate under this historic backdrop of inflationary pressures, and to position the company for long-term success. We are aggressively focused on improving operational efficiencies through initiatives like implementing a new ERP system, adding seven new more automated production lines, outsourcing our shipping logistics, and building a more geographically optimized distribution network. In addition, we have now fully implemented various price increases across our portfolio, which will continue to drive improved gross margins. Let me start with our supply chain strategy priorities. We communicated last quarter that our logistics and distribution management responsibility have now been fully outsourced to NFI a recognized expert in the industry. They are now managing 100% of our business, and we expect to generate approximately $4 million annualized benefit as we improve management of carriers improve truckload efficiencies and minimize miles through better network management. We are further investing in our supply chain process through the build out of three geographically located distribution centers across the country. These RDC will enable better location of inventory and simplify our warehouse network moving from managing over 30 plant three [PL] locations to approximately six. Two of these new RDCs we'll have a box in a box where we'll be able to store Dippin' Dots products adding capacity for growing this business and getting product closer to the customer. Our first RDC will open up in June at a facility just outside of Dallas, and the second RDC should open up later in the fiscal year. The third RDC is still in development and expected to be opened in fiscal 2024. On the operation side, we have committed investments to add seven new production lines that will add capacity and drive efficiency through better automation. To-date, we have opened two new frozen novelty lines and one additional churro line. Over the next six months, we will activate three additional lines focused on expanded pretzel production. As it relates to M&A, we are currently working on integrating Dippin' Dots into the J&J systems, processes, customer channels and operations. At the same time, we continue to evaluate potential M&A opportunities that complement our brand portfolio and our business model. In summary, we will remain focused on building this business for the long-term growth. Strategically, we are transforming the business, investing in our brands and capacity to grow while implementing initiatives to help us operate more efficiently. Our leadership team is aligned and the organization is excited about the opportunities ahead of us to continue building on the great history of J&J Snack Foods. As Dan mentioned earlier, we continue to experience double-digit sales growth across our business. We remain optimistic about the balance of the year given the many initiatives we have underway, and their expected impact on our business from top line to the bottom line. Net sales for the quarter were $351.3 million growing by 10.3% versus the prior year period. Starting with food services our largest segment representing proximately 68% of our total sales, revenue of $238.3 million exceeded Q1, 2022 by $26.6 million or an increase of 30% and that included approximately $13.4 million in Dippin' Dots sales. The healthy performance in food services was driven by 157% increase in growth and novelty sales benefiting from our Dippin' Dots businesses well, 32% increase in churros sales and 27% increase in handheld sales. We also saw growth in soft pretzels in our bakery business of 4% and 1%, respectively. The Retail segment posted sales of $43.1 million or an increase of 1% compared to the same period in fiscal 2022. Handheld continue their strong performance with 127% increase in sales or frozen novelties increased 1% so pretzels and biscuits decreased 11% and 4% respectively versus the prior year. Frozen Beverages sales were $70 million and grew 9% versus Q1, 2022 led by beverage sales growth of 15% as well as repairs and maintenance service revenue growth of 8%. Equipment sales declined 11% due to the timing installation between years. Gross profit for the quarter was $9.9 million or an increase of over 14% compared to the previous year period. Gross margin was 25.9% in the quarter favorably, comparing to 24.9% in Q1 of fiscal 2022. Moving down the income statement, total operating expenses increased to $81.5 million representing 23.2% of sales for the quarter compared to 20.3% in Q1 of 2022. These results largely reflect the - persistent inflationary pressures across all our expense lines in particular distribution expenses. Distribution expenses were 12% of sales compared to 10.5% in fiscal 2022, but did improve compared to Q3 and Q4 of 2022 when they were 12.7% and 12.4%, respectively. The 150 basis points higher distribution costs, as a percent of sales contributed approximately $5 million additional expense for the quarter on an equivalent basis when compared to a year ago. Marketing and selling expenses represented 6.7% of sales versus 6.6% in prior year period, while administrative expenses were 4.7% of sales in Q1, 2023 compared to 3.3% in Q1 of 2022. Also Dippin' Dots is a seasonal business and as expected, negatively impacts our results in the first quarter. This business will drive most of its profitability in the second half of the year in higher sales better leverage expenses in those quarters. This led to an operating income of $9.3 million compared to $14.8 million in Q1, 2022 or year-over-year decline of 37%. Adjusted operating income was $11.2 million an adjusted earnings per diluted share was $0.42. After considering income tax of $2.3 million compared to $4 million in Q1 of fiscal 2022, net earnings decreased to $6.6 million, resulting in reported diluted earnings per share $0.34. That compares to $0.58 in the prior period. Adjusted EBITDA decreased 8% to $25.3 million. Our effective tax rate was 26% for the first quarter. Taking a look at our liquidity position, even with the Dippin' Dots acquisition, we continue to have a healthy balance sheet and overall strong liquidity position with $61.2 million in cash and marketable securities, and approximately $92 million in debt. In addition, we have ample availability under our revolver with approximately $123 million of additional borrowing capacity. In summary, we are excited about the opportunities ahead and remain confident that our portfolio brands, investments in our business, and strategic initiatives will continue to fuel growth. Our efforts to gain added efficiency and effectiveness displays J&J in a position of added strength, and improved our ability to leverage opportunities ahead of us. With $55 million in cash and ample available liquidity, we have the means to adequately support, invest in the growth drivers of the business. [Operator Instructions] Our first question or comment comes from the line of Andrew Wolf from CL King. Mr. Wolf, your line is open. I want to start with, you know, good morning gentlemen. On the kind of your volume results, and maybe what you saw with consumer behavior, elasticity of demand. I think, you know, seemed like you're kind of outperforming most on the elasticity in particular. And then this quarter, you referenced the industry slowing and seems like, you know, to some extent, perhaps the business itself, kind of caught up to the industry and experience some negative consumer behavior? Could you just kind of give us a qualitative sense of that - and a quantitative sense to like, where your volumes are maybe adjusted for the SKU rationalization as well? So you don't get penalized by that that will be great? Right, I'll talk to some of that Andrew, thanks for your question. Yes, it's much like what you said, you know, when we ended our last quarter, our volumes were strong. And even as we entered into this quarter, they were strong. And then as the quarter went on, they trailed off. And so, we're watching that really closely. I tend to personally think, and we do as a company, that we were affected pretty greatly in the December month. And mainly, as we got into the - really two or three weeks of cold weather, we never liked to blame anything on weather and I won't allow our people to do that. But it does have an effect, especially as you're in the holiday shopping season. And we experienced that as we got late into the quarter. And so that we're watching it really closely as we move into a new quarter and are going to be mindful and watching it with a close eye to see what happens from there on. I don't personally think that we have hit the issue of elasticity. I think the pricing that we took was well within line of what others in our categories might have taken and maybe even maybe even a slightly below that. So I don't think that that's the issue. I just - I really believe that we hit into a period of time where you know, there's threats of a recession and you got cold weather and people aren't out shopping as much as they might have done under different conditions. Thanks very helpful. And Ken - I alluded to the - I think you know SKU rationalization where you got out of some on productive SKU, I think it's off pretzels. Is that a pretty significant, you know, somewhat significant number worth calling out or just a rounding error? I wouldn't call it significant Andrew in certain category. You had a bigger impact than others. Again, with some of the trail off of, you know volume and other places that we didn't expect, because of some of the things Dan said, you know, it kind of magnified that a little bit more. But it's not the key driver. I think as we tried to comment, we really were taking that quarter to sharpen the pencil a bit, you know, there's places in bakery, you mentioned places in pretzel. Where we feel really good about our business model, we're focused on to grow. But there were some things from a margin standpoint that we wanted to do to get that, kind of recalibrate it a little bit. And so anyway, the answer to your question is, yes, it had an impact on a couple of categories, but I wouldn't call it significant on the quarter until. Got it. And just one other question, really on capital allocation which - first of all, you reported a pretty big increase in cash capital expenditures, kind of seems to comport with your pretty aggressive plans for seven new lines. But can you kind of express to us what your capital budget is for the year and how you know, what you think you might be spending to invest back in the business? And the other side is the M&A that you alluded to. I guess my question, there's more balance sheet related you know how much debt leverage - is the Board and the executive committee willing to take on to, to execute a deal? Thank you. Yes, I mean appreciate the question, Andrew. Again, we feel really good about where we're at in terms of the ability to continue, invest in the business. But to your point as it relates to changes in debt. Yes, you saw on the balance sheet? Yes I think, almost double capital spend for the quarter versus a year ago. We've been very clear that we're investing close to $100 million in seven new lines and these new RDC. So obviously, that's going to drive, you know, increases in CapEx versus, you know, two, three years ago. You'll see that I think the number was just South of $90 million that we spent in fiscal 2022. CapEx as we continue to execute these investments that we're making, you know, the 2023 number is going to be probably in that range. I'd say $90 million to $105 million somewhere in there. And it's really all focused on completing the execution of those key production lines and RDC investments that we're making. In terms of leverage with the Board, yes I wouldn't say there's an exact number that we've kind of landed on with the Board of what we're willing to do. We're evolving as a company. We moved from really no debt, to start seeing that we can leverage our balance sheet now to go and grow this business and invest and I think the Board is supportive of that. But I can't say that there's a specific leverage number that we've kind of got in mind at this point. Thank you. Our next question or comment comes from the line of Todd Brooks from Benchmark Company. Mr. Brooks, your line is now open. Few quick questions for you, first of all on Dippin' Dots. Obviously, with the seasonality of the business, is there a way that you can size for us so that we can gauge kind of the operating income trend outside of the Dippin' Dots impact what the - drag on operating income was in the first quarter from Dippin' Dots? Yes, hi Todd, this is Ken. I think in last quarters, we had kind of tried to guide the group that you know, almost all - you can call it 100% of the profitability of dividends in q3 and q4 again, no surprise, given the seasonality in that business. Q1 is the slowest and it has a negative impact. You know, I think you'll see this spelled out in the 10-Q just south of $1 million negative impact in this quarter from Dippin' Dots. And that's Dippin' Dots actually had a great quarter and performed above expectations, but that's the weight of fixed expenses and high SG&A based on a low sales base, creates a deleveraging in Q1, that was certainly expected on our side. But that gives you a little bit around idea of kind of what that impact was in this quarter. Thanks, Ken. And is that the right type of number to use for the March quarter as well as we're going into the June and September ramp? Slightly better than that Todd, I would probably kind of guide you that, you know, it's should be positive, but less than $1 million positive. Okay, that's helpful, thank you. Secondly, just wanted to get back to a little follow up on Andy's question about volumes, I was wondering two things. One, did you see any - and this would be outside of the consumer? Did you see destocking of inventories from your retail or obviously at the clubs and mass in the food service business? Were those customers working down inventories at all at the end of the year? Is that part of why the volume may have dip later in the quarter? Yes, Todd that's a good question and a good observation. And we absolutely believe that we did feel that a little bit as what I discussed with our own business. I think many of the retailers out there, found themselves in the same situation and - in our smart retailers and started to drive inventories down. And so yes, I think that was a portion of what came into play in that December month. I was just going to add, there's data out there. And there's a lot of data, I'm sure you guys are doing the same thing. But I did read one that said spending at grocery stores was slightly down. So I think you're starting to see people be a bit more frugal on the basket. The other thing that I read was a pretty pronounced increase in traffic and shopping at Dollar Stores, and a little bit less traffic at some of the bigger retailers, particularly the higher end grocery stores. So I think there's something in there where some of that on the retail side is impacting you know, buying of our products. And then to your first question, does start to kind of drive different decisions on inventory. We've got too much for now they push back on us. We slowdown production and all of that, as you're trying to calibrate it, can create a little bit of inefficiency. Okay. And this is just I was wondering if this was part of the volume compare as well. Obviously, the ERP conversion in the March quarter of fiscal '22, did any customers kind of preload inventory in advance of the conversion that would have benefited the December quarter last year, but made for a tougher volume compared this year? No, Todd that's a great question. But that really did not happen. Maybe in 2020 hindsight at this point, you know, we might have encouraged that last year, but I can't say that that's what happened. Okay, great. And final question, I'll pass it along. The strength in churros was the only launch at food service was that in place for the, was it - for the full quarter did roll out over the quarter. So actually, that strength when you have a full quarter of selling it into the food service channel could actually accelerate a bit going forward? We believe it can continue to be accelerated. We're putting a lot of push behind it. Much like what we've talked about separately, all of the churros are really come of age. We love the new brand. We love the opportunity sale there, not just with large customers out there, but even through the distribution network. And we're, you know, we've got a lot of marketing behind it. We feel really good about it. So I think it can continue to build momentum throughout the year although -- It really rolled out throughout the quarter, but it would have been started early. And so you know, it would have been, it would have been early in the quarter. So I'm not sure how to guide you on that. Was a good quarter we had 32% increase and 30 plus, 30% increase. So it's a good quarter. I expect the same thing, if not greater, the coming quarter. Yes - there is even stronger promotional plans around that brand. I wouldn't say we've kind of, you know, really hit and executed every part of our marketing plan around that. There's more to come and we're really excited about it Todd. Thank you. Our next question or comment comes from the line of Connor Rattigan from Consumer Edge. Mr. Rattigan, your line is now open. So just quickly on Dippin' Dots, it sounds like this $13.4 million in sales generated - were decently ahead of your expectations. So by my math, it's about 13% of historical sales in the first quarter that puts the brand on about $100 million sort of run rate or about 10% higher than last quarter. Could you guys maybe quantify your expectations for the brand over the year just trying to get a sense of how big we should expect this thing to be given planned distribution rollouts? Nothing to be - like exact number, but I think our expectations are in that ballpark that you just came out with. We feel really, really good about what we're doing with Dippin' Dots. And we just mentioned one example, in the release in the script, but operationally things we're doing other things in the pipeline. So yes, we're aligned with you on kind of what we think we can do with that business this year. We are that good math in your part and really excited about that team and what they're doing. In fact, the whole sales team is here in the office this week at a sales meeting. And we're just really thrilled with the way that they're responding. Awesome, that's great guys. And then also just quickly on some of the efficiency efforts that you mentioned. So that $4 million figure, is that expected to be - fully realized this year or is that more of a fiscal '24 goal? And also on the automation efforts, just to be clear, are these fully new automated lines replacing manual lines or are these just purely incremental capacity? Yes well, on the lines, it is added capacity. So this is not replacing current lines its new lines, but lines that are obviously more modern and with better automation than existing. So we expect to be more efficient in how we move product through those lines. I'm sorry, what was your first question? Just on the $4 million in incremental savings from the logistics and distribution outsourcing. Is that expected to be fully realized this year or is that more of like fiscal '24 role? Yes, I think the way we've spoken about it before, we really took us until around September, October, to get all of our business on NFI and kind of the key to managing all this is for them to be kind of pulling the strings on how we manage product and distribution across our entire network. Secondarily, their job, get even easier as we execute this RDC strategy so on an annualized basis, yes, if I had to make a guess for 2023, given what we've got in motion. Yes, I'd probably say it's going to carry - some of that $4 million is going to carry into '24, but I think we should realize a good portion of that in this fiscal period. And Connor, let me just touch on the lines question that you had. They are in addition to the lines that we have today, but it also allows us to do some shifting of where we make some products to become much more efficient in different areas. Our intention is not to shut down the former line, but to be able to use that for more capacity. Thank you. Our next question or comment comes from the line of Jon Anderson from William Blair. Mr. Anderson, your line is now open. Good morning. Maybe just - I'll stick with that last question since we're on it. On the new production lines, how much capacity in aggregate will the seven new lines kind of unlock? And are there also margin benefits associated with it? I guess, that's second part of the question and gets to some of your comments around shifting or optimization of production. But again, how much capacity, are you unlocking with these seven new lines? And are the productivity benefits as well? I don't have the exact number to give you on the capacity, but it does allow us to grow our core products, right? So one of the things we really experienced was outgrowing our core, which is our churros and pretzels and frozen novelties and even our pretzel dog side of the business. And so, we have addressed that to be able to have enough capacity to get our sales team back out there and really selling new lines and new opportunities. It does help on the margin side, because we are becoming much more efficient in different areas, even making products like in our novelty side, making products where they're sold as opposed to maybe making them in one part of the country and shipping across to another side. So there are margin improvements that we think that we can realize as we open these up. That's helpful, thank you. Organic growth in the first quarter was about 6%. Can you help us kind of gauge how much of that the 6% organic growth was volume based and how much was price? And then you kind of laid out a lot of very interesting demand generation initiatives that are kind of kicking in through the year, the cross-selling opportunities the new account, new channel opportunities that seem to be kind of lining up? How - should we kind of think about organic growth accelerating through the balance of the year or kind of maintaining that level in this mid-single-digit range? I know it's a difficult question, but just trying to get a sense for your confidence in some of the initiatives that you have lined up and what that might do to the organic growth profile of the company during coming quarters? I'm going to let Ken talk a little bit about the numbers, if he can. But I just want to say this about our sales teams. We talked about it for two or three quarters now about cross-selling and getting people engaged in the different companies on selling the products across channels and across customers. And I couldn't be more proud of the way that they're responding to that, that is happening more and more. And I get to see it firsthand, and that will be helpful. It's certainly helpful as we're starting to look at the Dippin' Dots business, being able to leverage our relationships and our customer contacts that we have to accelerate that growth and so, just really pleased with the progress that is happening on that side, led by our sales teams, really happy with that. Ken, I don't know if you have some number, if you could help them with that. Well, I would just add so Jon, I'm glad you picked up on it. But we were very intentional to really go maybe even a little bit deeper on highlighting what we see is a lot of growth opportunity when we sprinkled an examples, but it was some Dippin' Dots to SuperPretzel to frozen novelties to churros. So yes, we still remain very, very confident in our ability in the next three quarters to grow the organic side of our business, if you just take out Dippin' Dots for a second. Like every other company out there, I mean, we're watching things like GDP and data on consumption and you see a little bit of that being dialed back, you see savings rates going up. So there's, some consumer things that we're watching, which obviously impacts our business as consumers pullback. But aside from that, I don't know a time at of J&J, where we haven't felt more confident about what we're doing in innovation with our brands and cross-selling. So we remain very confident in what we're going to be able to do for the rest of the year. Okay, that's helpful. One more it's kind of a similar question, but more from an earnings perspective. When I look at EBITDA or adjusted EBITDA in the first quarter, and even adjust, I guess, for a bit of the impact of Dippin' Dots, the deleverage. It looks like EBITDA came in around 15% or so of what the street anticipates full year EBITDA to be? And then if I kind of look back pre-pandemic to some more typical years, it looks like first quarter EBITDA might have trended more in the 20% to 22% of the year range. So just kind of optically, it would look like maybe you're starting the year a little bit slower this year from an EBITDA perspective, at least relative to what the street is modeling for the full year? But again, there are so many great cross-selling things going on. There are a lot of good things happening on the operational efficiency front, margin catch-ups from pricing, et cetera. Are you kind of - am I thinking about it right that, hey, we're in a pretty good position exiting Q1 and entering Q2 despite those metrics I mentioned to kind of deliver on a full year expectation? Yes, yes again, we try to explain this a little bit. Two headwinds right off the back in terms of comparing a year ago, EBITDA or even if you went back to '19, I don't have this number in my head, but I think the number will be even bigger, but you've got roughly $5 million of impact on distribution expenses. If you just - on an equal basis, that would be - that would impact profitability this year versus a year ago. And then I mentioned the impact when we bring on the Dippin' Dots business that had a loss in the quarter and, again, expected. Then that starts to create a $6 million kind of bogey right there just from two things. And then I do think as we ended quarter, we expect it to do a little bit better than that because we weren't expecting volumes to tail off in December with some of the weather challenges that we, talked about. And it's in a quarter where if you don't create the sales, then you deleverage pretty quickly. Keep in mind that even for total J&J, 75% of the sales and really profitability for J&J is going to be in Q3 and Q4, and that should play out if you go years back. That's just kind of the seasonality of the business. Thank you. Our next question or comment comes from the line of Robert Dickerson from Jefferies. Mr. Dickerson, your line is now open. All right. Great. Thanks a lot. I guess, kind of a follow-up to the last question that was asked. I just had to ask a little differently. Ken, to your point, right, there's a little volume deleverage that comes through input cost inflation is still a little bit high. On the COGS side, it sounds like there could be other pricing offsets. And then as you keep mentioning, good innovation, distribution opportunities as you get through the back half. Q1, understand kind of the drivers behind what happened not just in EBITDA margin, but I'm speaking more specifically to the growth side. If you go back a couple of quarters, right, and kind of the feel is as we kind of got into Q2 this year, maybe more back half-ish we could kind of get back a little bit more of those pre-pandemic margins, and it seems like you're making pretty decent progress on that goal in the back half of last year, right? And then December kind of had maybe a little softer volume, maybe some consumer behavior shifts to some extent. I guess, as you sit here now, right, if we're thinking about Q2 one, right, just point one, just because I do think you're kind of lapping right, that ERP issue you had last year, I would think there'd be some nice margin progression. And then when we're thinking about the back half of this year, kind of what I'm hearing, I feel like is like it's still a little bit of a moving target, right? Some of this is going to be contingent, obviously, on consumer behavior as we get into this summer, right, which is still kind of far away. It sounds like some pricing might come through to offset some of the cost inflation. And then maybe there's also some incremental distribution innovation that could help offset maybe some consumer weakness. So lot in there. I'm just trying to gauge kind of where -- how you want the market to be thinking about kind of that margin recovery potential this year. Or is it something that maybe we're kind of -- we're just pushing it forward a little bit kind of because maybe there's a little less clarity? That's all I have. That's a lot Yes. I think, been clear as you had these meetings even going back to last quarter. We can go on a trajectory to get this business up to those 30% margins. As I sit here now, I still feel confident in our ability to do that, particularly as we get to Q3 and Q4, because I believe the things we're doing, the initiatives, getting all those inflationary stuff behind us, getting in the peak season, and I think we'll start to see volumes really kick back in and some of these new products and new ideas, new innovations are going to drive growth. So I still said here, seeing that as a pretty good benchmark, Rob. We manage this business long term. And if I could emphasize anything, as we come together each quarter, our jobs are to continue to demonstrate from an investment standpoint from where we're driving growth, the long-term aspects of what we're doing are going to pay dividends for us. We then casually get into a quarter like this, where you get into some economic challenges and weather and that pulls back on volume and then you have to kind of recalibrate inventory reduction a little bit. And so that can hit a quarter, but still feel really good about the back half of the year. Yes, Rob, I would echo that as well. And I would just also add to it that we still have some pricing coming on the ICEE side. We talked about that in another quarter. ICEE takes pricing once a year. And so there's a pricing that was taken January 1 on the ICEE side. And so, yes, I think we're still feeling pretty confident about getting back to those pre-COVID percentages. And that's part of the conversation that we have amongst all of our groups and all of our conversations. Thank you. Our next question or comment is a follow-up from Mr. Andrew Wolf from CL King. Mr. Wolf, your line is now open. Hello. My first is on your outlook for commodity cost inflation slowing, which I think you said in the release. You might have talked about this, but I didn't hear it well if you did. But could you be a little more specific on kind of what you're thinking the cadence is going to be, maybe what percent of your costs are locked in through forged contracts and things like that. I think a lot of folks in the supply chain manufacturers and others are looking to the June quarter to really -- when the relief really comes in on the year-over-year comparisons where pricing is unambiguously a lot better than COGS inflation, plus your sense of that for the business? And then the other -- the second follow-up is very straightforward. It's just like there's been five full weeks and a couple more days since quarter ended. Have you seen any changes either way in the volume trends pretty much in January? Thank you.. Yes. On the commodities, I look at so much data on that, Andrew. And I think we've said this, trends are getting better. Sometimes they seem too gradual, but they are getting better. Just to give you a couple of examples. We were 16% higher than was a year ago. Quarter-over-quarter, it went up just 40 basis points. So it did go up, but it all went up 40 basis points. And the outlook on the wheat is that we do expect that continue to decline. I think as we look at the second quarter and this -- I think on wheat as it's our biggest commodity, we think it may go down 3% to 4% is kind of our best guess right now as we look at Q2. But if you kind of go across the eggs, obviously we use a lot of eggs. Egg is up triple digits year-over-year. Even, 43% quarter-versus-quarter. So eggs continue to go up. So it's kind of spending on what commodity you're talking about. It's a different answer. Collectively, we do expect them to continue to go down. I don't have a crystal ball. I think our best guess next quarter is maybe somewhere in that 3% to 5% range and, then as we look further out, hopefully better than that. I mean, wheat, diesel are two big ones that are supposed to continue to go down quite a bit. Sugar, it's not as high as it was, but it's still not showing signs of heavy decline at this point. And then Andrew on the weeks ahead, we're watching that cautiously being careful about kind of what's happening out in the industry. We do have some really bright spots. So one of those bright spots would be where the theater business was really off in the December month. They've come back pretty strong in the January month. And so we're encouraged by what we're seeing so far. Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Dan Fachner for any closing remarks. Great. Thank you, operator. In closing, we want to assure you that more than ever, our teams are focused on effectively managing through these dynamic market conditions, while serving our customers and partners. As we have outlined on the call today, we've taken aggressive measures to offset these various challenges and to position the company for long-term success. Our momentum remains strong with our core brands and new products continuing to resonate with customers. And we are -- and as we progress through 2023, we are confident that our strategies will have a marked and positive impact on our business and our results. We will also take this opportunity to acknowledge the hard work and dedication of our talented teams across the entire business unit. And thank you, everyone, for joining us today on the call. We appreciate your interest and your continued support. Should you have any questions or wish to speak to us, please contact our Investor Relations firm, JCIR at (212) 835-8500. Thank you very much. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.
EarningCall_918	Dear colleagues, dear audience, welcome to UPM's Fourth Quarter and Full Year 2022 Result Webcast. My name is Jussi Pesonen, I am the CEO of UPM. And as always, I'm here with our CFO, Tapio Korpeinen. So let's get started. 2022 was a pivotal year for UPM. We delivered all-time high annual sales and earnings driven by success across all of the businesses that we have. This shows UPM's resilience in exceptional environment marked by high inflation and Ukraine's war or Russian war in Ukraine and the European energy crisis. Fourth quarter results were excellent too. It was the second best quarter ever for UPM. At the same time, our transformative growth projects proceeds well, getting ready to deliver growth in earnings, and of course, volumes already this year. At the same time -- and even though there are significant uncertainties in the world, we expect 2023 to be a year of strong financial performance as well. Our Board with confidence on our financial position and future earnings has today proposed a dividend increase of 15% for 2022 to the AGM. Looking at the annual indicators, our 2022 sales grew by 19%, and our comparable EBIT grew by 42%. Return on equity increased by 2% points to 14% level. Operating cash flow decreased from that of previous year due to working capital increase and the cash flow impact of the energy hedges. Tapio will come back to these energy hedges later. Net debt increased, but the net debt-to-EBITDA ratio remained below 1x.As from here, you can see we got back to the earnings growth trend that we have had quite many years, which was interrupted by the COVID-19 pandemic in 2020. And maybe anecdotal, without the impact of the energy hedges, our net debt would have been EUR 1.6 billion -- around EUR 1.6 billion, so 0.66x EBITDA.4 of our 6 businesses exceeded their return targets last year. In addition, Biofuels reported in other operations achieved a record result as well. Fibers capital employed is impacted by capital related to the new pulp mill in Uruguay. This capital will start to contribute soon. As to Paso de los Toros pulp mill is starting up by the end of this quarter. In Communication Papers, working capital increase impacted both cash flow and capital employed. Profits for the full year in Communication Paper were still on a high level. As I already mentioned, fourth quarter was the second best quarter for UPM ever. Sales grew by 21% year-on-year and comparable EBIT grew by 42%. Operating cash flow was EUR 1.576 million, which this time was positively impacted by EUR 886 million cash flow from energy hedges. Even without this positive impact of energy hedges, fourth quarter cash flow would have been very strong, being EUR 690 million. In most businesses, margin continued to improve even from the record quarter 3, as a result, prices and margins in the fourth quarter were very strong. Towards end of the year, we saw significant destocking in many of the product areas and value chains, especially in Europe, which held back our delivery volumes during the quarter. But ladies and gentlemen at this point, I will hand over to Tapio for some more analysis of the result. Tapio, please. Thank you, Jussi. So here, again, we see on the left-hand side the fourth quarter EBIT bridge compared to the fourth quarter of the previous year 2021. And in this comparison, you can see that the sales prices increased in all of our businesses and very clearly outweighed the impact of higher variable costs. Volumes were down in most businesses due to the year-end destocking that Jussi mentioned. Fixed costs were on the increase, partly due to the scheduled maintenance shutdowns at the Fray Bentos pulp mill in Uruguay and the Lappeenranta biorefinery in Finland. And finally, in the fourth quarter 2021, the previous year, we booked a forest value gain, which is then visible in the right most sort of negative difference bar here. On the right-hand side, you can see the comparison between the fourth quarter and the third quarter sequentially in 2022. And as you can see, the sales prices were still increasing, whereas variable costs largely were stable at the group level. Therefore, our margins were still improving on the group level as compared to the previous quarter. However, here you can see the volumes impact of the destocking that I mentioned in many product value chains as well as the higher fixed costs, mainly to the maintenance shutdowns and other sort of seasonal variations. This maintenance impact between the third quarter and fourth quarter was a negative EUR 50 million. And then here, you have the comparable EBIT quarterly by business area. In most businesses, margins continued to improve even from the record strong third quarter. Towards the end of the year, we saw significant destocking in many value chains, especially in Europe, which held back our delivery volumes in Communication Papers, Raflatac and Specialty Papers. Raflatac is kind of a prime example here. Unit margins were on a good level. But then the market-wide destocking led to clearly lower quarterly earnings in the fourth quarter. On the other hand, in UPM Communication Papers, the effects of destocking were offset by declining input costs, especially energy costs, which brought an excellent earnings level for the fourth quarter. And Specialty Papers performance is sort of in between these 2 mix extremes. Energy reported excellent results. However, they were down from the third quarter and from the same quarter of the previous year. The energy crisis in Europe eased somewhat during the fourth quarter. And during the quarter, also the nuclear power unit Olkiluoto 3 generated only limited volumes. Fibers quarterly results reflect high pulp prices, but were also impacted by rising input costs and also the maintenance shutdown of the Fray Bentos mill in Uruguay. Sales prices in sawn timber were affected by the slowdown in construction end-uses.And then Plywood finished its record year with a solid last quarter. The markets in industrial applications remained strong, whereas the markets in construction end-uses slowed down. Then in Other businesses, reported as part of the other segment, UPM Biofuels achieved excellent quarterly earnings. The business achieved record results for the full year despite the fact that Lappeenranta biorefinery only had production during 7 months. Briefly, again, on the cash flow impacts of energy hedges, which we have discussed in the previous 2 quarter releases. As mentioned, the energy crisis is somewhat during the fourth quarter, and therefore, also the electricity futures prices moderated. This turned the cash flows from energy hedges significantly positive for us. During the fourth quarter, energy hedges released EUR 886 million of cash flow, reversing about half of the cash outflows that we had reported during the 9 first months. For the full year of 2022, the cash flow impact of energy hedges was therefore EUR 896 million negative, this cash flow will be later offset by a similar cash flow coming in from hedges or then from energy production as the hedges mature and power generation goes to delivery. And this slide shows the full year cash costs. EBITDA first, starting from the left-hand side, reached a new record, exceeding EUR 2.5 billion. Working capital during the year increased by EUR 479 million. And as I said, the energy hedges resulted in a cash outflow of EUR 896 million. And then finally, our growth projects were in an intensive phase, meaning that investing cash flows totaled EUR 1.585 billion as expected for the year. All-in-all, free cash flow was EUR 1.077 billion negative for the full year, but EUR 1.191 billion positive for the fourth quarter. As Jussi already pointed out, our financial position continues to be very strong. Net debt totaled EUR 2.374 billion at the end of 2022, coming down by EUR 759 million from the third quarter. Net debt to EBITDA then was 0.94x, and our liquidity totaled EUR 6.4 billion at the end of the year. And here you have our outlook for the current year 2023. As we have already discussed, UPM reached record earnings in 2022, a record year. This year is expected to be another year of strong financial performance. In the first half of the year 2023, our comparable EBIT is expected to increase from the first half of 2022.In the year 2023, our delivery volumes are expected to benefit from the ramp-up of the Paso de los Toros pulp mill and the Olkiluoto 3 nuclear power plant unit and also in comparison to the last or the previous year 2022, having no strike impact on volumes. In the early part of the year, however, demand for many UPM products is expected to be held back by the destocking that we have discussed in various product value chains. But the opening of the Chinese economy from the COVID lockdowns and easing inflation in other key economies represent potential for increasing demand as the year progresses. Year 2023 is starting with a high level of costs for many inputs, while the lower demand is exerting pressure on product prices. However, several input costs have also progressed at their peak. We continue to take measures to manage margins in this environment. Finally, it's good to note that there are some significant uncertainties, both positive and negative, in the outlook for 2023.So I'll now hand back over to Jussi for some discussion on our strategy and growth projects. Thank you, Tapio. As already mentioned couple of times, the year 2022 was a pivotal year for UPM as a whole. We did have a -- year beginning in 2022, we had the strike over 4 months. We were able to renew the CLA practices, i.e., the kind of labor practices, and that is actually important. We made a profit that we have not seen in 20 years. The profitability of UPM was great. We were able to really be successful in our front line, i.e., the sales, we were able to pass the cost increases in all product areas, including paper business. But 2023 -- let's come back to 2023. I feel that 2023 will be as well a pivotal year for UPM and in a bit different way, i.e., we are ramping up huge projects in our transformation, and that is continuing firmly in this stage. And this picture, the spearhead of growth is really valid today and is having a guideline for the future.First, we have large important projects coming to a ramp-up during this year into next year. Paso de lo Toros pulp mill will start -- is in starting up phase. Commissioning is in full speed, and it will start by the end of the quarter, and will increase our pulp output to more than 50% and highly competitive cost level, $280 per delivered tonne. Olkiluoto 3 nuclear power plant is scheduled to start up the commercial production in March and is starting in the test phase again pretty soon. And once again, it will increase our CO2-free output of energy by nearly 50%.The Leuna biochemicals refinery project progressed well and it will open new very attractive growth opportunities for UPM when it's up and running. And finally, small but not -- it's very important is the AMC acquisition in Raflatac, good growth step for Raflatac and the integration has gone well. But second part of this discussion around this spearhead of growth is, of course, the future, the next steps and the next plans that we have. We have further growth projects under planning and preparation, the basic engineering of the potential biofuel refinery in Rotterdam is currently in a very intensive phase. We are looking into a next step in biochemicals, while the first refinery Leuna is still under construction, but of course, the focus now is in the construction. We study opportunities in Power-to-X, whether it's a synthetic fuels source, synthetic chemicals to potentially complement our bio-based biofuels and biochemicals businesses in long term. And then we are looking, of course, all kind of opportunities in our specialty packaging materials businesses, i.e., the Specialty Papers and Label materials. So another pivotal year in UPM's actually future. This slide shows the progress of our transformation. You have seen this many times. Over the past years, we have been able to grow our attractive growth businesses quite significantly. At the same time, we have maintained good performance, both in our Communication Papers as well as in the growth businesses. So that has been our kind of aim. That we run -- we have the operating model that will actually keep the good performance, whether the business is growing or whether there is a decline in demand. And that way, we have been successful. I feel that the operating model of UPM is a secret source why, like the Communication Papers, was performing extremely well during 2022.Over the past 5 years, the growth businesses have been, on average, 3x more profitable than the mature communication papers measured with EBIT margin. But, of course, we know that the Communication Papers business has really performed well when it comes to free cash flow. As you know that since 2019, we have increased our CapEx significantly. However, those investments will only start to deliver growth and earnings from this year onwards. This is another way to look at our transformative growth. The fair value of the forest and energy assets in our balance sheet has increased by EUR 2 billion in the comparison period shown here, 2019-2022 to EUR 7.2 billion. We will continue to manage and develop these assets for sustainable value creation and supporting our strategy. At the same time, capital employed in our industrial operations has increased even more significantly to EUR 10.7 billion level and the majority of this increase is related to our transformative growth projects. At the end of the year 2022, almost a quarter of the capital employed more than EUR 4 billion was related to the growth projects that are not yet contributing to our sales or bottom line in 2022. They are, of course, expected to generate attractive returns once fully ramped up. This represents significant earnings potential for UPM. Ladies and gentlemen, UPM Board of Directors has to-date renewed our dividend policy to be based on earnings instead of cash flow. This aligns dividend policy with the company's transformative growth strategy. According to the new policy, we want to pay attractive dividends, targeting at least half of the comparable earnings per share over time.Effective capital allocation is key to attractive long-term returns as well as developing the business portfolio. Dividends are an integral part of the capital allocation. We plan to allocate capital to 4 purposes: Invest to growth, grow the company and its earnings. We invest in sustainable businesses with strong long-term fundamentals for demand growth and clear competitive advantage or high barrier to entry. We target growth in comparable EBIT and comparable return on equity exceeding 10%.Pay attractive dividends. The target earnings growth drives dividend growth over time. Maintain strong balance sheet. According to UPM's leverage policy, net debt to EBITDA ratio is to be less than 2x.And then finally, share buybacks. Share buybacks are complementing tool that may be used relative to investment opportunities and the company valuation. Next one, over the past 5 years, we can see how UPM has been allocating capital and EUR 4.6 billion has gone to investments. Dividends totaled EUR 3.4 billion, representing 64% of the cumulative comparable profit for the respective period. Net debt increased by EUR 2.2 billion. The balance sheet continues to be strong. Net debt to EBITDA ratio being below 1%.And then this is an illustrative capital allocation for next 5 years. We will -- compared to previous 5 years, our cumulative dividends will probably increase, while the total CapEx will probably remain, although somewhat -- or being somewhat lower than that over the last 5 years. We will continue to drive growth, and we will have an attractive investment ideas under consideration and planning. There's a lot of planning ongoing as we speak. However, none of these plans are quite as large as Paso de los Toros investment has been in the last couple of years. With confidence in UPM's finance position and future earnings, the Board of Directors has proposed today a dividend of EUR 1.5 per share for 2022 to the Annual General Meeting. This is a 15% increase from last year and represents 49% of the comparable EPS from 2022.Ladies and gentlemen, this slide shows our CapEx estimation for this year. In 2023, our CapEx will start to decrease. Our CapEx estimate for this year is EUR 950 million, of which EUR 750 million is related to remaining CapEx for ongoing transformative growth projects. Depreciation will increase this year when Paso de los Toros is up and running. And then the Paso de los Toros adds about EUR 40 million per quarter when it is up and running depreciation. Let's have a short, kind of, visit on both projects that we have ongoing -- or 3 projects: Paso de los Toros, Leuna and Olkiluoto. This is a very good look at the Uruguay project. And as you can see, that it is well proceeding and looks very good. Work at the pulp terminal in Port of Montevideo have been completed, and the port terminal is already operational, in use. The construction works at the Paso de los Toros mill were finalized in December. So that work has been now done. The project is now in the final phase, commissioning and putting kind of last pieces of the instrumentation and automation in place. The auxiliary boilers and the power boilers have been commissioned already, the water intake and water treatment process as well as the process of air systems are already in use. The recovery boiler testing is advancing well and the commissioning is progressing in all process areas as well. The mill is ready for startup by the end of this quarter. Leuna biochemicals, refinery project in Leuna is proceeding. And you can really see from these pictures that how much of the work has been done there. And the business preparation and commercial activities continues at the same time. Olkiluoto 3 nuclear power plant continues its testing program pretty soon and then hopefully -- not hopefully, but will actually be in commercial use in March this year. UPM's transformation is visible in shareholders' value. 2022, we reached a record earnings. We believe 2023 will be a year of strong financial performance as well. We have invested heavily in our transformative growth projects. We expect attractive returns from these investments and this capital allocation once the projects are fully ramped up. We continue to drive growth and portfolio improvement beyond the current projects, and we discussed in the capital allocation part -- or as we discussed this in our capital allocation presentation part. This way, we aim to drive shareholder value through earnings growth, dividend growth and valuation growth in long term. We do this in a sustainable manner and many of our growth businesses are driven by sustainability and megatrends of the world. Our sustainability work continued to gain external recognition 2022 as well. AAA rating in MSCI ESG Rating; AAA score in CDP, industry-leading; and participation in Dow Jones Sustainability Indices; Platinum rating in EcoVadis just to name some of them. Ladies and gentlemen, I will not read the summary again and repeat myself, we are ready for the questions. Starting off with Communication Papers, prices have skyrocketed, you're presenting a spectacularly strong fourth quarter. What's your outlook in this division? Could you give us a view of the status in the European graphic paper markets, how are your customers doing? And also maybe give us some sort of insight as to how your Continental European operations are doing compared to your Finnish operations. And in this context also, with regards to energy, what's your hedging level or hedging rate, should I say, in 2023 for the division, please? Hopefully, Tapio took some of the questions; they were pretty many. First, if I would like to start with the Communication Papers. Thank you for the question because I feel very comfortable with the business. And as you can see that even in declining business like paper businesses, if you are having an operating model that we have in UPM, you can generate extremely good results. And when saying that, it is -- what we have seen during the year, which has been pivotal year in that respect as well that there has been many companies that they have actually stopped producing paper, they have withdrawn from the business. So the consolidation has become more evident. And therefore, with the kind of operations that we have, we are managing the capacity and at the same time, being successful on passing costs to the prices. I feel very comfortable for going to the future with the paper business. Especially, when the consolidation has now happened, there's a plentiful of capacity that people want to and companies want to convert to the packaging grades. And having a low-cost assets in Finland and in Germany, feel very comfortable that we can manage the margins in the future as well. But then there was quite many other questions, maybe, Tapio, if you took some of those at least. Yes, maybe I took a few notes here. So maybe first of all, let's say, on the outlook. As said, Linus finished the year at very strong margins, and now going forward from here, of course, we are -- as we have also mentioned in our outlook statement, we're starting to see and already in the fourth quarter started to see some tailwinds also as far as availability and costs of inputs are concerned. And that obviously includes energy, but does include many or many other areas as well like logistics, chemicals, we have seen some of the world commodities already easing during last year and therefore, then starting to sort of impact the kind of downstream producers of our inputs. Energy cost, where you had the question on the hedging as well, of course, is still a moving target. As you all know, I'm sure, in the short term, there's been significant relief in Europe on energy costs and therefore, also in Continental Europe. Many of the sort of short-term factors obviously are behind it. We have had an unusually warm winter. Gas availability has been good therefore gas prices are down. So that, of course, is really for the Continental operations, in particular. But then we do have, I would say, let's say, a good position in the sense that we have both the Finnish and the Continental capacity available for Communication Papers as then we see how the remainder of the year unfolds as far as far as, particularly energy costs are concerned, so we can sort of optimize between the 2 sort of manufacturing locations. As far as hedging is concerned, roughly speaking, about 40% at the moment is the ratio of -- hedging ratio for our inputs in Communication Papers as far as energy is concerned. That was a lot of detail. Very helpful. And then just one more question, if I may. And it's what you're saying both generally and in some cases, specifically on significant value chain destocking. Can you give us any sense of where you think we are in that process? Has it just started? Are we starting to see the end of that destocking cycle? And maybe specifically on Raflatac, if you could, with maybe some extra detail on that process, please? Yes, I would say -- well, first of all, this sort of destocking, I'm sure you have sort of noted that it's something that is happening across many or most industries. In many industries or most of them, there is, first of all, a typical seasonality that destocking happens at the end of the year. And the commentary, I would say, quite broadly has been that this time around, this destocking has been clearly stronger than usual. And I think it's coming, of course, to a large extent from quite understandable reasons. As I already mentioned, for many sort of inputs also concerning then our customers, in a sense, the safety stocks have been sort of higher than usual because there has been concern over availability and that concern has been going away. We have had, let's say, also relatively high prices for many inputs in anticipation of still -- let's say, during the last year, still sort of significant increases on prices, which perhaps that is sort of tailing off. Interest rates rising means that financing working capital is more expensive. And then, of course, we have a general sort of slowdown in the economic environment. So all these reasons in a sense now -- again, now kind of pointing to the same direction. And therefore, we are seeing this sort of unusually large destocking. In Raflatac's case, like I think was mentioned here also one can say that, again, this has been particularly strong here in Europe, less so perhaps, but also the case in the North American markets, but clearly less so. We are, I would say, seeing already the sort of order intakes picking up again in the month of January. Perhaps it's sort of safe to comment that not to the kind of starting off right away to the level that the destocking would take kind of behind us completely. But clearly, we are -- I would say that is indicating that we are sort of over the hump on that. Just to follow up on the last comment. The order intake you're talking about was that specifically on Raflatac? That was my -- just a follow-up. Okay. Just coming back to your Communication Paper, of course, that was an outstanding performance in particular in Q4. You've also been going to provide a marginal cost of production consistently, but you're also calling out costs falling. And clearly, that marginal cost have been a driver for pricing and your advantage cost base, of course, has been really beneficiary. Sort of where do you see marginal cost now coming in the next couple of quarters as to your point, chemicals, logistics, energy and maybe fiber on balances coming down? And if I'm looking at the Fiber division in the quarter, it was quite a bit below current expectations anyway. Was there any particular disruptions going on at Fray Bentos that was more difficult than normal? Or is this -- if you can actually quantify that number, that would be helpful. But also, is this also a combination of that big drop we've seen in sawn goods that was a meaningful driver to that relative weakness?2 more technical, maybe guidance questions. D&A you guided EUR 40 million per quarter for Fray Bentos when it was up and running. How should we think about D&A for the whole group in the year? And the final question really comes from the energy hedges. You commented, of course, on Communication Paper, but just to help us out, there are so many uncontrollables here. So can you share with us your hedge levels in your Energy division and the percentage of what has been hedged? I mean, for example, to you provide that sort of number it would be extremely helpful to understand the potential for earnings in that division with Olkiluoto coming out. Well, maybe I'll start. At least if there's something Jussi wants to add, then obviously, please do so. But starting on the Communication Papers and the sort of marginal -- or the cost -- cash cost of the marginal producers. So yes, obviously, if there is a tailwind on the cost, then that will benefit the marginal producer. Like we have discussed, I would say, several times in the before, still the fact is that we have more tools in our toolbox than the small guy who is on the margin over there. So of course, we think that this will benefit, relatively speaking, more us than the marginal producer. So typically, when we have a sort of phase of the cycle where costs are coming down, then also our ability to manage margins is good and better than it is for the producers who are at the high end of the cost curve or reason being why they are at the high end of the cost curve are sort of structurally disadvantaged compared to our mills. Your question on fibers, of course, we have, as part of the fibers business area reporting, we have the sawn timber business. And as was mentioned already, I think it's obviously widely known that the construction markets have slowed down significantly. Sawn timber prices have come down, and that is affecting the results of our sawn timber business as well, which is, let's say, particularly the case in the fourth quarter and sort of visible in the figures. Maybe not, let's say, in the pulp business. A kind of a perfect month from a production point of view as well. But certainly, the sawn timber performance volume-wise and, let's say, profitability-wise was affecting the fibers business area. The depreciation figure, let's say, for the company as a whole, then will be slightly less than EUR 600 million depreciation, which this chart in the materials is kind of indicating at the annual level. And then on the energy hedges, what I can sort of repeat what we have discussed in the previous quarters that we have not hedged any Olkiluoto 3 volumes and with the kind of hedges in place in relation to the old capacity, the existing hydro and -- hydro and nuclear we're sort of somewhere around 80% for this year. Robin from Carnegie. 3 short ones. First, related to the China opening. Have you seen any changes in the sentiment among your pulp and fine paper customers in China already now? Or how do you expect that to evolve? Number two, regarding the Paso de los Toros mill, was there already some expenses booked in the fourth quarter? And what kind of start-up costs should we expect for Q1 and Q2 on the EBITDA level? And then the third question I have is regarding the possible biorefinery in Rotterdam. Do you expect the investment decision to go ahead or not to go ahead, to be made during this year? And if the scope still the same as before? May I actually take the first and Tapio second, and then I -- the final as with the biorefining in Rotterdam. But China is, obviously, now opening, and that is clear for us as well. And that what we see that the -- every time you talk to the Chinese team, there's a more positive outlook for the business is how it will evolve. Maybe an anecdotal that we are having some 1,200 people in China. And in 3 weeks' time end of December the COVID actually was hitting almost 1,000 of them, and they are all quite quickly afterwards back in business. So basically, it is opening. There are positive kind of talk every day when you talk to the team in -- both in paper business and also in pulp business. And then the biorefiner, like I said that we are in the very intensive phase of the basic engineering of the Rotterdam. Nothing really has changed when it comes to technology and the task that we have raw materials, technology, market's regulation. All of that needs to be completed before we are taking the final investment decision. And then on top of that, I remember that I have been guiding all of you that we are not prepared to make the investment if there is a scarcity of resources or high cost in raw materials and this and that. And when these all are coming together, then obviously we are taking the decision, not saying that whether it will be 2023 or beyond that. But as soon as possible and as soon as we are ready and the circumstances are favorable for taking the decision, not to go or to go in that investment. And Tapio was actually then -- then did you talk about the... Yes, about -- there was the question about Paso De los Toros and actually a kind of a good additional point to what Lars also was raising, which is that, yes, of course, now when the ramp-up has started to kind of take place and preparing towards the startup of production at the end of the first quarter, then we do have costs that are expensed already in the fourth quarter and will have on the -- in the current quarter. Won't have a number to give you on that, but it has also had an impact on the fourth quarter fibers reported figures. Then the positive EBITDA contribution, which was the question, will start in the second quarter. So we will start getting a sort of a positive impact on EBITDA from the Paso de los Toros production very quickly when the start-up happens. Well, maybe you talked to sort of fiber division cost base already a couple of times and gave a lot of color on that one. Maybe just one additional question on that. Is the pulpwood, I mean the raw material, the wood cost going up in such a way that, that's something which is sort of speaking? Or was this sort of increase in the unit cost mainly driven by the, as you say, some sort of loss of efficiency after the very efficient Q3 and the Paso de los Toros and Fray Bentos. Wood costs in Southern Hemisphere doesn't go up. Quite contrary, we can optimize that. So 3.5 million tonnes when Paso de los Toros is up and running, is intact on that. We don't see any of that. Of course, in Finland, then where we have the kind of 2-point-some million tonnes of capacity, definitely, the wood cost is relevant and the wood cost development is relevant, but 3.5 million tonne is intact on that perspective. Okay. Then on the cash flow side, in addition to the around EUR 900 million energy hedges that are still in the way in the balance sheet and then your net debt. But in addition to that, there was quite a lot of absorption in working capital last year, almost EUR 700 million, even if you released quite a bit in the fourth quarter.I mean, what's the kind of the best guess for this year? I mean, because, obviously, you need to scale up the operation and Paso de los Toros will be absorbing working capital. But then on the other hand, there are some probably sort of price declines and normalization. So is there any -- is it possible to give some sort of color on how you're thinking on the working capital development for this year? Well, let's say, of course, if you look at the working capital turns in terms of days of sales outstanding, then still, let's say, the efficiency from that point of view during last year, on the kind of normal working capital, excluding these energy items continue to be very good. So in other words, what has been, like you said, driving the working capital up is the fact that when there's been inflation, then it means that the -- and when prices have been on the rise, then it means that, of course, the value of inventories and receivables goes up and so on. So then, when there is perhaps tailwind, you would expect some release then now coming. And, let's say, obviously, presuming and believing that the sort of efficiency as such, the turnover continues the same, then that means cash should be released from the regular working capital. That will be it in the sense, like you also suggested offset by the fact that when starting up a huge mill and a new, in a sense, production unit and the volume into the market from Paso de los Toros that will, at the same time, tie up some capital in terms of working capital in the new operations. So those are the dynamics, but no guidance in a sense that what the end result will be. Yes. I understand. That's good. So the final question on the Communication Papers and then just sort of wondering what sort of visibility do we have for the paper prices now for the first quarter and for the first half of the year. I think you have sort of shortened the contracts during last year for a good reason. But what -- can you -- is there anything you can say about the sort of price negotiations, how advanced they are and are there still a lot of negotiations pending and sort of color on that situation? Unfortunately, Harri, as you know me, that I have never been in the position to comment on the future prices. We will talk about those when everybody sees those numbers and the market prices. Of course, what has been one of the reasons that we have been able to implement price increases during the escalating costs has been that the contract validities has been shorter. And of course, we are keeping very, kind of, good grip on it that if the costs are going down or up that we can react early enough in this business as well. But as I said, let's talk about them when there is a market prices available. What was the kind of process that we went through. Just a bit of color on your capital allocation priorities. I see you're calling out buybacks ahead of special dividends. I just like your thoughts how you think about buybacks versus special dividends once you've invested in CapEx, maintained your strong balance sheet, et cetera, just the split between that? And then following up on Communication Paper and how you're able to manage downtime in that business, if necessary. I see you've announced some effectively standard negotiation practices with unions to take 90 days of down, maybe just talk about that how you can manage costs and flex your system to protect profitability? If I take the latter, Tapio might talk about the capital allocation still on top of that. But Communication Papers, it is clear that we have been preparing ourselves to how to manage the capacity. And therefore, we have negotiated kind of very standard, temporary layoff where you can take in half a year time, 90 days if needed. And that is actually a tool that you can utilize to take the cost down when there's no orders for the particular machines. If I continue on the capital allocation. So basically, what we have indicated here, what Jussi described in the dividend policy is that, on one hand, as far as dividends are concerned, there, we want to have a kind of a consistent positive development over time, dividend growth as the earnings growth is sort of materializing over time. Then we have highlighted share buybacks here as a kind of a complementary tool for the Board, where the Board has no decisions yet to sort of communicate on that. But again, let's say if you look at like what, now the recent years show these large investments then mean that there is a kind of a certain cycle of CapEx. And then there is a certain sort of incubation or development time before the next wave of larger investments will be ready. So it's likely that we'll see some sort of cycle as far as the investment in bigger way into building the business and sort of generating the earnings growth will be. So in those points in time, in between the good return investment for the company can be to invest in the company itself, meaning buying back shares. And then, maybe just a follow-up on Paso de los Toros. When will the volumes be visible in the global pulp market? I imagine if you start up in Q1, will the volumes be delivered to customers kind of later in the Q2 period just considering the shipping times. And then you mentioned a bit of startup costs on the pulp mill. Is there anything we should think about for the start-up costs for your biochemicals plant later in 2023? Well, to the latter part, yes, we will have, as the -- then start-up for the biochemicals in Leuna comes closer, then we will have additional costs that are expensed as well. So that will have some impact later in the year. And for the first question, I don't know whether I have really information, but of course, it actually takes several months to fill the pipeline before we are starting to see the customer deliveries. Thank you for being hour -- and 50 minutes with us. Thank you for your time. See you.
EarningCall_919	Greetings and welcome to the Ball Corporation Fourth Quarter 2022 Earnings Call. At the start of the presentation, all lines will be in a listen-only mode. [Operator Instructions] As a reminder, todayâs call is being recorded Thursday, February 02, 2023. Thank you, Carlos and good morning, everyone. This is Ball Corporation's conference call regarding the company's fourth quarter and full year 2022 results. The information provided during this call will contain forward-looking statements. Actual results or outcomes may differ materially from those that may be expressed or implied. Some factors that could cause the results or outcomes to differ are in the company's latest 10-K, and in other company SEC filings as well as company news releases. If you do not already have our earnings release, it is available on our website at ball.com. Information regarding the use of non-GAAP financial measures may also be found in the Notes section of today's earnings release. Historical financial results for the divested Russian operations will continue to be reflected in the Beverage Packaging EMEA segment. See Note 1, Business Segment Information, for additional information about the sale agreement and a quarterly breakout of Russia's historical sales and operating earnings. The release also includes a table summarizing business consolidation and other activities as well as a reconciliation of comparable operating earnings and diluted earnings per share calculations. Joining me on the call today is Scott Morrison, our Executive Vice President and CFO. I'll reflect on 2022 briefly and Scott and I will discuss key drivers and financial metrics for 2023, and then we will finish up with closing comments, the outlook and Q&A. Let me begin by thanking our employees and stakeholders for their hard work and support. As I reflect on 2022, I'm struck by the magnitude and pace of change we have navigated. The commitments we are prepared to achieve, and the prompt and decisive actions that were made by our team in a fluid and ever-changing macroeconomic and geopolitical backdrop. Our full year in fourth quarter comparable net earnings reflect our EMEA, aerospace, and aerosol operations coming in as expected offset by the impact of our Russian business sale, softer volume in North and South America. Planned inventory management impacting fixed cost absorption and the effect of high cost inventory and the timing effect of customer sell group. Global beverage can shipments including Russia increased 0.8% in 2022 and decreased 6.1% in the fourth quarter. Excluding Russia, global beverage shipments increased 2.1% in 2022 and decreased 0.9% in the fourth quarter. North America beverage can segment shipments decreased 0.3% in 2022 and decreased 7.1% in the fourth quarter. EMEA beverage can segment shipments excluding Russia increased 8.6% in 2022 and increased 11% in the fourth quarter. South America beverage can segment shipments decreased 6.3% in 2022 and decreased 4.2% in the fourth quarter. Other non-reportable beverage can shipments increased 48.2% year-to-date and 48.5% in the fourth quarter as a result of continuing to provide support to domestic European customers. Our global extruder aluminum bottle and aerosol business continues to benefit from new refillable, reusable bottle offerings and higher recycled content aluminum bottles for personal care products. Shipments in this segment increase 12% year-to-date and 14.5% in the fourth quarter. And our aerospace team increased their backlog 20% year-over-year. In response to the previously discussed unfavorable swing in beverage can volumes relative to our early 2022 expectations and as a result of our sale of our Russian businesses, we optimized our global cost structure, deferred certain projects, and took actions to right size our North and South American manufacturing plant systems by consolidating high cost less bit facilities into scalable facilities capable of delivering our customers a portfolio of can sizes, enabling category and pack size innovation to our customers in a more agile way moving forward. In EMEA, newly constructed facilities will ramp up during the first half of 2023 and provide much needed cans to our customers across the region. It is also important to celebrate the accomplishments achieved by our team during 2022, including shipping nearly 115 billion innovative aluminum cans, bottles and cups to our customers, delivering numerous environmental space science and defense technologies to study the impact of humans and the environment on our earth. Weather satellites that protect life and property from extreme weather events on orbit defense technologies to ensure the safety of our homeland, the war fighter, and our allies, and deep space marbles like the James Webb Space Telescope to view previously invisible images via the Ball built mirror assembly and optics. Joining the World Economic Forum's First Movers Coalition to lead collaboration across the aluminum industry to prioritize circularity and decarbonize the industry, achieving aluminum stewardship initiative ASI certification across our global footprint, remaining on the 2022 Dow Jones Sustainability Index, North America for the ninth year, receiving an A minus in the CDP'S climate change questionnaire in 2022, which recognizes the company's commitment to maintaining best practices in corporate climate citizenship through its net zero carbon emissions commitment, renewable electricity coverage and ongoing assessment of climate related risks and opportunities. Receiving a perfect rating on the human rights campaign's annual corporate equity equality index CEI, receiving a 2022 ranking of 90 on a 100 point scale on the 2022 disability equality index DEI, reflecting the meaningful progress the company has made in creating a workplace that enables employees with differing abilities to support its global mission and being recognized as the 2023 industry leader for the industrial good sector for the just capital and CNBC's just 100 top performing companies on ESG factors, including ethical leadership, cultivating and inclusive workplace, use of sustainable materials and carbon reduction. And our global team supported 2,800 non-profit organizations across 30 countries and contributed 30,000 volunteer hours across our communities. Drive for 10 continues to be our vision. We know who we are, we know what is important, and we know where we're going. Together, Ball will one, execute our strategy of preserving our planet and delivering value by creating circular aluminum packaging solutions for single use, limited use and refill, and providing exquisite environmental space science and defense technologies. Second, we will provide our employees and communities the resources and opportunities to succeed. Third, we will be our customers and suppliers partner of choice to enable organic growth, achieve sustainability goals, drive innovation and technology development. And four, we will be a disciplined capital allocator by unlocking value and efficiencies from existing operations with limited future capital investment. And in doing so, generate free cash flow, grow earnings and EVA dollars, and be good stewards of our cash flow to do leverage and return value to our fellow shareholders. Consistent with our commitment at our Investor Day and on our third quarter earnings call commentary in 2023, we can deliver our goal of 10% to 15% diluted earnings per share growth, including the Russian business sale headwind. The next quarter will remain choppy as we work through higher cost inventory, complete the optimization of our North and South American manufacturing footprint, ramp up our new Kettering U.K. and Pilsen, Czech Republic plants in EMEA. And last, the previously disclosed 2022 customer contract breach in South America. We'll benefit from the previously identified and executed SG&A actions while continuing to receive the PPI cost recovery throughout 2023, which overall will lead to a back half weighted year. During the Q&A, Scott and I will strive to provide additional clarity on the external environment and cadence for 2023 based on what we know today. We also continue to reiterate our investor field trip long-term goals for global volume growth, fueled by sustainability driven substrate mix shift, product category impact size innovation. Our global beverage teams have positioned our businesses to deliver the year and with an eye on the future. In 2023, an excluding Russia, we estimate in the range of 4% global volume growth for Ball with North America flat to slightly down, South America volume up mid to high single digits, EMEA volume up high single digits, and our other non-reportable business volumes up mid to high single digits, as new EMEA capacity ramps up and exiting 2023 exports from Saudi Arabia into EMEA wind down. Our global beverage businesses work will be complimented by our aerospace and aerosol businesses continued success. We appreciate the work being done across the organization and extend our well wishes to our employees, customers, suppliers, stakeholders, and everyone listening today. Thanks Dan. Full year 2022 comparable diluted earnings per share were $2.78 versus $3.49 in 2021 and fourth quarter comparable diluted earnings per share were $0.44 versus $0.97 in 2021. Full year sales were up due to the pass-through of higher aluminum prices and aerospace performance offset by currency translation and inflation in Europe and fourth quarter sales were lower largely due to the sale of our Russian businesses. As Dan mentioned, fourth quarter and to a large extent full year diluted earnings per share reflect higher aluminum aerosol results, lower corporate expense and a lower share count more than offset by higher interest expense, higher comparable effective tax rate, comparable operating earnings declined in North and South America and EMEA attributable to the sale of our Russian business, cost inflation and unfavorable earnings translation. I would like to take the opportunity to proactively address the year-over-year results in our North and Central America segment. 50% of the North and Central America operating earnings decline in the fourth quarter was driven by unfavorable swing in fourth quarter volumes versus 2021. We were up 5% in fourth quarter of 2021 and down 7% in the fourth quarter of 2022. And the other 50% reflects the confluence of unfavorable fixed cost absorption that was planned entering the fourth quarter, customer mix and the timing effect of high cost inventory ahead of customer sell-through. This larger than expected headwind is the byproduct of volume declines, aluminum price volatility, and our proactive decision to greatly reduce production to meet current market conditions during the quarter. The segments earnings are anticipated to rebound late in the first half of 2023 as high cost inventory sells-through and volume production stabilizes across the consolidated plant system. And after July, segment earnings will accelerate further as we enter the busy summer selling season and all of the contractual inflation recovery will be effective. As we explained on our third quarter earnings call, during 2021, we ramped up our metal purchases to meet what we expected would be strong 2022 growth in North America. We did this at a time of rising metal prices. And while we are largely protected from metal price changes in our P&L, it does impact the cash flow and the amount of metal payables. Earlier this year or earlier last year, when we saw that volumes would not materialize as expected in 2022, we began to reduce metal purchases. This also coincided with declining metal prices, which reduced the metal payables even further. And again, typically not a material P&L impact due to our The net result is less billed in the accounts payable than originally planned. The result was a use of over $900 million in working capital for full year 2022. This will normalize in 2023 as both metal prices and our metal take should stabilize. As we sit here today, some key metrics to keep in mind. We ended 2022 in a solid liquidity position with over $500 million in cash and $1.5 billion in committed credit availability. 2023 CapEx will be in the range of $1.2 billion, driven by cash outflows related to prior year's projects. We will generate free cash flow in the range of $750 million in 2023 and initially focused on deleveraging. Our 2023 full year effective tax rate on comparable earnings will be in the range of 20% and full year 2023 interest expense will be in the range of $415 million. Full year 2023 corporate undistributed costs recorded in other non-reportable are expected to be around $90 million. Including the $86 million Russian operating earnings headwind, comparable operating earnings should increase over $200 million in full year 2023, comparable D&A will likely be in the range of $560 million. Recall that in 2022, we returned over $830 million to shareholders. And as we look forward, year-end 2023 net debt to comparable EBITDA is expected to trend towards 3.5 times, and we may want to drive it lower. Last week, Ball declared its quarterly cash dividend and an alignment with our Investor Day commentary after we navigate the first half of 2023, we'll address the path to resuming share repurchases. Rest assured, as fellow owners, we will manage the business through the lens of EVA and cash stewardship, and we will effectively manage our supply chain and customers in this current economic climate to secure the best cash, earnings and EVA outcome for our shareholders. We are happy to have 2022 behind us, and I'm excited and optimistic for 2023. Thanks Scott. We will continue to be agile and decisive in the current environment. We must do what is right to ensure supply/demand balance, foster innovation and stimulate equitable sustainability policy which will further broaden the use of circular aluminum packaging solutions and provide continued fuel for our organic growth. In addition, our aerospace team will continue to partner with our customers to deliver world-class solutions for some of the world's greatest challenges and opportunities. Yes, 2022 was an unprecedented year in Ball's history, and I am encouraged about our ability to deliver the year with an eye on our future. Last week, Scott and I reviewed our 2023 operating plan with the Board and our business' ability to deliver on that plan is on track. We look forward to generating free cash flow achieving our long-term diluted EPS growth goal of 10% to 15%, deleveraging and returning value to shareholders. Thank you. Hi, everyone. Good morning. Thanks for the details as it going. So, I want to thank you, first of all, for all the details in terms of what you're expecting in terms of performance cadence, particularly within North and Central America. Can you give us a bit more view in terms of what your underlying assumptions are in terms of your volumes as it will progress through the first half, the promotional activity and programs from your customers? What you're seeing in terms of innovation from customers right now? And if you were in our seats, as analysts and investors in your stock and we saw something not materializing or something developed that would undermine your expectations, what would it be? Yeah. Thanks George. So, as we sit here today, the volumes in EMEA are in line heading right out of the gate in North and Central America. They're in line. I think we're a little soft right now in South America versus my commentary on where we think the year is going to end up. The biggest element that, I think, misunderstood, George, relative to our expectations on volume and why we're a little bit more bullish is aluminum prices have come off. But that doesn't mean that's necessarily the cost position for our customers. So, as they lap their head positions heading into the second quarter and the second half of the year, with the price increases that have gone into aluminum beverage packaging plus the actual costs coming off, there are significant profit pools that our customers are going to be able to step into. As I said, right out of the gate, we're a heck of a lot closer to what we anticipated in terms of volume. In North America, in particular, given the December falloff on all in consumer products that has changed the behavior patterns initially this year with a lot more price promotion and in cap. Will that continue for the balance of the year, I would suggest it will given the other backdrop that I gave you relative to costs. But the Europe continues to be incredibly strong. North America is off to a good start. I think there's a little bit of a wait and see in terms of the volatility in South America. But having said that, the real cost positions that some of our major customers down there will lap in terms of hedge positions will stimulate optimism in the second half of the year. The PPI, pass-through, we're in good shape. All of the cost actions and the footprint reductions that we've talked about are in good shape. Maybe I'll turn it over to Scott just for some of the positive signs relative to inflation and currency and some of the other things that are starting to move in our direction from a more stable environment. But 2023, as we sit here today, I'm feeling really confident about. I'll touch that and then why don't you touch innovation as part of this question. Yeah. George, I think why we feel optimistic is we are definitely seeing input costs moderate. And whether it's European energy is not going to be as bad as what people predicted. We're largely hedged in Europe, lower than where the spot price is today. That really squeezed us last year. We're getting all the PPI pass-through. We started to see freight rates, warehousing, lots of input cost moderating. And so, as we sit here today, we feel pretty good about kind of the cost input side being in a much more stable place. You kind of had long-term rates kind of peak. Short-term rates are still ticking up a little bit, and so we'll feel that in our interest expense for 2023, but we feel much better. Yeah. Reflecting on your comment and question around innovation. Certainly, in the alcohol space, we continue to see a lot of innovation, which is a good thing because the combination of the innovation. Something is going to win. As we always say, George, we don't know what's going to win, something is going to win, but it also increases the pressure on the beer category to compete. Those two things will equate to improve volume outlook. So, we're helping to fuel the innovation, number one, but we also have a heck of a lot of customers that we sell beer cans. We'll benefit one way or another depending on who wins. Yeah. We'll be hoping for more consumption during the Super Bowl and other things. My other question, I'll turn it over. Thanks for all the color. So, you talked about reduced CapEx. That's certainly not a surprise, but that also includes your tail on spending for existing plants as they are coming up. I know it's not 2024, but is there a view you can give us on what CapEx might look like or what the delta might look like as we look out to 2024 and 2025. Thank you very much, guys. Sure. Most of the spend this year, George, that 1.2 are things that are already in flight. And as we've talked about we've got -- we'll have enough capital on the ground after completing these couple of things in Europe. We'll be in a pretty good spot. So, I would expect, although it's February 2 of 2023, I would expect in 2024, we'll see that drop further. Yeah. The internal conversation, George, quite candidly, is we've spent the capital we need to grow into over the next two to three years. We could most likely spend at D&A levels in 2024 and 2025. If we have a reason to invest, it will be with a strategic customer, one or two. So, I think you'll start to see a much more disciplined level loaded capital approach relative to D&A spend moving forward. Great. Thank you so much. Can you just talk a little bit more about North American volumes, specifically how much you believe was more just industry sell-through, specific customer destocking? And anything idiosyncratic to Ball given the shutdown in Phoenix. Just anything to break down those three variables, would be very helpful. Thank you. Yeah. I think, it was back half of the quarter, and it's no different than probably every other end consumer product in the retail shelves. Customers pushing price, pushed it too far, and there was price elasticity that kicked in. Beer was down the most. And I think what we're seeing is a return to more promotional activity here right out of the gate in Q1. So, I think there's recognition of what happened there in the last four to six weeks of the year, which is well publicized. Since we sell to everyone and every category and every channel, we were impacted by all of that. But I can tell you, there's a different behavioral patterns setting in relative to our customers and their promotional activity. So, I think this will normalize and we'll start to move into a more sustainable underpinning for growth moving forward. Got it. And just as a very quick follow-up on some of your Latin American commentary. Could you just very quickly just discuss the market dynamics? Obviously, it was pretty difficult during the first half with Carnival and everything else and then kind of easing that helpful. World Cup rebound, which didn't necessarily materialize. But just given the easy comps on 2022 and your comments on a preliminary basis for the beginning of the January, how do you think you believe the market will ultimately materialize throughout the balance of the year given the low comps just given the industry? And then also any perhaps just very quick comments on market share trends. Thank you so much. Yeah. I will point you to the fact that the real cost that our customers have relative to aluminum cans has as much to do with our hedge positions. And in the second half of the year, cans will be the lowest cost substrate with the greatest profit pool, and that will give ample reason for our customers to push aluminum packaging at that point. You're right, the World Cup relative to the fourth quarter. We did see an uptick, but we didn't see the uptick that we anticipated. We knew that early in the quarter and we were reacting to that throughout the quarter. And we've got -- to your point, you got Carnival, you've got another a couple of things. You don't have a COVID environment like you did last year. So, there's optimism. It started off less favorable than we anticipated in South America, but it's only one month in, and I would -- and we're still bullish on things getting better in the back half of the year. I would just add on South America. In the first quarter last year, we will lap the customer breach that we had. So, that will we won't have that volume as we look forward. Obviously, we've seen the destocking and some of the impact on the consumer from the inflation. And you mentioned that maybe that's turning a little bit now with the deflation [indiscernible] and customers of yours potentially in a position to promote the product. So, could you describe a little bit more what you're seeing on that front? And if you are seeing that -- do you expect -- what's kind of your growth and volume outlook for NA, North America this year, taking into account some of the closures you had last year as well. Thanks. Yeah. As we sit here today, I'm encouraged by what we're seeing, and I'm not willing to come off of -- is certainly in the year that we're planning for flat. We're planning our earnings lift in our 10% to 15% EPS growth, up a flat North America until we're more convinced that the behaviors of the customers will continue to lean into promotion throughout the year. That's where we're landing right now. Okay. Maybe I can ask the question a little differently. If you think about the $400 million or so that you delivered in Q4 EBITDA, maybe there's a little bit of seasonality improvement in Q1 2023. Q4 2023, I imagine, could look like Q1 and then Q2 and Q3 would be up seasonally better. But still, that would fall short of $2 billion of EBITDA. Is that right? I mean, what are some of the levers you guys can pull to maybe get back to that level? Or is that maybe more like a 2024 and 2025 kind of range that we should be thinking about? Right. I think in the first quarter -- remember, a year ago in the first quarter, things were pretty good. Our volumes were up. It looks strong. We're not going to have that kind of... And we had Russia. I mean -- but in North America, the volumes were good. So, we won't have -- we're going to have pretty tough comps in the first quarter. I think as we look forward then in the remaining quarters, we should see nice improvement year-over-year in each of the quarters in North America as we look forward. Okay. Great. And then just lastly, just on Europe, it sounded like Europe, you're somewhat a little bit more constructive on. Could you just describe that? I'm just trying to square that away with some of the inflation that they saw. Last year, you had some energy price inflation that was pretty stiff. So, is that what's also giving you some relief and potentially pushing some volume upside in Europe? Thanks. Well, we had a really strong volume year in Europe, and it wasn't impacted despite the end consumer being impacted with less discretionary spend. The aluminum package did really well. And I think it's more of the aluminum package story and the resiliency of the can in Europe than it is discretionary spending levels that helped us. Your point is valid. So, the way our contracts will work. We'll be able to pass through a lot of the inflationary headwinds that we experienced in 2022, we'll pass that back in 2023. So, if we're -- if inflation moderates, which it has, even if it dissipates a bit, then you've got the underpinnings of volume that continues to grow at a high single digit rate. We've got capacity online -- coming online in two major facilities that will take advantage of that growth. And we should be able to make more money given the stability of the inflation and the fact that we're catching up in arrears on a lot of the inflationary pass-through. We're really excited about Europe for 2023. And just to your comment on EBITDA, I would expect -- I'd be disappointed if we didn't exceed $2 billion of EBITDA in 2023. So, Dan, just kind of building off your recent comments, you've been quite vocal about how higher beverage price pressure volumes along the supply chain, including at your end. How much do you think volumes were impacted in 2022 just based on the dynamic in Beverage North America? And as it relates to your comment on Europe resilience, was that also boosted in 2022 by just the comparison from the reopening across Europe relative to the prior year? And do you still see sort of that momentum continuing into 2023. Yeah. I'm not entirely sure your first question, I could parse out that delta. I will tell you where it had an impact and where we'll be able to point to it is in the fact that it's really the promotional activity during the peak season that we didn't see any of last year. We still grew a little bit. I would probably go back to sort of that 2018, 2019 range of growth that we saw. And I would put that up against what we actually saw in 2022. And I would say that delta, just speaking out loud, is probably what we lost out on because of a lack of promotional activity in the peak season. So, maybe 1% to 2% during that period, which as you know, those -- that last billion cans is kind of where you make your money at the end of the year in a fixed cost business. So, yeah. Let's see. Right now, we're off to a good start relative to how the beer companies are promoting and how our customers are looking at what they need to do from -- elasticity curves have changed here in the last four to six weeks. But I would say in Europe, Ghansham, the sustainability push in Europe is not slowing down. And I think that will help. And we know how many can filling lines are going in Europe in the next couple of years. And so that's why I think we're bullish on the outlook for Europe. I think the reopening, if anything, would have slowed our growth because the on-premise is overwhelmingly kegs. And so, despite that return to on-prem, we're still growing at the high single-digit rate. So, I continue to be bullish about what's happening in Europe. I've said this -- a number of times, and I think I've said this to you. I'm most bullish on Europe and the medium and the long-term. The short-term, obviously, they have to figure out energy that will impact every industry, every business. But for us, the sustainability underpinnings are tremendous and we're excited about these new assets that we're ramping up here in the first half of the year. Okay. That's clear. And then for the second question, on the $200 million plus net price cost recovery guidance for 2023, how do you anticipate that will flow through the various beverage can segments? And then separately, did you give a working capital number for 2023 in terms of year-over-year movement? For 2023 working capital, we expect to get to that $750 million of free cash flow. We expect working capital to be a source around a little over $300 million. And on the net cost pass-through and net recovery, it's overwhelmingly Europe and North America, and it's 60% North America, Scott, as he's nodding. And you'll see, in Europe, it comes in a more linear fashion over the quarters. And in North America, you'll see probably 60% of that coming in, in the second half of the year. July 1 is a big date for lapping one particular customer contract. Just following up on Ghansham's last question, you reaffirmed the $200 million inflation recovery target. Scott, you mentioned inflation and energy coming in lower than expected, maybe in some cases materially. I'm just wondering if that's something that would cause you to raise that $200 million target or maybe it's too early in the year? Or do you think about sort of the benefits of those lower costs in a different way? Or is there a lag? Just wondering, how we should think about that. I'll answer it, and then I'll let Scott give you more detailed answer. We prefer to be heroes in December than off start here. But Scott, go ahead. No, what I was going to say. It's only February 2. I mean, I think the optimism we're feeling is that it appears a lot of the trends are more helpful to us. And so, all those things will be beneficial, but we've got to see how volumes show up. That's the big wildcard. We're getting out of the gate in a more positive and constructive way. And we're building our plan on a more conservative basis but we'll see. But definitely, things seem to be turning into a little more tailwinds than headwinds that we had last year. Okay. That's helpful. And then just a few quick follow-ups on Latin America. With the footprint actions in Brazil, I don't know if there's kind of a finer point you can put on the cost savings there. And then maybe just where your operating rates will be in Brazil once that's completed? And I guess just one last one. If -- how you'd characterize the South American businesses ex Brazil, how they're doing? Yeah. They're -- ex Brazil, they're quite resilient even with the inflation levels that you're seeing in Argentina. Our volume was up double-digits in the country year-over-year. So, it's incredibly resilient. Chile is performing well. Paraguay very well. Some of the other areas that we export into continue to perform well despite all of the geopolitical turbulence and the inflationary pressures you see in there, that's holding in, and the team is doing a wonderful job managing all of that -- all of those challenges. In Brazil, it's less about the cost savings relative to the expenditures. Obviously, labor is incredibly cheap there. So, yeah, you shutter a facility, you're not going to see near the savings that you would in Europe or in North America. But operating in a tighter supply/demand environment gives you the ability in your other facilities to keep them full and to run them full out and that generally benefits efficiency levels, reduces spoilage, all of the things that we're asking our plans to do and manage on a day-to-day basis. It gives them a a greater ability to do that, manage their quality aspects, stay in touch with customers, manage their supply chain more effectively. So that's where you see the savings and the benefits and the earnings profile being impacted in South America. Good morning. So, I guess, the first question is thinking about the demand side, maybe come back into North America. And Dan, our comments on -- January has had a better start, maybe seeing some pickup in promotional activity. Your comments seem to be a bit more focused on beer as a category versus CSD or elsewhere. And I'd love to just get your perspective on, are you seeing that change in customer behavior and promotional intensity across all categories? Or is it right now exclusive to beer. And corollary to that is, in discussions with customers across different beverage categories, is there any where you're seeing kind of a step-up in innovation and new product introduction that is giving you more optimism. Yeah. I think it's a really good question. Beer is being more aggressive on the promotional activities because beer had the most precipitive drop-off in volume. So, it correlates and the magnitude of the volume declines in terms of the promotional activity. So, yes, you're seeing it across every single category because every single category was down in the last six weeks of the year. But it's certainly more pronounced, and that's probably a reason bias in my comments are relative to really -- a really nice uplift in beer right out of the gate. Some of it is attributed clearly to the Super Bowl as we're two weeks out. Now, you always see some promotion and some lift there, but it's more pronounced than that from a historical standpoint because of the volume fall off. And on innovation, I made this comment earlier on the question, but maybe I can dive into a little bit more. There's innovation in every category. But the most innovation, and this has been a consistent thematic here with the exception of that accordion effect relative to COVID where there were less SKUs just trying to get cans out the door. But as the large CPGs become beverage companies, they're leaning heavily into alcohol and mixers and those types of cocktails. And that's where innovation is really stemming. And you'll continue to see that for the foreseeable future. And those are most of what we expect to see here in 2023. There are other things obviously being worked all the time that are -- but what I know is planned for retail shelves is going to largely fall into cocktails and innovation and around that for the can. Got it. And then, I appreciate you gave different segment level detail for the different can business. I'm not sure if I might have missed a view on the aerospace performance for the year and where you think that's tracking? Yeah. So, for 2023, we will be -- we'll exceed 15% earnings growth. Actually, right now, as it's shaken out, we're north of 20%. So, we will see -- we're beginning to step into the backlog that we've won through the years and starting to see repeat builds. Our defense platform is executing really, really well. And I think we've navigated some choppiness in terms of supply chain in 2022 that has stabilized. So, as we sit here today, we should see a much improved operating earnings performance from our aerospace business. Hi, guys. Good morning. Appreciating earnings will be a little tougher in the first quarter and likely down, do you have enough levers where earnings will be up year-over-year in 2Q. And I think you're targeting 10% to 15% earnings growth for 2023. Is that predicated on the 4% volume growth you were mentioning? Or is it more of a flattish backdrop like you previously guided to? I think we'll start to see momentum in the second quarter definitely. And you've got to really -- it depends on volumes. But as things kind of roll in, we get some PPI pickup here in the first quarter, but as Dan mentioned, the bigger chunk of it comes in the second half of the year. First quarter will definitely be softer year-over-year given some of the challenges. And we're still working through some of this inventory, both in North America and in South America. So that's where you'll see most of that impact. But then I would expect in North America, we'll see nice earnings improvement as we get into the second quarter and year-over-year as we look through the rest of the year. You should see sequential improvement, right, 2Q, Q3, Q4 throughout the year, both with the PPI, the fixed cost savings. And keep in mind, 2Q from a volume standpoint was quite challenged in North America. And so, we get a little modicum of promotional activity there in the peak season then I think our plans, as Scott indicated. They're more on the conservative side. Where we would need volume in order to achieve our plans is Europe, because we are opening up two facilities there. But Europe has been the most resilient and the anchor customers are the most resilient that are going to be the tenants of those facilities. But just to be clear guys, to hit your 10% to 15% earnings growth, you need 4% volume growth? Or is it more flat? Because I thought at the Analyst Day, the messaging was more flat, and we still can get to like 10% to 15%. Global is 4%, North America, it's flat. Mid- to high single digits in Europe; mid-single digits in South America. That's how we get to the 4%. Okay. And then, on Latin America, in general, certainly Brazil has been really choppy and there's certainly some social unrest. What gives you confidence kind of deliver the mid to high single digit growth in 2023? It's just been a pretty tough environment for some time, especially Brazil. Any contractor up renewal in 2023, 2024 in that Brazilian market? No. We have no open contracts heading into 2023 and 2024. The resiliency relative to South America is going to be the stabilization. First of all, lapping the contract for each in Q1. And then the actual cost position of our customers down there will have the aluminum package being the most cost advantaged product in Brazil, in particular, with that customer base. Thanks for taking my question. And just a quick little near-term one. It seemed like that you talked about kind of full year volume growth across the different regions. Could you give us a similar walk for what that 1Q number is and how you're kind of thinking about across the regions? I think 1Q in total will be down. Again, we had pretty good growth in Q1 of 2022. And so, I think we'll be slightly down Q1 in total. Yeah. I'd say in North America, you'll be flat. In South America, you'll be flat because of the customer breach, so we'll be lapping that. Flat would actually be growth on an apples-to-apples basis. So, we could be a little plus, a little minus there, and we'd expect to be that high single digits growth, mid to high single digits for Europe. That will be a linear number throughout the year. It'll -- you'll have more opportunity to grow in the back half because of the two facilities that are coming online, but you should see growth right out of the gate in Europe. And then flattish in the other two regions for the aforementioned customer breach and the market dynamics that exist right now in North America. Got it. That's very helpful. And then just curious, as you think about the ranges that you gave for the full year, I guess, maybe I'm reading too much into this, but South America, Europe and other seem to be a little bit of a wider range, whereas North America flat. I think if I kind of heard it correctly, flat to slightly down. It seems to be a little bit narrower, but this also seems to be an area or the region where we've seen maybe some of the more or bigger deterioration throughout the last few quarters. So, you kind of mentioned liquor and cocktails as one area of potential growth in promotional activity. But how much of this -- I guess, what gives you comfort to have a narrow range there as you think about the year progressing? Is some of that cocktail liquor related volume, the degree of visibility? Is it there? Is things contracted? Like I guess, yeah, I just want to give you comfort in that kind of narrow range. Yeah. Well, I mean, flattish. That's not the narrowest range we've ever given, but I appreciate the question. I would say optimism to tighten the range in North America is that we plan on a much more conservative environment. And one thing that I think is important to underpin this business and this industry in particular. We're generally the first to go into the recession and we're generally the first to come out. And what we need is to see what happened over the last four to six weeks was the elasticity curve on volume and price for our customers has been broken. And now you're seeing volume come off. That means you have to return to some level of promotional activity, that's good for the can. So, for North America, in particular, we've got a big business where with all of the customers. It gives us some foothold in understanding the market dynamics. The contracts are secured. We know what we have heading into the year. Could it be up a little, down a little, yes. That's not going to have an impact on whether or not we can deliver our 10% to 15% EPS target. I would also say, I mean, it's -- it's been more volatile in the last few years, no doubt. Historically, North America has been more predictable. South America has always had a wider range just because volumes can move around a lot. Those economies are more volatile. And so, you could see much -- you could see outpace growth at times. And you could see bigger declines at times. So, South America has just always been a more volatile region. And despite to Dan's comments, I mean, you would think with 100% inflation in Argentina that would be a big negative for cans, but cans grew double digits last year. So, it's a little tougher to predict in a place like that. That's very helpful. And if I may just kind of a quick little follow-up on that. I think one of the areas that historically in recession has helped is the customer pays [ph] back maybe how much they're spending on-prem, some of the off-prem starts to revise for cans. And have we seen some of that already? Or is that still a potential upside as we think about the near-term and the customer? Yeah. I haven't -- we haven't seen that particularly. But you're exactly right. Those are the early signs and signals that were -- that's when you know you're on the uplift coming out. And we've seen the first stages of promotional activity starting. We haven't seen them steering on-prem versus off-prem. But that usually is the next lever to pull. You're exactly right. Just one quick follow-up on -- Dan mentioned the weakness in beer. And obviously, you experienced it firsthand. You also saw that in the Nielsen data with beer volumes being very challenged late last year. How are you thinking about your exposure to beer at this juncture? Is it still a core end market? And given what's occurred in beer, are there any opportunities for you to diversify your mix? Yeah. There's always an opportunity. We're constantly looking at our portfolio and our customers. And how we look at it, Michael. It's a great question. So, I look at brand owners and brand builders. And the other thing is, we may be talking to or we may be having -- we may have a portfolio of historical beer customers, but those historical beer customers are moving aggressively into other things from an innovation standpoint. So, within the portfolio of some of our customers, we like the fact that they're acquiring products that they're innovating products and that they're pushing new innovations. And so -- you're right. I mean, there is volume ascribed to beer and there's big volume ascribed to beer, and that's always going to be an underpinning of us within a volume business. But as that beer SKUs to other drinks, and other alcohol profiles, it will be a trade-off within their portfolio. We're selling them the cans. The label they want to put on it doesn't matter to us. We just want to be with the winners on the brand side. Got it. That makes sense. And then just quickly, can you comment on any additional portfolio rationalizations or temporary closures and maybe contemplating. I think last quarter, you indicated that you've taken all the actions you needed to with respect to plant closures. But then there was an industry publication came out with some details, I guess, in December about temporary closures in Brazil. I think you highlighted it broadly in your press release as well. So, first question, are those closures in Brazil temporary or permanent? And then second, quickly, just given the volatility in Brazil over time, and certainly worse [ph] in the last few years. Can you walk us through the investment case as to why investing in Brazil makes sense or really doesn't at this point? Yeah. So, I would look at the regions, depending on what's permanent and what's temporary, a lot of times, labor laws dictate that. And I would tell you, in North America and South America, we've always managed our supply chain. So, we'll curtail lines. We'll have temporary shutdowns. That's more reflective of the conditions with which we are managing our South America plant. I think it was mischaracterized as to what we were doing with that. We -- whether we -- it's a temporary closure for now, given the existing conditions and economic conditions in Brazil. It's no different in the analysis, right? It's EVA. We do have a larger risk profile and hurdle rate in places that are more volatile like Brazil. So that's already embedded. So, it's going to be the length of the contract, the substantive nature and the economic underpinnings of that contract and whether or not we believe we can generate EVA. I mean, Brazil over a long period of time has been a really good place to invest. The can share has grown in all of the markets that we've operated. It does tend to be a more volatile region. And so you have to live with that volatility. But over the long run, it's been a great place to invest and we expect it to be a really good place going forward. It is not without its challenges, but that's part of why you can make some pretty good money there, too. Good morning, Dan. Dan, one on back to North America. So, your long-term target is 2% to 4%. Last year, you were down a touch. You're seeing the beer companies promote more. It sounds like you're encouraged about what you're seeing in January, yet you're expecting flattish shipments, so that would be two years in a row of flattish shipments compared to that long-term target of 2% to 4%. I guess, just given the low base, and the promotional activity you're seeing, why are you not expecting more growth in North America, particularly given your long-term target? I'm just trying to understand if there's something I'm missing. No, I just think it's earlier in the year, Adam. And we've seen a couple of weeks' worth of promotion. That's not enough for us to get overly excited that we'll return to some modicum of growth. And candidly, the inflationary, but all of the things relative to a soft economy are still present. I think the can will do well. I think you'll see trajectory in the second half of the year. That will be helpful with these promotions continue. I'd love to come back to you in six months and say, hey, we're right back on track with the 2% to 4%, but as we sit here today, I don't have enough data points to say that that's going to happen in 2023. But over time, we're still kind of in the post-COVID adjustment period, I think. And 2023 will kind of -- I think 2023 will kind of be the end of that. And I would expect those historical rates that we saw before COVID with sustainability tailwinds and all of those things, those aren't going away. Those are going to continue. And so that's why we think, longer term those growth rates make sense, but we're still kind of in a period where we're getting through COVID and now through rapid inflation. And we're starting to see things settle down and that gives us more optimism, I think. Just one follow-up to that, which is I know you said two plants. I think that was about 8% of your North American capacity middle of last year. So, you were down 0.3%, you're expecting to be flat this year. Do you think the market grew by more than what you were -- did you underperform the market last year and do you expect to underperform the market this year? Can you just give me any sense of how you think you're performing in terms of North American volumes versus the broader market? Yeah. I think we have -- it's a great question, probably a tick underperformance relative to the market because of the size of our beer portfolio, and that was the most distressed category last year. So that certainly had a knock-on effect. The good news is if that area reverts back to a more positive promotional activity, then we should be the beneficiaries of that shift moving forward. And remember, market -- the impact in the market is going to be dependent on who's bringing up capacity, who's turned on new capacity. In Europe, this year, we'll probably outperform the market, because we have facilities coming online. So, those kind of things can happen quarter-to-quarter, year-over-year. We don't focus on market share, we focus really on, to Dan's point, being with the right customers, the customers that are innovative, the customers that are growing, that are using the can. We focus more on that versus market share. Right. No, I get that. So, if you end up flattish, would it be unreasonable to think that the market would be up 1-ish just using that [indiscernible]? Okay. Thanks. And Scott, just on the working capital. Can you -- I think Ghansham asked about it that you're expecting $300 million [ph] source. Is that -- can you just help me with where that's coming from, just compared to what you dealt with last year? Is it probably from any particular place in particular, across the board improvements that you're expecting? Mostly inventory, Adam. We still have too much inventory, and that's what we need to work off. So, we've got a lot of cash, if you will, sitting in our inventory. And so, as we roll that off we'll be able to generate a lot of cash from it. That's the biggest chunk. Got it. Thanks. And just beyond that so if that working capital normalizes and the CapEx ends up equivalent to D&A. Are those the -- are there any other swing factors that you would point out as we think about free cash flow beyond 2023, lower CapEx. We have really good line of sight, Adam, into -- it's both raw material and finished goods. We've got really good line of sight. We're working that every single day right now. So, we're confident about that source of cash this year. Hey, good morning. Thanks for squeeze me in here. I just wanted to better understand kind of the bridge to 2023 earnings and I believe the few hundred million improvement in comparable operating earnings that you called out. You have the $200 million of net inflation recovery. You have the $150 million in cost savings, partially offset by, call it, $85 million from the Russia business. But that's still about $250 million to $265 million of improvement before we have any volume growth. I guess what are some of the major headwinds here that I might be missing in the bridge? All right. Got it. And then on the $200 million inflation recovery that you guys talked about, it seems like it's mostly... Going back to your past comments though, our while inflation is moderating, the base cost -- so energy costs in 2023 are going to be higher than they were in 2022. We're just passing them along, but that -- there are things that have -- are built into our plan that are negatives from a cost perspective. And so that's why you got to -- I can't just talk about all the positives, there's always some that go the other way. And so, the balance of those is how I get to my number. Right. And I guess, I was assuming that the net inflation was trying to net for maybe the incremental inflation that you're seeing, but maybe that's not the right way to look at it. Yeah. Makes sense. Sticking on that point. So, it seems like a large portion of that recovery, the $200 million inflation recovery is in North America, but it doesn't happen just given the contractual time until July. Okay. I appreciate that. That's very helpful. Do you -- I know it's early days, but do you have a sense of how much of that benefit could actually continue to flow into 2024 in North America? Effectively, what would happen to your question, you're thinking about it the right way. So, you pass-through inflation a year in arrears. If inflation moderates or dissipates, you hold on to that margin expansion for the following year. It was just the opposite of that the past two years for us. But if things come up in energy prices, et cetera, et cetera, come up after we put through the existing cost, then that would be carried into parts of 2024. You're right. Got it. Sounds good. Well, everything looks much better from a price cost standpoint going into this year versus the challenging last year. So, good luck with the balance of the year. Well said, Carlos, with that, we'll close the call and look forward to talking to you at the end of the first quarter. We are excited for 2023. And we've got the teams and the plans in place to execute. So, we'll be following up and iterating on those plans as we look forward to the next time we get together. Thanks.
EarningCall_920	It is now my pleasure to turn the conference over to Matthew Sealy, SVP, Director of Corporate Strategy and FP&A. Mr. Sealy, please go ahead. Thank you. Good morning, thank you all for joining. Yesterday afternoon, we issued our fourth quarter 2022 earnings press release, a copy of which is available on our website, along with the slide presentation that we will refer to during today's call. Please refer to Slide 3 of our presentation, which includes our safe harbor statements regarding forward-looking statements, and use of non-GAAP financial measures. For those of you joining by phone, please note the slide presentation is available on our website at www.b1bank.com. Please also note that our safe harbor statements are available on Page 7 of our earnings press release that we have filed with the SEC yesterday. All comments made during today's call are subject to the safe harbor statements in our slide presentation and earnings release. I'm joined this morning by Business First Bancshares President and CEO, Jude Melville, Chief Financial Officer, Greg Robertson and Chief Banking Officer, Philip Jordan. After the presentation, we'll be happy to address any questions you may have. Allright, thanks Matt. And thanks everybody for joining us this morning. We know you have choices about where to be, and we appreciate you deciding to prioritize being here with us. We'll, I'll keep the remarks kind of brief. So we can jump into questions, I do want to go over some of the notable trends from the quarter and then some four year highlights. And then we'll get into the Q&A. Fourth quarter, successful fourth quarter we were pleased with, with where we ended the year of non-GAAP core net income of $16.4 and $0.66 per share available to common holders better than we expected and for good positive reasons. Primarily, primarily, we continue to have good strong loan growth and almost 16% annualized, and one of the things that I was excited about was to see if that was diversified. We had it across our regions. And then also a good balance between commercial and CRE credits as well. Second, kind of positive impacts the numbers was we had higher loan accretion than we expected. We were able to, to, to sell a couple of loans that we felt it's good timing for us. And then we had a large payoff as well, so -- and those loans had accounting marks related to them that were able to benefit from it. We benefited slightly from non-interest income through SBIC revenue. And you'll remember that we have a number of investments in SBIC's, which occasionally surprised on the upside, and this was one of the quarters in which we had about 400,000 above budgeted SBIC income. We continue to focus on efficiencies. So we're proud of the fact that that our non-interest expense came in just below expectations. So certainly, given the environment that we're in being able to, to have discipline on expenses is important. Even though we were able to keep our expenses lower than we anticipated, we also made a number of key hires, including Jerry Vascocu, who joined us as our Chief Administrative Officer. After 17, 18 years at Iberia and First Horizons and weâre sort of excited to A, have the contribution of the experience that he's had, being a part of growth organizations and certainly the contact base, but also excited that it goes out our executive teams. So we felt like we're well established for where we need to be from the senior leadership perspective over the next few years, as we begin to approach the $10 billion mark in assets. We did have an elevated loan loss provision relative to our expectations. We took two specific reserves on loans. And we can talk more about that in the Q&A. But both we certainly consider them to be isolated and one-off incidents, one of which involve fraud. And so we don't feel like that's representative of anything more systemic across the portfolio. And our overall credit metrics certainly reflect that. So if you adjust the quarterly results for the backing out the additional loan discount accretion and the higher loan loss provision, we would have had about $15.4 million for the fourth quarter, which is still slightly ahead of expectations. So we feel very positive about that. Also, although it's a challenge, and probably the challenge going forward over the next two or three quarters, we actually were not pleased with our performance on the NIM side of the ledger. We did drop down 13 basis points on our core NIM. But you'll remember in our last quarter, we talked about the fact that our third quarter was artificially inflated by about five basis points, and we expected to have five or six basis points drop modeled on top of that. So we came in really close to what we've modeled and we feel good about our modeling going forward. We feel like we'll do well for say that or two. So I think it's important to take a step back. It's not just quarter to quarter, but first half of the year versus second half of the year, we had a 20 basis point increase in margin, even with that drop and so we feel like we're, we're in a better place going into next year or this year. I guess we are now versus where we were next year. We've also thought the fourth quarter was a little bit of a catch-up phase and we've modelled that where we had kind of held off on some, some great moves, and we're kind of catching up. And we feel like we'll be able to stay about flat for this quarter and then have some slight increases over the rest of the year. So we'll talk a little more about that when we hit the Q&A but, but not I'm pleased with where we are, from a margin perspective. Taking a step back and looking at the full year and review, it was a record year in many ways for us. We achieved a record quarter net income of $57.6 million for the year, which was about 10% above what we finished last year. But last year, you'll remember included a sizable positive impact of selling our PPP portfolio so we actually generated significantly more income this year and feel well poised to take on 2023 with some of the some of the nonmonetary accomplishments that we had over the course of the year which includes integrating the Texas Citizens transaction out of Houston. It includes integrating a number of banking teams that we picked up at the beginning of the year. So those are, those are kind of like mini acquisitions in a way and they take effort and, and judgment and time and so feel really good about the success that they're having. And don't feel that they are yet at capacity. So we should continue to see good things coming from those teams. We also opened our fourth full service locations in Uptown Dallas and, and experienced a lot of activity they're excited about. We actually crossed over a billion dollars in loans in Dallas, this past quarter and when you combine the Dallas and Houston operations, we're at about 35% of our credit portfolio as a whole is in those two large and fast growing metro areas. So as we have talked about one of our goals is getting closer to 50% of our exposure outside of Louisiana's so we can be diversified. And we took really big steps towards that this year. And finally, I would just say that we feel good about fortifying our balance sheet. We raised 122 million in equity over the second half of 2022. 72 million in a self-managed preferred equity race, which this quarter was our first quarter to, to pay the dividend on that preferred equity raise which to be able to pay that dividend without yet putting in all the work can still be at our numbers. It's something that I feel is another positive. And then we also did a $50 million common equity raise. So we feel well placed to take on the opportunities that we feel are out there in this next year. Our clients remain highly positive and incompetent. Certainly there will be some challenges but all in all with the strongest asset quality that we've had and our four or five balance sheet, and then a stronger team than we've ever had, we feel well positioned to take on 2023. So it was pretty impressive you guys were able to replace FHLB borrowings with deposits in this environment. Do you think you'll need to return to the FHLB later in the year? Or do you feel like there's enough deposit opportunities out there that you can kind of avoid wholesale funding for the near future. Well, I think one of the reasons that we maintain access to the line is so that we can have it as backup. We certainly would prefer to do the core funding raise and we feel we have some good activity and had some success in the fourth quarter and we certainly feel like first quarter will be even stronger perhaps in the fourth quarter. And over the course of the remainder of the year, we certainly would prefer to do core deposits. But one reason we paid down the line is because we want to make sure that we maintain access to that secondary source of liquidity. So hopefully, we don't have to use it, but if the opportunities make sense for us from a growth perspective to fund them through the FHLB and we certainly would utilize them if it made sense. So we're going to try not to. But if we do, we do, I guess, but it was nice to have enough tools in the tool belt as we navigate over the next year. Got it. That makes sense. And then just kind of more broadly on the margin, what should we expect from here? It came in a little better than we were expecting this quarter, part of that -- it sounds like it was related to a loan accretion income. But can we just talk through kind of where -- I think the core margin was 375 if I remember correctly. Can you talk about where you see that going from here? I mean, it's been good to see the yields come up and the loan beta outpace the deposit beta. But just -- I guess I'm wondering, does that continue from here? Yes. Thanks, Feddie. I think what gives us an optimistic outlook is -- if you look at the margin kind of month by month in the quarter, we started out margin in October at $3.71 and November, we moved it to $3.72, in December, $3.83. So we had some pickup in the margin within the quarter, really driven by the top line loan yields that we were able to manage through. So just to put that in context, September loan yields were 16 around new loans. And then the December new loan origination yields were 7 62. So we continue to update our pricing model every week. We manage that process. We feel like, as Jude mentioned a little bit earlier, we were a little aggressive on moving up our deposit rates late third quarter, early fourth quarter to position ourselves to be able to generate some of those deposits and increase core funding. We think that's going to continue, and we also think we'll be able to push those loan deals forward. What we're thinking in the first quarter is flat to maybe up 1 basis point or 2 on the margin. And then as the year goes on, maybe up 5 to 7 basis points each quarter thereafter. So we're going to continue with the pricing model the way we have it and manage it that way. Got it. And is the 5% to 7% each quarter; is that on the core of the GAAP margin or both? Got it. Yes. Feddie, one thing that I'd add, if we look at the loan beta during the quarter, some of the date were up 75% on new loan yields. And we look at the total portfolio of betas, they were around 30%. So I think what you saw some of it was not as much repricing in the fourth quarter, which we do expect to accelerate as that fixed rate portfolio turns over through the balance of the year, but we do still expect 60% plus loan betas on new loan yields. Got it. No, that makes a lot of sense. And then one more for me, and I'll step back in the queue. Just loan growth outlook. It seems like you had another strong quarter here. Do we see things start to slow down a little bit from here? Or do you think you can continue kind of the growth rate that you saw in the fourth quarter? So we're anticipating kind of low double digits, kind of low teens. We had a strong fourth quarter, but definitely a slowdown growth on a percentage basis from the third and second. And some of that was slow down, but some of it also was us managing, making decisions. Part of the positive loan data on new loans is the result of us being maybe more disciplined on pricing. And so we'll continue to do that. And we think it's -- over the next year, it's a little bit of important trade-offs where rates are growth versus pricing, and we want to manage that. But we still feel like we have -- we're in the right markets, not just Texas but also our North Louisiana market is doing really well. Our capital region, we're the strongest local bank here in New Orleans is catching on. So we feel like -- as I mentioned in my opening comments, the teams that we picked up earlier in 2022 are clicking, and we thought there's more capacity there as well. So we feel good about our ability to continue to grow low to mid-teens and then it will be kind of a question of what's the best use of our balance sheet. So you're not going to -- unlikely you'll see the 35% -- 34%, 35% organic loan growth that we had over the past year. But I think it will still be productive and moving in the right direction. I just wanted to circle back to the NIM, specifically on the deposit side of things. I think you guys talked about a 30% total deposit beta previously. Obviously, you said you guys lock in some funding this quarter, and it seemed to accelerate closer to 40% specifically in this quarter. So I just wanted to hear any updated thoughts you guys have here on where the cumulative beta might shake out by the time rate hikes are done. And then also, what kind of trends around noninterest-bearing deposit balances are embedded in those assumptions? Yes. What we saw in the betas, you're right, over the fourth quarter was about a 40% beta. It really was made up of really 3 categories to now can markets and time deposits. Those are around 60% beta in those 3 select categories, and that was the driver, obviously, of the 40% data. We think going forward in Q1 because of the way we price progressively in Q3, early Q4, those would come down more in the 40% to 50% range on our now money market rate and still the time deposit betas because of the nature of the market, still probably going to remain 50% range for Q1, and then I'll let Matt talk about really the betas for the balance of the year, what we're seeing. Yes, Graham. So like we hit on earlier, deposit growth was strong and expected, so that's going to drive up the cost a little bit more. But what I think we were quoting when we were talking about 30% betas previously, and typically the way that we'll tend to talk about things are cycle to date betas. And so you're right, for the fourth quarter, just the quarter was 40% total deposit beta. However, cycle to date through the fourth quarter since the Fed started moving was 25%. So when we look at it that way, we're still right in line with where we think the betas are going to trend up over time. And through the balance of this year, I think that we'll see that creep up a little bit closer to 30%. But that cycle to date beta is very much in line with what we had thought previously. Quarterly gets a little choppy because when you look at quarter-over-quarter depending on what the Fed does and how the forward curve moves that could be a little misleading, depending on how you're looking at it. Okay, great. That's helpful. Thanks for the clarification there. On noninterest-bearing deposits, are you guys expecting to see, I don't know, up down, way down? Or what's kind of your outlook there on that part of the funding base? Yes, I think we grew from year-over-year in non-interest bearing, we continue for that to be a huge focus for us to continue that growth. That will be a challenge as the whole marketplace liquidity is an issue through all banks. So it will continue to be our focus. But we understand the as a challenge has, but accumulating customers that are C&I focused for us that have that noninterest-bearing part of their balance sheet as a priority. As we've talked about previously, we've certainly geared some of our incentive plans towards noninterest-bearing. And then we've also made a number of hires in the treasury management department over the past year. And so that's the goal there, and we feel like we're making the right investments and doing the right things. So we'll just have to see how the economy as the whole interact for us in that regard, but we certainly have it as a number one priority, I would say. And I would just add that we do see the balances increasing during the first quarter. However, the composition might remain flat or even potentially down as interest-bearing there's just more low-hanging fruit and more opportunity on the interest-bearing side. But we do see the aggregate balances going up in the first quarter of noninterest-bearing. Part of the reason the composition might change a little bit is as we spoke about last quarter. The first quarter is typically when we see an inflow in municipal-related deposits, many of which are interest-bearing. So that's that would partially help explain even if we had an increase in noninterest-bearing, we may still fall back a little bit as a percent, but that would be a fair trade all for us. Okay. And then I guess just one more, but turning to expenses. They're pretty well marshalled this quarter. Kind of what lift are you guys expecting to see, I guess, over the course of this year? I know you guys are still building out the franchise and investing in it, trying to get a sense of kind of leverage maybe will drive out of the expense base this year. Yes. I think in the first quarter, what we expect to see is a 4%, 5% increase over Q4, still some seasonality and some things from that standpoint. But if you look at the balance of the year, I think you'll have a normalized -- more normalized path after Q1 and probably looking at a 10% growth track throughout the year. And a little bit more color there. That 4% quarterly, not an annualized figure. And it's important to remember that there's seasonality in Q4, but there's also seasonality in Q1 with for similar reasons, payroll accruals and true-ups. But then we also have a partial quarter impact from payroll increases for the year. So that does get you kind of an incremental seasonal pickup in the first quarter -- and then to Greg's point, about a 10% annualized growth rate thereafter, which should account for inflationary pressures and just kind of continued normal course of increases. Yes. Yes. I think the thing that -- the key areas that we're going to continue to look at opportunities to invest in technology personnel. And then as every bank is experiencing right now is the FDIC's assessment has grown across the board in so that's factored into those numbers. So kind of just following up on the expenses and kind of more in line with what you're talking about of having more capacity and adding personnel. What are your guys' expectations for hiring in 2023? And kind of what do you think is it going to be more towards loan producers or deposit gathering? Or if you could just kind of give more color on that that would be great. Thank you. Sure. I would anticipate -- I mean, that's one of the reasons that I pointed out that we feel like those teams have been well integrated, but still have capacity. Don't feel like we need to be ultra-aggressive this year in terms of hiring lenders. What we would plan on doing is making sure that they have the right support staff around them to maximize their capabilities and their relationships. So and that's particularly true in our faster-growing areas. So I would anticipate that we would do some hiring on the production side, but it would tend to be more support staff. Dallas has a strong team thatâs certainly capable of continuing to produce over the course of the year. And we've been pleased with the Houston team integration, but we do feel like we could add a bank or two there just to continue moving forward. So we'll probably see to do that, but on balance across our footprint, a little more hiring on the support staff versus the actual bankers. And we would continue to add treasury capability as well to your point about hiring deposit-oriented folks. Perfect. Thanks. And then maybe just one more kind of going on that acquired loan payoff. Do you guys anticipate similar levels of payoff in the near term? Or is that just kind of a one-off situation? That was I would call that more of a one-off situation, just -- and we happen to have the two loans in the same quarter, but it's not one that we hadn't been working on and kind of figuring out over the course of multiple quarters and the timing was just right. It also happened to be one that had a lower interest rate for a longer period. And so that obviously becomes a little more punitive today than it was even three quarters ago. So just a one-off business decision that we made, but I wouldn't anticipate that we would have a wholesale. We recapture the accretion on the acquired zones [Ph] will just take the -- make the right business decision on an individual basis. I think we still have what, Greg, about $20 million, $25 million in accretion of credit mark remaining. But I would anticipate that, that would go back to kind of its normal rate. I did want to take just a moment point out because unless you look at our deck, you wouldn't be aware just based on the screens that our loan loss provision has increased to $0.83, which is higher than it's been over the course of the year, but still low relative to peers. But on Page 17, you can see the fair value discount when you add that into the overall loan loss provision, you get an effective on loss revision of 1 4, which is well situated, we believe, relative to our peers and relative to the exposure in our books. So I feel like each quarter, we need to kind of reintroduce the idea that we have a fair value discount built in on top of the loan loss provisions and the loan loss revision, of course, is would what screens when you compare banks, the fair value discount you have to get from our deck. So that was a 20 and change accretion number hanging out there that I talked about. That materially impact our preparation for any adverse incidents over the next year. Hey sorry guys. Just had one more question. I appreciate the disclosure on the growth by region. You noted that Texas is about 35% of on paper and some balances now. Jude, could you just tell us kind of what your thinking is over the longer term there? Does that grow towards 50%? Do you have a target number? Or is it just kind of depend on where growth is in the future? So a couple of years ago, we said on our latest 5-year plan. And a couple of the components of the plan were age to grow. So we will need to double our loan book over the 5 years. But as we grew, we wanted to increase diversification. So another primary goal of the 5-year plan was to have -- to end up with 50% of our credit exposure outside of Louisiana, not anything being wrong with Louisiana, but we believe in diversification, in particular learning a little bit about the market reaction to perceive exposure to energy in South Louisiana. We certainly felt like there were some benefits, although we did not struggle through that period, we also recognized that we have an obligation to try to be perceived as strong as we can in addition to being as strong as we can. And so part of that is diversification. And part of that was a goal of being 50% outside of Louisiana. We didn't say Texas specifically, but given the choice of investments we could make 2, 3 years ago. We felt like those were -- that was the right place to do that. And then given the success that we've had there, we feel like building on that success makes sense. So I would say the bulk of that 50% non-Louisiana exposure that we expect to reach the conclusion of our 5-year plan would most likely be in the Dallas and Houston areas. And so certainly, we've had some success there, moving to 35%. I believe we were at 6% or 7% when we began the 5-year plan. And so we're ahead of schedule and hopefully we'll have that within range prior to hitting the 5-year mark. Now I will say the one thing that could -- I'm talking over time here, not tomorrow, but over time. If an M&A opportunity in Louisiana made sense for funding purposes, there obviously will also be some credit book associated with that bank. And so the only likelihood a CEO taking a step back from the 35% temporarily or whatever number we happen to be at it would be because we have made the business decision to partner with somebody that can help us with core deposits, which would ultimately help us in our overall growth goals. So I'm not saying that we'll get to the 50% in the straight line, but so far over the past couple of years, we're ahead of target and would anticipate continuing that strategy, reinvesting in those Texas markets to make the system as a whole stronger. Got it. Thanks Jude. Actually, I have one more as you say that. Is Texas going to be pretty much the market for you? Or would you consider as far as being outside of Louisiana would you consider another adjacent market, whether it's Alabama or Arkansas or wherever? Or is there just so many opportunities in Texas, so that's kind of probably be Texas, Louisiana going forward? Again, it depends on time frame, right? So we certainly think we have opportunities across the Southeast overtime. And so when those make sense to pursue, we feel like what we've done in Texas kind of shows our capability of doing that kind of thing. We're not in any rush to do that. We feel like we do have plenty of opportunity in Texas really just in Dallas and Houston, not even the rest of Texas, you could work it for quite a bit of time maximizing that. Our future expansion once we feel like the time is right, will be as our previous expansion has been, will be banker-driven. So we -- it's our philosophy that we don't just open up the shop and hope somebody comes, we find a good group of bankers to partner with. And typically, we'll do an LPO and then once we feel established, we'll grow from there. So I certainly think if we found the right banking partners, we would be open to that idea. But most likely, that's down the road and not something to contemplate in 2023, we have a lot of good potential ahead of us in the markets in which we're currently operating. And feel like achieving a balance between growth and efficiency is something that we have an opportunity to do in a way that we haven't in the past, and we're excited about that. Hey guys. I just wanted to follow up on fee income really quick. -- looks like Smith Shellnut Wilson had a pretty solid quarter, and then there's also the SBIC income. Do you think that the income is probably going to drop back to like $7.5 million? Or do you think this $7.8 million; $7.9 million rate is sustainable? Thanks. Okay. Awesome. And then one more quick one. I guess, just on the 2 credits that received specific reserves. I know you said one was due to fraud. I was just wondering if you could provide some color on each of those just like what industry they're in, the type of collateral on each and then maybe the overall size of each credit as well. Yes, Greg, what we had these two legacy originated -- we had originated loans. One of them was in the timber industry. The other one is the receivables line that is a contractor and does some work, government jobs and other various things like that. On the timber loan specifically, that loan what we started seeing was potential fraud in there with multiple sources of collateral pieces. So we thought as we're looking at it, and we've been talking about this loan for quite some time. We thought the prudent thing to do because it looks like a pretty long runway to settle on this thing because of the broad nature, but also just the numerous pieces of collateral we have to deal with. The right thing to do would be for us to put a reserve up now. And then that way, we can be prudent, take our time on the collection pieces, and we think we'll get some of that back as recovered. On the other loan, 1%. The loan size on that one is about $1.4 million. So on the other loan, and we mark that at about 80% of the loan in total. On the other loan, the receivables line, the customer is in dispute with -- on the contract. And so because of that... Governmental contract, right. And there -- because of that, there -- we think the path to settlement on that is going to be elongated it puts the line underwater in the borrowing base coming out of trust because we have to remove that disputed contract. So we really put the reserve against that contract. Now we don't think the contract will be total loss. So what we did was -- and that's about 50% of the total exposure of that credit. So we think over time, that will shake out, we'll get some recovery and they'll get paid, may not be 100%. But at this time, there's a lot of uncertainty and it looks like a long runway on that one as well. But the bars are cooperative working with, Yes. There are no further questions at this time. I'll now turn the call back over to the presenters for closing remarks. Okay. Well, we appreciate you spending with us and we felt like it was very positive fourth quarter. Many of the investments that we've been making over the past 2, 3 years are coming to fruition and certainly the first quarter is noisy from a seasonality standpoint, but we feel very optimistic about approaching 2023 and look forward to visiting with you all in 3 months. Thank you, all.
EarningCall_921	Good morning, ladies and gentlemen. Before I hand over to Magda Palczynska, Head of Investor Relations, a reminder that todayâs call is being recorded. Madam, you may begin. Good morning and welcome to UniCreditâs fourth quarter 2022 results conference call. Andrea Orcel, our CEO, will lead the call. Then Stefano Porro, our CFO, will take you through the financials in more detail. Following Andreaâs closing remarks there will be a Q&A session. Please limit yourself to two questions. Thank you, Magda. Good morning and thank you for joining us. Before I start, I would like to thank all our colleagues that have gotten us to this often going through grinding obstacles and seeing it through. Itâs very much appreciated. 2022 was a challenging year for people across the world, not least the clients and the communities we serve. Against the background of unprecedented turmoil across Europe, UniCredit has sustained its own internal transformation and further strengthened its lines of defense to ensure that we are ready to fit the future and win. We are not the same bank we were at the start of 2022, much less at the start of 2021. We have worked hard to evolve and todayâs results are testament to those efforts. Before I take you through our results, I would note that what we have guided this year, mostly referring to the group, excluding Russia, given the uncertainty related to our exposure. Going forward, I will refer to group numbers, including Russia. We continue to de-risk, but given the magnitude of our remaining exposure, the actions are part of our business operation, not an extraordinary measure. The numbers, including Russia are those that both determine our overall performance for the year and support our distributions. Letâs turn to Slide 2. Before I take you through the detail, I wanted to give you a snapshot of the year. Thanks to relentless execution, we have delivered a record fourth quarter, the eighth consecutive quarter of year-on-year growth and the best full year results on a like-for-like basis over a decade. These results are driven by our industrial transformation, which has led to record operational and capital efficiency and set the base for sustainable future performance. We have delivered top-tier profitability on a new run-rate surpassing all UniCredit Unlocked 2022 and most 2024 targets, enabling best-in-class distribution whilst further improving our capital ratio. The strength of our results should also be considered in light of the proactive actions we took to prepare for the future, including enhancing our already robust lines of defense and actively managing our Russia exposure to further protect or indeed propel 2023 and 2024 depending on the macroeconomic environment. We used our exceptionally good fourth quarter to execute additional prudential measures. Our results and their quality allow us to propose a total 2022 shareholder distribution of â¬5.25 billion, up 40% year-on-year, pending shareholder and supervisory approvals. With this, we will have distributed close to 60% of what we expected to distribute within UniCredit Unlocked whilst improving our CET1 ratio further, all underpinned by organic capital generation. The 2022 proposed distribution is composed of â¬1.9 billion in dividends and â¬3.35 billion in share buybacks, which we intend to commence as soon as possible post-AGM, approval on March 31 with supervisory approval expected beforehand. We aim to execute our share buyback in two tranches given its size, â¬2.4 billion post-approval and the remainder expected in H2 shortly after the completion of the first tranche. We are confident of supervisory approval based on discussions with the ECB, the strengthening of our leading CET1 ratio, extremely strong organic capital generation, which more than comfortably fund our distribution and step up in profitability and our robust lines of defense. Given the above and the expected macroeconomic environment, we are aiming for 2023 results and distribution to be broadly in line with 2022. Letâs turn to Slide 3. You can view the evolution of our bank on the UniCredit Unlocked in two stages. Our work to structurally improve the bank began with a focus on those easy-to-execute business imperatives, laying strong foundation for us to build on as we start to address the more substantive fundamentals, accelerating on that industrial transformation supported by the proactive and prudent measures taken to-date. Letâs turn to Slide 4. UniCreditâs transformation is evident across our entire group. We are clear on our direction, united behind a clear set of values, a structural better bank with an alpha-driven improvement in returns. We have stepped up our profitability, sustainable run-rate across all our four â three levers. All regions are outperforming with client solution proving to be a key engine for quality, sustainable growth. Our ESG volumes are above targets and Russia has been resized and repositioned at a minimal cost. This all supports the significant growth in our best-in-class distribution whilst further strengthening our leading CET1, which is up by 78 basis points since the start of the year pro forma for the distribution. Letâs turn to Slide 5. Our ambition is to be the bank for Europeâs future to set a new benchmark for banking, one that delivers value for all the stakeholders in a balanced fashion, shareholders, colleagues, clients and communities. Balancing their interest is how we will realize our vision for the long-term and deliver on our purpose of empowering communities to progress. Letâs turn to the next slide. We turn our organization on its head, centering it around clients and their need. We are delivering excellence across four industrial pillars, which allow us to optimize across three financial levers. Our industrial transformation is designed for our clients and addresses both our commercial and operating machine. The first pillar, our people and our organization. Our people are being empowered within clear frameworks and objectives. Decision-making has been returned to the right place with a great release of energy. Second, separating content and products from coverage, allowing us to focus and excel. We have two best-in-class product factories, which leverage the scale of our 13 banks to attract best-in-class talent and partners such as Allianz and Azimut to deliver equally for all our clients. These capital-light factories are the engine of our commercial transformation. They connect our bank together, drive high-quality revenue and are difficult to replicate by smaller players. Our client franchise has been reunified crystallizing significant synergies, allowing our local coverage to be differentiated and to punch above its weight. Our commercial machine has strong momentum to accelerate further as we continue to strengthen our factories and improve the cooperation with coverage. Our management focus has now shifted to ensure that the operational machine further accelerates its transformation. We have spent time on our technology starting to bring back key competencies in-house, reducing fragmentation, hiring 500 new technology talents, largely engineers and upskilling hundreds of our colleagues. Whatâs challenging, this work has been critical to reinforcing our security and resilience with incident down 35% as well as enabling us to build out our digital and data offering. We now have 42% of our data directly accessible through a global data platform, doubling the levels of 2 years ago, well ahead of our targets. Streamlining processes is central to our plan as it improves speed, efficiency, client, and employee experience. Once our progresses have been simplified, they can be automated and digitalized. Finally, our culture has come together faster than I had anticipated. Our people are reenergized, confident and determined to win. You can see that in these results. Letâs turn to Slide 8. ESG is a prerequisite for how we do business. Our key ethos is to lead by example, embedding our values in all that we do. Today, we announced our net zero 2030 targets on the first three priority sectors. We aim to be net zero on our finance emission by 2050. Our ESG business volume stood at â¬58 billion in 2022, ahead of our annualized run-rate. Within this, social lending amounted to â¬4.8 billion, a step-up level relative to the past, much is still to be done. Social remains a key focus for us reflected in our â¬2.5 million of new initiatives of education funded through the foundation. From supporting education via our banking academy in Italy to the UniCredit foundation strategy to tackle school dropouts, we are already seeing tangible impacts for our groupâs effort. Our diversity is strong. And in terms of gender, we are the first EU bank to obtain EDGE certification in Germany, Austria and Italy. This year alone, we have invested a further â¬30 million to meet our commitment to ensure pay for equal work by 2024. Letâs turn to Slide 9. Our well-defined industrial strategy, our people working together with strong principles and values and the combination of our three levers of cost, revenue and capital have delivered quality growth and operational and capital excellence. After years of retrenchment, we have recovered our ability to grow and are doing so significantly and in a qualitative way. Our new targeted approach to cost reduction focuses on non-business-related activity. It is clearly visible in our positive jaws with operating leverage up 16% year-on-year. Similarly, our focus on capital efficiency and return is delivering as we continue to grow revenues whilst compressing RWAs. Letâs turn to Slide 10. As a result, we have substantially increased both our return on tangible equity and organic capital generation outperforming peers while strengthening our lines of defense versus peers. Letâs turn to Slide 11. Our fourth quarter results have been outstanding. 2022 was our best year ever on a like-for-like footprint with all levers contributing to a meaningful shift in profitability. The numbers I will refer to on a year-over-year basis and continue to be on a group basis, hence, include Russia. Gross revenue for the quarter are up 29% and net revenue up 44% on very strong NII underpinned by excellent management of the pass-through. Despite some headwinds related to the TLTRO hedge with almost flat cost. Fees were only slightly down 1%, confirming resiliency of our fee base. Trading income remains strong and our cost of risk was down 27 basis points despite our continued prudence in building forward-looking provision and overlays. Our return on equity was around 12%, 14% normalized for our excess capital at 13% CET1. These results are even more impressive when taking into account the numbers of items we weighted on Q4. Cost absorbed a significant inflation relief payment, â¬80 million and a bonus adjustment due to our strong performance. Gross and net revenue for the full year are up 14% and 13% respectively, with costs down 2%, a cost-income ratio of 47%. Cost of risk was 41 basis points for the full year, including overlays and Russia. As Stefano will take you through, we are in the single-digits, excluding overlays and Russia. This led to a net profit of â¬5.2 billion on the UniCredit Unlocked definition. Our net profits are just only state of profit by AT1 and cash interest payment and DTAs. Our stated net profit for the year is â¬6.5 billion. Our 2022 return on tangible equity reached 10.7% despite being depressed by our 16% capital ratio before buybacks. This is already above our target return on equity in 24 of circa 10%. Please note that adjusting for the excess capital to 13% CET1 to be more comparable with main peers, our return on tangible equity reached 12.3%. Letâs turn to Slide 12. Our record result and new run-rate should also be considered in light of substantial headwinds and the action taken to secure the future. These include net of tax, â¬500 million of incremental overlays, which now amount to â¬1.8 billion gross of tax in excess of one full yearâs worth of cost of risk. These overlays are critical to ensure our cost of risk is under control and will propel us in case macro environment is better than expected. In addition, we made provision to secure reduce our future cost of risk, â¬300 million of one-off integration cost and inflation relief, â¬200 million fully absorbed in TLTRO contractual charges and the related hedging impact, and â¬200 million of Russia negative impact on net profit, which we do not expect to replicate in 2023. Letâs turn to Slide 3 â 13, sorry. Our performance continues to improve across our three levers, surpassing all targets and delivering profitability above the cost of equity and outsized organic capital generation. Letâs turn to Slide 14. Our net profit growth has been enhanced by share buyback, nearly doubling EPS versus our historical run-rate with DPS 5x higher and tangible book value per share up nearly a quarter. Letâs turn to Slide 15. 2022 was challenging and our footprint suffered negative beta. However, we took the necessary difficult decision. Our team rose to the occasion and our business model proved resilient. Russia impacted our profitability. Our balance sheet portfolio and risk profile, but active management of the exposure reduced this gap meaningfully. The challenging macro environment was offset by rigs improvement and complemented the best-in-class management of the pass-through and acceleration of our insurance platform. We acted before inflation hit to further reduce our non-business cost and to streamline efficiency in our operating machine without reducing our intended investment. Hence, we have been able to more than offset this negative beta, absorbed a number of prudential actions to secure or indeed propel our future whilst meaningfully exceeding our net profit targets. Letâs turn to Slide 16. Our new enhanced profitability and continued capital efficiency action generated 280 basis points or â¬8.9 billion of capital organically in 2022, nearly double our target to UniCredit Unlocked run-rate of 150 basis points per annum. It also comfortably funds our proposed distribution of â¬5.25 billion, subject to shareholder and supervisory approval after absorbing all regulatory headwinds, Russia and adding close to 80 basis points to our best-in-class CET1 ratio, lending at 14.9% pro forma for distribution. To be clear, such number is expected to further increase by the end of Q1 and beyond, particularly as we do not expect any regulatory headwinds in the quarter. We continue to generate substantially more capital organically than our peers, while still distributing less than we make, demonstrating the prudence and sustainability of our distribution. Indeed, today, our distribution do not include any of the excess capital. Since 2021, we will have generated organically more than â¬15 billion of capital while distributing â¬9 billion to shareholders. This has contributed to the increase of CET1 of 120 basis points, whilst growing our top line by BRL3.2 billion or around 20%, absorbing 85 basis points of regulatory headwinds, 30 basis points from the shock of Russia and doubling our already conservative provisioning and overlays. We will have distributed over 50% of a starting market cap since the beginning of 2021 with a proposed 2022 distribution without denting our best-in-class CET1 rather continuing to substantially increase it. Consistently with UniCredit Unlocked, such excess capital to the upper end of our CET1 range of 13% shall eventually be either invested in value accretive and distribution accretive acquisition or return to our shareholders in both cases, supporting or increasing our future distributions. Letâs turn to Slide 17. Client solution enables us to offer all of our clients best-in-class content and products. The scale of this model means we can attract best-in-class talent and partners and provide a quality and wide range of solutions unmatched by local players to clients unreached by global players. Client solutions will continue to grow as we strengthen our factories organically and partnership wise, design and rollout new products and seamlessly integrate production and coverage. Client solutions reached revenues of â¬9 billion this year, up 5% year-on-year despite significant market uncertainty. Corporate solutions was up 11% year-on-year, part of which is driven by client risk management still reflected in our strong trading income. Letâs now move to our regions. Letâs turn to Slide 18. Italy. Italy continued its momentum, leveraging the foundation set in 2021. Gross and net revenues grew respectively 7% and 18% and were targeted to our segment of focus where we continue to strengthen our market share. Growth was driven by outstanding management of the rates pass-through slightly growing fee income, while improving asset quality and conservatively further increasing our best-in-class coverage, particularly given our proactive staging. The continued reduction in costs demonstrates that our strict discipline in this area was growing our top line, hiring, refurbishing our network and strengthening of our client services. Our cost income ratio in Italy improved meaningfully to 43.5%. The business continued to display excellent capital discipline, focusing on risk-adjusted client profitability, delivering an outsized organic capital generation of over 150 basis points and a ROIC that grew at over 17%. We continue to develop our digital offering, creating a digitalized platform to facilitate easy access for corporate to next-generation EU funds in partnership. Our commitment to supporting the clients and communities remain the priority with the continuation of the PerItalia offering as well as the provision of â¬2.5 billion in social loans. Letâs turn to Slide 19. Germany, few believed that Germany or indeed Austria, our two best rated countries representing 35% of our revenues would be able to produce double-digit ROIC or go above cost of equity. While both regions benefited from higher rates and a well-managed deposit beta, where decisive rationalization, renewed focus on growth and discipline on capital efficiency have step-changed their performance this quarter and for the full year and there is more to come. Germany grew gross and net revenue by 13% and 7% respectively, driven by fees while reducing its overall cost base by nearly 6%. This led to a ROIC of 11% and over 50 basis points of organic capital generation. Germany has truly transformed with more to come in 2023, a strong culture, passionate employees also so it named a top employer in Germany, the active support of our clients, including cementing ESG as a critical component to drive our business. Germany also took a market-leading position in green loans and led the way in the digitalization of green tech fundraising. Letâs turn to Slide 20. Central Europe. Similarly, Austria continued to outperform, contributing to the Central Europe regionâs profitability. Overall, Central Europe gross and net revenues increased by over 15% and 20% respectively with the latter lending at â¬3.3 billion of sustained NII, thanks to interest rates, proactive management of the pass-through and quality volume growth. Service offering was further enhanced, for example, in consumer finance. Asset quality remained stable during the year. Costs were actively managed supported by organizational streamlining to prevent and minimize inflation impacts. Selective rollout of digital solution supported both revenue growth and cost efficiency. The regionâs cost-income ratio dropped 8.7 percentage points to just over 46%. Ongoing capital optimization remain the core driver with risk density improved despite regulatory headwinds and in all countries delivering double-digit ROIC, which reached nearly 15%, up 3 percentage points year-on-year. The region generated 43 basis points of capital organically this year. Letâs turn to Slide 21. Eastern Europe. Despite a challenging year, Eastern Europe gross revenues were up 11% and net revenue by over 16% to â¬1.8 billion, driven by exceptional new business origination and interest rate active management, coupled with a solid client base. Fees were strong, up nearly 13%, supported by intensified transactional business and cross-selling. We recovered post-COVID market share well. Costs were managed exceptionally well while facing the highest inflation in our footprint with a focus on digitalization, automation and efficiency initiatives. Cost income was down 1.6 percentage points at 41%. Capital efficiency remained the key priority with proactive management of processes and risk models with the region delivering the first synthetic securitization in Bulgaria and in UniCredit CE and EE. Asset quality was solid with an improving NPE coverage. Overall, ROIC was 19%, generating 23 basis points of organic capital generation. Reflecting and responding to our clientsâ desire for greater exposure around ESG, so the region become number one for corporate and green bond taking, a leading share of finance renewable energy as well as a strong positioning in the financing of solar, wind and recycling projects in the region. Letâs turn to Slide 22. Russia. At the end of Q1 2022, our total gross exposure to Russia was â¬7.4 billion, more than 128 basis points of capital hit in our extreme loss assessment, potentially bringing our CET1 to 13.3% pro forma for distribution. As of Q4 2022, just 9 months later, our total gross exposure to Russia dropped to â¬5.3 billion and the residual extreme loss assessment, which hit our CET1 ratio by 58 basis points, potentially bringing our CET1 pro forma for full 2022 proposed distribution to 14.3%. The difference in total gross exposure between Q1 and Q4 2022 is affected by an increase of â¬1.1 billion in our local exposure, mainly due to the ruble appreciation, partially obscuring the magnitude of the reduction of our cross-border exposure, about â¬4 billion, â¬1 billion of which in the fourth quarter alone. In conclusion, our local subsidiary has been resized, is liquid, well-positioned and well-capitalized. We decisively de-risked and resized our cross-border exposure, reducing it by two-thirds and local exposure both at minimum costs. Our cash exposure remains highly provisioned at 35%, while our intragroup derivatives are now fully collateralized. We continue to derisk our exposure to Russia. However, our remaining exposure is such that this will be seen as part of our business operation, not extraordinary measures. Therefore, we now consider our group numbers to include Russia going forward. For full transparency, we will disclose Russia separately in our divisional database. I will now hand over to Stefano who will provide more detail on our excellent fourth quarter and full year results. Thank you, Andrea and good morning everyone. Letâs turn to Slide 24. Before I take you through the fourth quarter â22 results, please note that most of the following slides and the comments will be in a group, excluding Russia basis. This is meant for your benefit of comparison. We bought the preceding quarters and the guidance, which was given on this basis. As mentioned by Andrea before, going forward, we will refer to group numbers, including Russia, which we also show throughout the presentation and I will comment further contribution from Russia is relevant. My comments are based on a year-on-year comparison that is fourth quarter â22 versus fourth quarter â21, unless otherwise noted. Letâs now look at profit and loss in more detail, starting with revenue. Our commercial franchise kept its strong momentum supported by revitalizing power frontline and reflecting our focus of adding value to clients and delivering high-quality revenue. In the fourth quarter â22, we generated â¬5.4 billion of revenue, up 25%, thanks to net interest up over â¬900 million and trading up by a factor of 2.5x. Net revenue reached â¬4.7 billion in fourth quarter â22, up 35%. This mainly reflects significant net interest growth but also lower LLPs despite increased overlays in addition to higher trading results. Trading for the group, including Russia, which had again a strong result of â¬100 million with â¬0.6 billion in fourth quarter â22. Excluding Russia, came in at â¬0.5 billion as we supported our clients in defending their business outcome in this volatile environment. The lionâs share is client-driven supported by client hedging revenues, which is up about â¬140 million year-on-year, notwithstanding a negative XVA impact of about â¬60 million. Treasury is up â¬40 million year-on-year. Letâs turn to the next slide. Net interest income was â¬3.2 billion, up 42% quarter-on-quarter or about â¬950 million, driven by higher loan rates, by the benefit of rising rates on the investment portfolio and the overall positive TLTRO impact, more than compensating the negative implication on term funding and higher remuneration for client deposits. TLTRO contributed â¬0.4 billion to net interest income in the quarter, including â¬0.5 billion positive one-off from TLTRO accounting recognition and around â¬0.4 billion negative impact from hedging derivatives following the TLTRO contractual changes. Average client loan volumes relevant for net interest are down â¬3 billion in the quarter, driven by Italy and Germany, mainly short-term loans for corporates and small medium enterprises, while we are still growing in Central and Eastern Europe. Loan volumes are supported by â¬4.7 billion in USG lending in the quarter as we continue supporting our clients during transition. Average client loans are up â¬15 billion year-on-year, focusing on profitable clients despite active portfolio management, including the reduction of low-performing businesses. Customer loan rates are up 61 basis points in the quarter across our regions, leveraging on higher interest rates and thanks to our commercial actions. These also include careful management of our deposit beta limiting the increase of customer deposit rate to 23 basis points in the quarter, while the average Euribor 3 months was up 129 basis points in the quarter. While expected to rise deposit EBITDA defined as a percentage of short-term interbank rate pass-through to cash on deposit rate remains below historical levels. This is especially true for Italy, where we are the highest stock of deposits and the customer deposit rate is only 11 basis points higher in the quarter at 13 basis points. Average commercial deposit decreased by â¬2 billion in fourth quarter â22 as growth in Central intern Europe only partially compensated lower deposits in Germany and Italy. The decrease was driven by single tickets of core presence on medium enterprises, whilst retail deposits were up. Average client deposit volumes are up â¬23 billion year-on-year. This year, we expect deposit volumes to be broadly stable, focusing on the deposit EBITDA and loans to be slightly up, concentrating on more profitable capital efficient loans. Letâs take a closer look at our net interest outlook and sensitivity on the next Slide 26. We have updated the managerial net interest income guidance and sensitivity based on conservative deposit beta and rate assumptions. Based on a 2.5% ECB deposit facility rate starting at the end of first quarter â23 and are remaining stable thereafter, this being below the current for rate and deposit beta around 40%, we expect an updated full year â23 net interest guidance, including Russia, of over â¬11.3 billion. Given that no contribution from TLTRO tiering nor excess liquid fees, which was â¬0.8 billion in full year â22. Russiaâs contribution to net interest in full year â22 was â¬0.8 billion, which is expected to materially decrease in 2023 as we deleverage. In the coming quarters, higher rates are expected to positively impact the net interest contribution from loans and financial assets, while having progressively a negative impact on funding in particular deposit where the level of pass-through has been very well managed so far. This depends on the evolution of the deposit beta. Therefore, you can simply annualize the fourth quarter â22 net interest income. The observed deposit beta for the group for both site and term deposits in fourth quarter â22 was about 20% in Italy only 7%. Our full year â23 guidance and sensitivity conservatively assumes a deposit EBITDA around 40%. As a consequence, we assume impact to net interest from EBITDA increasing is greater than the assumed contribution from rates. The net interest income sensitivity for a further ECB deposit facility rate increase of 50 basis points from 2.5% to 3% is above â¬0.3 billion, which also depends on our clientsâ behavior and competitive dynamics develop. Letâs turn to Slide 27. Fees in fourth quarter â22 are down 4% year-on-year due to lower investment and financing fees, partly compensated by transactional fees. Elevated volatility and the macroeconomic backdrop impacted negatively client sentiment and activity and as a consequence, investment and financing fees. Letâs look at the component part of fees year-on-year development in more detail. Investment fees were down 10%, as lower market levels, combined with conservative client portfolio management led to lower assets under management upfront fees and more than 10% reduced assets under management stock, net impacted management fees. This is partly mitigated by better asset under custody fees, thanks to certificate placement. Certificates are a good example of development products to meet our clientsâ needs across market conditions while helping to protect our fee income. Investment fees quarter-on-quarter, are up 4% to asset management upfront fees. Financing fees are down 10% as capital market specifically ECM and DCM were negatively impacted by volatility. Loan fees slowdown, mainly in Germany and higher circulation costs as expected by active portfolio management strategy. Fees for guarantees were up. Transactional fees were up 6%, thanks to payment and card fees, driven by client activity across division and property and casualty insurance growth in Italy. Please consider that client hedging fees are booked in trading, as mentioned earlier. In fourth quarter â22, that stood at â¬0.2 billion, up 16%. Full year â22 fees are up 1% compared to last year including the client agencies that would be up 3%. Letâs turn to Slide 28. Fourth quarter â22 costs came in at â¬2.4 billion, flat year-on-year. Thanks to our strict discipline, full year â22 costs stood at â¬9.3 billion and were down 3%. while inflation in our footprint, excluding Russia, was about 9% in 2022. The result is significant operating leverage with a full year â22 cost-income ratio of 49% and an improvement of 6 percentage points versus the year before. The cost income ratio in Germany improved by an impressive 10 percentage points in Asia by 8 percentage points both countries with double-digit return on capital. Letâs take a closer look at HR and HR cost development. HR costs up 2% year-on-year. We supported our employees across the region to better cope with the challenging economic situation by paying â¬80 million of inflationary relief. Excluding these, HR costs will be down 3%. HR costs are benefiting from lower FTEs down 4% as we focus on rationalizing non-business rated activities while maintaining investment in key areas. Last year, we hired over 1,400 FTEs for the front line and strategic areas like digital, where we continue to invest. Non-HR costs are down 4%, thanks to lower use of external consultants and credit workout expenses as the usual cost seasonality in the fourth quarter was kept at day, thanks to very frequent management and structural cost reduction initiatives throughout the year. Real estate costs were flat, thanks to more efficient maintenance spending and optimizing our headquarter footprint. Cost discipline is part of our DNA, and that will not change. So you can expect us to do a good job in managing the impact of inflation and structural cost improvement will help us to do so in â23 as well. Letâs turn to Slide 29. Cost of risk excluding Russia was 66 basis points in the quarter, almost entirely driven by further strengthening of our overlay provisions protecting future profitability. Full year â22 cost of risk at 23 basis points was below our guidance, supported by our still low default rate at 0.9%. As mentioned by Andrea before, our overlay LLPs on performing loans have increased to around â¬1.8 billion, about â¬0.5 billion higher than the quarter before to be used for any shocks or to be released in the following 2 years. We are reassessed all overlays, releasing â¬0.9 billion largely related to COVID-19 moratoria and billed $1.4 billion of new gross overlays, a precautionary measure for intake clients in light of the inflation and for enterprises in energy intensive sector. Existing overlays are equivalent to over 1-year cost of risk of our UniCredit Unlocked guidance. We also performed our annual IFRS 9 macroeconomic assumption update, increasing provisions by about â¬0.3 billion. Our updated spillover analysis confirms the soundness of our group risk profile, which you can find in the annex for more detail. Both expect the losses on stock at 35 basis points on new business at 26 basis points also confirm the credit quality of our performing portfolio and our discipline is ingrained in our organization. Full year â22 RFPs for Russia are about â¬0.9 billion, while in fourth quarter â22, we released about â¬100 million, mainly related to repayments and volume reductions confirming our conservative approach to provisioning. Cost of risk, net of Russia and additional overlays was single digit at about 7 basis points in full year â22, even lower than the year before. Letâs turn to Slide 30. Our underlying asset quality remained robust. Gross NPEs at â¬11.9 billion, reduced by â¬5 billion year-on-year. Our gross NPA ratio is down 21 basis points quarter-on-quarter. The net NPE ratio is stable on a low level at 1.4%. We will continue to pursue opportunities to reduce our NPEs as economically appropriate and value-creative terms including NPE sales. In fourth quarter â22, we sold â¬1.2 billion, which is the main reason for a 2.2 percentage points lower NPE coverage ratio at 47%. Remember, we have a favorable mix of our NPE stock with a high share of about 80% UTPs and past due. NPE coverage does not include overlays non-performing loans which come on top with our strong asset quality, high level of provisioning for NPE and overlay LLPs, we are uniquely positioned to absorb macroeconomic impacts. Letâs turn to Slide for 31. For quarter â22, we produced â¬2.3 billion net operating profit and a record stated net profit of â¬2.4 billion. At the same time, weâve taken actions and corresponding charges to protect our future profitability. In the fourth quarter, we did â¬0.5 billion additionally overlays LLPs, as mentioned, and also booked â¬0.3 billion integration costs, mainly in Italy and Germany. Additionally, we took â¬0.3 billion impairment of participation in profit from investment in Russia, but also Austria. This was partially offset by positive â¬0.2 billion for the completion of the rationalization of the shareholding with CNP Assurance as announced in the second quarter. â¬0.1 billion profit from investments shown on the slide is excluding Russia. The quarter benefited from tax loss carryforward DTA write-ups of about â¬850 million, thanks to improved long-term profitability expectation in Italy, but also Austria. Leading to a low effective tax rate, the group tax rate excluding any potential tax loss carryforward DTA write-ups is expected to be slightly below 30% in 2023. Net profit, as defined our strategy day adjusted for DTA write-ups and after cashes and additional on coupons came in at a strong â¬1.4 billion, delivering a return on tangible equity of 12.2%. The coupon on CASHES related to full year â22 results is expected to be paid based on preliminary figures and subject to the relevant approvals. We concluded the â¬1 billion second share buyback tranche for 2021 in the quarter for 87 million shares, equal to 4.3% of share capital. Together with the first share buyback tranche, we repurchased and canceled the equivalent of about 11% of share capital, which is highly accretive for EPS. Letâs turn to Slide 32. In fourth quarter â22, our risk-weighted assets, excluding Russia stood at â¬292 billion, down â¬10 billion quarter-on-quarter, driven by continued active portfolio management measure worth â¬6 billion with a focus on securitization and reducing low-performing businesses and â¬8 billion of business dynamics affect by counterparty and market risk reduction as well as lower loan levels. This allowed us to absorb â¬4 billion credit risk-weight assets as we finished implementing the EBA guidelines. Risk-weighted assets related to Russia, â¬16 billion are down â¬1 billion quarter-on-quarter mainly thanks to the ruble depreciation and further after deleveraging more than compensating negative effects driving from a conservative internal sovereign rating downgrade. Net revenues on average expected asset at 6% in full year â22, up 0.9 percentage points compared to last year. Over the course of full year â22, we achieved a total of â¬19 billion of risk-weighted asset reduction via active portfolio management. Efficient capital allocation remain a priority focus to manage risk-weighted assets enhancing the return on capital and supporting organic capital generation. Letâs turn to Slide 33. The CET1 ratio came in at a very strong 14.91%, up 78 basis points compared to last year even pro forma for a much higher â¬5.25 billion proposed older distribution, thanks to an outstanding organic capital generation of â¬8.7 billion, excluding Russia, This equal 271 basis points, very well above the 150 basis point target in our plan. In full year â22, we generated 181 basis points from net profit and 90 basis points throughout our proactive risk-weighted asset management way ahead of our plan. This also allowed us to absorb 14 basis points regulatory headwinds and about 31 basis point negative impact from Russia. Net profit, including and excluding Russia, notwithstanding additional â¬0.7 billion over legality and â¬0.3 billion integration cost is significantly beating our ambition for full year â22, supported by all regions achieving double-digit return on capital. Thank you, Stefano. In summary, while we still have a long way to go to fully unlock UniCredit, weâre already visibly different, better bank. Our stepped-up run rate is the evidence of this. Looking forward, we expect our commercial franchise to build on its momentum as our product factories continue to develop with increasingly affected local client coverage. We now focus on transforming our operating machine, which is expected to unlock substantial additional value over time. Our goal remains singular to continue to deliver profitable risk-adjusted growth and outsized capital generation to support distribution to investors through the cycle, whilst maintaining our unfailing commitment to acting in the right way so that we can fulfill or purpose of empowering communities to progress. Letâs turn to Slide 35. Structural changes have stepped up our profitability with gross operating profit up 29% versus average historic levels. Our â¬450 billion loan portfolio is solid, cleaned up with limited exposure to high-risk sectors and conservatively staged and covered. Our NPEs are improved in quality with over 70% GDP. Our coverage on Stage 1, 2 and 3 loans is much above peers after we moved â¬26 billion to Stage 2 at the end of 2021. We have taken over days to the tune of â¬1.8 billion, increasing them by a further â¬0.5 billion in Q4, which is equivalent to our cost of risk to more than our cost of risk of 1 year. Weâre strict on new business, balancing risk profile with commercial activity to preserve asset quality from macroeconomic impacts. Should the cost of risk increase to above our expected 30 to 35 basis points or more than sufficient overlays are expected to compensate keeping it stable. Should the cost of risk remain benign as it has been in these 2 years. And depending on the macroeconomic outlook, the entirety of our overlays should be released over the next 2 years, propending results and cost of risk is for us a tailwind at this point. Letâs turn to Slide 36. Turning to our group guidance. Following full year. We assume a mild recession scenario and include Russia. We expect net revenue to be over â¬18.5 billion. Fees will be down slightly year-over-year due to a rising cost of securitization and a one-off impact of the removal of current account fees in Italy now that we are in a positive rate environment. This will occur in the second quarter and will be a magnitude of a couple of hundred million. Otherwise, we expect fees to remain broadly flat. We do not guide for trading revenue, but we do not expect a continuation of a very elevated levels of 232, given the less volatile backdrop anticipated. As Stefano has explained, our NII guidance is for over â¬11.3 billion and based a prudent assumption of both rates and pass-through. Costs will continue to be managed tightly, and we expect the cost base to be equal to or less than â¬9.7 billion, keeping it significantly below and assumed inflation in our perimeter of over 7%. We have spoken about our cost of risk, which weâre highly confident will remain at or below the 30 to 35 basis points range. During 2023, we expect systemic charges of around â¬1.2 billion. Net profit for 2023 is expected to be broadly in line with 2022, meaningfully rebasing our expectation of what we can deliver sustainably and build upon. We aim for 2023 distribution to also be broadly in line with 2022, supported by our expected organic capital generation and net income and still not including the distribution of our excess capital. Yes. Good morning, everybody. And thank you for taking my question. The business is clearly performing well and performing ahead of expectation set UniCredit Unlocked. And I just wondered if we think about Slide 7, is there a scope to reinvest some of that outperformance back into the business in order to accelerate or expand the operational improvements embedded in the plan? And if so, where would the focus of that reinvestment be? Thatâs my first question. And then secondly, Andrea, you gave some color at a conference late last year on the outlook for M&A in the sector. I think at the time, you were flagging political uncertainty, macro uncertainty and also volatile valuations as obstacles to seeing more deals in this space. I guess, with the improvement in valuation across the sector and a slightly more constructive view on the macro, does that change your view at all on M&A? Okay, thank you. So reinvestment, Slide 7, so in UniCredit Unlocked, we had clear reinvestment into the business and into our operating machine. So the view was, if you remember, that we could extract â¬1.5 billion of cost reduction and reinvest the majority of it into either frontline, which had been depleted for the operating machine. That has not changed and is continuing. Obviously, the benefit you see from that investment takes time to fall through the P&L. But thatâs why weâre saying that if you look at the results today, I would say that the large majority, say, 80% of the improvement of results is a commercial machine stepping up and driving part. 20% is the structural change coming through. As we move through the plan, clearly, the commercial machine cannot continue to step up at this pace, but we hope that the operating machine, improvement in efficiency and then support to the commercial machine leads to better results still. So thatâs how we look at it. So we will continue to invest to be able to achieve that objective. With respect to M&A, I think we still have a relatively uncertain environment. I do think that, that vision has become more better. But M&A is about three things. One, does it strategically fit? And does it reinforce you that the structure improves your position? Two, is their seller and three, do the values makes sense? And usually, you collide on two and three. So for M&A to take off, there needs to be willing sellers and that relative valuation that makes sense. So far, at least for us, it hasnât been the case. Hello. Good morning, thank you very much for taking my question and for the presentation. I was thinking in terms of the guidance for 2023 net profit, it remains in line with the â¬5.2 billion achieved already in 2022, as you were saying, considering this year was already marked by provisions for Russian exposure somewhat weighing on the earnings. Going into 2022, youâre saying youâre expecting, of course, strong net revenues and even give room for further upside coming from more rate hikes beyond the deposit facility rate reaching 2.5%. So in this context, what would you therefore be thinking in terms of headwinds that youâre cautious on for 2023? Do you see any downside risk from current headwinds or is there more risk in terms of cost of risk? And then the second question is a follow-up on what Chris is saying. The agreement you recently signed with Azimut in Italy includes a call option. Within this context, can you give us some color around your thinking for inorganic growth in the asset management space? Would you be willing to deploy some of the excess capital by starting to build an in-house factory for Italy, particularly thinking of now European regulations could be evaluating requests for an inducement then? Thank you. Thank you. Let me start with the second one, and then Iâll go to headwinds, and Iâm sure Stefano will complement it. So Azimut, letâs take a step back. If you look at our factories, and itâs important to understand that we view our factories are as serving our existing clients. So to make an example, buying an asset manager that serve institutional clients and provide us with product is not exactly consistent with that, if you take 2024 and the potential review of incentives and inducement and all of that we are in a position to fundamentally reinternalize everything. We would have a position to have a developed factor with Azimuth. We have in a position to reinternalize our life insurance platform, etcetera, etcetera, etcetera. So regardless of what the environment is with respect to inducement, with respect to the compromise, with respect to whatever, we will see what it is. If it makes sense, we will reinternalize. If it doesnât make sense, we wonât. In terms of more generally the factories, we will continue to strength the strengthening a first in two ways: One, hiring talent that is very happy to come and work here because we can provide them with a career over the entire European unit. At the same time, advanced strengthen organically our factories. This is the case, for example, in advisory and capital markets. At the same time, we will continue to look for partnership to complement our skill set in factories where weâre clearly not best-in-class and cannot be and to complement our client base by providing access to their clients. That will continue. And I think goes, we will continue to do that. It also happens that this strategy is not very intensive in capital. Yes, if I internalize certain things in â24, I will have to spend some capital, but a lot less on what I would have paid from doing an acquisition externally. With respect to headwinds, thatâs a good question because weâve tried in through the year, but in fact the first quarter to anticipate what they could be. If you take our strong belief in a shallow recession, obviously, we should not have â¬1.8 billion of overlays. We should not have a number of the other provision we have made. But we have tried to see what can go wrong. So what can go wrong? Cost of risk. Of course, it can. But now we feel weâre bolted with it. And therefore, for us, we donât see it as a significant risk unless you have a very extreme scenario, then we have another problem. What can go wrong is a risk environment that is not as aggressive as some people think, i.e., where ECB does not raise the full way to free or both. But our assumption improve that we â on the rate scenario only include 2.5%. Weâre already there. What can go wrong is a pass through our deposit beta, but worsened significantly and that our experience in flight-to-quality on deposit does not materialize. Now weâre doubling the deposit EBITDA from â¬20 million to â¬40 million, so in our projection. So weâre bolted on that. What can go wrong is inflation and the impact on cost. We are ready for 7% in our perimeter. Remember that our cost this year include â¬80 million of inflation relief, which obviously we review contracts of our colleagues are not needed anymore because weâre doing it through contract. So net-net, the neutral. We â so weâve looked at cost in a in that perspective, and we started from June to rationalize further with respect to both internal, but especially external cost. And weâre now positioned to do that. Realize that a lot of the efficiencies weâve done have been done after the half year mark. So it donât flow through the entire cost base the savings of 2022. They will flow through in 2023, and we are continuing in 2023. Weâve looked at fees. We told you that in our fees, in Italy, we booked â¬200 million for fees on accounts for negative rates. Effectively, those are offset by the NII. If you take those off, we think were flat. And if you look at we have started the year from the base of last year, weâre constructive on investment. We have run rate on protection. We continue to crystallize on payments. So there is nothing that leads us to believe that we go further backwards. But we have â in our expectation we have put a flat fee environment. Trading is one, but I cannot comment, honestly, because they can go lower. But we have all the other levers to have just above against that. Have we missed anything else? We might. But I think weâve tried to go through down the list and build differences as much as we can. Consider also that in our 2022 results, we have a minus â¬200 million impact on net income from Russia, incidentally coming down from minus â¬900 million in the first quarter. So we clawed back â¬700 million. We donât think we are going to have a minus in Russia this year. So I think thatâs what we see. Obviously, with the uncertainty the geopolitics and the transformation that we are all undergoing, some things can go wrong, but we have tried to address as many of these points as possible. Anything else? No, I donât think there is nothing more than what Andrea already commented, maybe a couple of data points more. Andrea highlighted in relation to inflation, so 7%, just to give the flavor is around â¬500 million in bad debt cost in â23 in relation to inflation increase that is already embedded in the guidance that we gave for cost below 9.7%. And we are reiterating this because itâs really important. â¬1.0 billion overlay is more than 1 year cost of risk. So that is sufficient in order to cope also with scenarios that are worse than a milder recession scenario. Yes, good morning. One on profitability in the future and one on capital allocation. â¬5.2 billion of net profit post [indiscernible] targets in the double-digits after accounting for a better rate environment and low cost of risk. What do you think is the mid-term profitability prospects from there? And on capital, with the new guidance on shareholder remuneration, you would only have less than â¬2 billion cash thatâs left on 2024 earnings to hit the plans â¬16 billion cumulative capital return. You clearly got tied, but how do you look at the material remaining capital access and when are you going to adjust the strategy versus the UniCredit Unlocked? Thank you. Alright. So just one thing, Andrea, you broke up when you were talking about the â¬5.2 billion net income. Can you repeat your question on that please? Yes, sure. â¬5.2 billion net profit guidance after [indiscernible] for â23 given the Unicredit Unlocked target in the double-digits accounting for rates and low cost of risk what is the mid-term profitability prospect from that level onwards? Thank you. Okay. So in terms of net income, we have, as you said, â¬5.2 billion, including Russia and including Russia means â¬200 billion negative, excluding â¬5.4 billion. And it is a â¬5.2 billion that includes 41 basis points of cost of risk for the year. But the 41 cost â 41 basis point cost of risk of the year is inflated by obviously, Russia and overlays. As Stefano said, without that, we were at 7%, okay. So as you go forward, what is the normalized? For the time being, we feel comfortable we say broadly in line. There are like in everything, potential upside and downside. We feel that this view is tilted to having more upside than downside, but we will see itâs premature for us to tell you. And itâs tilted to have more upside than downside for how I responded before all the lines of difference and all the things that can go wrong that we have protected against. Now with respect of where are we going forward from that, it very much depends to where rates stabilize, where the pass-through stabilize and then how fast the benefits of our transformation can come through the P&L. And I think on that, thatâs why we are doubling our efforts on that. Letâs see how much we can achieve during the quarters of this year, and we will keep you posted. But clearly, our ambition is to step up from this again. I donât know how fast we will increase further. It depends on our execution. But the value to unlock is still there. I donât think we are done, not even close to being done. With respect to capital and cash and everything else, so I think we started by saying at UniCredit Unlocked that we would be generating about 150 basis points or â¬4.5 billion of organic capital per year. And therefore, that would be supporting sustainably distribution of an average in excess of â¬4 billion a year, which all of you have crystallized into the famous â¬16 billion. At this point in time, we are running at an organic capital generation that is much higher than UniCredit Unlocked, which is why we are creating capital. It was much higher in 2021, about â¬6 billion. It was much higher in 2022, about â¬9 billion. So, you are talking between 30% and now 2x of the average. The organic capital generation is linked to two drivers. One, my net income and how efficient I am with the capital I deployed to achieve it, the famous capital light and so on. And two, the process of rationalization and improvement of capital efficiency in my backpack, the â¬456 billion. The second one, at some point, we will finish. Itâs not a perfect read. The first one is we will reach a run rate and then we will be very efficient and profitable, and we will continue. If you had asked me at the moment of UniCredit Unlocked, our target of organic capital generation, so this efficiency was about â¬20 billion over 4 years. Thatâs why we see it in excess of â¬16 billion. Today, we have done â¬9 billion. And on the one hand, we have eaten into those â¬20 billion over â¬16 billion. On the other hand, we have become more bullish on how much is the total that we can achieve as our organization now leaves endures capital efficiency and profitability as they did volume before. So, I donât know the exact numbers, but I think we will go beyond. Other question that is linked to that, so I do think that if you look at â23 and â24, we are holding. There is absolutely no question, we will be there. If you go beyond those 2 years, then there is the topic or even beyond this year than there is the topic of excess capital. Itâs clear, and I said it at UniCredit Unlocked that by the time we get to the end of the plan, I canât look at shareholders and say this is a model that should run at a substantial excess to our target of 12.5%, 13%. When I said that, we anticipated to be at 13.7%. Today, we are at 14.9%. So, now we have very substantial excess capital that needs to be returned. How will it be returned, I answered the question in a way before in two ways. Either we get convinced that there are no out there value and distribution accretive acquisition because valuation of the targets are too far away. Then we will integrate our distributions going forward by distributing back the excess capital, like many other banks do, or in my opinion, better if we can execute value and distribution accretive acquisition, we will invest that excess and feed further the growth in distribution by supporting it with the organic capital generation we will from those acquisitions. Thatâs how we look at this. So, for the time being, â23, we think we are relatively bolted, â24 also. As we go towards the end of the plan, either we find new efficiency and we distribute over some time, the excess capital or we find new efficiency, and we employ that capital in an accretive way. And this is the way we look at long-term sustainable growing distribution underpin by organic capital and profitability. I hope it answers that we can talk about it further later. Hi. Good morning everyone. Itâs Antonio from Bank of America. I have two questions for me, please. One is a follow-up on strategy. And the second one on the deposit pricing, please. So, if I look at your numbers and go back, you presented the plan, including capital buffer embedded in your 12.5%, 13% target range. And I hear your comments. And clearly, you continue to prioritize capital distribution. You have a lot of buffers there not just on capital. And you seem to be generating more than you can distribute whilst absorbing unexpected shocks. So, my question is, where do your strategic priorities stand here at this point of the rate cycle with respect to some of the use of an allocation of excess? Where across your footprint, do you see the greatest opportunity to deliver the capital? And how should we expect the shareholder remuneration mix to change going forward? Would you be willing, for example, to introduce interim dividends? That would be my first question. And secondly, on deposit betas, I have seen you have increased your assumptions from 20% to 40%. But I am more interested in sort of exporting your Pan-European viewpoint. What are you seeing from competitors and from your client base when it comes to deposit pricing? You have talked about lower current account fees, which I guess is the first natural step. I wonder how you are thinking and what you have seen in terms of corporates and weaker clients across your key geographies? Thank you. Okay. With respect to capital, I think I mostly answered before, but fundamentally, we believe that a target of 12.5%, 13%, while higher than the peer group is a prudent and solid target, and we stick to that, notwithstanding regulatory headwinds that implicitly increase those numbers. With respect to the excess, especially given the magnitude of the excess I fully understand itâs a topic, and I fully understand that we need to answer that topic. So, for the time being, that access is absolutely not needed for us to continue to step up our distribution as we have this year and compensate our shareholders in at a magnitude that is commensurate to what we think is right. But at some point, not in 5 years, but in the next 2 years, we need to also articulate how this capital will be employed. And the employment will be either to be returned to shareholders progressively, complementing the ordinary distributions or employed into acquisitions that then would generate additional organic capital generation to increase the distribution, including on a per share basis. So, this is what we do, and we need to articulate it better. But I think after a year of operation on the UniCredit Unlocked, itâs a bit premature to give you exact timing and numbers. With respect to deposits, and I will then turn to Stefano, I would say this. So, if you look back to 20 years, every time there is a shock or a recession conflict potentially public belief UniCredit becomes a flight to quality. In every market, we have depositors, we have clients that come to UniCredit, every time in the last shocks, UniCredit manages in a value creation manner, the pass-through of the deposit beta and benefits on margins more than proportionally on that. In our numbers, we have a different thing. We have taken a conservative view that the deposit beta moves from 20 to 40. But just to be clear, if I look at my deposit beta in Italy, which is one that I know particularly well, given my new job, it was at 7% last year, it is up 7% in January. So, letâs see what we do, but the behavior of clients, both families and corporate is a behavior where we remunerate, letâs say, fairly, but the flight to quality and everything else that we offer is priced into the path through that is particularly positive for us. For the time being, thatâs what we see. But Stefano can add to that. Yes. So, itâs important to distinguish by country and by segment. So, before we are commenting, first of all, the overall kind of beta is 20% but importantly including both sides and term deposits. Thatâs very important because the side deposits on beta is even lower than that. Then we were commenting differentiating Italy in comparing with the other countries. We are commenting that Italy were at 7%, 7%, while on the other country on average, we are around 30%. Within that, letâs open it a bit, and then I will comment in relation to, letâs say, the competition. So, the retail [ph] to give you a flavor is fairly lower. So, the retail in Italy is 3% on the deposit beta. Corporate on the other hand, the group is currently above 30%. This is also depending on one end from the client behavior and the competition, i.e. so far, the client behavior is better than expected and is clearly showing a different competition on corporates mainly. And this is also reflected in the dynamic of the deposit that I was commenting before. So, when I was commenting that were the reduction of deposits, primarily in Germany and Italy due to large corporates small, medium enterprises, this is why we have decided not to follow-up with pricing that we think are not appropriate, i.e., the situation of the group in terms of liquidity such in other country, that the focus on the beta was such that if there is no need of liquidity, we will not change the pricing. So, coming to that, the competition is a little bit more on the corporate. For the time being, we are not seeing an important competition, especially in Italy on this side. Fact to be said, that we need to look during the course of the year, especially in the second part when there will be the full reimbursement of the TLTRO. Thatâs why we have decided to have conservative assumption also looking to the historical behavior in relation to the planned beta. Good morning. Thanks for taking the questions. My first one is on Russia. Just wanted to get a bit of an update on the deleveraging process and it looks like you are not expecting big impacts, but just as you know, now that the targets are based on the group, including Russia, again, I mean should we assume that the exit of the sale is off the table for now? And then my second question is on the costs. Just wondering and I know you have mentioned â¬500 million increase in inflation. I am just wondering specifically for it to be and what are you anticipating in terms of wage increases? Thank you. Okay. So, with respect to Russia â sorry, with respect to Russia, there is absolutely no change in strategy. We continued to de-risk, and we did that decisively trying not to leave too much money on the table. The only reason why Russia â by the way, Russia was never deconsolidated. We just presented the results separately because given the magnitude of the rationalization and the uncertainty and the volatility, we wanted to allow all of you to see how the rest of the franchise was continuing to progress, while and focus on how we were rationalizing Russia. As we end 2022, Russia is resized. Itâs highly rationalized. I mean last year, we compressed costs aggressively. We compressed the balance sheet aggressively. And now, it is in a place that because of its size, and because of what we expect in terms of volatility, it can be absorbed in the normal course. And therefore, having the difficulty of every quarter and every guidance today be accent with, we are simplifying, while providing you all the details on Russia. But the line of travel does not change. And I would like to underscore that relative to anything and everything, we set a strategy at the end of Q1, in terms of de-risking. And I do think that for those who have followed the same objective, we have de-risked more aggressively and more and faster than anyone else, leaving on the table, almost no money, which was the objective. And we will continue to try and do that. So, expect us to continue to de-risk with the rest â¬1 billion in Q4, obviously, at some point because the magnitude of what we have has compressed, we canât continue to shrink at that size all the time, but you should expect us to continue to de-risk. Right. In relation to cost, the â¬500 million was allotted before are also including the salary drift. The salary drift will be differentiated country-by-countries. We will not have the new agreement in Germany, because that will be relevant for 2024. So, in a way the 2023 costs are secured, why we started discussion in Italy and Austria. In general the salary drift will be below, however the level of inflation that we are assuming for each country. And in general, please take into consideration that taking the actions that were already secured, the average FTE will be down for around 3% or so during the course of 2023. So, this is an important element to be considered as mitigating factor of the salary drift dynamic. Hi, good morning. I have two questions for me, one is on asset quality and one is on lending rate. And when I look at the guidance that you have given, I understand is ex-macro overlay. And I understand all the cushion and cautiousness that you are including, but that is the biggest difference versus consensus. So, clearly the market is more conservative than you are on the supporting environment. Can you give us some reassurance on how you see on the ground in terms of corporate space, especially in this in Italy or the corporate space in Germany, of how the situation is developing in terms of asset qualitative studies, any area that you are seeing some signs of deterioration and how you are approaching this? The second one is on the lending. When I look at the Slide 26, when you talk about your further upside on NII, the lending positive impact, itâs lower than the negative on the deposit beacon. So, I was wondering if you can give us some color on the interest rate, pass-through rate on the lending side that you are seeing. And whether there is any pressure point on SMEs or corporate space in terms of re-pricing given the macro developments? Thank you. So, I am going to start and then pass it to Stefano and let me take asset quality. So, on asset quality, I think firstly, I think itâs always very important if you take away overlays and everything else to see what is the starting point. When you hit a shock or a recession, what will drive you through or not, is the quality and the coverage of your existing loan book. We move about a small fraction of that loan book every month. If a â¬456 billion are high quality, highly covered, prudentially staged and everything else, whatever happen, you will have a lower cost of risk than most. If you are not, you are going to skyrocket. If you look at the fact that our cost of risk continues to remain in the single digits, 2 years in a row, when you eliminate overlays, Russia and everything else, it demonstrate that actually we have a very defensive existing portfolio. So, thatâs point number one. Point number two, what do we see in the market going forward. As of now, we donât see any meaningful worsening of letâs say risk indicators, not in terms of expected loss, not in terms of anything. So, for the moment, we are in a position where plus-minus, we are at trend line. Can that worsen, of course it can. But for the time being, it hasnât. And for the â and if you expect a mild recession, the worsening is not that sizeable. And thatâs where the overlays come into play. But thatâs the way I look at it. But please, Stefano? Yes. So, letâs start from the default rate. So, the default rate for the full year as I was commenting is 0.9. Itâs lower than 1 in Germany, because itâs 0.5, is around 1 in Italy and Central Europe, a little bit higher in Eastern Europe. In our assumption, we are assuming the default rate that is above 1, but itâs not significantly above 1. What we are seeing on the ground as [indiscernible] is that not only we are not seeing a situation either on retail and corporate that are bringing us to classification, but also, so far your early warning indicators are constructing. One important point however to be mentioned is that, we are continually running through the spillover analysis and the spillover analysis is confirming that only around 1% of our total portfolio can be considered IRAs for the intern intensive standpoint. With regards the â in general pass-through re-pricing because your question was in relation to the asset side, so on the loans. On the loans side, if you look the client rate, on average were up 60 basis points. Thatâs the client rate in the quarter and we are up in all the countries. Fair enough on this spread, especially in country like Italy spread meaning a net of the cost of funding right. There is a spread compression. And thatâs why we are conservatively assumed also for 2023 a spread compression on some basis points. So, itâs not a lot, but there was some basis point. We do think that it will take a while to re-price also on the asset side. Like there is a delay on the liabilities side, it will be the same on the asset side. Such as spread compression is more in Italy and Germany, because in Central Europe and Eastern Europe, especially in the country where the interest rates movement started before the re-pricing was already happening. Hi. Thank you. Hugo Cruz from KBW. Two questions, one on capital and one on OpEx. In capital, can you remind us if there are any regulatory headwinds to come in 2023? But also, is there any material benefit from portfolio management in 2023? And then on OpEx, I understand a big part of the bankâs plan was to rationalize the usage of external providers, IT providers. How is that process going? Can you give us any KPIs? And are you seeing any different inflation dynamics between the external and internal IT providers in the group? Thank you. Thank you, Hugo. So, on capital, rec headwinds, nothing meaningful. We rolled out EBA in our models a long time ago. So, we donât get those or not meaningfully. We have got some from Austria in the quarter, but nothing meaningful in 2023. And in terms of organic capital generation, we still expect for it to be significant. But obviously, itâs difficult to keep it at 300 basis points per year. So, donât expect â¬9 billion of organic capital generation every year. It just at some point it stops, right. But I just need â we just need to be at 150 basis points or above. And I think we are determined to do that. With respect to cost and external providers and everything else, so that for UniCredit it is both a challenge and an opportunity. Challenge, we are very externalized and external cost flow through much faster than internal cost. However, itâs also an opportunity because as we internalize and rationalize all these external providers, our ability to reduce cost is more significant. And we have proven that throughout 2022. And we are going to do that even more in 2023. So, I think thatâs the external part of our cost base. The internal part of our cost base, just to be clear, and repeat what Stefano has said, we took some synergies in reductions and in streamlining internally. Some of them are not fully crystallized on the full year because they were done across the year. So, those as we started the year are bearing full fruit. And on top of those, we have new ones that we will continue to roll out this year. Thatâs why the 9.7 we said below, because we exceed, we expect to beat it. Just integrating a point because you asked for active portfolio management action, the act, yes, we are envisaging active portfolio management action, i.e. securitization and reduction of EBA negative clients, among others, also in 2023. And the magnitude of the action was such that we can fund it from a capital standpoint, the business dynamic, i.e., the growth of the lending. Good morning to everybody. Two questions, the first one is a clarification. I have seen that you are going through something like you were talking in terms of execution of the share buyback, with most of it to start in March and the second part in the second half. I was wondering whether you are going to apply to the ECB for the entire amount and then speed the execution or are you going to replicate that the same process of last year with a double application to the ECB once the first tranche of the buyback is completed? And the second question related to â in general to the asset quality outlook for Italy, I would like to know your views on how the higher rates environment may impact the risk profile and corporates and retail in Italy? My perception is that this argument is a little bit of a downward rates at this level, especially for retail, but I would like to know your view on this. Thank you. Okay. So, the share buyback, we will apply for the full share buyback in one go. So, not like last year. But we will apply for the full share buyback in one go. We expect to receive the answer from the ECB before the AGM. So at the AGM, if shareholders approve it, we will approve the dividend and the full share buyback. The execution is another thing, because given the magnitude, trying to cram in, at the same time with one bank, the entire amount felt a little bit too ambitious, which is why we are separating it. And then â and thatâs not for that. With respect to Italy, I will give you a macro view, but Stefano will add. So, obviously, increased cost of financing in an environment where value chain gets redefined and energy cost, food stuff, commodities cost go up is not great news for our clients, both families and corporates, but they are very liquid. They have been on the front foot on restructuring what we need, but to restructure and at the moment while there is increasing pressure and if you remember, on the third quarter, we even provided the most needy part of our families and corporate with the ability to extend their repayments and their payment of interest to help them, so there is an impact of that, but the impact is limited. Incidentally, very few people took the offer showing that they feel quite strong they can sustain and continue at the level. So for the time being, the macro view is that it is within the realm of what is absorbable. Yes. If we look â if we look to the stock with a breakdown between retail and corporate to give their flavor, if we look our long book, two-third of this stock of residential is â household sorry is fixed and one-third is floating. Thatâs different. Itâs more or less the other way around for corporate that, however, as some of them has EDGE deposition. So all in all, we are more looking to the impact on one-end available income, on the other end, the overall profitability of corporate deriving from inflation on one end and energy and as a consequence, energy intensive sector that for the time being rates. The situation can be different is the increase of rates is significantly higher that currently assumed. Thank you very much for taking my questions. Just a couple of things. First, could we have a bit more color on your funding plans for 2023 in terms of volumes anticipated? I know there is some reference in the release to capital intense, but Iâd be interested in the volumes. And secondly, did I hear properly that the outlook for the payment of cash components in 2023 is that they will be paid in accordance with the terms and conditions? Thank you. So the overall funding plan that we have for the group is a little bit more than â¬20 billion. You can break down that in fundamentally free component between â¬7 billion and $8 billion is the Marella part of the funding plan, around $7 billion is the corporate bond part and then there is the residual portion related to supranational funding and so on. With regards to the first part, itâs more secured also this year as last year towards senior preferred and senior non-preferred, i.e., the subordinated part of the plan it would be fundamentally more related to additional Tier 1. With regards to the cashes, I was already commented before so taking into consideration the current results and the proposed dividend, the coupon there are the condition for payment of the coupon clearly subject to the approval by the AGM of the relevant on one end, results on the other end dividend proposal. Okay. So this concludes our conference call. Ladies and gentlemen, thank you for joining. The conference is now over and you may disconnect your telephones.
EarningCall_922	Greetings, and welcome to the Seacoast Banking Corporation's Fourth Quarter and Full-Year 2022 Earnings Conference Call. My name is Malika, and I will be your operator for today. [Operator Instructions] Before we begin, I have been asked to direct your attention to the statement at the end of the company's press release regarding forward-looking statements. Seacoast, will be discussing issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act and its comments today are intended to be covered within the meaning of that Act. Please note that this conference is being recorded I will now turn the conference over to Chuck Shaffer, Chairman and CEO of Seacoast Bank. Mr. Shaffer, you may now begin. As we provide our comments will reference the fourth quarter and full-year 2022 earnings slide deck, which you can find at seacoastbanking.com. I'm joined today by Tracey Dexter, Chief Financial Officer; and Michael Young, Treasurer and Director of Investor Relations. Looking back at 2022, we made remarkable progress in expanding the franchise throughout Florida. Through acquisitions and new market launches, we strengthened our competitive position across the state and across the $10 billion in assets threshold. We started the year with the completion of the Sabal Palm Bank and Florida Business Bank of Florida transactions, putting us in the desirable Sarasota market and continuing our growth in Brevard County. Also in the first quarter, we entered Naples and Jacksonville with de novo teams, resulting in better than expected customer growth in both markets over the last 12 months. In early October, we completed the acquisition of Drummond Bank, expanding our presence in North Florida including Ocala and Gainesville and added an exceptional C&I team covering both markets. Also in October, we expanded our franchise into the dynamic Miami-Dade County market with the Apollo acquisition. And during the third quarter, we announced the addition of Professional Bank expanding our reach in South Florida even further. Moreover, in early 2022, we continued our focus on delivering better digital experiences to our customers. Completing a significant digital conversion adding Zelle, budgeting tools, account aggregation, proved digital onboarding, Spanish language and several other digital customer experience improvements. We enhanced our commercial banking team in 2022 with a transformative year of recruiting well-seasoned commercial bankers treasury officer and credit officers throughout Florida, meaningfully increasing productivity over the prior year. Our wealth team also had an outstanding year, adding $425 million to bring assets under management to near $1.4 billion at year-end. Throughout the year, we made investments across all of our operational areas in technology and talent, building resilience and scalability to Seacoast transitions to a mid-size bank. Seacoast had an exceptional 2022, setting ourselves apart as Florida's leading community bank. Turning to our financial results. The team finished the year with excellent performance. We materially expanded our net interest margin during the fourth quarter, increasing 69 basis points from the prior quarter with loan yields rising 84 basis points. At the same time, the cost of deposits increased only 12 basis points. This represents an impressive cycle to date beta of less than 5%. We believe the strength of our relationship focused lending model and our granular deposit franchise is finally becoming more evident during a period of higher interest rates versus other more transactional wholesale a rapid growth business models. We generated $67 million in adjusted fourth quarter pre-tax, pre-provision earnings, an increase of $17.7 million from the prior quarter. While achieving a 52% efficiency ratio. Our fourth quarter adjusted pre-tax pre-provision return on tangible assets improved to 2.28% and our adjusted return on tangible equity improved to 15%, up from 12.5%. Seacoast continues to operate from a position of strength with capital allowance ratios at the top of our peer group. We ended the quarter with a TCE ratio of 9.1% and an ACL coverage ratio of 1.40%. And considering the loss absorption included in the purchase accounting marks, the company's backstop at a 2.60% coverage rate. Additionally, should a downturn materialize, Florida has the potential to outperform the rest of the country, given the wealth accumulation and population growth over the last few years. Florida has exceeded every state in the nation and attracting affluent wealthy individuals and corporations, adding materially to the state's GDP and further bolstering the state's economic drivers. Our credit metrics remain outstanding and we continue to be a disciplined conservative lender focused on building a carefully underwritten and diversified portfolio by nurturing full client relationships to bring low cost funding. And as a reminder, our portfolio has been built over the long term with a consistent growth rate while driving diversification by product type segment and vintage. A final thought, considering the continued economic strength of Florida are carefully underwritten credit portfolio with low CRE and C&I concentrations and peer leading capital levels, we believe a very strong balance sheet that can weather any challenges ahead. Further such strength should provide optionality to be offensive and potentially more volatile economic environment including opportunistic market share gains, organic growth and acquisition opportunities. Directing your attention to fourth quarter results, beginning with the highlights on Slide 5. The net interest margin expanded 69 basis points to 4.36% and on a core basis expanded 43 basis points to 4.01%. Loan originations, in combination with acquisitions at higher book yields and the low cost of deposits we maintained during the quarter supported higher net interest margin. Our cost of deposits increased only 12 basis points during the fourth quarter to 21 basis points. We've managed deposit pricing largely on an exception basis since the beginning of the rate cycle, but we do expect to see an increase at a quicker pace in the coming months, given the velocity of rate movement and the competitive environment. Pre-tax, pre-provision earnings continued to increase with 7% growth quarter-over-quarter to $46 million and when adjusted for merger related costs and amortization of acquired intangibles in each period, pre-tax, pre-provision earnings increased 36% to $66.6 million and as a percentage of tangible assets to 2.28%. We delivered organic loan growth. In addition to growth through acquisition this quarter, our credit standards remain disciplined and focused on relationship lending. And we saw annualized organic growth of 14% this quarter. I'll emphasize that the growth is in keeping with the bank's credit standards and is a combination of solid production in the quarter and slowing loan prepayments. The loan-to-deposit ratio ended the quarter at 82%. Average loan yields increased 84 basis points to 5.29% and the December weighted average add-on yields reached 6.5%. Credit risk metrics remained strong, with non-accrual loans representing 0.35% of total loans compared to 0.32% in the prior quarter. The quarterly provision for credit losses is $14.1 million including $15 million in initial provision on the Apollo and Drummond acquired loans, offset by the release of $2.1 million in reserves we established in the third quarter to provide for losses potentially resulting from the impact of Hurricane Ian, that did not materialize. The allowance for credit losses stands at 1.4% of total loans and continues to reflect the possibility of potentially deteriorating economic conditions. Wealth Management was a particular bright spot during the quarter and for the full-year 2022 with the wealth management team adding $425 million in assets under management over the last 12 months. And as you know, there has been significant activity on the M&A front, including the closings of the Apollo and Drummond transactions on October 7th, and the upcoming acquisition of Professional Bank expected on January 31, with system conversion late in the second quarter of 2023. Turning to Slide 6. Net interest income expanded 36% during the quarter, adding $31.5 million with higher yields and higher loan balances. Net interest margin expanded 69 basis points to 4.36% and excluding PPP and accretion on acquired loans, net interest margin increased by 43 basis points to just over 4%. In the securities portfolio, yields increased 41 basis points to 2.77% and loan yields expanded 84 basis points to 5.29%. We continue to benefit from a strong low-cost funding base with 64% transaction accounts and the cost of deposits increased only 12 basis points to 21 basis points. In additions during the quarter of Apollo and Drummond banks, further enhance the deposit base with longstanding granular relationships. Looking ahead, we expect continued expansion of net interest income, driven by balance sheet growth and more modestly increasing yields on loans and securities outpacing increasing deposit costs. In the first quarter, we modeled net interest income in a range between $132 million and $138 million with the actual outcomes highly dependent on the pace and velocity of deposit competition in the coming quarter. Moving to Slide 7. Adjusted non-interest income was $17.6 million, an increase of $1.2 million from the previous quarter and a decrease of $700,000 from the prior year quarter. We saw increases in service charges and interchange revenue and wealth management revenue increased 6% from prior quarter and 22% from the prior year quarter. Comparing overall performance to the prior year quarter, the decrease relates to lower mortgage banking activity impacted by rising rates with mortgage related income of $2 million in the fourth quarter of 2021 compared to about $400,000 in the fourth quarter of 2022. Looking ahead, we continue to focus on growing our broad base of revenue sources and with the benefit of the expanded franchise, we expect first quarter non-interest income in a range from $20 million to $23 million, which includes the partial quarter activity from Professional Bank. Moving to Slide 8. Adjusted non-interest expense for the quarter was $70.4 million, which was lower than the guidance we provided last quarter. Increases from the prior quarter were aligned with the expanded associate base and growing customer base and it's important to note that the Drummond and Apollo cost synergies will fully materialize, beginning in the second quarter of 2023. Salaries and benefits on an adjusted basis increased $12.3 million, reflecting the increase in staff to support Seacoast's expanded statewide franchise as well as increases in incentives related to higher commercial production during the quarter. Data processing are typically volume based and the increase aligns with the larger customer base and higher transaction volumes. Similarly, occupancy related costs are in-line with the increase in the bank's footprint during the quarter. Amortizing core deposit intangible assets increased during the quarter with the addition of Apollo and Drummond. Amortization of these assets during the fourth quarter was $4.8 million and we expect the full-year amortization, including the addition of Professional Bank to be approximately $28 million. Looking ahead, we expect to maintain our expense discipline while continuing investments to support growth. We expect first quarter expenses, scaling with the growing size of the organization in the range of $86 million to $90 million inclusive of the operating results of Apollo and Drummond and a partial quarter for Professional. On an adjusted basis, excluding the amortization of intangibles, that would be $80 million to $84 million. On Slide 9, the efficiency ratio on an adjusted basis improved to 52%. As we scale the company for growth and become the leading bank in our Florida markets, we continue to pace our investments with discipline, evidenced by our consistent focus on efficiency. Looking forward to the full-year 2023, we expect to maintain the efficiency ratio in the low 50s. Turning to Slide 10. The chart on the left highlights the continued diverse mix of our credit exposures and our disciplined approach to managing concentration. In the upper right of the slide, construction and commercial real estate concentrations remained well below regulatory guidelines and well below peer levels. Turning to Slide 11. Loan outstandings increased $241 million or 14% excluding acquisitions on an annualized basis. Commercial originations were up over the prior quarter and looking forward, we're seeing market demand generally slowing impacted by rising rates. Average core loan yields increased by 50 basis points during the quarter to 4.8% with the December weighted average add-on yields reaching 6.5%. We expect the pace of loan growth to moderate somewhat, expecting an annualized growth rate in the first quarter in the mid-single digits. Loan yields will continue to benefit from the higher rate environment and we expect core yields in the first quarter excluding purchase accounting accretion to expand meaningfully to the 520s range. Turning to Slide 12. In the investment securities portfolio, the average yield increased during the quarter by 41 basis points to 2.77%. Values have stabilized and duration in the AFS portfolio has extended somewhat from around 3.5 in the third quarter to 3.73 in the fourth quarter. Turning to Slide 13. Deposits outstanding totaled just under $10 billion, which is an increase of $1.2 billion from September. Net of acquired balances. There were outflows of approximately $320 million in non-interest bearing demand accounts. Our cost of deposits increased by only 12 basis points and we did see some outflows with impacts from rate sensitivity and a general absorption of liquidity in the market. The competitive environment is increasingly dynamic and our expectation is that the cost of deposits will increase at a faster pace in the first quarter than in the fourth quarter. In addition to the impact of adding higher cost deposits from Professional Bank. That said, we continue to expect to outperform peers of the environment serves to highlight the strength of our low cost deposit base. Looking forward to the first quarter, including the impact of Professional Bank, we expect our cost of deposits to move above 50 basis points. Providing more precise guidance is difficult given the increasingly dynamic competitive market for deposits. Moving to Slide 14, Wealth revenues increased 6% compared to the third quarter and 22% compared to the fourth quarter of 2021. The previously mentioned deposit outflows contributed in part to the strong results for the Wealth Management division. You'll see that assets under management has increased 60% from $870 million two years ago to nearly $1.4 billion today. Moving on to credit topics on Slide 15. The allowance for credit losses increased during the quarter by $18.6 million to an overall $113.9 million with a decline in coverage of 2 basis points to 1.4%. The provision this quarter was $14.1 million which included $15 million assigned to the portfolios acquired from Apollo and Drummond, offset by the release of $2.1 million with set aside for Hurricane Ian, but fortunately, did not need. We remain watchful of inflation pressures and are carefully considering the ongoing impact of higher rates on the economy though our credit metrics remain very strong. Moving to Slide 16. Charge-offs were only 4 basis points on the overall portfolio. Non-performing loans represent 0.35% of total loans. The percentage of criticized loans to risk-based capital increased modestly with conservative grading on acquired loans. And in the allowance, we continue to assess the environment and the factors that might affect loan performance, and this quarter the allowance for credit losses is modestly lower at 1.4% of total loans, again attributed to the release of hurricane reserves. On Slide 17, our capital position continues to be very strong and we're committed to maintaining our fortress balance sheet. You can see the somewhat dilutive effect of the acquisitions in the fourth quarter on tangible equity and from prior quarters this year of the decline in accumulated other comprehensive income, while those measures will return over time. We're committed to driving shareholder value creation. The ratio of tangible common equity to tangible assets is a strong 9.1%. In this quarter, adjusted return on tangible common equity was 15.1%. In summary, considering our peer leading capital levels, prudent credit culture and high quality customer franchise, we have one of the strongest balance sheets in the industry, providing optionality if a recession materializes and flexibility to be opportunistic and client selection, organic growth and acquisition opportunities and to continue to build Florida's leading community bank. Thank you, Tracey. And before we go to Q&A, I just want to say, thank you to all the Seacoast associates on the call. 2022 was truly a special year. I'm incredibly proud of all of you and thank you for all your hard work and effort. [Operator Instructions] Our first phone question is from the line of Brady Gailey. Please go ahead. Your line is now open. So, I wanted to start with loan growth. I know you guys had been expecting high-single digit. It sounds like you're more in the mid-single digit area for the first quarter of the year. Should we think about mid-single digits as appropriate for the entire year? Or do you think that you get back to the high-single after you get through the kind of seasonally slow at 1Q? Yes. And maybe looking back at the quarter, we really had a very good quarter for loan growth and it was a nice mix between C&I and commercial real estate, and large part was driven by a lot of the new additions to the teams. We added over the back half of the year, last year and it was really great to see the relationships come over with that additional talent, generally very high quality relationships that joined the franchise. As a result of the quality talent we hired and so we're very pleased with the outcome, also pleased with the average add-on rate hitting about 650 there towards the end of the year. So nice pull up in new loan yields. And then looking forward, it's tough to provide guidance beyond quarter and we're guiding to mid-single digits for the first quarter. I would say, at this point given the inversion of the curve. I think it's prudent for us to be cautious and thoughtful as we move through this period will to add high quality opportunities as they come on to particularly high quality relationships coming with both deposits and loans. But beyond that Brady, we'll have to see how things play out for the year, but mid-single digit guide for Q1. Okay. And then your accretable yield really ticked up in the fourth quarter, it was almost $10 million, that was more than yield it for the first three quarters of the year combined. I know that line item can be very difficult to forecast. And I know you're about add professional into that bucket, but any shot at what accretable yield could be for the full-year 2023? Yes, I think, when we look back at the fourth quarter and the acquisition estimates - the credit marks came in really in line with our expectations. But to your point, the rate marks with those measurements driven off of the rate environment on October 7 for both banks, the date of closing. The rate marks came in a bit higher and so impacting the accretable yield. And so I think as we look forward, accretion kind of a difficult number to model as you point out, but with about 9.7 in the fourth quarter and the addition of Professional Bank in the first, our model shows about $10 million or $11 million in the first quarter, and you'll see it move a little higher after that. Okay. All right. And then lastly from me, I mean, Seacoast has been incredibly active in M&A. You're close in - your biggest deal ever next week. I know bank M&A nowadays is tougher just with the rate mark component, but how do you think about bank M&A. You've done a lot as it time to stop and pause and digest what you've done or are you still on the offense and you could see additional deals beyond Professional this year? I think the way to think about M&A for us is we'll - we're in the middle about the convert Drummond, we'll get that done here about the first week of February, and then our plan is to convert Professional right around the first week of June. And so as we come out of Professional, will be ready and available to do M&A, but I think it would be highly dependent upon what market conditions are at that time and whether or not pricing can make sense, obviously, earn backs have to make sense in M&A and we have to be able to model not only liquidity, but also credit reserve, et cetera. So it would be dependent on where things stand and when we get there, but I think from an operational perspective, we've done a very good job over the last few years, adding talent in technology to scale the franchise. I think we've been out ahead of the growth plan. And so will be ready, but it will be dependent on the environment. I wanted to circle back to the loan growth side. I mean, you talked about things starting to slow, but I just wanted to get some sense of the puts and takes here, right. How much of this is weaker demand from clients versus maybe you guys having less of an appetite for credit at this point given the economic backdrop? And if you could just talk about maybe what segments are still - like what loans coming across your desk or what sectors are still providing good risk-adjusted returns? And maybe, are there anything that avoiding or slowing where it just doesn't make sense? Yes. Thanks for the question, David. Growing a bank into an inverted curve. As I mentioned on the last question is something you have to be prudent and thoughtful about. And when we look at and what we're see in particularly in the commercial real estate sector, things have slowed pretty dramatically when you look at cap rates and where interest rates are. And it just - it seems like deal transactions have just really slowed pretty dramatically here, we're also seeing much less transactions in the residential market and both are being driven by the same thing. Customers are in, rates that are lower, rates are much higher in the marketplace and then cap rates and commercial real estate remain low. So there certainly less transactional volume. And the last thing you want to do stretch into that environment and so we're being thoughtful there. I would say, we've pulled back pretty strongly out of construction respect at this point, but we're still looking at stabilized income producing property where leverage makes sense and where we have relationships and borrowers we know well. And we're still looking at C&I and operating companies where they make sense. We are seeing nice pipeline around C&I and we're seeing much - really nice looks given some of the talent we've brought into the company on the C&I side. So we're taking our opportunities there. And on the commercial real estate side where we have appropriate leverage, strong cash flow and strong balance sheets good borrowers. We'll do deals there, but again really kind of the way we're playing the game pretty firmly here is we need full relationships as we move through time, we need to understand balance sheets, understand liquidity, understand deeply the client. And so it's a conservative approach, given the environment. But I think we're navigating it pretty well. And when you step back and just look at the balance sheet and the way we construct the balance sheet over - really the history of the organization is, we've really always focused on relationships where we have good yields on loans, good structures and credit and pick our spots carefully. Okay. That makes sense. And then maybe on the other side of the coin, just touching on the funding. You talked about, it's extremely competitive out there. Obviously days accelerating, deposit costs are increasing and you're doing a great job managing that. I'm just curious, how you think about deposits costs as we look forward. Slower growth does alleviate some of that pressure, but just curious like what are you seeing - how much of the outflows this quarter are surge deposits, our more price sensitive clients leaving. And so you get higher rates maybe in the bond market versus borrowers just using cash to pay down higher cost debt. And then just any thoughts on how you plan to manage future potential outflows between borrowings, brokered funding or even potential security sales? You captured it all in the question, David. The bond market, obviously, now a competitor to bank deposits. I think, the pace of which rates moved up on the short end of the curve, created a real competitive. When you look at the overall marketplace for bank deposits, certainly strong, can you seen that not only in the Community Banks, but obviously in the National Banks. When you look at our trends, quarter-over-quarter we look very similar to the national banks in terms of deposits shrinkage and what will be a part of that was driven and we saw it, we had about $150 million lower balances across title companies and attorneys and that's just the fact that there is a lot less transactions happening in the marketplace. And then the remainder of it was, just generally customers having less balance in their accounts and some, obviously, rate pressure. That being said, when you look at our franchise, we have $240,000 accounts, 87% of those accounts have under $5 million at Seacoast's and if you sort of peel it back further, 68% of those accounts are under $1 million. So we are a very granular franchise that's been built over almost 100 years that provides a lot of strength in these environments and we - 65% transactional on the depository side in terms of our funding base and that is a unique strength we have and I think that's evident in the prior quarter's results. And so, when I think when you compare us to most moving forward. I'm confident our ability to perform better than most the banking community, just given the transactional relationship nature and the granular franchise we built over a very long period of time. But looking forward on, Michael, you want to give some comments on the way we're thinking about deposits as we move forward. Yes, David, I'd just add to that. I think on a go-forward basis, we'll look to hold balances a lot more steady or potentially if we grow them. The competitive environment will kind of dictate some of that in the interim, we'll fund any gap with FHLB borrowings, as we have done, but we're not obviously in a very net borrowing position as of 12/31 and so we'll just kind of manage that as we move forward throughout the year to optimize rate and volume and in NII. As we have throughout the cycle thus far, we're still a sub 5% deposit beta on a cumulative basis. As a reminder prior cycles, we were at 28% cumulative deposit beta and we still feel pretty good about performing or potentially outperforming that on a stand-alone basis. So you will see the step up as Tracey mentioned in her prepared comments from Professional Bank once that deal closes kind of just a one-time step up. But other than that, we'll continue to manage through this with a little more rate to just hold or drive balanced growth. On the security side, I think you mentioned there, we wouldn't expect additional securities purchases or to grow that book will just kind of let that amortize down overtime and we'll remix positively into very high loan yields that we're getting in the market today. And that should be helpful to the overall NIM picture going forward. Yes, about $300 million - $300 million to $350 million. The extra a little bit could come from pro-banks, that's kind of about the level and that would fund a good percentage of our projected loan growth for the year. Okay. And then maybe just kind of circling back to the M&A question. On the other side, you've had a phenomenal job recruiting and attracting really high quality bankers. I'm just curious, how you think about recruiting versus M&A just given some of the challenges that you alluded to? And how do you think about recruiting at this point as we look forward? Yes, I think in both cases, we will be opportunistic. I think our banker size and the number of bankers we have in the company is appropriate right now for the growth rates we see out ahead. So if we're adding, it will be where we see very high quality talent and markets we want to be in. The great news is we continue to see large demand join the company which has been exciting that folks we brought in, have a lot of momentum and a lot of pipeline of talent that really wants to join the franchise. And as we've talked in the past, we're at a unique size and Florida now where we have a lot of brand across the state that we're building and that's been very helpful and bringing in high quality bankers in conjunction with a lot of the disruption that's happening up above us and all the names you know. And so that continues to push down our away, we'll be opportunistic as we move through time, all knowing that we're going to carefully manage cost as we move through this environment and manage our expense base. Same with M&A. It will be opportunistic, if earn backs makes sense, deal pricing works. It's in marks we want to be and we can get comfortable with liquidity and credit. We would look at it, but we just have to be thoughtful about the environment we're in and thoughtful about our index. And David, I'll just add. We've got a lot of production capacity already within the banker set that we already have. So there's not a need to hire to drive growth at this point. But again, we always want to be opportunistic and build the franchise over time. Thank you. And our next question is from the line of Brandon King. Please go ahead. Your line is now open. So another question on deposits. I just wanted to get a sense of the underlying mix there, and outlook for that kind of in the quarter were outflows came from. Was it from more non-interest bearing than interest-bearing? And then how do you see that mix trending for the year as far as your intent to grow deposits? Yes, Brandon. Most of the absorption and deposits in the fourth quarter, as you might expect, came from non-interest bearing accounts. We saw some movement to other account types, so really largely, those are just lower balances and it seems to be consistent with what we've been seeing across the industry. We chose to manage pricing on that in a way that's kept our deposit costs low. We do expect, as Michael said, greater stability in deposit balances going forward, but at incrementally higher funding costs. So, I think the patterns of customer behavior, potentially have stabilized in terms of rate movement. But we'll continue to seek some stabilization through shifting our pricing strategy a bit. Yes, Brandon. I'll just add. I think on just the demand deposit side, we've seen a lot of the surge deposits and just kind of average account balances come down a little bit from that excess liquidity. So, we're probably at a relatively better more stable position, more similar back to pre-liquidity surge levels. So that should be a little bit better, but we will continue to focus on growing core relationships and money market accounts with commercial customers, et cetera. So, you'll see incremental growth there going forward. Okay. And then - I know this might be a little pre-mature, but what sense of how the company and performance levels could performance that the Fed does cut rates to - people expect in the back half of this year and next year. Just what is a position from a balance sheet perspective as far as how company could perform in that environment? Yes, Sure Brandon. Our dynamic NII look would be in an up 100 basis point scenario, we would be up about little over 3% and down 100 scenario, we'd be down a little more than 3% as well. So pretty symmetric outcomes from that perspective and our asset sensitivity has been reduced, as well as we reach higher levels at absolute rates. So, I think we're pretty well positioned there, not a lot of sensitivity and risk as much today. I think we'll continue to evaluate downside risk to rates given the high level that we're at in terms of an absolute basis on interest rates today and minimize downside risk, obviously, for Seacoast as a franchise, our strength is our funding basis, we've seen this quarter. And so we want to make sure that we maintain the monetization of that strength going forward. Thank you and thank you all for joining us. As quarter showed the strength of the franchise, and our focus on building franchise over the long run. It was great to see the strong results for the quarter. And just to reiterate and I appreciate everybody the Seacoast team and the hard work they put in the last year. It's just a truly remarkable year. So, thank you all, and I think that will conclude our call. Thank you. Ladies and gentlemen, we thank you for your participation and ask that you please disconnect your call. This concluded today's call. Have a good day.
EarningCall_923	Good day and thank you for standing by. Welcome to The Scotts Miracle-Gro First Quarter 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. Please be advise that todayâs conference is being recorded. Thank you and good morning. I am Aimee DeLuca and I would like to welcome you to The Scotts Miracle-Gro first quarter earnings conference call. I have recently stepped in to lead Investor Relations after 21 years at Scotts and other finance and strategy roles. Itâs been a pleasure meeting many of you already and I look forward to meeting many more of you over the coming months. Joining me this morning are our Chairman and CEO, Jim Hagedorn; our new CFO, Matt Garth; as well as Mike Lukemire, our President and Chief Operating Officer; and Chris Hagedorn, Division President of Hawthorne. In a moment, we will share some brief prepared remarks from Jim and Matt. Afterwards, we will open the call for your questions. I see that we already have quite a few people in the queue. In the interest of time, please stick to one question and one follow-up. Matt and I have additional time with many of you today to fill in some of the gaps and I invite anyone else who would like to set up some follow-up time to reach out to me directly. With that, letâs move on to todayâs call. As always, we will be making some forward-looking statements, so I want to caution everyone that our actual results could differ materially from what we shared this morning. Investors should familiarize themselves with the full range of risk factors that could impact our results. Those can be found in our Form 10-K, which is filed with the Securities and Exchange Commission. Please be aware that todayâs call is being recorded. An archived version of the call will be available on our Investor Relations site at scottsmiraclegro.com. Thanks, Aimee. Good morning, everyone. I talked in our last call about the challenges of fiscal 2022, and the hard choices and aggressive actions we took to return the company to acceptable levels of profitability. I stated that our leadership team was on it and that we had full confidence in our ability to right-size the business and drive value for our shareholders. This brings me to today. For Q1, we exceeded our total net sales goal on the strength of the U.S. consumer business and the scrappiness of Hawthorne to find opportunities within a struggling cannabis market. Record consumer shipments to retailers resulted in strong load-in, an indicator of confidence in the consumer this lawn and garden season. I will sum up Q1 this way. There is light ahead. We are moving in the right direction. We have more work to do. And once again, we are on it. Our Q1 results reflect the transformation within Scotts Miracle-Gro. We are operating as a very different company than a year ago. We have reoriented our business. We are leaner but more focused on driving the greatest value. We have strengthened our financial position. We are demonstrating discipline. Most importantly, our entire company across all functions is performing to the highest levels. Let me provide context. For Q1, we are working against tough comps in the U.S. consumer segment, where in 2022 we posted a profitable first quarter for only the second time in our history. Consumer engagement remained high ahead of a year that ultimately was impacted by retailer shipments not keeping pace with demand. What our current Q1 numbers do not show is the exceptional performance of our Scotts Miracle-Gro associates in a much more challenging environment. They never blinked and they have approached 2023 with grit and a winning attitude. They are making our operating plan a reality. Hereâs a snapshot of what our hard work accomplished against our internal targets. Net sales that beat the plan by nearly $25 million, gross margin improvement of almost 300 basis points against our plan, EBITDA of $21 million against an internal forecast of zero, net leverage of 5.9 times debt-to-EBITDA comfortably within the covenant maximum of 6.25. We are ahead of schedule and overachieving on Project Springboard, tracking to exceed the original cost savings guidance for the year. We are guiding to mid single-digit decline in SG&A versus fiscal 2019. Overall, I am pleased, but itâs too early to declare outright victory. As I said, thereâs still more work to do. We are reaffirming our outlook for the U.S. consumer business and how we see it performing for the full year. There has been a massive company-wide effort in Q1 to make the lawn and garden season a success. Hawthorne continues to operate in a tough market. We are committed to increasing its return level, bringing it to profitability by year end. This is less about sales, although, the team is working hard on this front, and more about unwinding the overbuild supply chain and excess inventory. So far, we have achieved a 40% reduction in warehousing costs, and reduced SG&A and inventory by a third. Additional optimization and operating efficiencies are in the works. I want to provide more color around our core business as there are two dimensions to it. First, building momentum and making sure retailers are fully loaded and all in with us. We accomplished this in Q1. Second, motivating and energizing the consumer to visit stores browse and shop online and to load up with our products. This is our focus in Q2 and Q3. We will attack both quarters with the same result as we did in Q1. Early engagement is critical. As we know consumers who make their first lawn and garden purchases before May, spend twice as much in the category. I told you last quarter that despite our cost reductions, we would not stop making high value investments to enable growth. This year, we are increasing investments in marketing and promotions, doubling our lawn spend over last year. Overall, our total working media spend is nearly 25% higher than in fiscal 2022 and it will be more efficient and targeted. Total media spend this year will be even higher than the pre-pandemic year of 2019. As you know, the early season has already started in the South. Omni-channel campaigns, radio, television and digital activation are already underway. We are seeing positive POS growth in the South where in the past two weeks, Bonus S is up 68% in Florida and 54% in Texas. We are also seeing strength in grass seed during the same period with plus 24% in Florida and plus 65% in Texas. In March, we will launch a National Early Season Lawns Campaign. Miracle-Gro is partnering with Roku and Martha Stewart to support her new show, Martha Gardens. And this month, we will begin the largest product launch in Roundupâs history with the introduction of a new dual action non-glyphosate formula. These are just a few examples of whatâs coming. Our investments are being coordinated with retailers, who are increasing their spend on joint media promotions and in-store activations. Lawn and garden is the leading driver of foot traffic early in the year and our combined efforts can have a 3 times to 5 times multiplier on POS. I stand behind our operating plan. In a few moments, Matt Garth, who became our CFO on December 1st, will elaborate on the Q1 numbers and our fiscal 2023 outlook. First, I want to revisit our long-term strategy. Although we are managing our business quarter-to-quarter, we are starting to do so with a view toward growth. In fiscal 2021, we unveiled a five-pillar growth strategy. I am reaffirming the strategy. Three of the five pillars relate to the consumer business and the others to Hawthorne. On the consumer side, the lawn and garden pillar is a mature, steady generator of cash. The bulk of the new gardeners who entered our category during the pandemic are still with us. We see sustainable growth with our brands and continue to engage consumers through marketing, innovation and packaging, formulations and products. This includes drought tolerant solutions to create living landscapes that work in concert with the environment. The second pillar is direct-to-consumer, a component of category growth that includes our e-commerce and retailer.com sites. A strong online presence enhances brick-and-mortar POS, direct-to-consumer platforms are used to learn and shop for products. The lawn and garden omni-channel shopper, one who shops online and in store, spend 2 times as much in our category than an in-store-only shopper. With this in mind, we have improved our online product content and visibility, and last month, we migrated to a new e-commerce platform for improved efficiency and enhanced marketing and personalization tools across 10 brand sites. The third pillar live goods is a natural gateway for consumers in their lawn and garden journey. Consumer purchases and vegetables and herbs have remained steady over the past two years and almost 60% of edible gardeners intend to plant more over the next two years. We are strong believers in growth opportunities through Bonnie Plants where we will execute with enhanced precision at growing stations and retail stores, as well as invest in innovation to inspire more consumers to grow their own. I will now shift to Hawthorne, where our strategy is two-fold. Number one, we will retain Hawthorneâs competitive advantage in the cannabis non-plant touching space and professional horticulture. We are the leading solution provider for growers, which differentiates us from those who are primarily distributors. Number two, through our investment in RIV Capital, we will position ourselves to become a key player in the consumer and retail cannabis space in New York, projected to be the second largest cannabis consuming state behind California. Digging deeper into Hawthorne, I have explained how we integrated back office functions and are optimizing our network. We are windowing our focus. Just as importantly, we are innovating. Our scientists in Kelowna, British Columbia, the first R&D facility in North America devoted the cannabis research are running trials on lighting, nutrients, genetics and other technologies to improve yields, quality and energy efficiency. Similar work is underway on hemp in Oregon, Florida and Ohio where we opened a controlled environment facility to supplement our greenhouses. R&Dâs work led to the launch of the marketâs most advanced and efficient LED ever, the Gavita 2400e. We have continued to innovate with the WEGA LED lighting portfolio for indoor growers of vegetables, fruits and flowers. WEGA is expected to surpass last yearâs unit sales in Europe and North America and is now one-sixth of Hawthorneâs business. We capitalized on the trend toward indoor agriculture, an industry but by some accounts is about $40 billion annually in the U.S. with a projected annual growth rate of 13.5% through 2030. Additionally, by modifying the light spectrum for the WEGA, we can make it an excellent no-frills LED option for cannabis growers. One final point on the cannabis industry, when it does recover and it will, growers will be ready to invest in CapEx. We will be there to support the turnaround. Consolidation is happening in the industry and we see opportunities for high-value no-cash partnerships to further strengthen Hawthorneâs ability to provide value-added and innovative solutions to growers. I will shift to the consumer side of cannabis through our convertible loan to RIV, an integrated cultivator and retail in New York that owns the Etain cannabis brand. RIV holds one of 10 vertically integrated licenses that includes a growing and processing operation and four dispensaries, is developing a state-of-the-art indoor growing facility in Buffalo. From a regulatory perspective, New York has tripped over itself in developing and implementing rules, which has prevented the market from reaching its near-term potential. But let me make this clear, New York will become a monster market and we will see it through. There is progress in value in our investment with RIV. To summarize, we have adjusted the speed, which we are moving forward in our strategic pillars. We have shifted from an accelerated pace to a prudent but steady investment approach that strengthens our ability to grow and drive shareholder value. When we are able, we will shift back to a more aggressive shareholder-friendly bias. We remain focused on cost control, EBITDA and free cash flow. When we spoke last quarter, we committed to $185 million of annualized savings across the two phases of Project Springboard by fiscal 2024. We will achieve the full $185 million in savings by fiscal 2023 and now have line of sight to additional savings in excess of that commitment. Reflecting on the year, times like these illuminate the resiliency and strength of our business, and the determination of our associates. We have exceptional leadership and talent. We are bringing rigor to our financial processes, forecasting and capital allocation at an important time in our transformation. Itâs been a real pleasure to work with the leadership team and the Board of Directors, which has been a great partner to me and the executive team. I also want to thank our retail partners and banks. Their support and commitment has been invaluable and will contribute to our mutual success. Thank you. I will close with this. Consumers have emotional connections to their lawns and gardens, which is reflected in our vision statement. We help people of all ages express themselves on their own piece of the earth. This comes to life in our leading brands, innovation and products to meet diverse needs. Through good times, pandemics and recessions, people consistently turn to us to enhance their lives. I have often said thereâs no better business to be in and this is true today as ever. Thank you, Jim, and hello, everyone. I would like to begin by noting my excitement with being a part of The Scotts Miracle-Gro family. I have long been a consumer of the companyâs products and have firsthand knowledge in achieving a great lawn, applying Turf Builder 4 times a year and creating a productive garden using Miracle-Gro soil and plant food. I have been warmly welcome to the company and was transitioned expertly by Dave Evans as he wound down his interim CFO role. Since joining, I have immersed myself in operations, marketing, sales, human resources, and of course, the finance practice. To summarize my experience so far, we have an outstanding team that every day reinforces the open, transparent and accountable culture created by Jim and his team. As this quarter proves, the collective effort to improve the companyâs financial strength through Project Springboard is delivering. The discipline focused on improvements and savings will continue, while we also invest in our future and innovation to extend our leading positions and create significant long-term value. Now let me turn to the first quarter performance. Record December shipments in our U.S. consumer business delivered Q1 segment sales, 8% higher year-over-year and combined with the robust savings from Project Springboard that Jim referenced, more than offset early softness in Hawthorne. We now expect to achieve the $185 million of annualized Springboard savings by the end of the fiscal year, well ahead of our prior commitment. Springboard actions and the continued urgency of our team will create additional upside as we move into 2024, with potential savings above $185 million that we can direct towards innovation, consumer activation and growth. Net leverage at the end of the quarter was 5.9 times adjusted EBITDA, comfortably within our covenant maximum of 6.25 times. Let me move on to the P&L beginning with sales. Net sales on a company-wide basis were down 7% versus Q1 last year. Sales growth in U.S. consumer reflected the strong partnership with our retailers for the early season build-out. The sales and supply chain teams were outstanding in their execution and coordination in delivering on customer expectations, including getting some Q2 volumes out in Q1. For the first half, we still expect the load-in to be aligned with our original plan and slightly higher than the first half of last year. First quarter POS at our four largest customers was in line with our expectations, ending down 19% in units and 8% in dollars. The POS unit declines are consistent across our key customers and categories. As we discussed last quarter, we still expect full year POS units in fertilizers and grass seed to grow by 10% and unit volume and other product categories to remain essentially flat versus fiscal 2022. Early season performance in our Southern markets indicates that we are tracking well against our expectations. We call that Q1 represents less than 15% of the full year and our focus is appropriately shifting to our peak season in Q2 and Q3. As we entered the year with retailer inventory units slightly down versus prior year, a strong Q1 load-in and the expected decline in POS have brought retailer units slightly higher. Replenishment orders in the second half will be driven by consumer takeaway and the inventory management actions by retailers. Our plans align with our retail partners year-end target inventory positions and we are monitoring the consumer condition to ensure we act quickly to align production with any changes in demand levels. Turning to Hawthorne. Continued industry-wide challenges yielded a 31% topline decline year-over-year. This result was driven by lower retail and professional grower activity stemming from oversupply, and general uncertainty on when the market will become more balanced. Our original guidance estimated Hawthorne sales would be flat to down low-single digits for the full year. Given the soft start for the business and the state of the industry as a whole, we now expect Hawthorne sales to decline 20% to 25% year-over-year. There are many reasons to be excited about the future of Hawthorne. We are taking the appropriate prudent actions to achieve run rate profitability by the end of the year, while also strengthening our position for the future. For the full company, we previously guided to low single-digit sales growth for the full year. We now expect that a low single-digit sales decline in fiscal year 2023 is a more reasonable expectation given the market challenges Hawthorne is facing. Gross margin for the quarter was 20%, down 90 basis points versus last year. Strong U.S. consumer volume and pricing, better segment mix and sooner than expected progress against our Springboard targets largely offset lower Hawthorne sales and higher conversion and commodity costs. We continue to expect that gross margin will decline slightly in fiscal 2023 as the impact of lower Hawthorne volume will be offset by Springboard savings. As explained on the last quarterly call, commodities are now about one-third of our total cost of goods sold due to historic inflation levels. At this point, we are about 65% locked on our total commodity costs and north of 70% locked on total COGS, so we have a fairly good visibility for the rest of the fiscal year. We are seeing some bright spots in international freight rates, resins and pallets, while our larger inputs like diesel and urea continued to move with underlying energy related commodities. The team has executed well in working with our customers to manage inflationary costs and delivering pricing to largely cover our dollar exposure. Our progress on Project Springboard is most evident on the SG&A line, which is down $26 million or 17% versus last year. We guided for full year SG&A to be below fiscal 2019 levels, and given our first quarter results, we now expect a mid single-digit decline from fiscal 2019. Moving further down the P&L, interest expense is up mainly due to increased borrowings and higher interest rates, call that we guided to additional interest expense of up to $40 million in 2023. Given the move in SOFR and our spread at current leverage levels, we now expect incremental interest expense to be closer to $60 million for the fiscal year. The adjusted effective tax rate in the quarter was 25.5% and we anticipate the full year ETR will be between 26% and 27%. I will also note here that we anticipate fully diluted shares will increase by approximately 0.5 million shares through the end of the fiscal year. That brings us to the bottomline where our net loss for the quarter on a GAAP basis was $65 million or $1.17 per share compared with a loss of $50 million or $0.90 per share last year. On an adjusted basis, which excludes impairment, restructuring and other non-recurring items, we reported a loss of $56 million or $1.02 per share, compared with a loss of $49 million or $0.88 per share a year ago. On a total company basis, the overall year-over-year decline was completely driven by non-operating factors, mainly higher interest and tax expense. In fact, adjusted EBITDA improved to $21 million this year versus a loss of $1 million last year. Adjustments to arrive at non-GAAP adjusted EBITDA from our net GAAP operating loss in the quarter are detailed in the press release financials and include $19 million related to our ongoing restructuring efforts, including Hawthorne, integration costs and other projects Springboard initiatives. We are modifying our full year adjusted EBITDA guidance given lower than expected depreciation expense, mainly due to the timing of capital expenditures and Hawthorne impairments. We now expect the full year increase in adjustments to be less than $20 million, resulting in low single-digit growth in full year adjusted EBITDA. Now let me turn to an update on our capital allocation approach. We face no near-term refinancing risk and ended the quarter with over $800 million in undrawn revolver capacity. We expect to manage the seasonal working capital build through this year and stay within our financial covenants. We will direct our free cash flow to debt pay down, targeting a net leverage ratio below 4 by the end of fiscal year 2024. We are deploying CapEx of $100 million in 2023 funding maintenance requirements and high return, short payback projects. Our outlook also includes continued support for our quarterly dividend. In sum, we will maintain tight capital discipline and drive leverage down, while ensuring we fund the innovation and capability to deliver long-term growth at SMG. Please keep in mind the guidance that I have provided is not without risk. We are diligently managing what is within our control. Performance in the back half of our fiscal year is largely driven by consumer engagement. We have an aggressive and creative plan that is in lockstep with our customers to activate the consumer early and throughout the season. I also shared Jimâs excitement about the long-term prospects for Hawthorne and the potential for growth and value creation in the business. And let me close by putting the first quarter into proper context. Q1 is typically less than 15% of our full year. The peak of our year is fast approaching and I have confidence in the plans we have put in place and the ability of Mike Lukemire and his team to execute. I wanted to ask first on the U.S. consumer business. There are two parts. One, can you talk a little bit more about any early season reads that might kind of enhance your confidence in, I guess, particularly the lawns business and the recovery that you anticipate in the lawns business in 2023? And the second part is, Iâd love to hear a little bit more about the marketing plans. You are talking a lot about kind of leaning in and activating consumers early in the season across the country and how important that is. Have you taken that approach in the past, has it been successful, what are some of the details around that? Thank you. Okay, John. Hagedorn here. I have been -- I tell people I am not going to like to try to answer all the questions, but this is a good one. The -- first, letâs start with the budget we put in, and I think, it -- people can say, well, you are sandbagging or whatever. We think we are pretty conservative by putting basically flat, and remember, lawns was down 20% last year. And our view is almost entirely on weather. California, Texas, Northeast, Midwest, which I donât need to go through that again, it sucked [ph]. The -- so we are plus 10 with lawns, zero for everything else. So we donât think we have a particularly challenging number, because I think, many of us who have been in the industry a long time said, it was just a very challenging weather year for us and I think the same is true in agriculture. So anybody whoâs following, I think, knows that we speak the truth here. The early season numbers on lawn actually look pretty good. I donât know, Mike? Yeah. No. I mean, the last two weeks are up 57%, 64% and where we apply promotion. It is really -- itâs moving. So we need lawns to -- I mean, we do need lawns to work. In addition, I think, Bonnie is seeing similar kind of like very positive numbers, early season. So I think the early season -- itâs conservative numbers and I think this early part of the season look pretty good so far. So Iâd say that, Patti, you want to talk about -- like Patti runs the brands. Okay. The team, the SBU leaders and the marketing partners, we are really excited about the season and we are, particularly, pleased with our early season activity, which we have already seen in the South, working well with our bonus product offering and we have a program in partnership with the retailers. We are launching in the very early season to reflect Jimâs comments earlier about how we know that early season consumer pays -- spends more in the category. And the program is named the Lawn Savings [ph], and we are doing that in partnership with our retailers and getting out even ahead of their Black Friday promotions. So we will continue to support this consumer, get them in the category early and we are excited about the potential of the program and what itâs going to do to stimulate it. So nobody is messing around here. I think the retailers wanted to work. We want it to work. We are spending behind it. We have got new talent on the sort of regular lawns advertising, we replaced Scotty the Scotsman with a new personality and the big event at the beginning of the season. So we are not -- I think part of what we had happened last year, Jon, was we were sort of waiting for weather before we fire our activation dollars and we never just had that weather. And there gets to be a point where if people havenât bought, itâs getting late in the year and the weather is kind of cool and wet, and people say, my lawn looks great anyway. Thereâs a big reason to get them out early. So itâs a little bit of a back to the future approach, but itâs very well coordinated and being spent against very heavily. So I think we feel pretty good about it, and the POS, so far, I think, says thereâs no significant problem with the consumer at the moment. I guess a question on U.S. consumer as well, retailer inventories, you touched on this. Sounds like they are a little heavy, how much of might that be to your shipments this year? To our plan, I would say that, there is no problem with that pump. And so we are just looking at, in our plants, we baked in that they may want bring them down based on POS a little tighter, but thatâs a conservative look. So they have not really talked about they have a significant amount of inventory. Yeah. Joe and in my prepared remarks, what I said was, we came into the year with retailer inventories low and with the strong December that we had plus lower year-over-year POS, those inventories have come up. However, the retailer inventories are still below where they were last year. And I think internally, Joe, the conversations here, clearly we had a positive first quarter, a lot of work went into that. I think Luke has been pretty clear that sales that came in heâs not really changing his first half load plan. So we are not assuming that its additive. So I think Luke has been conservative for the first time ever, but... That may be our biggest issue, Joe, is just that, we are just working really hard to keep the supply chain type. Okay. Thatâs helpful. And maybe on Hawthorne, three months ago, the outlook for that business was, call it, $700 million of revenue this year. Now we are looking at roughly $550 million. So itâs changed pretty dramatically here in the last couple of months. I guess, one, have things gotten that much worse or do you expect some sort of recovery, and two, assuming revenue of $550 million, what does that mean for segment loss in fiscal 2023? Hey. So, Joe, itâs Chris. I will take the first part and I will let Matt take the second part. Yeah. Itâs really -- itâs sort of your latter assumption there is that we had baked an assumption of some market recovery in the earlier part of this year into our plan going in. We still expect to see some recovery in the marketplace, but it obviously, didnât materialize this quarter the way that we have been hoping. Now, I mean, I think, itâs worth noting, I got a text message from a competitor of ours [ph] yesterday and this was -- this is someone who -- he was the President and CEO of General Hydroponics when we bought that business and someone we stay close with over the years and very plugged into the industry. He reached out to me and prompt yesterday and said, hey, been thinking about you just want to let you know I feel the wins at my back out here in California for the first time in a long time. So we are starting to hear some rumblings and seeing some signs, I think, that the industry is beginning to gain traction, but obviously, with the way the last year plus has gone, we are going to wait before we start counting our checks. But I will let Matt take the second part. Yeah. And on a profitability perspective, we werenât really calling for a significant increase or additive EBITDA to our full year projection coming from Hawthorne. If you remember, coming from where we were last year, doing the efforts through Project Springboard to realign the cost structure with where we are from a demand and revenue component, that was going to bring us to some positive EBITDA contribution. Now with this call down on topline revenue, that brings it down a little bit sort of hovering around breakeven plus 5 and so we are going to navigate that as we continue to go through the rest of the year. . And like Chris just said, whatever bright spots are there, they will kind of mitigate any further downside that may come. So we sort of split the difference on that 20% to 25% outlook coming off of a 31% down first quarter, we are calling again up for quarters going through the rest of the year and so that is some positivity that we see. Just I just wanted to confirm U.S. consumer. So shipments flat for the front half of the year. Just to be really specific, would imply shipments being up in Q2 and with the expectation for POS for the full year, obviously, shipments are going to track below. Is it -- are you saying organic sales growth for the U.S. consumer business should be up in the high-single digits this year and maybe shipments are not down that much, and with that sort of outcome, would you expect margins to be able to re-expand in the U.S. consumer business or is the commodity impact and the other things that you are seeing still going away? So let me clarify something there. What we are calling for is on the topline. When you look year-over-year, you are actually seeing overall volumes down as we pointed to in the call last quarter, but we are pushing through the pricing. That pricing that we put through is carrying through and you see that in the press release, detailed very nicely. So, the first half of the year will be slightly up on revenue. Again, if you look at that first quarter performance outpaced what we thought and Jim spoke to that, we probably pulled in kind of $8 million to $10 million from Q2 to Q1. Jim also just said that we are forecasting that we are going to hold that as we move into the second quarter. So that proves out a really strong first half. However, again, volumes slightly down really, meaning shipments, but that pricing coming through. From a POS perspective, you are absolutely right and I am going to speak to this in two components. One, whatâs been demonstrated and how thatâs performing and you heard that from Texas and from Florida, the early spring season areas of the country performing well and showing good signs of consumer engagement. That leads to where we stand for later in the season here in the Northeast and other parts of the country as things start to warm up. Again, still looking for a POS that is going to be slightly down, but again, pricing very strong, and as Mike just said, should the consumer come in at a good level, recall that we have made adjustments to our operations, we are producing at a lower level at this point to help us from a cash perspective and so we will be working very closely with our customers to ensure that they have the product they need should POS come in stronger. But I -- Jim here. I would say from my point of view and I am not sure what Mike would say on this. But we struggled, I think, pretty heavily with Dave as we kind of put together our forecast for 2023. And Mike and I basically just plug zero and itâs not because we think the consumer is sick or anything, we just wanted to put a conservative number in and plus 10 on lawns after minus 20, which we thought was weather related, we thought was also conservative and safe. So we were basically looking to build the revenue numbers that we are just -- we are safe and so I personally wouldnât read a lot in that. I think it next call, we are going to know a lot more how the consumer is doing. But I would not try to put too much precision into our forecast. We were -- this was a pretty wicked discussions internally on just what we wanted to commit to and not get on the wrong side of everything. So the flat was not because really anything other than we just wanted to put a number we were confident after what we have just viewed as a really crappy year last year. â¦when you say flat, you mean your organic volume shipments in the front half of the year, you are expecting flat, just to be clear. Sorry, I just wanted to confirm that. I didnât mean to interrupt. So volumes are going to be slightly up in the first half across all categories. But when we are talking, I guess, the outlook that I gave, Chris, just to be specific about that slightly higher year-over-year for the first half is on the topline. Okay. Okay. And then just as a follow-up, for the Hawthorne segment, right? So this glide path to improvement in profit by the end of the year, so are you saying that you expect by fiscal Q4 that the segment profit should effectively be zero that you are running neutral, and between now and then, you are running negative. So, again, the idea is to get flat by the end of the year, and then just on that, do you have any view on U.S. consumer margin, the ability to be up or down just on the prior question? So thatâs it for me. Yeah. I think thatâs, obviously, you are coming out of the first quarter you are seeing the segment profitability in Hawthorn. So, yeah, the glide path as we move through the year will be improving and I think we are going to get another bite at that apple here in the second quarter as we start to see some seasonal uptick. So we will keep you abreast of whatâs happening in Hawthorne next time we speak and the full year outlook there, but yeah, progressively improving as we make our way through the quarter. From a U.S. consumer margin perspective, you have seen a lot actually take place in terms of what we had expected, I think, what we had originally communicated and versus last year, what we were able to do. The performance of the team, the costs that have come out of the business, the efficiencies that we are running have put us and you saw it in the gross margin line as well in a good position to start to begin to think about how you recover back to those sort of early 30s, mid-30s type margins in U.S. consumer that Mike like to talk about and that is going to be a combination of higher volumes coming out of the production facility. Thatâs going to come with time and maybe we can get some of that this year. Remember, we called that down for this year. And the other component of that is going to be what happens on the commodity side and so watching that, and like I just said in my prepared remarks, we have about 70% of our COGS already tied up. So pretty good outlook for this year, but that will be helping us progress back to those margins as we move forward. No. I think itâs going to recover as the commodities adjust. We also have a bunch of costs out as well. And so -- and then mix is always a factor for us. So strong lawn season. Itâs a good mix. So I am pretty optimistic we are going to get back there over time, yeah. Two things, if I could. First of all, Matt, you talked about upside to SG&A saves into 2024, and I just wanted to dig in a little bit in 2024, obviously, we got a long ways to go in 2023. But as you think about the amount of SG&A you have taken out of the business and this is mostly on the consumer side. I am just trying to get a sense of how much do you have to reinvest back into the business in 2024 to serve customers and to drive the business or is the cost structure and the operating structure in 2023, whatâs sustainable and then growth in 2024 and beyond levers off of that? I am going to take that from Garth to start at least. If you look at our in-store merchandizing sales force, we are in good shape there. If you look at the innovation work thatâs happening in R&D, we are in good shape there. We are definitely a skinnier team than we did, except, Eric, you might remember that our biggest issue is we were chasing these five pillars was, you in what army. We hired a lot of people. So we are kind of back. It was -- I sort of figured like -- I think people are starting to feel better around here, but there was a lot of PTSD here. This has been -- itâs been a god dam trip. But I think that the teams are smaller, a lot in this building, a lot at Hawthorne, and I think that, thatâs pretty much where we plan to be. I donât think we have a lot of spring back where we have to fill in a bunch of gaps and we are not doing things we should be doing. I think we have been really mindful of trying to spend the money where we need to spend it. Marketing dollars are up. In-store dollars are good. I think we are pretty well configured. And I think we have not committed to everything that we think we can do and thatâs, I think, what Garth is sort of pointing at and saying, thereâs more sort of sustainable cuts to G&A that you will see in 2024. But I donât think any of the teams are really saying we need a lot more people. I think we are -- we were pretty careful in, if you look in my hallway, itâs a lot -- thereâs a lot of different people here now on my side. I think we have been very careful to say the people who stayed are people who think we can operate this business much tighter than we were before. And itâs really the growth we were chasing that growth. I donât think we were unusual. I think a lot of companies right now are talking about that. But we were pretty careful to select people who like the way we set up now and if people acted like they didnât like it, they are not here anymore. So, Mike, anything you would add on that? No. I think we are streamlined or I mean itâs my ninth year of being the President and COO. But when I first took over, it was pretty streamlined. We invested in a lot of things to chase growth, and I think, we have readjusted. But we are not cutting the fundamentals of sales marketing and our foundational things. And then we are just more measured as we build back, we still want that growth, we still believe in that growth. How we get there will be a lot more efficient. Okay. Thatâs helpful. And then the second question, Jim, you mentioned the pillars. I -- on Hawthorne, I just wanted to understand a little bit better your perspective. A quarter or two ago, I think you wrote-off maybe $1 billion you had invested in this business, a quarter into this year you took the revenue target down by 20%. I guess I was a little surprised to hear you say we are still committed to the two Hawthorne pillars from 2021 when that world has changed so dramatic that you had to write-off basically the capital you put in the business. Why you still commit to those pillars, isnât -- I guess I am just trying to figure out your vision, it sounds like itâs the same it was two years ago when this world has changedâ¦ No. I wouldnât say itâs the same. I think we have been -- and listen, we run our own business and so I am not blaming anybody acting like a victim. So donât misread what I am saying. But we kind of paid for that business. We still believe in the growth of the cannabis sector. It is a bloodbath out there. I donât know that was Forbes or Fortune like two years or three years that itâs going to be a bloodbath. Well, it has been. But we are invested there and we look pretty carefully at our business. And Garth coming in with Mike and Chris and myself and sort of saying, who do we want to be? I mean this gets down to the sort of pillars. And I think there was a group of people in here who said, we should just be the best little Scotts company we can be and itâs a kind of low single-digit growth rate and I -- this is not chasing the value of the equity, but it basically says. What we get from direct-to-consumer, what we get from live goods, what we get from Hawthorne is growth. And we got on the wrong side of that. We paid for that. We have taken the pain for it. And the question is, do we just throw -- set it on fire? I had a situation with Smith & Hawken, where during the economic crisis in 2008, we bought that. I think we had thought we had a deal with Home Depot. It didnât come together in a kind of weird screwed up way with Nardelli. But Dave was the CFO back then, and he said, look, we donât have a forecast for profitability here, Jim, and nobody is putting it together and everybody is contributing. And Smith & Hawken, you need to make a decision on Smith & Hawken. He put it directly on me and I sort of -- I -- we burnt that thing. We auctioned off the pieces and it was a pretty bad experience. I regret it today. Smith & Hawken or Hawthorne is not in that same situation. If you could say roughly that half of the profit of Smith & Hawken or Hawthorne is we burn by setting up a supply chain that was just bigger than clearly we need right now. That is worth. I am going to call it north of $50 million. So I think this business can get back to pretty easily kind of a 10% EBITDA margin and thatâs kind of my view of opening stakes to sort of be a contributor here. And I think we get there and I think a lot of this happens, because we resized that supply chain. Itâs hard and you think because thereâs a lot of inventory there and we have got to work through it and we will. But I think we believe that thereâs growth in that business that itâs about a screwed up that you can get. I blame a lot of this myself, on very poor public policy. I mean all you got to do is look at New York, and say, could it possibly go worse than whatâs happening in New York. But remember, in California, they went recreational in California and the entire country was down 50%. So safe banking didnât happen and thereâs a lot of things that we thought would happen. But if you want me to -- I do think if -- because I do reflect occasionally and I think we assumed you would have federal normalization by now. That has been much more challenging than we thought. I think that you look at Oklahoma and Michigan as far as issuing permits far in excess of what the states require. It just -- itâs pretty screwed up. But we just think that without that we are fully invested in the space, we are committed to seeing it through and we think it will give us a growth rate thatâs in excess of what the consumer business can grow, and ultimately, we think we need to show growth and we can do it profitably. I donât know thatâs my view. Absolutely not. And as you said, we sit down as a team and go through this on a fairly frequent basis. You are sitting right now, Chris, and I think, you are very aware of this, Eric. Oh, Eric, I am sorry. Yeah, I have been moving backwards. You have been -- you are aware of this. The industry itself, as Jim just outlined, probably, not in the most advantaged position. However, what we do and I think this is not just me saying it, itâs everyone in the business is fairly unique. And the proposition that we have, the strategic position that we have, the customer position that we have all put you in a very good place for an industry that has a somewhat longer time line than we thought. That being said, you also heard Jim talk in his prepared remarks that this opens up some strategic opt for us, which are we feel we are in an advantaged position, given what we bring to the market and there are others out there who may not be in that position, but we can all benefit with together. So, just looking at it from a holistic perspective, how you maneuver through this market, how you strengthen our position and how we set up a business that on any type of recovery is in a strength and winning position is what we are looking to do. Hey. Thank you. Good morning. I wanted to ask about Hawthorne just digging into it like the 31% decline. I know Vegas completely incremental. I think you said sixth. So is that a sixth incremental. But could you also dig into kind of Signature brands versus non-distributed and how much of that non-distributed kind of rational or kind of shift in focus you are making this year kind of is reflected in your topline outlook for this year and also in the quarter? Thanks. Yeah. Hey, Andrew. So we are looking this year at a Signature to distributed breakout of about 65% on the Signature side of things. So lighting and new trends continue to drive that for us. Yeah. Andrew, itâs Chris. Yeah. I mean, the focus is, and Tom, can give you again more specific numbers and certainly, Aimee and Matt and follow-ups. But the philosophy that we are moving towards here and this is really as we look at how the market has evolved, and frankly, constricted here over the past year, the philosophy is certainly to move towards more of what we are calling internally as Signature Plus model, which is to focus much more on our owned brands. We have some distributed brands that we have unique relationships with. These are brands like Quest dehumidifier. And then thereâs other brands and products that are at least, currently, we think essential parts of our portfolio, parts of our offering that we donât make a great deal of money on and we donât feel like a great value proposition for us, but again, our customers require them. So Iâd say we are in a transitional period right now moving from what has really been a distributor business with a slight emphasis on our Signature brands to much more of a Signature offering. â¦ Andrew, a key focus on the brands that we own, the brands that we have developed, the innovation that we continue to develop and continuing to also take a hard look at partnerships out there in terms of where there are other key pieces of the category that makes sense for us to stay really close to all in the spirit of doing the right thing for the grower. Got you. Just to be clear, I guess, the -- I guess, I will say my question better. So that 65%-35% split, I guess, I was asking, do you expect that 35% to go down quite a bit through the year, i.e., an added headwind to sales, but one that might not show up much is probably. Thatâs what I was asking, do you expect that split to move meaningfully and any kind of associated headwind? Hey, Andrew. I think for the balance of the year, it will probably remain relatively steady, that 35% distributed ratio. Again, I think, the shift towards Signature Plus is going to be something we will see more over the course of, Iâd say, the next 24 months or so is that and we expect that we will be able to replace a significant portion of the distributed sales that we will be choosing to move away from with signature sales. So what we are hoping for is not a huge step back in terms of overall topline revenue from those sales, and again, thatâs not considering what we expect to see in terms of recovery in the marketplace, but a good deal more profitability on each dollar per dollar sale. Hey. Just a few things. One, I guess, looking back at 1Q, I am a little confused of was this significantly better than you expected or was it more of a timing of shipments? You said last year, part of the problem was retailers didnât order in line with demand and so I would assume that there would be kind of out of stocks or inventory that you had replenished? And then you also said that there was inventory problem at retail. So and then I think you had said there were some 2Q shipments that came in 1Q. So I am -- just help me understand like, is this kind of a, itâs a good start and we will no more less or are you really ahead of plan [Technical Difficulty] starting out. All right. I think I understood, although, it became somewhat garbled. So I donât know if you are on a cell phone, Bill. I think the quarter was a lot better than we thought it was going to be. Remember that we had in December, so we were really managing, at least I was very focused on sort of leverage in the quarter. We had agreements with our retailers on a rational first half load. We probably came out a little bit better, not by much, but I think we said $25 million better. But that was not without challenges in that we had that period right before Christmas where it got really cold and shipments became a little bit painful and I think the supply chain team did a fantastic job kind of managing orders to get them out. I donât think we have an inventory problem at all at retail. And I think that the Springboard work, which was the entire company did fantastic and that -- thereâs no one person you can sort of give credit to. It was a real company effort under the gun to get the orders out and drive our expenses down through a lot of very challenging sort of decisions that we had to make, especially in regard to people. So I think we had a good quarter and for those people who know us well and you do, it was a, I think, a lot of last year, I think, we take a step forward and it felt like get two steps backwards that just things were and the great thing about this company is that the company -- this is a company that with a challenge operates well as a group. So that all came together at the end of the quarter to a result that was better than we had expected. We were working to stay within 6.25 coming in at 5.9 was a really good result for us. And a lot of people have written on where they thought leverage was going to be for us. I -- it is a big success for us to have gotten through this. And it goes back to our team and our retailers agreeing to sort of numbers and not excessive load, this is a natural load for us. But what we needed was commitments for Q1 and Q2 that would meet the load. But given our tightness for leverage would make sure that as long as we could execute on our side, we could -- we would get the inventory in and had orders and all of our retailers were fantastic, getting product in and our team did the work. So I think it was a good result. Mike, I donât know. I give a lot of credit to Luke and I give a lot of credit to the people who are running Springboard to -- because this is a -- Springboard is a day-to-day very intimate view cross-functionally at the numbers and meaning that everybody had to do what they said, any deviations had to be noticed immediately. I think in the past, we have not operated at that site, but this was a requirement for where we were. And then I think the sales and marketing side and the supply chain, the operating side of the business did great. And Mike, you deserve a ton of credit for that. No. And I think our retail partners working with us. We all want to be ready. We are spending earlier. We want to get out of the gate fast. We have to get the store sets done. We want the inventory in there. We do not want to be chasing inventory and I think we are ahead of that right now. So and so then we want the consumer takeaway. Yeah. Bill, thatâs another thing, which is that, the retailers -- everybody cares about sort of the spring season. Everybody wants -- has a weird concern about, you got to just read the papers, I think, feels like itâs kind of easing up a little bit I think. But I think if you talk to the merchant partners and you probably do, I think, everybody wants the season to happen. And so people are not backing away from lawn and garden, they are very much focusing on lawn and garden and that benefit accrues to us. Thanks. And then kind of specifically on Bonnie, I mean, I know itâs the gateway you talked about in terms of bringing consumers in. But I think that business has underperformed your plan two of the past three years that you have owned it or had majority of ownership of itâ¦ I would say, urban vegetable actually performed well. We expanded into some flower and that was -- did not go as well, which the whole market was down and our execution wasnât there. So we are really focused on getting out, early indications are, I mean, you are going to see us much more integrated with our field sales in the Northeast. But itâs about execution and not getting out and throwing a bunch of plants away. So I am expecting a good year from Bonnie very focused. But, Mike, I mean, fair enough. But -- if you look at the last couple of years, have you been disappointed? I have been disappointed so especially in our expansion opportunities. So, I miss there. Too many varieties, not very good execution on some of our expansion opportunities. And by the way, part of that is our fault. I mean, we have got a lot of say in what happens there. We pushed them into a lot of stuff. And this doesnât mean against their -- what they wanted to do. But I think that this is a huge volume business and we have learned a lot and change in that business has been, I think, harder. But I think the team is on it and I think Mike and the group down at -- our partners at AFC and the guys at Bonnie and women are pretty organized and they knowâ¦ We try to change a lot at Bonnie and it was a little too much. So but I love that business and it is a gateway for us. I mean it still has that 6% to 8% growth, which is beyond the U.S. consumer and with the tie-in and the execution together is a path for our future growth. So not giving up on it. Yeah. And then one last one on Hawthorne [Technical Difficulty] New York a couple of times, I mean, can you just help me understand if you are going to invest further into that and why that -- you say it could be the second biggest market in consumption. Some would say it already is the second biggest market in consumption, itâs just illicit. And so how does that actually benefit you if they still donât get supplied by Oklahoma and Michigan and California, and how does that actually change and become an opportunity over the next four years or five years? Thanks. Wow, thatâs -- you save the biggest one for last, I think. Iâd start by if people are going to be selling out of their trunks or their cars or in bodegas and the state is not going to do anything to enforce. Thatâs a big problem and itâs a big problem in Canada. And you -- to take a business that is the size of the beer industry and have people making the stuff in their backyard and selling in other chunks of cars. Itâs not how the market should roll out. And thereâs plenty of history, Colorado is a good example of the market being rolled out in a sort of much more thoughtful way. So I think you say it is a big market and we believe that, starting with the governor and the legislature that they will be rational in allowing the people who spent the money or have gotten permits from the social justice side that they can actually make money. I donât think that thereâs any like short- or mid-term requirement for capital in that business. I think that business is properly capitalized. And had -- and maybe one of the few permits in New York that is sitting on in excess of $100 million in cash. So this business is capitalized and giving up on it, just I donât know really what it accomplishes. We donât own shares in RIV. We are a creditor to RIV. And we believe that, that marketplace is right. I also want to talk to our sort of partners that are investors in RIV that we donât view this as just a loan. We view this as this market matures and we have got very simple sort of rules internally on this conversion. I donât know if we have actually talked about it outside, which is that the ability to normalize relationships with banks, meaning the plant-touching businesses can bank and U.S. exchanges, NASDAQ or NYSE allow companies to list that touch plants. These are really our conversion sort of parameters. It doesnât assume on legalization federally it assumes kind of that we can bank and have a relationship with the public exchange and I donât think thatâs that crazy. But I think what that tells people is, we act like we are equity holders, but we are not, we are sort of creditors to that business, the only creditor and the most senior creditor. But the business is capitalized. It is a monster market. We are not chasing multiple states down here. We basically say we won a big state. We kind of focused early on, and I think, you guys knew this. New Jersey or New York, one of the big states in New York, we landed that license. It would be very easy to say you overpaid for it. I think we probably would not our head to that. But thatâs where we are. The business is capitalized and we are going to see this through and we think, ultimately, itâs worth doing. But we are not required to put more money up and we are not chasing it to the extent where we donât think. Itâs actually -- they are actually moving ahead like we want. If the state of New York would actually come out with their rules and listening to people and try to give the -- not just us but the other MSOs who have invested billions of dollars in their footprints in New York, some advantage here for the amount of money thatâs been invested, that would be helpful, but itâs frustrating, but itâs worth doing. And I think every time we say to ourselves and plus we are in. So itâs like thereâs no here for us to go. They are not in default. They have got the money to see this through and we are going to hang in there and be with them. Actually, Chris, anything you want to add on this? Sure. Yeah. I think you said most of it. But look, RIV, which -- and itâs a business that I pay a great deal of attention to and I am on the Board of that company. RIV has one of, if not the strongest and most unique balance sheets in the cannabis industry. As Jim touched on, they donât need further investment, at least not for some time. And New York, yeah, look, itâs right now, I think, anyone who walks down the street in Manhattan and steps into a corner bodegas sees that thereâs a thriving illicit market there. That is not something we expect to persist over the course of many years. When the legal market there becomes the standard, which it will, we believe resonate are positioned to be really just to be -- not -- I wouldnât say dominant in the state, but to take more than their fair share of the market, just because of the resources they have at their disposal. So itâs something we remain really enthusiastic about as the last year had a discouraging moments, of course, it has and anyone whoâs been involved in the cannabis industry, I think, knows that has experienced it. But the commitment on our side certainly on my side remains pretty firm and I think the upside that we have seen, itâs pushed out a little bit, but the end thesis is still in place. Hi. Good morning. I have a few questions. So one is on the leverage of the company and the bonds, so they are trading at $0.85 to the dollar, so you can literally retire like $1.2 billion of debt with this $1 billion of free cash flow you will generate in the next two years and accelerate the deleverage and I understand you have restricted payment restrictions because of higher leverage. But is that an option you can look at and I think that you can buy about $25 million per quarter when it comes to this bond sort of buying it in the open market. So are those options you are looking at? Yeah. I think we have a number of opportunities to use the free cash flow that we are going to generate to deleverage. You just named one of them and the practice of going through and determining what our highest cost debt is and what the opportunities are is what we go through. So as free cash flow is generated, we will direct it to the highest interest rates, pay that down. I will tell you that we do have a very nice maturity profile. We have a very good structure in place for how our debt is laid out and the rates that we have on our bonds are very advantageous. So the prioritization would more than likely be taking care of the Term Loan A, getting the revolver back down and then looking at the bonds for potential opportunities to buy them. Sure. And then, letâs say, over the next two years, you generated this billion free cash flow EBITDA has improved, because raw material prices have come off and leverage is closer to 4x and then what happens, like, will the excess free cash flow then start getting back invested again in cannabis ventures, because you still believe in the long-term thesis, are you... Well, that has -- thank you for the trap. No. I think what we have tried to convey to all of you in this conversation is a disciplined approach towards growth. Whereby we are measuring every dollar and determining the potential payback and the returns that we expect to generate. As it comes to Hawthorne, RIV, those types of investments that we have made and the conversation that we just had with you, you heard Jim say non-cash. The cannabis industry, the companies that are involved in there are at very, very low valuations. There are opportunities non-cash to consolidate and provide a basis for value creation moving forward. The free cash flow prioritization that we talk about, and that you are pointing to is, one, ensure that we are investing in the organic growth and capability of the company, those high return, short payback opportunities we have inside the company, doing that, making sure that we do that. Thatâs $100 million of CapEx. However, we could probably spend $125 million to $150 million and continue to position this company for growth and free cash flow generation in those investments. Moving back down to 4x leverage gives you the opportunity to start looking at the window for the balanced approach between continued debt pay down, M&A and shareholder return activity. Remember, the history of this company in that 3 to 4 range is to pursue shareholder friendly acquisi -- activities through share repurchases, one-time dividends, those types of things and that gives you the flexibility under 4 to begin to do those things again. So a lot on the table as we generate free cash flow, deleveraging over the next two years with the $1 billion that we are going to generate, thatâs priority one and then we will take a look as we move below 4 at the more balanced approach. Sure. And one last question and I apologize if this has been answered already, but U.S. consumer pricing very strong. What is like the private label share right now? What are the price gaps? Is there anything that worries you, if you could just comment on that? Well, we are not concerned about the price gaps right now. We are not seeing share change on private label versus, in fact, we are picking up share, people -- consumers tend to prefer branded. So that is not necessarily a concern. But let me just throw in my too sense on this. I do think that the price gap between private label and national brand mostly us, did get larger than it was as. Remember, the contracts that the retailers had with us re-price once a year and I think that allowed, they were getting, I mean, I think we were losing money on a bunch of those private label deals. I think you will see a correction that we took pretty significant pricing as much as we possibly could and these are double-digit pricing that occurred. But we did not see share loss to private label last year in spite of that increased gap. I think you will see that gap probably come down. But I think itâs worth looking at and we will continue to talk to you guys about that as we look at sort of our pricing versus private label. But I think low concern at this point and probably correcting from last year. Yeah. We were seeing it. Correct. So thatâs in the right direction. So, but we do run price elasticity studies and all that with our retail partners to be sure that. I mean I am more worried about -- I am always more worried about category growth than I am share at this point. Hi. Somewhat on the -- a little bit of the same lines with the getting to your 4 times leverage target by year-end with a slight decline in EBITDA implies a big debt pay down. Can you just talk about what you are expecting from working capital if you still see $400 million inventory release for the year and/or the timing of that? Sure. And just to make sure thatâs correct. We said $1 billion of free cash flow generated over two years beginning last, I think, Q3 and then we also said under 4 times by the end of 2024, so not by the end of this fiscal year. When you are talking through and taking a look at the working capital perspective, the inventory that we are looking to take out is $400 million. That will take place as we move through the year, obviously, we are in a bit of a filled position right now. We have talked about the fact that retailer positions are down 5% to 7% versus last year and that our production is down year-over-year. So we will be releasing that inventory that we have in place. That $400 million in inventory release is going to help generate a working capital benefit this year north of $200 million, right, because we are going to grow some sales, we are going to have some AP thatâs going to come through and we are going to pay, and so the net of all that on working capital is just north of $200 million. That leaves the cash from operations, excluding working capital, less CapEx to generate the balance of our free cash flow this year and next year. And so as you look at it that way, you are kind of looking at north of $300 million in sort of nonworking capital related free cash flow plus the working capital release. Okay. Great. And then if I could just ask a follow-on. You said you have strong liquidity with over $800 million available. Can you just talk about what your drawings were on the ABL versus the AR facility and if that $800 million availability was the two facilities combined? No. The $800 million is sitting on our revolver. The ABL and the AR facility, you are -- we didnât change really over the -- from last quarter that much. So I think they are kind of in the $400 million range. In terms of your -- I am trying to think about elasticity, you said you guys have done some studies and worked with your retail partners and I know that this varies by product. But is there any way for us to think about how much higher your prices are this year versus last year? So I think thatâs probably what you will see is that pricing will show up. Now remember, we have got Real Mondo promotion early season. So I think you will probably see lower retail margins in the early season, particularly on lawns as we promote very heavily with the retailers. But I think, generally, what you would see is a 5% to 10% increase in retail compared to a year ago something like that. Thatâs what I would -- you have. But they are going to pass through some of that pricing or all of it. So I think 5% to 10% higher than last year is what you should expect to see. And the way that she has characterized it previously is from a price elasticity perspective, part of the reason that we are pointing to POS flat in all categories, except for essentially seed and fert being up 10% is because of that price elasticity, right? So raising prices and some of that is offset -- coming in lower volumes. So, net-net, thatâs whatâs driving the POS that way. Great. And then just one follow-up, in some of the prepared commentary, you discussed that there is risk this year. You then immediately talked about consumer engagement. You have locked in prices on 70% of your products. Are there other major risks that I didnât mention there that you guys were thinking about for this year? No. I would say thereâs -- the big question always is the consumer and maybe throw weather in that, because I think thatâs probably the biggest single factor with the consumer. But I think based on the economy, sort of the health of the consumer, that -- the work we have done on the first half is the work that we all know about. We build work with our retailers. We ship it in, load the shelves, merchandize it. At the end of the day, itâs going to come down to the consumer showing up, and that of course, is the risk that I think everybody in the consumer business is looking at. Again, I think we have a pretty conservative sales number of flat to kind of the worldâs crappiest year, get back half of what we lost last year in lawns. Again, we think that was mostly weather. And then, I would say, Hawthorne, just starting to make numbers is -- I would think those are the two risks and we are covering a lot of that risk. When we say we can do better than $185 million. Itâs -- we have got room to cover if we have to. I think on the positive side, which people are starting to feel a little bit positive, particularly on the consumer side is, how much of that money can they reinvest back into the consumer activation. Remember, itâs already up, but I think Pattiâs expectation on the brand side is that, if they overachieve early season that thereâs more money to continue to push activation. So I think the big risk is the consumer showing up in Hawthorne. Springboard savings are ahead of plan, and they will continue to be ahead of plan. And that gives us room to sort of cover and I think that answers the question, I think. Thank you. Thatâs all we have -- the time we have for questions. Thank you for participating in todayâs conference. This does conclude the program and you may now disconnect. Everyone have a great day.
EarningCall_924	Good morning and welcome to the WestRock First Fiscal Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. Good morning and thank you for joining our first fiscal quarter 2023 earnings call. We issued our press release this morning and posted the accompanying presentation to the Investor Relations section of our website. They can be accessed at ir.westrock.com or via a link on the application you're using to view this webcast. With me on today's call are WestRock's Chief Executive Officer, David Sewell and our Chief Financial Officer, Alex Pease. Following our prepared comments, we will open the call for a question-and-answer session. During today's call, we will be making forward-looking statements involving our plans, expectations, projections, estimates, and beliefs related to future events. These statements involve a number of assumptions, risks, and uncertainties and that could cause actual results to differ materially from those we discussed during the call. We describe these assumptions, risks and uncertainties in our filings with the SEC, including our 10-K for fiscal year ended September 30th, 2022. We will also be referencing non-GAAP financial measures during the call. We have provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the appendix of the slide presentation. As mentioned previously, the slide presentation is available on our website. Thank you, Rob and thank you all for joining our earnings call today. This morning, I'll provide an overview of our fiscal first quarter results, followed by a review of our strategy, and progress on our transformation. Then I'll turn it over to Alex, who will review our segment performance in more detail review our adjusted free cash flow, and provide our outlook for the fiscal second quarter. We will then move to Q&A. Turning to our first quarter results on slide three. Net sales were comparable to prior year at $4.9 billion and consolidated adjusted EBITDA declined 4% to $652 million. Adjusted EPS was $0.55, a decrease of 15% compared to the prior year quarter, and the company generated $30 million of adjusted free cash flow. It's important to note that consolidated adjusted EBITDA was negatively impacted by $119 million due to economic downtime and weather disruptions. Pension and foreign exchange rates also negatively impacted our year-over-year consolidated adjusted EBITDA growth by $57 million combined. As we anticipated, the first quarter operating environment saw continued inventory rebalancing, elevated inflation, and shifting consumer spending. These trends primarily impacted external containerboard demand as well as our Corrugated Packaging segment. However, Corrugated Packaging improved quarter-over-quarter with North American packaging shipments up 2% and to 373 million square feet per day. We continue to balance our supply with our customers' demand, and we incurred 356,000 tons of economic downtime during the quarter. Our Consumer Packaging business and external paperboard continue to see consistent demand supported by exposure to several resilient end markets and adoption of our plastics replacement solutions. During the quarter, our consumer business was negatively impacted by weather disruptions and other items in several of our mills. However, we continue to see healthy demand and backlogs. The resiliency of our consumer business illustrates the benefit of our diversified business model and differentiates us in the market. Longer term, it also positions us well to capture more share of wallet as we are the only paper and packaging company able to offer a full range of packaging solutions, including machinery and automation. Corrugated Packaging adjusted EBITDA margins, excluding trade sales, were 14.2%, an increase of 70 basis points. Consumer Packaging adjusted EBITDA margins were 15.1%, an increase of 20 basis points. Both Corrugated and Consumer margins benefited from strong year-over-year pricing. We are continuing to implement previously published price increases in our consumer business, which should continue for several more months. Global paper margins declined 320 basis points to 14% as inventory rebalancing and softer demand pressured results. Distribution adjusted EBITDA margins increased 140 basis points to 3.4%, primarily driven by favorable selling price and mix. We ended the quarter with net leverage of 2.35 times, slightly above our targeted range of 1.75 times to 2.25 times. We intend to use proceeds from the expected sale of our stake in RTS and our Chattanooga Mill as well as our free cash flow to return leverage to our targeted range over time. We remain focused on executing our transformation and striving toward the goals we outlined in our Investor Day last May, recognizing the uncertain macroeconomic environment. We see significant opportunity to drive productivity, increase our margins and improve our return on invested capital. We will continue to leverage our robust cash flow to invest in growth, manage our leverage and return capital to shareholders. Before moving to an update on our transformation initiatives, I'd like to highlight that for the third consecutive year, WestRock was included in the Dow Jones Sustainability North America Index in recognition of our commitment to sustainable business practices. The index recognizes the top 20% of sustainability performance among the 600 largest US and Canadian companies. Sustainability is core to what we do at WestRock, and we're proud to be recognized for our efforts. And I'd like to thank our 58,000 team members for living our values in everything they do. Turning to Slide 4. Last May, we communicated the four key pillars of our transformation strategy, and we continue to make progress in each of these areas. First, leveraging the power of One WestRock. Given WestRock's broad capabilities and scale, we are uniquely positioned to deliver value to our customers and serve their packaging needs. An ongoing example of this is our relationship with Molson Coors. Through our partnership, Molson Coors is replacing their use of plastic rings with our cluster pack packaging and automation solution. Molson Coors estimates this solution will eliminate over 1.7 million pounds of plastic waste annually by 2025. The complementary relationship between our machinery business and packaging serves our customers well, creates deeper relationships, and drives organic growth. We now have over 5,100 machines in our installed base and it continues to grow. We see strong demand for our machinery solutions with backlogs of 12 months as of the end of the quarter. Our next pillar is innovating with a focus on sustainability and growth. We are investing in innovative solutions to help our customers meet their sustainability targets and displace plastic packaging with more than 225 innovation projects in development. More than 30 of those projects are related to plastics replacements. Our plastics replacement revenue continues to grow and is currently estimated at a $365 million run rate and we are targeting increasing that to more than $700 million in run rate revenue by fiscal 2025. Our third pillar is relentless focus on margin improvement and increasing efficiency. We are executing on our productivity initiatives and we are on track to achieve $250 million in cost savings in fiscal 2023. These initiatives are driving savings through logistics and planning optimization, centralized procurement, SG&A reductions, and efficiencies in our mill and converting network. We continue to see significant cost-saving opportunities beyond fiscal 2023 and we remain focused on unlocking these savings to expand our margins. And finally, executing disciplined capital allocation. We remain focused on using our cash flow to drive value through our disciplined capital deployment strategy. Last year, we invested more than $860 million to maintain and improve our assets. We've increased our dividend over 37% in the last seven quarters, while also repurchasing more than $700 million of our stock. We are also continuing to refine our portfolio to focus on the most attractive markets, reduce volatility, and improve our return on invested capital. Last year, we permanently shut capacity in higher-cost facilities in Panama City and St. Paul, enabling us to redirect significant capital investment toward better use in other assets. In December, we closed on the sale of two non-core URB mills and we continue to work toward closing on the sale of our stake in RTS and our Chattanooga mill, which remains subject to regulatory approval. We also recently completed our Grupo Gondi acquisition, which complements our North American footprint and increases our exposure to the attractive Latin America market. The IMF projects the strategically important market will grow more than 50% faster than the United States, driven by economic growth and export product expansion in produce, protein, and industrial goods. In addition to attractive financial returns, Grupo Gondi's high-quality assets bring us closer to many of our large multinational customers operating in the region. Grupo Gondi is already contributing to our growth, with adjusted EBITDA of $17 million since the acquisition closed in December and its full year results were in line with expectations. The results for Grupo Gondi are included in other unallocated this quarter given the timing of the closing and we are near finalizing how we will report it longer term. Thank, David. Moving to our consolidated quarterly results on Slide 5. The first quarter net sales were roughly flat year-over-year at $4.9 billion, and consolidated adjusted EBITDA declined 4% to $652 million. Consolidated adjusted EBITDA margin was 13.2%, down 50 basis points year-over-year. Price and mix positively contributed approximately $454 million year-over-year. This benefit was offset by cost inflation, lower volumes and higher operating costs. Note, consolidated adjusted EBITDA was negatively impacted by $119 million due to economic downtime and weather disruptions, which impacted our volumes and operating costs. Pension and foreign exchange rates also negatively impacted our year-over-year consolidated adjusted EBITDA growth by $57 million combined. Turning to Slide 6. Corrugated Packaging segment sales, excluding trade sales were $2.2 billion, an increase of $26 million or 1% year-over-year. Adjusted EBITDA increased $20 million or 7%. Adjusted EBITDA margin, excluding trade sales, increased 70 basis points year-over-year to 14.2%. As David mentioned, we saw 2% improvement quarter-over-quarter with per shipping day volumes of 373 million square feet. Strong pricing and mix contributed $206 million, largely offset by $79 million of inflation, $58 million from lower volumes and $39 million from higher operating costs. Results were negatively impacted by $60 million due to economic downtime and weather disruptions during the quarter. We are managing our business for current conditions, and we'll continue to balance our production with our customers' demand. Turning to the Consumer Packaging business on Slide 7. Segment sales increased $76 million or 7% year-over-year to $1.2 billion. Adjusted EBITDA increased $14 million or 8%, and adjusted EBITDA margin was 15.1%, an increase of 20 basis points year-over-year. Strong price and mix contributed $132 million, partially offset by inflation of $54 million and higher operating costs of $34 million. Consumer packaging demand remains strong and backlogs are healthy. This diversification from our consumer business reduces earnings volatility and provides attractive long-term growth opportunities. Turning to Slide 8. Global Paper segment sales decreased $229 million or 17% year-over-year to $1.1 billion. Adjusted EBITDA declined 32% to $157 million with adjusted EBITDA margin declining 320 basis points to 14%. While adjusted EBITDA declined year-over-year, it was 4% above the first quarter of fiscal year 2021. Strong price and mix contributed $115 million, more than offset by volume of $114 million and inflation of $48 million. Note that adjusted EBITDA was negatively impacted by $56 million due to economic downtime and weather disruptions. We saw weaker demand for containerboard and more resilient demand for paperboard during the quarter. Export containerboard declined 65%, while domestic containerboard declined 33%. In the current environment, we are continuing to prioritize margin over volume in our Global Paper segment. I'd like to mention that we will face a difficult year-over-year comparison in the second quarter, as Global Paper revenue increased 36% year-over-year in the second quarter of fiscal 2022. Next, our distribution results are on slide nine. Segment sales decreased 1% year-over-year to $322 million, and adjusted EBITDA increased 66% year-over-year. Strong price and mix contributed $20 million, partially offset by inflation of $13 million and volume of $3 million. In the quarter, favorable selling price and mix contributed to the 140 basis points of margin expansion. Looking to the second quarter, our distribution business also faces a difficult year-over-year comparison as distribution revenue increased almost 30% year-over-year in the second quarter of fiscal 2022. Turning to slide 10. During the quarter, we generated $30 million in adjusted free cash flow, down $54 million year-over-year driven by higher capital expenditures. We expect fiscal year 2023 adjusted free cash flow to be above $1 billion for the year, making this the eighth straight year of adjusted free cash flow above $1 billion. We ended the quarter with net leverage of 2.3 times. Looking ahead, we're focused on returning that leverage to our target range of 1.75 times to 2.25 times. Turning to slide 11 and our other financial guidance. We remain confident in the long-term trajectory of our business. WestRock's diverse portfolio of sustainable fiber-based packaging and complementary machinery uniquely position us to serve our customers. We are focused on serving our customers and growing our business through cross-selling, packaging innovations, and plastics replacement solutions. At the same time, we see significant opportunity to reduce costs by the following actions; one, leveraging our scale to capture cost savings and procurement; two, optimizing our logistics and planning; three, driving productivity in our mills and converting network; and fourth, streamlining our back-office operations. That said, we're not immune from macroeconomic conditions, which have created uncertainty in the near-term. As such, we're removing our full year guidance. Our forecast for second quarter consolidated adjusted EBITDA is $625 million to $725 million and adjusted earnings per share is between $0.31 and $0.61. Some assumptions behind our sequential outlook include the following; favorable costs driven by natural gas down approximately 20% to $5 per MMBtu; OCC costs stable at $35 per ton; and stable costs in virgin fiber, chemicals and freight. An effective tax rate between 23% and 26% and approximately 257 million diluted shares outstanding. We are planning 132,000 tons of scheduled maintenance downtime across our system in the second quarter. Thanks Alex. While the current environment remains dynamic, WestRock's diversified business model and financial strength positions us very well. Our ability to provide corrugated packaging, consumer packaging and complementary machinery solutions differentiates us in the market and uniquely positions us to deliver a complete range of sustainable packaging solutions. In addition, our distribution business provides an additional channel for our products and allows us to serve a broader customer base. Our strong balance sheet and robust cash flow engine enables us to invest in our business and execute our transformation agenda in the midst of changing market conditions. We remain excited about the future, and we look forward to providing you updates on our progress. Thank you. Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Kyle White from Deutsche Bank. Please go ahead. Hi. Good morning. Thanks for taking the question. I guess, I just wanted to touch on the guidance and the full year outlook and the decision to remove it. I guess, where is the most uncertainty that you're seeing in kind of the rationale for this decision? Is it on demand in corrugated and implications on pricing, or are you seeing a similar level of uncertainty in consumer as well? Yeah. Thanks, Kyle. This is David. And we really wanted to be very transparent with the economy and where it's at. So to answer your question, our packaging business in both consumer and corrugated came in fully in line with our expectations in Q1. We have full confidence in our packaging business, both Corrugated and Consumer and our full year forecast. So even despite the soft macroeconomic conditions in packaging, our sales, our EBITDA and our margins were all up in Q1. Where we see the biggest headwind is in our Global Paper business. Our customers really experienced much higher inventory levels in the last quarter, with a much softer demand environment than they even expected. And that was particularly true in the export market. There was no lost business. Our relationships are extremely strong. It was just an uneven global macroeconomic environment. So as we look at the full year, the visibility, it was just difficult for us to ascertain purely in Global Paper in this environment. Our customers are definitely expecting more normalization in the second half of the year, and we do expect sequential and steady improvement. We're focused on what we can control and manage with our cost and productivity. We're confident that we'll get back to normalization. It's just probably going to take a little bit longer than we anticipated and our customers anticipated. And so we felt the best thing to do was to provide a quarterly forecast to get back to more confidence in the global environment. And just as a reminder, Kyle, our global Paper had an incredible year in 2022. Sales were up 20% almost. EBITDA was up 40%. And going back to 2021, we're still up 3%. So we see the paper business and its cyclical downturn. We have a tremendous leadership team that's actively managing through it. We've all measured these turns very well in the past, and I'm confident we're moving through the cycle and paper as the year progresses. Sounds good. And then on the outlook for next quarter, are you able to give us a sense of how shipments have trended here in January for both the corrugated as well as the consumer business, or maybe what the outlook assumes for demand? Yeah. So Kyle, we've definitely seen Corrugated stable from Q1 into Q2. Year-over-year, it's actually a slight uptick. So we feel good about where that's going. And consumer is truly a resilient business, very strong through this cyclical environment. January is off to a really good start. One comment I'd make on consumer. We did have weather impact at seven of our mills in December. So that did impact us a little bit, but the business is strong and resilient. I'd also say on the paperboard side in Global paper, it's been resilient as well. So really, when you look at our full year forecast and where we're at. It's really just the uncertainty around the Global Paper business, particularly in the export market. Thank you. David, just a quick clarification. So you mentioned Corrugated, a slight uptick year-over-year. I assume that -- does that mean that the year-over-year comparisons are looking a little bit better, i.e., it's still down, but not quite as down as opposed to actually seeing an uptick? Yes, Mark. Sorry, if I wasn't clear. So if we look at how we exited Q1 year-over-year, we're seeing a slight uptick over Q2 year-over-year. But we do still see the volume down. Okay. Thank you. So I mean -- and also just on the Global Paper, I assume that's pretty much containerboard. Is that fair to say as opposed to the Consumer Packaging grades? And can you share with us at this point what percentage of your -- maybe in the prior quarter, what percentage of your containerboard production was going into the export market? So if you look at in typical environment, it's usually about in containerboard, it's about 75% domestic, 25% export. And then we just saw the dramatic softness more on the export side. And again, just to reiterate, it wasn't lost business. It wasn't anything other than was a really tight market in 2022, as you know. A lot of our global export customers were getting as much inventory as they could with the tight market. They saw a lot of softness last quarter with their customer base, so they were just had over inventory. And when you compare our containerboard customers to our corrugated customers, I would say, we're pretty much toward the end of inventory rebalancing on that side of the business. But in our containerboard business, they're a little further behind. So that's just where we wanted to get a little bit better visibility in the full year. Okay. And then just lastly, you, Alex, I think, mentioned kind of a number of actions that you were looking at to improve on cost performance, et cetera. One thing I didn't hear was anything -- any additional potential action on the footprint? Are you, at this point, satisfied with the footprint, or might it make sense to be looking at additional footprint actions? Yes. So consistent to what we said back at Investor Day and our actions in 2022, we are going to be continuing to optimize our footprint. As you know, we took action last year with the closure of St. Paul in Panama City, the sale and divestiture of our URB mills and RTS stake. And so we do want to continue to improve our vertical integration. We'll continue to optimize our footprint, especially where we maximize our CapEx for returns. And we'll continue to do that. But again, this is a cyclical business. We think we're kind of near or at the bottom of the trough. So we think the upside and everything our customers are telling us for this as we get through the year, it's going to continue to improve. So we'll balance all of that in our supply with our customers' demand. Thanks for all the details and the commentary. So I guess the first question I had for you, one of the things we noted in the slide is it looks like your maintenance downtime schedule, the tonnage that you have out is lower in the third quarter than you previously had been guiding to. Correct me if I'm wrong in that regard. But if there is a change that's worth noting, what's going on there relative to your schedule and what's the impact in terms of earnings? Yes. George, there's no material change in our scheduled maintenance downtime. I believe in third quarter, we have 127,000 tons, which I believe is consistent with where we've been. But if that's different, we'll look into it and -- we can follow. I think you're at $165 million in the last slide. So I was just checking if there's anything notable there, that's all. No. We're anticipating about 130,000 tons of David mentioned. And that's sort of in line with our normal maintenance schedule. You'll know that sort of the end of the calendar year tends to be our -- and first of the calendar year tends to be our heavy maintenance period, and that's consistent with the way we've always done it. Fair enough. Fair enough. Second question, kind of a two-parter. Can you talk -- you said backlogs are good. I don't know if you specified a number if you did, apologies, but could you tell us what the backlogs look like in consumer across the grade? And can you give us an update? You used to provide the enterprise sales metric where the number of customers or amount of revenue that's being generated by customers buying $1 million of both consumer and corrugated packaging from WestRock look like. Can you give us some -- here's where we are, here's where we've been on that discussion point, so backlogs and enterprise sales. Sure. I would tell you, George, first off, on the consumer side, our backlogs are consistent with what they've been in 2022 as we head into Q2. So that's why we feel it's a very resilient business. We feel good about where we're at with our -- both our consumer business as well as our paperboard business. And on the enterprise piece, I appreciate you asking that. We feel great about it. We are still tracking over $8 billion in sales of customers that buy over $1 million in Consumer and Corrugated. And what's been really encouraging is the dialogue we're having with customers now that we have Gondi. Many of those customers, particularly in beverage and some industrial customers have large operations in Mexico. And so we're having really good dialogue both on the Corrugated and Consumer side. So, we -- this just really emphasizes the importance of that Gondi acquisition. Okay. Last question, I guess, do you have any kind of growth sort of a delta, the enterprise sales or number of customers, something like that, that would show the progress that you're getting from that versus, say, last year or two years ago? And then my last one, would it be fair to say that not getting into forward-looking pricing, but the price change that we have seen in containerboard will likely see most of that impact in WestRock's results in fiscal 2Q and fiscal 3Q? And if you could give us a cadence? Thanks guys and good luck in the quarter. Yes, sure. So, to start with your question on pricing, obviously, we don't forecast what we believe pricing is going to do. But with the pricing that has been announced, if you look at our corrugated business, about 65% right now of contracts are tied to RISI pricing and the contract implementation is typically about three to six months. So, if you back out when those increases were announced and you add about three to six months, you'll see that in 65% plus of our corrugated customers. You do see that pricing much more immediate in our Global Paper sales. Conversely, last year, as you saw that we got price increase very quickly on paper, and there was the delay of about three to six months side. Hey good morning. Thanks for taking my questions. Just I want to start -- big picture question. And just sort of following up on the Investor Day and some stuff we've talked about before, can you remind us how you're thinking about margins and really in the Consumer and the Corrugated segment as I recall, we were targeting about 20% EBITDA margin in both of those. But can you give us an update on kind of what the margin targets are and maybe on the timing where we stand? Yes, sure. So, if you go back to our Investor Day, we targeted greater than 19% margins overall for the company. And we are laser-focused on value over volume, driving our value-added solutions in both our Corrugated and Consumer business. And that ties in with our customer base, our segment, our pricing discipline, but also our productivity and cost out. So, even as you look at Q1, which is historically a low-margin quarter just on the cyclicality of the business and even in a softer economy, we were able to grow margins in both corrugated and consumer. So, we feel we're right on the right path. We're committed to the focus of our 2025 targets for Investor Day. Okay. But I mean, is it fair to say that margin improvement in Consumer and Corrugated is kind of the focus right now. That's correct. We'll also driving growth, but it's profitable growth. That's the way I'd say it, where we provide great solutions for our customers. Sure. Okay. That's understood. And then, I don't want to dead horse, but just a follow-up on the guidance. You said that Q1 was basically in line with your expectations, which if you add back the weather, you sort of hit the midpoint, you're pretty close to it on EBITDA. So, I'd just like to understand where -- and really when is the uncertainty. And I mean, is this about second half container export demand that just isn't clear right now, or should we take this to mean there's a higher degree of uncertainty around the second quarter? I'm just trying to square those comments of sort of Q1 falling in line and then being more uncertain about the outlook. I guess, Cleve, let me take a swing at it. First of all, as David mentioned, in his response to the prior question, we feel really, really good about how the converting businesses are performing. They're performing directly in line with our expectations. The segment that has been more challenged has been Global Paper, driven by the issues that David mentioned around inventory, inventory destocking and customer demand. So, that's really -- it's the macroeconomic environment that's driving the uncertainty. We feel really good that the team is executing well, and the team is performing against everything that we can control. We're taking cost out of the back office. We're driving operational efficiencies. We're managing the slowdown in the economy through prudent use of downtime. And so we're controlling everything we can control. As David mentioned, we still saw margin expansion even in the converting businesses. So the real uncertainty comes from Global Paper and just not knowing when that business begins to rebound. But again, we feel good that it will strengthen as we get to the back half of the year. But given the level of uncertainty, we just felt as though it was prudent to shift to a quarterly cadence as opposed to an annual cadence, which I don't think is that uncommon for cyclical industries like ours. Sorry about that. Hey guys, quick question. On your consumer business, if I'm looking at it right, your volumes were down about 4%. Was that mostly weather-related? Anything else that's driving that? Dave, you commented how backlog has been pretty strong. Do you expect demand in the consumer business to be like flat to up this year for the most part? Yes. So, there was a couple of things. Weather certainly played a role in December. We also have some really large national accounts that as it got to the end of the year, they just wanted to reduce their inventory levels. And then how January started, we feel we're back to where we were at 22 levels. So, if you look overall, as far as a dollar basis, which I know is also common that way to look at it, it's flat, which is similar to how the industry looks at this when you take out FX and pricing. So, we continue to see strength in our consumer business and where we're at. And I think there was just a weather related and just some inventory relations with some large customers at the end of the year. You talked about how your export business was a little weaker in containerboard. Are you seeing any of that on your boxboard side? I mean, I believe the SBS you probably explored a little bit? Yeah. So because of the weather, we actually could have sold a little bit more. But because of the weather that happened in December, as I mentioned, our sales were still up in paperboard. So we're not seeing paperboard trends similar to containerboard at all. Okay. Super helpful. And then from an inflation standpoint, Alex, really appreciate the color you provided for fiscal 2Q. But how do you think about it more holistically on a full year basis some of the major inputs? And then on the nat gas side, certainly, it's pulled back quite a bit lately. Can you remind us how much of it's hedged because I think you started implementing a hedging program more recently? Yeah. So we're probably hedged in the sort of 40% to 50% ZIP code. What we've done is our assumption on natural gas for the second quarter is around $5 per MMBtu. So that's contributing about a $25 million tailwinds to EBITDA, when you think sequentially. When you think about the full year, the full year outlook for natural gas, we expect it to stay relatively stable. So on a year-over-year basis, down about, call it, 25%. The other area is where we are seeing favorability again, sequentially versus â and also year-over-year are fiber and freight. So fiber, OCC, sequentially, we anticipate being roughly flat, up about 3% to, call it, $36 a ton and then continuing to strengthen as we get through the balance of the year, but that's offset by virgin, which is down about 8%. So that becomes about a $20 million good guy to EBITDA sequentially from Q4. And then freight has mitigated as well. So sequentially, we anticipate that being down about 1%. The area where we're seeing some inflationary effect offsetting the good guys that I just mentioned are both wages and chemicals, which are both up about 4%. So that's about a $75 million headwind sequentially, and that will persist likely through the balance of the year. And then just while we're talking about kind of guidance and the outlook, important to point out Gondi is going to add about $12 million of incremental depreciation for the quarter and about $47 million of interest. So as you're getting your models tweaked, get those two inputs. Well, what we do is we dollar cost average it over the course of every month, we make a purchase and we're in the market dollar cost averaging it. So like I said, the blended number that we can share is $5 per MMBtu over our overall portfolio. Got you. Super helpful. And then from a cash flow standpoint, I'm pretty impressed despite the uncertainty you're able to reiterate your free cash flow guidance. Any offsets that you're seeing that's helping you kind of sustaining that level of free cash flow. And in this current environment, David, any thoughts on how you want to deploy that capital? Maybe I'll take the cash flow comment, and then David can talk about where he's going to spend it. So look, the biggest delta in the quarter was on CapEx. So if you look sort of â it was about $100 million higher year-over-year from CapEx. A lot of that is driven because of the supply chain constraints that we had last year, we were accelerating purchases to get the orders in the system, and now we're deploying that capital into the system. So, we do feel as though there's some opportunity to manage that as we get through the balance of the year. The other area where I think we can see some improvement is in working capital. So, as we came into the end of the year, we did see several of our large customers basically just managing their cash flow across the period, and that had a negative impact as well. So, we think both of those are strong levers we can pull. One of the things I'd point out, as we said in the prepared remarks, for the last eight years, we've generated more than $1 billion of free cash flow, and you all have lived through the cycles of the last eight years, including COVID. And so I think we continue to be extremely confident in our ability to generate strong cash regardless of the uncertainty around the profitability and the revenue growth. And David, do you want to talk about the deployment? Yes, I think it's consistent with what we demonstrated over the last year, year and a half is we'll continue to get our leverage in the range that we've targeted between 1.75% and 2.25%. And with Gondi came up, we'll get that paid down fairly quickly. And then with the cash flow generation, we'll continue with a growing and sustainable dividend. And we'll be opportunistic in our share repurchases when we think our stock is undervalued. I apologize if this has been asked, we joined a minute late. I wanted to ask about this -- the disclosure as it relates to economic downtime. And you called it out in your Corrugated operations, which I think historically speaking, we would have associated economic downtime with mill activity. I thought with the new reporting structure that's sort of been segregated. So, I'm just -- was this related to Corrugated operations that we're also taking downtime, or maybe there's a transfer effect? I don't know how to think about that. Yes. So, let me take that one, Gabe. So, economic downtime, it is directly related to the mill operations. As we go through our process of dividing up profitability between our Corrugated segment and our Global Paper segment. We basically do that following the transactions. So a portion of the economic impact of that downtime will fall in the Corrugated segment, Packaging segment. And another portion of that will fall into the Global Paper segment. So, that's why perhaps it's a little confusing. Previously, when we did that historically, it all would have been blended within the Corrugated Packaging because that's where it all set. But it did impact our it did impact our Corrugated business. As David mentioned, our consumer business remains strong, both on the Consumer Packaging as well as the consumer side of Global Paper. So that's really just as we're showing you the fully integrated margins by the segment, that's where you see the split out. So does that help, I hope? It does. It does. And then again, I apologize if it was addressed. But as you look across the system in terms of inventories, we on the outside world, we're trying to understand where you're at? And I know the destocking term has been thrown on quite a bit. Just where you're at with inventories going into the heavy maintenance outage period in your Corrugated system specifically. Maybe I'll take the internal inventory question, and then David will, I think, comment on how the market looks. So from an internal standpoint, I think we feel as though our inventory levels are looking quite good. We did take some higher inventory at Mahrt on the consumer side of the business as we were anticipating some potential disruption related to the labor issues that we've talked about. And then we also tend to take inventory as we're planning for the maintenance downtown. So we did have inventories that were perhaps elevated, but not elevated beyond what our expectations were. David, do you want to comment on the market conditions? I do. Maybe just one other comment. Alex mentioned Mahrt, and I did want to let you know that the contract was ratified yesterday, so our employees will be back to work as soon as administrative will be possible. So we feel great about that. That will certainly help us as we move forward on our productivity issues. And just the team has just done a great job ensuring that there was no disruption in our customer service. As far as overall customer inventories, I think destocking at our corrugated customers is largely behind us. I think it's getting back to normalized levels. There's a few here there, where maybe little bit elevated but as I mentioned earlier, it's really global paper specifically even more so in the export market where they still have elevated inventory levels. And I go back to last year when it was tight, I think there was a lot of ordering to make sure that they kept their customers secured with product. And so with a little bit of softness in the global economy, I think their customer orders were softer than they anticipated. So they're still sitting on some elevated inventory levels, but they are working through that. And that's why, as Alex mentioned, as we get toward the second half of the year, I think we'll be -- have more confidence in the normalization of where we're at. Hi, good morning. David, just following up on that last point. When you look at your global paper export customers and you think about the inventory situation, would you draw any differentiation between Europe, Latin America, I guess Asia is maybe a bit smaller for you. And when you talk about normalization in the second half, is that calendar -- second half calendar 2023, or is that your fiscal second half? Yes, Anthony, thanks for that. It's pretty consistent. You hit it. I mean, we export Latin America, Europe and to a smaller extent in Asia Pacific. It's pretty consistent across all of those as far as kind of the levels of inventory that our customers are seeing. So I think -- don't think I could really classify one region's ahead of another. It's just been pretty consistent. I think our customers are telling us we were just really worried last year when the market was so tight, and then they just experienced a little bit of softness more so than they anticipated. So that will, I think, come back. And then Anthony, I apologize what the second part of your question was? Yes. And I think that goes part to the transparency and our guidance is we are on a fiscal year. So obviously, we end, end of September. And so our customers are talking calendar year. And that's where I think it's just -- we just wanted to be certain. So I think that's just a subtle difference with our fiscal year versus the way our customers think about calendar year and which is why we just felt like, let's go to quarter until we get that stabilization in the second half of the year, whether we understand it's our fiscal Q4 versus 2024 Q1. And I think we'll give visibility to that as we get closer. Okay. That's helpful. And then just on Gondi, I mean, you gave the earnings contribution in calendar 2022 understanding you're not giving full year guidance for 2023, but I'm just wondering if there's any kind of finer point in terms of maybe expected contribution for Gondi or just maybe more broadly, how that business and maybe the Mexican market is performing maybe relative to expectations three months ago? Yes. Let me talk about the outlook and then actually, David was down in Mexico recently. So he'll talk about the Mexican market. So you're right, we did disclose in the other unallocated portion of the business. We did disclose Gondi contributed $17 million, and that was for one month. The other point we made was it finished the year on a trailing 12-month basis in line with our expectations. Now we're not going to give guidance for Gondi for a lot of reasons. But I think from a modeling standpoint, it's fair to either annualize the December results or take our comments on it performing in line with expectations as a reasonable pro forma for what it will contribute next year. Yes. No, nothing more to add other than. I mean, if you look at Gondi Mexico sales, they came in line. And as we mentioned, the IMF predicting that Mexico will grow faster than the US, and we saw their packaging sales higher than our North America sales. David and Alex, good morning. Thanks very much. Alex, just on clarification on your free cash flow guidance. Can you put a finer point on what you're expecting to spend on CapEx as well as any source from working capital that you might be expecting this year? Yes. So our CapEx guide is in line with the $1 billion. That's consistent with what we've communicated previously. And then working capital, I think it's fair to take a look at what AR did in the end of the year and anticipate that we'll be working on that significantly. I sort of anticipate, call it, four days of improvement in our cash conversion and that will get you back to your $1 billion or north of $1 billion. Okay. Perfect. And in terms of your total cost expectations for fiscal 2023, some of it's inflationary, whether it's -- I think you mentioned labor and chemicals, specifically, but then you've got OCC, gas, other costs that will be significantly deflationary in fiscal 2023. So just overall, can you give us a sense for what -- do you expect total deflation flattish total cost, maybe slight inflation. Any thoughts there. Sure. So, let me -- I'm going to avoid giving guidance. So, I'm going to try to give you -- where we're headed. So, I think I mentioned in my prior comments, we do anticipate gas right now in Q2 at around $5 an MMBtu. We see that as relatively steady through the back half of the year. OCC, it's right now at around $35, $36 a ton. We do see that strengthening as we get to the year. So, probably exiting in Q4, maybe a little bit between where it was in Q3 and Q4 of fiscal 2022. Virgin probably staying fairly consistent with where it's been were exited last year, call it, in the $45, $46 a ton zone freight mitigating, so freight being stable. And really the largest headwind I mentioned being the chemical and the wage, which is 4%, and that will persist through the balance of the year. Got it. Okay. thanks Alex. And David, just on the topic of providing full year guidance, I mean I know you're doing it just to help investors get a sense for what your full year expectations are. But obviously, during COVID, the company withdrew guidance. And now again, you've chosen to withdraw guidance. So, just on a longer term basis, do you think it's appropriate to continue providing full year profit guidance just given how frequently you've had to withdraw it. And look, you have no control over the macro, currency, commodity costs, et cetera. So, is it really worth it to try to give investors a sense for what you expect when there's just so much over which you have no control? Yes, Adam, I appreciate your comments and thank you for them. Your points are all valid, and we'll continue to evaluate it as we continue to move forward. But you're right, there are a lot of moving pieces that are out of our control versus we are in a cyclical market, and so we'll continue to evaluate it. But I don't think we have a firm answer one way or the other right now. Great. Thank you, everybody, for joining our call today. As usual, we are available after the call for any additional questions that you have. And we look forward to updating you again next quarter. Thank you.
EarningCall_925	Thank you for standing by. Welcome to the Woodward, Inc. First Quarter Fiscal Year 2023 Earnings Call. At this time, I'd like to inform you that this call is being recorded for rebroadcast and then all participants are in a listen-only mode. Following the presentation, you are invited to participate in a question-and-answer session. Joining us today from the company are Mr. Chip Blankenship, Chairman and Chief Executive Officer; Mr. Mark Hartman, Chief Financial Officer; and Mr. Dan Provaznik, Director of Investor Relations. Thank you, operator. We would like to welcome all of you to Woodward's first quarter fiscal year 2023 earnings call. In today's call, Chip will comment on our strategies and related markets. Mark will then discuss our financial results as outlined in our earnings release. At the end of the presentation, we will take questions. For those who have not seen today's earnings release, you can find it on our website at woodward.com. We have included some presentation materials to go along with today's call that are also accessible on our website. An audio replay of this call will be available by phone or on our website through February 13, 2023. The phone number for the audio replay is on the press release announcing this call, as well as on our website and will be repeated by the operator at the end of the call. I would like to refer to and highlight our cautionary statement as shown on slide three. As always, elements of this presentation are forward-looking or based on our current outlook and assumptions for the global economy and our businesses more specifically, including the expected and potential effects of the ongoing supply chain and labor disruptions and net inflationary pressures. Those elements can and do frequently change. Our forward-looking statements are subject to a number of risks and uncertainties surrounding those elements, including the risks we identify in our filings with the SEC. In addition, Woodward is providing certain non-U.S. GAAP financial measures. We direct your attention to the reconciliations of non-U.S. GAAP financial measures, which are included in today's slide presentation and our earnings release and related schedules. We believe this additional financial information will help in understanding our results. Thank you, Dan, and good afternoon, everyone. Our first quarter earnings were in line with our expectations, although our Industrial segment had a challenging quarter. We continue to see strong demand from our end markets. The ongoing industry-wide challenges from supply chain and labor disruptions and inflation impacted profitability in the quarter as we anticipated and negatively affected our cash flow. These supply chain and labor disruptions are anticipated to begin to subside in the second half of the fiscal year as our strategic investments and mitigation actions translate into improved financial results. Our past due commitments to customers remain elevated as a result of the supply chain and labor challenges, but also because of sustained strong demand. We continue to focus our efforts on improving our supply chain by securing additional capacity with trusted suppliers. Making strategic investments into the creation of rapid response centers and maximizing our current machining capabilities to increase deliveries to customers. In addition, we continue to focus on developing and retaining talent. I'd like to recognize our Woodward members, who are working hard to serve customers better and improve our company's results. During the quarter, we announced streamlined Aerospace and Industrial organization structures with leadership designed to enhance the sales experience for customers, simplify operations, and increased profitability through improved execution. Within the Aerospace segment, this new structure enables advancement of our missiles and space programs. In December, Randy Hobbs joined Woodward as President of our Industrial segment. Randy is an accomplished executive with significant global leadership and lean manufacturing, lean enterprise management expertise. Randy and I are working closely to transform Woodward's Industrial segment as significant changes required. He is already driving multiple initiatives to improve our operational execution. We have three priorities in addition to accelerating operational recovery. First is rightsizing the business and improving our cost structure. We are already well on that path with the announced consolidation of Engine Systems and Turbine Systems business units inside the Industrial segment. Second is pricing. We are executing multiple work streams to capture prices that reflect the value we deliver. And third is product portfolio rationalization, which will reduce complexity and maximize profitability over the longer term. I'm confident in Randy's ability to lead this segment and improve near-term operational results, as well as improve long-term returns for shareholders. I look forward to discussing our progress on these priorities during our next call. On a somewhat related note, we are moving the date of our June 2023 Investor Day to later in the calendar year. Our internal strategy work related to the transformation of the industrial segment is ongoing. We want to demonstrate progress and establish a firm foundation before we present our long-term targets for Industrial and the rest of the company. As we indicated in the last call, but were unable to name names, we are proud to announce that Woodward was selected to work with Airbus to provide the fuel cell balance of plant solution for the ZEROe demonstrator. This project leverages our leading fuel control technologies to enable a more sustainable form of air travel based on hydrogen propulsion. This Airbus demonstrator program aims to support ZERO emission aircraft development for entry into service by 2035. This project goes hand-in-hand with multiple carbon emissions reduction projects already underway at Woodward for Aerospace and Industrial end markets. Moving to our markets. In Aerospace, utilization rates for the commercial airline fleet continue to rise, driven by increasing global passenger traffic; U.S. And European domestic passenger traffic has returned to near 2019 levels. International travel continues to improve. Passenger traffic in China is increasing and we are pleased to see that the Boeing 737 MAX is beginning to fly in China again. In the defense market, we are seeing U.S. procurement increase, while rising geopolitical tensions may lead to increased international defense spending. In Industrial markets, robust demand for power generation continues to be driven by strong growth in Asia, increases in global aftermarket activity and consistent demand for backup power at data centers. In Transportation, the global marine market remains healthy with increased ship build rates, higher utilization and elevated freight prices, all of which drive increases in current and future aftermarket activity. Ferry and cruise activity is near 2019 levels, which should result in increased spare parts demand. In addition, the global marine market continues to show increasing interest in alternative fuels as more projects are announced and under development. Woodward content is greater on multi-fuel engines, which should enhance OEM and aftermarket activity in the future. On the other hand, demand in China for natural gas trucks remains at depressed levels. In the oil and gas market, elevated commodity prices continue to drive higher equipment utilization, which should in turn result in increased aftermarket demand. In summary, we anticipate continued market strength as heightened demand signals point to growth and opportunity for Woodward. We are committed to improving operational execution across the company, developing and retaining talent and innovation, all of which will position Woodward for long-term success and value creation for our shareholders. Thank you, Chip. Net sales for the first quarter of fiscal 2023 were $619 million, an increase of 14%. Sales growth for the quarter was driven by increased volume and price realization, but negatively impacted by approximately $95 million, due to the ongoing global supply chain and labor disruptions. Sales were also impacted by approximately $19 million, due to unfavorable foreign currency exchange rates. Net earnings were $30 million or $0.49 per share for the first quarter of 2023. For the first quarter of 2022, net earnings were $30 million or $0.47 per share and adjusted net earnings were $36 million or $0.56 per share. Aerospace segment sales for the first quarter of fiscal 2023 were $396 million, an increase of 18%. Commercial OEM and aftermarket sales were up 32% and 47% respectively, driven by continued recovery in both domestic and international passenger traffic and increasing aircraft utilization. Segment sales were negatively impacted by $35 million in delayed shipments caused by global supply chain and labor disruptions. Defense OEM sales were down 15% in the quarter primarily due to lower sales of guided weapons. Defense aftermarket sales were flat. Aerospace segment earnings for the first quarter of 2023 were $55 million or 14.0% of segment sales, compared to $51 million or 15.2% of segment sales. The increase in segment earnings was primarily a result of price realization and higher commercial OEM and aftermarket volume. Segment earnings including as a percent of segment sales were negatively impacted by inflationary impacts on material and labor costs; increases in costs related to supply chain disruptions; inefficiencies related to training new hires; and the return of the annual incentive compensation. Turning to Industrial. Industrial sales for the first quarter of fiscal 2023 were $223 million, compared to $205 million, an increase of 9%. The increase was primarily driven by higher marine sales from continued utilization of the in-service fleet and strong industrial turbomachinery sales supporting the increased demand for power generation and process industries. Segment sales were negatively impacted by approximately $60 million in delayed shipments caused by global supply chain and labor disruptions, as well as unfavorable foreign currency exchange rate impacts of approximately $17 million. Industrial segment earnings for the first quarter of 2023 were $11 million or 5.1% of segment sales, compared to $24 million or 11.5% of segment sales. The decrease in segment earnings was primarily as a result of inflationary impacts on material and labor costs; increase in costs related to supply chain disruptions; inefficiencies related to training new hires, unfavorable foreign currency effects and the return of annual incentive compensation, all partially offset by higher sales volume and price realization. Non -segment expenses were $24 million for the first quarter of 2023. For the first quarter of 2022 non-segment expenses were $29 million and adjusted non-segment expenses were $21 million. At the Woodward level, R&D for the first quarter of 2023 was $29 million or 4.6% of sales, compared to $25 million or 4.7% of sales. SG&A for the first quarter of 2023 was $63 million, compared to $62 million. The effective tax rate was 6.7% for the first quarter of 2023. For the first quarter of 2022, the effective tax rate was 19.7% and the adjusted effective tax rate was 20.6%. Looking at cash flows. Net cash provided by operating activities for the first quarter of fiscal 2023 was $5 million, compared to net cash provided by operating activities of $39 million. Capital expenditures were $24 million for the first quarter of 2023, compared to $13 million. Free cash flow was negative $19 million for the first quarter of fiscal 2023. The first quarter of fiscal 2022, free cash flow was $26 million and adjusted free cash flow was $27 million. The decrease in free cash flow was primarily related to the inventory increases, due to supply chain and labor disruption impacts; increased capital expenditures; and timing of tax payments. Leverage was 2.3 times EBITDA at the end of the first quarter. During the first quarter of fiscal 2023 $37 million was returned to stockholders in the form of $11 million of dividends and $26 million of repurchased shares under our board authorized share repurchase program. Turning to our fiscal 2023 outlook. Woodward's previously stated fiscal 2023 outlook remains unchanged. We anticipate total net sales for fiscal 2023 to be between $2.60 billion and $2.75 billion. Aerospace sales growth is expected to be between 14% and 19% and industrial sales growth is expected to be flat to up 5%. Aerospace segment earnings as a percent of segment sales are expected to increase by approximately 150 basis points to 200 basis points. Industrial segment earnings as a percent of segment sales are expected to be flat year-over-year. The effective tax rate is expected to be approximately 19%. Free cash flow is expected to be between $200 million to $250 million. Capital expenditures are expected to be approximately $80 million. Earnings per share is expected to be between $3.15 and $3.60 based on approximately $61 million of fully diluted weighted average shares outstanding. Our fiscal 2023 outlook assumes improving operational and financial performance, while continuing to navigate a challenging industry-wide environment. The supply chain and labor disruptions are anticipated to begin to subside during the second half of the fiscal year. However, the timing of improvement is uncertain and results could negatively be impacted if so, supply chain and labor disruptions do not improve as expected. Finally, a few reminders to assist you with your modeling. As a result of our strategic investments and mitigation actions, we anticipate the supply chain and labor disruptions will begin to subside in the second half the fiscal year. We expect the full-year price realization to be in the range of 5% of sales. EBIT for the full-year is expected to include approximately $60 million of annual variable incentive compensation costs, an increase of approximately $50 million over the prior year, $12 million of variable incentive compensation was recorded in the first quarter of fiscal 2023. We anticipate our interest expense will increase by approximately $10 million, primarily due to rising interest rates. As we reduce our past dues in the second half of the year, we expect to generate free cash flow in the same period. This concludes our comments on the business and results for the first quarter of 2023. Operator, we are now ready to open the call to questions. Thank you. The question-and-answer session will begin at this time. [Operator Instructions] Our first question comes from the line of Robert Spingarn with Melius Research. Your line is now open. I'm not sure who wants to take this, but I -- it's about margins. And I just want to understand what deteriorated from last quarter to this quarter or what pressures got worse? I understand comp went up, but it would seem the other things would have been relieved by like you mentioned higher volumes and the fact that it's -- these margins are lower both quarter-over-quarter and year-over-year. Perhaps you can offer some clarity on that in that? Yes. So let me take a stab at that and just for clarity, let's first start with the sequential, because I think that Rob, that's where your question started. If you actually look at sequentially, the volumes are actually down, which is what we had anticipated just based on the lower number of working days that we were talking about in the November call. And in addition to that we also had the variable compensation increase that we also discussed at the November call. And then the one other headwind on the earnings side was really on the industrial side of the business was the currency related impacts, which of course we can't forecast what the currency rates are going to do and that's primarily driven by the euro and just translating the euros to U.S. dollars. So sequentially that was really the drivers around the sequential earnings decline both in dollars and in rate. Without going through all the math, if you didn't have the fewer working days in the currency, would at least on the aerospace side, would sequential revenues have been up just given that those businesses are recovering and ramping, so the normal seasonality, I would think shouldn't apply? Yes, I mean, we always have a little bit of normal seasonality in our fiscal Q1 quarter just based on it's a lot of our customers year-end, they're Q4. And so our Q1 is always a little lighter and some of it's just how they're managing their inventories and then the other is just the number of work days around the holidays. So this isn't -- our sequential decline in revenue is not related to demand at all. It is truly just a matter of output and how our customers are pulling product from us. Okay. And just tip for you just higher level you've talked about last quarter and touched on it this quarter about improving the business. Bringing more machining in-house and just solving problems. Does the business need more help looking at it today than you thought three months ago as you get more time to dig into it and see what's really going on? Well, we are making some progress, Rob, in terms of the number of parts that we're moving to better performing suppliers than the ones that we're bringing in-house. And we've graduated over 30 suppliers from watchlist, the elevated watchlist and we still have more than 20 on it, but we've gotten 32 folks to improve and we've got some of our machining centers to improve. So I see us making progress, but having that make it all the way through the supply chain to affect the daily build rates of assembly and test and shipping to our customers is the piece of the puzzle that we're working on this quarter. In terms of needing more help, we're always on the hunt for talent. We're -- we brought some very talented folks on to the team like Randy Hobbs and whenever somebody new comes in, it looks at a business theyâll find things that we're asking them to do a full detailed look and roll up in terms of capability of our operations, as well as how we're running the business and E&I are partnering with the places that need more action and more attention. So I'd say that we are seeing a little bit more in the industrial space attention needed, but most of those were things I thought needed attention three months ago. We're just confirming itâ¦ I would say we're in confirmation mode. I really had most of those thoughts on my mind already in terms of especially the product portfolio actions that we need to really scrub through from a product to good olfaction product lifecycle management approach. So we're on it. Hey, good afternoon, guys. Maybe Chip, kind of, a macro question for you. Obviously, industrial revenue this quarter was pretty solid. Can you give us a sense about order flow was through the quarter in industrial? Are you guys seeing any signs at all of, kind of, macro weakness out there, like some of the strategists or anything could happen? So we're seeing those signs from our customer demand signal remains strong and increasing. We were under a lot of pressure at the end of Q4 from our major OEM customers to serve their increasing rates on their lines and preparations for taking their lines up in 2023. That was just a lot of pressure we were getting to prime the pump for them to increase their build rates in 2023 coming out of 2022 and as well from a service standpoint restocking dealer shelves with remanufactured or new parts. We don't see any softening of demand at this point up to now. Okay. So your full-year outlook for industrial is flat to plus 5%, do you feel that's on the conservative side perhaps? I feel like itâs -- we're not metered by demand. We're metered by our ability to produce units. A lot of this demand is in some cases dropping in inside lead time and we're trying to manage with our customers how to make promises and keep them and they can count on our delivery forecast. So really a lot of the constraint is us, as well as some FX headwind on the top line from a dollar standpoint. Right. Okay. That's helpful. Last one for me just on the $95 in COVID disruption, it's helpful to see kind of by segment here. It seems like for a year, Aerospace has gotten better and you've had less issues there through this quarter where industrials actually got worse. Could you maybe -- is there anything that you haven't touched on in industrial that's kind of leading to that performance falling behind? Yes. So you're right, Pete, that Aerospace did get slightly better in the quarter and industrial did get worse. As Chip was just talking about really the supply chain and labor disruption got worse on industrial, really related to the demand. The customer order volume continues to be strong and so that demand is still there. It's still -- we've talked previously that the electronics availability is still limited in our output capability on the industrial side is one of the big drivers and the other is the machine components and it's still both of those is what's driving that increase based on their availability. Well, there's a labor factor of this across the board in that $60 million both from our supply chain availability and getting our -- the labor that we brought in, trained and improving output on the line. Hey, thanks. Good evening. Wanted to ask about some of the incremental strength in industrial turbomachinery. Are there any positive inflections you're seeing more pronounced now? Relative to the past few quarters, maybe certain process verticals stepping out, kind of, investment mode? I don't know that we see all the way through to the exact end market application that you're asking at the end of your question. But for us, we see a -- just a definite step function in OEM demand for land-based gas turbine-controlled accessories that we provide. So that's where the bulk of that increase is coming from for Woodward. Yes, there's the -- we can postulate that it's this splits between power generation and an oil and gas process, but we're not sure. Okay, great. And as you look at the supply chain and labor outlook to subset, the issue is to subside. Or to begin to subside in your back half. Is there one where, you know, you have more certain visibility, you know, you've made some real investments. Where are you starting to see the traction, where you have more of a tighter timeline? So I don't know about the tighter timeline, but traction and things that are within our control, the rapid complex machining centers that we're standing up at a few different locations at Woodward plants. That equipment is starting to hit the floor next quarter and be in the installation and commissioning phase, so that by third quarter and our fourth fiscal quarter for sure, we'll be producing quite a number of parts and controlling our own destiny and be able to offload some of our struggling suppliers in the machining category. So that's something that we have a good line of sight to and are able to control the actions that will lead to that benefit. Does that lead to any, sort of, increment step-up in the run rate as a proportion to your current base revenue outlook? It certainly will alleviate disruptions and so I believe that will translate into consistency, which will give an overall uplift to output. But we are essentially going to be trading planned capacity that's not producing to actual capacity that we can count on, if that makes sense. Hey, good afternoon, guys. Thanks for the question. I wanted to ask about guided weapon, and you said they're down? Are they down year-over-year, sort of, on a tougher compare? Do they sort of slow down sequentially? And just help us understand kind of where we are? Is there more downside? And I guess specifically, are you seeing any more demand there around either Ukraine and for a while, we're talking about some JDAM or just general, kind of, restocking of munitions that, that could maybe pick up a little bit? Yes. So I'll take the two questions, Matt. And so the JDAM decline on the guided weapon side continues to be soft. I mean, there is a year-over-year, but it isn't really the tough comp you may recall from following us that we had a sizable step down really in fiscal 2022, compared to fiscal 2021. We are still anticipating and talked about another continued softness on the guided weapon side of our business. It's not as significant of a step down as what we've seen in the prior year, but it's still there just based on the ordering volumes that they've had. Which then transitions into your second part of your question around have we seen any uptick in orders from anything in the Ukraine conflict? And we haven't yet at this point, you hear of some opportunities that might be out there, which is -- for us and typically on foreign military sales, the ordering pattern and I'll call it more of a drop in type order that we don't have a lot of visibility to versus a lot of the -- on the DoD side of our business, we have orders out for a couple of years typically. So that would be the opportunity for us. That some of that may come forward for us. But at this point, we haven't seen any firm orders. Mark, could you just -- could you comment on the inventory levels you're carrying? And it looks like the inventory balance is basically where it was pre going back to 2019 sales or 20% lower. I mean, how much excess inventory are you running today? And when do you expect some of this to reverse out? Yes. So we're significantly increased on the inventory and well above where we want to be, that is for sure. Really with the supply chain and the labor disruption, our inventory has gone up, it continued to go up here in Q1. It increased in fiscal â22 and continued to go up here in Q1. What we're focused on as a team is, as we mentioned in our prepared remarks to begin improving here in the second half of the year, both around output and that would help with reducing inventory. So at this point, it's at, like you're mentioning, almost all-time highs from that perspective and something the team is very focused on making improvements. And with the output increases that were anticipated in the second half of the year that would help reduce some of that inventory as we go forward. Okay. And on the Defense side, I mean it looks like the Aero, the Aero OEM and aftermarkets coming back as would be expected. But what is the right run rate and I'll think about for the defense business was $750 million revenue a year business that now looks like it's $600 million? I mean, is that the right way to think about as a baseline for the business going forward? Or is there something that's going to fill in the, I guess, the gap that JDAM has left? So on the Defense side, I would say that it's in the ballpark of what we're looking at based on of the decline in the JDAM. Now we have spoken about there is some increases both with the small diameter ROM, SDB and AIM-9X, which is a weapon of choice on the F-35. But the volumes aren't at what the volumes were of the JDAM back, when it was the weapon of choice back in the last decade or so. On the Defense aftermarket side, we do see strong demand there. A lot of our supply chain and labor disruption is impacting that defense aftermarket side of the business. So what we've talked about for fiscal â23 is we anticipate defense to be stable throughout the year. Obviously, some headwind as I was just describing on the guided weapons side, offset by some improvements on the defense aftermarket side. Based on output improvement that we've spoken about here in the second half of the year. So that's kind of in that stable world is kind of where we're at from a revenue perspective for FY â23, compared to FY â22. Okay. And last one for me. You said your Q1 came in line with your, I guess, internal plan. Obviously was, you know, a fair amount below what the [Indiscernible] was looking for. Any help you want to provide to calibrate us on Q2? So we don't give quarterly guidance as you know. I'll go back to really a lot of discussion that we had in November that I also had in my prepared remarks today. This is a second half improvement recovery is, kind of, where we are starting to see, that's where it will begin to subside. So if you look at Q2, we will have the variable comp that I spoke about, right, the $50 million increase is what's anticipated for the year, compared to FY â22. We did book $12 million more in Q1, than we did the prior year, but that will still be there. As Chip was mentioning, for example, with the Rapid Complex Machining, improvements that we're making. Again, that won't really be producing many parts here in Q2. It's more of a back half opportunity for us. And so what we're really looking at is continuing to stabilize the business here in Q2 make some improvements just based on some more working days. We don't have the holiday periods that we had in our Q1. We don't have the seasonality effect that we had in Q1 of our business, but really not at our full not even full, not really improving much as we move through Q2, but really into the second half of the year is where we're going to start seeing some of that disruption impact subside. So maybe just to follow-up on slide 16 and the 5% price realization? Is that gross price or net price? And what did you see in Q1? And, can you talk to us about the timing of the contracts, whether it's an Industrial or Aerospace? How it's going to flow through? And as far as timing goes, our long-term agreements in both Industrial and Aerospace are come due when they come due. They're not sort of in some cases annual. It's just -- it's the month that expires. And so that plus catalogs are spread out through the year. The annual, sort of, long-term agreements with OEMs that are under contract like Life Program or things of that nature, do adjust on January 1. So there's a bit of lumpiness on the January 1, and then the rest of them are kind of spread out and what we're saying is that 5% is what we'll see through the year. Okay. And then just maybe switching gears onto your commercial aftermarket. You know, I think it grew like double the peer average thus far given limited numbers. But what are you seeing in your aftermarket narrow body versus wide body initial provisioning. And you also mentioned China in your script. So how far below is your China business versus peak? Well, just to take a -- maybe one at a time, but I'm not sure I can remember all of those points. So we have very strong inputs to all of our service shops right now and our team is doing a pretty good job of turning those units and getting them back out the door. We have had some initial provisioning for narrow body. Not extremely strong, but we've had some. China is pretty quiet for us. In most of the case, I can't really think of much China business that we did in the last quarter or two, kind of, looking for that to take off for us in the coming years hopefully, but not predicting that. We've got a good demand from our Europe and the Americas and the Middle East right now. I just wanted to ask two questions. One, on the guidance, how much of the $95 million supply chain related delinquencies? Do you anticipate catching up in the fiscal year? And, then I have a follow-up. Yes. So when we went into the year just to get everybody grounded again, we had $85 million at the end of September of 2022. Obviously, the guidance range has a wide range to it and there's varying points in that range based on both market demand and supply chain and labor disruption impact. What we had said previously was we are anticipating as you get towards the higher end of our sales guidance range, you would be seeing improvements. From that $85 million that we started the year with, kind of, the middle, you would be kind of right in that range and the low end at, maybe things would get a little worse. And so it's not a specific number that we're really focused on, but really that was a part of what we took into account related to the range that we gave. Okay. And could you elaborate on what you're seeing, what changed quarter-to-quarter with respect to supply chain constraints? What got better? What got worse? If there's any trend you can discern? I think overall, Gautam, Iâd say that more suppliers are recovering that's a general statement. But we've taken more off the elevated attention list than we have put on. So that's a good sign in terms of things getting better. We've had better output in some of our value streams and in the front ends of some of our lines, including machining. So that's also we're feeling like we're starting to get more of our newer machinist and operators up to speed. So I think sequentially that's a good thing. We're doing less hiring, because people are staying in -- more people are staying, so I think those are the three maybe good trends that we're seeing, but we were having this discussion earlier whether two points as a trend or we need three quarters to say we're feeling better about those three items. Right. Makes sense. And last one, if I may. What are your preliminary thoughts on the industrial portfolio? Is it -- are you thinking like to skew management? Is it where you make stuff? Is it markets you participate in? Like, what's your initial impression Chip of where you could actually do better? I think the initial impression is kind of where you went first with the SKU rationalization is what I would use as an old term from another company. But the product portfolio is vast in the industrial segment. And not all our children are top of the class in performance. So we've got some work to do that we do work with our supply base or make strategy as well as our customers to try to rationalize and take good action on things in the latter stages of the product lifecycle. That need to be managed differently in conjunction with supporting our customers, as well as things that we have that are actually upgrades to some of the older things that we sell that we could standardize upon. So there are a number of different moves we could make with that portfolio that are, sort of, well-known tried and true ways to improve our results and reduce our complexity. That's the really the main focus of it. So a little bit of deja vu here from a year ago, we were kind of same spot tough first quarter and looking at a second half recovery and we kind of know how that story played out. So if I look at just Industrial now, I think your guide is kind of implying 11% margins in that business the rest of the year on average. I mean, is that realistic? Well, we are taking action to achieve that. Like I said, our three focuses in addition to recovering our operations are on rightsizing the business, so that's a key action. Price realization, we've got some opportunities to do a little better there and we need to push that through and get the value that we're looking for our products. And then the product portfolio rationalization that I was talking to. So none of these are easy things and none of these -- and each of these things take some time, which is why it moves it to the back half. If things that we were in many cases planning to execute on this year, but we knew it would take time to start to see the benefits of them. Great. Thank you. And then just -- can you tell me what you guys are seeing on the OEs side from Aerospace? What about you are 737, 787, A320, any pull from the OEs? We're seeing the same sort of schedules, I mean, there are a lot of, I would say, small changes in reschedules going on out there, but there's nothing that's changing our overall build rate or rate break plans from last year. So we're in tune with the engine and airframe folks and following their lead and trying to make sure we support them. All right. And then just lastly just on the variable comp, so I guess most of that's flowing through the cost of goods. SG&A was pretty much flat year-over-year. Hey, guys. Good evening. Thanks for taking the questions. Maybe I don't know if you want to super mark just to go back to -- I think Rob's first question on Aerospace, you guys are one of the companies that help us out and disclose these operating income bridges. So if I looked in the Aerospace segment this quarter, I mean, was price mix and productivity, did that improve sequentially from the fourth quarter? Yes. So we don't have sequential bridges as you know Michael in 10-Q overall. But where really the price mix and productivity inflation impact is, kind of, the other side of it. In essence, as we've achieve that 5% price realization, which we did here in the quarter, that's offsetting the inflation both on the material and the direct labor side that we're seeing. Okay, okay. And then I guess just back to the previous question, this confidence level in the industrial margins, I know you're not going to give us second quarter guidance. But I mean, should we expect -- are we going to see a step function improvement in the second quarter? Or just -- it sounds like most of your new capacity comes online in second half? And I mean, it really sets up for what's going to look like I don't know 13.5%, 14% margins to kind of get to that flattish. Is that the right way to think about it? Or should we expect maybe some more pronounced improvement in the second quarter here off of this 5% level? Yes. I'll say consistent with our prepared remarks. And as you mentioned, this is a second half story here. As Chip was mentioned earlier on the call a lot of the activities that were, as he mentioned, confirming and then working it towards they take time. And so that's why we are talking about this is really a second half improvement. Okay. Is a stable supply chain good enough to get you there for the second half? I mean, most of the peers that are reporting are seemingly calling for a stabilized environment and you guys unfortunately strike your fiscal quarter for September, which kind of puts you in a little bit of a bind there too. I mean, is stable enough to get you there for the second half? Stable is enough, because we have a lot of inventory as you can see and we have a lot of assembly and test and shipping capacity. And we need some stabilization and not missing those final one or two parts that hold us up. So we've got some good plans around Rapid Response Centers and shift balancing to get us that capacity and capabilities delivered in the second half. This is going to be a little repetitive, but I guess I'm just struggling to piece together all the margin inputs, because you know, I just heard you saying stable is enough. Your -- you know, description to the question prior sounded like supply chain was stable, if not a little better. You've got better pricing, it sounds like? And then just general cost input inflation, supply chain disruptions we've been dealing with. I guess, I'm trying to better understand why the margins were worse in the quarter. You know, putting the back half ramp aside for a moment, just still struggling to square. I guess it's hard to really answer without showing me, but the line-by-line cost inputs, but it's hard to understand why the margins are worse and it seems like some of them that you've had were stable and some of them that you've had were better? So no, I was pointing to some of the improvements that we've seen, but there's in no way would I term our supply chain stable right now? What we're trying to do internally, there are two places where the costs show up right now from our labor and training and so people who are in training are not even applying their labor to making a part. And then once they graduate from a step of training and are on a machine making a part, they're making fewer parts than to standard or a proficient operator would make. So those are two places where costs are accumulating and impacting our margins that by the time we get to the second half, we're planning to have more people be proficient by that time. So that's an internal stability factor. But then externally, we have -- even though we've graduated more than 30 suppliers off that watchlist, we've got more than 20 on it right now. And as you know, you need all the parts to make the unit. And so the fact that in some cases we're not getting good signals and we're not getting the parts we need on time. We end up very much sub-optimizing our internal factories. So that's sort of a double whammy on cost where we're not getting the output and we're resequencing or doing work at it, having traveled work or having to re-sequence it. I just want to be clear that. This is not stable right now. I just want to be clear about that. Okay. No, that's helpful. On the product rationalization piece or the SKU review, is that all industrial? Is there any Aerospace and what are the characteristics? Is it too much OE, not enough aftermarket, too much competition? What are the disruptors in those things? Well, I mean, the simple answer is too many part numbers. If I showed you all the things we made here, I think you'd be surprised. And a number of whom we don't make very often and when we do, it's very disruptive to the value stream we inserted into. So there's hidden costs associated with that, as well that show up on the -- maybe a manufacturing overhead or a period cost that isn't trapped in cost of goods sold just, because of what it takes to actually bring that product to life that quarter. So getting better alignment with an understanding of what we should make and what we should offer and how we should price it. These things are -- you might say basic product management, but that's the tool we're going to use to improve our ability to serve customers and generate higher margins. Last one for me. Mark, just on the free cash plan. Understanding it's a back half loaded year, just the ramp from 1Q to 4Q implied is pretty steep, compared to history and especially with the elevated capital plan this year? Anything, you can add to that on how you do that if its working capital related or something else? Yes. So a couple of comments there. So you hit the last -- the most impactful one first. It really is that working capital improvement I mentioned earlier on the call as to we are significantly higher on inventory that we have initiatives that we'll be working and that improvement in the second half of the year will be -- what will help drive that cash flow. We have had, I'll say, cash flow seasonality in the past. If you do go back and look at Q3 and Q4 free cash flow generation that has historically been consistently strong for us. And so it obviously with where we're at today and where inventory balance is today, we'll be a back half story like we're, kind of, implying with the reduction in past dues, getting the inventory out and then getting the collections and the customers that working capital piece will be important. Your CapEx note there, we guided to $80 million, we did spend more than just the $20 million here in Q1, so it was a little first half loaded. The other one was the timing of tax payments, that's going to -- we talked back in November, we will have higher cash tax payments, primarily related to the R&D, the U.S. Tax law change for R&D deduction here. And so that has an impact too. But really, I mean, the big one comes down to the production capability getting the past due improved and which will allow us to reduce inventories and collect that cash. Ladies and gentlemen, that concludes our conference call today. If you would like to listen to a rebroadcast of this conference call, it will be available today at 7:30 p.m. Eastern Standard Time by dialing 1-800-770-2030 for a U.S. call or 1-647-362-9199 for a non-U.S. call, and by entering the access code 4278216. A rebroadcast will also be available at the Company's website, www.woodward.com, for 14 days.
EarningCall_926	Good afternoon, and thank you for standing by and welcome to the AppFolio, Inc.âs Fourth Quarter 2022 Financial Results Conference Call. Please be advised todayâs conference is being recorded and a replay will be available on AppFolioâs Investor Relations website. Thank you. Good afternoon, everyone. Iâm Lori Barker, Investor Relations for AppFolio and I'd like to thank you for joining us today as we report AppFolio's fourth quarter 2022 financial results. With me on the call today are Jason Randall, AppFolio's President and CEO; and Fay Sien Goon, AppFolio's Chief Financial Officer. This call is being simultaneously webcast on the Investor Relations section of our website at www.appfolioinc.com. Before we get started, Iâd like to remind everyone of AppFolio's Safe Harbor policy. Comments made during this conference call and webcast contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties. Any statement that refers to expectations, projections, or other characterizations of future events, including financial projections, future market conditions or future product enhancements or development is a forward-looking statement. AppFolio's actual future results could differ materially from those expressed in such forward-looking statements for any reason, including those listed on our SEC filings. AppFolio assumes no obligation to update any such forward-looking statements, except as required by law. For greater detail about risks and uncertainties, please see our SEC filings, including our to be filed Form 10-K for the fiscal year ended December 31, 2022. In addition, this call includes non-GAAP financial measures. Reconciliations of those non-GAAP financial measures with the most directly comparable GAAP measures are included in our fourth quarter earnings release posted on our Investor Relations section of our website. Thank you, Lori, and welcome to everyone joining us for AppFolioâs fourth quarter and fiscal year 2022 financial results. I'm pleased to report that AppFolio continued to show resilience in the changing real estate industry in evolving macroeconomic environment. Fourth quarter revenue grew 30% year-over-year to $124 million capping off an annual 31% increase to $472 million. Units grew 15% for the year to 7.3 million. Also the total number of our customers expanded. ARPU increased, payments continue to grow, and we were pleased with that adoption of AppFolio Property Manager Plus focused on larger unit count customers. Our continued focus on delivering innovation that positively impacted our customers resulted in continued high retention as customers continue to recognize the value of AppFolio to drive operational excellence in their business. One recent example of Innovative Solutions you've heard us talk about is the AppFolio stack partner integrations marketplace. Another important case in point is our investments in AI. As of the end of 2022, 40% of our customers now use one or more AI enabled features or services, including our newest ones like Smart Insurer to help property managers enforce their insurance lease requirements and bank fees, a smart accounting tool that automatically imports bank transactions and supervise reconciliations. These examples reflect our continued efforts to help our customers save time and money and drive operational efficiency. Driving operational efficiency is also important within AppFolio as we look to scale our business. Our path to increasing profitability is focused on growing revenue, while executing a company-wide initiative to be more efficient. We are always evaluating how various businesses meet both our customers' needs and AppFolioâs strategic priorities, and in 2022, we divested and wound down a non-core asset to drive focusing our business. We are continually working to identify areas where we can improve our cost structure, such as transforming our sourcing and procurement capability, rightsizing our real estate footprint, and migrating certain roles to third-party resource providers. In addition, we have been moderating and will continue to moderate our headcount growth rate. We are pleased with the early progress from these efforts and look forward to continuing them in 2023. From a macro perspective, it is an important time for our customers to continue investing in the portfolio to save costs and add operational efficiency. Earlier this week, we published the inaugural AppFolio Benchmark Report of nearly 5,000 property management employees. The report found that the growth outlook is positive among property management organizations, despite broader economic challenges. More than 80% expect the organization's revenue to increase 2023, nearly three quarters expecting net operating income to grow. They reported their top priorities are as adding new units to their portfolio, increasing revenue, improving customer service, and growing their staff. They also expressed the desire to leverage data to make faster, better decisions, and to make financial interactions easier for both residents and the businesses they work with through processing or rent payments online and improving their accounts payable process. These are all priorities that AppFolio has been and will continue to help with. AppFolioâs long-term strategy is at its core all about helping our customers solve problems in innovative ways. Our goal is to keep our customers happy, resulting in low churn, growing ARPU, and added new customers and units. In [2023] [ph], we will continue to innovate at a fast pace. For example, we are building on our one powerful platform for mixed portfolios as we expand support for property types and capture new revenue streams. Another example is accounting and reporting. This functionality is at the core of our product offering and we will focus R&D efforts around things of automation, centralization, and flexibility. These are the types of these customers' business and it is critical that we remain the source of record for property level accounting. And we are delivering service excellence at scale by enabling an intuitive onboarding process and leveraging technology to make it easier for customers to get the help they need when and how they need it. These are just a few of our long-term projects that's won the pipeline for 2023 and beyond. Also core to our long-term strategy are our sustained efforts and investments behind acquiring and supporting larger customers. Our corporate segment is quickly growing and is a major contributor to our increasing ARPU. The strategic bets we made in 2022 drove success with more than 60% growth rate in our AppFolio Property Manager Plus or APM Plus [Tier] [ph]. These units are fueling our go-to-market efforts and improving our ability to win that market. Large customers are increasingly coming to us to partner on the current and future needs. And our team is introducing new and creative ways to help our fastest growing customers organize around their future residential portfolio expansions. Let me share an example. Evernest is the APM PLUS customer managing a mixed portfolio of 30,000 units across the U.S. And they have a goal of six figure unit growth through a focused organic growth and acquisition strategy. They are heavily invested in the AppFolio technology platform and together we have [indiscernible] closely to maximize their adoption and performance. As a testament to the strength of this partnership, Evernest recently renewed a multi-year agreement with AppFolio. According to Matthew Whitaker, CEO of Evernest, âwe are growing rapidly and AppFolio Technology helps Evernest accelerate growth. We're happy to be working closely with the AppFolio team to achieve our growth goals.â We will continue to deliver differentiated experiences to meet the needs of more customers like Evernest. Large and small customers alike are embracing stack, our partner integrations marketplace have launched since June 2022. Stack seamlessly integrates our customers' preferred software applications with our platform, giving customers more choices as they focus on boosting productivity, improving their resident experiences. More than 800,000 of our customers units are now connected on Stack and the number of partners we've onboarded has more than doubled since Stackâs launch, spending marketing and leasing, smart home technologies, utility management, inspections and maintenance in our newest category compliance. [J.P. Morrison] [ph], President of Horizon's Asset Management LLC of Columbus, Ohio, a customer since 2016 was just under a 1,000 units on APM PLUS, recently said, âour AppFolio integrations experience has helped Horizon's focus on our team's enjoyment of their duties, introducing more mobile and user friendly software that removes many daily administrative burdens, allows our teams to concentrate on maintaining the asset, closing on active renters and heading home to their families more energized.â Large customers are also looking for functionalities to serve their mixed use housing portfolios. We previously shared our plan to deliver purpose built features for the affordable housing segment. In 2022, we partnered with charter customers to deliver meaningful, affordable housing capabilities such as tools to manage subsea programs more easily. This year, we plan to go further to support customers' needs through a focus on building integrated workflows to differentiate our product in the market. Payments continues to be the fastest growing of our value-added services and we are working to find additional creative ways to deliver customer value to our growing ecosystem of end users. One example is our integrated securities above the [return feature] [ph] announced at our October customer conference. No longer is it necessary to write a check, mail it out, then make residents go and take it to a bank for deposit. The whole process is now done electronically. We have seen meaningful adoption of this new offering helping more than 4,000 customers automatically return funds to nearly 75,000 residents. Another customer conference announcement was Apple Pay. Now, when a resident wants to pay their rent, they don't need to type in their credit card information, they can just [click twice] [ph] on their phone and pay. For property managers, this removes friction in the payment process, improves on-time payment, and the [likes of our] [ph] customers. Early indications show that resident card transactions increased by approximately 6% when our customers adopt AppFolioâs link with Apple Pay. Based on these early results, we plan to expand Apple Pay capabilities in used cases and we anticipate the full rollout to be complete in the first half of 2023. While we are making meaningful strides in achieving our market growth, we remain committed to growing our SMB customer base by adding capabilities, simplifying the service experience in driving deep adoption across the leasing, accounting, and maintenance domains. In 2023, our SMB efforts were focused on improving the owner experience increasing self-service rates and reducing the rate effort to achieve success. You've just heard about the innovative ways we are expanding and it is all made possible through our people. At our annual employee kick-off event early this month, we discussed the importance of sharp execution and a focus on the actions that will deliver the greatest customer impact. As I've already mentioned this year, we are looking to improve our internal efficiency. We will continue to invest in our current team and simplify AppFolio to create an environment built for meaningful impact that's powered by performance. We also continue to embrace the hybrid workplace and I'm proud that our team and culture recognizes employer of choice. In 2022, we were selected among Glassdoor's Best Places to Work and Fortune's Best Workplaces in Technology. Great people make a great company and Iâm confident in our nearly 1,800 [AppFolioâs] [ph] ability to achieve our goals. As we enter 2023, we are well aligned on growing the business and increasing our focus on profitability. During 2022, our payments business achieved an exceptional growth rate, fueled by increased adoption and usage of electronic payments. For 2023, we expect that card usage growth rates will naturally moderate. While we are becoming more efficient, we also need to continue to invest in R&D to support our move upmarket. The result of our estimates for revenue growth and expenses is a moderate level of free cash flow and Fay Sien will take you through more detail shortly. Over-and-over AppFolioâs business has delivered consistent resilient results in various market conditions. We are growing steadily by driving efficiencies for owners, property managers, residents, and vendors, and we have a debt free balance sheet and a healthy cash position. I'm proud of our accomplishments and believe in our ability to drive continued success through our committed focus on innovative products and services, trusted customer partnerships, and a strong team and culture. Thank you, Jason. We are pleased to report that in the fourth quarter revenue was up 30% year-over-year to $124.1 million. This marks five quarters in a row of 30% of better growth, evidenced that we are driving success by making it increasingly easy for our customers to manage their business in an ever changing world. Core Solutions revenue was $35.4 million in Q4, another strong quarter and a 23% year-over-year increase. Full-year Core Solutions revenue grew 26% year-over-year. At the end of the fourth quarter, we managed approximately 7.3 million property management units from 18,441 property management customers, compared to 6.3 million property management units from 17,215 property management customers a year earlier. This represents a 15% increase in our ending property management units. In addition to the number of units we serve, it is important to note that Core Revenue also grew as we continue to focus on customers with larger unit portfolios that drive higher ARPU through increased adoption rates of APM PLUS and additional value added services. Regarding value added services revenue in Q4, we experienced a stronger than expected growth of 35% year-over-year to $86.3 million and our full-year value added services grew 36%. During 2022, revenue from both payments and value added services benefited from the rise in property management units under management, the expansion of our offerings in addition to increased adoption and utilization. The sequential quarterly decrease of 2% in value added services is typical and follows the leasing season, which peaks in the summer months. In Q4 of 2022 and 2021, the non-GAAP cost of revenue, exclusive of depreciation and amortization was 40% of revenue. Full-year 2022 cost of revenue, exclusive of depreciation and amortization, was also comparable with the 2021 full-year. Our product mix shifted due to the higher annual growth rate of value added services revenue. However, the related increase in expenses for third party service providers was largely offset by additional efficiencies. Turning now to non-GAAP operating expenses. A year-over-year increase in operating expenses for Q4 is primarily related to headcount growth of 12% to [1,7085] [ph]. Also, employee cost associated with hiring and retaining talent continues to increase more than in prior years, particularly in specialized areas such as R&D. As compared to the third quarter, expenses also increased to accrue for performance bonuses and there was some incremental marketing expense for advertising related to recent product launches. Sales and marketing expenses as a percentage of revenue increased from 20% in the prior year to 21% in both the fourth quarter and full-year. R&D expenses as a percentage of revenue increased from 18% in Q4 last year to 21% this year. During the year, we continue to invest in expanding our product offerings, including projects like Stack, affordable housing, and some other capabilities that make our products easier to use. For the full-year R&D increased from 17% to 20%. Our G&A expenses as a percentage of revenue remained comparable with the same quarter last year at [16%] [ph]. For the full-year, G&A decreased from 15% to 14% as we continue to scale and find efficiencies. Putting all this together, our non-GAAP operating margin in the fourth quarter of this year was a 2.7% loss, compared to the fourth quarter loss last year of approximately 0.4%. For the full-year, our non-GAAP operating margin was slightly better than expected at a loss of 0.6%. We exceeded our guidance for revenue and expenses were in-line with our forecast. The full-year loss of 0.6% compares to income of 2.2% in 2021. Free cash flow was a positive $1.3 million, approximately 1% of revenue in Q4, compared to a loss of 2.1% in the same quarter last year. This marks the second quarter in a row of positive free cash flow, and for the full-year, our free cash flow margin was 0.9%, compared to 3.6%. Turning to the balance sheet. We ended the fourth quarter with $185 million in cash, cash equivalents, and investment securities. We are targeting annual 2023 revenue of $565 million to $575 million. The midpoint of this range represents a healthy full-year growth rate of 21%. While we have been delivering a higher revenue growth rate and we have conviction of our strategy, in this economic environment, we also want to make sure we are being prudent in our outlook. Also, our guidance assumes that high growth in the use of cards will normalize in 2023. In terms of the seasonality in our value added services, in a typical second quarter, tenant applications increased in our property management experience and expansion of new tenants in the third quarter. This results in higher demand for our insurance and screening services in the third quarter. Then in the [first quarter] [ph], the business is seasonally slower. We expect seasonality to continue in 2023. We expect that 2023 cost of revenues exclusive of depreciation and amortization will decrease slightly as a percentage of revenue due to changing product mix with value added services, revenue now growing at a more normalized rate. Our [2023 percentage] [ph] increase in takeout is projected to be very modest. And as you heard from Jason, we are working on various projects to increase efficiency and reduce operating expenses on a percentage of revenue basis. Brining all these together, full-year non-GAAP operating margins are expected to be above breakeven and non-GAAP free cash flow is projected to grow to 2% to 3% of revenue. Basic weighted average shares outstanding are expected to be approximately 35 million for the full-year. Thank you all for joining us today. We believe our long-term strategy is resilient and will continue to feel success. And we look forward to speaking with all of you in future calls.
EarningCall_927	Ladies and gentlemen, thank you for standing by. Welcome to Central Garden & Petâs First Quarter Fiscal 2023 Earnings Call. My name is Shamali and I will be your conference operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded. Thank you, Shamali. Good afternoon, everyone. Thank you for joining us. With me on the call today are Tim Cofer, Chief Executive Officer; Niko Lahanas, Chief Financial Officer; J.D. Walker, President, Garden Consumer Products; and John Hanson, President, Pet Consumer Products. As usual Tim will provide a business update, and Niko will discuss results for our first quarter ended December 24, 2022 in more detail. After the prepared remarks, J.D. and John will join us for the Q&A. Our press release and related materials are available at ir.central.com, and contains the GAAP to non-GAAP reconciliation for the non-GAAP measures discussed on this call. Lastly unless otherwise stated all growth comparisons made during this call are against the same period in the prior year. Before I turn the call over to Tim, I would like to remind you that statements made during this call, which are not historical facts, including the potential impact of COVID-19 on our business, earnings per share and other guidance for fiscal 2023, expectations for new capital investments, product launches and future acquisitions are forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially from those implied by forward-looking statements. These risks and others are described in Centralâs filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K filed on November 22, 2022. Central undertakes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events or otherwise. Thank you, Friederike, and good afternoon everyone. Let me begin by extending a sincere thank you to Team Central for their perseverance and execution in yet another challenging quarter. Three key messages for todayâs call. First, our quarterly results. We delivered Q1 in line with the guidance we provided in November, which anticipated near-term challenges. These included unfavorable cost overhang from last yearâs poor garden season, higher inventories at our retail partners, and a more sluggish demand environment compared with the strong growth quarter a year ago. As expected, these challenges put downward pressure on our key financial metrics. Net sales were $628 million, gross margin was 27.4%, and operating income was $400,000. We had a loss per share of $0.16 in line with our guidance. Second, our outlook for the year. Our fiscal first quarter is traditionally our smallest quarter. As such, we donât usually draw any major conclusions from Q1, especially since the 2023 garden season is still in front of us. For the remainder of the year, we assume a normal weather garden season and that inventory dynamics will stabilize and we expect our pricing actions and cost control measures to largely offset inflation. As such, we are maintaining our EPS guidance of $2.60 to $2.80 for the year. And third, our long-term outlook remains favorable. Both Pet and Garden are dynamic growth categories with numerous consumer trends that underpin sustainable growth potential for years to come. We remain confident in the competitive strength of Central and our Central to Home strategy as the roadmap to create value for our customers and shareholders. Now letâs take a look at our two segments starting with Pet. Sales in the Pet segment were 5% below prior year largely due to our decision to discontinue low-profit private-label product lines, especially in pet beds. On a positive note, we saw robust sales growth in our dog and cat brands, as well as outdoor cushions. Pet remains an attractive growth category and while our sales were down in the quarter, we drove an increase in our POS by 6% versus prior year. This is a further indication that retailers are still working down their inventories and we expect that to normalize by the middle of the year. Thanks to our investments in capacity expansion and automation in the last two years, our pet service levels are no longer a headwind and are now in the mid-to-upper nineties. Moreover, our efforts to grow capabilities around consumer insights, brand marketing and innovation are beginning to pay off as evidenced by market share gains in dog treats, dog toys, small animal, pet bird, aquatics and equine. Another near term dynamic impacting portions of our business is the change in pet adoption rates. Following a few years of growing pet ownership during the early COVID period, we are now seeing a flat to declining trend. This unfavorably impacts consumer demand for durables such as fish tanks, small animal enclosures, and other new pet durable goods. The difference between consumable and durable sales trends is more than a ten-point spread in the recent quarter. Our eCommerce business continues to significantly outperform brick-and-mortar channels with solid growth in the first quarter, including double digit gross sales increases in our dog and cat businesses. eCommerce now represents approximately 23% of our pet consumer sales. We are continuing to prioritize investments in digital capabilities and talent, and weâre pleased with our eCommerce market share performance. Similar to our fiscal 2022 fourth quarter, we gained share broadly across pet supply categories on a leading pure play etailer, including aquatics, reptile, small animal, pet bird, dog treats, and dog toys. We keep a close eye on consumer behavior, including any change in purchasing patterns. While there may be a shift to private label in a future recessionary environment, in aggregate, we continue to see our branded pet business outperforming private label. Turning now to our Garden segment, our fiscal first quarter typically represents only about 15% of annual Garden sales. So weâre careful not to read too much into this quarter, since the Garden season is still in front of us. We anticipated our first quarter would be challenged largely as a result of the overhang from last yearâs poor Garden season, including higher inventory levels, unfavourable fixed cost absorption, and weaker demand. In addition, our top three customers saw lower foot traffic ranging from mid-single to low double digits below prior year. With that backdrop, our Garden sales declined 6% versus prior year, driven by weakness in live goods, and controls and fertilizers. Bright spots were Wild Bird and Grass Seed, which both saw sales and market share growth. Wild Bird continues to be a strong business for us. The category has been reignited post-COVID with more and younger households participating in the hobby. And our Pennington brand is on its third consecutive year of market share growth. Grass Seed also grew sales and market share in the quarter, driven by recent innovation and improved marketing. While our overall Garden sales were down, we are encouraged by the low-single-digit growth in POS, which is lapping 14% POS growth in the prior year. This indicates that consumers remain engaged in the Garden categories. And as we move into Q2 and the back half, we will be lapping softer comps. Our customer fill rates are now consistently in the high 90s back to historic levels. And while still a relatively small part of our Garden business, weâre pleased with our Q1 eCommerce POS growing 30% versus prior year. Now let me share a few quick comments on our strategy. We remain committed to our Central to Home strategy as the strategic roadmap to unlock value for our shareholders, and we continue to make good progress across a number of key priorities. In todayâs call, I will focus on two of our strategic pillars, consumer and cost. First, our consumer pillar. Over the last few years, weâve made investments in advancing our growth capabilities through talent acquisition, increased working media, bigger and better consumer-driven marketing and innovation ideas, and importantly improved tracking and measurement tools. The latest quarter suggests that our investments are beginning to pay off. While the Q1 demand environment was sluggish for the reasons I previously outlined, we are growing our POS and our market share across both Pet and Garden in Q1, we are growing faster than our competition across the majority of our categories. And in the fastest growing sales channel, e-commerce, we are growing market share, especially in the largest pure-play platform. Second, shifting to our cost pillar. In fiscal 2023, the theme internally is all about cost and cash. This means we will take additional short-term actions to cut costs while developing longer term initiatives to build margins. It also means we are concentrating our efforts on reducing inventory and converting it into cash. We believe thereâs a meaningful opportunity across Central to simplify our network, optimize our footprint, streamline our portfolio, and better leverage our supply chain scale across procurement, manufacturing, and distribution to improve our cost structure and build margins over time. We are taking a measured approach here. This is about evolution, not revolution, and weâll share more as we firm up our longer term plans to improve margins and fuel growth. So to summarize, we remain confident in the competitive strength of Central and our Central to Home strategy and the fundamental trends that support Pet and Garden industry growth. We knew that Q1 would be a challenging start to the year and as the year progresses, we assume a normal weather garden season and that inventory dynamics will stabilize and we expect pricing actions and cost control efforts to largely offset inflation. I remain confident in our teamâs ability to navigate and perform. As such, we are maintaining our EPS guidance of $2.60 to $2.80 for the year. Thank you, Tim. Good afternoon, everyone. Building on Timâs remarks, Iâll share with you details of our first quarter results for fiscal 2023. Net sales were $628 million, a decline of 5% as we are comping strong growth in the prior year first quarter. Consolidated gross profit was $172 million, a decrease of 13%. Gross margin of 27.4% was down 260 basis points, largely driven by our Garden segment due to further cost inflation and commodities and much lighter sales volumes, resulting in unabsorbed overhead, which were partially offset by our pricing actions. SG&A expense of $171 million was in line with prior year. However, SG&A as a percentage of net sales increased 130 basis points to 27.3% due to lower sales. Operating income declined by $26 million to $406,000 and operating margin decreased 390 basis points to 0.1%. The decline was largely driven by our Garden segment, which saw continued cost inflation and unabsorbed overhead due to lower sales, which were partially offset by lower commercial spent. Net interest expense of $14 million was in line with the prior year quarter. We had a net loss of $8 million compared to net income of $9 million a year ago. Our loss per share was $0.16 compared to earnings per share of $0.16 in the prior year quarter. And adjusted EBITDA was $29 million compared to $52 million in the prior year. Our tax rate was 24.2% compared to 20.7% in the prior year quarter, due to a lower benefit from stock-based compensation. Now provide some insights in the segments, starting with Pet. Pet segment sales of $416 million declined by 5%, driven by our decision to discontinue some low profit private label pet bedding product lines and SKU rationalization. Lower demand and durables especially in aquatics, strength in dog and cat and outdoor cushions partially offset the declines. Pet segment operating income declined by 13% to $40 million and operating margin decreased 90 basis points to 9.5%, largely driven by inflation and lower sales, partially offset by our pricing actions. Pet segment adjusted EBITDA was $50 million compared to $55 million a year ago. Turning now a Garden. Garden segment sales were $212 million down 6% due to lower sales in our live plant business and controls and fertilizer, which were partially offset by continued strength in wild bird and grass seed. Garden segment operating loss was $11 million. Garden segment operating margin decreased to a negative 5.1%, mainly driven by inflation and the impact from lower sales, partially offset by our pricing actions. Garden segment adjusted EBITDA was breakeven compared to $16 million a year ago. Now moving to the balance sheet and cash flows. Cash and cash equivalents at the end of the first quarter were $88 million compared to $296 million a year ago. The decrease was mainly driven by inventory build over the last 12 months. About half of this build was cost inflation and the rest was volume to improve fill rates and also pre-build leading up to the garden season. Net cash used by operations was $63 million for the quarter compared to $92 million a year ago. The decrease was mainly driven by lower working capital requirements. As Tim mentioned, we entered the year with higher inventory and built less inventory this quarter than in the first quarter a year ago. CapEx was $18 million for the quarter, 27% below prior year. Remember, last year we significantly invested in capacity expansion across our businesses. This quarter, we invested in dog and cat, small animal bedding, live plants, in our bird feed businesses. Total debt of $1.2 billion was in line with prior year. Our leverage ratio was 3.1 times at the end of the quarter compared to 2.9 times a year ago well within our target range. We had no borrowings under our credit facility at the end of the first quarter. Depreciation and amortization for the quarter was $22 million compared to $20 million in the prior year quarter, primarily driven by higher depreciation due to our recent investments in capacity expansion across our businesses. During a quarter, we repurchased approximately 251,000 shares or $9 million of our stock. And finally, turning to our fiscal 2023 outlook, which remains unchanged from our guidance in November. That said, we continue to take into account the ongoing economic uncertainty, continued cost inflation, unfavorable retailer inventory dynamics, as well as changing consumer preferences as they continue to adjust to increased cost of living pressures. Nevertheless, we remain committed to our Central to Home strategy. However, in the near-term, we are taking a more deliberate approach to investments in our consumer growth agenda. As Tim said for fiscal 2023, we are squarely focused on cost and cash. This means we are tightening our belt, including a pause on hiring, a reduction in travel expenses, decreased CapEx to $70 million to $80 million of which the majority is carryover and maintenance, and we are working on converting inventories into cash. Thanks to our strong financial position and the amount remaining on our credit facility, we remain on the lookout for great growth and margin accretive companies in both Pet and Garden. Lastly, we expect a tax rate in the range of 22% to 24% similar to 2022. All said, we continue to expect earnings per share for the year to be in the range of $2.60 to $2.80. Our guidance reflects our belief in the competitive strength of Central and the long-term trends supporting growth in the Pet and Garden industries. Consumers remain engaged in our categories as demonstrated by our POS consumption trends that have been consistently stronger than our shipments in both Pet and Garden. This gives us confidence in our full year guidance. And as we indicated in our November call, we expect fiscal 2023 to be skewed to the back half with EPS in the first two quarters below the prior year quarters and EPS growth in the second half. As always, this outlook excludes any impact from potential acquisitions or restructuring activities undertaken during the year. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Bill Chappell with Truist Securities. Please proceed with your question. Hey, just want to talk a little bit more about kind of the POS numbers in the quarter and try to break that down between price and volume. I mean, I would expect that you had at least kind of a 5 point â 5 percentage point tailwind from pricing into this quarter. And so I didnât know if youâre seeing volume still up on a year-over-year basis in Pet and Garden and as you look forward, will you lap that pricing where we could see things turn downward on POS or do you have enough pricing to carry sales growth into 2023? Sure. Thanks, Bill. Look, our pricing continues to be an important part of the overall algorithm in this inflationary environment. And as you look at Q1, we priced again in the high singles. Thatâs a good chunk of that is carry over on pricing actions that we took in the last fiscal and then some select new pricing actions in the first quarter. As it relates the volume impact of that, we monitor that closely on a regular basis business by business. We continue to see an elasticity around one, meaning, weâre seeing that upper single digit volume decay off that upper single digit pricing. And thatâs more or less our expectation. Obviously the mileage varies, we have some views that are more elastic, some businesses and brands than others, but in aggregate thatâs what you see. As you go to the balance of the year, we still have a new pricing. Weâve got some pricing in this quarter meaning now weâre in the second quarter as you know, our fiscal second quarter thatâs landed. Our overall pricing envelope when you look at it in aggregate around a couple hundred million bucks, it is north of 90% landed with our customers. So we feel good that it will come through. Again, the wildcard, if there is one, is any sort of changes in elasticity versus our assumptions. And I think when you look at that pricing envelope for the balance of the year, and you compare that to our view on the inflationary envelope, we feel pretty good as I said in my prepared remarks, that weâll be able to between pricing and our cost control efforts largely cover that inflation. POS finally is, as you heard, remains strong and in positive territory. So while net sales was down in both Pet and Garden for the reasons that you heard on the prepared remark call. POS is up and itâs up mid single digits on Pet and itâs up single digits on Garden. So that we feel good about. Great. And then on gross margin, it was obviously down year-over-year, but still a little bit better than I was anticipating. Is that driven in part by just the mix shift in Pet of more consumables versus durables and is that something that continues or was that not that significant? Yes, I mean that played a role, the other piece too is we also got out of some private label bedding, which is lower margins. So some of that was also intentional on the Pet side and â but yes, a lot of it is the shift to consumables from the durable area. And Bill, the good news on Pet is gross margin on the quarter was basically flat. The gross margin degradation at a company level was Garden driven as Niko said on the call. And thatâs for the reasons that I think Niko shared and we certainly can elaborate on further. But overall, Iâd say on gross margin, feeling pretty good about being able to hold on the water line on Pet and a little bit challenged in the first quarter on Garden as we anticipated. We also had some of our higher margin businesses outperform in the quarter on the Pet side as well. So that helped margin. Got it. And last one for me. Just kind of early read in terms of how the retailers are thinking on the garden season. This is obviously the season hasnât really kicked off with the weather. But yes, I may imagine you have a pretty good idea whether theyâre all in, half in, not really sure if theyâre in for the season. Thinking of last year, trying to figure out whether it was more â last yearâs weakness was more weather related or more return to normal consumer patterns related. So what are you hearing or seeing from your retail partners right now in terms of how theyâre set up for 2023? Hi, Bill, itâs JD. Iâll take that question. Iâd say the feedback weâre getting from our retailers is overall very bullish. They do think that last year was mainly a weather driven challenge more than anything else. This year what theyâve done is take a more measured approach to flowing the goods to stores to set the stores at the beginning of the season. But weâve seen some nice pickup in POS. In fact, POS and shipments have both rebounded very nicely after the end of the quarter in early January here. So in my conversations with the retailers theyâre saying that theyâre going to take an aggressive approach once the season starts to break. The good news is weâre up against some pretty weak comps for the next couple of months. And I think if the retailers see that itâs going to embolden them to be more â even more bullish on the season, I think most of our season is going to â our consumption is going to take place between March and mid-June. And I think by then, first of all, we feel very good about our off shelf activity, our promotional activity, but the retailers seem to be remain engaged. And when weâve had decent weather, doesnât have to be stellar, but when weâve had just decent weather, the consumerâs very active in our company. I think once all that comes together, we are cautiously optimistic, but the retailers are very much engaged and bullish. Hi. Thanks for taking my questions. First just on inventory just the timing of converting that. Is that expected to happen in the next quarter or is that maybe more of a starting in the back half of the year? No. The way our business is, you see the working cap build kind of through the tail end of Q1 and then it peaks out sort of mid-Q2 and then starts to come down. A couple comments in inventory. In absolute dollars, it was obviously up about $180 million. Couple things I want to point out, we mentioned are focused on cost and cash. If you look at the quarter itself the inventories were actually down. We â a year ago in Q1, we came up about $160 million. And if you flip through the cash flow, youâll see that. And then this quarter, this last quarter, we are only up $85 million. And then thatâs reflected in cash used from operations, which was only $63 million versus $92 million a year ago. So you can kind of see the early sort of fruits of our labor. We were very serious when we said we were going to focus on cost and cash, and I think weâre starting to see the early stages of that with a lot more to come as the year plays out. Thatâs great color. Thank you. And then this thing about acquisitions, just talk about what youâre seeing in the M&A pipeline and maybe deal flow versus what you saw 12 months ago. Yes. I mean, weâve sort of said this on a couple of past calls. The deal flow has definitely slowed down. I think as we look at the volatility in the public markets, the private market tends to follow that. So, clearly deal flow has slowed, the pipeline is not quite what it was 12, 18 months ago. But weâre still out there. And we still have a number of deals that are in play and discussions that are going on. So itâs not going to deter us. For us, itâs all about finding the right fit, the right company, management team and the right margin profile for us. So weâre still going full speed ahead. All right. This is Taylor Zick on for Brad Thomas. Thanks for taking my question. Iâm curious on some of the factors. If you touch on some of the factors that have been impacting the business from an inflation standpoint, and kind of how youâre thinking about those for the rest of the year. And then additionally, if you can kind of just talk about maybe what your customers were saying in terms of pricing as you kind of continue to push these prices through? Thanks. Yes, I mean, as far as inflation goes, last year was unprecedented. Weâre still seeing some continued inflation into 2023, but itâs certainly moderating in our opinion. Everyone has seen labor has sort of flattened out. Delivery certainly has moderated, especially ocean freight. Fortunately we canât take full advantage of a lot of like the ocean freight, because we do have heavy inventory, so weâre not bringing in as much product right now. We need to sell through what weâve got. But I would say overall the trend, thereâs a moderation going on. That said, weâre still at historically very, very high levels. So, weâre still combating that. Yes. And the build on Nikoâs comments, I think you said it well, Taylor, look, weâre still in an inflationary environment and our total cost envelope is going up year-over-year. It is unfavorable. And you ask for a little bit, some of the details, I mean, certain of our commodities around grains, grass inputs, wheat and potato starch for dog treats, et cetera. These are still year-over-year and unfavorable cost input into our total envelope. And so and thatâs why weâre pricing as we price, because we have that pressure and we are seeking to do our best to maintain if not expand margin. But the order of magnitude of the increase is definitely diminished 2023 versus 2022 compared to 2022 versus 2021, as Niko said. Got it. Thank you. And then if I could just squeeze one last one. How did that pet to stocking kind of turn out this quarter relative to what you had expected for the last quarter? Yes for Q1, as Tim mentioned, our POS was 6% and our shipments werenât close to that, right? So, you can see customers continue to tighten their inventories. Our expectation is that weâll continue to impact us in Q2, and then it will normalize mid-year. Thank you, and good afternoon. I have two clarifications please. On the exit of the private label contract. I understand that it started last quarter, so youâre through the first half of it. So I want to just clarify that, and then youâre going to lap in the fourth quarter. So what is the magnitude of that impact? And on the EPS guide, of course, I understand this is like a small quarter, but can you talk about like cadence if we should expect basically inflection in the second quarter and how to think about it? And lastly, if you can talk about market share trends? Thank you. Iâll do that one. All right. Well have John Hanson take the pet bedding, Niko will take EPS, Iâll take market share. John? Yeah. So on pet bedding; we have a meaningful private label pet bed business. In Q1 of 2022, we proactively rationalized skews. And then in the back half, we decided to exit some low margin product lines to improve margins profitability. We started laughing that in the back half of fiscal 2023. Weâll see that throughout 2023. In this business and other businesses, weâre going to continue to critically assess our cost competitiveness to improve margin and improve profitability. So itâll be a â itâs an ongoing effort from us and to a degree, normal part of our business. And just speaking EPS, Andrea, so next quarter Q2, weâre still expecting EPS to come in a little bit lower than a year ago. As I mentioned in my prepared remarks, itâs really a back half story for us here as more pricing kicks in. We see a little bit more normalization in terms of retail inventories throughout the year. And then, weâre assuming a more normal sort of weather pattern as we go through that. And then all along weâre going to be controlling costs and cash. So itâs going to be a Q3, Q4 story as we head to the $2.60 to $2.80 guide. And then Andrea, on your third question on market share, I will say that we feel good that our market share performance is definitely a bright spot on the quarter. It continues a trend that started in the back half of last year. If I break it out across garden and pet, starting first with pet, we had broad market share gains across pet supplies. In my prepared remarks, I mentioned many of them. We grew market share in dog treats, dog toys, small animal, pet bird, aquatics, equine, feel good that we are outpacing those supply categories in which we compete. Notably as well, if I drill into e-commerce, as you would know, Andrea e-commerce remains the fastest growing channel by far relative to the brick and mortar footprint out there in the channel landscape. And on e-commerce and in particular of the largest pure play player whom you know, we expanded market share there as well. And thatâs the fast growing channel. So Iâd say, sales on the quarter, they are â what they are, they were down 6% in pet. But you kind of peel that back and say, as per your first question, part of â a big part of it was a purposeful decision to exit lower margin private label pet bed. Thatâll still continue in the next quarter or two as John said. But you look at POS, POS up 6% and then you look at market share Nielsen syndicated data and you feel good about our performance relative to competition. Shifting to garden, garden was more muted in the quarter for the reasons we stated. But we gained market share in two of our biggest and most important categories. First in Wild Bird, this is our third consecutive year of market share expansion primarily behind brand Pennington and Wild Bird. And we continue to grow market share in grass seed, a very important category for us. And one, we turn the corner on grass seed market share mid last year with some of the launch of new innovation that weâve talked about Smart Patch, as well as a new fully digital marketing campaign. And we saw that positive share performance continue in the first quarter of this fiscal. Very helpful. Thank you. I was confusing the first part of my question on the EPS because when you said the first half, I didnât know if youâre adding back the losses and could â the losses in the second quarter? Could it still be higher or not? But it seems that itâs on isolation. The quarter is also going to be down from last year. Appreciate the clarification. Great, thank you. How much of your overall business in Pet & Garden is private label? You mentioned youâve got a sizable pet business, but can you just give us a little bit more color on how you see private label? Sure. I mean, in aggregate a private label is approximately 10% of our sales. Little noise in the â on the line. But private label is about 10% of our sales. The vast majority of our sales are our own branded products that we manufacture and bring to market; thatâs two thirds of our portfolio. And then the balance of the portfolio would be our distribution business where we are a distributor on both the Pet & Garden side for select third party brands. Okay, great. And then on the business that you exited, did you say how much sales you had done in that business in the fourth quarter in the first quarter last year? Okay. Okay, great. And then how much supply chain savings are built into your guide for 2023? Any kind of a ballpark that you can give us there? Okay. We havenât given that out either. A lot of the supply chain savings are early stage and timing of it is going to be a little bit tricky. So we were a little remiss in our November call to give firm numbers for the year. That said weâve got a number of work streams in progress right now. And building on Nikoâs comments, I mean, generally look weâve got a â weâve got a continuous improvement, net productivity cost out mindset in the company. I think ideally weâd like to look at around 1% of cost that we can impact and try to take out each year. Thatâs at a high level, but we donât as Niko said, we didnât guide to a given number. Thanks, afternoon. I just â I had one question. I was wondering, how you were thinking about the guidance you provided in November versus today relative to what youâre seeing in the consumer. So things have changed and I was wondering if you â if you were feeling that the consumer was tracking to where your guidance was potentially better or potentially worse? I would say broadly we feel the same. We guided at the end of November, so weâre only a couple of months on since our last guide. Thereâs no doubt that the consumerâs under pressure and I think our crystal ball like many others would suggest that thatâs not going away anytime soon. Having said that, looking at things like point of sale trends as you heard the consumer is still boarding with his or her dollars in our categories, and theyâre spending more than prior year. And that is true on both pet, which was low-single-digit POS growth, lapping a 14% POS growth in the prior Q1. And then pat in the mid-single-digits, I think we quoted 6%. So thereâs the ultimate test. Now a big part of that is the pricing, right? Our goods as well as competitive goods are more expensive. So on a unit basis; youâd see a slight down tick as a result of that. But overall, I think that the consumer remains highly engaged in both of these categories. Certainly when you look at recessionary environments over the last, call it 30 years both of these categories are resilient. We like to say here, theyâre not recession proof, but theyâre recession resilient. And consumers continue to love to spend time with their pets in treating them and aiding their health and wellness and then spend time, beautifying. Itâs a small cost outlay to beautify your backyard and improve things in your lawn and garden. So, Iâd say in general, back to the core of your question, nothing has â we have seen nothing in the last 90 days that gives us a very different view on state of consumer as it relates Pet and Garden. Good afternoon. Just on the Pet side and the consumer behavior, certainly it sounds like dog and cat, youâre seeing that resilience. The pet is a family member, but on the aquatic side, is it that the consumer is not shelling out for the durable goods or not getting involved in a new category or perhaps not replacing the fish when it dies? Yes, on the aquatics, which we did call out, thatâs a durable product, right? And we have seen, live animal sales slowing and a bit of a decline. And that does impact durable purchases. When somebody does buy that live fish, they often buy a fish tank, right? When somebody does buy the guinea pig, they often buy a small animal enclosure. So that, certainly has had an impact Okay. And then just lastly, when you look at M&A, you mentioned it had slowed. Is it just that the financing is not there or is it that folks have kind of pulled down, pulled back and hunkered down and saying, Iâm not going to sell into this environment? Yes, I think, itâs more the latter, especially for us because, our balance sheet is in good shape. So we are, a great buyer from the standpoint of financing and whatever we canât finance from the balance sheet, we can get, on the outside. So itâs really more the latter. Weâre not seeing the volume of deals out there that we saw 12 months, 18 months ago. And again, I think just looking at the public markets and the volatility thatâs there, I think, a lot of folks are scratching their heads in terms of, whatâs deemed a fair valuation in this day and age. And then especially in our categories, that got such a great lift during COVID and for the most part, theyâre starting to flatten out. And so if youâre a seller, you may opt to wait and see how things play out, so just the overall volume is a little more muted. And we have reached the end of the question-and-answer session. Iâll now turn the call back over to Tim Cofer for closing remarks.
EarningCall_928	Greetings, and welcome to the Teradyne Fourth Quarter and Full Year 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Andy Blanchard, Vice President of Corporate Communications. Thank you. You may begin. Thank you, Daryl. Good morning, everyone, and welcome to our discussion of Teradyne's most recent financial results. I'm joined this morning by our CEO, Mark Jagiela; President, Greg Smith; and our CFO, Sanjay Mehta. Following our opening remarks, we'll provide details of our performance for 2022's fourth quarter and full year, along with our outlook for the first quarter of 2023. The press release containing our fourth quarter results was issued last evening. We're providing slides on the Investor page of the website that may be helpful to you in following the discussion. Replays of this call will be available via the same page after the call ends. The matters that we discuss today will include forward-looking statements that involve risk factors that could cause Teradyne's results to differ materially from management's current expectations. We encourage you to review the safe harbor language contained in the earnings release as well as our most recent SEC filings. Additionally, those forward-looking statements are made as of today, and we take no obligation to update them as a result of events occurring after this call. During today's call, we'll make reference to non-GAAP financial measures. We've posted additional information concerning these non-GAAP financial measures, including reconciliation to the most directly comparable GAAP financial as it were available on the Investor page of our website. Looking ahead between now and our next earnings call, Teradyne expects to participate in technology or industrial-focused investor conferences hosted by Citi, Susquehanna, Luke Capital and Morgan Stanley. Now let's get on with the rest of the agenda. First, Mark and Greg will comment on our recent results and the market conditions as we enter the new year. Sanjay will then offer more details on our quarterly results, along with our guidance for the first quarter. We'll then answer your questions, and this call is scheduled for 1 hour. Hello, everyone, and thanks for joining us this morning. I'm going to limit my remarks today as Greg will be taking full leadership of the company from next week. I'll leave the outlook to Greg, and Sanjay will provide the financial details, including our updated midterm earnings model. 2022 was another good year for Teradyne with our second highest sales in history. Midyear, we saw a turn in our markets with the SOC test market softening after 6 years of growth and Industrial Automation growth slowing. At the company level, our financial results were slightly under the long-term trend line after operating well above trend in 2020 and 2021. This oscillation around the trend line is a familiar pattern that we expect to continue. We manage our business investments according to this trend line and tend not to chase these excursions up or down. Sanjay will note how these trend lines roll into our updated midterm earnings model. Looking at a longer-term perspective, over the last 8 years, Teradyne's revenue has about doubled and EPS has grown about 4x. Growth of our core test markets is part of the story, as is expansion into new markets like Industrial Automation and System Level Test. This, combined with a rich cash flow and a balanced capital allocation plan, has been the recipe for shareholder returns. As you will hear, we see all of these drivers remaining in place for the years to come. Since this is my last earnings call, I would like to thank all of you who follow, invest and influence our journey at Teradyne. As Greg takes on the role, I'm confident we won't miss a beat, and he's been a key part of developing and implementing our strategy for many years. Thanks, Mark, and good morning, everyone. Today, I will summarize the full year of 2022 and then comment on our early view of 2023. For the full year, we delivered sales of $3.155 billion and non-GAAP earnings of $4.25 per share. 2022 was the second-highest revenue in company history but down 15% from 2021's record level due mainly to reduced demand in SOC test, specifically in mobility and compute. This offset was -- this was offset somewhat by strength in the automotive end market, including substantial demand for ADAS processor test. Overall for 2022, we estimate the SOC test market was about $4.6 billion, down 6% from '21, and the memory market was down a similar amount for the year. Industrial Automation grew about 7% in dollar terms. Foreign exchange was a major headwind in that business. Our growth was 15% in constant currency. I'll divide my comments on market conditions into an early view of 2023, followed by our outlook for the midterm. In July of last year, we noted the Semi Test equipment market was entering a downturn, with demand declining in end markets such as smartphones. This began to create chip supply/demand and inventory imbalances. We noted these types of corrections typically have a 4- to 6-quarter duration. Now we're a bit more than 2 quarters in, and as the downturn continues, our customers continue to rebalance their production and inventory with end market demand. Much of the imbalance is in test-intensive end markets like smartphones, compute and networking, where we see lower utilization. At this point in time, with limited visibility into the second half, we estimate a market size for SOC tests to be 10% to 30% below 2022's $4.6 billion level. Major SOC producers are expected to start the transition to 3-nanometer later in 2023, and this could mitigate the headwinds a bit. Our historically largest end customer is expected to lead this transition, and revenue driven by this customer is expected to grow in 2023, moving from less than 10% of our revenue in 2022 to low double-digit percents of revenue for this year. Demand won't be finalized until Q2 and will be weighted towards the second half of the year. In general, our models factor in 2 key demand drivers, unit volume and device complexity. We've read the same press reports that you have, that smartphone volumes are likely to be down in 2023. The complexity growth associated with the 3-nanometer transition is likely to offset the test demand impact of the unit decrease, and the net effect is the increase in revenue that I've described. Our assumption that this transition is going to be gradual is likely to mute the peaks, but it will also fill in the troughs as the full portfolio migrates to 3-nanometer. Overall, averaging across the entire life of a process node, like 5-nanometer or 3-nanometer, we expect that each new node will drive continued higher test investment in total than the prior node. On top of that, increased unit growth and the addition of new part types to the portfolio will drive further increases in test investment. In the memory test market, technology transitions continue to drive demand. Faster interface speeds in DRAM with DDR5 and in flash with UFS 4.0 cannot be tested on existing testers and are driving purchases of next-generation ATE. Offsetting this technology-driven replacement demand is a difficult end market for our memory customers, which is likely to reduce capacity buying for this year. We are seeing some impact of that in the first quarter. On balance, we expect the memory test market size to be flat to slightly down from 2022. We expect Storage Test will be weak in 2023 due to excess capacity in the HDD end market. And Wireless Test demand will be soft on lower smartphone shipments and a demand lull in advance of the transition to WiFi 7 beginning in 2024. Shifting to Industrial Automation. As we expected, the macro-outlook in industrial markets is cautious, with weak industrial PMIs. We expect this will be a growth headwind in the first half of the year. Rolling up these headwinds and offsetting factors over the first half of the year, our current judgment for the total company has our second quarter about flat with Q1. However, in Industrial Automation for the full year, we have 3 notable factors that should help offset these headwinds later in the year. First, we do not expect the currency exchange impacts we experienced in 2022. Second, growth initiatives that began in 2022, including a channel transformation at UR, will gain traction. One component of the channel transformation is supplementing our traditional distributor channel with a focused OEM channel. That effort delivered 26% growth in 2022, and we expect this to continue in 2023 as our existing OEM partners continue to grow and we add additional OEMs and targeted verticals. The third factor driving IA growth is expanding the served market through new products. Most notably, in 2023, shipments of the new long-reach, heavy-payload cobot at Universal Robots, the UR20, which will ramp in the second half of the year. Barring a significant deterioration in the macro economy and reasonably stable currencies, we expect channel expansion, combined with new products, to drive greater than 20% growth for IA in 2023, weighted to the second half of the year. Now shifting to the midterm outlook. The short-term changes in customer buying patterns in semi cap equipment can be abrupt. We built our flexible operating model to accommodate those cycles. Our midterm plans track the long-term historical trends and the future demand drivers in each of our businesses rather than the short-term cycles. In any given year, we will land above or below trend, but that trend line has provided a reliable baseline for planning. Sanjay will be going through a quantitative view of our 2026 earnings model. To set up that discussion, I'd like to make a few qualitative comments to provide some context. Our 2026 earnings model shows significant revenue and EPS growth, and it's reasonable to ask why we assume midterm growth when the short-term environment is so weak. There are several factors that give us confidence in our midterm outlook. End markets, like AI and cloud computing, mobile processing and automotive, including ADAS and EV, are driving increased semiconductor content and increasing chip complexity. The deployment of advanced wireless standards will support ever higher data volumes and the pervasive deployment of edge AI. This end market demand will drive the timeline for new semi fab nodes and packaging technologies, like 3-nanometer, chiplets and gate all around. We have seen these technology transitions drive demand for test as the new nodes enable more complex chips and multichip packaging technologies like chiplets drive higher quality level requirements. Both of these factors drive longer test times and higher ATE TAMs. But the landscape is changing. These complex chips are increasingly developed by a new class of vertically integrated producers, or VIPs, including hyperscalers and automakers. We've had good design-in success to date with this emerging customer type, and these VIPs provide Teradyne with an opportunity to grow share in a space long dominated by legacy x86 architectures, where our share has historically been lower. These large, complex devices are used in uptime-critical applications and will require exceptionally low defect levels. To achieve this quality level, our customers will increasingly adopt an additional test step, system-level tests or SLT. We have a strong footprint in this growing market, and our design-in success with new customers is expected to be a growth driver over the midterm. Over the midterm, we expect to see WiFi 7 ramp and the rapid expansion of UWB-enabled devices for both precision location tracking and security. These new standards obsolete existing test instrumentation, and this replacement cycle will be a growth engine over the midterm for both SOC test and Wireless Test. Turning to IA. Global labor shortages and converging regional wages will continue to be unrelenting demand drivers. Market penetration for collaborative robots, including AMRs, is under 5%, providing enormous opportunities for long-term growth. The steady application of new technologies in our products will continue to expand our served market, and the transformation of our channel will enable us to serve a broader range of customers and drive revenue to the $1 billion level in 2026. Summing it up. Over the midterm, our strong core test businesses will support share gain and trend line growth, while IA will grow to be about 20% of company sales and become a meaningful contributor to earnings. In 2022, we have planted the seeds for future growth. We expanded our design-in footprint in the vertically integrated producer space and recognized substantial revenues from this emerging market. We expanded our customer base in SLT. We grew our IA sales in challenging business conditions and set the foundation for higher long-term growth at both Universal Robots and [Newark]. We're in a cyclical downturn in the semiconductor capital industry, and visibility in downturns is always a challenge. We expect sales and earnings to be below our midterm trend line in 2023. While we don't have line of sight to an inflection in demand, that's typical in these cycles. The market will recover, and we expect to return to historical growth rates driving strong earnings over our midterm planning horizon, as Sanjay will describe. Before turning it over to Sanjay, I would like to thank Mark for his more than 40 years of service to Teradyne and his 9 years as CEO. He has steered the company through an extraordinary period in the semiconductor industry and helped to assure our future growth through our investments in robotics. More personally, it's been an honor to work for Mark during that period. His candor and insight has made me and all of us at Teradyne better. Although we're facing a cyclical downturn, we're facing it as a company with tremendous financial strength, a great team and a clear strategic vision, thanks to Mark. Thank you, Greg. Good morning, everyone. Today, I'll cover the financial summary of Q4 and the full year 2022, provide our Q1 outlook and review our updated earnings model and capital allocation plans. Now to Q4. Fourth quarter sales were $732 million, which was approximately $20 million above our mid guide with non-GAAP EPS of $0.92. Semi Test revenue of $481 million was strong in Automotive and Industrial and SOC. System Test group had revenue of $100 million, down 22% year-over-year, driven by lower sales in Storage Tests serving a weaker HDD end market, slightly offset by higher defense and aerospace and Production Board Tests. LitePoint revenue of $40 million was down 23% from a year ago due to lower cellular and WiFi demand. Industrial Automation revenue of $110 million was down 2% from fourth quarter of last year, but up 7% in constant currency. Non-GAAP gross margins were 57.4%, above our guidance, due to favorable product mix and some resiliency costs deferred until the first half of '23. Non-GAAP operating expenses were $252 million, about flat with third quarter OpEx. Non-GAAP operating profit rate was 23%. We had one customer -- we had one 10% customer in the quarter. The tax rate, excluding discrete items for the quarter, was 12.3% on a non-GAAP basis and lower than planned because of geographic mix. We repurchased $2 million of shares in the quarter. Turning to the full-year results. We had revenue of approximately $3.2 billion. QUALCOMM was our one 10% customer for the full year. Gross margin for the year was 59.2%, OpEx was $1 billion, and operating profit was 27.5%. Non-GAAP EPS was $4.25. We generated $415 million in free cash flow in 2022. We returned $822 million to our shareholders through share repurchases and dividends and ended the year with $1 billion of cash and marketable securities. Our tax rate for the full year, excluding discrete items, was 16.3% on a GAAP and non-GAAP basis. Semi Test revenue for the year was $2.1 billion, with SOC revenue contributing $1.7 billion and memory $373 million. Our SOC sales contracted in 2022. But I'll note a bright spot for us in Automotive, where year-on-year shipments increased over 60%. In memory, our sales declined about 6% and were roughly evenly split between flash and DRAM. System Test group had revenue of $469 million, which was flat to 2021. Strength in defense and aerospace and Production Board Test was offset by a decline in our storage business. In Wireless Test, revenue of $202 million in 2022 was lower year-on-year, with declines in cellular and connectivity partially offset by strength in UWB. Now to Industrial Automation. IA revenue was $404 million, with UR contributing $326 million and MiR $77 million, which includes. Notably, MiR grew 26% for the year in constant currency, 19% in dollars. Large portion of IA sales are outside the U.S. and sold in local currencies. For the full year, 40% of the IA sales were in Europe, 35% in the U.S., 11% in China and the remainder in the rest of the world. From a profitability perspective in IA, the group was slightly above breakeven on a non-GAAP operating basis for the full year. Now to our outlook for Q1. In October, we expected Q1 revenue of approximately $640 million which was projected to be down 10% from our Q4 midpoint. Since then, 3 declines have occurred: First, approximately $20 million of revenue was pulled in from Q1. Second, we expect approximately $20 million of supply constraints in Q1, which has not been included in our guidance range. Third, approximately $20 million of memory related to capacity additions has shifted to later in the year, including other offsetting factors. Q1 sales are expected to be between $550 million and $630 million, with non-GAAP EPS in a range of $0.28 to $0.52 on 165 million diluted shares. First quarter guidance excludes the amortization of acquired intangibles. First quarter gross margins are estimated at 55% to 56%, down from Q4 due to lower volume and higher spending on accelerating our manufacturing and service resiliency. OpEx is expected to run at 39% to 44% of first quarter sales. The non-GAAP operating profit rate at the midpoint of our first quarter guidance is 14%. A few points to assist you in the modeling in 2023. First, the gross margin profile. In 2023, we expect gross margins will be below our model in the first half, driven by lower volume and additional spending on accelerating our manufacturing and service resiliency. We expect second half gross margins to return to our 59% to 60% model range. Regarding OpEx for the full year. We expect full year 2023 OpEx to be roughly flat, compared with 2022. IA profitability is planned to be in the range of 5% to 15% profit level on higher volume. Our GAAP and non-GAAP tax rate is forecasted to be 16.75% in 2023. Turning to capital allocation. Our strategy remains consistent as we take a balanced approach and prioritize free cash flow to maintain a minimum cash level to run the business and to have reserves set aside in the event of a significant downturn. Excess free cash flow will be prioritized for M&A, share buybacks and dividends. Prior share buyback authorization was replaced with a new $2 billion authorization. We expect up to $500 million of repurchases in 2023. Moving to our earnings model. We expect test and IA growth will drive 2026 company revenue to approximately $5 billion and non-GAAP EPS to $8.75 at the midpoint of the updated model. Gross margin is estimated at 59% to 60%. OpEx as a percent of sales will decline to 26% to 28%, yielding a non-GAAP operating margin of 31% to 34%. Some context on the model. Over the last 6 years, Teradyne has grown revenue at a compounded 10% rate and our non-GAAP EPS at a 19% rate. Our model midpoint, we -- at our model midpoint, we expect the 2016 to 2026 extended trend line for revenue and non-GAAP EPS CAGRs will be -- to be 11% and 19%, respectively, roughly in line with the historical rate and reflecting an increasing contribution of revenue from Industrial Automation. We have included a backup slide in the deck that illustrates these trends. In prior calls and Greg's comments today, we have outlined the key drivers for the test portfolio, including device technology trends, complexity and unit growth, which we anticipate will drive ATE growth over the 4-year horizon. Our test revenues are expected to grow at a CAGR of 8% to 13% from 2022 to 2026. For IA, we believe this market is still sub-5% penetrated. Greg has outlined the drivers over the midterm for this market, including labor shortages, new products and applications and channel transformation. Our IA revenues are expected to grow 20% to 30% from 2022 to 2026. Summing up. After 6 years of growth, the SOC test market slowed in the second half of 2022, and our financial model flexed down as designed. Despite the smaller test market, we delivered 27.5% non-GAAP operating profit, generated over $400 million in free cash flow, returned over $800 million to shareholders, reduced our share count by 4% and ended the year with $1 billion in cash. Going forward, our updated model builds on proven foundation of historical growth in test and IA and includes new drivers of future growth. While there is uncertainty in the short run, we are confident of the growth opportunities in the markets we serve and our team executing our strategy to capture that growth. The first one has to do with the Semi Test cycle. You did mention in your prepared remarks that perhaps we are in the second quarter of a typical downturn that would last 4 to 6 quarters. But wouldn't that be fair to say that the situation with Teradyne Semi Test is different? If I just look at your guide for Q1, it would suggest that Semi Test is already down by more than 50% since the peak some time in early '21, and perhaps Teradyne is well into the semi cycle correction. I would appreciate if you could help me reconcile, and then I have a follow-up. Thanks for the question, Mehdi. Our thought in terms of the Semi Test cycle is that we really don't have great visibility. Where -- we believe we are about 2 quarters in. And one thing to remember is that the peak that you're talking about was well above our trend line. So there was a fair amount of contraction to happen before we got into a region, where we would have considered it to be sort of a true downturn. So we're really measuring from that sort of July of '22 time frame. And we think we are just about 2 quarters into it. In terms of when it will inflect back up, we really don't have good visibility. There are a number of factors that make us feel a little bit better about the second half of the year than the first. But we don't see the kinds of leading indicators that the demand is returning. So I don't think we can give you a lot more color than that. Got it. As my second as a follow-up and as a follow-up to your comment, would it be fair to say that you have pushed out your targeted model by 2 years because you just -- we don't know the rate of recovery into '24, and yet you have a new target 2026. We may go through another downturn before we get to that target. But the main valuable here is the rate of recovery into '24, and we just don't know. And I also want to thank Mark for all the calls that he has hosted and wish him the best of luck in his next endeavor. Yes. Mehdi, it's Sanjay. Yes, I think it's a reasonable comment to say that the model has shifted to the right, really tied to the economic downturn. Really, as Greg mentioned, the inventory in the channel tied to the demand in the end markets coming down and the supply in the market. And maybe, Mehdi, thank you for those kind comments. I'll just make one quick comment on your first point, which is every downturn cycle, as we try to measure, it's different. But if you classify it around when does the imbalance between semiconductor supply and demand start to inflect and cause an industry-wide downturn, from that point of view, we see it as something that started last summer. So that's how -- why we mark it back to that date. So the SOC TAM in 2022, it came in at the high end of what your range was. So what segment drove that in 2022? And then, can you also segment for us, in 2023, how you see the mix? I mean, I think this year, you'd been -- you sort of gave us some numbers for each of the markets. Can you sort of tell us -- if you just take the midpoint of that down 20%, can you tell us sort of what the mix will be, and how the different markets will change? Yes. It's Sanjay. Yes, 2022, the SOC market, we estimate about $4.6 billion and continued strength in compute, a little bit down in '22 from '21 in mobility, and then strength in auto that we referenced in prior calls, and industrial continued along with service. And in '23, really across the board in SOC, we see a decline with the exception of service across the board. And most notably, of course, in compute and mobility, as those markets we've talked about, we see a supply and demand imbalance, as well as Automotive and Industrial. So really, it's across the board from a decline perspective, is our view. Okay. Okay. Got it. And then I guess, Greg, since you're taking over for the company, I know you've been running IA. And I guess the indictment I would have over the past 5 -- well, really more like 7 years in IA, the growth expectations sort of have consistently been downticking since 2017 or 2018. And I get there's been a ton of macro headwinds. But can you just sort of take a step back and sort of assess maybe the competitive element in the market? Do you think some of it is competition? I know you'd like to maybe do some M&A, it sounds like in IA. So I think some -- I mean I just get a lot of questions from folks that just question whether there really is as much growth in IA as you think there is because the model does keep on pushing out. Yes. So it's a really good question. The thing that I would note is the growth of the collaborative robotics, including AMRs, has been slower than we or other players in the market or analysts have predicted. So essentially, the TAM has grown at a slower rate than we were originally envisioning. So there are other competitive entries in the field, but in general, what we're seeing is that they're sort of raising the profile of the market and potentially helping to accelerate how fast we increase market penetration overall. So especially in cobots, where we have a really strong share position, we think that market entrants are both sort of a blessing and a curse, that they are certainly giving customers options to compare. We think we've got a good product, and we believe that we're going to be able to hold our share despite those entrants. And that's going to sort of increase market awareness and help to accelerate the growth of the whole market. In AMRs, it's much more of a toss-up, that we are one of the leaders in that market, but their -- the share is spread quite wide. And the market is still forming and people are still figuring out how to really make money in that space. We think we have a winning strategy over the midterm for that, but we have less certainty of the market growth in AMRs. So our plan is to take both of those things into account. But to sort of sum up, the growth has been slower in TAM. We don't think that it's a sign of loss of share due to competition. First off, Mark, congrats. And we'll miss seeing you on Valentine's Day, but I'm sure you'll find better dates from here. But first question, for SOC test market share in '23, I guess I would love to hear your thoughts on the moving parts. It looks like roughly 37% share in '22, which was a very off year for your Cupertino account. What kind of recovery are you assuming there? And I guess, what kind of offset on the negative side should we be thinking around Eagle from the slowdown in Auto, Industrial? Would love to hear your thoughts there. Sure. No, it's a good question. We're very cautious about making predictions about 2023. We have a reasonable line of sight, but a lot of uncertainty around even just the first half. In the second half, there are some things that could break our way and could drive both the market larger and our share higher. And there has also been -- in 2022, there's been quite strong buying in compute with traditional customers that has tended to push our share down. So I can't really give you sort of a target number for share in 2023, but we believe that we're going to see some share recovery. Very helpful. And then maybe more importantly, as you think about the underlying growth trends for SOC test, can you speak to 2024? And if you kind of had to rank-order the positive drivers for your business, whether it's 3-nanometer, a recovery in auto, hyperscalers starting to really expand, could you kind of walk through the 3 most important drivers that we should be thinking about into 2024? Yes. So I think you hit many of them. So I think that we are more bullish about 2024 than we are about 2023, certainly. There's -- it's a cloudy crystal ball to try and figure out what's going on. But the positive drivers, I think you hit an important one, that 3-nanometer is going to have much broader adoption across the industry, and 3-nanometer enables a significant increase in device complexity. That's always been a really good driver for ATE TAM. The hyperscalers and automakers, we think that, that is going to be a -- we tend to think of it more as a share gain opportunity than a real TAM driver. So if you think about -- the end market has a demand for a certain number of semiconductors, those semiconductors are going to come from traditional suppliers or these vertically integrated producers. We think that we have an opportunity to do well with that class of customers and potentially shift some share. Overall, I think I hit kind of the high points around AI, cloud computing, a recovery in mobile and especially increasing semiconductor content in automotive. The one thing that could happen in 2024 is we're seeing unit declines in smartphones in 2023. And typically, if people take time off, if they slow down their refresh cycle for their phones, the following year tends to have a little bit more positive task to it. So that may also help with the rebound. I guess for the first one, I know you're sort of seeing the test market, particularly on the SOC side, being down, particularly in the first half. But -- I mean, you called this sort of the early part of a down cycle as well. But when you sort of rely on your experience going through prior down cycles, how would you sort of think about the recovery path between the different pieces here? Like should we expect memory test to sort of rebound sooner? Or are there certain pieces of SOC that you would expect to sort of rebound a bit faster than the others? How should we think about sort of the recovery path? And then I have a follow-up. That's interesting subtlety. So I think your question is really, how should we expect the shape of the recovery? Do we expect it to come first in SOC, first in memory? The first thing that I'll say is that, right now, it appears that the SOC market is impacted more than the memory market in terms of 2023 TAM. And that's mainly because of these technology transitions in memory that are driving tester purchases, even though there isn't a need for more capacity. What that says to me is that, when there is a recovery, it's probably more likely to be SOC-led than memory-led because there's sort of a capacity overage in memory that is going to need to be absorbed as the end market for memory recovers. So that's just my opinion. I think it's pretty murky. So it could turn out a different way. But I think SOC is likely to snap back a little faster and harder than memory would. Okay. And for a follow-up, and I apologize if you've discussed this already on the call, I jumped a bit late. But in terms of sort of your expectations for what sounds like a bit better sort of second half versus first half, I mean, is -- how much of that is driven by sort of one of the primary customers moving to 3-nanometer? And have you -- are you able to provide a split of how you're thinking about sort of first half versus second half in terms of revenue? All right. It's Sanjay here. Yes, I think from a revenue perspective, right now, our plans in the first half, as we provided, are lower, obviously, than the second half of '22. And we do expect an increase through the year really tied to IA and including in Semi Test. And we do expect that to occur in the SOC market as well. Yes. But we're not able to sort of predict a 2023 in full, so we really can't give you an exact percentage, this percent first half, this percent second half. We're cautiously optimistic that it will be bigger. Again, best of luck, Mark. And Greg, congratulations and look forward to working more with you. Maybe first question, just to clarify on the complexity. You outlined again that you expect your largest customer to grow year-over-year and expect -- I believe that complexity-driven revenue will occur mostly in the second half of the year. And so while the sizing sounds fairly similar, is this later than you anticipated maybe 3 months ago from a timing perspective? And just how would you describe why that those shipments could occur later towards the second half versus sort of maybe in 2Q, but where I might normally expect it to be concentrated? Yes. Thanks, Brian. Yes. I think it is a bit later than we've seen in some other years. Our customer always tends to firm up their demand during the second quarter. But oftentimes, they have sort of a directional idea of what they'll need. I think the combination of softness in the smartphone end market and this technology transition is pushing those decisions a little bit later in the year. But that's sort of our outside observation. Got it. And I mean this is probably just geared up to a plan at the moment, which obviously is subject to change or revision. But do you have sort of a -- or could you give us a sense of where test cell utilization is broadly across our device end markets? Maybe where you think it gets to by midyear and where it could end the year, based on your current planning? Yes. So it's -- measuring utilization is something that's challenging to do, and so the absolute numbers aren't perfectly trustworthy. The thing that we try to do is we try to use the sort of a consistent method to look at it each quarter, so that we can trust the deltas. So if things are moving down, then that's not great. If things are moving up, then that is a good leading indicator. And what we've seen across the fourth quarter of 2022 is that utilization is declining, especially in OSATs. It's helped -- holding up a little bit better inside of IDMs. And we are -- we expect it to sort of bottom out around where it is, and potentially, utilization to increase through the back half of this year. But it's definitely softened in the second half of '22. Got it. I appreciate the comment. Maybe if I could just sneak one thing on Automation. Greg, you provide a growth rate for the OEM business through UR, 26% last year. Can you give us a sense of how large that is, the significance relative to UR sales? And also, is that margin profile similar or different relative to traditional channels? Let me take that in backwards order. So the margin in the OEM channel right now is the same or better than our traditional channels. So that is a potential operating margin improvement for that business. In terms of the portion of sales, if I'm recalling correctly, I think it was 16% of UR sales in 2022, but we probably should double check that number. The weakness in SOC test this year, Greg, you mentioned it was pretty broad-based. I guess I'm a little surprised that Eagle Test, Auto and Industrial could be weak as well, just given how your customers sound as of today. Are you seeing weakness kick in, in the near term? Or are you embedding some sort of conservatism as you progress into the second half? Yes. We're -- I think it's safe to say that we're baking in conservatism into the 2023 plan for Automotive and Industrial. It's been a very, very strong year for that in 2022, and it sustained very well through the whole year and into the first quarter. But we've definitely modeled declines in that market as well. Got it. And then as my follow-up, a high-level question for you, Greg. I know you've been with the company for a long time, you've partnered with Mark for a long time. From a top-down kind of strategy standpoint, how you manage the portfolio? How you think about capital allocation? Buybacks versus M&A? What do you intend to inherit? And what are some of the changes you might introduce going forward? Yes. So it's an interesting question because I helped to bake this cake. The strategy that we have in terms of a capital allocation strategy that prioritizes M&A, share buybacks, dividends, nothing is going to change in terms of that strategy. The thing that's happened is we've been on the sidelines since 2019 in terms of M&A, mainly because when we did our analysis of the valuations, it didn't seem like we would be able to do something that was beneficial to our shareholders by using our capital in that way. It's a different market now. And we assume that valuations are going to become more reasonable. And so you may see different outcomes across the next few years than you've seen in the past few years. That's not a reflection of a change in strategy, it's more of a change in the business conditions. Congratulations and best wishes to both Mark and Greg. For my first one, from what you have described about the different segments, it seems like full-year sales are in the ballpark of being down 10% to 15% year-on-year. I just wanted to make sure I'm in the ballpark. And if yes, I wanted to check how you expect your mobility sales to do this year versus last year. It's Sanjay, Vivek. Thanks for the question. Yes, we do expect full-year sales to be down. And really, as you can see with our first quarter guide and our comments throughout the call, visibility is really unclear in the second half. And that's something we've learned from prior downturns, the depth and the duration of this downturn is questionable. So it's really challenging to provide a full-year view. But I would give you the directional -- yes, we agree. We expect it to be down. From a mobility perspective, again, in earlier questions, how do we view the TAM? We view the TAM in mobility to come down. And again, our revenues are expected to come down as well, as that market significantly, we believe, is softer, just given the inventory in the channel and demand coming down and volume. Got it. And for my follow-up, I'm curious, for the 3-nanometer transition, do I absolutely need new testers? Or is it possible to just reuse existing tester capacity? Yes. Vivek, that's an excellent question. So unlike the memory market or the Wireless Test market, where you need new equipment for new standards, and that drives replacements, in node transitions like 3-nanometer, for the most part, the installed capacity is perfectly capable of testing the new part. And so the tester demand is really driven by increased complexity. So if you are testing a part that takes longer to test, you're going to need to add to your test capacity, test the part on both the stuff you already own and then the new testers that you buy. And so we look really carefully at how much of the industry is on a particular node because that drives basically the number of transistors that have to get tested. So it's definitely -- there's a high degree of reuse in the SOC market as nodes transition. Got it. So there is a scenario where, if 3-nanometer volumes are low enough, that they don't really need to buy new testers in the back half, right? Yes. That's certainly one scenario. It's not our current best view, but things could certainly play out that way because of this balance of units versus complexity. Mark, thanks for all your help, and welcome, Greg. Two quick questions. First one, Sanjay, you mentioned about gross margins in the back half of the year kind of going back up. Kind of curious, what gives you that comfort, especially given the fact that if auto does roll over, those are high-margin Eagle testers that get out of your profitability equation? So I'm just kind of curious on the second half gross margin. And then I have a follow-up. Sure. Thanks for the question. So I think a couple of things are included in our plan. The first thing is we expect to gain some operational efficiencies, some tied to specific programs, I would say, mainly in our IA portfolio. There are also some price increases baked into our -- that are rolling through in the second half, and some volume that is anticipated in the second half. Got it. Very helpful. And then as a follow-up, maybe for Greg. Kind of curious, in the past, you folks have mentioned how -- I understand you're not impacted by some of these China export controls because it's more of a front end. But the Chinese OSATs have been a big component of your China sales, and they might also see a slowdown if some of your front-end counterparts are seeing weakness. I'm kind of curious how to think about China on a go-forward basis, especially given the fact that through 2021 and the first half of 2022, Chinese OSATs seemed to have ordered a lot of equipment. Yes. So that's -- it's a good question because most of the business that's going through Chinese OSATs, it comes from 2 places. There are local Chinese fabless specifiers that are driving volume through that value chain. And then there's also companies that are from other places that are utilizing those facilities. What we expect is that, if there are issues in terms of producing chips in China because of any sort of restrictions, the non-Chinese specifiers will move their supply chains. They still need to build their chips. They will move to other parts of the world, other facilities to do that. The indigenous Chinese sales, that could be affected by the new trade regulations that are in place. But I'd like to point out that, that's not the majority of our revenue in China, and it's not the majority of the business that -- of the TAM in China. So our exposure there is limited to probably less than 5% of our total revenues. So I just wanted to dig in a little bit on the compute SOC side of things. So you mentioned that you're seeing a lot of digestion that's going on in the traditional x86 markets, where you have lower share. So does that, in a way, put you in a better position? Are you seeing things -- are things different on the hyperscalers versus the traditional x86 architectures? So that's a really good question because 2022 was a terrific year for traditional compute suppliers, and they drove a lot of tester purchases. We are seeing that soften in the back half of the year, and we expect that to remain soft, going into 2023. The new vertically integrated producers, including hyperscalers, are running to it on a different track. They have new parts that they're designing, that they're releasing to production. And those parts typically need different tester configurations that are driving capacity in different places than the traditional compute specifiers. So we do think that, that's going to be a stronger part of the compute market in 2023 than the traditional -- there'll be softness in the traditional market. That's great. And then for my follow-up. On the automotive side, there's, I think, portion of your revenues are tied to legacy parts and some would be more on the ADAS side of things. Could you help me understand like what that split is, essentially? Is it a 50-50 split? Or is it more levered to traditional and less towards ADAS or other way around? Yes. So it's definitely a market in transition. If you look back in time, legacy automotive parts, airbag controllers, engine controllers and MCUs, was sort of the majority of that market. And last year, that market would have been in the $600 million to $800 million range. There are new part types, and there are 2 types of new part types. One are ADAS, which are complex digital devices. And the other would be power devices for battery management and for high-power management going into electric motors, in EVs and hybrid vehicles. That part is, in 2022, would probably have been maybe 2/3 of the size of the traditional automotive. Well, actually -- so the number that I gave you in terms of the size of the automotive market includes these new classes, and I would say that in 2022, it was probably a little bit more than half in these new stuff that's growing, the EV and ADAS, and slightly less than half in legacy. Moving forward, we expect the legacy stuff to track vehicle sales. So as vehicle sales increase, that would increase at a relatively slow rate. But the adoption of ADAS and the transition from internal combustion to electric vehicles is going to drive much higher growth rates in ADAS and power. And operator, can we sneak in just one last question, please? Operator Our final questions come from the line of Sidney Ho with Deutsche Bank. I just have one question. So you talked about your largest customer going from less than 10% of sales to, I think, ['22]. So call it $300 million, going to low double digits in '23. So maybe $100 million increase. But that's still quite a bit lower than in 2021. First, are those numbers right? And second, do you think that this, call it, $400 million range is the correct run rate, going forward, but maybe with less volatility than in the past? Yes. So I don't think I want to comment on the specific numbers. But directionally, I think you're not wrong. And your comment about smoothing out the troughs, that's our belief as well. As to what the sort of steady state average is, I think we're going to have to wait and see. We're pretty -- we have some optimism that, that average is going to be strong because of both new parts coming into the portfolio and the transition of the portfolio of all processors going to 3-nanometer and continuing to march in that way. So that's -- I think that's kind of our view, that we have some optimism that the peaks are going to be lower, the overall is going to be stronger. All right, folks. And we've overstayed our welcome. So thank you so much for joining us today, and we look forward to talking with you in the weeks ahead. And those remaining in the queue, I'll get back to you later this morning. Thanks so much.
EarningCall_929	Hello! And thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Electronic Arts, Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Welcome to EAâs third quarter fiscal 2023 earnings call. With me today are Andrew Wilson, our CEO; Chris Suh, our CFO; and Laura Miele, our COO. Please note that our SEC filings and our earnings release are available at ir.ea.com. In addition, we have posted detailed earnings slides to accompany our prepared remarks. Lastly, after the call, we will post our prepared remarks, an audio replay of this call, our financial model, and a transcript. With regards to our calendar: Our Q4 fiscal 2023 earnings call is scheduled for Tuesday, May 9. As a reminder, we post the schedule of our entire fiscal year of upcoming earnings calls on our IR website. This presentation and our comments include forward-looking statements regarding future events and the future financial performance of the company. Actual events and results may differ materially from our expectations. We refer you to our most recent Form 10-Q for a discussion of risks that could cause actual results to differ materially from those discussed today. Electronic Arts makes these statements as of today, January 31, 2023, and disclaims any duty to update them. During this call, the financial metrics, with the exception of free cash flow, will be presented on a GAAP basis. All comparisons made in the course of this call are against the same period in the prior year unless otherwise stated. Thanks Chris. During Q3, EA entertained hundreds of millions of fans through our games and multi-platform live services. Our teams delivered high quality experiences reaching global communities, providing 128 content updates across 36 titles. We launched two new AAA releases: NHL 23 in October, and Need for Speed Unbound in December, both earning strong reception and positive reviews. The just-released Dead Space has also earned high praise from fans and critics alike, being dubbed âa new benchmark for remakesâ and even âone of the best games of all time.â We drove record engagement during the quarter on some of our biggest franchises, even surpassing historical highs delivered over the last several years. Our player network also continues to grow, now over 650 million. While we delivered for our players and engagement was strong in the quarter, the macro environment remained challenging and impacted Q3 results. During the quarter we took measured action to reduce our expenses, and we continue to exercise cost discipline, further focusing our investments in key areas of growth. As we navigate the short-term, we remain focused on what fuels our business: delivering high quality entertainment and driving strong engagement across our global network. The passion and enthusiasm for interactive entertainment continues to grow. For more and more people around the world, games are a cherished and authentic way to stay connected with the people they care about, build community, and find joy through shared experiences. Across all of entertainment, people are diving deeper and engaging further with their favorite franchises. EA SPORTS FIFA is at the heart of global football culture, and once again we delivered strong engagement in Q3 across our entire ecosystem. Year-to-date net bookings from our FIFA franchise has grown 4% or 15% at constant currency. FIFA 23 is pacing to be the biggest title in franchise history, delivering record engagement in Q3. In North America alone unit sales are up over 50% year-over-year. FIFA Mobile engagement was up triple digits in Q3, and FIFA Online in Asia is hitting the highest monthly active users in years. This engagement fueled strong financial performance. We have incredible momentum in our global football ecosystem. For 30 years weâve been leaders in interactive football and collaborated with the most extensive network of partners spanning the globe. Our games are interwoven with the fabric of football fandom, averaging 300 million hours of gameplay every month. We are unbelievably excited to take this energy into the future with our EA SPORTS FC brand, where we'll deliver even more for fans as part of an expanding experience with endless ways to play, watch, create and connect through their love of football. Madden NFL is the worldâs preeminent interactive American football experience and one of the most powerful franchises in sports. We continue to invest in innovation to drive engagement and growth across this mega-franchise. Madden NFL 23 had a solid holiday quarter driven by Ultimate Team, and Madden NFL Mobile launched a new season and multiple in-game events further powering engagement. With big moments ahead, like Super Bowl LVII and Team of The Year, Madden NFL will continue to entertain millions of fans. Our EA SPORTS & Racing teams are the best in the business. The convergence of sport and entertainment is picking up pace. Through our investments in technology and new experiences, we will continue to push the boundaries and blur the lines between the digital and physical by empowering players to come together, express their fandom, and build online communities, both in and around our games. Our owned IP franchises are some of the most deeply engaging and culturally relevant entertainment properties in the world, with mega-franchises like Apex Legends and The Sims. Apex Legends has historically had a quieter Q3 as the live service model ebbs and flows against a seasonally crowded launch slate this time of the year. Moving into Q4, weâre already seeing a rise in engagement as we approach the gameâs four-year anniversary and the launch of a new season, bringing highly anticipated updates and fresh content. Apex is one of the few IPs in its genre with proven endurance to engage and re-engage players as they play, watch, and compete. The Sims is also evolving and growing as a live service. In Q3 we took the base game free to enter and welcomed over 10 million new players into the community, driving strong engagement. Our teams are gearing up to add more collaborative ways to further empower our community to unleash their imaginations. We have incredible opportunities ahead. To do more extraordinary things in service of our players and our people, we are making deliberate decisions and reallocating investments to prioritize our biggest growth areas, building global online communities around our biggest franchises, telling incredible interactive stories, and harnessing the power of our social ecosystem to create meaningful connections. Our teams are deeply committed to delivering incredible experiences for our players. As part of this commitment, we have made the player-first decision to move Star Wars Jedi: Survivorâs launch date to April 28. The game is a creative and innovative leap forward, going further into the experience of a Jedi, delivering more content, more exploration, and more fun. Anticipation for the game is incredibly high and the Respawn team known around the world for delivering top quality entertainment is focusing on the final polish stage to enhance performance, stability, and most importantly, the player experience. Giving the team these extra few weeks to deliver the best experience for our players will not only result in a higher quality game, but puts us in a best position to grow the long-term value of the franchise. Weâre also making strategic decisions around two mobile titles. Apex Legends Mobile won game of the year on both iPhone and Android. Despite this strong start, the ongoing experience was not going to meet the expectations of our players. After months of working with our development partner, we have made the mutual decision to sunset this version of the game. Weâve learned a great deal and have plans to reimagine a connected Apex mobile experience in the future. It is through these learnings, combined with a clear franchise strategy, that weâve also made the decision to stop the development of the current Battlefield mobile title. We know our community values a deeply connected ecosystem and our team is focused on delivering the best, unified cross-platform experience for our players. Everything we do is designed to inspire the world to play. As a company, our teams have demonstrated that with a culture of creativity, innovation and resilience, we can grow through transformative periods of change and lead the future of entertainment. As we look ahead, our teams remain focused and disciplined as we reshape our investments toward a future of accelerated content generation, increased direct player engagement and deeply connected ecosystems to bring more people into our global community. We are taking strategic actions to evaluate our cost structure as we navigate through the current macro environment. With our exceptional talent, our broad portfolio of amazing IP, and massive player network, we remain committed to delivering long-term value in our business. Thank you. As Andrew shared, we delivered strong engagement and high-quality titles again in Q3. Nevertheless, our results were mixed relative to our expectations. Based on Q2 trends and leading indicators, we had built our Q3 guidance on four key underlying assumptions: First, that our player network would continue to expand, and engagement metrics remain healthy. Second, we would see strong momentum for FIFA, our global football franchise. Third, that we would release high-quality new games into the market; and finally, that Apex would experience its typical seasonal low in Q3. While these assumptions were directionally correct, net bookings came in short of our expectations. We achieved new highs in our player network, sustained healthy engagement trends, and delivered a record quarter for the entire EA SPORTS FIFA franchise. However, the performance of new games, despite strong reviews, and of the Apex franchise, was below the levels we had anticipated, reflecting the challenging market dynamics. Recognizing the softer net bookings trend, we proactively took focused measures during the quarter to reduce our costs and lessen the impact on our underlying profitability. Now letâs go through the quarter in more detail. Net bookings for the third quarter were $2.3 billion, down 9% or 5% in constant currency, driven largely by a tough comp as we lap the launch of Battlefield 2042 and by Apex performance, partially offset by strength across the entire FIFA ecosystem and the launch of âNeed for Speed Unbound.â Madden 23 was level with a very strong quarter last year. Our life services net bookings were down 1% year-over-year or up 3% in constant currency. Growth at constant currency was driven by strength in FIFA, with rapid growth occurring in FIFA Online 4 and FIFA Mobile. On a trailing 12-month basis, live services were 75% of our business. We delivered Q3 net revenue of $1.9 billion, up 5% year-over-year. Operating expenses were down 3% year-over-year or flat on a constant currency basis, driven by lower marketing spend as we lap the Battlefield 2042 launch. Further, we reduced costs by just over $60 million by moderating our hiring and prioritizing our variable spend in the quarter. Operating cash flow in the quarter was $1.1 billion and we returned $377 million to shareholders through dividends and our ongoing share repurchase program. Now, moving to guidance. As we navigate an uncertain market, Iâd like to share more context about how we set our Q4 guidance. First and most important, we expect we will continue to execute well on the two most important drivers of our long-term success and growth: strong player engagement and the production of high-quality games, like the just-released and well-reviewed Dead Space. Second, we are confident that EA SPORTS FIFA will sustain and build on the strong momentum that we exited Q3 with. And third, based on our Q3 launch results, weâre taking a more measured approach for the highly anticipated Q4 launches. Next, we are committed to operational excellence and being disciplined in our investment decisions. The actions weâve taken during Q3 will reduce our total H2 operating expenses by approximately $140 million. In addition, we will continue to work to prioritize, spend broadly, evaluate our real estate footprint, and focus our investments on our best long-term growth opportunities. And finally, our Q4 guidance reflects the player-first decision to shift the launch of Star Wars Jedi: Survivor to Q1-FY24. Itâs important to note that while it changes the timing of reported net bookings, it does not change the overall lifetime economics, nor our expectations around free cash flow for Q4 or FY24. Now, on to our guidance for the fourth quarter. We are revising our Q4 net bookings guidance to $1.675 billion to $1.775 billion, which reflects the shift of Star Wars Jedi: Survivor to Q1, our decision to sunset Apex Mobile and updated expectations based on Q3 trends, in particular for launches happening in the quarter. We expect GAAP net revenue of $1.7 billion to $1.8 billion. We expect operating expenses to be $1.075 billion to $1.085 billion for the quarter, approximately $80 million lower than our previous expectation, reflecting our ongoing efforts to prioritize and focus our investment. As a result, we expect earnings per share of $0.05 to $0.20 for the fourth quarter. This Q4 guidance results in fiscal year net bookings of $7.07 billion to $7.17 billion. We are also revising our guidance for operating cash flow as a result of the updated net bookings guidance to $1.40 billion to $1.45 billion. With capital expenditures of about $200 million, that results in free cash flow of about $1.20 billion to $1.25 billion. For further details on our fiscal 2023 guidance, including our GAAP guidance, please see our press release. Before handing it back to Andrew, Iâd like to provide a few early thoughts on our fiscal 2024. As we look to next year, we see the main drivers of our business being our durable broad portfolio of live services. Our newly rebranded EA SPORTS FC franchise, Star Wars Jedi: Survivor, plus additional titles we will announce in due course. Excluding the impact of FX, we expect mid-single digit growth on net bookings and low double-digit growth on underlying profitability. If rates remain unchanged from today, that would equate to mid-single digit growth for both top and bottom line. Our business is anchored by incredible brands, evergreen live services, high quality games, and a growing player network. We will be focused on our investments as we build and scale our business, all while delivering amazing experiences for our players. Thanks, Chris. We drove incredible engagement and delivered high quality experiences in the quarter. As Chris shared, we are being disciplined and focused on what we can control to fuel our biggest growth opportunities. We are confident in our vision for the future, and with our exceptional talent, proven IP, and growing player network, EA is operating from a position of strength. Our audiences have an insatiable appetite for interactive entertainment and are engaging more deeply with the experiences they love. The future of entertainment is interactive, and no team is better equipped than EA to deliver amazing games and content to inspire the world to play. Thank you, Andrew, Chris and Laura. I wanted to â I would hope you could provide a little bit more color. I'm trying to reconcile some of the comments, from the press release and slide deck and your comments here. On the one hand it seems like certain titles are doing extraordinarily well; FIFA, Sims, but then in your guidance, you kind of update the expectations for Q4 based here, in particular around launches in games on Q4. So it kind of implies maybe the smaller medium sized titles aren't performing. So one, I was just curious if that's true; and two, what gives you the confidence that it's mostly macro and not competitive pressures across the other broader industry? Sure. Hi Andrew! This is Chris. I could take this one. So in my prepared commentaries I talked about what we saw in Q3 and the specific trend I point to is the fact that we talked about strong player engagement and high quality titles. But I also talked about the fact that the highly rated titles didn't perform to the level that we would expect it based on historical expectations for a title of that caliber. And so we're taking some of those learnings, and I do think that you know when we look at all the data and we analyze what we saw in terms of demand and results, we do believe that that's a reflection of the overall market conditions that we saw continued to mount throughout the quarter, and we've taken those learnings and we applied those into the Q4 guidance. Got it. And then just on the mobile side, what kind of learnings are you kind of taking from Apex Mobile, because it was Game of the Year, but clearly you struggled with a little bit of engagement. Is it who made it; is it the game â you know itâs just too PC based? Could you share kind of the learnings that you've taken away to determine why to cancel this one and cancel the Battlefield title? Yeah, great question, and I do believe we've learned a great deal as we've gone through this. Certainly, this game was in development for a long period of time as the expectation for the size and scale and complexity of mobile games continues to grow as the platform continues to mature over time. As we look at it, we really kind of compartmentalize into a few key categories. First, as you point out, this was a really good game built by really good teams, and it won game of year on both Apple and Android devices, which is an extraordinary achievement given the amount of games that are made. But a couple of things also were true inside of that: One is, there is a level of immersion and complexity to Apex Game Play in particular, which is very much about what Apex is about, verticality of game play and team based play that didn't translate quite as well to mobile devices as we had hoped. I think we've learned a great deal from that. Second is, the game while it really engaged the core deeply, and it actually attracted a lot of new users, which we think speaks volumes for the future success potential of the franchise, it didn't retain the more casual user at the rate that we needed it to, and in a game that relies a lot on team play and competitive play, liquidity of the overall player base is really, really important as you think about the future experience of players over time. And then third, I think the mobile market continues to be challenging, and we certainly saw â you know we launched into what was a soft mobile market, and with some changing and evolving kind of player personalities as we move through. So as we think about this on a go forward basis, we take those learnings and we apply the real strengths, which is we know Apex has incredible demand from both the core users and new more casual users. We know that we have the underlying ingredients to make an incredible game. We need to be thoughtful about the nature of the core game mechanics and the retention mechanics that we build into the game over time, and most importantly, as we look at the mobile market, the biggest new launches that are seeing the most success are the ones that are deeply connected to the broader franchise, where there's not always cross play, but it's certainly cross progression and a feeling that they are part of a single unified community and a single unified game experience. And so as we think about that for the future, that will be very, very important as we reimagine Apex Mobile. And certainly as we had those learning from Apex Mobile and we were developing into Battlefield Mobile, we anticipated that while Battlefield had also been in development for some time and was making good progress, given the construct of that game, it also was probably going to run with some of the same challenges, and rather than continue to push against that, we wanted to come back, take a breath, reset and really think about the broader franchise strategy and allow the leadership to build a true cross platform immersive game experience around a reimagined battlefield in the future. Both of these things represent strong learning opportunities for us, and both of these things represent an ability for us as a company to lean into two great franchises in a way that the mobile market is more aligned to for the future. Thanks so much. Maybe building on Andrew's questions, so I want to come back first to mobile. You know how do you think about the array of type of content you have on the mobile side, and how much of it is potentially exposed to sort of casual play that might act in a more sort of hyper sort of volatile mode as consumer monetization might be volatile, depending on what happens with consumer spending going forward, versus maybe some of your sports titles and mobile that have a very different trajectory from a spend perspective. So I want to sort of broaden out the conversation to what you're actually seeing on the spend side across an array of mobile that really runs the gamut first. And then second, I think we've seen a lot of folks in the industry talk about pushing titles out, out of â22 now and into â23 and calendar â23 and maybe even calendar â24. Is there a broader theme emerging around getting titles right before they launch, or are there elements where you need to see the council cycle possibly be maybe deeper into what it's happened over the last couple of years to maybe see the success. You want to see with some of the titles. How should we think about the broader narrative around content being pushed out across the industry and with you guys idiosyncratically? Thanks. Okay, that is two solid questions. Let me start and then maybe Chris and Laura can provide some color as we get in. First off on mobile, I think a few things that we start with, and certainly I think that we, you know we think through on a daily basis, which is while the mobile market continues to be a very challenging market to find success in, it also continues to be the world's largest gaming platform and certainly has the ability to attract more plays than any other platform. And so for us it will always be a very important part of our go forward franchise strategy. When we think about mobile broadly, we really think about the titles fitting into two key categories. The first category is what you speak to in the connective sports, but it's also true for Sims and Apex and Battlefield, and will be true for Skate, which is how is it part of a broader cross platform global community of play, and how do we unite and unify global communities of players around their core IP regardless of where they play on PC, mobile or console. This for us represents probably our strongest opportunity in mobile and certainly where you'll see us begin to really invest. When you look at what's been happening with FIFI up triple digits, it's really as we've started to bring the mobile title closer to the core franchise and start to operate it as a singular business with a unified play community around the world. Itâs how we're building for Skate, itâs how we're going to build for the future of the Sims, and with these decisions around Apex and Battlefield, itâs also how weâll build for those franchises. That represents an extraordinary opportunity for us to attract a much bigger global community to our biggest IP. It represents an opportunity to grow monetization on the mobile platform, but it also represents an opportunity to provide alternative ways for our existing core audiences who plan console and PC, to play when they are away from those core devices they have. And as we look at the mobile market on a go forward basis, we think that that will be where weâll find real strength for that part of our business. The other part is, the stand alone mobile native titles, and we have a number of titles that continue to perform exceptionally well. Star Wars Galaxy of Heroes, The Sims, some of the titles that we got as part of our Glu acquisition, Golf Clash. We'll continue to invest in those as well, but you should expect that as we think about the future, we're going to really lay our investment into our bigger franchise play. We will continue to drive the long term value of our existing standalone mobile titles and will probably invest less in new startup standalone titles, just because we think that's probably not where we will find strength in the industry over time. To hit your second part around title launches, and certainly I think we're hearing more about that across the industry, and I just, Iâd separate what you are hearing from us with everything that you're hearing around the industry broadly. While it might be â it might make sense to kind of draw a broader narrative, I think for us as we look at it, we launched a number of titles in Q3 and Q4 certainly with Dead Space and Need For Speed and NHL some of our smaller titles, and FIFA and Madden, we've launched an incredible amount of titles on time and at tremendous high quality. I think what we saw with Jedi, was this is an incredibly large game. It's you know both, immersive and creative and innovative, and the team just have come down the home stretch and really want to get to quality. And when we think about quality, quality is really a combination of three things: Innovation, Creativity and Polish. And that last element Polish, the removal of bugs and the removal of potential play frustrations is as important as the innovation and the creativity itself. And so as we look at our future, we feel that we've been executing extremely well till this point, around the titles and the title updates that we've been launching. We also feel incredibly bullish and positive around the trajectory of Jedi. And when the team came and sat down and said, âHey, if you let us have just a few more weeks, we think we can deliver even higher quality.â We really wanted to get behind and support them. After all, this is an incredible team with the first iteration of the franchise that they launched. They broke all kinds of records. They are deeply committed to the franchise, deeply committed to our partners at Disney and deeply committed to our players, and we really wanted to get behind them and support it, especially as it will not impact the overall health of the franchise. In fact, it will not only last with a better quality, but almost certainly increase the lifetime value of the franchise over time. Okay, thanks. So Andrew, you know we do have a bit of a setback in the transition to mobile, given the developments across Apex and Battlefield. So naturally this makes us worry a little bit more about how Glu was coming along, because the thesis at the time of the acquisition was to bring some of the success that has had in the more, shall we say the casual sports franchises in exporting that dynamic of FIFA, Madden, etc. So can you update us on your progress there? And I guess FIFA Online 4, triple digits, that's a pretty remarkable result, and I presume there will be a lot of that is due to the World Cup. So you know, what do you think the Nexon and/or the Tencent team are doing right, you know to properly monetize the World Cup, and I think you know the recent â I guess, shall we say the last four to eight years, we have not had sort of an equivalent amount of growth in FIFA around the World Cup. So I'm just wondering if there are some learnings or best practices that you can export out of Korea and China into the western world â the World Cup. Thanks. Hi Stephen! This is Laura. I'm going to take the Glu mobile question. As Andrew framed earlier, we still perceive the mobile market to be significant. It's a $100 billion. It's where Gen Z and Gen Alpha play. It's the platforms they prefer. It's also a significant platform in growth geographies around the world where we are looking to expand our franchises, so incredibly important market. And as it relates to Glu, we see the genres and markets in the shooter category, the sports category, the casual creation category where females primarily play. So â and of course the Glu content fits very well into these genres and these categories in the mobile market that are still growing and where we still see a strong connection. Glu is fully integrated into EA and EAâs mobile teams now, and so as we think about our future of Sims, we of course consider Cabot Fashion Design Home as part of that ecosystem as Andrew has referenced. We think about tapped sports and the potential that we have globally around our sports business. Those are a meaningful part of our growth there. And we also have had some strong talent, some good tech have been integrated into our overall EA mobile business. So the integration and the transition has happened, and we really consider and look at the mobile business within EA in a very whole way. And then as we think about FIFA broadly, and more importantly as we think about FC and you think about the growth in that business. I think we should think about it on three vectors. The first vector of course is World Cup, and certainly we saw very strong growth in our business coincided with the World Cup. The good news about the World Cup, and we've been tracking this for many World Cups as you might imagine, is it's not a moment in time. It actually establishes new fans and brings more people to football. And while we had some incredible matches during this World Cup and we saw, you know incredible final that pitted Messy versus Mbappe, you know what that does is establish a whole new set of fans for football on a go forward basis. And so while certainly World Cup was a boost for us, we expected that will create an ongoing benefit over the course of time. The second part of the growth though, it wasn't just about World Cup. It was the incredible titles that our teams launched, and certainly with what we did in the core FIFA franchise was our biggest and most innovative FIFA yet, with all that we did in and around FIFA Mobile, which was up triple digits, and all the new event content we put into FIFA online and how we really tied that community together into a global football ecosystem, you know interwoven into the fabric of football fandom, that's a really important part of growth. And what we're seeing now is that we have fans coming into the experience, not just about experiencing one event or one team or one league, but fans coming to experience really to share their love and passion for football with their fans, and really to put it on the line against their rivals. And so as we think about what the teams have been able to do, we expect that that will continue to drive more growth for us over time. The third one is football more broadly, and if you really track what's going on in the world, football in every part of the world is growing. It was growing before the World Cup, and it's certainly growing post the World Cup. Premier league, La Liga, League One, MLS, all these leagues are growing in popularity globally, and if you look at what happened for us, we nearly doubled our units in North America FIFA. That represents a significant opportunity for us in this incredibly sports hungry market. And so if you take those three things and then you roll that into EA Sports FC that we will launch later this year, where we have significantly more control over the nature of the experience and the things that we can do for fans, we can work more closely together with our partners at a league level, at a team level, at a player level. We think that well beyond this World Cup and certainly through many World Cups to come, the growth in football for us represents an extraordinary opportunity. Hey guys! How are you doing? In the past you've given high level assumptions as to your expectations for the growth of the PC and console videogame software market, and I was wondering if you have assumptions for 2023 as to how much they might grow? I don't know that we have given direct assumptions on those markets in time. We may have represented some market data that had been shared with us over time. We don't have anything to share specifically at this moment, other than what I would say is what we're hearing from our partners, particularly in console, is that a lot of the constraints around their ability to get product to market is pretty much behind us, and that we should expect a fairly strong console supply in the coming quarter and the quarters through the rest of this year. So that represents a great opportunity for us. We don't yet know how to quantify that. We know that we've been selling into what has been a relatively constrained console market. The demand is incredibly high. The good news for us as we continue to launch quality software and you combine that with what we believe, weâll be unconstrained supply of consoles. We think that positions us well in the coming year with respect to our core HD market. Okay, thank you. And for Chris, so if I just look at the full year guide of around maybe midpoint about $7.1 billion and about $7.750 billion, which is the guide you guys gave last quarter, I see a difference of 650. If I were to subtract this quarter you know versus your guide and you know I would get about $500,000 or $1 million of push out. You know that â and of course the Apex Legend. So if I subtract 130 for the under performance in the quarter, and then let's say 20 or so for under performance or cancellation of Apex Legends or sun setting of Apex Legends, I get about $500 million left and obviously that $500 million subtraction is not entirely Star Wars. So I was wondering if you could break that down for us. So how much of that roughly $500 million that I'm seeing is Star Wars versus FX impact versus the PC console titles that you think might be softer in Q4. And especially on FX, it looks like the British Pound and the Euro are up about 10 points versus when you guided in November, which would suggest that FX impacts should have been positive. Thanks. Okay, got it. I think I followed all your numbers Omar, so let me see if I could help. So I think directionally if I followed your math, your math is sort of futs, if I could put it that way. The drivers for Q4 and consequently for the full year are in fact the exact drivers that I talked about previously, which is first and foremost the shift of Jedi from Q4 and into Q1 of FY â24, that's the most significant impact on the Q4 number. Secondly, as you pointed out, the performance in Q3 relative to our guidance, that's the next one. And then by extension of that which Andrew asked as well earlier, which was what did we take in terms of learnings from Q3 and how are we applying the current macro environment and the current market conditions against what we know to be high quality launches in Q4, and thatâs part of the equation as well into Q4. And then the fourth one as you pointed out is the sun setting of Apex Mobile. So those are the four primary â I think you have the four primary drivers and that equates the revision in the guidance in Q4. Hey! Thanks guys. I was wondering if we could dig a little bit deeper into the trends that you're seeing in Apex. And within that context, what's your view on whether or not the industry is getting more competitive as a whole, in addition to the macro environment getting a little bit weaker. And then I just wanted to see what you guys thought about, you know whether or not this is a franchise we should expect to continue to grow in the future, you know given your early color for fiscal â24. Thanks. Yeah, so I think that you know as we talked about in the prepared remarks, Apex is traditionally a little quieter in Q3 as the live service ebbs and flows with a launch slate of new titles around the holiday. I think this was a very strong launch holiday slate, including you know FIFA which performed very well during a World Cup, and certainly there were some competitive titles that were very strong â that had been very weak in prior years quite frankly. And so there was probably a little built up demand around some of those competitive titles. And so, while you know the franchise still performed incredibly well, just not quite as well as we had expected based on our projection of where the competitive landscape would be. And we're already starting to see a resurgence of engagement in the franchise, which is again typical of Apex, and we're coming up to a four year anniversary, and we've got a season launch update coming, and we feel very, very good about where the franchise is going. I believe the franchise will continue to grow. We've got a lot of new things that we can do. While mobile isn't going to be the growth vector today, it will be a growth vector in the future. There's new geographic expansion that we will go to. There will be modalities of play, that the team will â you know additional modalities of play that the team will investigate over the course of time. As we've always said, we think about this as at least a 10 year franchise. We're just coming up to the fourth anniversary. It's an incredibly successful franchise. Our community is very dedicated to it, very highly engaged. Our expectation is that weâll have a strong quarter, but we're also being very deliberate around how we planned for the quarter, given what we've just seen in Q3 around the macro. Good afternoon, and thanks for the question. So you still have a very deep development pipeline going on. So I'm curious, with the cost cuts that you've made, are these temporary cost cuts, are they permanent cost cuts. And as I think about what you said about an early read for next year, sort of mid-single digit revenue and bottom line growth. Does that mean with these cost cuts, maybe you can get to a flat operating margin year-over-year. Hey Eric! This is Chris. I'll sort of take your questions I think together in â I think it sort of thematically hits on similar things. So let me just talk about sort of our approach to what we've talked about on the call, which is really focusing our investments into our best long term growth opportunities. I think what you see, that we did in Q3 and Q4, as well as the inferences of what we're going to continue to do in â24 is a reflection of us continuing to be very disciplined about how we view and really prioritize how we view our growth opportunities. And so they don't â you know we've been very deliberate and very careful to continue and invest in those things that will bring long term growth and really being very disciplined about the pace of hiring and some of the variable spend that applied to our â you know given the business that we see in the second half of the year. As we look forward into â24, I think again, just doing the math on the early guide that I gave, if we're able to achieve the guidance or the preliminary direction that I gave to a mid-single digit top line with a better than that improvement on operating line, it would be margin improvement year-on-year in â24 versus â23 for sure. Hey Andrew, Chris, Laura! Thanks guys for taking my questions. Just two from me. Thanks for the early look on your fiscal â24 growth opportunity. Just curious if you could speak to sort of the degree perhaps and the longevity of the macro pressure you're seeing on your players, if you think it's going to get worse before it getter better or how you think about the potential for a recession in job losses, and how that plays into your â24 guidance, the early look that you gave us. And then the second question, obviously you didnât give the number, but I think the FIFA license was rumored to be around $150 million annually. Curious if all that money has been spent as you sort of budget â24 in terms of right fees with the other partners and maybe incremental marketing spend. Or if you think there's some cushion there, in your forward fiscal in terms of potential savings. Thanks, guys. Yeah, I could certainly take that one. As we talked about, we're operating in a time when there's greater uncertainty and greater unpredictability in the market. And we saw that in Q3. As we look forward into FYâ24 I would say that the early direction we gave assumes really based on the best information we have now, which is you know we're not in the business of forecasting markets or GDP or macro, but we do know the trends that we see now that we executed Q3 with and that we are seeing entering Q4. And so I would say that the best way to think about FYâ24 is that the underlying market assumptions that are neither material improvement nor material worsening in that macro environment that we're operating in. And then obviously, as we continue to go on and get closer to the quarters, we'll have more certainty with the out quarters that we are looking at. In terms of the FIFA math associated with the license fees, you know the way that I would encourage you to think about it is that, in FY â24, it's such an important transition year for what is, our biggest franchise, and our focus is really about making sure that we build the greatest experience in terms of bringing the players along with us in the journey. It never has been solely about the profit margins associated with this transition, and so we are completely focused on making the transition in the launch of EA SPORTS FC a really fantastic experience for players. The one piece I would add to that around that, and concur with Chris, it's not so much about what did we pay fee for or what won't we pay fee for the future. I think that we will invest meaningfully into the franchise to grow it through this phase. Again, we have really said this is not just about a change of the sign on the front of the game, but a real sign of change in terms of what we offer the players over time. And we do believe that we can offer a bigger, more comprehensive, more immersive global football fan experience within our games and beyond the bounds of our games, working with our great partners around the world. And as we think about investing in that in â24 and maybe even deeply in â25, we believe it will pay meaningful dividends over the course of time. This is a franchise that we've been investing in for 30 years. I couldn't be more excited about the next 30 years of the franchise, and what we'll be able to do. And so I think our focus right now is really how do we set ourselves up to realize the fullness of the potential of developing the preeminent interactive football fan community in the world. Hi everyone! Thanks taking the questions. Just on some of the commentary about mobile, you've talked about some challenges in the mobile game industry and some macro headwinds. I guess you know at this point we're a fair bit of the way, maybe a year into weakness in the mobile market. Are you seeing a real differentiation in terms of the stickiness and the predictability of your players on the PC and council side versus mobile, that's question one. And then the second one is just, can you quantify the guidance impact of delaying Star Wars into the next fiscal year? Thanks. Hi Matt! On the mobile sickness as you said, we measured certainly by engagement. And I would say it varies across the mobile experiences we have. As we've discussed our strategy and how we are thinking about the future, itâs really around how the mobile platform can contribute to the overall connected ecosystems of franchises and what we're seeing, as in Andrew mentioned, as players play on the go, as Gen Z and Gen Alpha market, you know addressable market expands as every year goes by, itâs going to be very important for us to show up on the right platforms for the right moments and right experiences. So we're seeing in some of our, as we discussed on FIFA Mobile is we've had we have significant engagement and significant acquisitions into this franchise, because of the mobile game that we have. And that's how we're really looking at the incredible assets that we have around casual creator games for our Sims products, our sports games and really dial that up to connect into the ecosystems, because they can be a meaningful contributor of new players, engagement and connection into a high def experience. Great! And Matt, let me jump in on the question about the guidance. So as we talked about in some form in some of the other questions, the move of Jedi to Q1 is the most material driver of the Q4 guidance revision, And itâs a significant part of the full year revision as well, depending on which wins that you're taking a looking at the at the guidance numbers. Again, just again reiterating that from a lifetime economic standpoint, the move to Q1 is better for the overall game, the ecosystem and for the brand, and again importantly, given the timing of the original launch in March versus now in April, it doesn't change our cash flow forecast for Q4 nor for FYâ24. Hey! Thank you for fitting me in. Chris, you noted your forward view is based on trends currently or where you exit in Q3, but wondering if maybe you could speak just to the phasing of kind of the economic impact through the fiscal third quarter. Did you see player engagement or monetization kind of change at all? Was there anything specific to call on the holiday period. And they're just given the news around Apex and Battlefield, any update on Lord of the Rings, that you still plan to launch this game, you know anything you could say around the soft launch? Thank you. Great, okay, and I'll start and then turn it over to Laura to talk about Lord of the Rings. The shape of the quarter, and I think you know, in some of the materials, we talked about how uncertainty mounted throughout the course of the quarter, and I think thatâs a â thatâs probably a good reflection of what we saw, and it is a quarter where the results were mixed. Where we were continuing to watch the strength in FIFA, the strength and FIFA that occurred throughout the quarter, and in particular at the end of the quarter. And then we were also watching the performance of these high quality titles, and how they launch in the market reception to that and both from a player, and a reviewer, as well as a monetization standpoint. So I'd say we were, understanding, absorbing and analyzing you know different data points throughout the course of the quarter. But as I talked about, in particular the things that led to the our performance in Q3 and the extension of that into Q4 were specifically related to high quality launches and the pattern I would say of recognition of what we would expect in terms of return, versus launches of that caliber, and that was very specific to the titles that launched on those dates in the quarter, as well as just the macro, I would say market gravity that we saw across smaller titles throughout the quarter. Hi David! To answer your question about Lord of the Rings Mobile. As a reminder, this is a team that created Star Wars Galaxy of Heroes, which has been one of our most successful mobile games, and we're over $1 billion in net bookings on that. They are currently actively working on Lord of the Rings and soft launch currently and so we expect a full launch on that mobile game this coming year. Okay. So thank you all for joining us for this quarter. We appreciate the support. We appreciate the good questions and the engagement today, and we'll speak to you next quarter.
EarningCall_930	Hello. Thank you for standing by, and welcome to the NXP Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the prepared remarks', we will conduct the question-and-answer session and instructions will be given at that time. I would now like to hand the conference over to your speaker today, Jeff Palmer, Senior Vice President of Investor Relations. Please go ahead. Thank you, Michelle, and good morning, everyone. Welcome to NXP's fourth quarter and full year 2022 Earnings Call. With me on the call today is Kurt Sievers, NXP's President and CEO; and Bill Betz, our CFO. The call today is being recorded and will be available for replay from our corporate website. Today's call will include forward-looking statements that involve risks and uncertainties that could cause NXP's results to differ materially from management's current expectations. These risks and uncertainties include, but are not limited to, statements regarding the continued impact of the COVID-19 pandemic on our business, the macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products and our expectations for the financial results for the first quarter of 2023. Please be reminded that NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure on forward-looking statements, please refer to our press release. Additionally, we will refer to certain non-GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance. Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our fourth quarter 2022 earnings press release, which will be furnished to the SEC on Form 8-K and available from NXP's website in the Investor Relations section at nxp.com. Thanks, Jeff, and good morning, everyone. We really appreciate you joining our call this morning. I will review both our quarter four and our full year 2022 performance, and then I will discuss our guidance for quarter one. Beginning with quarter four, our revenue was $12 million better than the midpoint of our guidance with the trends in the mobile and industrial and IoT markets performing better than our expectations, while Automotive was in line and Communication Infrastructure below our expectations. Taken together, NXP delivered quarter four revenue of $3.31 billion, an increase of 9% year-on-year while maintaining channel inventory at a 1.6 months level, well below our long-term target. Non-GAAP operating margin in quarter four was a strong 36.5%, 160 basis points better than the year ago period and about 50 basis points above the midpoint of our guidance. Year-on-year outperformance was a result of good fall through on the higher revenue, better gross margin due to higher factory utilization and disciplined expense management. Now let me turn to the full year performance. Revenue was a record $13.21 billion, an increase of 19% year-on-year. When passing the revenue growth, approximately 14% was due to higher pricing - and was due to a combination of volume and mix. And here, as a reminder, we have executed a consistent pricing policy to pass along the inflationary increases of our input costs while not patting our gross margin. Throughout 2022, we consistently found ourselves in a situation where robust demand across automotive and core industrial markets, outstripped available supply even as production levels, both internally and from our supplier partners improved through the year. And now we do see a continuation of input cost inflation in 2023, however, not at the same pace and level we experienced in 2022. The full year non-GAAP operating margin was solid 36.3%, a 340 basis point improvement versus the year ago period as a result of higher revenue, improved factory loadings and positive operating leverage. Now let me move to the specific trends in our focus end markets. First, Automotive. Full year revenue was $6.88 billion, up 25% year-on-year, a reflection of higher pricing, our strong company-specific product drivers and accelerated content increases, thanks to the secular growth in sales of xEV vehicles and prioritization by OEMs of premium class vehicles in a limited supply environment. For the fourth quarter, Automotive revenue was $1.81 billion, up 17% versus the year ago period and in line with our guidance. Now moving to Industrial and IoT. Full year revenue was $2.71 billion, up 13% year-on-year, primarily due to higher pricing and the strong competitive positioning of our solution offering comprising industrial processes and about [ph] cash connectivity and security. For the fourth quarter, Industrial and IoT revenue was $605 billion, down 8% versus the year ago period, so better than our guidance. Mobile. Full year revenue was $1.61 billion, up 14% year-on-year, primarily due to higher pricing and continued traction of our secure mobile wallet. For quarter four, Mobile revenue was $408 million, up 9% versus the year ago period and better than our guidance. Lastly, Communication Infrastructure and Other. Full year revenue was $2 billion, up 15% year-on-year. The year-on-year growth was due to higher pricing and a combination of sales growth of network processors, RFID tech solutions, secured transit and access products and RF power products for the cellular base station markets. For quarter four, Communication Infrastructure and Other revenue was $494 million, up 8% year-on-year and below our guidance. Now as discussed earlier, I also would like to provide you a progress update on our accelerated growth drivers. At our Analyst Day in November '21, we highlighted our expectation to grow total company revenue to approximately $15 billion in 2024, coming from $11 billion in 2021 within a compound annual growth range of 8% to 12% over that period. Embedded within this outlook, we highlighted six company-specific revenue drivers across all our served end markets, which we anticipated to grow in aggregates to about $6 billion in '24 from a $3 billion level in '21, representing about a 25% 3 year compound annual growth range. Additionally, we shared with you that our high relative market share for business would grow to $9 billion in '24 from $8 billion in '21, reflecting about a 5% 3 year compound annual growth range. Overall, we are confident to achieve the anticipated growth rates for both our accelerated growth drivers as well as our high relative market share core business. Moving to the segments. Within Automotive, the accelerated growth drivers are 77 gigahertz radar, electrification and the S32 domain and solar processes, all of which are tracking ahead of plan. According to market research company, Yole, NXP is confirmed as the clear number one revenue market leader in automotive radar solutions, as well as individually in radar RF transceivers and radar processes. Furthermore, we just announced the industry's first 28-nanometer RF CMOS radar one-chip IC family for the next-generation ADAS and autonomous driving systems. Turning to our efforts in electrification. Our sales, including battery management solutions, inverter control and other xEV control processes has doubled year-on-year and achieved record custom design wins. Finally, within Automotive, the customer enthusiasm for this S32 domain and sonar processor family, enabling the software-defined vehicle, are far in excess of our expectations. This includes the awards by a major automotive OEM, which selected the S32 family of automotive processes and microcontrollers to be used across its fleet of future vehicles beginning mid-decade. Moving to Industrial and IoT. We are in line with our expected growth range of about 25% 3 year CAGR for our accelerated growth drivers. Both our crossover and i.MX application processor families grew nearly 50% year-on-year in 2022. However, we did see a deceleration in revenue in the consumer IoT portion of the end markets during the second half of 2022. Finally, we announced our new MCX microcontroller portfolio that is scalable, optimized foundation for energy-efficient industrial and IoT edge applications, addressing the heavy real-time workloads for the next wave of innovation. In addition, we recently announced our new analog front-end family for high-precision data acquisition and condition monitoring systems for factory automation. Moving to Mobile. We are below our expected revenue growth range for the accelerated growth driver of ultra-wideband due to the well-documented weakness in the Android handset market, which is the focused mobile market for our ultra-wideband solutions. However, for ultra-widebands, the ecosystem build-out and design win activity and traction in both Mobile and Auto are going well. And we believe as the Android market rebounds, awarded design wins will result in the expected revenue growth for ultra-widebands. Lastly, within Communications and Infrastructure, we are in line with our expected revenue growth range for RF power amplifiers. The industry transition to gallium nitride from LDMOS technology has occurred faster than expected. The revenue for our gallium nitride-based solutions has doubled year-on-year and demand continues to outstrip our increasing supply capability. In review, 2022 was a very good year for NXP, with strong execution resulting in record revenue, solid profit growth and a healthy free cash flow generation. Additionally, we experienced unprecedented year-on-year design win traction across the entire portfolio. Now let me turn to our expectations for quarter one, 2023. We are guiding quarter one revenue to $3 billion, down about 4% versus the first quarter of '22. From a sequential perspective, this represents a deceleration of about 9% at the midpoint versus the prior quarter. At the midpoint, we anticipate the following trends in our business. Automotive is expected to be up in the mid-teens percent range versus quarter one '22 and flat versus quarter four '22. Industrial and IoT is expected to be down in the low 30% range year-on-year and down in the low 20% range versus quarter four '22. Mobile is expected to be down about in the mid-40% range, both on a year-on-year and sequential basis. Finally, Communication Infrastructure and Other is expected to be about flat, both on a year-on-year and sequentially. In summary, as we head into 2023, our Automotive and Core Industrial businesses remain supply constraints in select areas. Within Automotive, the increase of global production levels and the secular adoption of xEV are tailwinds to continued content increases. In Industrial and IoT, we expect relative strength in the core industrial submarkets as our products enable critical infrastructure and companies to be more efficient. However, the Consumer IoT and the Mobile segment will continue to be dependent on a cyclical rebound. And lastly, in Communications Infrastructure, we expect our supply capability to improve against pent-up demand, specifically in our RFID packing solutions, secure access products and e-government identification. Within the 5G base station markets, growth in '23 will be dependent on the build-out, especially in India. At the same time, we do believe from an external macro perspective, the general demand environment is offering much higher levels of uncertainty than last year. And in the very short term, we are expecting a dip in China due to the spike in infection rates following the policy shift relating to COVID. Additionally, we expect continued cyclical weakness in demand for consumer-oriented products and a potential correction of customer inventory. In this more uncertain demand environment, we will focus on prudently managing what is in our control. And especially while we have plenty of orders, we will continue to very vigilantly manage general inventory to a 1.6 months level, which is about a monthâs below our long-term target, equaling approximately $500 million of revenue. We intend to maintain that 1.6 months channel inventory in the first quarter, while we are well positioned with our on-hand inventory to increase channel inventory, if and when demand in China evolves. So far, quarter-to-date, our distribution sales through in China is off to a slow start as is incorporated in our guidance. Over the midterm, we are cautiously optimistic given customer engagement levels, design win momentum in our strategic focus areas and a potential rebound in China. Thank you, Kurt, and good morning to everyone on today's call. As Kurt has already covered the drivers of revenue during Q4 and provided our revenue outlook for Q1, I will move to the financial highlights. Overall, our Q4 financial performance was very good. Revenue was slightly above the midpoint of our guidance range and both non-GAAP gross profit and non-GAAP operating profit were above the midpoint of our guidance. I will first provide full year highlights and then move to the Q4 results. Full year revenue for 2022 was $13.21 billion, up 19% year-on-year. We generated $7.64 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 57.9%, up 180 basis points year-on-year as a result of higher internal factory utilization and fall-through on higher revenue, which is at the high end of our long-term financial model. Total non-GAAP operating expenses were $2.86 billion or 21.6% of revenue, below our long-term financial model. Total non-GAAP operating profit was $4.79 billion, up 32% year-on-year. This reflects a non-GAAP operating margin of 36.3%, up 340 basis points year-on-year and above our long-term financial model. Non-GAAP interest expense was $386 million. Cash taxes for ongoing operations were $558 million, non-controlling interest of $46 million and stock-based compensation, which is not included in our non-GAAP earnings, was $364 million. Full year cash flow highlights include $3.9 billion in cash flow from operations and $1.06 billion in net CapEx investments or 8% of revenue, resulting in $2.83 billion of non-GAAP free cash flow, up 23% year-on-year or a healthy 21% of revenue. During 2022, we repurchased 8.33 million shares for $1.43 billion and paid cash dividends of $815 million or 21% of cash flow from operations. In total, we returned $2.2 billion to our owners, which was 79% of the total non-GAAP free cash flow generated during the year. Now moving to the details of Q4. Total revenue was $3.31 billion, up 9% year-on-year, in line with the midpoint of our guidance range. We generated $1.92 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 58%, up 70 basis points year-on-year and consistent with the midpoint of our guidance range. Total non-GAAP operating expenses were $713 million or 21.5% of revenue, which is up $32 million year-on-year and down $17 million from Q3, slightly favorable to the midpoint of our guidance. From a total operating profit perspective, non-GAAP operating profit was $1.21 billion, and non-GAAP operating margin was 36.5%, up 160 basis points year-on-year, above the midpoint of our guidance range, reflecting solid fall-through in operating leverage on the increased revenue level. Non-GAAP interest expense was $95 million, with cash taxes for ongoing operations of $126 million and non-controlling interest was $12 million. Stock-based compensation, which is not included in our non-GAAP earnings was $97 million. Now I would like to turn to the changes in our cash and debt. Our total debt at the end of Q4 was $11.17 billion, essentially flat sequentially. Our ending cash position was $3.85 billion, up $86 million sequentially due to the cumulative effect of capital returns, CapEx investments and cash generation during Q4. The resulting net debt was $7.32 billion, and we exited the quarter with a trailing 12 month adjusted EBITDA of $5.47 billion. Our ratio of net debt to trailing 12 month adjusted EBITDA at the end of Q4 was 1.3 times, and our 12 month adjusted EBITDA interest coverage was 14.9 times. Cash flow generation of the business continues to be healthy and our balance sheet continues to be very strong. During Q4, we paid $221 million in cash dividends and repurchased $475 million of our shares. Additionally, the NXP Board of Directors has approved a 20% increase in our quarterly cash dividend, bringing the quarterly cash dividend to approximately $1 per share. These actions are all aligned with our capital allocation strategy. Turning to working capital metrics. Days of inventory was 116 days, an increase of 17 days sequentially and distribution channel inventory was 1.6 months. As we mentioned on our last quarter's call, given the uncertain demand environment, we made the intentional choice to limit the months of inventory in the channel, while keeping inventory on our balance sheet to enable greater flexibility to redirect product as needed. Furthermore, given our manufacturing cycle times, combined with the uncertain demand environment in the first half of 2023, we will continue with this approach in Q1, and we expect DIO to increase in the quarter. Days receivable were 26 days, down one day sequentially and days payable were 105 days, an increase of 9 days versus the prior quarter due to the timing of material. Taken together, our cash conversion cycle was 37 days, an increase of 7 days versus the prior quarter. Cash flow from operations was $1.08 billion and net CapEx was $233 million, resulting in non-GAAP free cash flow of $843 million or approximately 25% of our revenue. Turning now to our expectations for the first quarter. As Kurt mentioned, we anticipate Q1 revenue to be $3 billion, plus or minus about $100 million. At the midpoint, this is down 4% year-on-year and down 9% sequentially. We expect non-GAAP gross margin to be about 58% plus or minus 50 basis points, driven by favorable mix, offset by the lower revenue. Operating expenses are expected to be about $710 million, plus or minus about $10 million. Taken together, we see non-GAAP operating margin to be 34.3% at the midpoint. We estimate non-GAAP financial expense to be about $77 million. We anticipate the non-GAAP tax rate to be 16.5% of profit before tax. Non-controlling interest and other will be about $10 million. For Q1, we suggest for modeling purposes you use an average share count of 261.4 million shares. Taken together, at the midpoint, this implies a non-GAAP earnings per share of $3.01. For full year 2023 modeling purposes, we suggest for a non-GAAP tax rate you use a range between 16% to 17%. This is lower than our previously anticipated effective cash tax rate of 18% and is based on current tax legislation. For stock-based compensation, we suggest you use $410 million, no change from the model. For non-controlling interest, we suggest you use $30 million to $40 million lower than 2022 and for capital expenditures, we expect to invest approximately 8% of our revenue. In closing, looking ahead into 2023, I'd like to highlight a few focus areas for NXP. First, we plan to execute and drive our six company-specific accelerated growth drivers. Second, we will manage our internal and channel inventory thoughtfully based on market conditions. Thirdly, we will continue to be disciplined with our operating expenses, while protecting our long-term R&D investments. Taken together, we plan to operate within our long-term financial model ranges in what is a dynamic macro environment. Yes, thank you. Good morning. I guess to start, Kurt, perhaps you could speak to your comments on managing the channel inventory. And of course, one of the concerns investors naturally have is the worry that customers order more than they need given the constraints at the present over the last year and then potentially you overship that. Can you speak to how you're ensuring that what you're shipping to customers now is actually going to real demand rather than inventory? And I guess that's particularly as some of the foundry capacity loosens up, gives you a little - a little more access to wafer supply? Yeah. Thanks, Chris, and thanks for taking the first question. Yes, the very, very vigilant management of the channel inventory is a very deliberate choice Bill and I took. And we do this while we have more than enough orders at hand to actually ship, say, another $500 million in the quarter into the channel and still hitting our target of 2.4 or 2.5 months of inventory. But we take the choice because we specifically now in China see a weakness. Actually, we think the weakness in China, which for us is almost entirely distribution. We see that connected to the change of corporate policy, which they took in early or first half of December and the spike of infection rates following that. And we just want to be responsible through this period of weakness in China, but watching the situation very carefully. So as soon as we would see signs of consistent rebound in China, we have both the orders, but also the product at hand to actually fill back the channel. So it's kind of our choice, which we took here, and I have to say this is across all segments. So that weakness, which we see in China, is not really segment specific, it is distribution specific across the board related to this policy change and infection spike in China. Maybe important to highlight that at the very same time, we are seeing across the board very strong trends in our direct customers. So it's - we have a very diverging - last quarter, we spoke about the dichotomy, very diverging picture now that from a segment perspective, Auto and Core Industrial remain strong. But now we have an additional effect here that we see this short-term weakness in China, which we try to be prudent about with the choice of the channel inventory stable. Got it. Thank you. As a follow-up, if I could pivot to Auto. And question is what's a reasonable expectation for Auto revenue for the year, if not quantitatively, at least qualitatively? And it was flat last quarter, you're managing to be flat again. Is it - should it stay flat from here? Are you trying to get additional capacity in the process nodes needed for Auto. So that quarterly revenue would at one point rise and catch up on that backlog? Yes. Let me give you some color on Q4, Q1 and then directionally for the year. Indeed, Q4 was flat from a quarter-on-quarter perspective, by the way, nicely up year-on-year really because of supply constraints. I mean we just did - we couldn't ship more because we didn't have more products in Q4. In Q1, it's a bit more of a mixed bag. We are getting more products. But at the same time, we - Automotive in China distribution falls under what I said earlier. So we have a bit of a decline when you think about Automotive distribution in China, while the rest is actually going up at the same time. In the mix, it turns out to be then flat quarter-on-quarter and again, nicely up from a year-on-year perspective. Maybe more importantly, for the full year, yes, we are optimistic, Chris. We see, according to IHS, a far increased to about 85 million, so I think 82 million cars last year, going to 85 million this coming year, which is 3.5 or so percent increase and more importantly, definitely a continued increase of xEV, electric vehicle penetration. Again, according to IHS, I think going to 35% of the total car production having hybrid or fully electric drivetrains, which is significant and continues to be a significant boost from a content perspective for us. At the same time, we are gradually as through the last quarters, getting access to more supply. I dare to say from today's perspective that probably through the end of the calendar year '23, I hope we have most of the shortages behind us. I mean that will never be totally complete, but I think we are getting closer to a better balance towards the end of the year. And finally, pricing continues to play a role. I think I talked about the pricing specifics for last year in my prepared remarks. Now when you think about this year, input cost continues to go up, especially in those areas which continue to be tight from a supply perspective. So there is also, specifically in Automotive, continued pricing tailwind to be expected. Thanks for taking my question. Kurt, when I look at the two areas facing the most headwind, Consumer IoT and Mobile, and I think they could be below 20% of sales as you get into Q1. Should we assume that is sort of the cycle look when I look at Mobile, I think it's back to like Q1 '19 level? So do you think Q1 kind of marks the cycle low for these two most problematic areas? Or do you see them slipping further in Q2? Honestly, Vivek, we don't know. I would go over my skis to make a firm statement here. But indeed, Mobile, of course, has a couple of specifics which are driving it really low. There is a seasonal element to this, obviously. Secondly, we do have in Mobile executed our NCNR orders last year, which gives us a headwind from an inventory perspective, if you will. We firmly executed these NCNR orders because these are custom-specific products where we have no chance otherwise to move them around and give them to other customers. And then finally, there is the well-known and documented Android weakness, which continues to be. I'd say the following, as you see, we are very disciplined with customer inventory and mind you that our Mobile business, to the largest extent, is going through the channel. So if and when end demand picks up, rebounds, which I think it will, at some point, we should indeed very quickly see it. Is that exactly for the second quarter? I don't know, but we are very close to the post given the way how we treat this. I mean I'm glad you are asking, Vivek, because this whole thing around our almost brutal discipline on the 1.6 channel inventory moves us very close to as soon as there is pickup in end demand, we will also see it in our numbers. Got it. And then on gross margin, I think, Bill, you mentioned something about mix that is helping you keep gross margins at the high end of your target range of 58%. So conceptually, let's say, if your Q1 is the bottom-in sales and sales are flat to up from here. Then do you think gross margins can stay at 58%? Or do you think there is something in mix or utilization in the following quarters that can change gross margins below this level? Or it's 58% kind of now the new baseline of gross margins for NXP? Vivek, thank you for your question. Let me talk about Q4 and the Q1 guide and also looking ahead. First, as you know, we did slightly better than our guidance and I mentioned it was improved by product mix for Q4. Again, as we look into Q1, despite those lower revenues, we see this positive product mix offsetting lower fall-through on the revenue. Also, we have lowered our internal front-end utilization rates. In Q3, we were running in the high 90s. In Q4, we're about 90%. And again, remember, this is all linked to that non-auto industrial type of products because of market softness we're seeing. For Q1, we do expect to lower our front-end utilization again to about 85%, which is where we still remain constrained in our internal auto IP processing technologies and so forth. And again, I'd say, looking ahead, we expect to stay within our long-term gross margin forecast of 55% million to 58% as our cost structure today is more variable in nature than the past. Also, our factories, if you think about it, become more efficient when they run at normal utilizations and we have a disciplined inventory approach with their channels. So we're going to stay with that range. We're not revising it, but we feel very good about our gross margin performance. Hi, guys. Thanks for letting me ask the question. Kurt, I want to go back to your core Automotive and, I guess, Core Industrial business, not the consumer IoT side. I believe you said the demand was largely holding in well there, except for some of the channel dynamics in China. I guess overall, is that true? Is the core industrial especially holding in? And how do you delineate between the channel weakening and isolating that to a variable other than demand? Obviously, you can see this is coming out of China, and we know the COVID policy. But to the extent it's weakening, people aren't really going to care if the source is coming from this is having too much inventory or OEM slowly demand. Either way, it's kind of slowing even though the latter could by some sort of a temporary aspect. So any sort of color you could give on your core demand would be helpful? Yes. Thanks, Ross. It is actually easier to speak to this in Automotive because we have a much larger portion of direct customers where we can also triangulate with the demand from the OEMs, from the end customers. And we have these discussions actually with all three parties on the table. So we cannot be misled by inventory builds or anything from the Tier 1s because we really cleaned this out now all the way to the OEMs. And I think what I said to Chris earlier about the optimism on the Auto business through the year is the answer to your question. So there is a short-term disturbance in China, but that's really more about the distributors than anything else when it comes to Automotive. In Core Industrial, Ross, it is indeed harder [ph] to be that specific because the majority of our business goes through the channel. So it is much harder to say from the perspective of what do we know from end customers really, which is also why into Q1, I'd say also Core Industrial probably drops sequentially. But again, it is very hard to decompose this from the China situation. So it could just be because of this particular China situation since we have such a high exposure in Industrial - also in Core Industrial to China. I can, however, tell you that the direct accounts in the Core Industrial business, but they are a minor portion of our business. They are holding up quite well. So for that reason, you could say there is some data points, which would tell us that also Core Industrial is robust. But I have - it's less certain given the channel exposure, which we have in that segment. Now from a content increase perspective from - if you think more from a macro perspective, what these applications are doing in critical infrastructure in driving efficiency of industrial customers, I think there is any reason to believe that we should also for Core Industrial continue to be optimistic for the year. Finally, what I said about pricing earlier, pricing for Automotive holds true also for Core Industrial. Similar technologies, similar continued pressure on supply, which is very different, obviously, to the Consumer and Mobile businesses. Thanks for the color. And I guess one kind of on utilization, inventory and gross margin all tied into one for Bill. It's impressive to see that your utilization is dropping and your gross margin is still staying at 58%. I guess, in the DIOs, is there a limit to which you would go on the upside there? I know your long-term target is 95%. I also know that you've been very clear as to why you're going above that right now. But is there a limit to how high you would go on days of inventory internally before you'd really have to ratchet the growth - the utilization down? And if so, how does that fold into what the gross margin that would be the outcome in that scenario? Thanks, Ross. Yes, you are correct in a way that when we look at inventory, we look at both the internal and the channel together. So as you can imagine, right, the channel inventory today at 1.6 months, basically, we can move that up by about another 25 days if we wanted to, to our target of 2.5 months of sale. Clearly, with the softness in several of the areas, we are monitoring this. We're keeping it strategically on our channel. And as Kurt mentioned, as conditions do approve, we will release some of that and want to go sell-through one-to-one. Now the good news is the inventory we have on hand is all long lived and has very low obsolescence risk. At the same time, I'd say, unfortunately, we're still constrained in several selective nodes. Remember, we buy about 60% externally. We do about 40% internally. That 40% really - more than two thirds of that internal capacity is linked to Auto and Industrial. So that's going to keep us at nice levels of utilization for the rest of the year. So again, we're going to be more flexible, yet disciplined to support our customer service levels and the potential for future growth. But to give you an example, right, if we have the orders, as Kurt mentioned, and we shipped that $500 million and went to 2.5 months of sales, assuming none of it sells through, this would basically have an effect on our revenue and our COGS and basically say NXP's internal inventory would have been below 90 days. So you have to look at them combined. We're doing this very proactively and intentionally to prevent inventory buildup. So I think from an internal DIO, if we kept the channel at 1.6, I'm comfortable holding probably another 15 to 20 days on top of the level that you see today. Yeah, good morning. Thank you for taking the question. I guess a follow-up question on gross margins. You started the call talking about expectations for higher ASPs given higher input costs. It sounds like you're very optimistic around accelerated growth areas that should benefit mix. You've cut back utilization, and it sounds like that should trend higher over time, and that's focused more on proprietary mixed signal, which I assume, again, is better mix. And then you guided CapEx essentially flat to down year-on-year, which means depreciation shouldn't be moving higher. So the question is this, I guess, are there any kind of headwinds to gross margins that we should be thinking about in '23? I mean the only thing I would say that could cause gross margin to go below the long-term model that 55% to 58% is probably a prolonged global recession, that affects all of us, right? But if we're having the - what we're seeing right now, we think we'll - we will and plan to stay within that 55% to 58%, C.J. Thank you. And I guess as my follow-up, on the Comps Infrastructure and Other line, can you give a little more color on what led to the weakness in December? And how we should be thinking about the different moving parts for that business for all of '23? Thanks so much. Yeah, C.J. I'm happy to do that. Q4 was purely supply. We were a bit ahead of our, say, skis with the guidance because we know that more supply is coming up, and that's also why Q1 is now going much better. And that - there were some operational issues and we didn't get it going in Q4. So Q4 fail against guidance had nothing to do with demand, that was purely about a supply base. Now going forward, it is indeed such that I would say we are cautious when it comes to the radio power part of the business because the one area where we see build-outs in network infrastructure this year then it's India. So it's all about to what extent at what pace is this going to happen through the year. What is for sure is that it is much more and much faster leaning to gallium nitride versus LDMOS, which is favoring us and we just have to do a good job in increasing our supply capability to actually run up here. The one other piece within this Comm Infra and Other segments, which will matter this year, is actually the RFID tagging, secure and access cards and government identity products. There is a significant amount of pent-up demand C.J., which we could not serve the last 2 years which was our choice. I mean it is a technology which we have to use for other segments and other products. That is a classic demand, which doesn't disappear because it is about infrastructures, it is about government IDs, which people need around the world. So the demand is still there. Now we are actually moving the supply capability from other areas where the demand has softened into this and we are starting to serve it. So from a sub-segment dynamic perspective, C.J., think about this part being the one which is actually going to generate growth this year. Great. Thank you. I think you've talked about being for your Auto business having backlog coverage for the year. With the disruption in China, kind of would you still say that's the case? And as a follow-up, how are you guys thinking about NCNRs on your backlog this year? How flexible are you going to be if, for example, the China situation causes people to want to reschedule deliveries? Yes. So Joe, first of all, the supply capability through the year. Clearly, the number of escalations has moderated. We still have a number of nastily short technologies. And I would call out 180 nanometers, 9055 gallium nitride and the high-voltage analog mixed signal, which is proprietary to NXP. This is, of course, in size less than it used to be, but it still leads to significant customer escalations and shortages, which we think will go through the year, but hopefully moderating towards the end of the year. If we translate this back into supply capability, I think we said on the last call, we would be able to serve about 85% of kind of risk-adjusted backlog for the year. I'd say for this year, for '23, this is now more like 90% to 95%. So you see it's better. It's not yet on target. We are not yet in a position that we have visibility to serve everything we want, but we are coming closer. Now you might be confused with the high DIO and still me saying that we can't serve Automotive. The matter of the fact is that if you would pass it the DIO in two segments. And I mean, I will not give you numbers, but the auto part of it so the product which is specific to the lease in Automotive is actually well below target. So it's just very variable between the segments, and it's not fungible, as you know. Now that leads me to the second part of your questions around NCNRs. I gave you one example earlier where we have very strictly executed NCNRs and that was the Mobile last year, which indeed is a bit of a headwind now getting into this year because product was not fungible. I mean it's customized in software, so there was no way to let customers of the hook. Going through this year, there is not a one-fits-all answer, Joe. So I'd say we are flexible if the product is fungible. I mean we do not force one customer to absolutely take it if we can at the same moment, sell the same product to somebody else. I mean, that wouldn't make sense. We are very strict if it would go against any take-or-pay liabilities, which we have to our suppliers. I mean there is no way we would let our customers off the hook. Then it depends on overriding commercial agreements, which we have with customers, in some cases, which might be of forcing functions. And then - and that's especially in Automotive, which is a large part of our NCNR backlog. We are working with ODMs. So if a Tier 1 comes to me and says, I want to discuss about the NCNR level, I say, okay, then we discussed together with your end customer. And we want to understand if that is in the best interest also for the end customer which puts quite a bit of pressure on the system and actually enforces some of the NCNR through that channel. So you will see - I cannot say the 100% always in force. We would not do this where you would see that we create a problem for ourselves later. I mean that's the same philosophy, which we are applying with the channel inventory. Why would we? I mean that wouldn't be smart. But in many cases, we still do, given the dynamics I just mentioned. Great. Thanks so much. The last couple of questions in particular are very helpful in understanding the sort of shape of demand. I'm hoping maybe we can talk a little bit about longer-term competitive dynamics, in particular, in the Automotive end market, you seem to be doing well in these growth areas. But Kurt, I'm hoping you can talk more about your position with the emerging Chinese OEMs, which especially in EVs have started to deliver some very strong growth. Can you compare your competitive position with those OEMs relative to how you've done historically with the bigger global ones? Thank you. While - Bill, while I cannot speak on a customer-specific level, obviously, I dare to say when I look at the win rates and then the shipment rates, we are very well balanced when it comes to EVs, both geographically but also between, say, big OEMs and start-ups. And that has been an attention point for me right from the start because actually, many years back already I always thought that China might become a leading force in electrification, given that they didn't have the legacy to change their companies from combustion engines to electric drivetrains. I mean there is significant advantage. And so for many years already, we tried to stay very close to start-up companies, which, by the way, is not just in China, but that's often between China and California. I mean there is a lot of combined companies there. So, no, I would not say that we have a, if you will, negative buyers only to the big guys and would not participate in the growth provided by start-ups, which largely are in China. It has also to do with our product portfolio, Bill. I mean, we are so broad and so leading in automotive, how would we only work with one part of the market. It's almost impossible. So no, that's not the case. I'm optimistic here. Thank you very much guys for squeezing me in. Kurt, in your prepared script, you referenced the model from the Analyst Day sort of the $15 billion in revenue in 2024, and sort of reiterated the targets for sort of the core business and the new growth areas. But as we start on a sort of $12 billion run rate, and I know a couple of the segments are really down in the first quarter. But just on an annualized basis, I think we need to get to 6%, 7% growth or something like that for this year and next to hit that target. So maybe you could just give us a little more color on the specific drivers, not just in the next quarter or two, given the volatility, but over the next, like, 24, 36 months of how you see getting there from where we're starting? Thanks. Yes, Matt. So indeed, I mean, the Q1, given China and everything we discussed in the last 25 minutes is indeed a bit of a - probably a bit of an outlier. I think the growth rates, which contribute to the 8% to 12% for the company, being led by Automotive and Industrial IoT, that is still how we look at the growth for the next 3 years. So we do believe that if you look across NXP, the content increases and our strong position in Automotive will let automotive growth above corporate average. I think we said 9% to 14% relative to the 8% to 12% for the total. Since this is half of the company, Matt you will understand that, that has a significant dynamic for us. And in Automotive, it's also fair to say, and I gave you some details for last year that pricing is a positive further contributing element which maybe was not always fully comprehended in the initial forecast. And in a similar way, I would speak to Core Industrial, mind you, that is 60% of the Industrial IoT segment. There, indeed, and that's maybe where your question was going to the more cyclical businesses being the consumer IoT as part of industrial IoT segment, as well as Mobile, there it will all depend on timing. I mean we really have to see what the timing of a rebound is going to be. Where at the same time, if you look at history of these segments, they are very fast moving. I mean you can very quickly have significant changes through the quarters, especially when China makes a move. But again, strategically, I think the growth algorithm guiding us to the 8 to 12 for the company is pretty much intact. There possibly automotive has a bit more momentum even than we would have anticipated in the first place Got it. Thanks, Kurt. Just a quick follow-up for Bill. You guys pretty tight on OpEx in the first quarter. I think maybe a tiny bit above the 16% and 7% of revenue that you sort of laid out in the model, Bill, but on a pretty big down revenue quarter in a couple of segments, we potentially reaccelerate off the bottom in a couple of the segments that are challenged in China. Have you - are you going to reaccelerate OpEx at the same rate? Or is there a sort of - how should we think about that into the back half as the revenue potentially recovers? Thank you. Thanks, Matt. Let me address operating expenses. I think we continue to manage our operating expenses pretty well with the uncertainty in the macro markets. So in Q4, we were a bit more favorable than our guidance driven by the lower variable compensation, and we managed our discretionary spend. In Q1, we're keeping our OpEx relatively flattish, I would say despite you all know the typical headwind that we experienced in the U.S. employee benefit rates and so forth. So we're doing a good job there. And as I mentioned in my opening remarks, we are going to navigate and control our spend. It's one of those levers that we have. And for 2023, I'd say we'll plan for the full year to make sure that we're below that 23% for modeling purposes. So maybe a quarter here, it may go out of balance, but for the full year, we expect to be within 23%. That will be our last question. We'd like to pass it over to Kurt for some final remarks get right here to the end. Yeah. Thank you - thank you very much, Jeff. Now as we have discussed, clearly, the level of uncertainty currently is higher than what we've had through the past couple of quarters. The stance we take is that we want to be prudent and disciplined to those elements, which are in our control. We just discussed about OpEx. But much more importantly, I think this is all about inventory management. There, we don't want to be blocked by a lot of over shipping into the channel and not having a deal anymore what the true end demand is. So that's why we focused on this call and also for our guide very much on that approach. For the channel, which mind you, is more than 50% for NXP, more than 50% of our revenues are going through the channel. So that discussion is a very important piece for us. With that, we are actually in a position to certainly navigate in a good way through this period of uncertainty and at the same time, remain very prepared for a potential rebound which we think could happen in the time to come, especially in China when the infection rates come down again after this policy change.
EarningCall_931	Greetings and welcome to The Hershey Company Fourth Quarter 2022 Question-and-Answer Session. At this time, all participants are in listen-only mode. As a reminder this conference is being recorded. I'd now like to turn the call over to your host, Ms. Melissa Poole, Vice President of Investor Relations for The Hershey Company. Thank you. You may begin. Good morning, everyone. Thank you for joining us today for The Hershey Company's fourth quarter 2022 earnings Q&A session. I hope everyone has had the chance to read our press release and listen to our pre-recorded management remarks, both of which are available on our website. In addition, we have posted a transcript of the pre-recorded remarks. At the conclusion of today's live Q&A session we will also post a transcript and audio replay of this call. Please note that during today's Q&A session, we may make forward-looking statements that are subject to various risks and uncertainties. These statements include expectations and assumptions regarding the company's future operations and financial performance. Actual results could differ materially from those projected. The company undertakes no obligation to update these statements based on subsequent events. A detailed listing of such risks and uncertainties can be found in today's press release and the company's SEC filings. Finally, please note that we may refer to certain non-GAAP financial measures that we believe will provide useful information for investors. The 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. Reconciliations to the GAAP results are included in this morning's press release. Thank you. At this time we'll be conducting the question-and-answer session. [Operator Instructions]. Our first question comes from line of Andrew Lazar with Barclays. Please proceed with your question. I guess just one from me. Trying to get a better sense of how you're thinking about elasticity for '23 versus what you saw in '22, which was very little? And what percentage increase in capacity you're expecting for this year? And I guess I asked because, if elasticity were to stay as benign as it has been, and you ramp some capacity, trying to get a sense of whether it could render your flat, just slightly down volume outlook for the year somewhat conservative, or will continued capacity constraints limit the potential for top line upside from here? Yeah. Thanks, Andrew. As we look at price elasticities, we are assuming that they will be closer to last year than they were to historic, but not quite as good as last year. And as we look at our capacity, we will have low single-digit increases in capacity which do give us some ability to flex with demand as we see it. Steven, you can add. Hi, thanks, and congrats, everyone, for such a great year. I wanted to know, the guidance for '23 is more aggressive than normal, like you normally start the year rather conservative. But this year, you're guiding above your normal algorithm. And I want to know if could kind of isolate what the key drivers are, and why you've raised it compared to three months ago. Maybe drilling down looks like gross margin is coming in better than you thought, maybe you could explain why. So just on, the big movers on the top line, obviously price driven, and we have good visibility into that. We saw that effect be part of the driver for the fourth quarter performance, but we see that carrying forward, especially through the first three quarters of next year. And we do have elasticity factors, as Michelle said in the last question. Our planning isn't quite down to the levels of historic elasticity, but something looks more like last year. And if you sort of drop further through the P&L, we do see some benefit from the gross margin side, as we could see more stabilization, the pricing coming down and some cost efficiencies, and a return to more historic levels of productivity. Now we still have efforts for more productivity. But at least this year, we're starting to see something that we hadn't seen in the last two years. So those are some drivers through the P&L that far. On the market share side, yes, we do expect to have a positive market share next year. I think that's one that we're disappointed about this year and want to see turn the other direction Next Year. Yeah, and some of that market share will be helped by the incremental marketing investment, as we've taken that up, as we have additional capacity online and certainly, the additional capacity as well. As we think about the pacing of the market share, you should think about it relative to the beginning part of the year will be slower, and we won't see those declines, probably till we get into the spring. But once we hit the spring that will really kick into gear. We know that we had some lost opportunity this year around seasons that we weren't able to fulfill totally all of the orders. And then also a little bit of a mix impact from refreshment, being a late rebounder given social behaviors, but we think that'll neutralize going. Okay, makes sense. Just one follow-up. On the gross margin side, are your cost, like inflation cost coming in better than you thought or is this really just productivity is accelerating more than you thought? Yes, probably more on the productivity side. We have pretty good visibility in the cost, with the hedging program and so forth, particularly on commodities, and we're still expecting high-single-digit, year-over-year inflation through commodities, and a lot of the materials items and mid-single digits on things like labor and logistics and other supply chain costs. I don't think those assumptions have changed much from our outlook, but probably a little bit more productivity. Hi, thanks. You're guiding to a gross margin of around 44.5% next year. I'm just curious for this coming year, what do you see as a, I guess, ânormal levelâ, if there is such a thing in this kind of environment? And I guess more specifically, if you can grow your gross margin by a healthy amount in an inflationary environment, is there any reason it can't ultimately get back to 45% or above? Sure, again, our model is growing gross margin every year. That would be the goal. That's really part of the growth algorithm. And so we've had two years where that's been a challenge. We see that now turning for 2023 and really getting back on the algorithm. And so I would like to say it's price and inflation agnostic in terms of the strategy. How we get there will change based on the external environment. But yes, we do see restoring to gross margins that we had in the past and frankly, continuing to drive that forward. And then, how do we think about the breakdown of sales growth and operating margins by segment in 2023? You gave a little bit there. But are there any unusual items we should be aware of for either of these segments, just as we consider our models, maybe drivers that aren't necessarily apparent at first glance? Yeah, the only things that are unusual or different, I kind of go to salty, and we mentioned some of this in the remarks. Salty is going to have a strong top line. We're expecting that. We're also expecting to see gross margin improvement year-over-year. We saw some of that in the fourth quarter, finally seeing pricing catch up in that business a little bit to inflation. But still some room to grow. But we'll see some reinvestment below that. And so we're going to activate more against the brands next year. We're going to do some capability investments between the lines to really scale up the infrastructure. And part of that infrastructure is the ERP transition that we talked about in the prepared remarks. And so that's probably the one area where I see strong sales growth, some gross margin improvement, less route through to off margin that we might see in a normal year on the back of those capability investments. Other than that, I think the other segments are probably, pretty traditional in terms of the growth characteristics. Thank you. Our next question comes from the line of Bryan Spillane with Bank of America. Please proceed with your question. Thanks, operator. Good morning, everyone. My question is just around the advertising and consumer spend investments. And I guess I had two questions. One, in the prepared remarks, one of the things you talked about investing in is workforce. So I wanted to just understand, is that like more merchandisers and people in the field or something else? And then maybe I'll start with that, then I had one other follow up. Yeah, I mean, as we look at some of the investments that we're making in our employee base, clearly, one of our key strategic goals this year is really to integrate scale our salty business. And so we are adding some increments of talent there to really make sure that we have the right skillsets, and that we have all the employee base and talent needed to do that heavy lifting and the work, some of that also around improving our planning system. Some of the things that whey we buy a smaller company, we need some more sophisticated capabilities. Then obviously, given a lot of the work across the business on supply chain, where we are continuing to invest to build capacity and resiliency in the network, we have made investments in supply chain talent as well. Okay. Okay. And then the second, just was related to the kind of the thinking behind the double-digit increase in advertising and consumer spend. Is that partly a -- sort of a function of just inflation has been so persistent. Now obviously, you've got price increases on your own product lines, but consumers are just seeing -- have seen a lot of inflation across a lot of consumables. And is it -- if you're going to have that level of pricing, you really need to advertise in order to sort of make sure consumers stay engaged, because they're going have to start making some choices. Or was there something else that kind of drove the decision or the need to increase advertising at that rate? Yeah, absolutely. So our long-term model, we believe in advertising. We've seen the impact and the returns that we get on advertising in terms of having very strong ROI. So we take a very databased approach to media spending, and we invest where we see that incremental profitable growth. Over time, we do know that that advertising builds consumer connectivity. And we know that, that consumer connectivity is -- what part of what helps us to have the elasticities that we do. People are connected to our brands. And during the tough times, we know that that connectivity leads to them continuing to buy. So yes, it is important during an inflationary time, and we've done statistics over that, analysis to validate that. And then, as you know, we reduced spend last year really due to capacity constraints. And we did see an impact in demand on several of our brands. And so those are really the priorities where we are reinvesting this year. And we're also investing in some of our whitespace opportunities, like gummies and better for you to strengthen the business, as well as our salty brands, where we're really in a major growth mode, gaining household penetration, gaining market share, and we want to continue that momentum. I just want to start by following up on the spending. Could you give us a sense -- I recognized last year, you adjusted spending to match your -- better aligned with the capacity limitations. But would this year be restored levels to sort of the optimal targets? Or do you still see that ramping into next year as well? We're just trying to understand a sense of, if you'll be back on your sort of steady run rate or kind of ideal level or if we're not even quite going to be there yet until maybe 2024. Yeah, I mean we are always looking at the returns that we're getting on our spending, and making decisions as we go forward based on that. So we think that we're in a reasonable zip code. I think we've said before that we don't think we have to go back up to the very highest levels that we were at historically. We've done a great job over time, getting a lot of efficiency, getting very tight in our targeting, so that we're getting even greater returns. But I wouldn't also commit that this is the high mark, above which we're not going to move above. We're still probably not quite back to exactly the point we want to be. Okay, that's really helpful. And just want to unpack a little bit more if we can, a comment you made in the prepared remarks about seasons being a growth driver. You said it's off to a great start. Obviously, last year went really well as well. And so just would love to understand a little bit better how that unfolds and how to be thinking about that. Yeah, we continue to anticipate very strong growth in the seasons. We've continued to see that in the category. Consumers, during the past several years, have even dialed up their interest in season. So it is a strong part of our portfolio. It's a place where we do very well. It's a place where there's a lot of emotional connectivity. There's an anchor event, people want to participate in those anchor events with the brands that they love. And so we think that there's opportunity. We had some missed demand that we weren't able to fully fulfill because of capacity. And we're going to be in a much better position this year to be able to more fully capture that opportunity. And the first part of the year, as I mentioned earlier, from a share perspective, we won't be as strong as we anticipate that we will be for the seasons towards the back part of the year. Good morning. Thank you for taking our questions. I just want to go back to the last question on volume and perhaps unpack cadence throughout the year. You have increased capacity for seasons coming on, but you're also lapping the over shipment in the first half this year. Can you just unpack a little bit how you expect volume to progress throughout the year, understanding that you expect for the full year to be flat to slightly down? That's my first question. Thank you. Yeah, going into the first part of the year, the seasons we've got already identified the volume and shipments there. So as Michele said, we still -- we're dealing with some capacity constraints leading into the seasons in the front part of the year. When you look at the year overall, we're not expecting any big material differences by quarter for volume. Okay, that's helpful. And then just one last question on capital allocation here. You're at the low end of your leverage target over the long-term. Are you beginning to look at making additional acquisitions or perhaps return more cash to shareholders in the upcoming years? Thank you. I just say job one right now for us is integrating the amazing acquisitions that we bought SkinnyPop, Pirates and Dot's, and we're investing to leverage their full potential. However, we do always continue to be in the market, looking at assets that can continue to advance our strategies, expand our portfolio appropriately into high growth, consumer demand segments. And we certainly do have a lot of balance sheet flexibility to be able to do the right M&A, if it becomes available. That's right. And I would say more broadly, from a capital allocation standpoint, no major changes. We definitely want to be giving back cash and repurchasing shares as part of our strategy. That puts good tension on the internal investments and M&A to make sure we're getting the best return. And so that's an area we'll continue to monitor. We've got a lot of CapEx this year. And so that's one thing that we're taking into consideration as we look at the overall balance of capital allocation. Hi. I just had a question. First, if I could a bit of a follow-on to an earlier question, but in particular in the salty snacks division, with the margin being so strong, and in the fourth quarter and reaching over 20%. Was there anything unique to the quarter? And then I certainly heard about investments you want to make both internally and advertising throughout 2023. I guess I just want to understand how you expect the margin to fare throughout the year as margins expand, but just not to the level of which it did here in the fourth quarter. Yeah, we're really pleased where the fourth quarter finished. Probably two things drove that. One we did have easier laps in the fourth quarter. And then second, you know, we said earlier, we are seeing pricing, catching up a little bit more to some of the inflation that we saw over the course of the years. We've got a little bit of a benefit of that. As we look to a margin for that business going forward and into next year, we want to again, on the gross margin line, expect to see some continued advancement. We got a lot of plans to still optimize that business. And we've talked before about streamlining the back office, streamlining the supply chain, network, better integrating all of that with our existing Hershey systems, and so forth. And so in fact, we'll talk more about that when we get to our March Investor Conference, and spend some time on that. But have aspirations to continue to see that profile up over the course of the year. But as Michele said, we are going to reinvest some of that back between the lines to accelerate the top line to invest behind the brands. And then on the capability investments like ERP. But I'd say the key takeaway is we have still high margin aspirations for that business as we look forward over the next couple of years. And most of those will occur over the longer term. We don't expect significant margin expansion or margin expansion in '23. Okay, that's helpful. Thank you. And then just a quick follow-up, if I could on to understand how inventory will fare for the year. You talked about depleting some inventory late in the years. You've converted -- or moved to the new ERP system. Should inventory grow to the year and then you deplete it? Or does it hold this level? Then it goes just goes lower as you kind of move that inventory out? Have you built it already, I guess is the question, or do you expect to build more? Yeah, we haven't built it already. I mean, there will probably be some build, not that material. I mean there's a limit to how much salty inventory we can build. But as we said, when we get to the fourth quarter, we expect a pretty significant depletion. And that's really just to allow the cutover between systems. And so on a net-net basis that will look like a negative for the year for that business. We would expect to see that come back next year, probably with a strong start to the year. Yeah, thank you. Good morning, everyone. Hi, Michele, hi, I was hoping you could just comment on fill rates, kind of where you guys are now versus kind of where you'd like to be. And I know things are below where they have been historically. Just curious, is that just a function of capacity? There's also a labor component to that. And then I had a bigger picture question. Yeah, so I would say our fill rates are much better than where they were. There's been some significant improvement versus last year, as we've been able to invest in capital and get additional capacity on the ground. So and really, there's minimal impact from labor. It was really, largely very much tied to capacity. Now we did step up in labor to enable us to be able to obviously execute against the capacity, and the incremental lines. But we're seeing less network disruption than we've seen in the past, not all the way back to the perfect situation it was before the pandemic, but it certainly improved. Right, thanks for that color. And then just the bigger picture question is, look these categories, especially on the chocolate and confectionery side, I think, clearly, we can see a renaissance. And maybe we can attribute some of that to COVID. But I'm just curious like, what does your research, internal research say about what's actually going on with the consumer and these categories? Because I think we can all agree the underlying trend rate has been much better than I think anyone would have expected a couple of years ago. Well, certainly we know that snacking has been on the rise, has continued to be on the rise as a consumer behavior, pre-pandemic, and also post-pandemic. We know that there still is a bit more at home behavior versus folks cutting back on going to restaurants. And certainly that's a benefit across packaged goods snacking. We also know based on our insight that consumers are interested in snacking and particularly in confection and chocolate on two diametrically kind of opposed parts of their emotional state. One is when they are incredibly happy and it's a treat time, and they want to treat themselves and the other is when there are downtimes, and they want a bright spot. But they do view these categories and especially chocolate as a part of kind of emotional wellness, what it does and how it makes them feel. And then of course I think that the more that we interact with consumers and this really hasn't changed over time, consumers have emotional connectivity to our brands. Our brands are more about the products -- more than just about the products. They are about the moments of connection. Many of them are used in special times. And we get letters all the time with people talking about the special role that some products played in their life. They remember when they were with a friend, experiencing it or with their kids at a season. And I think that continues to be timeless, and perhaps has even dialed up a bit since the pandemic. Hey, good morning, folks. Thanks for fitting me in. My apologies I didn't get a chance to go through all the prepared remarks. We have a lot going on this morning. Apologies if you have answered the question. I have two quick things. First, the capacity expansion. You give some quantification for the year? What's the cadence? When should we expect to see that capacity coming along? Yeah, it's going to be coming online throughout the year. And again, this sort of fits into a broader discussion we've had on capacity expansion. I think we've talked in the past, if you look at the 2020 to 2024, period, we were looking for a 15% ish increase in capacity across the network. And so what we're going to see in 2023 is going to be a low single digit contribution towards that goal. And I would kind of think about it coming in ratably over the course of the year. Okay, and the elevated CapEx, it sounds like it's a long slog. Should we expect this elevated level to continue into next year, for the year beyond as well? Yeah, not at this level. But I would say at least for the next -- for 2024, we will have some amount of elevated capital. We will still be finishing off the ERP program, and still probably having some tail investments from a capacity standpoint. So those are the two things I would point to and, on the CapEx, as we talked about all the time, the majority of that CapEx is targeted on capacity expansion. If you click into that a large portion is driven by recent fantastic growth we've had there and recent capacity and network capacity has improved significantly. But we still have opportunities, some are recent, some in other brands to unlock more efficiency and capacity. And so that capacity expansion plus the ERP investments that will eventually drop out are the two kind of biggest components of the CapEx right now. Understood. The last question for me. I've always considered your European venture to be a bit opportunistic. It's a small tactical export business. Yet, recently, you've kind of carved it out as a standalone business. Does this signal anything in terms of your strategic intent on expansion in Europe? No, not at all. If that's in reference to any of the talent changes that we made, they were really in the course of just normal development and expansion for people to get new opportunities. Europe continues to be small. We continue to feel that we are making great strides and seeing a lot of growth there. But there is no strategic change in our approach to that market at all. Can you talk about your key innovations planned for '23? And how are you thinking about the drivers of top line growth between innovation versus existing brands, where you've been capacity constrained? Sure. So innovation continues to be an important part across our portfolio. And we have several items that are launching this year that we think will generate a lot of consumer excitement and merchandising. And if we look at our core confection business, the highlights there would be Reese's Stuffed with Reese's Puffs. We have a limited edition, which is a Reese's Creamy, and then a Reese's crunchy product. So a line of limited editions that let consumers pick their favorite, which texture they like. And then we have an exciting new kisses flavor that is called Milkilicious [ph], which is a kiss filled with a milk chocolate filling. On our salty business, we launched as a limited time edition this year, a dot cinnamon sugar flavor. And so folks will see that in the market as it's been very successful. So those are probably the highlights of some of the biggest innovation. We continue with our strategy that we employed several years ago, that's really helped to accelerate our top line growth, which is while innovation is important and we will support innovation across the board, for news and excitement. We really don't want to stray away from a primary focus on our core. Our core are brands that are sustainable. They have been out there for a long time. Consumers love them. The velocities on them will always be stronger than innovation. So across our entire portfolio, driving our core is job one. And then using new innovation for news and excitement. Great, thank you. And just in terms of your organic growth outlook for '23, how are you thinking about the growth between North America confectionery and salty snacks? And maybe if you could just touch on some of the key growth drivers behind the salty snacks business for '23? So I can talk about some of the growth drivers and then let me have Steve talk a little bit about the part of your question. So as we look at salty snacks, we will be, as Steve mentioned investing in marketing, so that we can continue to expand those brands and business and continue our growth in household penetration. So that is clearly an investment that will drive growth. We continue to have some level of distribution upside, especially on Dot's. We saw distribution upside as well as increased item counts in 2022. And we'll see some of that growth continue as we go through '23. Once we get beyond that, we think will then start to be going more to velocity increases and price pack architecture opportunities. So those are some of the biggest ones. Investments in SkinnyPop, in advertising as well will continue to unlock growth potential. So I think those are some of the biggest growth drivers across the salty business. Yeah, just at a very high level, from a projection standpoint, we're expecting high single digits, top line price being the primary driver there. And as we talked about earlier seasons, underneath best seasons, and then media investment behind the brands are going to be big components of that. On the salty side, double digit growth, which is, what we should expect from that business, and more is price there as well, but also volume. And again, as we said, there are two we're investing behind the brand. We have some distribution opportunities, as Michele mentioned. On the international side, solid mid-single digit performance on the back of distribution, volume, some pricing as well, and some innovation. So at a high level, those are sort of the big targets. Steve, you gave good information on gross margin ranges for the year, a little bit on cadence with the Q1 and the impact of inflation. It's just striking to see high single digit commodities with labor, which is this dynamic of sticky inflation that we're seeing, across the staples landscape. But clearly you have good visibility into that outlook. I guess what I'm wondering is, this is going to be a probably a volatile environment for inflationary drivers, namely commodities over the next year. And I'm just trying to frame if there is a change in the commodity outlook. Is that something that changes your own outlook? Or are you so locked in on costs at this point, that it's we have good visibility on the year and we're fairly locked in. And that's really more of a consideration, from a year from now, something like that. I have a quick follow-up. Sure. On the -- in general, we have pretty good visibility, I would say across cost and commodities. I'd say the hedging program gives us some of that visibility. The caveat is that if you look at the last two years, where we've been bitten, in some cases, those are the things that we don't hedge and have been volatile, things like packaging, and resins and specialty ingredients and so dairy. So those are ones that I think we keep an eye on and movements at some of those, material movements can move the needle on. We saw some of those material movements in the last few years. I think our expectation is some of that will settle down and with that settling down in our visibility into the rest of the talks. I agree with you it's still potential for volatility, but we feel we've sort of picked the guidance range to try to accommodate most of that volatility. Okay, that makes sense. One quick follow-up and perhaps something that's even better suited to, the Investor Day coming up. But this sounds confidence on long term margin improvement. And clearly we saw an inflection in the snacks business today with positive commentary on the medium term in that business. So when you think about that long term margin between the confection the sack size do you have any sense of what would be driving that between those segments? Or is it more of a holistic target for the organization over time? Thanks so much. Yeah, that is a great one for the investor conference. And -- but I will say, our expectation is we want to see margin improvement across all parts of the business, all segments. And so we've seen a lot of improvement in international in recent years. But we have the same expectation that that's going to continue also. And that we're going to optimize and grow but grow in a sustainably profitable way there. Salty, probably expectations, given the capital that we've deployed in those acquisitions and the opportunity, we touched on things like private label and the impact that still has on the business as we look to the future. Opportunities to extract more margin out of that business. And in always on the confection side, we want to have a model that drives margin accretion. Thanks. A question on gross margin in this latest quarter, especially versus the third quarter. The reason I'm asking for color about what might have been your biggest unlocks that fourth quarter is because on a one and multi-year basis, it looks like pricing was rather similar to the third quarter. Yet your margin trend improved. And that fourth quarter was actually higher than it was in the in the fourth quarter of 2019. So any color about unlocks and gross margin would be helpful? Yeah, I think the biggest drivers that we touched on, we did have some better productivity dropping through supply chain efficiencies that had ramped up and essentially, Michele said we're not all the way back in terms of that supply chain efficiency. But we'll get to see an uptick in the fourth quarter. And then the -- I'll say the volume growth on the elasticity side, helping dropping some fixed costs absorption through the P&L as well. Those are probably at the point, just a couple of things, those are the ones I point to. And just a big picture question, one I've been thinking about is in a during this COVID era, clearly, at home snacking did well. You guys have made your own thunder with s'mores and your Seasons. And you've seemed to have a pretty good visibility into what you're doing each year in seasons. And so it looks like you're going to -- you're poised to have a pretty good 2023. But I'm wondering just as you just think about the overall energy for at home snacking as an occasion, do you have a view about whether that can sustain in terms of its growth rate? I wonder about this not just for Hershey, but for other companies as well. Any comments there would be helpful? Thanks. Sure. So let me start by saying as much as we have benefited on our take home business, with at home snacking, our instant consumable business has also been quite strong. So we've really seen growth across all what we say, all three segments of our business seasons, take home and instant consumable. We don't expect that we're going to lose volume on those segments going forward. So we don't see a reversal in the trend. But we would say that growth may moderate. We would expect it to moderate a little bit versus where it's been as consumers just shake out into their normal ongoing behavior. Yes. Hi. Good morning. I wanted to go back to the two topics you talked about already. The A&P investments and the workforce investments just a little bit, drilling down into those. Just any -- on the A&P side any notable phasing of the incremental spending that you're planning and if so just the drivers, of that phasing, if you could. And then on the workforce side, Michele, you walk through a number of priorities, especially on the salty side, and I think there makes sense and they are frankly, intriguing. I guess, question is, where are you with those hires? Is that something that we should anticipate? You kind of have in the near term pipeline and in the investment show up early in the year and carry forward? Or is it something that builds and is more the spending progressively layers out as the year goes on? Just where you are in in making those hires that you talked about earlier? Thank you. Yeah, so as we looked at the investments in marketing spending, you should think about the confection investments being fairly stable throughout the year. On salty, our investments will be more front loaded during the year because of the -- towards the end of the year is when we're doing the S'more conversion. So we're really going to you know drive the volume harder at the beginning and those investments harder at the beginning of the year. Hey, thanks for the question. Just one for me, and it's on gross margin. So you expect gross margins to be up 40 to 50 basis points year-over-year in 2023, given net price realization and higher levels of productivity, which are expected to offset inflation. But it sounds like 1Q '23 gross margins will be pressured due to lack of a timing benefit related to inventory valuation last year. I'm trying to get a sense if you could close frame the magnitude of that 1Q, '23 impact. Thanks. Yeah, so you're exactly right. For quarter one that will be our most pressured gross margin quarter. In fact, I expect we will be still down year-over-year for the first quarter because of those laps. And I don't know if that I'll dimension -- get specific as the guidance for that. But you're exactly right. That'll be our most pressured gross margin quarter. Good morning. Thanks for the question. First off, Michele, in confection, you're bringing more capacity online, increasing brand spending as well. But how are you thinking about in store activation at this point? I think going back pre-COVID, there was an increased focus in the aisle with the king size and some different shelf sets. Then you move to the checkout lines, and then you would take in some shelf space for magazine [ph] and non-consumable. So as we think about 2023, and I guess even beyond at this point, where the levers you see as most impactful from here? Where do you can you still benefit from activation going forward? So we are always looking to optimize across the entire mix of levers that we have to drive activation. Managing the shelf distribution, shelf space is always a priority. There were some areas as we were lighter on capacity, where we were unable to fill some of those distribution needs. So we see some of that ahead of us as an opportunity as we have improved service. We talked a little bit earlier about the marketing spending where we had pulled back again, because we were lighter on capacity, so reinstating, that. We know that there's a very strong return on that, reinvesting the front end. Retailers are always looking at how they optimize front end space. And so we partner with them. And we continue to see opportunity there. And as we look at our in store promotional spending, we do believe that getting visibility and display in store is important to our business. That said, our promotional spending is below COVID levels. And we've seen that we've continued to be able to drive the business, where those promotion levels are today. Okay, thanks for that. And then Steve, on the salty snacks margin. There was a lot of noise this year, you mentioned the catch up on pricing. You had the warehousing in Q4. You had some reduced promo and advertising spending. As we think about the sequential increase in margin from Q3 to Q4, is it possible to bucket those tailwinds across the different elements? Or maybe what do you think the underlying run rate is for segment margin exiting '22? Is mid-teens, high teens, just trying to think about the moving pieces versus the structural improvements there, just far. Thank you. Yeah, it's a fair question. There have been a lot of movements across the quarters. I think, think about run rate in the mid teens. That's probably a good baseline to operate from let's say. There will still be movement across the quarters, probably, especially as we look to the back half of this year with that ERP transition that we talked about. As we get further into the year we will give more color to some of that variability. But if you think about mid-teens, that's probably a good starting spot. Good morning. Thanks very much. So it's been about 15 points or so over the past two years of pricing. And I was wondering if you could characterize -- I know that's data driven. But I wonder if you characterize how much of that was driven by this narrative about rising costs and if costs continue to moderate or even decline, should we expect some -- is the expectation from the retailer that some of that pricing goes away if costs go down, or has this just all been a change in the conversation to let's work together to grow the category? Just curious about how much risk do you have, if cost in fact start to moderate or decline? Thank you. No, we always work together with retailers to try and maximize category growth. That is our fundamental premise, especially being leaders in all of the categories that we are in. If the category is growing, we feel really good that we will benefit from that growth. Historically, there hasn't really been a move in the category to execute price declines or price rollbacks. As prices kind of have gone up, they have tended to stick in the marketplace, as a matter of principle of how that category dynamics have worked. And what we really try and do is to leverage some of that favorability in price in our holistic model, to reinvest for growth, whether that's reinvesting in capabilities to get smarter about managing the shelf with the retailer, helping them to find new points of interruption, or whether that is incremental consumer investment. Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Ms. Poole for any final comments. Thank you so much for joining us this morning. We will be available for any follow-up questions you have. Have a great day.
EarningCall_932	Good morning, everyone, and thank you for waiting. Welcome to Cielo Fourth Quarter of 2022 Results Conference Call. With us here today we have Mr. Estanislau Bassols, Filipe Oliveira, Daniel Diniz and other companyâs executive officers. This event is being recorded and is also being broadcast live via webcast and may be accessed through Cielo website at ri.cielo.com.br/en/ where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Remember that the participants of the webcast will be able to register via webcast questions to Cielo that will be answered soon. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Cielo management and the information currently available to the company. They involve risks and uncertainties because they relate to future events and therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that conditions related to macroeconomic conditions, industries and other factors could also cause results to differ materially from those expressed in such forward-looking statements. Based on the presentation published on the company website, this conference call is opened exclusively for questions-and-answers, which will be preceded by a message from the CEO of the company, Mr. Estanislau. [Operator Instructions]. Good morning, everyone. Thank you all for joining our earnings call. Before jumping to Q&A, Iâd like to share a few thoughts about our performance and strategy going forward. â22 was an outstanding year for Cielo. It marked a turning point in which many indicators evolved and show how the company transformed itself over the last years. Iâd like to highlight some milestones of this journey. The conclusion of our investment agenda marketed by the MerchantE transaction, much more than cash, this investment allowed us to purely focus on our card markets and also provided for a very lien structure. Cielo Cateno became our only business units. The second point I would like to highlight is that Cielo is a more data-driven company, with increased capabilities, both in terms of costs and pricing. In pricing, the company learned a lot over the last years and used its analytical capabilities effectively. As you saw in the repositioning, we implemented both in large accounts and SMB segments. On costs, we consolidated our positioning as the most efficient player among the listed acquirers, with the cost ratio reaching the lowest level in 2022. We have also evolved in our capacity to understand our customer needs and therefore adapt our structures to better serve them and improve our commercial effectiveness. Through the year we saw evolution in many indicators of service quality, such as customer satisfaction with our call center increased, reduction of complaints to our ombudsman, reduction of complaints to the regulator channels and that led to improvements in our NPS. Commercial productivity also remained in an upward trend and we recently concluded the expansion of our commercial team. The financial metrics reflect all these achievements. Our bottom line reached R$490 million, the highest net income reported by the company since the first quarter of â19. The EBITDA margin was 40%, a level that wasnât seen since the beginning of â18 when we had a completely different competitive environment as compared up to today. In 2023, we want to expedite and increase the visibility over these levels. With this agenda, we should increase our margin and return, improving process to better serve our clients and curb costs and improve the profitability of our customer base, including potential opportunities to optimize prices. Back in this agenda, we have five pillars that comprehend our top strategic imperatives. The first pillar is to be the leader and acquirer the core of our business. The main imperatives of this pillar are: first, to ensure a sound financial position and efficiency, aiming persistent and sustainable growth. Second, deliver the best of Cielo to each customer segment. The third, excel in process to enchant our customers; and finally, ensure quality of products and service in the journey of customers from end-to-end. Well, this was the first pillar. The second one is innovations within payments. We want to fully and broadly serve our customer needs in payment solutions. The third is distribution of financial service. We aim to expand our product offering with financial service, and the fourth part related with this is value-added service. We intend to increase the value of our customer base, becoming a platform of service. Lastly, the pillar that support all the others, we have people, technology and data supporting the whole strategy. We want to be seen as a cutting-edge technology in payment space. Deliver more to our clients with data driven offering decisions, expedite the development of our team and expand the adoption of agile methods, seeking for performance gains spread in the company. And we want to do all of this, taking care of people, implementing the best corporate governance batches and always, always looking for more sustainable ways of doing business. As you can see, we have an ambitious agenda and we are completely committed to it. Our team has been successfully working in a spectacular turnaround. We have an undisputable positioning in the market, 27% of market share. We are presenting more than 95% of Brazilian municipalities. We have a strong footprint in every segment of the industry. We have been leaders in profitability and efficiently. Our team is engaged with a strong mindset and inclusive and collaborative culture, which has seen as ESG as a competitive advantage. And I should remember you that we also have Cateno, a unique story of diversification of revenues in our industry, which generated cash earnings of $1.4 billion in 2022, well above net income due to the amortization of the investments made to explore the Ourocard business in Banco do Brasil. Cash earnings is the relevant metric for investors in our view, and Iâm not sure that the market fully understands Cateno and its cash generation potential. Our purpose is to be the most desired platform, smart platform in Brazil e-commerce. Thatâs what drives our efforts and folks to reach our vision. We want to be seen as the smartest platform that integrates the value chain of our customers, delivering a broad array of service and also customized solutions. Those are the main messages I would like to share with you. An agenda to go further in operational transformation in expediting the digital transformation of the company. Again, thank you all for being with us. Now, we can move to Q&A session and discuss further our fourth quarter earnings. Thank you. Hi! Good morning and thank you for the call and taking my questions. A couple of questions. First, on your payment volumes right, it grew 5% in the quarter. So I mean it seems high level you're maintaining share, but looking on slide 12 in your presentation, the SMB and Long Tail segment only grew 2% on the quarter. So it seems that despite your efforts, you're still kind of maybe losing share in that segment. Can you talk a little about the sort of the competitive dynamics? Will you be able to gain share there at some point? Any comments and any ability to reprice in that segment at all? And then I have a second question on expenses afterwards. Thanks. Actually Tito, its Filipe. Thank you for your question. So talking about the TPV and SMB and Long Tail. It's too early to say whether we lost market share or not. One thing that's important to notice is that in the fourth quarter of the year, it's natural that SMB and Long Tail performs a little bit worse than large accounts. Simply because Christmas and Black Friday sales are mostly concentrated in a very large accounts. So itâs natural to have this discrepancy in growth between the two mutual segments. However, if weâre looking in the second question regarding the share, if youâre looking at 2023, it is a strategy to at least maintain market share in SMB and Long Tail. Of course their absolutions are variations in time, which are natural, but thatâs not our strategy at all. And then, talking about pricing specifically in this segment, weâve seen a large increase in prices, already pricing during the course of 2022. But still want to look at the P&Ls and the ROE for main competitors. We still see that the profitability in the market as a whole is still not in adequate levels in our opinion, and it's still not paying the shareholder its fair amount. So we still see space for repricing in the industry as a whole. Cielo by itself, we did some weighting in the fourth quarter. We're still going on to do some weighting in the first quarter of this year. But you know we still believe that the market needs to move forward in repricing a little bit further. Great, thanks for that. Maybe one follow-up there just in terms of the room to increase our ROE for the sector. I mean just given some players are private and that may be less of a focus for them in terms of improving profitability, particularly in payments. I mean, do you see that as a risk? Have you seen any of these private competitors being more aggressive on pricing at all? Most of the private competitors here in Brazil, they are controlled by banks that are listed, and those banks have been following an ROE agenda very closely in the market and most of the market is looking at ROEs quite closely. So we believe that they probably don't want to be diluted. Actually they are a major shareholder in bank. So I do see some of those players engaging in repricing during the course of 2022. We have seen that, and we still see them committed to reprice in 2023, and we haven't seen any signals change from them. Okay, great, thanks for that. And then my third question on expenses, just actually particularly on Cateno, where expenses were down in the quarter, you mentioned some provision amounts in reimbursements. Could you give a little bit more color on that? Is the level where you're at now, it looks like it was at BRL 21 million in the quarter. Is that the right level? Help us think about how that should evolve from here. Sure, yeah. So we do believe that the current level is the right level. We have seen some provisioning in the past that has moved around and has confused a little bit of your analysis, but we do think that the current level is the right level. Good morning everyone. Thank you for taking my questions. The first on the ambitions for new products, right? It seems that the company wants to explore opportunities outside the core business, mostly like credits, products or software solutions. I would you like to understand, is this possible to continue seeing rising efficiency, rising profitability, even exploring those new products, that's the first question. The second is more like a follow-up on Tito's question on this SMB segment. The company expects to not lose market share this year right, but we continue to see net disconnections. So are you expecting to see net disconnections reducing or potentially becoming net additions in the future? And when are you expecting these turning points? Thank you for your question. The first point, we are working first. We improve the products that we already have in our core and we do believe that having a platform where the client can assess their information easily and compare that information with similar markets, it will open the doors for new products. So the first wave is, expand the financial services. So in terms of new financial service solutions, a good example is the big solution where the retail can find a more easy and mostly more safe way of receiving through the PIX using Cielo. The second point is we are working to have a platform of value added service and also financial service. But the way we are doing it is doing small pilots to be sure that what we have, what the client wants, what the client perceive that they can obtain through us are in the best point possible. So making these, through small pilots, we do believe that we can keep our efficiency agenda and that's what we had already been doing so to be clear. The second point about the net disconnection. When we see the big client segment or the small to medium business segment and compare the first quarter with the fourth quarter, we have a net gain. When we see the micro companies, then we can see that we are losing companies, yes, but this is part of our strategy of not subsidize the segment. So we do believe that we will have â that weâll keep the focus in the small to medium businesses and that we will keep losing possibly part of small merchants in our base. But year-by-year, month-by-month, the remaining very small businesses that we have in our base are more help than the last cohort. So we do see that this will move all the time. Excuse me! This concludes todays question and answer session. I would like to invite Estanislau to proceed with his closing remarks. Please go ahead sir. Well, thank you all for being here. 2022 was an amazing year for Cielo where we have been working on the fundamentals that will bring 2023 to even a better condition. So I'm proud of being part of Cielo, and I would like to thank you all for being here. That does conclude Cielo conference call for today. Thank you very much for your participation, and have a great and nice day!
EarningCall_933	Welcome to the Presentation of the DSV Annual Report for 2022. For the first part of this call, all participants are in a listen-only mode. Afterwards, there will be a question-and-answer session. [Operator Instructions] This call is being recorded. Today, I am pleased to present Group CEO, Jens Bjorn Andersen; Group COO, Jens Lund; and Group CFO, Michael Ebbe. Speakers, please begin. Thank you very much. Jens Bjorn Andersen here. Thanks for joining us for the full year 2022 results from Hedehusene, Denmark. You've probably seen the presentation. Its online. After having clearly looked at the beautiful photo on the front page of a bridge in Tokyo, you can go to page number two, and look -- and read the forward-looking statements and then further on go to page number three with the agenda for this morning. Those of you who have listened in before will probably recognize the agenda and you can read it yourself. So with that said, I just wanted to remind you that when we get to the Q&A, we would kindly ask you to refrain from asking more than two questions each to respect the time we would like to get this done in about one hour. I'm sure you also have a very busy day. But page number four talks about the highlights of what we do deem as an exceptional and very, very strong year for DSV. By far the highest and the best EBIT result this company has ever seen. And far above the initial guidance, we gave of between DKK18 billion to DKK20 billion of 2022 when the year started. So, overall, on a day like today, we can be happy, we can be proud, we are still humbled. But all the staff members of our company have done an absolutely fantastic and remarkable job. And we are both proud and very pleased about the performance. It's not often that we can show to an EPS growth of 60%. And also, please be reminded, I'm sure you're aware that looking at the EPS for a longer period of time, we still have a very, very strong development. Also been a more eventful year than probably ever before. Amongst others, we have integrated GIL in a record-breaking pace in less than 12 months. It was not an insignificant chunk of business. And then off the top of that we have seen extreme market volatility and the year was also characterized by a great degree of supply chain disruption. We always say that cash is king in DSV. So, the fact that we had a very, very -- I'm sure Michael will spend some time because that's really highlight of the year also very strong performance of the cash flow. And the fact that we've been able to distribute or allocate over DKK21 billion to shareholders is really a great feeling and Michael will elaborate on that. This morning, we have also released the earnings guidance or the EBIT guidance for this year. For 2023, we estimate that the result will come in between DKK16 billion and DKK18 billion and that reflects that the market is normalizing and that we will get at least at the beginning of the year, some macroeconomic headwind. As such, is a little bit against the law of nature and DSV where we normally always have a higher result than the previous year. But as such we are actually pleased about the fact that we will see some sort of normalization in 2023 and that we will get back to levels that we can recognize will be in somewhat similar to what we saw in various degrees I have to say before COVID. So, nothing wrong with this -- the result. If we can achieve this between DKK16 billion and DKK18 billion is still internally considered as ambitious and very strong. Not to forget, we also announced this morning, our new sustainability ambitions to -- and we have committed with a science-based target to a net-zero target by 2050. We're very happy and also proud to take part in this journey of decarbonizing our industry. So, with that, we'll go to the divisions Air & Sea. Again, very strong results. We have seen a certain decline as we would have expected in Q4, driven both by a soft market where volumes declined, but also, of course, yields going down. So, more or less as we had expected, nothing dramatic in the development in Q4. We had basically been aware that this was going to happen and the fact that it happened was actually good, because it sets the base for -- as I said before more normal situation going into 2023. A lot of you -- and we will not elaborate too much of this, but a lot of you have asked if we will sit on our hands and do nothing with the cost base. We get a little bit disappointed when you ask this question because if you know us well, you should know that this will not be the case. We will do what we can to adjust the cost base and we have already Air & Sea and also for the two other divisions taking steps to align the cost base with the lower volume. We need to ensure that the productivity of our divisions to not decline. We feel that the Air & Sea division is very, very strong. The network is -- it will never be complete, but it is strong. We have great competencies from digital point of view, high service levels, great employees, good leaders in the operation. So, we feel that the division is stronger than ever before. And we have now to go out and grow our volume and take market share in the coming months, but very, very strong performance and the fact that the division surpassed DKK20 billion is, of course, absolutely remarkable compared to the EBIT result the year before. So, flipping to the next page just quickly on the products, first, Air freight. Maybe we should start by looking at the markets for Q4. Of course not an environment you want to be in. For many, many quarters in a row, we have seen a decline in volumes of between 15% and 17%. Our own market development is approximately minus 16%. So, we are in line with the market. We have still moved 368,000 tonnes of air freight, so we have still been busy. And we have managed to have a fairly reasonable yield also of above DKK11,000 per tonne. So, there's no really peak season and we have to see how the development will develop how the development will be for 2023. Inventory -- high inventories by our customers is, of course, one reason for the low decline -- or for the low development in volume. And of course also the fact that air freight is the most expensive mode of transport, has meant that it has -- had this weak development. Sea freight on page number seven, more or less the same story as air freight. I did forget to say we also have to remember that air freight is in nature more volatile than sea freight, so we will expect less volatility here on sea freight than what we have seen on air freight. Market is down approximately between 9% and 11% and we have the same development also. So, we have volume development more or less in line with the market. Still a higher yield than we had a year ago of a little over DKK5000 and we have to see now -- we're very eager to see how the development will be when we get into February here after the reopening of China -- after the Chinese New Year. We do expect that volumes will develop in a better way than what they have at the beginning of the year. But overall, we are happy and content with the situation. Then we'll go to road freights. A couple of things have happened. First, we would like to point your attention to the gross profit. It's more or less in line with what it was last year. So, of course, you can allude from that that we have had a higher cost base. A couple of things have happened. We have tried to highlight that. We have to remember we have exited Russia and Belarus [ph] and Kaliningrad. So, some profit was in the numbers for 2021, which we missed this year. And then we have been hit a little bit in one region, which is South Africa, where we've had certain issues that we've been dealing with, which has had a negative EBIT effect. And also at the very end of the quarter, a little bit later than what we did see on Air & Sea, but also at the very end of the quarter, we did see a little deterioration in volume and we were impacted by that also here, it was no surprise. Also, congratulations to the Road division of surpassing not DKK20 million but DKK2 billion in EBIT for the full year. This is also a great achievement and growth the year-on-year of 9.2%, something that everybody in the division can also be very proud about. Last slide before I hand over to Michael, is solutions. Some of you have asked about the development this morning and this was also expected. We are also here pretty happy with the gross profit where we have had an increase. We are very aware of the fact that we need to get the reporting right all the time and even though it annoys investors and ourselves, for that matter, we have done a little reclassification of some of the cost base, which makes a difference between GP and EBIT. And then also at the end of the year, we did do a few accruals also on the cost base to make sure that we don't carry any risks, so to say, from 2022 into 2023 as such that has happened throughout the company. Then the last thing I wanted to say is that when we look at the Q4 numbers for 2021, it was the first full quarter of GIL and it was probably a little bit too good. There were also other allocation mechanisms in GIL than what we have in DSV. So that has also been one of the reasons, but you shouldn't be too concerned. We are full of optimism and we still believe that solutions will continue to produce good and strong results. And also here, growing earnings from DKK1.7 billion to DKK2.7 billion for the full year is absolutely fantastic. And also job really well done for everybody working in the Solutions division. Thank you very much. And yes, I will go to page number 10 with the -- some KPIs from our profit and loss 2022. I think Jens Bjorn has already explained the development in EBIT, so I'll just touch upon some few other KPIs here. Clearly, the revenue is -- especially in the fourth quarter is impacted by the lower freight rates and also the declining volume as Jens Bjorn already mentioned. So, clearly, the gross profit has been less volatile than the revenue also as expected. Another thing that we have seen, especially here in the second half of 2022 is obviously the currency impact and that has also had an impact of our cost base. Most likely, some of you will say how will that develop in the guidance and what we can say here is that as always, we are an asset-light, so we are investigating different opportunities to protect the conversion ratio. I would also say that we aim to have the same cost base in 2023 as we had in 2022. So, that's about it for the cost base. Then I will say like always, we do have some foreign exchange adjustments, it's still related to our intergroup loans. So, no cash impact there. Then our tax rate is 24% for the full year, a little bit as expected and then when we come to the guidance, we also expected that will be this tax rate going forward as well. Last KPI on this page Jens Bjorn has already touched upon that this -- earnings per share with a growth of 60%. Clearly driven by strong earnings growth and we expect that it will normalize in 2023. Then we skip to the next page 11 with the cash flow. We believe ourselves, it's a strong cash flow that you can see here. All earnings reported are converted into cash and the adjusted free cash flow are then allocated back to the shareholders that you will see in the next page. The growth in the cash flow is obviously driven by the earnings, but also our network capital that we have worked with throughout the year. So, it's good to see that that has been reduced. Clearly, there's also an impact on the lower rates and the lower activity level, but we have also done a lot of initiatives in order to work with that after we have implemented the deal. The net -- the development of the net working capital in the same line is offset by higher tax payments due to the higher results obviously. Our gearing ratio is 1 -- exactly 1.0. That will also if you look at 2023 when our guidance taking into consideration, the EBIT DA will obviously decline, meaning that that will have an impact on the gearing ratio as well as well. We do obviously still have a target of staying below two times EBITDA. So that is, of course, what we want to work with. Our capital structure and balance sheets are in good shape. I think we have nearly DKK10 billion in cash and the average duration of our corporate bonds is 8.3 years and the first corporate bond that we have to repay or refinance is in 2024. So, we have a good balance sheet here. Our return on invested capital are also satisfactory, 25%. So, also impacted by the growth in earnings. The next page number 12. As mentioned, we have allocated all the cash, all the earnings that we have converted into cash. We have then allocated back to the shareholder, so we have nearly 19 million shares were bought back into the 2022, giving an allocation to the shareholders of DKK21.6 billion in this table that [Indiscernible] has provided you with. I think for the dividend part, we will -- we have suggested to increase the dividend from DKK5.5 per share last year to DKK6.5 for this year. We have also, like we normally do at every quarter, assessed our cash flow for the current period assessment. And we have initiated a new share buyback of DKK2.5 billion starting today and run until we publish the first quarter results in April. So, that's the allocation part. Then I go to the next page number, page number 13, the outlook for 2023. I think you've already read that this outlook is significantly lower than our results this year. It's clear when we talk about outlook, it's more uncertain market and macro-economic outlook that what we have been used to. That's obviously reflected in our in our guidance here, which is between DKK16 billion to DKK18 billion, that is how we see it. Currently, we do expect the first half of 2023 to be negatively impacted and then we assume a normalization or improvement in the second half of 2023. It's clear the Air & Sea division is one that has gained the most -- the market conditions, so they will most likely also be the one with the highest decline. Our tax rate, it's expected to be 24%. It's a little bit harder than what we've seen, but that's due to the nature of our earnings and the way that it's structured these days. It's still our target, obviously, to take market shares in all areas, so that is also what we will work with. And I think that's about it for the outlook. Then we've also -- the last slide from my side, slide 14, it's just to remind you that we adjusted our long-term financial targets last year, exactly a year ago and we maintain the current long-term targets. It has been an unusual year this year and now we look into normalization. But that doesn't change our ambitions for the more long-term 2026. And I think that's it from my side. So, we can go to the Q&A. I have assumed lots of questions. Two questions from me, please. First, on volumes into the medium term. Do you think in 2023 that we're undershooting what would be a normal level of volumes and therefore, there's some subsequent capture to come or the future years probably look like pretty normal growth rates of a 2023 baseline? And if there is no catch-up to come back, the destocking that we're seeing now, why might that be? Second question is on GP yields. So, your outlook for the year suggests your GP is down between 20% and 25%, which would be about15% higher than the targets at the Capital Markets Day from last year. Should we be thinking about more medium-term upside to the 8,000, 4,000 levels that we talked about at the CMD, please? Thanks. I can talk a little bit about this. Good questions. When you talk about the reduction of between 20% and 25% as we have guided, you have to take into account that this is the average for the full year. So, you can make your own calculations as when you expect this to kick in. So, we still believe that what we have indicated before is correct. And I think with this number, you can also make calculations getting to that point. But we've also said that we are slowly moving a little bit away from giving the hard kind of numbers on the yields because we have also come to realize that it is very difficult for us to anticipate exactly how the yields will develop going forward. We have said on the volume side that we -- it's the biggest misalignment we have ever seen from growth in the GDP of the world, which is estimated to be 2% maybe 3% this year, and we guide that volumes will drop 2% to 5%, of course driven by high inventories. So, let's see how it goes. Of course, we'd prefer 1% rather than 5%, but this is the best estimate we have right now. And we think also we've seen that already with the continuation of the weak markets from December going into January, we do expect that it's not going to be super strong in the first quarter, but then we hope to see an improvement subsequently in the quarters to come. Thank you, Alex. The next question will be from the line of Stig Frederiksen from ABG. Please go ahead, your line will be unmuted. Thank you very much for taking my question. A question back to the capital structure because calculating backwards on what you've announced of share buyback DKK2.5 billion that would go into April. And then comparing back to that you were guiding DKK16 billion to DKK18 billion on EBIT and DKK5 billion on depreciation and an EBITDA of DKK21 billion to DKK23 billion, what should we think about returning cash? Do you want to deleverage? I am aware that you are multiples or ratio would go up to 1.3%, 1.4% based on the guidance you've given today. But are you seeking to keep it around one-time or should we expect maybe more cash returns relatively in the second half? Thatâs my question. Thank you. Its Michael speaking. Steve, we have not changed in our ambitions or our guidance for the ratios. What you need to take in mind here is that when we look at the first quarter, we always have a little bit lower cash flow for the first quarter. So, that's reflected in this one. And then when you talk about our earnings, we also have to pay some taxes, and we also have some interest that we need to pay. So, I think that that's what we will keep for the time being, but we don't have an aim to deleverage the company. We still have an aim of being below two times. Let me just make it very clear. We have the ambition to return all the proceeds of the earnings of the company that we convert to cash to shareholders 100%, if possible. It has been a true pleasure on buybacks in 2022, the fact that we could purchase about 9% of our own company and eliminate those shares was absolutely a fantastic feeling. Thank you, Stig. The next question will be from the line of Ulrik Bak from SEB. Please go ahead, your line will be unmuted. Yes, hello Jens and Michael. First question on this cost cutting procedure that you alluded to. Can you please just confirm that you expect your fixed cost level to be flat? And is there any variability depending on whether we will see volumes decline 2% or 5%? That will be my first question. And then second question on the yield. Can you perhaps just shed some light on the compensation of this yield structure? How much is purely related to the level of the rates? And how much is more fixed pricing customs and other kinds of services? Thank you. Yes, it's Jens Lund here, hello everybody. When we look at the cost cutting, I actually don't like phrase cutting. It's basically then we adjust the capacity to the volumes that we produce. And then as an example, if you said in the department, you produce in on your 10 people, if we are down on volumes, so we produce index 90 [ph], we need to be nine people. Then what happens as a general rule of thumb what happens is then that people are very focused as [Indiscernible] on what is going on a daily, weekly, monthly basis, quarterly basis on the productivity measures so that we have the right conversion ratio. We've been having the focus -- I've only been here for a little bit more than 20 years, but it's been the same ever after. And this adjustment already started in Q4 last year, and it's continuing into this year. And then depending on, as you say, it's a 2% down for the year of 5% to these mathematics will apply, and we will, of course, govern it from the top. Accountability is basically our middle name, and we're very accountable when it comes to this. So, you can rest assure that we will protect the conversion ratio. When it comes to the yields, is it rate or is it basically our fees I think it's basically mostly related to the yields to the rates because, of course, now capacity is not what can I say, a tight resource as it used to be. So, we won't be able to kind of say to make the same trading gains that we've done previously. Our fees, let's say, to do a custom declaration or the sell an insurance or whatever, they are very stable in their nature. It might be that it will be a little bit harder just short-term to increase but normally, what can I say, if the cost base go up on the production cost of these, then basically the fees they also have to increase Otherwise, we have to deliver higher productivity via digitalization and order to protect what can I say, the conversion that we have on them. So, I hope that answers that question as well. Thank you, Ulrik. The next question will be from the line of Alexia Dogani from Barclays. Please go ahead, your line will be unmuted. Yes, good morning, it's Alexia here from Barclays. Just two for me as well then. So, just following up from comments just now on the conversion ratio. Obviously, you've said that in the first half, volumes will be weaker than in the second half, but given your prior comments on the GP yield, most probably the GP yield will be weaker in the second half than the first half, given kind of potentially an exit rate closer to your medium-term target. How quickly are you able to adjust, I guess, your cost base to reflect the GP yield reductions? Because I assume with kind of service intensity coming up, maybe volumes are improving a bit, but not to the extent to offset the GP yield decline. Are you kind of mindful to that dynamic as well? And should we expect foresee further year conversion ratio to be kind of bottom at 50%? And should the quarters be broadly similar? Sorry, that's a long first question. And then secondly, just on the shipping industry. Obviously, we are going into likely a very challenging backdrop for them given they don't have the similar ability to adjusted cost base. As a large customer, how do you feel potentially the risks that they go into losses? The industry goes into losses next year? And how does that matter to you? Is it a positive or negative or neutral? Thanks. I can just take the last one first. We have basically no interest in the profitability of the shipping lines and this is not meant -- kind of disrespectful manner as long as they have the funds and I'm sure they have that from 2022 to continue to invest -- produce services that we and the shippers need, and we are happy about this, and we will not go into speculation if they will go into losses or whatever, you probably have much better views on that than what we have. What we have said though is that you're right, market dynamics have changed. And we are of the opinion that we need to stay loyal to the shipping lines that supported us during 2022 where access to capacity was difficult. So, the ones that helped us back then, we will help now and I think this is also only reasonable. And I don't know, Jens, if you would continue a little bit on the conversion ratio. I think you can already see it in the Q1 numbers that we've already -- will be able to see it in the Q1 numbers that we've already taken out costs. And this is something that is very dynamic. It happens on a daily basis. The vast majority of -- what can I say, adjustments will be made by just normal turnover -- staff turnover that you have in departments. And there will probably be a lag of two, three months because you have to be certain when you reduce the capacity, but I think that will be the lag impact that you will see. So, we should be fairly quick on that. So, it may lead to that we have a little bit lower conversion the first part of the year than we will have in the second half. But to put percentages on it is very difficult, but I think that's how the numbers should basically pan out at the end of the day. Thank you, Alexia. The next question will be from line of Muneeba Kayani from Bank of America. Please go ahead, your line will be unmuted. Good morning. So, with Agility now integrated, where are you M&A plans. And if you could generally talk about the M&A environment in the Forwarding market? And then second question on yields. Could you give an indication of what was the exit rate for Air & Sea yields in the fourth quarter? And just a clarification. So, did you just say that the second half yields will continue to decline, while volumes could improve? Thank you. I'll talk a little bit about M&A. We are ready to do M&A. We've concluded the deal integration and world record time. I'm very, very happy with the way that the organization have embraced yields, the way we have done it, all the support functions, finance, IT, I don't want to mention anybody else because I will leave someone out have done a remarkable job. It's a sizable company. We have acquired as many, many tens of thousands of employees. We have put on to our platform. It tells us that we have a scalable situation, which we are very happy about. So, from principal point of view, we are ready. We have been for some time. What we need now is to kind of get some sort of alignment between sellers and buyers. It has been a little bit difficult. It's no surprise in 2022, where results were very high also. We were always of the opinion that this was temporarily. Now, we will see that. It's at least reflected in our own guidance. If you get one or two quarters under your belt, you will also see it in the actual reported numbers. And then we have the expectation that there will be an alignment between two parties. So, there can be some sort of consensus around the table and deals can be done. So, we go into 2023 full of optimism also on the M&A side. Will we be successful? We cannot promise that. We don't know. There would be different opportunities that we will pursue. But what we can say is that we, I don't know, 25-year-old strategy that we have had in DSV, but we want to grow through acquisitions that it makes sense. That is 100% intact. We think that we can demonstrate that we have generated value for all stakeholders, not least shareholders through M&A. So, basically, why stop that now. And maybe, Jens, I don't know if you want to go further into the yield. The yields, I think -- the thing that the yields, I think I can explain that a little bit. We will not go into specific numbers on what was specific day we will refrain from that. But of course, I think in Jens Bjorn's comment was basically, as you know, we will probably see a little bit higher yields in the beginning of the year, as you alluded to, and then has better volumes in the second half, but also a little bit lower yields. So, that's basically a confirmation from our side. Thank you. The next question will be from the line of Michael Rasmussen from Danske Bank. Please go ahead, your line will be unmuted. Yes. Thank you very much for taking my questions. First, I would like you to talk just a little bit about the journey ahead of us in terms of the Road Way Forward. And also, if you can tell us if any costs have been or will be incurred from the change of just the new transport mode management system. So, that's my first question. Secondly, I want to continue a little bit on the sub-suppliers on the ocean side here. So, as we're entering 2023, is there anything that you are doing different versus a normal year? I mean, obviously, you're probably doing things very different from the past two years when just getting space has been so difficult. But just from a contract view, are you thinking about being more short the market than normal? Or are you using maybe the lower rates to maybe add a little bit of contract or any flavor that you can -- that you would add on that, please? We will also for competitive reasons, not go too much into how we contract with our carriers. But I guess we can say a couple of things, Michael, it's a good question. One is that we are probably slightly shorter than what we have been. We've been tempted many times to go along, but history tells us that it's a short week right, and then it turns out to be -- can be a disastrous in the future. So, we are a little bit shorter than what we have been. And then maybe a point, which is also important to emphasize and to mention for all of you, we do not carry anything into 2023 from 2022 when it comes to agreements with carriers, which are not kind of mark-to-market. So, this is something which is very good to be able to establish that we do not have a lot of agreements, which are priced in the previous market environment that carries into 2023 or 2024 for that matter. It's all been kind of aligned. So, we start the year in a way where we are kind of being priced according to market conditions. And then Jens, as you are a little baby, of course, Road Way Forward all of us [indiscernible] but you have a special interest or maybe you want to-- The thing is what happened during last year was, of course, there's two angles in particular, the Road Way Forward project. One is this European group is network from a physical point of view, how we develop moving the cargo that's progressing according to plan and basically more or less all the lines up and running. And it's basically price from [indiscernible] lead-time and how that works as all set up and structured. Then on the IT side, we need to automate more of these processes now that we have this fixed structure. And here, we have not made the progress that we had expected because we did not get any deliverables from our IT vendor in 2022. We've gotten them now the 2022 deliverables and they are already deployed into production, and we need to release more. Once we have these two releases in place, called 23.1 and 23.2, itâs a very good way they invent how they do the releases so that we can follow-on. When we have them, then we don't need more development. And then it's basically a rollout game. But it slowed us down this with the year under projects. And when you have these projects, it's very important that you don't accumulate this cost in the balance sheet, but you're expense it as you go along. It's probably also hurt cost base a little bit on road during the year, but that's how it is. We can't capitalize costs and then have some big problems sitting in the balance sheet. So, that's a little bit on the Road Way Forward, and we're still equally optimistic about, in particular, the traction we have on the commercial side. Here on some of the lanes where we've established this, what can I say, higher quality service and product and better visibility that we are 200%, 300% under volume. Of course, it's not all the lanes, but it's definitely good news and carries over to all the other lines. So, I think we have a plan that we want to grow faster than the market. We have to remember that it's only a certain proportion of the road business is probably between -- around a little bit less than 15% of the volume in road, that is this kind of [indiscernible]. So, it also has to grow fast, if it really has to have a meaning. But I'm quite comfortable that we will continue this because it definitely is very welcomed by our customers. And this is what matters at the end of the day. And then whether we will be able to get the conversion of that depends on the infrastructure that we have available to support the production. And as I said, we will also make that happen. It just takes a little bit longer. So, we also have to say that not all things work out just exactly as they should, but we're making progress. Thank you, Michael. The next question will be from the line of Lars Heindorff from Nordea. Please go ahead, your line will be unmuted. Yes, thank you. A couple of questions regarding Road and Solutions and also a little bit about the guidance. Now, in Q4, you experienced actually a decline in solutions and the revenue and that actually comes past, I think, two or three quarters where you have plus 10% organic growth. So, maybe a few words on the development there in Q4, which appears to be sort of declining a little bit faster than lead had expected. And then on the same line, you expect roughly flattish markets for Road and Solutions into 2023, maybe a few words on that. Is that -- what will that mean in terms of volumes? I know you don't disclose shipments, but maybe you could say a little bit about the price development in those Road and Solutions and how that will impact the [Indiscernible]? I think if we take solutions first and development in the revenue, it's clear that as the economy has slowed a little bit down, we have seen which actually produces more less the same number of order lines, but the mix has changed quite a bit when it comes to that Lars. So, let's say that you had a certain number of activities per order that has definitely come down. So, we still ship with a higher frequency, there's a lot to do, but we make a little bit less money. I think on the utilization in the warehouses, it's a little bit down compared to what we saw in the previous quarters as well. So, we also get a little bit less storage income. I think these things will be true -- we probably also have some regional differences where we had an exceptionally good start in the Middle East last year that also helped us quite a bit. That's been -- it's been okay, but it's been a little bit slower this year as well. Then we talked about the -- or you asked about how do we see volumes into the next year. And it's clear that there will probably also be an impact for Road and Solutions, but not as dramatic as you will see it for the ocean side. So, we do expect that it will be a couple of quarters here where activity will be a little bit lower, then hopefully, it should get a little bit better as we progressed during the year. Actually, some of the indications that we have on solution have us by [Indiscernible] couple of times, what are we doing? How is the activity? And he is actually fairly confident -- now he's a confident guy I'm saying, but he's fairly confident when it comes to that. And I also think that the Road team even though it's a little bit less busy and perhaps easier to get capacity, they're still also confident. So, this kind of flat -- a little bit positive development -- this is probably what we're looking into. And we will then adjust the capacity we have available according so that we continue to show some strong financial numbers. Yes. And just a follow-up, but you have announced a few price increases in relative towards the end of 2022, will that carry into 2023? Yes. We try to hold on to the price increase because some of the large customers, of course, they push back and I don't think that we will get a dramatic extra income. I think we've also increased the yields. And now perhaps the push will be towards the suppliers as well as Lars, if the capacity situation allows us, but we are not 100% certain where that will end out yet with the suppliers. So, we will have to see. Thank you, Lars. The next question will be from the line of Marc Zeck from Stifel. Please go ahead, your line will now be unmuted. Yes. Thank you for taking my questions. First question would be on net working capital. Do you expect another, let's say, significant release of free cash going into next year's as, let's say, line [ph] rates is ongoing? Or do you feel like most of the capital release from rightsizing net working capital is already done? And the second question would be more on the, -- let's say, more general side and the freight market. Do you expect any impact from the solution of the alliance between Merck and MSC [ph] and in terms of was it more difficult when Merck decided to, let's say, not service trade rate somewhere to the same extent as previously? Did that impact your bookings with MSC as well? Do you expect that to improve? Or is it just too early to tell right now? Thank you. I can take for the net working capital first and then maybe Jens can take the second question. In terms of net working capital, it's clear that we have worked, you can say, in order to rightsizing payment terms and supplier payment terms and so forth. So, -- but also impacting by the freight rates. So, I would say that we will not be in the low two times -- or 2%, but we will either be in the 3.5% that we were last year. So, I think the rightsizing, I would assume, would be around 2.5%-ish as a general rule. And the two lines -- it's not appropriate to comment too much on that. But as far as I understand, the separation is planned for 2025. So that's a few days out in the future. and we don't as such do not expect it to have a big effect on us. We have had separate dialogue, of course, negotiations and relations with each individual carrier. So, as such, we don't expect it to have a big impact on our business. Thank you, Marc. The next question will be from the line of Sam Bland from JPMorgan. Please go ahead, your line will be unmuted. Thanks. Thanks for taking the question. I've got two, please. First one is sort of an air versus sea question. We've seen these spot rates come back, I think, more or less to where they were before COVID. Air looks like it's still a bit higher. Can you just talk about whether you see reasons for air to stay higher for longer and then how that feeds into your yield guidance? And the second question is on this short spot effect. We're talking about that through the second half of last year as well. I guess we have seen unit margins come down quite a bit, does that say that the short spot position sort of hasn't worked as expected? Or is it that unit margins would have come down by more, if you didn't have it? Thank you. I would hope that is the last thing that you say is correct. We believe that being short is the right thing to do it has definitely protected the proportion of the GP that stem from the [indiscernible] So, we are believers in that. You're right, it has come down, but it's come down to a level that we had anticipated. And for us, there's no drama in the development we have seen. When it comes to air, it's also right that the yields have dropped at a slower pace it all remains to be seen what happens now in 2023. We are a little bit concerned that also we will see -- I would not call it an acceleration, but a continuation of the declining yields for air freight. We will see some overcapacity also. We have not seen it yet. But of course, there's always the risk of irrational pricing behavior, if you sit on assets, which cannot be utilized. We don't have any assets which are not utilized, but it's a little bit speculative to go into. But we have to see -- we have not seen anything yet, but of course, we are following the situation very closely. And I think that is basically as much as we can say about that at this moment in time. Thank you, Sam. The next question will be from the line of Rachel Short from Jefferies. Please go ahead, your line will now be unmuted. Hi, thanks very much for the call. My question is already somewhat been addressed around M&A plans for the next year, but I was just wondering if you have any kind of ideas on limits on the size of the deals you might be going for or the level of transformation or if it's just sort of an opportunistic outlook for now? Thanks. Not meaning that we don't want to answer it, but meaning that they are basically, in principle, no limits. I didn't want to be rude or disrespectful just to make that clear. Thank you, Rachel. The next question will be from the line of Sathish Sivakumar from Citigroup. Please go ahead, your line will now be unmuted. Thank you. I've got two questions here. So, firstly, on Solutions, right? Obviously, you operate based on a sale and leaseback model there. Given the current rising interest rate or funding costs, how is it going to impact the, say, cost of solutions leases as we look into out years into 2023 and 2024, do you see inflation or pricing cost of capital there impacting the operating lease cost? And the second one is actually on the air freight. Obviously, you clarified that you're not carrying anything from 2022 to 2023 in terms of capacity arrangement with the ocean freight. How does this going to impact the block space agreement that you say, for instance, with Qatar, where you actually buy like six months up in terms of capacity. So, any color around that would be helpful. Thank you. Yes, I think I'll answer that. On Solutions, right now, what you see on the warehousing is that if you speak to many of these companies, like [indiscernible] or whatever they are called, I think they are sold out. I think that is the what can I say, view on the market. And it's clear that right now the market is softening a little bit. And I'm not -- what can I say, the rent that they will charge is not necessarily that correlated to the yield. I mean, that would have been nice if when the yield was slow that they would have said then you also pay a low rent, if you understand what I'm saying. But they said, no, no capacity is needed, so you have to pay more. Of course, now you are in a situation where there's a little bit less demand. So, they speak more politely to us than they did before on the leases. It's not a big swing in the balance of power. I can tell you that -- so I think we'll probably see that the significant increases will taper off. There might be a slight reduction on the rent cost. And of course, we have contracts with our customers that are aligned with what we have with the land or otherwise, you would want a very big risk when you operate a business like this. So, I hope that answers your question. And on the PSAs, yes, we have PSAs in place here and there. They are always supported by back-to-back arrangements so that we don't sit on big, uncovered risk. So that's in reality how we contract with these carriers. And it's been a model that we've been using for years and years. So, both us, the carriers and certainly also the customers are very familiar with that. Thank you, Sathish. The next question will be from Nikolas Mauder from Kepler Cheuvreux. Please go ahead, your line will now be unmuted. Good day gentlemen. We're seeing Air & Sea volumes declining, but warehouse utilization is still high and activity in retail and e-commerce is also slowing. How does this factor into your idea for the shape of the destocking throughout the year? And do you think we'll see an orderly destocking or perhaps some undershooting there and also continuing solutions regarding the cost base. What are your thoughts regarding your long-term conversion rate target given the development of the cost base in the fourth quarter? And can you also comment on the certain one-offs you flagged in the presentation? Thank you very much. On the destocking, the inventory levels, it's very difficult for us to find clarity and clear KPIs to use. But of course, shippers and our customers have been very conservative during 2022. They could not unfortunately rely as they were used to on our services. So they did start up to safeguard themselves and their supply chains, which is fully understandable. You raise an important or an interesting point is be undershooting. We don't have any knowledge that points to that fact, it could also be driven by different verticals that some would actually go lower on inventories as supply chain stabilize, but we typically have to follow that during the year. I don't know, Jens, if there's anything you want to add on the solutions side. But it's clear that when we run and operate the Solutions business and also with the little change that we did see also to the methodology in Q4, I don't think you can extrapolate that. You have to look at the at the whole year. And then of course, it's clear that from a financial targets point of view. It's -- there's still some ground to cover on solutions. We have a lot of programs where we digitize our services further so that we drive up the productivity and not least in the back-office part. So that should help us to get there, and it's start as dramatic as the Road Way Forward program, but we are definitely aligning our system landscape and adding different types of productivity enhancements into the way that we produce our services. So that is, in reality, what should take us to award our target and hopefully achieve them. Thank you, Nikolas. The next question will be from the line of Cristian Nedelcu from UBS. Please go ahead, your line will be unmuted. Thank you for taking my questions. See the move of normalization of profits, mean that the first half EBIT will be meaningfully higher than the second half? Second one, also staying in Air & Sea try to calculate the cost base per unit. I'm getting something like 15%, 20% higher level and the inflationary pressures, but also meanwhile, your volumes doubled longer have the complexity cost of the congested supply chain. My question is, where do you see this production cost per unit stabilizing versus 2019 levels over the next couple of years? If you look at H1 and H2, how are we going to fare on the income, it's clear that there will probably be a little bit of tailwind still from higher yields in the beginning, but then I think you will have headwind on the volume side. And then when you go into Q2, I think the yield issue will have stabilized that normalized, but then we will get growth. And of course, these things they will balance out, and I think will be, at the end of the day, more or less, as we normally see it's showing sort of 48%, 49% in the first part of the year and then the remaining part in the second, I think it should stay in that ballpark. And then as you say, the production costs in Ocean have been, what can I say, impacted by COVID. And of course, we are working our way back to the same productivity we had before. But there's one thing that you have to remember as well that the service catalog is not the same. So we offer, what can I say, more services to the customer now than we did in 2019.There's a lot of development on different types of value adds that we are doing. So, you cannot necessarily compare it. It could be that we have growth in custom formality. So, we do have growth in that we do more purchase order management activities, et cetera. And this is then something that requires more staff, but it also gives us a little bit higher yield. So, we shouldn't expect that everything can be 100% compared to 2019. Thank you, Cristian. The next question will be from the line of Robert Joynson. Please go ahead, your line will now be unmuted. Good morning everybody. A couple of questions from me, please. I apologize, I did miss part of the Q&A before, so apologies if I am repeating anything. But firstly, on the guidance, you the EBA guidance provided today is, obviously, in line with consensus, which is good. But equally, it is lower than the DKK20 billion that you talked about at the Capital Markets Day as being a kind of full level for future years. Obviously, the macro hasn't been great since last May. But equally, it hasn't been that bad either. The consumer is holding up quite well. And certainly, bear case scenarios for 2023 now appear less likely. Could you maybe just talk about what has changed in your thinking since last May? Is it mainly volume assumptions? Or is it that freight rates have pulled back by more than you're anticipating or more quickly or any other factors there? And then second question on Solutions EBIT. Could you maybe just talk a bit more about how we should think about that going forward relative to the DKK2.7 billion produced last year, should we be thinking about that level as sustainable going forward? Or should we be thinking about the past few quarters as more of a sweet spot for contract logistics businesses in general that saw quite meaningful help from the market? Thank you. Rob, we don't, as you know, guide on particular divisions or countries or anything like that. So, it's difficult to say, but we don't expect the Solutions division to go big time and reverse they're going to make this year exactly 2.7 whatever I cannot, of course, say that. But I don't think it would be too unrealistic to assume somewhat similar result in 2023 as what we saw in 2022. We see nothing that concerns us scare us in substance and solutions. So, we're pretty happy about that. And I will take a bullet now for Michael and explain a little bit about the DKK20 billion. Michael is very happy because somebody took a photo when he said the train is DKK20 billion on the CMB. And in the background, you could see the PowerPoint presentation, which stated that the basis of that statement that Mike came with was growth in volume going forward. And now when we say that we expect transportation volumes to decline between 2% and 5%, of course, the situation is different. So, it's not really the yields. I think you have the same yield assumptions as we had back then. Maybe we did -- to be totally fair, we did not -- maybe we did not see the inflation may be hitting, maybe that could explain one percentage point, I don't know. But is the main factor that has changed this philosophy is the volume development. And of course, Michael, you are free to elaborate as you want to say more about it. Thank you, Robert. The last question is a follow-up from Alexia from Barclays. Please go ahead, your line now will be unmuted. Hi, thank you for taking the follow-up. Just when we think about 2024 or 2025, should we expect 2023 to be the reset and we grow from there? Or do you think it could be a little bit of kind of a prolonged rebasing? Thanks. I can only say that we've never experienced that it takes more than a year to rebase. So, if we can base what can I say, our projection on that? I think it will be the same. And I think that was -- I can't remember one of the analysts that said that actually, people were a little bit more -- what can I say, less negative, not positive, but less negative on the outlook. And I think that will then, of course, support, what can I say, that 2023 will be the trough. Thank you. I don't have a lot of closing remarks, apart from thanking everybody listening in to this conference call. It's been great speaking to you this morning. We will meet a lot of you on roadshows in the coming weeks now. As always, if you have follow-up questions, and I know a lot of you do have that, please reach out to your Investor Relations contacts in DSV. Again, if anybody from DSV listening in, thank you very much for all your hard work and your efforts in making this an absolutely fantastic year 2022 and also for making a foundation for a good guidance for 2023. We really appreciate this. So, with that said, we will pack off our bags here in Denmark now and wishing you a good day. Thank you.
EarningCall_934	Good morning, and welcome to the Bridgewater Bancshares 2022 Fourth Quarter Earnings Call. My name is Joe and I will be your conference operator today. All participants have been placed in a listen only mode during the duration of the call. After Bridgewaterâs opening remarks, there will be a question-and-answer session [Operator Instructions]. Please note that today's call is being recorded. Now at this time, I would like to introduce Justin Horstman, Director of Investor Relations to begin this conference call. Please go ahead. Thank you, Joe and good morning everyone. Joining me on today's call will be Jerry Baack, Chairman, President and Chief Executive Officer; Joe Chybowski, Chief Financial Officer; Jeff Shellberg, Chief Credit Officer; and Nick Place, Chief Lending Officer. In just a few moments, we'll provide an overview of our 2022 fourth quarter financial results. We will be referencing a slide presentation that is available on the investor relations section of Bridgewater's Web site investors.bridgewaterbankmn.com. Following our opening remarks, we will open it up for questions. During today's presentation, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements are predictions and that actual results may differ materially. Please see the forward looking statement disclosure in our 2022 fourth quarter earnings release. For more information about risks and uncertainties which may affect us. The information we will provide today is as of December 31, 2022 and we undertake no duty to update the information. We may also disclose non-GAAP financial measures during the call. We believe certain non-GAAP financial measures in addition to the related GAAP measures provide meaningful information to investors to help them understand the company's operating performance and trends and to facilitate comparisons with the performance of our peers. We caution that these disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP. Please see our 2022 fourth quarter earnings release for reconciliations of non-GAAP financial or non-GAAP disclosures to the comparable GAAP measures. Thank you, Justin and thank you, everyone for joining us today for our first ever earnings call. We're excited to begin hosting quarterly earnings calls as we think it will be a good way for us to provide more insight into our financial results and share more about what we're seeing across the business. Started on Slide 3, we provide an overview of our strong full year 2022 earnings. Since our IPO in 2018, our results have consistently been highlighted by robust balance sheet growth, a highly efficient business model and superb asset quality. This was the case again in 2022 as we saw loan growth of 27% and an efficiency ratio of 41.5%, and non performing assets to total assets of just 1 basis point. All of which are among the best in the industry. As a result, we had another record earnings and revenue year in 2022. Our sustained growth throughout the year was due to the hard work of our team members as we continue to build and develop client relationships, as well as deepening our brand presence and the ongoing market disruption in the Twin Cities. Finally, one of the most important metrics to us is tangible book value as it is a good measure of shareholder value we are creating. We're able to grow tangible book value by 6.5% in 2022 despite the market value depreciation of the securities portfolios related to rising interest rates, which put significant pressure on tangible book value across the industry. Turning to Slide 4. We reported 2022, fourth quarter earnings per share of $0.45, which was driven by a continuation of our strong growth, efficiency and asset quality trends, as well as emerging funding pressures which impacted the net interest margin as interest rates continued to rise. Loan growth remains strong with balances increasing 22% annualized during the quarter as we continue to get in front of high quality deals. Given the level of loan growth we've seen -- that we've been able to generate during the year and where we are in the interest rate cycle, it's not surprising to us that we've started to run up against funding pressures. While our teams continue to work to bring in core deposits, we have supplemented these with higher costs wholesale funding and borrowings to support our loan growth. Coupled with increased competition on interest rates to retain current deposit clients, we saw our net interest margin decline to 3.16% in the fourth quarter. Joe will provide more color on the margin and how we plan to manage the balance sheet as we head into 2023. We continue to operate very efficiently during the quarter with an efficiency ratio of 44% even as we invest in our people and extremely low levels, and we saw no net charge offs in the fourth quarter. In fact, we finished 2022 with net recoveries for the year. As we head into a more uncertain environment in 2023, we're taking steps to proactively assess our portfolio but at this point we're really not seeing any early warning signs. Thank you, Jerry. Turning to Slide 5, I'll provide some more details on net interest income and the net interest margin compression we saw during the quarter. Over the last few years, we have seen strong growth trends in non-interest income driven by a relatively stable margin and robust loan growth. However, these trends have become more challenging to maintain based on where we are in the current cycle, as well as the further inversion of the yield curve. Last quarter, we indicated our expectation for flattening net interest income over the near term as we saw funding costs begin to rise. Coupled with our strong loan growth outlook, this implied a meaningful drop in the net interest margin and this is largely what we saw in the fourth quarter. Our margin declined 37 basis points during the quarter, which was a bit more than we expected as robust loan growth resulted in the need for additional wholesale funding and borrowings. As a result, net interest income declined to $32.9 million. We were anticipating this margin reset for a couple of reasons. First is the recent growth in higher beta deposits and borrowings to support our robust loan growth. Second, we have a more sophisticated higher balance deposit client base that tends to be more sensitive to rising interest rates and has the wherewithal to move, especially given the unprecedented competition we have seen from the treasury market with yields north of 4%. Lastly, two thirds of our loan portfolio is made up of fixed rate loans, which means a slower pace of repricing initially. This is evident on Slide 6 as you can see that funding costs have increased faster than loan yields so far. We expect loan portfolio yields to continue grinding higher for the foreseeable future, especially with yields on new originations today typically coming on at a 6.5% or higher rate. Many of which are being structured with strong prepayment penalties, which will help make these higher yield stickier for longer. In addition, we have over $400 million of fixed rate and adjustable rate loans scheduled to reprice over the next year and over $500 million of variable rate loans at or above their floors. On the funding side, we expect a steeper increase in funding costs to continue into the first quarter before beginning to stabilize. This all implies additional managers margin pressure from our fourth quarter margin of [3.16]. Looking ahead to the first quarter of '23, we expect to see a similar pace of margin compression as we just saw in the fourth quarter with stabilization thereafter and the potential for margin expansion in the back half of the year as funding costs flatten and loan yields continue to expand. Obviously, this is all with the caveat that the interest rate outlook is uncertain and can always change. Our expectations assume fed funds peaks at 5% and remains there throughout 2023. Turning to Slide 7. We have demonstrated a long track record of strong revenue and profitability. This was impacted in the fourth quarter by the margin compression we discussed given that the vast majority of our revenue is spread based. However, total revenue was still up 14% year-over-year. On the feed side noninterest income was up 25% during the quarter as other noninterest income included elevated rate lock fees, which we don't typically or we don't expect to recur. Turning to Slide 8. We continue to operate with a high level of efficiency given our branch light model and CRE focused loan portfolio. Our efficiency ratio remained in the low 40% range at 43.8%. We typically look to grow expenses in line with asset growth, which we did in 2022 as core expense growth of 19% came in below our asset growth of 25%. Expense growth in the fourth quarter was a bit higher at 29% annualized rate, primarily due to derivative collateral fees, which we expect to remain elevated in 2023. Thanks, Joe. Turning to Slide 9. We continued to generate robust loan growth as balances increased 22% annualized in the fourth quarter and nearly 27% year-over-year. Overall, we have seen a decline in demand in recent months as fewer deals are penciling out due to higher interest rates. However, our teams are continuing to get in front of good high quality clients with good yielding loans in our core business lines. For example, there are many large names in the Twin Cities that we've been trying to bring on board for years. We were able to bring some of these clients over during the quarter as other banks pulled back. This is similar to what we did in 2008 to 2010 to develop some of the long term client relationships we still have today. So despite the funding pressures our growth is creating in the near-term, we believe it puts us in a better position for the long term. We have certainly demonstrated a comfort level with growing the loan portfolio in excess of 20%, but we are also aware that our loan to deposit ratio is close to 105% as we enter to 2023 bear the top end of our comfort range. We are taking several actions to help manage the growth of the portfolio going forward, including selling participations on new loans, being more selective on pricing and credit and requiring increased compensating deposit balances on new and renewed loans. We do expect a much slower pace of loan growth in 2023 as we look for better alignment with core deposit growth. Turning to Slide 10. Given the reduced loan demand in the market, we continue to see a slower pace for originations and advances, which totaled $313 million in the fourth quarter, down 13% year-over-year. However, this has been more than offset by the decline in payoffs and pay downs, which is contributing to the continuation of our robust loan growth. Pay offs and pay downs declined 37% from a year ago as many borrowers have interest rates below current market rates making refinancing less attractive. As I mentioned, we have also been selling participations on new originations to help manage our growth. Over the past two quarters, we have sold 116 million of participations for 17% of our total originations and advances. Our loan participation portfolio balance is now over $425 million and over $580 million including unfunded commitments. In addition to helping manage our growth, this servicing provides an added revenue benefit as well. On Slide 11, you can see we had strong fourth quarter loan growth across the various loan types led by multifamily, which continues to be a key growth driver given our expertise in the Twin Cities market and the low risk characteristics of the portfolio. We also saw good growth in the construction and development portfolio, which we expect to continue in 2023 given the upcoming construction draws on existing loans. As these projects complete their construction phase, some of the balances will migrate into other loan portfolios similar to what we saw in prior quarters. In addition to continued growth in the C&I portfolio, we are taking steps to expand our C&I function to help drive incremental growth and diversification of our loan portfolio while also creating new deposit growth channels over time. This is a long term initiative we are building out in 2023 that will take time to implement but we expect to see the benefit in future years. Turning to deposits on Slide 12. Growth has remained strong as balances increased 13% annualized during the fourth quarter and 16% year-over-year. As we've mentioned, generating sufficient core deposit growth to keep up with our loan growth became more challenging later in 2022. In addition, new deposit relationships don't always come in a linear fashion given the larger nature and sophistication of our commercial deposits, which have longer and less precise onboarding than our loan pipeline. As a result, we brought in more higher beta brokered deposits and borrowings during the fourth quarter than we have in the past. Over the course of 2023, our focus will be on funding more of our loan growth with lower beta core deposits. It is worth noting that we have -- the cumulative beta on our core interest bearing deposits has been well controlled at 31% cycle to date. Increased funding from core deposits should help our overall spreads even as betas are likely to continue trending higher. Thanks, Nick. Turning to Slide 13, our asset quality continues to be superb. Non-performing assets have been steadily declining from already low levels and totaled just 0.01% of total assets at year end. In addition, we had no net charge offs for the second consecutive year. In fact, we have had cumulative net charge offs of just $381,000 over the last five years. This is largely due to our measured risk selection, consistent underwriting standards, active credit oversight and experienced lending and credit fees. While we have seen an extended period without credit issues, we do expect normalization at some point given the higher interest rate environment and potential recession on the horizon. Therefore, we're taking proactive steps to address our future credit concerns. For example, we're evaluating loan repricing risk by assessing our client's ability to meet loan covenants in the current interest rate environment. It's worth noting that our fixed rate loan portfolio actually helps from a credit standpoint as it reduces some of the repricing risk. In addition, we will be adopting CECL in the first quarter and we do not expect the material day one impact given our low historical losses. In terms of classified assets, we saw a decrease of $2.7 million in the fourth quarter. The bottom of Slide 14 provide some more detail on our classified assets, which made up less than 1% of total loans and just over 5% of total capital. The majority of the classified assets are C&I loans. In the fourth quarter, we saw a $9.5 million increase in watchlist balances, primarily due to two relationships we moved to watch. These relationships included the multifamily and C&I relationship and reflect our ongoing monitoring of the loan portfolio. Overall, we feel good about the risk profile of the portfolio and feel it is well positioned as we head into 2023. Thanks, Jeff. Slide 15 highlights our strong capital and liquidity positions. We remain comfortable with our current capital levels at CET1 ratios, finished the year at [8.40] and tangible common equity at [7.48]. We did see our capital ratios trend lower in 2022 primarily due to robust loan growth and $10.8 million of common stock we repurchased throughout the year. Although we did not purchase any stock during the fourth quarter. We will be looking to build our tangible common equity and CET1 ratios backup throughout 2023 as we slow the pace of loan growth and continue to retain earnings. From a capital priority standpoint, organic growth remains our primary focus. Beyond that we continue to review and evaluate potential M&A opportunities. We also have a new $25 million stock repurchase program that was approved by the board in 2022. However, it is unlikely we will repurchase shares in the near term as we look to build capital levels from here, but will remain opportunistic based on market conditions. We also remain comfortable with our liquidity position as we maintained $1.4 billion of on and off balance sheet liquidity at year end with our investment portfolio being completely unencumbered. Turning to Slide 16. I'll summarize our thoughts on our near term expectations as we head into 2023. We expect overall balance sheet growth to slow as we look to better align loan growth with core deposit growth and reduce our reliance on higher beta funding sources over the course of 2023. Coupled with the loan pipeline that is about one third of what it was at its peak in mid 2022, we expect loan growth in the high single digit to low double digit range for 2023. In general, the more core deposit growth we're able to bring in the more loan growth we will be comfortable with. There are a couple of factors to keep in mind here. First, the level of payoffs and pay downs is difficult to predict and can affect our net growth. Second, we already have built in fundings coming in throughout 2023 on previously originated construction loans totaling approximately 5% of our loan portfolio today. Overall, we plan to maintain a loan to deposit ratio in the 95% to 105% range. As I mentioned earlier, we expect margin compression in the first quarter to be similar to what we just saw in the fourth quarter. However, we expect the margin to then stabilize near first quarter 2023 levels with the potential for expansion in the back half of the year as loan repricing catches up to the funding side. Once the margin stabilizes, growth in net interest income will again be tied to the pace of loan growth, similar to what we have seen over the past several years. We expect our efficiency ratio to move slightly higher into the mid 40% range, which is still very strong as margin pressure impacts revenue. We also expect noninterest expense growth to slow a bit and align with our slower pace of asset growth. And as I mentioned from a capital standpoint, we will look to build our tangible common equity and CET1 ratios throughout 2023. Thanks, Joe. Before we open up for questions, I want to take a minute to look back at the 2022 strategic priorities were identified and a look ahead to our priorities in 2023. On Slide 17, our first priority in 2022 was to continue our balance sheet growth trajectory, which we did as loan growth was very strong. We also invested in our business scalability, including the launch of Encino commercial origination system in March. This is in addition to other partnerships we've established such as ServiceNow, and Salesforce. As I've mentioned, we continue to operate one of the most efficient business models in the industry with expense growth coming in lower than asset growth. And last week, we recruited, developed and retained top talent. While we didn't add as many people as we were expecting due to the challenging hiring environment, our employee base still increased 12% during the year, including key hires across all areas of the bank. Finishing up on Slide 18, our strategic priorities for 2023 are based on positioning the bank for long term success. First, we want to manage high quality balance sheet growth by better aligning our loan growth with core deposit growth over the course of 2023. Second, we want to maintain our strong efficiency while continuing to invest in the business. Given the slower pace of balance sheet growth, this means pulling back on some expenses, which we plan to do by looking at areas of discretionary spend we can eliminate, while also continuing to leverage and embrace technology investments we have made in recent years. Third, we want to proactively assess asset quality and repricing risk as we expect credit to normalize at some point. Jeff shared his thoughts on this earlier. Last week, we want to implement initiatives that prepare us for longer term success. This includes a C&I build out initiative Nick mentioned earlier, as well as preparing to be opportunistic as M&A opportunities become available. Overall, while the environment remains challenging as we begin 2023, we remain optimistic that the actions we're taking now will allow us to continue to be our usual strong growth and high efficiency bank over the long term. To start off here just on the margin question kind of after the first quarter. It really feels like a slowdown in deposit pricing increases is really the key to getting that stabilization if not inflection later in the year. So just talking about your confidence that you can actually realize that that slowdown and stability and funding pressures rather than just a continuous grind higher kind of throughout the year? I think, for us, I mean, if you look at the growth that -- in the third and fourth quarter, with the pace of loan growth and having to kind of fill the gap with higher cost wholesale funding or broker deposits, I mean, when we, we highlighted the core deposit betas that we've experienced and we feel confident our ability to grow core deposits throughout 2023. And I think, given those beta levels, those are obviously meaningfully lower than where it is to borrow overnight or in the wholesale markets. So that's really the, from your funding cost question, I think our ability to continue to grow core deposits which, we have line of sight to real opportunities and feel good about them throughout 2023. We feel like, those coming in at lower betas than really the wholesale markets should certainly -- that's definitely margin accretive from there. And then I think on the flip side, on the asset side as we talked about, I mean, the more time passes, the more time for the loan book to reprice in this higher rate environment. And I think also, the other piece to talk about is really the slowdown in pay downs and pay offs that we experienced in 2022. I mean, obviously, there's a component to the margin that's loan fee based. And so you saw on the last quarter that was in half compared to what it was in the third quarter and certainly quarters historically. So it feels like if loan payoffs do pick up and you do see an acceleration of that loan fee income, obviously, that's margin positive as well. Maybe one more from me, just kind of given the intention of slowdown in loan growth. Just kind of curious how you keep your lending staff motivated in light of that after a very long track record of years of much higher growth? We're actually had -- we had a meeting with their whole learning stuff last night actually talked through that. I mean, obviously, we're incentivizing them and to eagerly go out and get deposits versus loans which, it is a change in their thought process and how they go out and sell. But our staff has been really good at representing the bank out there and kind of pivoting when they need to. And I'll probably let Nick maybe talk a little bit more about it since he manages all of them. The only thing I'd add to that is -- and we touched on it in our presentation, I think, we will continue to find good new loan opportunities. I think we're just encouraging our staff to be diligent about focusing on those types of opportunities that will help bring really good long term growth for the organization through acquiring core, well known, long history, well healed clients that we can do good business with in the long term. So we had some of those wins in the fourth quarter. We've got some additional wins that we're working on now. And then we're just really focusing on the deposit aspect, as Jerry mentioned, which allows us to continue to fund the transactions of our long term historical clients, which is really where we're trying to put our time and energy today. So I echo Jerry's comments that our staff feels good about the game plan going forward and how we're going to try to continue to manage the balance sheet through 2023. I appreciate the deck and sort of the outlook slides, those are helpful. So I think you framed it up well. I just wanted to kind of get into the mind of your deposit customers that sort of sophisticated bunch that sensitive to rate. Just want to see if fourth quarter and in the first quarter as you have approached them and had those conversations. Do you feel like they've received the catch up rate that they need and maybe aligns with your thought that kind of troughing margin beyond Q1 and then kind of stabilizing, if that's a piece of it? In other words, are customers now, you feel like that's satisfied, you'd gone through the round of a vast delivering a little bit better rate? I think the deposit customers that we've -- our core deposit customer, we've got great relationships with them. I think what we continue to be pleased by is that that relationship that we have is giving us the opportunity to keep those deposits. So while we have seen some increase betas on some of those sophisticated clients as treasuries and other high yield savings accounts are attracted to them, we do have the goodwill and relationship with the client where we get the calls where we at least have the ability to try to retain and potentially reprice that deposit up. I think the other thing to note is given some of our niche deposit markets that we've been in, those industries have seen just overall industry declines and balances. So like some examples of that would be some 10/31 clients that we have that that industry and that has slowed, title company balances are down as interest rates are higher and mortgage refinances have slowed. So some of it is just structural in nature due to some of their businesses. And then just on the new business side of things, I mean, Joe touched on this briefly. I mean, we do feel good about and we have shown historically a really strong ability to grow core deposits that has not changed. And our attention to that has really only increased in recent months. So I feel good about our ability to continue to bring on core deposit customers that will have betas that are much lower than sort of borrowings and other wholesale funding. So we feel good about our ability to do that. So maybe that's just an insight on the customer. I mean Joe, I don't know if you have anything else on the margin? No, I think you nailed it. I think that's -- as Nick said in his prepared remarks, too. I mean, I think it's not linear either, like a loan pipeline, right where you have a real precise time period of which that lands. But I think to reiterate Nick's point that we look out on '23 and we see the relationship opportunities that are in our deposit pipeline, we feel like we have good visibility to those landing and it's certainly less precise and it's chunky when it hits and it takes time to bring over. But I think if you continue to get in front of those relationships keep that momentum, there's a huge opportunity in this market as we've talked about in prior quarters and certainly since we went public. I mean, there's been material disruption here and I think we continue to get in front of some really high quality relationships and we certainly are confident in our ability to out serve relative to our customer or to our competitors. And so obviously that continue that momentum, it takes time but we feel good about it. Just to pivot a little bit to the expense side. How expectations for that to slow? My guess is a bit of that's a function of incentive comp with slower growth, but also the intended kind of gear back hiring. Is that sort of tabled or take a pause on that end? Yes, I mean, we're always going to -- if we find some great treasury management people, would be all over that. Outside of that, it's really just some key replacements and upgrades to some of our staff in the risk area. But yes, generally overall, we don't expect a lot of hires in 2023 but obviously we're also going to continue to build and scale our business. So if the right people come along that we think adds to the value of our bank long term, we're not going to shy away from that either. And maybe one last one, if I could. The mention of the CECL adoption coming, maybe a question for Jeff. Just I guess, how would you expect that to impact reserve levels? I mean, at this NPA level pretty skinny, but just want to kind of see what the kind of dual track kind of modeling looks like if you expect a big adjustment there? We don't -- as we said in prepared remarks, we don't expect a material impact to day one. I think, as we talked to me within 5% of current levels, we feel really good about that percentage in the portfolio. And obviously as macro conditions can change on a future basis that certainly can change. But I think today where we sit the reserve levels under CECL we do feel those are appropriate. Just curious, in the prepared remarks, you guys said that the linked quarter change from 3Q to 4Q on margin compression is likely to be similar. So you kind of guiding towards a, call it, roughly 2.8, 2.85 type range, and then therefore kind of bottom in the first half and then increases? I just wanted to confirm that I got that, and then I've follow-up based on that. So based off of that I know you have repricing throughout the back half of the year and let's assume that the fed kind of slows things down. Can you get above 3 again before the end of FY '23, or is it rather muted? I mean, I get that there's upside and upside is good. But once you kind of hit the bottom, I'm just trying to look at the magnitude assuming that that kind of stops here, let's call it, 5% terminal? Yes, I mean, I think it's certainly an uncertain rate environment. I think when we consider all the variables on both sides of the balance sheet, I mean, we feel comfortable in the back half of the year that expansion is possible. I mean, I won't specifically call it a number. I just think when you consider those inputs on the loans and the deposit -- core deposit growth and given our rate outlook, I mean weâre assuming a 5% fed funds rate. I think, we're comfortable with expansion in the back half. So Iâll leave it at that. And then this is more philosophical in nature, and given that kind of slowed things down a little bit intentionally. I mean, just given the market is assuming higher rates across the board large costs makes sense. And I think you guys are doing a good job from a shareholder value perspective. So when you think longer term, are you taking things off the table in terms of initiatives intentionally for a year, or is it kind of more so really dependent upon the franchise growth of the deposit base longer term? I get that you guys manage expenses and there are so maybe things as potentially to retain profitability. But let's say deposits -- I mean growing deposits is the hard part of the business. I'm trying to think about the out years, and I get that we're pretty far from 24 or beyond. I'm just trying to think, has the strategy changed or are you just tapping the brakes a little? No, I wouldn't say that our overall strategy has changed at all. I mean, we continue to take market share. I mean, as you're well aware, I mean, US Bank and Wells control a big part of the Twin Cities market here. And we continue to get in front of great long term clients of theirs decades long clients. And so I mean, we continue to be in front of people take market share. And I'd say, yes, we certainly pausing on the loan side compared to the super strong growth we've had in the past. But we're certainly still out in the community, continuing to network, continuing to be in front of clientele and trying to grow the business. I'll let Joe follow-up on anything with that. And Iâd speak more, Ben, to just the internal initiatives, if there's part of your question there, too. I think, we've done a lot of scaling the business over the last couple of years, a lot of technology investment. And I think we're just starting to really harness and really see the value. And so a lot of it's really just optimizing that technology investment that we've really has been internally focused to help us better serve our clients. As Jerry said, if hiring is muted from an FTE standpoint, we feel comfortable, a lot of the technology investment internally will allow us to use the same amount of staff from an FTE standpoint and still get more productivity. So I think a lot of those internal initiatives over the last couple of years are really starting to bear fruit. And we feel good about a lot of the efficiency technology based investments that we should continue to stay and optimize even while we might, on an asset basis, see more muted growth. This concludes our question-and-answer session. I would like to turn the call back over to Jerry Baack for any closing remarks.
EarningCall_935	Good afternoon, and welcome to Aviat Networks' Second Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. And now, I'd like to turn the conference over to your host, Mr. Andrew Fredrickson, Director of Investor Relations. You may begin. Thank you, and welcome to Aviat Networks' second quarter fiscal 2023 results conference call and webcast. You can find our Form 10-Q, press release, an updated investor presentation in the Investor Relations section of our website at www.aviatnetworks.com along with a replay of today's call in approximately 2 hours. With me today are Pete Smith, Aviat's CEO, who will begin with opening remarks on the company's fiscal second quarter, followed by David Gray, our CFO, who will review the financial results for the quarter. Pete will then provide closing remarks on Aviat's strategy and outlook, followed by Q&A. As a reminder, during today's call and webcast, management may make forward-looking statements regarding Aviat's business, including, but not limited to, statements relating to financial projections, business drivers, new products and expansions, the impact of COVID-19 and the economic activity in different regions. These and other forward-looking statements reflect the company's opinions only as of the date of this call and webcast and involve assumptions risks and uncertainties that could cause actual results to differ materially from those statements. Additional information on factors that could cause the actual results to differ materially from the statements made on this call can be found in our annual report on Form 10-K filed with the SEC on September 14, 2022. The company undertakes no obligations to revise or make public any revision of these forward-looking statements in light of new information or future events. Additionally, during today's call and webcast, management will reference both GAAP and non-GAAP financial measures. Please refer to our press release, which is available in the Investor Relations section of our website at www.aviatnetworks.com and financial tables therein, which include a GAAP to non-GAAP reconciliation and other supplemental financial information. Thanks, Andrew, and good afternoon, everyone. Thank you for joining us to review Aviat Networks' results for the second quarter of fiscal year 2023. Aviat executed well against its plan this quarter, and we continue to position ourselves to benefit from growth around the world in 5G, rural broadband and private networks as well as drive meaningful bottom line improvement. In the second quarter of fiscal year 2023, Aviat delivered revenue of $90.7 million, which represents growth of 16.5% versus Q2 of last year. Record non-GAAP operating income margin of 12.5%. Adjusted EBITDA of $12.9 million, a 27% increase versus the same period prior year. Non-GAAP EPS increase of 32%. These results would not have been possible without the tireless dedication and execution of the Aviat team and our supplier partners. . Let's discuss some key highlights from the second quarter. The global 5G upgrade cycle continues to be a driver of Aviat's business and outlook. Our recent 5G win with Bharti Airtel in India is officially underway as we began delivering products in the second quarter. We are excited about this win in India as it represents an entirely new customer and geography for Aviat and demonstrates the value that we can deliver to customers through our products and services. Elsewhere around the globe, we continue to gain 5G business through increased customer focus. Part of this growth has come from execution on replacement opportunities from our largest competitor. Globally, our share gain funnel against this competitor is approximately $60 million. In fiscal year 2023, we have booked over $19 million in such opportunities year-to-date and have recognized over $8 million in year-to-date revenue. We will continue to execute on these opportunities to take share of demand. In terms of capturing new 5G opportunities, we recently announced the release of our better agnostic multi-band solution. This allows customers to leverage Aviat's best-in-class E-band and multi-band solutions to seamlessly migrate their existing networks to 5G with lower incremental investments. This creates a large upgrade opportunity for Aviat as it helps to overcome high switching costs. The Aviat multi-band vendor agnostic solution works with existing third-party microwave radios and is detailed in our investor presentation. Our solution provides extended distance and higher capacity alternatives versus competitive offerings. With regards to our rural broadband business, we continue to execute well and the Aviat store remains a point of differentiation for the company. We recently refreshed the store to expand the products offered beyond our microwave radios and accessories to include software products like our Health Assurance Software, or HAS and Frequency Assurance Software or FAS as well as integrating our access products from the Red Line acquisition. Some additional commentary on the government funding programs follows. We continue to anticipate RDOF, Rural Digital Opportunity Fund to begin flowing the first half of calendar year 2023 and Aviat to see RDOF related revenue in the second half of the calendar year. The recent RDOF authorization for an industry leader using fixed wireless access in their deployments is encouraging, and we anticipate more providers to use wireless technologies and the RDPF deployments moving forward. Note that we anticipate a long ramp for RDOF funding. Fortunately, Aviat is still benefiting from customer spend from the CAF, Connect America Fund and ARMA (ph) programs. On the horizon is the BEAD program, Broadband Equity, Access and Deployment, which we are optimistic about. The BEAD program has allocated $42.5 billion to expand high speed Internet access in all 50 U.S. states. There is much still to be seen about the implementation and allocation of the program, but this should be a large beneficiary of BEAD, which bodes well for Aviat. In private networks, we are maintaining our leadership in North America and see increasing international opportunities. For example, in APAC, we secured a multi-year high margin win with our ECLIPSE platform for a national public safety network. The integration of the Redline Communications business which we now refer to as access products continues to go better than anticipated. We are improving our progress from a cost takeout perspective. And we are beginning to see cross-selling opportunities for Aviat backhaul into Redline accounts and vice versa. Moving on to the supply chain environment. We continue to see improvements for approximately 98% of our supply, we have returned to pre-crisis performance, last, we need 100%. Currently, we have 27 components to remain in allocation. Note that it takes approximately 2,000 components to deliver our microwave system. Of the remaining components of allocation, semiconductor chips on the 28-nanometer node remains problematic. We've come a long way, but are not done derisking the supply chain. Fortunately, Aviat has been able to avoid significant supply chain interruptions through the crisis period. Throughout the supply chain crisis, Aviat has held elevated inventory levels. These elevated inventory levels started at the outset of COVID-19 and have persisted an increased through the recent China reopening. We have built resiliency to the third derivative of the supply chain, which is subject to the reopening risk. Based on the past few years of execution and building inventories, we will declare our peak inventory levels at Aviat and anticipate improvements over the next several quarters as lead times and location continue to moderate. This quarter, we saw no missed revenue opportunity due to supply chain shortages. Aviat remains committed to building resiliency in our supply chain by proactively identifying at risk components and secondary suppliers. Our work in driving Redline's manufacturing base over to Aviatâs a good demonstration of an opportunity where we believe we will see improved reliability results through a stronger supply chain. I will now turn the call over to David to review our financials before coming back for some final comments. David? Thank you, Pete, and good afternoon, everyone. During my remarks today, I'll review some of the key fiscal 2023 second quarter financial highlights, noting our detailed financials can be found in our press release and 10-Q filed this afternoon. As a reminder, all comparisons discussed today are between second quarter fiscal 2023 and second quarter fiscal 2022, unless noted otherwise. For the second quarter, we reported total revenues of $90.7 million as compared to $77.9 million for the same period last year, an increase of $12.8 million or 16.5%, driven by strong growth in Asia-Pacific, Europe and Latin America as well as the contribution from the Red Line acquisition. North American revenue, which comprised 57% of the total revenue for the second quarter was $52.0 million, and international revenue was $38.7 million. We continued our trend of trailing four quarter book-to-bill ratio above one started back in fiscal 2018. Gross margins for the quarter were 35.5% and 35.7% on a GAAP and non-GAAP basis as compared to prior year margins of 36.2% and 36.3% for GAAP and non-GAAP. Current quarter margins were weighed down by initial shipment of equipment for a large Asian 5G project. These project margins will improve substantially in subsequent quarters as we recognize revenue on higher margin services and software. Second quarter GAAP operating expenses were $22.6 million an increase of $2.7 million from the prior year, driven by the inclusion of Redline operating expenses and $0.9 million restructuring charge in the quarter. Second quarter non-GAAP operating expenses, which exclude the impact of restructuring charges, share-based compensation and deal costs were $21.0 million. This is an increase of $1.8 million from the prior year, primarily due to the Red Line acquisition. On a like-for-like basis, we continue to manage costs aggressively. Second quarter tax provision was $3.1 million, essentially flat to last year. We continue to report our non-GAAP tax expense of $0.3 million per quarter based on a reasonable estimate of cash taxes we expect to incur. The company has over $500 million of NOLs manifested as the almost $90 million deferred tax asset on our balance sheet that will continue to generate shareholder value via minimal cash tax payments for the foreseeable future. We recorded second quarter GAAP net income of $6.0 million compared to $5.9 million last year. Second quarter non-GAAP net income, which excludes restructuring charges, FX impacts, share-based compensation M&A related costs and non-cash tax provision was $11.1 million compared to $8.5 million for the same period last year. Second quarter non-GAAP EPS came in at $0.94 per share on a fully diluted basis compared to $0.71 per share for the same period last year, an increase of 32%. Adjusted EBITDA for the second quarter was $12.9 million an increase of $2.8 million or 27.4% from the prior year. Adjusted EBITDA margins were 14.2% for the quarter. Moving on to the balance sheet. Our cash and marketable securities at the end of the second quarter were $21.6 million from $22.9 million in the prior quarter. Accounts receivable continue to be impacted by limitations on ForEx availability in certain emerging markets, extending the collection cycle. We continue to leverage our balance sheet to mitigate supply chain risks via buffer stock and supplier deposits. Given the recent improvements in our supply chain, however, we will begin to unwind these investments in future quarters. We continue to have a strong debt-free balance sheet, leaving us well positioned to execute our long-term plans. Thanks, David. Before opening up for Q&A, I'd like to add a few comments and summarize our performance. Year-to-date, we have executed on our long-term growth drivers of 5G rural broadband and private networks. In North America and around the world, we continue to grow and capture additional share of wallet through our differentiated product, software and services offerings. We also remain focused on increasing profitability and generating meaningful shareholder value over the long term. Based on our results, the hard work and dedication of the Aviat team and the demand environment, we are raising our revenue and profit guidance for fiscal year 2023. We now anticipate revenue for fiscal year 2023 to be in the range of $340 million to $347 million and adjusted EBITDA for the fiscal year 2023 to be in the range of $45 million to $47.5 million. This is an increase on both the lower end and the higher end of guidance for both figures. Hey. Good afternoon. Thanks for taking my questions. Nice job on the quarter. Hey Pete, maybe to jump right in on gross margins. None of you were down sequentially in the quarter. Product revenue, product gross margins were up. I'm wondering if you could give us a little bit more color on that, particularly given that you've got some initial contribution from -- which tends to be lower gross margin. And where we can expect that to go over the next couple of quarters as you start to see more normalization on the component side? And then, on the other side of the ledger, the service gross margin seems they were down, any onetime items or something that we should be thinking about in that segment of the business going forward? Hey, Scott. This is David. I'll take that. So actually, I'll start in reverse on the service margins. So service margins tend to be a bit volatile to begin with, but they're subject to kind of some of the secrecies of revenue recognition standard. We have to go through a process of repricing every quarter, which impacts the allocation of revenue across services and equipment. And this quarter, we had a, let's call it a carve-out from services that ended up in equipment. It was kind of bucket to bucket. So that did impact our service margins this quarter and also positively impacted equipment and kind of masked the dilutive impact of that large Tier 1 project that we talked about that, again, that should be a temporary impact to this quarter and improve sequentially as we start mixing in higher margin services and software into that project. So it's a fit on idiosyncratic, but fundamentally, I think we're in good shape, and things are looking more positive going forward. And Scott, to just add, when we won the Bharti Airtel business, we said we were going to crank up our cost reduction machine that takes a little while, and we're going to get the volume benefits. So we see improvements coming on the margins side, and we thought taking the Bharti business and improving it over the right time -- over time was the right thing to do. Got you. Very helpful. And maybe just to follow up on that, Dave. I mean, how should we be thinking about gross margins, though, over the next couple of quarters in aggregate, should they be starting to tick up then as we start to see some alleviated pressure on the component and cost and expedite front offset a little bit by India. Is that the best way to be thinking about it? Yeah. I think that's a good way to think about it. It should -- definitely be moving north from where we were this quarter. I think the back half looks relatively strong. Of course, there's always some give or take there. But in the -- certainly, probably at least 100 basis points higher than what we currently had this quarter. And I think for the full year, we'll probably still end up higher than what we were for full year fiscal '22. Great. And if I could just lastly follow up. In terms of the guidance, very strong December quarter. Looks like you're guiding kind of in line with where the first half is. You guys have tended to be a little bit conservative on that front historically. And it sounds like RDOF starts to kick in, in the second half of calendar '23. So I'm wondering what kind of visibility do you have in the near term, given that your book-to-bill has been running over one? And what are some of the key elements and swing factors as we're looking in the first half year? And should we basically been kind of very early, but be expecting a little bit of pick up as we get into the back half of calendar '23? Thanks. Yeah. So I mean, as far as visibility is concerned, roughly 80% of our coming quarters revenues are coming out of backlog. However, it's not as quite as simple as it sounds because there are some big projects in there and the timing of the revenue recognition associated with those projects can be somewhat dynamic. So there's always a give and take there. But I think we feel good about the rest of the year, and I think that's reflected in our guidance adjustment. Thank you. One moment for our next question. And our next question comes from the line of Erik Suppiger from JMP Securities. Your question, please. Yeah. Thanks for taking the questions. Congrats on a good quarter. Can you talk a little bit about some of the competitive dynamics with Huawei? Was that part of the factor of why your international was particularly strong this quarter? Well, we would -- we all like to name specific competitors, but that's the large competitor in the script that we alluded to. In part, the share gain in India, I would say, Huawei contributed to that. And we put together the script and our story on Monday and then on the 30, the Huawei restrictions came out from the Department of Commerce. So we haven't fully digested. It's going to be more favorable for us, but we've -- I think we said we have $60 million of funnel, and we're starting to execute on that. So we think that's a favorable trend and the restrictions that were announced on January 30. We'll give us some time to figure out if that's -- it's either new worst, it's neutral. If it's going to be positive, we'll be able to figure it out over the next 90 to 180 days. Okay. Very helpful. Just talk a little bit about kind of the play between fiber and microwave, any updates there in terms of kind of general adoption trends, one versus the other? Yeah. I think the share is about steady at the competitive front between fiber and microwave. And what I would point to in terms of making Aviat more robust with respect to the fiber competition is our multiband extended distance, and our multiband vendor-agnostic innovations allow us -- the vendor agnostic allows us to work with third-party microwave and the extended distance, that's explicitly designed to make us more competitive versus fiber. But overall, we have a chart in our investor presentation, and I wouldn't say that there's any share shift between fiber and microwave at this point in time. Okay. Last question. North America grew, I think, a couple of percent. Are you seeing impact from macro-economic? Is that playing much of a factor there or how are you thinking of the North American business from an economic perspective? Yeah. So we think North America right, our [indiscernible] business is project based, right? North America's growth was a little muted this quarter. But we see that the backlog of almost double-digits versus the same period point in time last year. And well, so we have a backlog that's increasing. We have, I would say, longer projects. Our North America business has dominated by private networks, which we haven't seen any slowdown. So we read the headlines like everybody else. So we're hard pressed to say that there is a macroeconomic impact to the North America or the overall Aviat business. And the growth in Q2 is really a project timing impact rather than something in the macro. Thank you. One moment for our next question. And our next question comes from the line of Tim Savageaux from Northland Capital. Your question, please. Hi. Good afternoon and congrats on the results. When I stay with North America, I think another feature of the quarter is Verizon making the 10% customer list, which I think is -- when the last time that happened was, but feel free to let me know and is that indicative? And I guess I asked this question both from a North American and global perspective. I mean, do you see 5G backhaul here. Obviously, you've got the Bharti deal ramping taking a greater role in terms of driving the company's growth throughout the balance of the year or short term than your other growth drivers and we know that Bharti is a Huawei replacement win? What's driving the strength at Verizon? And then I have a follow-up. Yes. So we looked a little bit about Verizon. They've been a long-term customer of Aviat, and they've typically been right under the $0.10 threshold. And we see overall connectivity driving be up at Verizon. And it's a combination of LTE, LTE Advanced 5G. So that drives the need for more mobile backhaul to fixed wireless access transport. So we see all of those trends, then we like all of our growth drivers, 5G private networks and all broadband. And -- but right for the next couple of quarters, I think our growth is going to be driven by 5G. And we have the kind of running dialogue about when is RDOF going to have an impact, and we think the recent developments with point in the back half of the calendar year 2023. So we think our guidance would probably factors in 5G over the next couple of quarters. And as we start to think about a guide for fiscal year '24, we will see the impact of rural broadband and the funding, which is perhaps more definitive than I have to. Duly noted. And you mentioned a bunch of numbers there that I want to go back through because I think they're probably pretty interesting. Was the $60 million, is that the estimate of the opportunity for share gain over a certain period of time? I think you mentioned with regard to your big competitor and then you went through, I think, some bookings and revenues recognized $19 million and $8 million, respectively. I'd just love to get a sense of how significant a piece of that, the India business is versus what you're seeing globally? So I would say that's a really good way for it to get us to back out the India business. So I would say the India business of that the revenue is over half. So to kind of put it in the ballpark, it's over half. But it's not over its let's say, maybe 25% of the funnel. And the reason I make that statement is that the funnel is a mosaic of opportunities where we're not just dependent on taking share from one or two accounts. We see that these restrictions are having a broader impact, and we're getting looks at customers that historically we have. Is that helpful? Great. And then last question for me. You mentioned record non-GAAP operating margins, 12.5%. And obviously, you did have some nice revenue upside there in the quarter. But longer term, have you guys given some consideration as to where those -- obviously, it's dependent on gross margins to some degree as well as some revenue growth. But do you have a sense for where operating margins can go over time now that you've kind of achieved this recent milestone? Well, I would say that we -- our stated milestone is for EBITDA margins to reach 15%. We're in spending distance, but we're not quite there yet. I'll tell you this, we're heading into our strategic planning season here. So we'll probably have kind of dust off the playbook there and figure out where we want to be from that standpoint. And we'll to respond to your question as well to pay specific attention to our operating margins. Thank you. [Operator Instructions] And our next question comes from the line of Theodore O'Neil from Hill's Research. Your question, please. Thanks very much and congratulations on the good quarter. I appreciate you discussing the inventory turns and the DSOs in the prepared remarks. I was wondering if you could talk about if you're seeing anything on the inflation side, either improving or not improving? Yeah. It's been fairly stable, right? I mean we're still having some instances on select components where we'll have to pay some expedite fees. But as far as general price increases are concerned, they've been few and far between. And actually, we're trying to push the tide the other way at this point and start realizing some -- clawing some of that back that we've incurred over the past year, 1.5 years. So more to be seen on that. But for right now, we see the situation is stable. And can you give us an update on the new chip you're building with MaxLinear, some timing on that? And if that chip is going to help with some of the semiconductor allocation issues you've got? So we're still in the -- we still haven't given the -- when we expect it out, but that project is progressing nicely. We think our investment has helped us get prioritized with respect to access to the modem supply chain, right? And I think a couple of quarters from now, we'll give definitive time line on when the ship will start to impact our top and bottom lines. Thank you. And we have a follow-up question, just one moment. The follow-up comes from the line of Scott Searle from ROTH. Your question, please. Hey, Pete. Maybe just a follow-up on Redline, you're a couple of quarters in now. I'm wondering if you could give us a little bit of an update about how that's tracking from a revenue standpoint? It sounds like you're starting to get some cross synergies from a sales perspective in terms of backhaul capabilities, but I'm wondering what that line of opportunity is looking like on the private networks front, how should we think about that going forward over the next 12-plus months? Yeah. So the private network funnel is starting to grow. We haven't had a win. When we got prep for the call, we thought about -- talking about that more, and we said we wanted to have a win before we started to kind of put that in the earnings deck. So we -- but we see when we made the acquisition of Redline, we thought that our channels and our access to private networks and the product portfolio was going to work. And it's not working yet, but we think we're one to two quarters away from saying, yes, the investment thesis is proven. With respect to revenue, it contributed less than 10%. And it was accretive to our gross margins, and we are ahead of the EBITDA guidance we gave for the year. On Redline, we said it was 1% to 1.4%, and we factored that into our increased EBITDA guidance that we mentioned at the end of the recorded call. Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Pete Smith for any further remarks. Well, thanks, everyone, for attending the call and your support. Fortunately, the line state opened during the Austin Ice Storm. We are looking forward to updating our progress in 90 days, and let's stay in touch. Thanks, everyone. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
EarningCall_936	Greetings and welcome to the Valero's Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Homer Bhullar, Vice President, Investor Relations. Thank you, Mr. Bhullar. You may begin. Good morning everyone and welcome to Valero Energy Corporation's fourth quarter 2022 earnings conference call. With me today are Joe Gorder, our Chairman and CEO; Lane Riggs, our President and COO; Jason Fraser, our Executive Vice President and CFO; Gary Simmons, our Executive Vice President and Chief Commercial Officer; and several other members of Valeroâs senior management team. If you have not received the earnings release and would like a copy, you can find one on our website at investorvalero.com. Also attached to the earnings release are tables that provide additional financial information on our business segments and reconciliations and disclosures for adjusted metrics mentioned on this call. If you have any questions after reviewing these tables, please feel free to contact our Investor Relations team after the call. I would now like to direct your attention to the forward-looking statement disclaimer contained in the press release. In summary, it says that statements in the press release and on this conference call that state the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by Safe Harbor provisions under federal securities laws. There are many factors that could cause actual results to differ from our expectations, including those we've described in our filings with the SEC. Thanks Homer and good morning everyone. We finished the year strong with our refineries operating at 97% capacity utilization in a favorable refining margin environment. In fact, this is the highest refinery utilization for our refining system since 2018. I'm also proud to share that 2022 was the best year ever for combined employee and contractor safety, which is a testament to our long-standing commitment to safe, reliable, and environmentally responsible operations. As we saw during most of 2022, refining margins were supported by low product inventories, which resulted from the significant permanent global refinery shutdowns and the continued recovery in product demand. Our refining system also benefited from heavily discounted sour crude oils and fuel oils. These discounts were driven by increased sour crude oil supply, high freight rates, and the impact from the IMO 2020 regulation for lower sulfur marine fuels. Also, high natural gas prices in Europe incentivize European refiners to process sweet crude oils in lieu of sour crude oils, adding further pressure on sour crude oils. And our refining projects that are focused on reducing cost and improving margin capture remain on track. The Port Arthur Coker project is expected to be completed in the second quarter of 2023 and will increase refinery's throughput capacity and ability to process incremental volumes of sour crude oils and residual feedstocks while also improving turnaround efficiency. In our Renewable Diesel segment, we continue to expand operations, and we set another sales volume record in the fourth quarter with the successful commissioning and start-up of the new DGD Port Arthur renewable diesel plant in November. That project was completed under budget and ahead of schedule and brings DGD's annual production capacity to approximately 1.2 billion gallons of renewable diesel and 50 million gallons of renewable naphtha. In the Ethanol segment, BlackRock and Navigators carbon sequestration project is still progressing on schedule and is expected to begin start-up activities in late 2024. We expect to be the anchor shipper with eight of our ethanol plants connected to this system, which is expected to result in the production of a lower carbon intensity ethanol product that should significantly improve the margin profile and competitive positioning of the business. And we continue to advance other low-carbon opportunities such as sustainable aviation fuel, renewable hydrogen and additional renewable naphtha and carbon sequestration projects. Our gated process helps ensure these projects meet our minimum return threshold. On the financial side, we continue to strengthen our balance sheet, paying off all of the incremental debt incurred during the pandemic and ending the year with a net debt to-capitalization ratio of 21%. Looking ahead, we expect low product inventories and continued increase in product demand to support margins, particularly for US coastal refiners that have crude oil supply and natural gas advantages relative to global refineries. And we continue to see large discounts for heavy sour crude oils and fuel oils that we can process in our system. The startup of the Port Arthur Coker is also expected to have a significant earnings contribution in the back half of 2023, supported by wide sour crude oil differentials and strong diesel margins. In closing, we're encouraged by the refining outlook, which, coupled with the contribution from our strategic growth projects in refining and renewable fuels, should continue to strengthen our long-term competitive advantage and shareholder returns. Thanks, Joe. For the fourth quarter of 2022, net income attributable to Valero stockholders was $3.1 billion or $8.15 per share, compared to $1 billion or $2.46 per share for the fourth quarter of 2021. Fourth quarter 2022 adjusted net income attributable to Valero stockholders was $3.2 billion or $8.45 per share compared to $988 million or $2.41 per share for the fourth quarter of 2021. For 2022, net income attributable to Valero stockholders was $11.5 billion or $29.04 per share compared to $930 million or $2.27 per share in 2021. 2022 adjusted net income attributable to Valero stockholders was $11.6 billion or $29.16 per share compared to $1.2 billion or $2.81 per share in 2021. For reconciliations to adjusted amounts, please refer to the earnings release and the accompanying financial tables. The Refining segment reported $4.3 billion of operating income for the fourth quarter of 2022 compared to $1.3 billion for the fourth quarter of 2021. Adjusted operating income for the fourth quarter of 2022 was $4.4 billion compared to $1.1 billion for the fourth quarter of 2021. Refining throughput volumes in the fourth quarter of 2022 averaged 3 million barrels per day. Throughput capacity utilization was 97% in the fourth quarter of 2022. Refining cash operating expenses of $5 per barrel in the fourth quarter of 2022 were $0.14 per barrel higher than the fourth quarter of 2021, primarily attributed to higher natural gas prices. Renewable Diesel segment operating income was $261 million for the fourth quarter of 2022, compared to $150 million for the fourth quarter of 2021. Renewable Diesel sales volumes averaged 2.4 million gallons per day in the fourth quarter of 2022, which was 851,000 gallons per day higher than the fourth quarter of 2021. The higher sales volumes were due to the impact of additional volumes from the DGD St. Charles plant expansion and the fourth quarter 2022 start-up of the DGD Port Arthur plant. The Ethanol segment reported $7 million of operating income for the fourth quarter of 2022, compared to $474 million for the fourth quarter of 2021. Adjusted operating income for the fourth quarter of 2022 was $69 million compared to $475 million for the fourth quarter of 2021. Ethanol production volumes averaged 4.1 million gallons per day in the fourth quarter of 2022. The higher operating income in the fourth quarter of 2021 was primarily attributed to multi-year high ethanol prices due to strong demand and low inventories. For the fourth quarter of 2022, G&A expenses were $282 million and net interest expense was $137 million. G&A expenses were $934 million in 2022. Depreciation and amortization expense was $633 million and income tax expense was $1 billion for the fourth quarter of 2022. The annual effective tax rate was 22% for 2022. Net cash provided by operating activities was $4.1 billion in the fourth quarter of 2022 and $12.6 billion for the full year. Excluding the unfavorable change in working capital of $9 million in the fourth quarter and $1.6 billion in 2022 and the other joint venture member share of DGD's net cash provided by operating activities, excluding changes in DGD's working capital, adjusted net cash provided by operating activities was $4 billion for the fourth quarter and $13.8 billion for the full year. Regarding investing activities, we made $640 million of capital investments in the fourth quarter of 2022, of which $349 million was for sustaining the business, including costs for turnarounds, catalysts and regulatory compliance and $291 million was for growing the business. Excluding capital investments attributable to the other joint venture members share of DGD and those related to other variable interest entities, capital investments attributable to Valero were $538 million in the fourth quarter of 2022 and $2.3 billion for the year, which is higher than our annual guidance primarily due to project spend timing on the Port Arthur Coker project and the accelerated completion of the DGD Port Arthur plant. Moving to financing activities. We returned $2.2 billion to our stockholders in the fourth quarter of 2022 and $6.1 billion in the year, resulting in a 2022 payout ratio of 45% of adjusted net cash provided by operating activities through dividends and stock buybacks. With respect to our balance sheet, we completed additional debt reduction transactions in the fourth quarter that reduced Valero's debt by $442 million through opportunistic open market repurchases. As Joe noted earlier, this reduction, combined with a series of debt reduction and refinancing transactions since the second half of 2021, have collectively reduced Valero's debt by over $4 billion. We ended the year with $9.2 billion of total debt, $2.4 billion of finance lease obligations and $4.9 billion of cash and cash equivalents. The debt-to-capitalization ratio, net of cash and cash equivalents was approximately 21%, down from the pandemic high of 40% at the end of March 2021, which was largely the result of the debt incurred during the height of the COVID-19 pandemic. And we ended the year well capitalized with $5.4 billion of available liquidity, excluding cash. Turning to guidance. We expect capital investments attributable to Valero for 2023 to be approximately $2 billion, which includes expenditures for turnarounds, catalysts and joint venture investments. About $1.5 billion of that is allocated to sustaining the business and $500 million to growth. For modeling our first quarter operations, we expect refining throughput volumes to fall within the following ranges: Gulf Coast at 1.59 million to 1.64 million barrels per day; Mid-Continent at 415,000 to 435,000 barrels per day; West Coast at 245,000 to 265,000 barrels per day; and North Atlantic at 415,000 to 435,000 barrels per day. We expect refining cash operating expenses in the first quarter to be approximately $4.95 per barrel. With respect to the Renewable Diesel segment, we expect sales volumes to be approximately 1.2 billion gallons in 2023. Operating expenses in 2023 should be $0.49 per gallon, which includes $0.19 per gallon for non-cash costs such as depreciation and amortization. Our Ethanol segment is expected to produce 4 million gallons per day in the first quarter. Operating expenses should average $0.51 per gallon, which includes $0.05 per gallon for noncash costs such as depreciation and amortization. For the first quarter, net interest expense should be about $130 million and total depreciation and amortization expense should be approximately $655 million. For 2023, we expect G&A expenses, excluding corporate depreciation, to be approximately $925 million. That concludes our opening remarks. Before we open the call to questions, please adhere to our protocol of limiting each turn in the Q&A to two questions. If you have more than two questions, please rejoin the queue as time permits. Please respect this request to ensure other callers have time to ask their questions. My first question is related to â good morning. Related to your macro outlook over the near-term. And with respect to Russia, how do you see the EU embargo or price cap on Russian products imports playing out, specifically to the diesel as well as the geo situation? Theresa, this is Gary. I think, initially, we felt like even with the ramp-up in sanctions, you would just see a rebalancing of trade flows much like we saw with crude and resids. Most people in the trade today think that the sanctions will actually result in a reduction in Russian refinery utilization, and you'll see lower exports of VGO and diesel coming out of Russia when the sanctions take place. Got it. And clearly, there's been a focus on an elevated amount of maintenance in the first half of this year, plus some unplanned downtime. How big of an impact do you think this will be on near-term refining economics? How real do you think this is? And what are the implications on your own refining earnings taking into account that you have your own maintenance program to work through as well? Yes. So the market is very, very tight. We're looking at total light product inventories 55 million barrels below the five-year average. And so typically, this is a period of time where you see restocking take place. And with the winter storm outage and high maintenance activity, we just haven't been able to restock inventories which sets the year up very nicely in terms of refinery margin perspective. And Theresa, this is Lane. So as we've been pretty consistent, we don't do a lot of commentary around our turnaround activity. But nonetheless, I mean, the first quarter and third quarters are heavy turnaround periods when we have turnarounds. And so that's sort of seasonally, that's how we execute our maintenance. Hi, good morning, everyone. Thanks for taking my questions. Happy New Year, guys for those I havenât spoken to you yet. Joe, I don't know who you want to direct this too, but I'm curious about coker economics. When you laid out the original plan to bring this online, we were in a very different diesel resid market than we are today. So could you -- as you see the earnings power of that facility as it stands, maybe at strip or however you want to characterize it, can you give us an idea what your expectations are relative to what it looked like when you first set out the project? And I've got a follow-up, please. Hi, Doug. I hope youâre all right. It's -- so just to remind everybody, our FID, I think, was $325 million, that's sort of based on mid-cycle. We sort of look back at it in sort of 2018, I think the EBITDA was around $420 million. If you sort of fourth quarter, it's in the order of probably $700 million, maybe a little bit more dollars. So if you use those kind of margins. So obviously, it's -- I don't know if we have incredible foresight, but it's great to be lucky. And we lucky to be good, that's exactly right. So yes, I'd say have assuming all this holds, and I think, at least for our outlook, at least for this year, is that the sort of resid prices and distillate cracks a whole, it will be a -- the timing is pretty perfect. Just to be clear, and I know you don't want to be specific on timing, but would you anticipate this up by the end of the second quarter, or how are you thinking about start-up? I'm going to be fairly specific right here. We're going to be mechanically complete somewhere late Feb, early March, and we expect oil in somewhere late April or early May. Joe, I hate to do this, but I got to ask the cash return question. Your balance sheet, you've managed it or Jason, maybe, back to below COVID levels. Your dividend still hasn't moved and your share count is now down, I guess, about 7%. So, all things considered, it seems you've got a lot of capacity for dividend to restart dividend growth. How can you walk us through what you're thinking on cash returns? Thanks. Yes, I'll give a little context quarter, we did beat a goal, which will kind of change in how we look at things. So, back prior to the pandemic, we were frequently at the high end or even above our target return payout range of 40% to 50%. Now, during the pandemic, we were very committed to our dividend and paying the dividend loan put us way above our 40% to 50% target range. And as you know, during COVID, we had to take on another $4 billion of debt in 2020. So, one of our main objectives as the financial situations improve post-COVID was the payback this incremental debt, which we've been aggressively working on. And we've messaged that while we're working on this competing goal of deleveraging, we would stay at the lower end of our 40% to 50% payout range, which is what we've been doing. Now, in the fourth quarter, we were able to repurchase $442 million of debt, which is the final step in us meeting our goal of deleveraging by $4 billion. So, with that insight, during the quarter, we increased our stock purchases to $1.8 billion and we're able to end the year at a 45% payout ratio. So, we're able to work our way back to the midpoint of our target range for the full year. And now that we've paid off our pandemic debt and build our cash balance up to a good level, you should reasonably expect us to be looking at mid-level or higher payout targets given the construction margin environment as we move forward. Now, on the dividend side, please go ahead -- yes, you'd asked about dividend too, which is other pieces of the puzzle. So, we continue to aim for a dividend as sustainable and competitive versus our peers. We would also like to show growth. And as you know, the dividends -- we hadn't had any growth since the first quarter of 2020 because, first of all, we had the pandemic, which we had to work our way through. And then we're rebuilding cash and working our debt down. So, now, as I've said, we've kind of met those goals so we would like to return to a pattern of growth as we move forward. I appreciate the full answer, Jason. As you know, Joe, we'd like to see cash on the balance sheet. So, thanks so much for that. All the best. Yes, good morning. I guess I'd like to jump in here on just, call it, crude structure in the market, right? We had big SPR releases a lot of last year. Those seem to have at least, I don't know if I'd say ceased, they've definitely eased quite a bit. You mentioned the Russian sanctions coming up. That's really more of a product thing. And then we've had the Venezuelan barrels start to enter the Gulf of Mexico. So, I guess as a broad question, how are you looking at crude availability and crude dips as we get into the early days of 2023 here? Yes. So, this is Gary. I think our outlook on crude quality differentials is we expect the market to stay fairly consistent. The key drivers really on the quality differentials have been more sour crude on the market, refineries running at high utilization rates, which produce more high sulfur fuel oil. And then with the IMO 2020 regulation, it's decreased the demand for high sulfur fuel oil. And so all those factors come into play, affecting the supply/demand balances around high sulfur fuel and then high sulfur fuel really drives the quality discount. So we don't see much changing at least in the near-term in terms of where those quality differentials are. And as a follow-up on that, I think, Joe, you mentioned with the Russian ban, we might see less VGO in the market. Maybe, Gary, those were your comments. If there's less VGO in the Atlantic Basin in general, what is your expectation for substitute feedstock into the summer of the secondary units and the kind of follow-on impacts on distillate production? Hey, Roger, this is Lane. I'll take a shot at it. I think what you'll see, and we were concerned about it going into this past year was the VGO availability, but we sort of through with some of the way some of the refineries in the Middle East started up. And I think some people stockpiled VGO, I mean, the answer to that is it will remain tight. And ultimately, what it affects is gasoline production. If you believe distillate cracks are going to hang in there where they are, you'll have clear margins by VGO into a hydrocracker, but it will challenge FCC's economics through the summer, it's in fact, as it gets tight. Hey, guys. Good morning. Thanks for taking my question. So I was hoping for your view on China reopening and how that could trickle through the market, particularly when you think about the new refining capacity coming on and they appear to still be releasing big batches of export quota. So anything on China reality would be helpful? Thanks. Yeah. So this is Gary. I think we've certainly seen the Chinese more active in the market, both purchasing feedstocks and in the product markets as well. It looks to us like a lot of the product exports from China are staying in the region, although we occasionally see some exports making their way into our market. But our view is that, you'll see significant demand recovery in China by the second quarter. And a lot of that ramp-up in refinery utilization in China will be needed to supply the domestic demand. On the new refinery capacity, at least our supply-demand balances still show year-over-year demand will outpace capacity additions. And so we're not too concerned about it. A lot of that capacity really doesn't make a lot of transportation fuels. Some of the big refineries in China, it's less than 50% total gasoline, jet and diesel yield, a lot more petrochemicals and fuel oil production. Great. Thank you. That's helpful. And then on the Renewable Diesel side, can you talk about how the feedstock market is absorbing DGD 3 and assuming this is the case, why it's been kind of easier than having pushed up advantaged feedstock the way it did with DGD 2? Yeah, this is Eric. We haven't really seen a big change in feedstock costs with DGD 3 coming on. As you said, we did see a big change where waste oil feeds really equilibrated to soybean oil with DGD 2 in 2021. But with the start-up of DGD 3, we've seen prices hold pretty flat. We saw that soybean oil actually, at least CBOT âsoybean oilâ, came pretty flat to waste oils in October and November. But then we saw the âsoybean oilâ drop really with the EPA announcement on their RFS obligations for the next three years. And so â but overall, to answer your question, we haven't seen a big change in feedstock prices. It's been pretty stable. So in the prepared remarks, you mentioned European energy cost driving optimization opportunities in the US via a lot of different factors. But energy costs in Europe have crashed and diesel cracks are still rising and those optimization opportunities are still there. Can you talk a little bit about maybe what's going on in Europe from your perspective that's kind of sustaining these advantages even though the gas cost side is maybe out of the equation? I'll start and if Gary wants to sort of add. This is Lane, by the way, Sam. So natural gas still at the UK and really in the Netherlands is still nominally around $20 per million BTU. When comparing that today, sort of the Houston -- I mean probably nominally three and change. So there's still a significant difference between natural gas cost now. With that said, we'll use our Pembroke refinery as a proxy. Natural gas really hasn't driven our signals in over a year. And so I guess what I'm saying now we don't have an SMR and we're not -- we don't have a big hydrocracker, so we don't have a lot of insight into how that flows through to their marginal economics on those units. But what I'm saying is it's high natural gas prices. In Europe, at least for us, it hasn't changed our signals, which is macro run max at our Pembroke refinery. Okay. That's really helpful. And then I guess just as a follow-on, it's a little bit related, but it's back to Port Arthur. I mean the coker is starting up at this high run rate, and you've got a new renewable diesel facility there that's very cost advantage if for no other reason than just its integration with the refinery. So this is facility that's probably the most valuable fuels complex in the world at this point, I would say. And I don't even know what the question is, to be honest with you, but I'm just trying to get contribution to the system. Yes. I mean if it has -- if it's dragging up the entire Gulf Coast system with it because of optimization opportunities that it comes with, I mean, just sort of I guess, a plant level contribution would be helpful. Yes. We can't really say that. We do appreciate your comments around it. I mean -- if you think about what this coker does, at least, it reduces -- well, heavy the refinery up and our intermediate purchases sort of if you think about our VGO comments will be down significantly. So the better integrates sort of vertically integrates that refinery and makes it way less sort of, as you said, it's a very important asset. It makes us way less, I'd say, significantly less dependent on intermediates to fill out the refinery. And then obviously, the renewable diesel plant, there is going to be very helpful. So you're right, Sam, it's a very valuable complex to us. Can I go back into Port Arthur, mainly with the coker coming on stream, we understand that, I mean, one of the decisions behind is that you will allow you doing the turnaround, you can still won the facility. But during the long-term around period, how that impact Port Arthur in terms of the cruise lay of throughput and product yield? But I'm more interested if it is not doing the turnaround, how the new coker addition will impact in terms of your [indiscernible], your product, yield and your overall throughput? So, as I said to Sam, it's -- we'll heavy up considerably. Today, we run some light and medium crudes. You'll see us run significantly more heavy, maybe plus rate, probably over time. I'd looking back at the FID some, but it's not as much as you would think. And in terms of distillate, that's really the net product we make out of this, and it's sort of a plus 15% to plus 25% depending on the crude die in terms of distillate. What it really is, is a reduction in feedstock purchases for us. In addition to like we said, it's a turnaround efficiency. Right. So, we assume that is a 55,000 barrel per day, so you will see incremental one of heavy and mediums to the tune of 150,000 barrels per day? Now, the coker, the capacity is 55,000 barrels per day. Should we assume we're heavier up by about 150,000 barrels per day of the heavy and medium sour crude? No, we're not increasing 50,000 barrel per day. We're heavying up. You'll see our rates. I don't normally go from -- I don't know if it's public here, I got to be careful. [indiscernible] We run anywhere from 340 to 360 today, 375, depending on the crude die. I think we could potentially go up plus 30 to plus 40 on crude depending on how heavy we are or light we are. So, that's sort of what happens. And so then it just changes. When we do this all the time whenever we change our crude die, we sort of have to spot in intermediate purchases to finish our conversion units out. So, what will happen is we'll reduce the amount of intermediate purchases depending significantly on the base and tuning the refinery between how heavy we are and how we'll change sort of the how crude run rates. So, -- but it's not a plus 150,000. No, no, I'm saying not the overall throughput increased by 150,000, I'm saying that, will you increase the run of heavy and medium sour crude by 150,000 barrels per day with this coker? We would have to get back to you. It's going to be a lot. I mean, I have to go back and see how much we incremented on in terms of the volume. So, -- and we'll have to get back with you. We can get back with Homer disclose that I don't know. I don't know what-- And second question is that in your North Atlantic, the margin in this quarter is really, really strong, even comparing to the benchmark indicator. Can you maybe help us better understand that what may be some driver outside just the market conditions? Yes, any? Well, I didn't really -- it's not that much stronger versus the prior quarter. I mean, just the way we look at it isâ¦ Thanks. Maybe â a follow-up on some things that you maybe touched on a little bit earlier on the call. I think from a macro point of view, as some of the â what appear to be at least whether they're structural or lingering improvements and kind of underlying profitability for the business. It seems like the global system is exceptionally tight in terms of generating low sulfur product, and maybe that's a post IMO effect. But is that a fair statement? Have you seen kind of a post IMO have you seen a structural change or tightness in the ability of the global refining system to generate ultra-low-sulfur product? And is that something that sticks with us for a long time and on the margin drives higher distillate margins? Yes, I think so. So you can see that a couple of places, you can really see at the low to high spread on fuel oil, you can certainly see the gap that's occurred and then just general weakness in high sulfur fuel. I think it tells you that the industry really is tight on capacity to upgrade high sulfur fuel into low-sulfur products. And we've really seen that starting early last year, and it's continuing, and we don't see anything that changes that. Right. Thanks. And then maybe just one on the renewable diesel side. I mean early guidance for the 2023 to 2025 time frame didn't appear very supportive for renewable diesel on its surface. Any thoughts on what your takeaways were overall, whether you see the market as potentially oversupplied this year? And whether this may result in pushing more marginal players out of the market? Obviously, you have a structural cost advantage, so you're on the low end of the curve. But do you expect â I guess, how did you read the guidance? What do you think the impact will be over the next year or two on the market? Well, so one thing that we saw with the RFS obligation is that they kept the ethanol target at 15 billion gallons, which means you're still going to be in a situation at some point in the year where you have to use the D4 RIN to cover the D6 obligation because the ethanol blending won't reach 15 billion gallons. So that mechanism is still in there. To your point, the future obligations were higher, but not as high as people expected. And when you saw that announcement come out, you did see a big drop in soybean oil prices as well as a lot of pressure on â or question on whether or not all these soybean crush facilities were going to get built based on that lower obligation going forward. So it's a little bit of a mixed bag that, there's still going to be short on the D6 RIN, but there is definitely a lower growth curve on the D4 RIN in this current proposal. So we'll have to see how that plays out. There's still a lot of talk about a lot of the policy trying to move away from soybean oil as a feedstock, both in Europe and in the US, at least in terms of conversations. And so as everyone's trying to figure out is that part of what's at play with this lower RFS proposal. So â but overall, as you said, we're a waste oil units that isn't affected by that. And as you said, we will be competitive regardless of the obligation compared to our peers. So we'll have to see how the -- we'll just have to see how this plays out. I don't know, Rich, you had other comments about the future outlook on the RFS proposal. I know we'reâ¦ Yeah. I mean, one thing I would hit on is the elements that they put in that's probably the thing that we find most problematic with the rule. EPA is trying to convert the RFS into a subsidy for EVs, for autos. And, obviously, we'll be commenting very heavy on that. We feel that the RFS is really set out by Congress and the intent was for it to be used to promote liquid renewable fuels like the use of soybean and corn and for ethanol. And we don't think trying to convert this into some kind of a user it for EV purposes really is consistent with the underlying obligations and intent of Congress with the RFS. Yeah. Thanks. I, kind of, want to continue that line of questioning there. I appreciate this is a little bit ridiculous since you just brought DGD 3 online. But what is the policy vision make you think about DGD 4 or some of the opportunities that you'll have when you have your carbon capture system online for your ethanol plants? Just where is your head on where future renewables growth for you guys might be? Well, previously, we said we would take a pause after DGD 3 and reassess the market. So we're -- like you said, we're still lining out DGD 3. Its project went great. It came in under budget. It was nine months ahead of schedule. It's met design. It's met its design rates already. And I'll just say that the project team, the operations team and the fuel compliance team did a great job making this a very smooth start-up, and we're not having any problem moving sales out of DGD 3 into markets. So as I said before, we haven't seen an increase in feedstock prices. So everything looks very competitive with DGD3 coming up. That all being said, I think we continue to do the engineering on the SAP project. For the DGD platform, and then we continue to support the Navigator pipeline for the CO2 sequestration for our ethanol plants. So all of that still says that there's a lot of opportunity with our platform, given its location and competitive position. Yeah, I think there's two things. Obviously, what's key to that is that the sequestration project has to go first. In order for ethanol to qualify for SAF, you have to get below the 50% GHG targets for the EU. And so if you look -- if you assume that pipeline is done in the next couple of years, it will qualify our ethanol platform into SAF. And so the other thing that we've learned is with the SAF projects, you still have to blend that with conventional jet to make the final SAF product. So if you think about our platform, we have the ethanol, we have the carbon sequestration and we've got the conventional jet on the refining side. It does look like we would have a lot of advantage in just a complete supply chain into a finished SAF product. So that all looks like it's something we will continue to look at as we get closer to reality on this carbon sequestration pipeline. Yes. Good morning, team and congrats on a great quarter. The first question was around jet cracks. We're seeing that premium relative to diesel really blow out in some markets. Would love your perspective on -- do you think there's a structural premium in jet? And how do you see those premiums playing out over time? Yes. So I think in the short-term, a lot of what you're seeing, the premiums on jet are primarily in New York Harbor in the Florida market. And it's still a bit of an overhang from the winter storm outages that we had in the US Gulf Coast, causing those markets to be exceptionally tight. It looks to us like probably mid-month in February, you'll get some resupply, which will help jet supply in those regions. But overall, we expect jet demand to increase significantly this year and overall, a lot of tightness in the distillate markets. Thatâs helpful. That to follow-up is around just the demand levels. I mean, we've historically anchored to EIA on some of the US demand levels and the numbers are noisy. I mean in the last four-week trailing number was down 11%, which is hard to reconcile with the fact that disti is 20% below the five-year from an inventory perspective in gasoline below the five-year as well. So just would love to hear what you're seeing through your own wholesale system in terms of demand? And any thoughts on real-time color there? Yes. So we share the view that the DOE numbers look low to us and we would expect them to be corrected going forward. Our wholesale numbers are trending pretty high. So gasoline volumes through our wholesale channel are about 12% above where they were pre-pandemic levels, which we don't necessarily think is representative of the broader markets either. For us, I think the number which we focus on are more around the mobility data, which is kind of showing vehicle miles traveled flat to slightly above where it was pre-pandemic levels with some improvements in the efficiency of the fleet, it would say gasoline demand down maybe in the 2% range is what we kind of believe is most likely. Good morning. I got a couple of questions. First, I wanted to ask about the US Gulf Coast intermediate imports, the resids, and I understand some of that's going to be backed out with the Port Arthur Coker project, but you'll probably be taking some in-sell. And as these resid differentials have widened throughout the year, I imagine it's been a pretty large benefit to your capture rates in 2022. So I was hoping you could help frame that? And if you expect resids the discount to stay wide in 2023 and continue to contribute to stronger captures despite your commentary that you expect some of the Russian VGO to be taken off the market? And I have a follow-up. Thanks. So this is Lane. I'll start on that. I mean, I think we'll probably -- we always look at heavy crude versus fuel oil. I mean one of the things that's happened sort of Russia big buyers have been 100 out of Russia. And obviously, we don't buy that anymore. So we've canvased the world and figured out alternative sort of fuel oil feedstocks and they're plentiful largely based on what Gary has mentioned. I mean, you have a lot of incremental crude going into low complexity and they're struggling making sulfur. So you can see that in the 3.5 weight percent discount to virtually everything else. And so we do believe that's going to continue. I think through this year. So, at Valero, you'll see us buy more heavy crude, we want post coker, and you'll see us buy some more fuel oil and less intermediates. Yes. So, the only thing I would add is for the full year 2022, resid probably didn't have a significantly positive impact on our capture rates just because after the Russian sanctions and those barrels came off the market for really the second and third quarter, it was rebalancing the trade flows. But in the fourth quarter, we certainly saw a significant impact. Got it. Thanks. And my follow-up is on DGD. Given the start-up of DGD 3, I suspect there was a larger distribution to the joint venture partners. So, I was wondering if you're willing to disclose what that distribution was? And now that you're going to likely moving forward to have more access to the cash from DGD in the form of ongoing distributions, does that impact how you think about the payout ratio at all? Thanks. Maybe I'll start on just on the DGD side, it just started up. We haven't even got to the conversation with cash distributions yet. But the expectation is this year, it should be with capital spending coming to a close with the project that there should be more cash spinning off from the joint venture. I don't know, Jason, if you comment-- Yes, that's right. With having DGD 3 finish, we'll have excess cash. And they're always looking at new capital projects and maybe they'll find another way to deploy it otherwise, there should be cash coming out. And we do include that in our calculus when we're looking at payout ratios, but I guess that's all I had on it. Hey, thanks for taking my question. Good morning everyone. Do you have any early thoughts on the Q1 2023 refining capture rate? It seems like we might want to be just a little conservative here. I think you're refining guidance implies like 86% to 89% utilization. So, probably a heavier turnaround period. And then some other factors like butane blending and octane spreads still good, but looks like they're coming down from Q4 levels. So, I guess, directionally, does that make sense that we want to be more conservative on capture in Q1 and anything else we should consider there? Yes, I don't know that you need to be more conservative on capture rates. Obviously, we have seasonal maintenance. We'd have to look at the material balance and figure out how that actually impacts the sort of the dollars per barrel capture rates. So, I wouldn't jump to conclusion of changes, but appreciably from Q4 to Q1, both quarters, you're blending butane both quarters, you have fairly wide sour discounts. So, I don't -- we'll just have to see how that plays out. But obviously, we have some maintenance occurring, our turnaround were occurring in Q1 and that's normal for us. That's -- when we do turn around, this is a heavy quarter for us versus the rest of the year. Got it. And then for DGD, how should we think about the feedstock mix going forward? Your old guidance was one-third fat, one-third corn oil, one-third uco [ph], but you started up DGD 3 and your partners acquired production. So, it seems like we might want to inch up maybe a little bit on the fat compared to that one-third guidance, maybe inch down on the uco, is that fair? And do you have anything more specific on that? Well, I guess, we don't normally get into that level of detail on feeds. What I would say is the whole DGD platform is big for waste oils. And so it's always going to favor the and tallows and inedible corn oil over other feeds from a CI standpoint. So how each of those individual feedstocks play is always â that's very dynamic. And the thing I'd say is what we do see, maybe just to add some color, is we are running a lot more of international feedstocks, both coming from Darling as well as just more broadly in the world. So â and those are waste oils. We ran some veg oil in the fourth quarter because as we spoke earlier, the prices of it became attractive. But going forward, I think it's always going to be some mix of those three waste oils as the most attractive feeds. Thank you. We're showing no additional questions in queue at this time. I'd like to turn the floor back over to Mr. Bhullar for closing comments. Thanks, Donna. I appreciate everyone joining us today. Obviously, if you have any additional questions, please feel free to reach out to the IR team. Thanks, everyone, and have a great week. Ladies and gentlemen, thank you for your participation. This does conclude today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.
EarningCall_937	Welcome to the Five Star Bancorp Fourth Quarter and Year End Earnings Webcast. Please note, this is a closed conference call and you are encouraged to listen via the webcast. After todayâs presentation, there will be an opportunity for those provided with a dial-in numbers to ask question. [Operator Instructions] Before we get started, let me remind you that todayâs meeting will include some forward-looking statements within the meaning of applicable securities laws. These forward-looking statements relate to among other things, current plans, expectations, events including the continuing impact of the COVID-19 pandemic and industry trends that may affect the companyâs future operating results and financial position. Such statements involve risks and uncertainties and future activities and results may differ materially from these expectations. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from the companyâs forward-looking statements, please see the companyâs annual report on Form 10-K for the year ended December 31, 2021, and in particular the information set forth in Item 1A Risk Factors therein. Please refer to Slide 2 of the presentation, which includes disclaimers regarding forward-looking statements, industry data and non-GAAP financial information included in this presentation, as well as reconciliations to non-GAAP financial measures to the most directly comparable GAAP figures, which is included in the appendix to the presentation. Please note this event is being recorded. I would now like to turn the presentation over to James Beckwith, Five Star Bancorp President and CEO. Please go ahead sir. Thank you for joining us to review Five Star Bancorpâs financial results for the fourth quarter and the year ended December 31, 2022. Joining me today is Heather Luck, Senior Vice President and Chief Financial Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy of the release, please visit our website at fivestarbank.com and click on the Investor Relations tab. In the company overview section, we have provided a brief overview of our geographic footprint and our executive management team. The fourth quarter of 2022 exhibited continued execution of our growth strategy, as evidenced by our earnings, expense management and balance sheet trends during the quarter. Additionally loans, deposits and total assets have consistently grown since the prior periods. Our pipeline continues to remain strong at the end of 2022 within the verticals we have historically operated in, as presented in the loan portfolio diversification slide. Loans held for investment increased during the quarter by $208.3 million or 8.07% from the prior quarter and increased by $856.9 million or 44.29% year-over-year, primarily within the commercial real estate concentration of the loan portfolio. Loan originations during the quarter were approximately $295.3 million and pay offs were $86.8 million. During 2022 loan originations were approximately $1.4 billion and pay offs were $513.9 million. Asset quality continues to remain strong with non-performing loans representing only 0.1% of the portfolio, slightly decreasing from the last several quarters. As of December 31, 2022, the allowance for loan losses totaled $28.4 million. We recorded a $1.3 million provision for loan losses during the fourth quarter, primarily related to loan growth for a total provision for loan losses of $6.7 million for the year. The ratio of the allowance for loan losses to total loans held for investment was 1.02% at year end. Loans designated as substandard totaled approximately $0.4 million at the end of 2022 representing a decrease in substandard loans of approximately 26,000 from the previous quarter and a decrease of approximately $10.2 million from the previous year end. Now that we have discussed the loan portfolio, I will hand it over to Heather to discuss deposits capital in the results of operations. Heather? Thank you, James. And hello everyone. During the fourth quarter deposits increased by $167.7 million or 6.41% as compared to the previous quarter. During 2022 deposits increased by $496.1 million or 21.7% since the end of the prior year, of which $69.1 million of the growth related to non-interest bearing deposits. Non-interest bearing deposits as a percent of total deposits at the end of the fourth quarter decreased to 34.9% from 39% at the end of the previous quarter and 39.5% at the end of the previous year. We've had strong deposit growth over the last several quarters with deposit balances increasing when compared to the prior quarter and year. Non-interest bearing deposits decreased by $49.4 million, while interest bearing deposits increased by $217.1 million quarter-over-quarter. Profit total deposits was 95 basis points during the fourth quarter and 43 basis points during 2022 overall. We continue to be well capitalized with all capital ratios well above regulatory thresholds for the quarter and the year. As disclosed in our prior quarter call, we redeemed $28.8 million of previously existing subordinated notes on December 15, 2022 with the proceeds received from our private placement of $75 million in aggregate principal amount of fixed to floating rate subordinate notes due on September 1, 2022, completed on August 17 2022. Net income for the quarter was $13.3 million. Return on average assets was 1.7% and return on average equity was 21.5%. Net income for the year was $44.8 million. Return on average assets was 1.57% and return on average equity was 18.8%. New loan originations drove increases in the daily average balance of loans period-over-period. Average loan yield for the quarter was 5.12% representing an increase of 37 basis points over the prior quarter. Average loan yield for 2022 was 4.75%, representing a decrease of 7 basis points over 2021. As a result of these factors, our net interest margin was 3.83% for the quarter, while net interest margin for the prior quarter was 3.86%. Our net interest margin was 3.75% for the year while net interest margin for the prior year was 3.64%. The change in the yield curve as a result of interest rate hikes that occurred during the year had a negative impact on the company's accumulated other comprehensive income. The negative income impact on the company's accumulated other comprehensive income improved slightly during the quarter ended December 31, 2022 in the amount of $3.7 million, primarily in our mortgage, mortgage backed and municipal securities portfolios, resulting in lower unrealized losses in each of these portfolios of $1.5 million and $2.1 million respectively. The negative impact from the decline in tangible book value per share, which is a non-GAAP financial measures discussed in our press release. This decline was offset by increases to tangible book value per share due to an increase in equity as a result of net income earned in the quarter for a net increase in tangible book value per share of $0.79. Non-interest income increased to $1.6 million in the fourth quarter from $1.4 million in the previous quarter, due primarily to $100,000 increase in gain on sales loans related to higher volumes of loans sold and $100,000 increase in other income related to a gain on distribution received on an investment in a venture backed funds during the quarter. Non-interest income decreased to $7.2 million in 2022 from $7.3 million in 2021, due primarily to increases in loan related fees earned of $0.9 million, and other income of $0.4 million from gains recorded on investments in venture backed funds during the year. The remaining increases related to FHLB dividends and earnings on BOLI during the year. These increases were partially offset by a decrease in gain on sales loans of $1.1 million related to lower yields on loan sales during the year and $8.7 million reduction in the net gain on sale of securities year-over-year due to minimal sales of securities during 2022 compared to 2021. Non-interest expense remained relatively flat quarter-over-quarter with decreased professional services of $0.2 million related to legal expenses incurred for corporate organizational matters completed in Q3, 2022 offset by increases and other operating expenses of $0.5 million primarily related to $300,000 of expenses recognized on an amortized subordinated debt issuance costs upon the redemption of the subordinated notes in December 2022 combined with increased expenses incurred related to travel and fees paid for attendance at professional events, conferences, and other business related events during Q4 of 2022. Non-interest expense increased from 2021 to 2022 relating to increased salaries and employee benefits of $3.6 million due to a 9.2% increase in headcount partially offset by $1 million in loan origination costs related to increased production during 2022. Other operating expenses also increased year-over-year related to the previously discussed expenses recognized and subordinated debt redemption and other employee travel and conference related expenses. These increases were partially offset by a $1.3 million reduction in professional services due to increased audit, consulting and legal costs incurred to support corporate organizational matters leading up to our IPO in 2021, which did not recur in 2022. Now that we've discussed the overall results for operations, I will now hand it back to James to provide some closing remarks. Thank you, Heather. I want to thank everyone for joining us as we discussed the fourth quarter results. The strength of the bank's financial results is emblematic of a reputation built on trust, speed to serve, and certainty of execution, which support our client success. Our financial results are also the result of a truly differentiated customer experience which powers the demand for Five Star Bank relationship based services. We attribute sustained success to our prudent business model and treating customers with an empathetic spirit, understanding and care. We are very proud to have earned the trust of those we serve, including our shareholders. Looking to 2023 we will be guided by a focus on shareholder value as we monitor market conditions. We are confident in the company's resilience in any interest rate environment and we'll continue to execute on our growth strategy and discipline to business practices, which we believe will benefit our customers, employees, community and shareholders. We appreciate your time today. This concludes today's presentation. Now Heather and I will be happy to take any questions you might have. Thank you. We will now begin the question and answer session. [Operator Instructions] Today's first question comes from Gary Tenner with D.A. Davidson. Please go ahead. Hi there. Good morning. This Clark Wright on for Gary Tenner. Last quarter you've mentioned that you think you can grow deposits 2% to 4% higher than loan growth in 2023. Do you continue to believe that that's going to be the case? Yes, we do. Our expectations about loan growth in 2023 will be around 10%. We expect we'll be able to grow our deposits by 12% which is about 2% higher. So we're confident that we'll be able to do that at this point. And we look forward to that opportunity. Great. And then in terms of loan growth guide you just gave it would that be primarily from the historic areas that you've seen growth in with manufactured housing? Or are you seeing there in terms of where originations are coming from? No, we don't expect any major shifts. Deal flow so far for the first part of this first quarter is really been centered around the manufacturing housing space. So we expect more of the same. Hey, maybe just to follow up on the last one to start on deposit growth, wanted to get a sense for during the fourth quarter how much of the deposit growth was driven by brokered CDs or brokered money market funding? And then within the 12% deposit growth expectation for 2023, are you assuming any incremental brokered deposits? Or do you anticipate that 12% to be kind of a core deposit growth number? Yes. The fourth quarter, I think you rightfully point out that we funded a lot of our growth through what I would call wholesale opportunities. And so we expect as we move forward into 2023, that we will, our growth will be funded by core deposits. We were hopeful being able to diminish our wholesale positions, if you will, on the depository side, and time will tell, but that's our orientation Andrew. We think that we'll be able to achieve that. Okay. Very good. And maybe just on that point, any realignment of kind of lender incentives that have occurred recently, or anything changed in terms of how you're going about gathering deposits that would kind of, it seems like you certainly have confidence in this deposit growth guidance. Just wanted to get a sense of maybe some of the drivers there that lead you to that confidence. Well, I'm glad you bring that up. Yes, we have had a realignment of how our incentive programs for our business development team. Much more deposit oriented, the minimum standards that are deposit oriented and that half of their production has to be deposits. Some of our special incentives are all deposit oriented. And so this is what we pivoted. We started to pivot with respect to our orientation on business development in the fourth quarter. And we're really coming on strong right now with respect to our expectations and also our biz dev expectations. We've had a successful January so far in terms of new account and new relationship, onboarding. Probably going to be our biggest month ever, in terms of new relationship onboarding. So we're excited about that. So that's our orientation. Yes, we have changed how we pay people and it's going to be much more oriented to deposit generation. Very good. Okay. I appreciate the color there James and itâs helpful. If I can move over to the margin, just briefly. Heather, it looks like the FHLB were added pretty late in the quarter. Do you have what the weighted average rate was on the FHLB borrowings â the rate -- Yes. Those were slightly under 4% for the FHLB borrowings and then our broker or wholesale funding for about 3.88. We do our FHLB borrowings are very short term in nature. So we only have a week to maybe two weeks at the most outstanding during any period. So those should have a minimal impact on the margin. Okay. Understood. And then do you have the spot deposit costs either interest bearing or total at the end of the year? No problem we can. I'll ask one more really quick for James, on the CD one, just a little bit less than 9% this quarter. Just wanted to get your thoughts on kind of current capital position. Comfortability around the current capital position and kind of outlook moving into 2023 and where capital targets might be? Sure. Yes, we're comfortable with our capital position right now. We intend to grow our tangible book value per share in 2023. But we always want to prepare ourselves and be in a good position to do with respect to raising any additional capital. So I think that we're oriented that way. We want to be good stewards of our capital position and continue to be mindful of where we are. As we mentioned our expected growth in 2023 is going to be a lot different from what we've experienced in the past five years. And so we expect we'll be able to build our capital positions in 2023 through internally generated earnings. I wanted to sort of focus on the growth, the loan growth in the quarter. It came better than what I was expecting and maybe a little bit better than maybe your expectations heading into the quarter. Do you think that growth just sort of represents a pull through in the year? Or in the year ahead? Or was there just new customers that were unexpected that drove the growth or any color you can give on the fourth quarter growth? Sure, we didn't really get a sense that anything was kind of being pulled from 2023 in terms of the originations Woody just that it was new business that happened within the quarter within the verticals in which we operate in. And I think it was just more of the same week. As I mentioned, previously, we have seen a, we expect a decline in originations in loan growths in 2023 and certainly where we are with respect to our pipeline, as we entered into 2023 is representative of that notion. So I wouldn't say any pull through. It's just business that was there. And we did it because it was good business. You have a really strong growth, good to see. Maybe moving over to the NIM. I know, it'll get a little bit of a pickup from that [sub] redemption. But sort of excluding the impact from there. I mean, do you think the NIM is under pressure just from the intense deposit competition or any thoughts on your margin for the expectations in 2023? Yes. I think that every depository institution is on under some degree of pressure. We're not immune to that. What we've seen is we've had some of our liquidity positions by some of our long term customers go out of the bank as they invested in treasury securities. At this point we're unable to match what they can get on those short term treasuries. We do our best. But we're mindful of the fact that it's difficult for us to match those rates. Having said that, what we're really interested is banking their operating accounts. These are businesses that have been around for a long time. We expect that liquidity potentially if rates do decline to come back on balance sheet. But it's a very competitive environment right now. And it's not necessarily with other institutions, it's really with the big brokerage houses that can create positions or ladders, if you will, treasury securities ladders for our clients. We're in great standing with them. And we certainly understand what they're trying to accomplish, but we think it's a near term thing, hopefully. And so we definitely recognize the environment in which we're in. but having said that, we're also excited about what we're being able to do on the business development side in terms of bringing in core deposits. Right. Okay. And then, last for me, I just wanted to touch on credit. I mean all the underlying metrics look super clean. Just anecdotally, are you seeing anything in the market that gives you concern at this time? Or is it really just a waiting game? And then just as a follow up to that I know, you're adopting CECL in the first quarter. Do you expect that they have a material impact to reserve levels with implementation? Well, let's take the first part of that question first. We're very happy with where we are with respect to our portfolio and how we manage it. Our loan portfolio is different than others. We're in some very well, I should say safer asset classes than other institutions that have a commercial real estate concentration. And you can see that when you add up mobile home communities and recreational vehicle parks, if you will, that represents about 40% of our CRE portfolio. We like that space. And when you add in storage, which we also think is very safe, we like our position. Our office book, if you will, which I think is the most risky part of any CRE portfolio right now, I think is around 6%. So I think we're different than the I'm going to say the average bank in California with respect to the composition of our CRE portfolio. And we know that those asset classes perform better in downturns. Historical data would suggest that they perform a lot better than other CRE classes. Now with respect to CECL, Heather you want to give some color on that? Sure. Yes. So we have successfully completed a year of parallel runs. We're currently going through with our auditors the final review of our day one adjustment, but we are anticipating a day one adjustment between the reserve and then the reserve for unfunded all in ranging anywhere between $6 million to $7 million for an increase for our day one adjustment, which we'll have finalized and ready for Q1. Hey, thanks for the follow up. Back on the margin. Just a quick one here. I wanted to get a sense for what new production kind of on a weighted average basis is coming on the portfolio just as we think about. I know there's maybe some pressure on the funding cost side and competition there just trying to think about what the incremental margin looks like. Yes. So for Q4 our overall kind of weighted average rate for new loans [imported] was about 6.54%, definitely thought to get from the rising interest rate environment. For Q1 though, we're looking at an overall NIM ranging anywhere from like 3.75 to 3.85. Yes. Our standard pricing is 300 over the five year for our typical CRE portfolio loan and as the five year jumps around and what not, you could have as high as 7, 7.15 to 6.5 right now or 6 almost 6 in three quarters. So that's what we expect in terms of production, where that will land in 2023. And certainly saw that in the fourth quarter, which resulted in really moving our loan yields up quarter-over-quarter. Yes. Okay. Now last one for me. Just for Heather on the expense base, just working in 2023. can you just remind us the normal seasonality that we might, I guess [cadence] of the expense base throughout the year and then any estimate on kind of clean run rate starting out the year and Q1 â23? Sure. I really do think I know, you all stripped out at the $300,000 of subject costs that we ran through Q4. But I really do feel like Q4 is a good proxy for our expenses going forward. As we look for the year, you could estimate about 1.33 as far as non-interest expense to assets. But Q4 is a pretty good proxy to those subject costs. Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks. Well, thank you, and appreciate everybody being on the call. Five Star Bank continues to execute on strategic initiatives which include growing our verticals in geographies while attracting and retaining talent to our people, our technology, our operating efficiencies, conservative underwriting practices and expense management have also contributed to the success we share with our employees and shareholders. At Five Star Bancorp we seize opportunities, embrace challenges and value the intrinsic reward of serving others. We look forward to speaking with you again in April to discuss our earnings for the first quarter of 2023. Have a great day and thank you for listening. This conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines and have a wonderful day.
EarningCall_938	Good morning, ladies and gentlemen, and welcome to the Amalgamated Financial Corporation Fourth Quarter 2022 Earnings Conference Call. During today's presentation, all parties will be on a listen only mode. Following the presentation, the conference will be open for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. With me today is Priscilla Sims Brown, President and Chief Executive Officer. As a reminder, a telephonic replay of this call will be available on the Investors section of our website for an extended period of time. Additionally, a slide deck to complement today's discussion is also available on the Investors section of our website. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We caution investors that actual results may differ from the expectations indicated or implied by any such forward-looking statements or information. Investors should refer to slide two of our earnings slide deck as well as our 2021 10-K filed on March 11, 2022, for a list of risk factors that could cause actual results to differ materially from those indicated or implied by such statements. Additionally, during todayâs call we will discuss certain non-GAAP measures which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release, as well as on our website. Thank you, Jason. Good morning, everyone. We appreciate your time and your interest today. This morning, I will provide an update on the progress we have made on our Growth For Good strategic plan and my thoughts on the next leg of our strategy journey. Jason will then provide an in-depth review of our fourth quarter financial results. With 2022 concluded culminating in our third consecutive quarter of record earnings, I feel good about what we've accomplished and confident that we can execute the next leg. Before discussing future plans, I'd like to spend some time on the quarterly and full year results. Starting off, we reported another record quarter of earnings at $0.80 per share, while we reported core earnings of $0.83 per share. For the full year 2022, we grew earnings per share of 56% to $2.61. Also, we delivered 6.1% loan growth as compared to the linked quarter increasing nearly 24% or $785 million to $4.1 billion over the year. And our net interest income was $67 million for the quarter and increased $66 million or 37.6% to $240 million over the year. I have spoken often about our commitment to credit quality and the efforts we have undertaken beginning over 18 months ago to better condition our balance sheet against future credit risk. Over the course of the year, nonaccrual loans decreased to $22 million or 0.5% of total loans and equally as important, credit quality greatly improved as classified or criticized assets declined by $125 million or 54.3% to $106 million. At the beginning of 2022, we set a macro target of a 1% return on average assets. While modest as an industry peer comparison this target represented a 25% increase from our previous year performance. Given our improved profitability and earnings power, the return profile of the bank has markedly improved and our return on average assets expanded 24 basis points to 1.05% by year end 2022. Before leaving our results discussion, I'd like to take a moment now to discuss our fourth quarter deposit metrics. Average deposits decreased by $576 million to $6.7 billion, largely due to the $513 million expected runoff of our political deposits following the congressional elections. The [Indiscernible] during the quarter was at the high end of the estimate that we communicated during our third quarter call as this election cycle was highly competitive, evidenced by the thin margin of both maturities and Congress. We were very pleased that our political deposits grew to approximately $1.3 billion during the year and our political deposit trends are interesting as both our high and our low balance points have grown over previous cycles. With another highly contested presidential election already in its early phase, political deposits have started to build already through January. We expect our political deposits to grow steadily throughout the year by approximately $250 million. Also during the quarter, we had some nice non-political deposit wins and I am encouraged by our deposit pipeline. Although we expect our deposit base, including the political, to be more rate sensitive in 2023 based on a protracted higher rate environment, we believe our deposit gathering franchise and mission aligned thesis will be a differentiated and competitive advantage. Over a year ago, we described the fundamentals of the first leg of our strategy were to accelerate loan growth and improve our profitability, managing our risk exposure prudently and growing our positive impact on society. Underlying these fundamentals were a set of financial targets that focus on us being the most improved bank in the country for financial performance. The combination of credit profile improvement, lending execution, deposit retention strategies and our core earnings strength positions us well for a changing economic environment and success as we are on the precipice of our second century as a U.S. banking institution. As we celebrate our full first 100 years, I cannot be more inspired by the team we have in place to propel this great bank into its next centennial. The expansion of our lending platform has been a priority for our management team. The lending and credit risk management teams we have built over the last six quarters should continue to deliver results in the segments of the market where we see opportunity to grow, including real estate, sustainability and not for profit. In particular, we believe sustainable lending holds significant opportunity where it is estimated that $3 trillion will need to be invested in the United States to achieve net zero emissions by 2050. This is a significant market opportunity, which we believe will be less impacted by economic or cyclical factors. Our bankers are experts in sustainability and underwriting commercial loans across the sector, such as storage for solar energy, geothermal projects and biodiesel projects. We also anticipate that the fee increases that we negotiated with our customers last year in the Trust business will take effect in 2023. I'm confident that the rolling of our Trust business under our Chief Banking Assert will provide the unified customer focus needed to drive better results. Similar to our digital and customer strategy, we see substantial growth across our banking services to our Trust customers and trust in asset management services to our banking customers. As mentioned on previous calls, we will be focused this year on executing our digital transformation. We see a tremendous opportunity to tie our commercial business into a reimagined consumer business and reach through our commercial customers to their members. For instance, if we're doing business with a large non-profit, we want to attract their members and donors who are naturally aligned with Amalgamated. To be successful, we need to offer products and services that are competitive and meet their needs, as well as enhance the customer experience for both our commercial and consumer customers. To date, we have conducted an RFP for a digital plan. And we expect to make a selection during the first quarter. The combination of our efforts in both marketing and digital were reflected in the fourth quarter expense rate and we expect to remain constant on those expenses through 2023. We recognize these investments need to be made as with the case with our lending strategy, we will make discipline choices funded through profitability with a requirement for timely returns. I am excited moving Amalgamated into its next centennial and the next leg of our Growth For Good strategy. Our supportive issues that are consistent with the social responsibility of a bank and importance to our employees, our customers and the majority of Americans will always be core to our mission. I expect continued discussion around positions we have taken and I understand this and encourage a sensible dialogue to build a better understanding of views. Ultimately, I believe our mission, paired with our financial performance this year, shows the resilience of our strategy. Thank you, Priscilla. Net income for the fourth quarter of 2022 was a record $24.8 million or $0.80 per diluted share compared to $22.9 million or $0.74 per diluted share for the third quarter of 2022. The $1.9 million increase for the fourth quarter of 2022 was primarily a result of a $0.7 million decrease in non-interest expense, a $0.9 million decrease in provision for loan losses and a $1.3 million decrease in income tax expense related to an elective change in taxable income recognition offset by a $0.3 million decrease in net interest income and a $0.8 million decrease in non-interest income. Beginning on slide five, exclusions related to solar tax equity investments were $1.7 million in accelerated depreciation for the fourth quarter of 2022. Because of the income statement volatility associated with the accounting for these investments, we believe metrics excluding the timing impact of tax credits or accelerated depreciation is a helpful way to evaluate our current and historical performance. Core net income, excluding the impact of solar tax equity investments, a non GAAP measure, for the fourth quarter of 2022 was $27.2 million or $0.87 per diluted share compared to $24.8 million or $0.80 dollars diluted share for the third quarter of 2022. Turning to slide seven, deposits at December 31, 2022 were $6.6 billion, a decrease of $565.3 million from the third quarter of 2022. The decline in spot balances was primarily due to the expected decline in political deposits, given the conclusion of the congressional elections in the fourth quarter of 2022. Through January 20, 2023, deposits have increased by approximately $225 million to $6.8 billion, including approximately $135 million of brokered time deposits strategically issued to reduce fundings costs. Non-interest bearing deposits represent 53% of average deposits and 51% of ending deposits for the quarter ended December 31, 2022, contributing to an average cost of deposits of 34 basis points in the fourth quarter of 2022, a 20 basis point increase from the previous quarter due to our repricing actions in response to the more competitive environment for deposits in our markets. Deposits held by politically active customers were $643.6 million as of December 31, 2022, a decrease of $513.7 million on a linked quarter basis. As noted on our previous call, political deposit trends are difficult to predict, but we are at the natural low point of our balances as the election cycle concluded in November. We expect political deposits to begin rebuilding in the first quarter of 2023 and we have experienced $5.2 million of political deposit inflows through January 20, 2023. Turning to slide 12. Total loans receivable, net of allowance and deferred fees and costs at December 31, 2022 were $4.1 billion, an increase of $231.8 million or 6.1% compared to September 30, 2022. The increase in loans is primarily driven by $120.6 million increase in commercial and industrial loans and $82.7 million increase in multifamily loans and a $39.8 million increase in residential loans, offset by a $3.8 million decrease in consumer and other loans, a $1.3 million decrease in construction and land development loans and a $2.9 million decrease in commercial real estate loans as we continue to reduce that asset class exposure. During the quarter, we had $12.7 million of payoffs of criticized or classified loans, as the bank's credit quality continued to improve. The yield on our total loans was 4.24% compared to 4.11% in the third quarter of 2022. On slide 13, our net interest margin was 3.56% for the fourth quarter of 2022, an increase of 6 basis points from 3.5% in the third quarter of 2022. The margin increase was driven by continued loan growth which substantially improved our asset yield mix, offset by increased rates and average balances of interest bearing liabilities, particularly in short term borrowings. This increase in funding costs was expected as we communicated during our third quarter call, that borrowings would elevate in the fourth quarter in relation to the decline in political deposits. Prepayment penalties earned and loan income contributed 1 basis points to our net interest margin in the fourth quarter of 2022 compared to 4 basis points in the third quarter of 2022. Core non-interest income, excluding the impact of solar tax equity investments, a non GAAP measure, was $7.3 million for the fourth quarter of 2022 compared to $7.5 million for the third quarter of 2022. The decrease of $0.2 million was primarily related to slightly lower Trust Department fees, a $0.2 million loss on the disposition of an OREO property, and a $0.6 million loss on the sale of nonperforming held for sale loans, mostly offset by increased business banking fees and a onetime beneficiary income on bank-owned life insurance. Core noninterest expense, a non GAAP measure, for the fourth quarter of 2022 was $35.6 million a decrease of $0.7 million from the third quarter of 2022. This was primarily driven by a $1.5 million decrease in professional fees, offset by a $0.5 million increase in advertising and promotion expense and increased other expenses related to recruiting services. Looking forward, we expect our noninterest expense to modestly rise as we embark on the next leg of our Growth For Good strategy as Priscilla discussed earlier in the call. Moving to slide 17, nonperforming assets totaled $34.8 million or 0.44% of period end total assets at December 31, 2022, a decrease of $19.5 million compared with $54.3 million or 0.7% on a linked quarter basis. The decrease in nonperforming assets was primarily driven by the sale of $9.6 million of restructured residential loans held for sale and $12.7 million of payoffs related criticized and classified loans. Our criticized assets declined $7.4 million or 7% to $105.6 million on a linked quarter basis. The allowance for loan losses increased $2.9 million to $45 million at December 31, 2022, from $42.1 million at September 30, 2022, primarily due to higher loan balances. At December 31, 2022, we had $27.8 million of impaired loans, for which there was a specific allowance of $5.7 million compared to $38.2 million of impaired loans, for which a specific allowance of $5.2 million was made. The ratio of allowance to total loans was 1.1% at December 31, 2022and 1.09% at September 30, 2022. The ratio of allowance to nonaccrual loans was 207% at December 31, 2022. Provision for loan losses totaled $4.4 million for the fourth quarter of 2022 compared to $5.4 million for the third quarter of 2022. The decrease in provision expense in the fourth quarter of 2022 was primarily related $1.6 million in charge offs related to nonperforming loans that were transferred to held for sale in the previous quarter and subsequently sold in the current quarter. Adjusted, our provision for loan losses in the current quarter increased by $0.6 million related to higher loan balances, increases in certain specific reserves and elevated charge offs in our consumer solar loans. Moving along to slide 18, our core return on average equity and core return on average tangible common equity excluding the impact of solar tax equity were 21.8% and 22.6%, respectively for the fourth quarter of 2022. We did not repurchase shares of our common stock during the fourth quarter and have $28 million of remaining capacity under our $40 million share repurchase program. Additionally, we have declared a quarterly dividend of $0.10 per share. Our capital position remains solid to support our ongoing growth initiatives and improved to 7.52% during the quarter. Slide 20 shows a reconciliation of the change in tangible common equity and related tangible book value. As expected, during the fourth quarter, the Federal Reserve Board continued its cycle of interest rate increases with a 75 basis point and 50 basis point increase at each of the November and December meetings, respectively. The Fed has also messaged further rate increases to occur in the first half of 2023. Despite the consistent rising interest rate environment through the fourth quarter, the Fed stepped down the rate increase in December, which reduced the market volatility in the fourth quarter and resulted in very little change to our tax affected mark to market adjustment to the fair value of our securities portfolio from the third quarter. As such, as of December 31, 2022, tangible book value per share, a non GAAP measure, was $16.05 compared to $15.37 as of September 30, 2022. Increasing almost entirely related to quarterly earnings. We are also pleased with our tangible common equity to tangible assets of 6.30% for the quarter in comparison to 6% from the previous quarter reflecting our conservative balance sheet management and capital position against our general target of 6%. As a reminder, fluctuations from mark to market changes have no impact on our Tier 1 capital position. Following the trajectory of the third quarter, our loan growth exceeded our expectations in the fourth quarter as demand for our mission aligned real estate lending and our sustainability lending continues to increase based on fiscal spending projects and increased funding in our focus segment, paired with the investments we made in talent where needed. That said, we anticipate net loan growth to moderate in 2023 to approximately 2% to 3% sequential growth, led mainly by our commercial portfolios. As the industry pivots to an overall conservative outlook relative to the uncertainty that exists for 2023, we've implemented actions relative expense from balance sheet management, which correlate to closely managing our solid current liquidity position, access to capital and borrowing capacity to avoid realized losses. Turning to slide 21, considering the economic uncertainty and the forward curve suggesting further rate increases in the first half of 2023, we are initiating full year guidance for 2023, which includes, core pretax pre provision earnings ex solar of $142 million to $148 million and net interest income of $256 million to $263 million. As the Fed continues to raise interest rates, generally speaking, the benefit to our net interest income from asset sensitivity reduces. Going forward, we estimate an approximate $0.5 million increase in annual net interest income from a parallel 25 basis point increase in short term rates and a decline of approximately $0.7 million if only short term rates increased by 25 basis points. We're taking a cautious view towards the economy given the risk of recession as the Federal Reserve has aggressively raised rates over the last year. We're focused on optimizing our loan portfolio by continuing to replace older, lower yielding loans with higher yielding loans and expect modest margin expansion and net interest income growth as we improve our loan yields, while also reducing high cost borrowings over the course of the year. That said, we anticipate net interest income to decline to approximately $63 million to $65 million in the first quarter of 2023 as we recognize the impact of the borrowings used to offset our political deposit outflow. Looking forward, we know we will need to be more competitive to maintain and attract deposits, which will continue to drive upward pressure on our funding costs. That said, we will still be repaying high cost borrowings at lower cost deposits throughout the year and we believe this is a significant opportunity to drive earnings. As Priscilla noted, we are pleased with the bank's third consecutive quarter of record results, which demonstrates the resilience of our sustainability focused lending segment and strategic initiatives designed to grow the bank while improving our profitability and returns. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Janet Lee with J.P. Morgan. Please proceed with your question. Hi, good morning. I want to start off with your NII guidance of $256 million to $263 million. Are you guys still assuming that 33% interest bearing deposit beta that you guys gave in the third quarter? Hello? We have a 40% beta on any incremental rate rises. So when we think about how we're modeling it out, it's really based on any forward increases to the Fed rate, but we're not taking it as 40% kind of across the entire portfolio on a blended basis, if that makes sense. As you've probably seen in the first 300 basis points of rate rises, our deposit paid was very, very low. And only more recently in the last hikes that happened in November and December, and as we're projecting into January -- I'm sorry, the February meeting and beyond, 40% on those numbers, but we think that -- we think that overall our cost of funds should remain relatively stable when factoring in kind of the previous performance of the deposit base over the first 300 basis points of rate rise. Okay. So just to make sure I understand this correctly. So if we look at it, in terms of the cycle to date, I mean, through the cycle interest bearing deposit betas, is it going to be lower than 40%? Is that what you said? I'm just saying, I think on the incremental increases that are coming from the Fed in the current year, we're going to look at 40% on the interest bearing deposits. That's kind of our model. But I'm not taking that as a number across the entire portfolio as a 40 basis point -- I'm sorry, as a 40% beta. What I'm trying to say is, I think there is an implied benefit that we've received in the first 300 basis points of rate rise. And I think our overall blended cost of funds should remain stable from where we've been right now other than the increases that we've seen in the November, December Fed hikes and then what we're projecting going forward. So it's really kind of a prospective 40% beta on interest bearing and nothing on any retrospective rate hikes. Okay. All right. Got it. And I think there's a lot of moving pieces with, like, the debt pay down. So in terms of the trajectory of NIM directionally through 2023, so it's fair to assume a step down in margin from the 4Q 2022 level, starting in 1Q 2023. And then are you assuming a stabilized NIM after first quarter? How should we think about the trajectory of NIM? I think that's exactly the way to think about it and the way we're thinking about it. There should be a little bit of margin compression in Q1 as the full effect of the deposit repricings we did at the -- near the end of the fourth quarter and also the effect of the borrowings that we've had take hold in our margin calculation in Q1, we do expect that to stabilize. And then as we look out throughout the remainder of the year, our ability to really drive deposits through the deposit gathering franchise could favorably impact the margin if we're able to pay down more borrowings than we're modeling right now. Okay. That's helpful. And just on the deposit growth, you're expecting around 3% balance sheet growth for 2023. Can you just give us more color around how you're seeing your deposit growth, I mean, deposit trends being in 2023. I know there's a lot of seasonality to your deposit trends on a period end basis. But if you look at it on an average deposit balance, like, how should we think about that growth prospect in 2023 versus full year 2022? Yes. I think we're trying to take a very conservative view on deposit growth throughout the year and be realistic relative to the deposit market and the competitive environment that we're in as the liquidity has continued to tighten in the Fed. We're expecting a protracted higher rate environment. So a lot of what we're showing in our projections is assuming a conservative approach. It's hard to think about it, probably generally speaking, we see a 5% opportunity to grow deposits on an average basis throughout the year. And I would look at that as sort of accelerating as we get into Q2, Q3 and Q4, particularly as we would expect the political deposits to start to build at a more rapid pace leading up to the 2024 elections. So that's generally how we're thinking about it right now, Janet. Okay. I want to shift to credit. It's good to see your NPLs going down, looking at your net charge offs in the fourth quarter, it looks like all of your charge offs were coming from solar loans and if I'm doing some rough math here, I think I'm getting about 1.5% loss ratio on that consumer solar loan balance, which is a little bit up from that 75 basis point to 100 basis point range you mentioned in the previous call. How comfortable are you with that credit risk on this portfolio? I know you guys should be working on the CECL adoption started in January. So I assume you guys have done -- there's some expectation that you guys have with that portfolio. And do you expect the continued sort of pick up in loss rates on this segment? Can you just help us think about that? Yes, absolutely, too. The consumer solar charge offs have ticked up a bit from where we were originally thinking they were going to be. I think as rates have accelerated and remain in a little bit of a higher place. We've seen a little bit more stress in a little bit of a faster fashion in that portfolio than we were originally anticipating. That said, I think we're still just under some of the thresholds that we have with loss protections that we've got built into some of our arrangements right now. So most of the charge offs that you're seeing are coming in before some of those protections kick in. So I feel like there's a little bit of a governor on that charge off ratio kind of moving forward. But it is something that we think is going to be a little bit higher than 1%, whether it gets to 150 on an annualized basis is a little tough for us project. But right now, I think there's really two things in the solar portfolio. Number one, we're really not adding any more solar in the consumer space throughout the first -- at least the first half of this year, maybe some minor things. But more importantly, I think what we've seen now is an opportunity for us to really tighten up on the credit box that we're offering -- I'm sorry, that we're requiring for additional purchases that we're going to be doing. With regard to things that are already on the books, we're paying very, very, very close attention to the individual loans that are in fact going delinquent. And we're working with the providers right now to make sure that we're getting all the benefit of what they offer in terms of collection services and other things that would potentially put a governor on this consumer solar charge offs. To your point on CECL, obviously, it's a significant component of CECL. We've factored that into what we've been doing to model right now. In terms of how it would lay out, we're not quite ready to talk about that since we have embedded our entire control structure through our audit team yet. But what we do see is not a significant impact on capital when we do the adoption and the build through retained earnings, but probably we'll have an overall increase in our coverage ratio, ALLL, that would obviously have a component of it related to solar. I wanted to ask about loan growth. I know you guys did a lot of hiring at the end of 2021, early 2022. I'm just curious as those teams or if those teams and people that you've hired are now kind of fully up to speed or if there is additional kind of low hanging fruit to expand the loan portfolio early in the New Year? Yes, Alex, you're right. We've talked about this on prior earnings calls too, which is that our -- we had a robust pipeline due to the banker growth and hiring initiatives that took place back in first and second quarter of 2022. And that materialized through both the third and fourth quarter as those banker relationships developed into securing loan originations at a pace ahead of plan. In the quarter, the biggest drivers were our commercial portfolio with our C&I book at $120.6 million, primarily a function of our unique climate finance products. And we had an increase of $82.5 million or so in multifamily. And the retail resi book was also supportive at nearly $40 million. So that was the quarter. We think that you'll still continue to see nice opportunities coming our way and a very nice pipeline on both the multifamily book and also in the areas of sustainability. When you've got a net zero sector that's looking like it's valued at around $3 trillion, we've got bankers now, both existing and some of those that we brought on with unique skills and expertise in these areas. And so we're really seeing the opportunity to bring on additional loans, but also we have the opportunity to be quite choosy in this environment. And bring on the kind of quality that we want to see in the book. Great. And then when you think about the sustainability loan, C&I loan since I think a lot of us probably aren't familiar exactly on what that might look like. What sort of spreads or pricing or indexes would those be repricing off of and kind of what are new loan yields today that we could maybe help to think about where the overall loan yield could be going over the next couple of quarters? Yes. So I think the -- let's maybe focus a little bit more on the yields. I think they're coming in right now, call it, 5.75% to 6%. They move around a little bit, depends on sort of the underwriting criteria, Alex. But I think in general, the spreads are fairly wide for us in terms of being able to have profitability and good return on those. I'd have to get back to you on some specifics. It might be easier to -- because I need to break it down a little bit between the types of sustainability deals that we get into. It might be a little bit easier to share some detail that way. But right now, I'd say generally speaking, they're coming on in the upper 5% to 6% range. Okay. And then just kind of looking forward a little bit, you guys are pretty asset sensitive. You really enjoyed the lift up in rates. And now, seeing that the forward curve now has a number of rate cuts baked into them, I'm just curious what kind of steps you're taking to try to shield net interest income for the possibility of rates going down at some point towards the end of this year or early next year? Yes, that's a great question. I mean, I think we've been kind of doing that throughout the year. We've been -- in certain cases, we've been taking security sales losses and reposition those proceeds into fixed rates. So trying to blend down the overall portion of our portfolio, particularly in securities, for example, to more of a 50:50 mix between fixed and floating. If you recall, we were much higher on the floating side as we entered the year and then slowly we've been mixing that down to sort of put in the built in hedges to interest rate declines. But I think the more important thing has been kind of the overall migration from the -- really from the securities portfolio and from cash into the lending portfolio. So the more we grow the lending book and -- we're up almost $800 million this year in net loans. The more we grow the lending book, roughly 75% to 80% of that book is fixed rate. So we're really doing a lot to sort of protect ourselves from that down interest rate sense. And I would think if I would characterize ourselves, right now we're probably pretty close to neutral in terms of sensitivity to an [Indiscernible] at this point. Hey, good morning, Priscilla. Good morning, Jason. So I was hoping to dig a little bit into the commentary around deposit pricing and being a little bit more rate sensitive for next year. Could you give us a breakdown of how much of the political deposit business is noninterest bearing and what might be subject to some sort of rate sensitivity next year? And how much kind of longer term you expect to kind of remain in noninterest bearing? Yes. Thanks, Chris. Normally we've been operating at about a two-thirds DDA or noninterest bearing and one-third interest bearing. That number has been sort of moving over time in the past year towards almost the exact opposite direction. Right now, I would say we're probably at about 40% DDA and 60% interest bearing at this point in time. And the way we sort of think about it is of the remaining $650 million that we have right now, roughly $150 million is how we model that as being potentially subject to shifting from here from -- I'm sorry, from interest bearing to -- sorry, from a noninterest bearing to an interest bearing position. So that's sort of the risk that we have baked into our DDA mix right now for cost of fund adjustments. But in general, what we think will happen this year is because it's sort of a building year for political deposits. We think more of those will come in, require some form of compensation. We don't think it's going to be top of the market in terms of pricing. I think there's still very much mission to line value proposition that has benefit for the bank in terms of when these deposits come on even if they are interest bearing. But over the course of this year, it's likely that there'll be some form of compensation that will be required for these deposits because they'll be in a building phase. As we move into next year, 2024 and we become much more a transactional style year heading up to the election, I think we would naturally expect there to be less requirement for pricing on those deposits and just more ability for it to be placed and then execute it in terms of the way campaigns typically want their accounts serviced by a bank. Got it. So it sounds like the modest near term pressure given the high velocity of those deposits in general that they're still pretty insulated from rates longer term? You might be in -- In other words, we think that this unusual rate environment is going to lead to a greater focus on rates than we would have had in the first 300 basis points, but we don't expect to have to go to market. And for the -- you mentioned some success recently and some pipeline success potentially from kind of the rest of the sustainability or SRO broader clients outside of political deposits for deposit gathering. Maybe just some of the categories or types of clients that you guys are having success there outside of political deposits? Yes. So I think one of the interesting things, we gave a little bit of an update on deposits through January 20, and we're up $225 million or so and granted $135 million as our issued broker CDs. But that leaves a $90 million delta, which is all new customer attraction. And it's been things that we're talking towards that end of Q4 update where we thought the pipeline looked good and we still think it does even after these wins. They've been kind of spread across some of our -- some of them are union based customers, some of them were really relationship driven accounts based on the real estate lending we've been doing prior. And then there's been others that have been very mission aligned in the philanthropic [Multiple Speakers] Yes, that's right. They've been not for profits. That's where you're going to see that continue as we look at the pipeline today. Great. And on the Trust segment and those fees, when do the 2023 kind of fee adjustments take hold and how material is that increase on those fees? And just any other kind of success or update that you're having on that side of the business? Why don't I start with just generally what's happening. You might the numbers. So those fee adjustments and also cost adjustments, meaning, the pass through of some of our costs related to custody. Those adjustments are -- you're starting to see come through in the beginning of 2023 and on through. And maybe you have the actualâ¦ Yes. It's going to be an evolutionary process in the Trust business. There's a lot of opportunity for us to drive results out of that business. But I think it's going to be a staged approach. I think in the current year, we'll see some incremental benefit to the trust fee line as it runs through the income statement. I don't have an exact number to quote for you Chris. But I do think you can think of where we are right now or how we finished the year at about $13.5 million as sort of a baseline and that it should be improving from there. It's going to be based on the existing book of pension based business. It's not really new products or anything that we're kind of hoping. It's really things that are already embedded and just additional margin contributions that we've been working with our partners to be able to accommodate on. And then I think over time, we'll continue to focus the Trust business. But as it pertains to overall noninterest income, I don't think it will have a significant impact relative to the ratio of our noninterest income to interest income over the course of 2023. There are no further questions in the queue. I'd like to hand the call back to Priscilla Sims Brown for closing remarks. Okay. Well, thank you all. Thanks for your questions and thanks for your interest today and thanks for listening to our optimism for the bank as we go forward this year, in particular, with great enthusiasm in our 100th anniversary. We look forward to follow-up calls with most of you one on one as we go through the rest of the day and next week. But thank you for your participation. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
EarningCall_939	Good day, ladies and gentlemen and thank you for standing by. Welcome to the First Fiscal Quarter 2023 Digi International Incorporated Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Jamie Loch. Sir, you may begin. Thank you. Good day, everyone. Itâs great to talk to you again and thanks for joining us today to discuss the earnings results of Digi International. Joining me on todayâs call is Ron Konezny, our President and CEO. We issued our earnings release before the market opened this morning and weâve posted a shareholder letter this morning as well. You may obtain a copy of the press release and shareholder letter through the Financial Releases section of our Investor Relations website at digi.com. This morning, Ron will provide a comment on our performance and then we will take your questions. Some of the statements that we make during this call are considered forward-looking and are subject to significant risks and uncertainties. These statements reflect our expectations about future operating and financial performance and speak only as of todayâs date. We undertake no obligation to update publicly or revise these forward-looking statements. While we believe the expectations reflected in our forward-looking statements are reasonable, we give no assurance such expectations will be met or that any of our forward-looking statements will prove to be correct. For additional information, please refer to the forward-looking statements section in our earnings release today and the Risk Factors section of our most recent Form 10-K and subsequent reports on file with the SEC. Finally, certain financial information disclosed on this call includes non-GAAP measures. The information required to be disclosed about these measures, including reconciliations to the most comparable GAAP measures are included in the earnings release. The earnings release is also furnished as an exhibit to Form 8-K that can be accessed through the SEC filings section of our Investor Relations website. Thank you, Jamie. Good morning, everyone. Before we jump into Q&A, just a few highlights. I sound like a broken record, but we set new quarterly records for revenue, annualized recurring revenues, or ARR and adjusted EBITDA. We sustained first, the first of our three 100 goals with another quarter of over $100 million in revenues. We climb closer to our remaining goals of $100 million in ARR and $100 million of annualized adjusted EBITDA. We are excited to play a leading role in our customersâ digital transformation, which has become increasingly important in unpredictable macro environments. We continue to see elevated demand as evidenced by a strong backlog, while a gradually improving supply chain has helped us exceed our expectations. We expect those dynamics to continue throughout the balance of our fiscal year. Lastly, we are making tremendous progress with our processes, systems and services to enable superior customer experiences and accelerate the delivery of differentiated solutions driving increased ARR growth. At this time, Iâd like to turn the call back to the operator for our questions and answers session. Thank you, operator. [Operator Instructions] Our first question or comment comes from the line of Tommy Moll from Stephens. Mr. Moll, your line is open. So I wanted to start off, Ron, I think I saw some of the language in your letter about having stronger confidence in the â23 outlook. And I was curious, is that primarily related to the fact that you just beat the first quarter or if you look at the demand and supply chain dynamics, have those gotten better versus when we spoke a quarter ago? And if they have, any context would be appreciated? Yes, Tommy very good question. We really feel like demand continues to be robust. So, our performance has been more dictated by the availability of supply. And you saw that happen in the first fiscal quarter, we had more supply that enabled us to exceed some expectations there. We do still have supply chain challenges. We are seeing less of them that we saw in a period or a year ago, but they are not â they are not alleviated yet. So the extent that we get additional supply we can meet and potentially exceed expectations. Thatâs helpful. Thank you. And then zooming in on the next quarter outlook you have given for the second fiscal quarter. With that backdrop, you just outline which sounds fairly constructive. Can you walk us through why you would expect revenue to be down quarter-over-quarter? Is there some conservatism in there or any assumptions? Yes, itâs really our visibility supply chain itâs not a demand issue. We have got a robust backlog. So itâs really getting access to key components that we can turn into finished goods. So we like to make sure that weâve had expectations that are consistent with our supply chain visibility. If that improves, certainly, we would be communicating that. And the associated compression in EBITDA margin quarter-over-quarter, is that simply a function of lower volumes on that supply chain constraint or is there any other noise you would want to call out? No, we continue to make investments to the business. And we donât want to slow down those investments, especially those associated with improving the customer experience. And again, to the extent that we can get access to components, we do have some I think some very considerate assumptions we have put in there for costs. There are still some components that are coming at increased costs. And although we work to mark those down, we donât want to make sure we get too far ahead of ourselves. Thank you. Our next question or comment comes from the line of Harsh Kumar from Piper Sandler. Mr. Kumar, your line is now open. Yes. Hey, guys. Congratulations on yet another solid quarter. Ron, let me start off with something simple. Are you guys still leaving revenues on the table and could you characterize for us how much that might be? Yes, we absolutely are. Itâs still in the double-digits, millions of dollars that we are not able to ship in any given period. We do think as the supply chain eases, there could be some normalization that occurs. But right now, we are still not able to meet all of our customer demand. Okay, great. And then I had a question on your cold chain business. So everybody is out eating out people are out milling around and that should be a tremendous tailwind for your cold chain business. I was curious if you could frame for us, how you see the growth in that business. And I know there was an angle on international expansion, particularly maybe in the European side, curious if you can talk to that? Yes, we were really happy with this quarter, Harsh and that we have got balanced contributions from really all of our offerings across all of our geo. So it was a rewarding quarter and that included, of core SmartSense. And youâre absolutely right, Harsh, food has been a big part of that businessâ success, not just the restaurant side, but grocery continues to be a strong vertical for us as well. On the international expansion, we want to be very considerate. We have plenty of opportunity domestically. We still look towards international expansion. Europe would be the most likely scenario, especially as we land multinational customers that want us to have a broader presence. But we are being very considerate and calculated about geographic expansion. And then I had a very similar question, Ron, on integration of Ventus. I was curious if itâs all done at this point in time or how far along are you? And then do you think there was an international angle to that as well? And then if you think with maybe Ventus under control and sort of taken care of from an integration angle, if itâs time for you to start thinking about adding something else to your portfolio or maybe other uses of cash at this time? Yes, again, good questions, Harsh. We are largely complete with the Ventus integration. We do have one big milestone which is converting their ERP and CRM to the companyâs systems, which will improve â which will conclude about the middle of this calendar year. But thatâs in good shape. There is a great team thatâs well underway in implementing that. The international expansion is very similar to SmartSense and that we have some larger customers that are asking us in particular for European presence and thatâs a great, great way for us to enter those markets. Part of the experience of being a Ventus customer is making sure that you have that excellent uptime, which includes making sure we have the people, the inventory, the processes and systems. And so we want to pace that really with the implementation of our ERP and CRM integration middle this year. So thatâs definitely an opportunity. Lastly, we are always looking for opportunities to grow inorganically. We have a robust pipeline out there. We â as you know, we are focused on integration execution, reducing our leverage. And so that remains the priority, especially though maybe slowing down, but rising rates environments. We think itâs important to delever and prepare ourselves. We are biased towards potentially fewer bigger deals than smaller deals. And so those can take a little longer to curate and get the confidence that we are the best owner and operator of those businesses. Thank you. Our next question or comment comes from the line of Mike Walkley from Canaccord Genuity. Your line is open, Mr. Walkley. Great. Thanks, Ron. Congratulations to you and the team on the progress towards your three 100 goals. Here I want to focus on, can you update us just on the business model transitions away from one-time hardware sales to the stronger mix of recurring revenue? How should we think about the pace of this journey and impact if any to near-term growth rates and product sales such as cellular routers and gateways from a more recurring revenue mix? Yes. Good morning, Mike. Good question. Itâs a tremendous imperative for the business. We are being very, very, I think considerate and thoughtful in making sure that we generate an incredible customer experience. And it starts with our processes with our systems we are going through very deliberate stages of piloting with our channel partners who are a critical part of the success of these programs. And there is some system enablement that we are doing and we are going through, if you will, a crawl walk and run phase that will gain momentum as we pace through this fiscal year. We expect really to began fiscal â24 at that run stage where in particular with routers, but other parts of our businesses as well, being really fully committed to that experience and that solution that has the strong attach rates. Great. That makes sense to look on that transition. And Jamie, just a question for you with the strong backlog, you built up a lot of inventory this quarter, any thoughts in kind of working capital and how this might impact stronger free cash flow as the year progresses we are going to keep inventory at these levels? Do you think that kind of burns down over time as you ship against the backlog? Yes, morning, Mike. I do think the inventory will burn down. But I think we are also trying to be optimistic where â while we are seeing improvement, there still is some constraints out there. And so when opportunities to especially in the component side present themselves for us to be able to deploy our capital that way and really secure that that forward-looking revenue thatâs coming out of the backlog, we are going to take advantage of that. So, I would tell you that over the course of time inventory clearly will come back down to normalized levels. Does that happen in say, one quarter or two quarters? Thatâs hard to tell because you are still a little bit blind on certain areas. And so when all of a sudden, an opportunity arises, weâll go through an evaluation period to decide and sometimes your buying components knowing that you still donât have that proverbial golden screw. And so you know that itâs going to sit in inventory for a quarter or even two quarters. So, I do think it comes down, but I think inventory will most likely, it could bob and weave a little bit as those opportunities present themselves, but we evaluate that as they come forward. Right. Makes sense. Then one last question and Iâll pass the line. Ron, you talked in the past just about strong demand trends when you left on the table. Are you seeing anything in terms of demand patterns from your customers or is demand still just too strong? Itâs really just supply thatâs keeping your guidance kind of in that low-teen or just over 10% range? Yes, itâs really the availability of supply thatâs been governing our performance much more so than demand. We have got strong demand. The backlog stretches up mainly the next four quarters, but in some cases actually goes well into fiscal â24 for those that really want to ensure their delivery of products. And whatâs nice is we are seeing not just good contributions geographically, but across different verticals whether it be as we talked about earlier, the food vertical for SmartSense, EV charging, renewables has been a strong segment, medical device has been a strong segment, data center, retail. So itâs nice to see a balanced tack if you will. Thank you. Our next question or comment comes from the line of Anthony Stoss from Craig-Hallum. Mr. Stoss, your line is now open. Congrats as well. A lot of my questions have been asked. But maybe if I could just hone in a little bit more on the backlog, Ron. Was it up sequentially from last quarter? And can you share with us maybe the bulk of where that might be or how it splits amongst the three divisions? And then follow-up would be if you are seeing any kind of weakness, either geographically or within any of the three business segments? Yes, itâs a really good question. Itâs something we look at very carefully. It remains at historically elevated levels. We are struggling to get all of the parts to meet our customer needs. Although as we said earlier, we are seeing some easing there, which clearly last quarter drove our outperformance. That backlog is mainly in the next four quarters. It does spill into â24. We have been really watching Europe, in particular, with the war in Ukraine, with inflation, rising energy costs. We have been really pleased that Europe has held up. That was the area we â I think have been most concerned about. But with these rising input costs, if anything, really accelerate the urgency on digital transformation, to save on labor, to save on truck rolls. And that ROI is really compelling even in times that could appear dire. So we are pleased with better performance than we expected, especially out of the European theater. Thank you. Our next question or comment comes from the line of Scott Searle from ROTH. Mr. Searle, your line is now open. Thanks for taking my questions. Nice job on the quarter guys. Hey, maybe just to quickly jump in. Ron, it sounds like you are continuing to be supply constrained, but things are improving, you guys have guided conservatively. I am wondering if you could give us some color in terms of what visibility do you have to the current level of guidance, particularly at the lower end of the range? I would imagine at this point, itâs probably pretty good. And then I had a couple of follow ups. Yes. Thanks, Scott. Good morning. Yes, as I mentioned, demand has not been an issue for us. So itâs really our line of sight on key components and we are making some assumptions that our partners will deliver to our contract manufacturers. And we are taking what I think is a reasonable approach as to how people perform in the past and will they perform? We are not trying to be too aggressive that we are assuming too many enhanced improvements in their ability to deliver those components. Our manufacturers are healthy and ready to turn that into finished goods. So we think we have got a reasonable approach. Given the information we have, we still see some sticking points, there is some components, especially those that are used by automotive industry that we are in contention with to get our allocation. But we think we have got a sort of reasonable level of assumptions we put into that. Got it. And if I could, on the product front, you had good results, this quarter up sequentially, gross margins look good. I am wondering if you could provide a little bit more color in terms of how things are progressing from September to December in the outlook from a gateway perspective, from an Opengear perspective being the two elements of that business there, what you are seeing on that front, how that pipeline is shaping up and maybe some color in terms of the end markets? Yes, I think we have seen â again really rewarding to see every one of our offerings grow year-over-year and contribute to the companyâs success. One of the things that we are excited about is 5G is starting to gain a little bit more momentum than it has in the past, and in particular, for the retail segments. So we are excited to see that 5G start to kick in and that affects of course our cellular router and gateway business, but also businesses like Opengear to a lesser extent. Great. And lastly, if I could on the IoT solutions front, revenues were a little bit flattish there, ARR grew, but it hadnât grown at a particularly accelerating pace. I am wondering if there is anything to be read into that how is that pipeline and book of business starting to shape up? Thanks so much. Yes, itâs a good question. We are targeting growth thatâs in excess of a revenue growth for ARR. And we do feel confident we have got the pipeline, weâve got the opportunities that there is, if you will, a real deliberate approach to make sure that ROI is there, especially with larger rollouts that really start to move the needle. So you see our book of business on if you will kind of your small medium-sized opportunities continues to progress. But the larger opportunities I think are gaining a little bit more scrutiny, but we do expect those to really help push that ARR growth further as we go throughout the fiscal year. And maybe Ron, just to quickly follow-up, as you start to look at the gateway business and managing some of that transition to more of a Ventus model. Should we be expecting an acceleration on the ARR front, particularly in and around Ventus as we look into the back half of the calendar year? Thanks. Yes, itâs a very good question. Itâs one of the key growth synergies we had between Ventus and Digi and cellular routers in particular. Those teams are working closely together. So for example, at the NRF Trade Show held recently in New York City, those teams were really in the same exhibit area, working with those customers to make sure we are providing the best solution. Thank you. Our next question or comment comes from the line of Derek Soderberg from Cantor Fitzgerald. Mr. Soderberg, your line is now open. Hey guys. Yes. Thanks for taking my questions and my congrats as well on the results. Ron, I was curious if you can talk about sort of which areas of the business you think you can drive subscriptions? My understanding is that some hardware products, maybe itâs embedded solutions, wouldnât make sense for subscription agreement? Should you take sort of a Cradlepoint business model? What portion of your product portfolio, do you think you can successfully drive subscriptions? I mean is it half the business? Is it limited to routers and gateways? How should we think about, what portion of the product portfolio you think you can go to sort of 100% attach rate? We feel strongly that with the exception of our OEM embedded solution that we can really push our business and our offering towards the solution offering. Embedded will not be 100%, those companies are typically working with us at the engineering level. We are a part of their IoT solution, but not necessarily all of it. That doesnât mean, we can improve our ARR in that business, but itâs not going to be 100% like we would expect out of our businesses. Of course, in solutions that are already there, but even our box businesses like infrastructure management, cellular and Opengear, where we think we are going to have really compelling offerings. Got it. And then Jamie, on the gross margin front, I think they were slightly down year-over-year. Can you just kind of talk about or maybe quantify the puts and takes on whatâs having an effect on gross margins? And then if you can, where do you think gross margins will move from here, sort of as we move throughout the year? Thanks. Yes. Thanks Derek. I think there is really a couple of things that drive that. And purchase price variance is one of the biggest impacts that you see. In that constrained environment, you are seeing pricing on certain components going up and above what we have got our standard pricing in that. And our accounting policies have been to take those purchase price variances at the time of purchasing the inventory. So, one of the challenges that we do get is as inventory goes up, we see a little bit more purchase price variance going through the P&L. We are seeing that to some degree on a large scale, kind of the theme is that itâs coming down, you still see pockets of it. And again, itâs kind of back to that timing issue, we are depending on the components that you buy, that depending on the opportunities that how you are deploying the working capital. That is another part of the equation in terms of where is the pricing on those components, where do we think that pricing is trending. And so thatâs probably one of the biggest impacts that we have seen. On the gross margins side, we have talked in the past about our pricing strategies and how in some cases, you are able to get that reflected in price. In other cases, we have made determinations that itâs appropriate for us to make that investment and to the relationship with our customers. I think you have seen us as the supply challenges have really navigated their way through. We are really watching those gross margins at a sequential level. And you are seeing that just a regular, pretty consistent ticking up. And I think you will continue to see that as the supply chain stabilizes, as recurring revenue becomes a greater mix of the total revenue portfolio, which provides strong mix into that. So, I think you will continue to see that, that gradual improvement making its way through as those two elements, as time allows those to flow through the P&L. Thank you. Our next question or comment is a follow-up from Mr. Tommy Moll from Stephens. Mr. Moll, your line is now open. Just a couple more to wrap this up maybe for the day. Ron, one comment you made in the materials this morning was around, ARR was maybe not as the growth was maybe not what you had hoped for first quarter, but you are still confident in exceeding overall revenue growth for the year. You called out some internal investment in process and systems there. Can you give any more detail around that? Yes. So, what we are spending a lot of time as a team is making sure of that, especially in a business that goes through a channel, Tommy, that when we ship inventory to that channel and it eventually gets to the end user, we get that point of sale data back. And that point of sale data has to contain the serial numbers. So, we create the customer account or if itâs an existing account, those products go into that account, so itâs a seamless zero touch activation for the customer. And the first contact they get is a proactive one for us, making sure the channel partners have the systems, the tools and give us the data on a timely basis is incredibly important. And of course, then we have got to make sure we ingest that data into our ERP, CRM system and into any host systems like the best device management system. So, that gives you an example of some of the plumbing that we are putting in place to make sure that that customer experience is an outstanding one. Thatâs helpful. Thanks. Jamie, this will be my last question of the day. And I wanted to ask a follow-up on working capital, which has been discussed a couple times or at least inventory. I hear you loud and clear that making a call on inventory any given quarter is difficult, just because you have got the plan to buy opportunistically as I think I hear you say. But just as a working assumption for working capital comprehensively for the year, are we thinking a source of cash, a use of cash, neutral, or no way to knowâ¦? Yes. I do think when you look at it over the year, I think Digi has always been a good, strong generator of cash. I think that will continue. I donât think you will end up in a use of cash position. I do think you may not have cash flow from operations as high as maybe what we have seen in the past. But I definitely â right now, I am not projecting that it would flip into a use of cash position as much as just less positive than normal course and speed. Thank you. Our next question or comment is a follow-up from Mr. Harsh Kumar from Piper Sandler. Your line is open, sir. The follow-up guys, first of all, just a quick comment. I love the format of this call, all the information is in the letter, and then itâs just pretty quick, and we can get to the topics that are on our mind. So, appreciate you following this. And then Ron for the question, you have got a couple of different software, you have got Lighthouse, you have got SmartSense software. The question is really on your journey towards better ARRs or increasing ARRs? Could you maybe help us understand how much of that software can â how much of that software has penetrated for example, into your existing hardware? And therefore, as you move towards a greater penetration, what would that impact roughly be on the ARRs? Yes. Thanks for the follow-up Harsh. As probably most people know, our solution segment, itâs 100% attach rate. You cannot do business. You cannot consume your offerings without a subscription thatâs part and parcel. Within our products and services businesses, the attach rate, if you will, has been well under 30%. We are moving towards 100% attach rate with both systems processes offerings and as well as increased software content. We announced containers are available now for our cellular gateways. As an example, the OEM business recently announced their connect core cloud and connect core security services, which allow our customers to have more of the solution provided and get them to market more quickly. So, you are seeing very demonstrative efforts on the products side as well. And with these opportunities, with the exception of embedded, we think we can race towards the 100% attach rate. But we want to be very considerate, very thoughtful into the process of systems, the service and the experience that this bundle that we are offering is going to be comprised of 24/7 support, limited lifetime warranty, and of course all of our device management capabilities and software. So, we think itâs a compelling offering of that the market will see. So, Ron from the process angle, I suppose when you make a sale now from a product angle, is it mandatory for the customer to get the software with it, or do you really push them, but itâs not mandatory? Yes, itâs not mandatory. We are moving from opt-in to opt-out and then eventually into product lines having that part and parcel the experience that. And thatâs a courageous moment for us Harsh, where we tell the customer that doesnât want the full offering that we may not be the best fit for them. And thatâs what we are going up towards. Thank you. I am showing no additional questions in the queue at this time. I would like to turn the conference back over to management for any closing remarks. Thank you for attending Digiâs earnings call and for your continued support. For investors, we will be attending ROTH Capitalâs 35th Annual Conference, March 12 to 14 in Dana Point, California. Have a great day and thanks again. Ladies and gentlemen, thank you for participating in todayâs conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.
EarningCall_940	I'd now like to turn the call over to your host for today, Mr. Dominic Canuso, Chief Financial Officer. Sir, you may begin. Thank you, Angela, and thanks to all of you for taking the time to participate on our call today. With me on this call are Rodger Levenson, Chairman, President and CEO; Art Bacci, Chief Wealth Officer; Steve Clark, Chief Commercial Banking Officer; and Shari Kruzinski, Chief Consumer Banking Officer. Before I begin with the remarks on the quarter, I would like to read our safe harbor statement. Our discussion today will include information about our management's view of our future expectations, plans and prospects that constitute forward-looking statements. Actual results may differ materially from historical results or those indicated by these forward-looking statements due to risks and uncertainties, including, but not limited to, the risk factors included in our annual report on Form 10-K and our most recent quarterly reports on Forms 10-Q as well as other documents we periodically filed with the Securities and Exchange Commission. All comments made during today's call are subject to the safe harbor statement. Thanks, Dominic. Consistent with our recent practice on the fourth quarter earnings call, our remarks today will be divided into 2 sections. I will provide brief commentary on the fourth quarter and full year 2022 results and then turn it over to Dominic for our 2023 outlook. After our prepared remarks, we will open it up for Q&A with the team. 2022 was an important year for WSFS. Since the closing of our combination with Bryn Mawr Trust, last January, we built momentum and our financial performance improved each quarter, culminating with the strong fourth quarter. This past quarter's results were highlighted by our core net interest margin of 4.49%, which expanded 50 basis points or 13% higher than the third quarter. Loan growth was solid, and we continued to exhibit the value of our diversified fee increase. The trend of absorption into the economy of the excess liquidity build up during 2020 and 2021 was evidenced by the decline in deposits. Excluding lower institutional trust deposits due to reduced capital markets activity and normal seasonal runoff of municipal deposits, total customer deposits declined approximately 2% linked quarter or 6% annualized. Credit costs were modestly higher due to loan growth and the economic forecast and all credit metrics remain at favorable levels. Expenses remain well managed and reflects the continued impact of higher rates on Cash Connect funding expenses that are offset in our fee revenue. In summary, our operating performance improved significantly from the third quarter with core EPS, core ROA and core PPNR increasing 12%, 13% and 14%, respectively. Although we expect economic growth to be muted in the near term, we enter 2023 with the BMT Bank integration activity successfully completed and positioned very well to optimize the significant franchise investments over the past several years. Dominic? Thanks, Rodger. On Slide 4 of the earnings release supplement presentation, which is available in the Investor Relations section of our company website, we lay out our expectations and outlook for 2023, which I will walk through now. Our assumptions are based on a relatively flat yield environment with Fed funds ending the year at 4.75% and flat GDP growth with mild recessionary growth rates in the second half of the year. Net loan growth is expected to be in the mid-single digits with growth across all of our lending portfolios. Consistent with our current loan mix, C&I lending is expected to be a meaningful contributor to overall growth, along with our continued success from our NewLane leasing business both driving the mid- to high single-digit growth in our total commercial portfolio. While remaining excess liquidity could result in some elevated payoffs. Portfolio pipelines and our competitive market position provide for anticipated continued growth. We expect the consumer loan portfolio growth to moderate in 2023 relative to 2022 in consideration of the overall economic outlook. Deposits are expected to remain relatively flat by year-end. While we have benefited meaningfully from our customers' outsized excess liquidity, demonstrated by our lower-than-peer average loan-to-deposit ratio, including the current quarter 73%. We anticipate this to normalize throughout 2023. Of course, our expectations are subject to somewhat unpredictable nature of the current macro liquidity environment. With that said, we have a well diversified and loyal customer base across all of our primary businesses, and we will be competitive and prudent in our deposit pricing to retain our existing customers where appropriate and to grow new customers. This is consistent with our performance to date as demonstrated by our through-the-cycle beta of 15%, which we expect to increase to approximately 35% by the end of the year. As we have discussed over the past 2 years, our strategy has been to deploy excess liquidity into our investment portfolio, which historically was in our target range of 16% to 18% of total assets and has grown to be in the high 20%. this has provided optionality given the unpredictable nature of the environment and has served us well, generating over $40 million of pretax income in 2022. With the normalization of excess liquidity, we will let the investment portfolio cash flow back down to our target level to fund loan growth. The portfolio currently cash flows at a run rate of approximately $500 million to $600 million per year. Full year net interest margin is expected to be in the 4.35% to 4.45% range. We are assuming 225 basis point increases in short-term rates early in the year, followed by 125 basis point decrease late in the year. We will continue to benefit from our predominantly variable loan portfolio and the asset mix shift from our investment portfolio to loans. These will be offset by the previously mentioned deposit betas and a return to a modest level of wholesale borrowings. Core fee revenue growth is expected in the mid- to high single digits driven by Cash Connect's variable rate fee pricing and franchise growth and also supported by modest growth in mortgage banking and capital markets. Our fee income is expected to continue its resiliency through these economic and interest rate environments, generating a core fee revenue ratio in the mid- to high 20%. Provision costs are expected to be between 40 to 50 basis points of average loans for the year primarily driven by loan growth and the forecasted economic environment. This is supported by the beginning of the year with strong current and leading portfolio credit metrics and an ACL coverage ratio of 1.17%. Our core efficiency ratio is expected to be in the mid-50s as we continue to invest prudently into the growth of the overall franchise, particularly in talent and benefits and our technology stack to enable internal efficiencies and scale and to continue to enhance our customer experiences across our delivery channels. 2023 full year core ROA outlook is around 1.50%, with a robust PPNR as a percentage of assets of around 2.3%, which reflects the strength of our business model, including our broad lending products and the highly diversified and resilient fee revenue base. 2023 continues the momentum from 2022 and we are excited about the strong growth potential from our unique strategic market position in both our regional and national franchises. Just -- Dominic, on the mid-single digit or the guide in general on the mid-single-digit loan growth and then utilizing the cash flow from the securities book. It seems to me they're pretty much, I don't know, perfectly offsetting. So you also mentioned, I think, some modest level of borrowings. So I just wanted to make sure just in terms of modeling. I'm kind of thinking about it for a click. Yes, I think you summarized the calculus of how they come together. The question will be the phasing throughout the year. So we do expect -- while the cash flowing of the investment portfolio is between $40 million to $50 million a month, the phasing of the loan growth might result in a different pace of that. And we are anticipated to fund that depending on the excess liquidity runoff with wholesale borrowings. Okay. And then in the past, when you guys have talked about loan growth, you've excluded resi runoff. I don't know if maybe that's just sort of almost complete now. So it just doesn't move the needle or what's the thinking there? Yes. As you may recall, since beneficial and through BMT, we've had some runoff portfolios, including the acquired residential portfolio. For the most part, they have run their course, and the remaining acquired residential portfolio is nominal relative to attrition rate to impact the entire story, plus in select places and working with some of our customers, we are retaining some ARM mortgages that will supplement that portfolio. So we're now at a point where we'll be speaking to total loan growth from here on out. Okay. Great. And then just lastly, you talked about the efficiencies in mid-50s on the higher revenue guide was a little surprising to me, but you mentioned the further investment into the franchise. Just wondering if that's -- I guess, first, is that sort of a reasonable place to expect WSFS to operate in the longer term? And then also, does that assume any cost saves in the Wealth Management business in 2023 following the merger? Or is that something that's further out? Sure. So parse those out. We would expect mid-50s to be a sustainable level of efficiency ratio particularly for 2 reasons: our high-touch customer service levels across our banking franchise and our outsized fee income ratio. And as we know, both in Wealth and Cash Connect, there's a higher than bank average efficiency ratio in those businesses. So -- and we continue to invest across all those opportunities. I do think our step-off point was particularly low from 2022 because of the higher vacancy factor from the labor markets. And then lastly, on the synergies we have achieved all of the BMT cost synergies that we anticipated, almost all of them were from the bank side. There were some from the wealth side, but they've all been included in our run rate. The business does continue to look for operational opportunities, but no restructuring benefits. I was just curious with respect to loan guidance, should we expect loan growth to be more heavily weighted towards the earlier part of the year assuming an economic slowdown later in the year? Or do you think it will be fairly consistent? Feddie, this is Steve Clark speaking. I think our pipeline has been pretty consistent, the 90-day weighted average for the past several quarters of just under $300 million. So that's our expectation going forward. No real front loading. We're hoping that we'll continue to have a fairly robust pipeline and generate loan growth through the whole year. Got it. And then switch to deposit costs. You guys had a lot of success this quarter holding down deposit costs. Can you talk a little bit more about your deposit strategy for the year and how your different business lines like Wealth play into that? Sure. Yes. I would say, first, setting the landscape for the Greater Philadelphia market is predominantly driven by the larger banks that aren't rushing to change their rates. We do see some competition from smaller banks who have higher loan-to-deposit ratios. But across the board, we have a very consistent and loyal customer base, and we provide a full suite of products and services from variable rate deposits all the way to higher-priced CDs. And so we continue to work with our customers to leverage our -- the right product for the interest rate expected and for their needs. And we expect to be competitive to retain our existing customers and to be able to grow new customers in this market throughout the year. We continue to benefit from a well-diversified deposit base with more than 50% of our deposits coming outside of our consumer and branch network with $2 billion coming from Trust and Wealth. And we do expect both from the Wealth side being able to grow deposits, particularly in this environment where there's a heightened focus on Wealth Management. And over the long term, while there may be some quarter-to-quarter variation in the trust deposits, we do see opportunity to continue to take market share and grow those over the long run. But those are all included in our deposit outlook for the year. Got it. Dominic, that's helpful. And just 1 more follow-up. Just following up on an earlier question, given the cash flow of the investment portfolio we've already discussed and the excess liquidity runoff, it sounds like we might continue to see a limited amount of earning asset decline in the next couple of quarters. Is that a fair assessment? . It really will be a function of the trend of the liquidity environment, but we would expect our total assets and interest earning assets to be relatively stable throughout the year. Just a couple. First, just a point of clarification, Dominic, on the 2023 guide, Steve kind of addressed the loan growth. But where else does the mild recession assumption show. I mean, obviously, in the 40 to 50 basis points provisioning I'd imagine. But does it impact anything else like in terms of NIM or efficiency that we should just be aware of if the macro kind of shifts more favorable? Yes. I think some of that will show up in our fee income, particularly mortgage banking and the wealth side of our Wealth & Trust business on the AUM side. So they could have upside relative to our outlook if the economic forecast becomes more rosy. Okay. That makes sense. And then, Rodger, a big picture question. I mean I think -- if I think back over the last handful of years, while the economic environment is uncertain, this feels like one of the cleaner guides we've had. There's no runoff. There's no accretable yield in the margin or at least much smaller. And so I'm kind of looking at these return targeted metrics, the 150 ROA, the 230 PPNR ROA, are these the right metrics for you guys for the time being for us to be thinking of? And is the focus kind of for you guys to try and grow the franchise on a net basis, while maintaining these metrics? Is that kind of the right way to think about kind of strategically where you guys are at, at this point? Or would you frame it differently? No, I think that's a good characterization of where we're at. I think it's representative of the fact that there has been a lot of noise in the numbers the last couple of years because of the beneficial and bring more deal, that's all behind us now. Obviously, we're seeing the benefits of the rate environment. And as you know, Mike, the way we manage the company is to be a top quintile performer in our peer group measured by ROA, and we think we're there now, and our goal would be to grow -- to grow from here. Perfect. And then just last for me, and I'll step back, is on the buy backs, you saw some authorization here, you've been active. I guess the question is, how do you balance? It sounds like your base case is for the mild recession in the back half of the year, capital should build throughout the year, but still probably not as high as you guys are used to it being. So how do you balance that with the ongoing appetite for buybacks over the course of the year? Sure, Michael. This is Dominic. As you mentioned, we do have 9% share authorization. We were very heavy participants in share repurchases throughout 2022, particularly in the first 3 quarters as we caught up to some share repurchases that we pended during the waiting period for the BMT acquisition. As we've said, our historical practice with regard to capital is waterfall approach, where we evaluate the overall economic environment and protect the balance sheet with our capital, then we look at organic growth and then to the extent we have additional capital that is not needed relative to those first 2 tiers, we would then redeploy it. Now we do anticipate routine share repurchases regardless of price. And we would expect between that and our dividend, we would return about 35% of our core net income through the cycle and on average throughout the year. Incremental to that would be dependent upon that waterfall of capital demand need followed by our IRR model looking at our share repurchase plan, and would -- we'll take that on a quarter-by-quarter basis as we evaluate the overall economy. The deposit beta that you have projected out, have you already started to increase the deposit costs? Or you just kind of have that out there to be -- to anticipate some future deposit cost increases? Sure. In our materials, you'll see a chart on our NIM slide in the supplement that demonstrates the last few quarters deposit betas and deposit pricing, and they have continued to tick up. And in fact, at accelerated rates. So we have seen through the cycle deposit betas of 15% by year-end. So we have been judiciously moving pricing, particularly on our CDs and the shorter-term CDs to attract and retain deposits given the anticipated rise and potential stabilization of the interest rate environment. And we expect through some rack rate movements, product shifting exception pricing to deliver that deposit beta in the mid-30s by the end of this year. We have not disclosed that, but we do think, relative to where we are today, I think the deposit beta would provide that detail for you. What type of offers are you putting out there? And what kind of -- have you already seen some pretty nice success rate for attracting deposits? Yes. I think one of our leading products right now is 12 -- 11- to 12-month CD at 4% to retain short term. And while we assess kind of expectations from customers looking for that higher rate, and that will give us time to evaluate the broader market trends. That's been very competitive. And then we have some other variable rate products that customers are shifting to. And then to the extent they are looking for something more than that. We are working and the consumer and commercial teams are working with Wealth to look at other products, including treasuries to bring the value in the near term, but retain the customer. That's helpful. One small question on the loan loss reserve that consumer loan growth was -- in the consumer partnership was really strong. What type of reserve does the Spring EQ product kind of require? That one specifically. I know you had the whole thing laid out in the back of 4.4%, but just that product itself. Yes, that's -- it's a secure product and kind of cash flows pretty quickly, and the losses have been relatively low. So it's in the low to mid-single-digit range and captured in the consumer line item that we provide on the loan loss reserve slide. [Operator Instructions]. And with no further questions in the queue, I would like to turn the conference back over to Mr. Canuso. Thank you all for joining the call today. If you have any specific questions following this meeting, feel free to reach out to me directly. Also, Rodger and I will be attending conferences and investor meetings throughout the quarter and we look forward to meeting with many of you then. Have a good day.
EarningCall_941	Good day, everyone, and thank you all for joining us to discuss Equity LifeStyle Properties Fourth Quarter 2022 results. Our featured speakers today are Marguerite Nader, our President and CEO; Paul Seavey, our Executive Vice President and CFO; and Patrick Waite, our Executive Vice President and COO. In advance of today's call, management released earnings. Today's call will consist of opening remarks and a question-and-answer session with management relating to the company's earnings release. [Operator Instructions]. As a reminder, this call is being recorded. Certain matters discussed during this conference call may contain forward-looking statements in the meanings of the federal securities laws. All forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement any statements that become untrue because of subsequent events. In addition, during today's call, we will discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release, our supplemental information and our historical SEC filings. At this time, I would like to turn the call over to Marguerite Nader, our President and CEO. You may begin. Good morning, and thank you for joining us today. I am pleased to report the final results for 2022. The strength of ELS can be seen in all facets of our business. We continued our record of strong core operations and FFO growth with full year growth in NOI of 5.7%, which translated into a 7.4% increase in normalized FFO per share. Our MH portfolio is 95% occupied. Importantly, 96% of our sites are occupied with homeowners. The pride of ownership is evident in the well-kept homes and landscaping throughout our community. The stability of our resident base can also be seen in the high FICO scores for incoming residents. For the year, we experienced an all-time high for new home sale with over 1,100 new home sales. Due to the strength of our operating markets, we were able to increase sales prices by 22% for the [technical difficulty]. our strongest performing properties for home sales were in Florida with a 16% increase in sales volume and a 28% increase in home prices. It is important to note that while home prices have increased to an average of $106,000, they remain significantly lower than other housing options in the immediate vicinity of our community. Turning to our RV properties. In 2022, the demand was strong for RV sites across the country. It is estimated that 67 million Americans plan to take an RV trip in the next 12 months. These trips will strengthen the commitment to the RV lifestyle. Our quarterly surveys indicate that our years plan to camp more this year. The reason cited for their desire to camp more includes spending time outdoors and traveling with their pets. In the year, we continue to see new transient guests converting to a longer-term commitment with nearly 4,000 guests increasing their commitment to us after their initial transient day. Our transient revenue increased 26% from pre-pandemic levels with an increase in the average rate being the largest driver of that increase. In 2022, our Thousand Trails membership properties performed well. We sold over 23,000 camping passes and initiated 28,000 RV dealer activation. These passes and activations are the seeds for future growth in the Thousand Trails portfolio. Turning to 2023. We have issued guidance of $2.84 at the midpoint for next year, which is a 4.1% growth in normalized FFO per share. The demand for our MH communities continues to increase. Over the last five years, we have sold over 4,000 new homes in our communities. These new homes further enhance the look of the community as new and existing homeowners throughout our portfolio showcased their pride of ownership. We have noticed rent increases for approximately 67% of our residents and anticipate growth of 6.5% in core MH rent revenue. Our guidance for 2023 reflects the strength in our business. Our guidance is built based on the operating environment in each property, including a robust market survey process and continuous communication with our residents. In 2022, our acquisitions and development teams focused on strategic RV investments and added over 1,600 sites to the portfolio. In addition, we purchased six parcels of land with approximately 300 acres of development potential. Our vacant land is geographically diverse and will positively contribute to our future growth. Next, I'd like to update you on our 2023 dividend policy. The Board has approved set an annual dividend rate of $1.79 per share, a 9.1% increase. The Board will determine the amount of each quarterly dividend in advance of payment. The stability and growth of our cash flow, our solid balance sheet and the strong underlying trends in our business are the primary drivers of the decision to increase the dividend. Historically, we have been able to take advantage of opportunities due to the free cash flow generated by our operations. That will continue in 2023 as the dividend increase of $29 million is roughly equivalent to our anticipated increase in FFO for 2023. In 2023, we expect to have in excess of $100 million of discretionary capital after meeting our applications for dividend payments, recurring capital expenditures and principal payments. Over the past five years, we have increased our dividend by an average of 10.2%. We had a strong finish to the year due to the hard work of the ELS team members. The well-being of our residents and guests were prioritized. The dedication of the property regional and corporate level is impressive. Thanks, Marguerite, and good morning, everyone. I will review our fourth quarter and full year 2022 results and provide an overview of our first quarter and full year 2023 guidance. Fourth quarter normalized FFO was $0.66 per share. Strong performance in our core portfolio generated 7.3% NOI growth for the fourth quarter. Core NOI growth of 5.7% for the full year contributed to our normalized FFO per share growth of 7.4%. Core community-based rental income increased 5.8% for the full year compared to 2021. Rate increases contributed 5.4% growth, while occupancy generated the additional 40 basis points. During 2022, we increased homeowner occupancy by 637 sites. Full year core resort and marina based rental income increased 9.1% compared to 2021. Growth from annuals was 8.8% with 6.7% from rate increases and 2.1% from occupancy gains. In our seasonal RV income, the strong demand trend for stays of a month or more continued in the fourth quarter generating 17.4% growth over 2021. The full year increase in seasonal RV income was almost 40%. Full year growth in seasonal RV rent offset the decrease in full year transient income. These rental streams combined generated 9.5% growth. For the full year, net contribution from our membership business, which consists of annual subscription and upgrade sales revenues offset by sales and marketing expenses, $74.4 million, an increase of 4.9% compared to the prior year. Subscription revenues increased 8.4%, reflecting a 3.2% increase in the member base a rate increase of approximately 5.2%. During 2022, we sold almost 4,700 upgrades at an average sale price of approximately $7,400. Full year growth in Core utility and other income was mainly the result of increases in utility income. Our recovery percentage of 44% remained consistent in 2022 compared to 2021. Fourth quarter core operating expense increased 2.1% compared to the same period in 2021. We experienced some moderation in growth in utility and payroll expenses compared to earlier quarters in 2022. In addition, during the quarter, repairs and maintenance and insurance and other expenses decreased from prior year. Overall, full year 2022 core property operating expenses increased 6.7% compared to 2021. Utility expenses represent more than 27% of our core operating expenses, they increased 10.6% for the full year. Payroll and repairs and maintenance expenses generally increased in line with inflation for 2022. Our noncore properties, including the assets sits group in the fourth quarter as a result of suspended operations following storm damage, contributed $5.8 million in the quarter and $41.2 million for the full year. Property management and corporate G&A were $119 million for the full year. Other income and expenses net, which includes our sales operations, joint venture income as well as interest and other corporate income, $32.5 million for the year. Interest and amortization expenses were $116.6 million for the full year. Our full year weighted average debt balance of $3.275 billion and the weighted average rate was 3.4%. We've modified our income statement presentation to include a line item, casualty-related charges, recoveries net. The Hurricane Ian related expenses incurred through year-end, along with offsetting revenue accruals for expected insurance recovery are presented in this line item. The press release and supplemental package provide an overview of 2023 first quarter and full year earnings guidance. The following remarks are intended to provide context for our current estimate of future results. All growth rate ranges and revenue and expense projections are qualified by the risk factors included in our press release and supplemental package. Our guidance for 2023 full year normalized FFO is $2.84 per share at the midpoint of our guidance range of $2.79 to $2.89. We project core property operating income growth of 5.5% at the midpoint of our range of 5% to 6%. We project the noncore properties will generate $18 million and $22 million of NOI during 2023. Our noncore portfolio includes properties acquired during 2022 as well as the six properties with the interrupted operations. Our budget assumes stabilized NOI at these six properties from a combination of reduced operations and business interruption insurance proceeds. We intend to recognize business interruption proceeds upon receipts. And as a result, we may experience some variability in recognition of income during the year as compared to our budget assumption. Our property management and G&A expense guidance range is lower than our 2022 actual expense primarily as a result of legal activity in 2022 that we don't expect to recur. We've also provided guidance ranges for our weighted average debt balance and interest expense. Our guidance model includes the impact of all acquisitions we've announced. The full year guidance model makes no assumptions regarding other capital events or the use of free cash flow we expect to generate in 2023. In the core portfolio, we project the following full year growth rate ranges, 5.7% to 6.7% for core revenues, 6.7% to 7.7% before expenses and 5% to 6% for core NOI. Full year guidance assumes core MH rent growth in the range of 6% to 7%. We assume occupancy and our stabilized MH portfolio will be flat during 2023. Full year guidance for combined RV and Marina rent growth is 5.7% to 6.7%. Annual RV and Marina rent represents 2/3 of the full year RV and Marina rent, and we expect 8% growth in rental income from annuals at the midpoint of our guidance range. Our full year core expense growth assumptions include our current projections for future utility rate increases the potential impact of our April 1 insurance renewal. Our first quarter guidance assumes NFFO per share in the range of $0.70 to $0.76, which represents approximately 26% of full year normalized FFO per share. Core property operating income growth is projected to be in the range of 4.4% to 5% for the first quarter. First quarter growth in MH and combined RV and Marina rents are in line with our full year assumptions. We project first quarter annual RV and marine events to be approximately $67.1 million at the midpoint of our guidance range. Our guidance assumes first quarter seasonal and transient RV revenues performed in line with our current reservation pacing. I'll now provide some comments on the financing market and our balance sheet. During 2022, we invested cash of approximately $150 million in operating properties, development properties and land for future development. The investments were funded with available cash and proceeds from our line of credit. At year-end, our unsecured line of credit balance was $198 million. Current secured debt terms are 10 years at coupons between 4.75% and 5.5%; 60% to 75% loan-to-value; and 1.4 to 1.6 times debt service coverage. We continue to see strong interest from GSEs, life companies and CMBS lenders to lend for 10-year terms. High-quality, age-qualified MH assets continue to command best financing terms. We have approximately $92.5 million of secured debt maturing in 2023, in-place rate on this maturing debt is 4.9%. Our $500 million line of credit currently has approximately $265 million available. Our ATM program currently has $500 million of available sales. Our weighted average debt maturity is approximately 10 years. Our debt to adjusted EBITDA is 5.3 times, and our interest coverage is 5.6 times. We continue to place high importance on balance sheet flexibility, and we believe we have multiple sources of capital available to us. Thank you. Just in terms of the properties that were still interrupted from Hurricanes Ian, can you give us an update of what's actually happening on the ground there and when you would expect things to return to normal? And then related to that, what the business interruption and other insurance recoveries are assumed in 2023 guidance? Sure, Nick, it's Patrick. So just as a reminder, it's six properties in the greater Fort layers market, 4 of those RV with 1,550 sites and two of those are Marinas with 550 slips. Of four properties have resumed operations; and two will resume operations in the next few months. We're working through infrastructure repairs and improvements. in order to bring those properties back online. So, by the time we get into mid-2023, all properties will be operational, and we'll bring them up to full operations over the next few quarters. And as far as the expected contribution, Nick, those properties get a little bit less than half of the noncore NOI that we'd expect in total from those properties. Perfect. Thank you. And then just broadly on the transaction market, it looks like there are a handful of RV acquisitions, so maybe a bit more interesting with JVs or development in the quarter. But just broadly, what are you seeing on the transaction market today across RVs and MH? And has there been any movement in cap rate or pricing? Sure. Thanks, Nick. So yes, in the quarter, we closed three deals. One was near the shore in New Jersey. It's a property that had 80% annual, I think, and it was really a great access to a large RV customer base and population. And then we also continued our growing relationship with RBC and invested in a new development in Sandusky, Ohio. And then we entered into a 50-50 joint venture with KOA in the foothills of the Blue Ridge Mountains. So, we're pleased about those acquisitions in the quarter. I'd say, in general, the acquisition volume was kind of down across our industry in 2022. And we haven't really seen a real pickup in activity so far this year. There are certainly sellers in the market but they're not really in a rush to sell when there's uncertainty with respect to cap rates and valuations. Hi. Good morning. I guess a question on the RV annual revenue growth, which was pretty strong. Could you remind us how you go about pricing those annual contracts? And what kind of the outlook looks like for kind of future kind of ongoing growth for annual revenue growth in RVs going forward? Yes, Anthony, thanks. I think Patrick can talk you through kind of our market survey approach to how we get to the RV annual rate. Yes. Anthony, it's similar to the process that we go through in our other business lines, particularly on the MH front, these are long-term customers, and they typically own a unit that's located on our property for years, if not more than a decade. So, we review the directly competing properties as well as other choices for hospitality and that type of a weekend getaway in the local submarkets. When we come to the determination of what we feel to be representative of the market. And then we send out the rate increases. Similar to the MH process, we may very well have more moderate rate increases for our in-place long-term customers. And as new customers come in, they'll be charged at a full market rate. Thanks. Maybe switching gears to the same-store expense guidance in the hurricane and the insurance impact. How much of the growth is driven by the resetting of the insurance rates? And do that -- those insurance resets cover just the impact of properties, Florida as a whole, lease portfolio. maybe more detail there would be super helpful. Yes. I guess kind of as I think about our guidance assumptions for expenses, I'll cover insurance and utilities, both because I think those are the two key areas to focus on. those line items on a combined basis represent about 1/3 of our total core property operating expenses. Regarding the insurance, we're in the process of negotiating with our insurance carriers. So, I'm not really inclined to disclose too much on this call. I will remind you, though, that we've talked about over the past five years or so, we've seen premium increases around 20% each year. Our policy renewal is April 1, and we plan to provide an update on the first quarter call as far as how we progress. With regard to utilities, our growth assumptions are based on various factors, including projections of rate increases that we've identified directly from the utilities to the extent we have noticed. We also have two third-party advisers that we rely on for this information and the eia.gov website for the Energy Information Administration. Hi thanks. You had a strong fourth quarter and operating expenses with the 2.1% growth, but the guidance obviously shows a reacceleration to a figure that's a little bit above what you reported in 2022. Can you walk through first, what led to the low figure in the fourth quarter? And why you would expect that to pick back up meaningfully? Yes, I think our experience in the fourth quarter, we had some moderation in expenses, primarily moderation in our payroll and our utility expense. And then I did mention that R&M and our insurance lines were down in the fourth quarter. I'll cover the year-over-year reduction first. We have an annual process related to our casualty insurance line, and we'll take a look at the reserves that we have established. As we review the activity at the end of the year, we identified favorable development and that supported a reduction in the reserves on the balance sheet and thereby reduce the insurance expense. The R&M expense savings resulted really from a favorable comp that we had because there were some elevated expenses in R&M in 2021. The moderation in utility expense attribute that primarily to a change in the mix of operations from the third quarter to fourth quarter as we exited the summer season. And payroll expense growth moderated mainly as a result of reduced reliance on overtime as we stabilized staffing to pre-pandemic levels in 2022, we reduced our reliance on over time, which generated savings year-over-year in the fourth quarter. Okay. Got it. So, I guess why, like, for instance, the payroll, presumably you'd have easier comps in 2023 as well. So, is that just being overwhelmed by the insurance and the utility expense? Is there something else going on there? No. Well, I think it's less about the fourth quarter being an indicative run rate and more about kind of the fourth quarter activity. I think looking to the full year of 2022, considering where we are with CTI headed into 2023. Those are the key drivers. And then as I said a moment ago, and keep in mind that 1/3 of our expenses are utilities and insurance, and we're talking about increases that are meaningfully higher than CPI expected from 1/3 of our expense base. Okay. Got it. And then moving to the transient business. I guess, can you talk about what the underlying assumption is that's in the guide? And then in the core numbers, I think transient was down 16% or so in the fourth quarter. I know there can be some moving pieces there with the side count. So, I'm curious if that's a comparable number and then what your expectations are for '23? Yes. I think if you take a look at the guidance page in the supplemental, you'll see our footnote disclosure that provides the expected percentage contribution from annual rent. And from that, you can derive our expectations for combined seasonal and transient in the first quarter as well as the full year. I'll say that we anticipate the strong demand for longer-term stays that in a monthly stay that drives the seasonal business, anticipate that strong demand will continue and will offset unfavorable impact, if any, on transient rents, resulting from availability of fewer sites, market-specific demand trends and perhaps weather. You expect these combined rental income stream to deliver modest growth in 2023. And I think, Brad, we've experienced operating with our V-parks over the last 15 years. We're very experienced. When you look at annual, seasonal and transient results over that time, transient revenue has had the most volatility by far. We've seen periods of negative growth, flat growth, outsized growth. And that's why we're really focused on the business of the annual rental stream to reduce that volatility. Thank you. Marguerite or Paul, just curious, are you doing anything differently this year from a projection standpoint, for expenses sort of get a better read on utilities? I know last year, there was sort of two guidance increases on expenses. So just wondering how you're thinking about that line utilities from a projection standpoint? And how much sort of conservatism you've baked in this time around? I think certainly, the approach, I mentioned the sources that we use to build our model. I'll say that we've refined our approach historically because of the consistency that we saw in utilities over our long history. We did place a greater reliance on our past experience when developing our annual model. This year, we stepped away from that a bit and look to other sources to provide insights and develop the model. Okay. Got it. And then just on new home sales, gross revenues saw a meaningful decline sort of year-over-year in that number. Is that just a function of sort of the macro environment? Just maybe a little bit more color you can provide on that. Yes. Samir, it's Patrick. For the quarter, we were down 35% in new home sales. There's a few drivers there, really largely impacted by the Hurricanes that came through Florida in late September and then Nicole mid-November. We have seen some pressures just with respect to construction activity and the number of new homes that we have ready for the full quarter. That was exacerbated in Florida as a result of the hurricanes. Likewise in Florida, the disruption in just kind of the cadence home sales, the marketing, the showing and the eventual closing of those transactions to new homebuyers experienced some disruptions that led to a push of about 15 new home sales. Some of that is a mix of potential buyers just reassessing and potentially pulling back from purchasing a home at this time and the balance was for just delayed closings as we work through the timing disruptions of the hurricanes. Maybe just on the communities that are removed from the same-store pool but are now up and running. Could you just provide some color on occupancy and your expectation for leasing those communities back? And were there material move-outs that took place? Yes. So just as a reminder, for those properties, it was four RV and two Marinas. So, we don't have any of the direct impact with respect to occupancy trends. And as we're bringing those properties back online, I would expect them to largely reach full operations in late 2023, but we have resumed operations at all but two of those properties to this point. Those are modified operations on a few key categories, but our core customers are engaged and have access to the properties with amenities coming online over time. And what we've seen is a real desire for our customers to come down and come back to their place in Florida and get out of the winter and come down and start to fix their home if it was impacted or fixed their RV if it was impacted. Got it. And just shifting gears on to transient revenue. Obviously, it was down in the quarter, but it was relatively offset by the seasonal growth. Just kind of curious on transient. Are you guys seeing any relative softness in demand? Or is it primarily just a function of having less sites available? I think it's really a function of that having less sites available. We're seeing people choose to stay with us longer, so they're staying with us on a seasonal basis and staying with us on an annual basis. So that's just having we have less available sites. Thank you and good morning every one. I just noticed that the 1,000 cells membership dipped in the fourth quarter sequentially. Is this just a seasonality having to play here? And then what is your expectations for subscription income growth this year? It was around 5% in 2022. I think year-to-date, I'd say our Camps sales are down, I think they're about down 3%. Upgrades are down a little bit or down about 18%. The camp pass sales are really a decline from a heightened interest in 2021. And the upgrade decline is really a result of a new product that we launched in 2021, where we typically see outsized demand in that time when we launched the product. Hey guys, thanks for taking my question. What is the mark-to-market on the image portfolio when a new tenant replaces an existing tenant? Is this still 10% to 11% after the recent rent increase? And Anthony, if you look at the trend on a monthly basis. And certainly, as you look at it, roll it up for the quarter, every quarter, I think in the fourth -- in 2022, it was somewhere between 10.5% and 11% -- 11.5%. Okay. And so shifting gears to RV, like; there's a lot of articles about the Airbnb bus. I know this might not be true in your markets, but in some markets, occupancy for Airbnb is down like 8% to 9%. Just curious, what do you think the implication could be for RVs? Yes. I think the demand is very strong for our RVs. Our locations are where people want to be there in the winter or in the summer. So, I think that I don't see a change to that. I do see that we have less available sites like I just mentioned. So that's going to have an impact. But we've been able to push rate on the transient side, and we continue to be able to do that. So, I think that shows the strength of the market. Okay. And just one last question for me. So, you quarter the quarter-over-quarter office sites for the core portfolio was down 130. I know this is not a material number, but I don't think I've seen this since ELS started reporting this metric. Can you provide some color on what you're seeing on the ground today? Well, I think you're talking the sequential quarter. The full year occupancy was essentially flat. I think we were down 15 sites for the, [indiscernible] call it, plan. And in the quarter, there was some impact associated with the storm on our [indiscernible]. And that impact was a result of homes coming back to us, but also our inability to sell homes through the hurricane and during the hurricane. Thank you. Our next question comes from the line of Joshua Dennerlein with Bank of America Securities. Your line is open. Goos morning every one. I guess there were two same-store spend line items we didn't touch on payrolls and real estate taxes. I guess just curious what kind of trend you assumed in both of those for your guide. And then if you could remind us on the real estate taxes, like is that a projection at this point, like a best assumption? Or is that kind of totally unknown or known? For the most part -- to your latter question, for the most part, real estate taxes are a projection. Obviously, our greatest exposure is in the state of Florida. Florida, Texas are billed in the current year, same calendar year bill as payment, but we don't have visibility into the expected increases until August or September. The assumption is, call it, a mid-single-digit type increase for real estate taxes, which is right in line with our historical experience. And then with respect to payroll, I would characterize that assumption as being closer to API through 2023. Okay. Great. And then just for your guide, the same-store revenue, it's lower than your same-store expense growth guidance. Just kind of curious how we should be thinking about that on kind of a more go-forward basis? Is this kind of a one-off? Or should we kind of assume that same-store revenues can exceed expenses in a more normalized go-forward basis? Yes. I mean I think if you look at our long history, certainly, we've not found ourselves in an environment with CPI showing as much volatility as it has in the last 12 to 15 months. So, our long history, certainly, our increase in revenues was, call it, 100 basis points higher than CPI. And kind of trending close to that. And -- sorry, expenses trending close to that. I think going forward, kind of as we settle out, the opportunity for us is to identify where we'll be able to maintain and/or improve margin [indiscernible] that type of [indiscernible]. I think there are opportunities in the form of automation and technology implementation and so forth, [indiscernible]. But necessarily look at 223 as the model for the forever future. And Josh, I'd just also -- remember that we're here in January, we have really good visibility into the revenue side, and we've talked about that in October -- on our call in October. But expenses, we have less visibility into. So that's how we create our model for the year. My first question is on the trajectory of manufactured housing rent increases. And so, I think last quarter, you anticipated the first batch, the first 50% of MH rent increases to go out in the low to mid-6% range. Just curious, as the year unfolds, do you expect that growth to accelerate, be stable or come back down? John, we have an assumption that is kind of tied to a projection of CPI that anticipates that CPI moderates throughout the year. But one thing to keep in mind is that the notices that we send. The last notice is that we send that will have impact in 2023 in the month of August. So, it's really looking at CPI from now through, call it, July. And so, our model tested down a bit to 5% from a starting assumption of 7%. Okay. That's helpful. I apologize if I missed this. Can you let us know how seasonal bookings and actually the 1Q reservations are trending versus last year? Yes, I think that -- I guess the way I would talk about it is the guidance model that we've built based on our current reservation pacing for seasonal and transient. And I think I mentioned earlier, but consistent with the trend we saw during 2022. We're seeing strong demand for the longer-term stays people that want to be with us a month or more. So, you walk through the math that we provided on the guidance page, our first quarter and full year combined rent growth for seasonal and transient is between 2% and 3%. That's [indiscernible] based on where we are with pacing, advanced visibility in the transient business, as you know, John, it's challenging. About 60% of those rents are booked within 5 to 7 days of arrival. So, it's just tricky on a forward basis beyond the first quarter. Okay. Last one for me on the financing markets. Paul, I'm just curious if you've seen secured financing terms or just the availability debt changes at all for really hurricane-prone properties along Waterfront? I'll say it's a little early to say there's been a change. I think that -- I think there's -- we are not in the market right now. So, what I'm hearing is more questions around a bit more time spent on underwriting, but I haven't seen an indication of reduced capacity or appetite from then. Good morning. Thanks for taking my question. Your 2023 FFO guidance calls for a $0.10 range, which is consistent with the range you provided last year. So presumably, you have a similar level of insight into the year. I guess, I was wondering, what are the factors or the line items that you have maybe less or limited visibility in 2023 to accommodate this range? Well, certainly, the transient RV business is the line item has the greatest exposure to us. After that, I would point to our membership upgrade. And our -- just our home sale activity at the level of the properties. As we look at the economic landscape and we kind of think about projections for 2023 and talk of potential recession, it harkens back a bit to 2008, and we certainly saw impact from the slowdown in the single-family home sales market on our business and specific despite the fact that we continue to see very strong demand for our home sales in our properties today, I'd indiscernible that as an area. So, would you say you have less visibility into kind of like the top line than you do to the expense growth for the year? Well, I think that, as I mentioned earlier, there -- we have refined the way that we review our utility expense, which created a significant amount of exposure in the expense line item in 2022. So, I think that to ask whether we have greater visibility, I think that we have a model that looks to different sources of information. And based on the recent experience that we have had, and our testing of that model, we think we'll be more reliable than our method. Got it. That's helpful. And then on -- are you seeing any change in bad debt? Was there a change infrastructure in the fourth quarter? Or are you expecting any change in 2023? Is that built into the guidance in any way? So, our rent collection rates are -- they remain strong in the MH and RV properties. There were a diction moratorium following the onset of the pandemic that did cause a slight increase in our delinquent MH rents. As those restrictions have begun to ease, we've been collecting past due rents from residents interested in resolving their debates. Our reserve policy takes a look at debt collectability. And we've seen an increase in the gross receivables resulting from the delay in processing addictions across the MH portfolio, since the beginning of the pandemic, that pressure started to ease in 2022. So, our bad debt expense moderated to be in line with historical levels. And our historical levels are about 40 -- call it, 40 to 50 basis points of base rent. So, I think that kind of turn to historical normal is what I would otherwise expect in 2023, absent some legislative impact that extends moratoriums or challenges our ability to collect rent. One last one for me is you've been acquiring land and you've been looking at expansion sites which given the current backdrop, is this a good time to continue to push on that? And then how have expected yields on expansion sites changed? Is there any difference for '23 versus maybe in the past? Yes. We purchased land -- a fair amount of land during the pandemic and last year. I think we'll continue to do that where it makes sense. Certainly, land that's adjacent to our properties is something that is highly accretive. There have been cost pressures placed just on construction, in general. But we think that we're acquiring the land at a price that makes sense, and we'll continue to do that, and you'll see us do that this year and beyond. SP-15 Yes. Paul, I just wanted to follow up on your comment that payroll should be in line with headline CPI for 2023 guidance. Is that in -- is that kind of backwards-looking CPI, like the current CPI or kind of how CPI trends over the next 12 months? Thank you. Ladies and gentlemen, this concludes the question-and-answer session at this time. I would now like to turn the call back over to Marguerite Nader for closing remarks. Thank you very much for joining us on today's call. We look forward to seeing you at all the upcoming events. Take care.
EarningCall_942	Good day, and thank you for standing by. Welcome to the Q4 2022 Enterprise Products Partners L.P. Earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session [Operator Instructions]. Please be advised that today's conference is being recorded. Thank you, Andrew. Good morning, everyone, and welcome to the Enterprise Products Partners Conference Call to discuss fourth quarter â22 earnings. Our speakers today will be Co-Chief Executive Officers of Enterpriseâs General Partner, Jim Teague and Randy Fowler. Other members of our senior management team are also in attendance for the call today. During this call, we will make forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 based on the beliefs of the company, as well as assumptions made by and information currently available to Enterpriseâs management team. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. Thank you, Randy. At our Analyst Meeting last year, we ended the meeting with all senior management, including Miranda, onto the front to take questions. Becca Followill at the time with US Capital Advisors asked me, what I'd like to see in our future. My answer was that I was tired of eights, I'd like to see a nine. Meaning that I was tired of our adjusted EBITDA starting with an eight, I'd like to see it start with a nine. Some folks took that as guidance, which it wasn't, as at the time, I didn't think it was possible. Once we returned to the office, I was visiting with Tug Hanley, kicking around the idea of creating a company-wide goal of a nine. Doug said, let's call it Project 9. So Tug was immediately appointed Chairman of the Project 9 initiative. Tug was joined by 12 others to lead the effort, one of whom Rick Rainey, implemented an internal communications campaign designed to maintain our focus on Project 9 throughout the year with a poster themed around the Starship Enterprise, stating that we can boldly go where Enterpriseâs never gone before. Tug Hanley, Yvette Longonje, [indiscernible] and Daniel Boss introduced the initiative via a company-wide webcast, and Starship Enterprise posters were sent to locations throughout the company. The prize was if we made $9 billion adjusted EBITDA, every employee up to and including senior directors would receive 3,000. And if we exceeded 9.3, they would receive 5,000. It was made clear that there would be no safety shortcuts. And very proud to report today that our core values for safety were reinforced in â22 with another year of our best year ever for safety performance with a 0.33 total recordable incident rate. Also, we had zero lost time injuries in our trucking division where they logged something around 20 million miles for the year. We also emphasized that to achieve Project 9, we would not defer maintenance, pipeline integrity, mechanical integrity or anything we would ordinarily do. In other words, no smoke in mirrors. Our message was that no matter your job, you can always do it better. Through webcast, town halls and safety meetings, we encouraged our employees to come up with ideas that would help realize the success of Project 9. We asked them to share ideas and success stories. We received almost 200 success stories that resulted in something around $280 million toward Project 9 success. A couple of examples is we maximized MTBE production blending isobutylene [indiscernible] PIB, and through the [ether max] (ph) increasing MTBE production by a couple of thousand barrels a day. Distribution, operations, commercial and our big data group worked to find a way to adjust fractionation set points to increase throughput at our Mont Belvieu Complex. Project 9 gave every enterprise employee a common goal to boldly go where Enterprise has never gone before. For our folks that listen in on this call, when there is a number, albeit through your hard work, creativity, finding ways to do your job better and teamwork, we made $9.309 billion of adjusted EBITDA. So every employee up to and including Senior Director will be receiving $5,000. We had so much fun with this. And we decided we are going to have Project 9.3 for 2023. Again, don't take it as guidance, because nothing is automatic, especially in this environment. As to numbers, we generated $7.8 billion of distributable cash flow in 2022 compared to $6.6 billion and â21 providing 1.9 times coverage. We retained $3.6 billion in DCF, which compares to $2.6 billion in 2021. We set 13 financial records and 10 operating records in 2022. Operating results included record and NGL pipeline transportation, ethane exports, total NGL marine terminal volumes, fee based natural gas processing and natural gas pipeline transportation. In our petrochemical sector, we set operating records in propylene production, DIB processing and octane enhancement. In barrels of oil equivalent per day, Enterprise transported a record 11.2 million barrels a day of oil equivalent in 2022. Major growth for our capital in '23 in addition to our second PDH, we have four gas processing plants under construction in the Permian and weâre constructing our 12 fractionator in Chambers County and we have expansions in both ethane and ethylene export facilities. 2022 was another volatile year with crude trading as high as $120 and as low as $70. NYMEX natural gas traded between $9.50 to $3.50. Natural gas liquids also was no stranger to volatility. Ethane traded between $0.70 a gallon and $0.25 a gallon and propane traded between $1.60 and $0.60. For 2023, we are constructive on crude oil, but much less so on natural gas. Wide gas to crude spreads should lead to US petrochemicals having a very large cost advantage globally. On the supply side start with the fact that volumes from the strategic petroleum reserve provided a whopping 240 million barrels slug of supplies in the global markets most of it from the US. Those barrels are not going to be here in 2023. China seems to be open. IEA estimates Chinese demand will be up by 1 million barrels a day to 16 million by June. This accounts for one half of expected global oil demand growth. The IEA also expects demand to hit a record of nearly 102 million barrels a day this year, 3/4 of the growth in non-OECD countries, which is just fine with us as we do have a nice real estate position on the water. One thing we believe there will be continued volatility in 2023, but our experience is volatility leads to opportunities. All right. Thank you, Jim. Good morning, everyone. Starting off with the income statement. Fourth quarter net income attributable to common unitholders was $1.4 billion or $0.65 per common unit on a fully diluted basis. This compares to $1 billion or $0.47 per common unit for the fourth quarter of 2021. Adjusted cash flow from operations, which is cash flow from operating activities before changes in working capital was $2.1 billion for the fourth quarter of 2022. This is a 16% increase compared to $1.8 billion generated for the fourth quarter of 2021. We declared a distribution of $0.49 per common unit for the fourth quarter of '22, which is 5.4% higher than the distribution declared for the fourth quarter of the prior year. The distribution will be paid February 14th to common unitholders of record as of close of business on January 31st. We will evaluate another increase in the distribution midyear in 2023. During the fourth quarter, we repurchased approximately 4.9 million common units at a cost of $120 million. For the entire year, we purchased a total of 10.2 million common units for $250 million. In addition, on a combined basis, our dividend reinvestment plan and employee unit purchase plan purchased 1.7 million and 6.4 million common units during the fourth quarter and for the full year of 2022, respectively. For 2022, we paid approximately $4 billion of distributions to Limited Partners. Together with our buybacks for 2022, Enterprise's payout ratio of adjusted cash flow from operations was 54% and our payout ratio of adjusted free cash flow was 71% if you exclude the $3.2 billion investment in the acquisition of Navitas Midstream. Now turning to capital investments. Total capital investments in the fourth quarter of 2022 were $763 million, which included $465 million for organic growth capital projects. $160 million for purchases of pipelines and related assets and $138 million of sustaining capital expenditures. During the quarter, we purchased approximately 580 miles of existing pipeline and related assets that enables us to cost effectively optimize and expand our NGL and petrochemical pipeline system on the upper Texas Gulf Coast. Total capital expenditures in 2022 were $5.2 billion, which included $3.4 billion for the acquisition of Navitas and the purchase of the 580 miles of pipelines, $1.4 billion for investment in organic growth capital expenditures and $372 million of sustaining CapEx. Last quarter, we had estimated $1.6 billion of organic growth capital investments in 2022. However, approximately $200 million of this investment slipped into 2023. Our major growth capital projects under construction grew from $5.5 billion last quarter to $5.8 billion. The additional $300 million of projects under construction are really attributable to expansions in the scope of our new ethane -- ethylene export facility and debottlenecking gathering systems in the Permian. As a result of the $200 million of CapEx slipping from 2022 into 2023 and the above additional opportunities in the Permian, we currently expect our 2023 growth capital expenditures to be approximately in the range of $2.3 billion to $2.5 billion and sustaining capital expenditures are expected to be approximately $400 million. Our total debt principal outstanding was $28.6 billion as of December 31, 2022. During 2022, we reduced the principal amount of our debt outstanding by $1.3 billion. Assuming the final maturity date of our hybrids, the weighted average life of our debt portfolio is approximately 20 years. Our weighted average cost of debt is 4.5%. And at December 31st, approximately 96% of our debt was fixed rate. Our consolidated liquidity was approximately $4.1 billion at year end and this includes availability under our credit facilities and unrestricted cash on hand. In January, we issued $1.75 billion of senior notes comprised of $750 million of three year notes at a coupon of 5.05% and $1 billion of 10 year notes at a 5.35% coupon. We are appreciative of the strong continued support of our debt investors in this offering. We do not expect to return to the capital markets in 2023. Adjusted EBITDA was $9.3 billion for 2022 and our consolidated leverage ratio was 2.9 times on a net basis after adjusting debt for the partial equity treatment of our hybrid debt and also reducing by the partnership's unrestricted cash on hand. As Jim noted in the earnings release, we expect to achieve a major financial milestone in 2023, that is 25 consecutive years of distribution growth. As we looked at the financial attributes of the 65 companies that comprise the dividend aristocrats, these are the bluest of the blue chips. Some have over 60 consecutive years of dividend growth. The overwhelming majority had debt to EBITDA leverage ratios of less than 3.0 times and almost half were below 2 times. To support our financial goals to responsibly grow the partnership and provide our limited partners with a growing and resilient stream of cash distributions over the long term, we believe we have entered into a new era, which it is wise to have a stronger balance sheet than historical norms in the energy industry. We are seeing our customers in the E&P, refining and petrochemical sectors do likewise. As a result, we are lowering our target leverage ratio from 3.5 times to 3.0 times, plus or minus a quarter of a turn. That is a range from 2.75 times to 3.25 times. And as we've noted earlier, our leverage for 2022 we ended at 2.9 times. So we're in good shape with regard to this new target. We would be willing to temporarily take our leverage ratio above this target zone, if necessary, to complete an acquisition or an organic growth project that is strategic to the partnership. We believe this lower leverage target will be welcomed by our long term oriented investors who value distribution growth and stability. We also believe as more generalist investors consider income producing investments in infrastructure, the combination of Enterprise' avoidance of double taxation and our history of distribution growth, coverage and lower leverage will make EPD attractive and that they may also start to consider EPD among the blue chips. Thank you, Randy. Andrew, we're ready to take questions from our participants. I'd like to remind everyone to please limit your questions to one question and one follow-up. Thank you. Go ahead, Andrew. First question, just on the 580 miles of pipeline and related assets that you purchased last quarter seems like a good price paid for that. If you could just provide more color on what you were able to purchase, how those assets will be integrated into your system? And if there's any CapEx allocated to that in 2023 that may be driving part of the higher growth capital? I guess, first off, this is Chris D'Anna. The capital won't increase or hasn't increased as a result of that. Secondly, these pipelines are in a valuable corridor, which is going to allow us to optimize both our NGL business and our petchem business and provide other opportunities. This is Zach on the NGL side, I think if we look at the price we paid versus the optionality that Chris is describing, I think it made sense for us. It also saves some -- one of the other projects fairly small capital, it saved us a pretty significant amount of capital in that project. I guess the follow-up is just a general question on capital allocation. You guys clearly continue to maintain plenty of flexibility, strong balance sheet with target debt leverage lower and you already sit there. So I'm just trying to see, do you anticipate any shift to more distribution growth? Is there any more intent on finding some of these acquisition opportunities like you did on the upper Gulf Coast, or how do share buybacks fall in there? TJ, yes, I think between the Navitas deal and then the two deals that we did at the end of 2022, we are interested in asset acquisition opportunities that make sense that can come in and bolt on to our system and get good returns on capital that way. And that's where the lower leverage gives us flexibility to come in and do these cash transactions to do that. I think over the last, call it the last 18 months, we've shown -- we've sort of completed that pivot to go from an externally funded model to an internally funded model. And we had slowed distribution growth there for about three years or so. And over the last, call it 18 months, we've taken that distribution growth back up to about 5% area. So we have increased the pace of distributions. And then the buybacks, we continue to do that opportunistically. So we feel like we're in good shape to execute on opportunities that come to us in 2023, 2024. So we feel like we're sort of checking the box of returning capital and all of the above and also maintaining lower leverage at the same time. So just on Project 9.3, I appreciate the distinction that it's an internal goal and not guidance, but two questions there. First, for Jim, has the team ever missed an internal goal? And then secondly, any high level comments as to how you achieve that mark. It seems like commodity margins maybe a bit of a headwind, but then you have some sizable projects entering service throughout the year. I don't think we've ever set a goal like this before. So thanks to Becca Followill for being the catalyst to it. We achieved it through everybody doing what they're supposed to be doing, attention to detail, our employees work their butts of for this. And frankly, it created a lot of excitement. You had those posters up everywhere you'd go within Enterprise. And when a truck driver is asking you, how are we doing on Project 9, you know you've got some excitement. Project 9.3, we figured 9.3 in 2022 was quite an achievement. So we'd use that to start on the 2023. And then maybe just a couple of questions on processing. So I think first, the Midland assets were down about 50 million versus Q3. So any indication as to whether we're at or closer to the fee floors for Navitas now? And then second, keep hold pretty strong margins despite very high Rockies gas prices. So just curious if that was hedge related or any other comments there? Yes, Colton, I'll do my best. Midland down slightly in volume. There was -- if you remember, there is a, I'll call it, a Christmas winter event, where there's some production loss in the field just a little bit. I think it's a little bit longer to get - or producing longer to get back up during that time. I wouldn't count the Rockies out, to be quite honest, high gas prices are pretty good. So watch out for the Rockies. We've hit the C4 maybe once or twice, but Waha has been really volatile. So anyway, some processing margins probably down a little bit, but there's some offsets, thereâs some headwinds or some tailwinds that come from that. And so it sounds like on the Rockies, the higher price [indiscernible] drilling activity maybe offsetting the replacement cost there for the keep-whole contracts? Randy, a follow-up question on the new leverage target. So historically, the sense I've gotten from you is that you preferred the flexibility of being in the BBB ratings category, but a leverage policy is a policy. So it begs the question given the rating agency upgrade targets are generally around 3 times up into low single As. Is that something you guys now would be open to and potentially welcome? Harry, I appreciate the question. From our perspective, despite the lower leverage target, we're still very comfortable at a high BBB rating. From our standpoint, what we don't want to do is have the agencies upgrade us to an A minus and that removes the flexibility for us to be aggressive when it comes to external M&A opportunities, because what we don't want to do is whipsaw the fixed income investor from a high -- from A minus rating to a high BBB rating. So we want to maintain that consistency. So we're very comfortable maintaining the BBB plus rating across the three agencies. And Harry, I think one other thing the agencies look at on that A minus threshold is also looking at your cash distribution payout with regard to net income. And I think that's just because we returned so much capital to our investors through distributions, I think that maybe a little bit harder threshold for us to overcome. So as Chris said, we're pretty pleased with the BBB plus rating and ample flexibility. And I guess the follow-up to that is just any sort of guardrails you can give us? I mean I know you mentioned you'd be comfortable taking leverage up higher for opportunities. But any sense you could like frame that out for us in terms of how high on a temporary basis over what sort of time period you'd look to bring leverage down? Harry, I'll be honest. I can't envision a scenario where we would come in and take leverage up to a level that would threaten a BBB plus rating. And I think if you -- Harry, again, this is Chris. If you look back a year ago to the Navitas acquisition, I think within that first quarter, that $3 billion acquisition bump leverage up a quarter turn and then it quickly came back down. My first one is probably for Tony. Curious about your internal view of NGL pricing versus crude. How long do you anticipate it will take if we ever get there to return to the historical range of NGLs versus trade? Propane is going to price itself to go. So at the end of the day, the international markets are going to decide that. I'll let Brent weigh in, but we think you'll see more activity out of China. And so there's there is support for that number as we head into '23 as I see. I think there's going to be some lag, Jean Ann. I think China has got five PDH plants coming on this year. The plants they have existing currently are not running at full capacity. So as the China reopening occurs, it's just going to take some time to work off some of the inventories over there. And once that economy gets back up and running and there's enough dock capacity in the US then you can potentially see a rebound in LPGs. But it takes time, it's going to take some time. I mean, assuming reopening is going to be consistent, there's no stops and starts, and I would like to think that the trajectory is up on a percentage of crude basis. And then as a follow-up, Permian crude production estimates have come down over the last six months, I would say, pretty much across the board. The Midland to Houston price spread has kind of also come in. Is spot a more difficult pitch to customers in this environment? I mean, I think ultimately, when you talk about spot and so like -- I think Tony is going to lay out his forecast in our Investor Day. And I still think when it comes to volume, we have a bullish view of Permian volumes. And the question is, do you believe in the US producer and do you think that volumes are going to increase specifically out of the Permian Basin. And the next question is, do you believe that domestic demand is going to decline. And then ultimately, if you believe that crude production is coming online, it's going to have to find its way to Houston because for the most part, its Corpus pipes are full. And then you got to think about the most environmentally friendly, the most efficient way and the most cost effective way to export those barrels to help them clear. And in terms of the timing on spot when that could potentially come online, our conversations with customers, it's still frankly a project that this market needs. And we've had good conversations. We're in the process of a lot of meetings and a lot of trips. But I'd say, overall, it's been positive. I'd actually like to follow up on Jean Ann's question related to spot. As you're working through the process of getting an additional or other anchor shippers, how do you view the demand side of things if you have like a demand pull anchor shipper? Because I believe a lot of the large refining complexes in Asia that were previously under contemplation are taking incrementally more euros at this point. And as that flow reroutes, does that threaten the outlook for spot? I think ultimately, I mean, we've talked about LPGs, we talk about LNG. This barrel is going to price to export. So from the routes that it takes that maybe different, I don't -- probably at one point in time, Theresa, I would have thought that we would have seen more global type customers. But I do think there's going to be some producer push behind us. I do think we're going to have potentially some traders involved with this project in terms of the advantages on freight to play in that game. But I think our view on global crude demand is probably more aligned with Exxon and BP. And we think that demand is going to be out there and it's going to be out there for a fairly long time. And ultimately, we think a lot of crude oil has to come from this country to satisfy that demand. With our lighter barrels, it's really a perfect fit for the integration that you see now in the large refineries in Asia that are integrated with petchem operations. And if you look at the amount of VLCCs that are coming from the Gulf Coast, we're north of 30 a month [J]. There's a lot to share between markets, between the Corpus market and also the Houston market, and that number is going to go up. And then shifting gears a bit, can you just give us an update on your exposure to Waha basis given your open capacity on the Texas interstate business and your outlook on that through this year as well as the outlook for ethane economics recovery versus projection from the Permian? The exposure hasn't changed since our Investor Day. So I think we're just probably shy of 400 million a day, Natalie. It has compressed over the last several months. You go back to Tony's forecast, we're still fairly bullish on volumes. There has been a new pipeline that came back online, that adds some compression. But ultimately, we think it's going to be extremely volatile. We do think ethane is going to have to price to be recovered out of the Permian Basin. But if you look at that market, it's not a whole lot different than the LNG market, the whole gas infrastructure in the US is very, very fragile. And when something happens out there, there's a lot of volatility and I think we're going to embrace that volatility as we go forward. I wanted to touch on the NGL fractionation fees and volumes on a year-over-year basis. It seems like the market is tighter just with Medford and [indiscernible] frac coming online until mid-2023. Can you talk about the contributing factors, outages, what's driving fees and where you see the market right now? So when Medford went down, no doubt, we saw an increase in spot fractionation fees. You since had some cooler weather, which helps with the fractionators run rates. You also had Philips come online with the fractionator. So we've seen that market kind of cool down. We also see a lot of capacity coming online this year, which I think the market needs. And then as far as our results, we obviously had some unplanned downtime. We had -- the vast majority of the down from quarter-on-quarter was due actually to commodity prices and blending, and then some slightly lower frac fees on average, but it wasn't nearly as significant as the blending. Going forward, really excited about Frac 12. I can say pretty confidently that fractionator will be full on day one. And as a follow-up, looking at the kind of the propylene markets right now, that looks like the tough one with the PGP, RGP spreads. It looks like we're at the trough in Q4. Can you kind of talk about how fast you see that recovering? And then in terms of PDH 2, when it comes online, how do you look at the volume outlook for that in terms of like a dispatch stack once you have that online versus the fractionators in PDH 1? I think as far as the [RGP] spread, we saw throughout last year that tightening a bit. We've seen that widen out a little bit, but at first month of the year and really, it's more of a supply issue than demand. And ultimately, for that spread to remain wide, we need propylene derivative demand to be strong. So China could play a part in that but we see that a little bit further out, maybe second half of the year. And a big part of that is during COVID propylene goes into durables and we saw that accelerate throughout COVID, the demand for those durables. So we think it's probably second half of this year before we see that demand return. Polyethylene demand has strengthened quite a bit. And talking to customers from where we were last year at the end of December, exports grew quite a bit. One of our customers told us that December was the highest month of polyethylene exports that theyâve seen in five years. I guess just going back to your PDH 2 question. PDH 2 is 100% subscribed, so that's going to be day one pull. It's been touched on a few different ways already, but I just want to bring it all together with regards to just economic conditions out there, potential and pending recession. And just wondering, specifically as it relates to your petchem business, how you see that faring in this environment? I think there's some concern in the marketplace on that. So just wondering if you could walk us through the level of cash flow stability or other offsets that you see in that business line. Also, do you have any planned downtime for any of those facilities in '23? I guess our petchem business is predominantly fee based. And what we saw last year was as spreads were wider than normal, we were able to capture -- because of the way we structure our contracts, we were able to capture a part of that. Looking for '23, on our octane business, we're about 75% hedged at a pretty good spread. And then we expect the earnings for our propylene [better] and PDH to be pretty consistent. And maybe just one last one, if I could, as it relates to capital out there. Enterprise clearly has a fortress balance sheet relative to others in the space, and it seems like you can afford to be opportunistic if the right opportunity comes. How do you view the current, I guess, market out there as far as potentially acquiring assets, private or what have you? Is there anything -- any other part of the portfolio that you would look to kind of round out through M&A? We -- getting a position in the Midland Basin was important to us, and it's proved to be pretty successful. I think Randy Fowler always says price matters and price does matter. I think we're in a position right now that if there's anything out there, it's got to be pretty damn strategic for us to get interested. wanted to go back to natural gas for a moment. With the exception, maybe putting the Waha aside, which I think we all understand. Can you maybe just talk through the puts and takes on how this lower natural gas price environment will impact your business this year? You said it, Michael, there is a lot of puts and takes. Lower price obviously affects our equity gas and that's probably around $100 million a day. But if you look at our total gas burn and you equate our power consumption and you want to call that natural gas, at different price levels, we get imbalance. And the higher price, there's probably some knock on benefits to us, but there's a lot of pass throughs associated with this price. I mean the ultimate would be go sell the equity gas at the highest number, just wait and catch these load numbers, but we run a fairly balanced portfolio and it's not -- as Jim said, it's fairly balanced. The last thing I'll say, Michael, is that when you look at throughput in US petrochemical industry and you look at load gas and high crude, I mean, there's a lot of benefits for our pipeline system. Just had one other question really about distribution growth in 2023 and beyond really. So you obviously raised the rate of growth in 2022. So I'm just wondering is that a new run rate, is there a reasonable range to think about going forward? And then kind of related to that, are you going to be going to like a one increase per year type of model? Michael, I guess we did two increases in 2022. And we said we'll come in and take another look at it at the middle of this year, really don't want to come in and put out a marker of where expected distribution growth is going to be. We'll come in and take a look at it mid year. Certainly, we pivoted off the slower rate that we saw there as we went from an internal funding -- I mean, external funding model to an internal funding model. So you've seen that the growth bounced back up into the 5% area and we'll come in and evaluate it as we do every quarter. We continue to hear discussions on the higher GORs in the Permian along with just continued discussion on parent child interactions. Curious if you could just discuss if you're seeing higher GORs and higher parent child interactions that perhaps changing your view to the upside on associated gas production in the Permian going forward. The answer is we are continuing to see higher GORs. It's not surprising. Look, putting it simplistically, oil declines faster than natural gas and shale basins. So we modeled it and we projected in our projections. Relative to parent child, I'll tell you how we feel about it as a midstream company and watching all the rhetoric around it. We think parent child is a good thing, not a bad thing. And producers are learning more and more every day about it. And obviously, producers are getting larger in scale. We think when we read the different rags that parent child is a bad thing, it absolutely is a good thing. It's how you get the most out of the reservoir. So frankly, we don't sit up at night and -- the producers and we see a lot of them and have a lot of talks with them in their conference room for things that we're doing with them. I have to tell you, I don't think any of the major producers are losing any sleep over it either. Brent, do you agreeâ¦ And maybe to touch briefly on just future growth projects. Post the quarterly results, it seems like free cash flow profile is keeping pace with the recent rise in growth CapEx. Just given Slide 6 in the presentation is largely unchanged, curious if you could provide a little color into whether we're seeing new projects, i.e., processing plants are PDH 3 perhaps in the future, or is the rise in CapEx really just a function of maybe upsizing the existing projects, i.e., ethane exports or perhaps Shin Oak? I think our ethane and ethylene export expansions are pretty key. We're going to see a lot more demand for those products going forward. Our ethylene export is chockablock full and our ethane exports are growing. So I like those. We're building four processing plants in the Permian, two in the Delaware, two in Midland basin and probably all have Zach Strait knocking on the door, want to do the 14th fractionator, because we're not going to do 13. But on a lot of our projects, there's a knock on effect that we get out of those projects. So I can't think beyond where we are. $160 million in really key quarters. I mean, those kind of bolt-on deals will do all day long. As to PDH 3, I'll throw Chris DâAnn out of my office if he walks in with PDH 3. My question is also on the petrochem and refined segment specifically. Could you give me an idea of your sales volume expectations for the remainder of the year for your Chambers County propylene facility, wondered any more downtime expected there? And then maybe secondly, just is that PDH 2 facility in Texas Western System still on pace for next quarter and later this year respectively? And just in terms of sales, we expect those to be pretty stable. It's really a function of refinery grade propylene supply coming out of the refineries and what their run rates are. And so looking at cracks today, it's pretty profitable for them to run. So I would expect that to continue. Maybe just going back to the Permian. We had -- I guess there was a bit of a debate last quarter on just the pace of growth going forward. The Shin Oak kind of pushed to the right fell out of that, I guess. Just curious if you could update us there on again, when you think Shin Oak might be needed? I know you have the early â25 in the deck. So maybe just puts and takes on that timing and your general view on kind of NGL growth beyond this year out of the Permian. This is Justin Kleiderer, I'll speak to Shin Oak timing. I think we still feel good about that first half of â25. There's probably room for it to be accelerated given its two years from now. And in the meantime, we've got various amounts of options to create incremental capacity if that first half '25 doesn't prove early enough and we can't accelerate it. So we feel good at least for the next couple of years that we've got enough capacity. And then beyond that, we'll continue to evaluate what projects are needed to make sure that we have enough capacity going forward. Relative to Permian production, just so everybody know the EIA reported yesterday growth in crude from year end â21 year to November of 741,000 barrels, that was down from what they reported in October. So I know that we hear different things and everybody looks at their own acreage and capture our own numbers. But these are -- for lack of a better term, these are what the EIA calls actuals. We go back and we gauge our numbers to them. So we take a look back in our own models and directionally, these numbers are correct. And almost all of it, I'll use that term [loosely], but comes out of the Permian Basin, has liquids associated with it. So no change in the trend for us relative to what the production profile out in the Permian Basin. One quick one should be easy. Can you just remind us, are we done with the Eagle Ford contract roll offs? And maybe an update on what you're thinking about the basin overall? We had a major producer tell us we're in the second inning of a nine inning game in the Eagle Ford. I mean, the Permian just kind of dwarfs everything. But we had some -- our contracts and the ones we did have some roll-off. We renegotiated a lot of those and ended up with life of lease dedications, which we kind of like. It seems like it's becoming -- it's becoming kind of like the [Haynesville]. It's regional players and that's where they are and that's where they're going to drill. But we haven't forgotten the Eagle Ford by a long shot. Crude got capacity, but the contract roll-offs are over. I'd like to think everything that we had, incrementally, itâs going to be beneficial from a profitability standpoint. Andrew, I think our time is up for today. And so I just wanted to thank all our participants for joining us for our call. And with that, we will be terminating or ending the call. And thank you, and have a good day. Bye.
EarningCall_943	Good morning, and welcome to SouthState's fourth quarter 2022 earnings call. This is Will Matthews, and I am here with John Corbett, Steve Young and Jeremy Lucas. John and I will make a few prepared remarks and then we'll open it up for questions. As always, a copy of the earnings release and the presentation slides are located on our website on the Investor Relations tab. Before we begin our remarks, I want to remind you that comments we make may include forward-looking statements within the meaning of the federal securities laws and regulations. Any such forward-looking statements we may make are subject to the Safe Harbor rules. Please review the forward-looking disclaimer and Safe Harbor language in the press release and presentation for more information about our forward-looking statements and risks and uncertainties, which may affect us. Thank you, Will. Good morning, everybody. Thanks for joining our call. We're really proud of our team and the momentum that's been building throughout 2022. I think that 2021 is a year that we were taking the time to plant the seeds for the future, and 2022 was a year where those seeds began to take root and to grow, and that growth is reflected in the results that we announced last night. During the fourth quarter, PPNR per share increased 11% over the third quarter. That took us to a PPNR return on assets over 2% and a return on tangible equity of 20%. We set aside $47 million in reserves, but incurred less than $1 million in charge-offs. So credit quality metrics continue to be excellent and Will can walk you through the impacts of the Moody's economic forecast later in the call. Total loans grew 19% annualized in the quarter, and over the last few years, we've recruited some of the best middle market bankers in the Southeast and that team is doing a great job as C&I loans specifically grew at 27% annualized. In the period, deposits declined 6% annualized and we've still got balance sheet flexibility with an 83% loan to deposit ratio. Our total cost of deposits landed at 21 basis points, and so far this cycle, our cumulative total deposit beta is only 5%. If you step back and look at the full year for 2022, PPNR per share was up 36% over 2021. Loans grew 17%, deposits decreased 5%, and as we right sized the balance sheet, net interest margin expanded 120 basis points. Over the entire year, we set aside $82 million in loan loss provisions, but only incurred $4 million in charge-offs. So we strengthened our reserves in 2022 to prepare for a likely economic slowdown in 2023. In addition to organic growth, our integration team successfully completed the Atlantic Capital conversion last summer, and our Atlanta bankers are doing a terrific job in a dynamic market. The Census Bureau released their latest population report last month. We updated a Census Bureau map on Page six of the deck that breaks out the four regions of the country. And since the pandemic began in 2020 $1.7 million people in the Western states, the Northeast and the Midwest, sold their homes, they packed their bags and they moved to the South, and of the 1.7 million people that moved to the South, two-thirds of them landed in our SouthState markets. Based on the latest census reports, SouthState continues to do business in four of the six rowing states in the country, with Florida ranking number one as the fastest growing state in the country last year. As we think about the economy and the year ahead, it seems to us that the Fed is getting what it wanted. The economy is slowing and loan pipelines are shrinking. So we don't know if 2023 will be a soft landing, a mild or a moderate recession, but what we believe is that regardless of the direction of the economy, based on the level of population migration, the South will outperform other areas of the country. We believe in the power of compounding over time, so our aspiration has always been to grow everything good in the bank at a compounded annual growth rate of 10% a year over a cycle. Three years ago this week, we announced the merger of equals of CenterState and SouthState and began the integration process, coincidentally right when the pandemic hit. It's obviously been a volatile three years of monetary policy since the merger announcement and our growth has been lumpy, but if you look back over the last three years, and if you smooth out the lumpiness of the cycle, we've grown at the pace that we planned. Deposits have grown at a compounded annual growth rate of 13% since the merger announcement and loans have grown at a compounded annual growth rate of 9% a year since the merger announcement. So our team is executing on our plan and we're now witnessing the earnings power of their hard work. So I'll close by congratulating and thanking all of our team members from our IT team that made big improvements to our digital offerings, to our risk management areas that have strengthened our defences, to our bankers that generated $13 billion of new loans during the year, and our branch employees that have cared for our clients through countless changes. You've done a great job in a challenging environment. Thank you, John, and I'll echo your comments. The team's really done a great job executing in this environment, leading to great results for the quarter and the year. We had another very strong quarter and net interest revenue with a tax equivalent NIM of 3.99% up 41 basis points from the third quarter and core net interest income up $36 million. Our loan yields improved by 45 basis points, and our cost of total deposits rose by 13 basis points versus the third quarter. As we noted last quarter, we expect our deposit beta to increase from this point forward. Non-interest income totalled $63 million down $10 million from Q3. A few items I'll mention impacting non-interest income. We wrote down the value of our MSR asset by $3.2 million, which led to negative mortgage division revenue for the quarter. We also wrote down our SBA servicing rights asset by $900,000 for a combined $4.1 million right down on servicing assets in the quarter. You'll also note that we began applying settle to market accounting for a variation margin collateral on exchange cleared swaps to net against the swap asset or liability. That resulted in a decrease in deposits and swap assets on the balance sheet and a decrease in the corresponding interest expense and non-interest income with no effect on net income and to help with your models, we've adjusted prior periods accordingly as noted on Page 11 of the release. Mortgage production fell in the quarter to approximately $700 million with 81% of the volume being portfolio. Looking forward, expectations from mortgage production in 2023 remained muted at across the industry. We expect ours to also be down significantly from 2022, but we expect our percentage of secondary market production to increase. Correspondent income continued to be somewhat challenged in this rate environment. Service charge income showed a seasonal lift in our wealth management division closed out another strong year. Non-interest expenses of $228 million were up slightly from Q3 with no big swings versus the prior quarter. Looking to 2023, we currently estimate NIE in the $950 million range with the first quarter being in the low $230 million. That would represent an increase of approximately 5% from 2022 if normalized for 12 months of Atlantic Capital. I will note that there are of course factors in our business lines and in loan production that can cause the NIE number to increase or decrease through the year due to the impact on commissions, incentives and deferred loan costs. On the balance sheet, the $1.3 billion in loan growth John mentioned, was centered in single family residential CRE and CRE construction and C&I loans. Although we're starting to see some slight increased usage on commercial lines, line of credit utilization remains about 5% below pre-pandemic levels. Expectations for loan growth in 2023 are in the mid-single digit percent range as we're seeing pipelines and pre-flight discussions declined and a general sense of cautiousness amongst borrowers. Deposits declined approximately $600 million in the quarter. So coupled with loan growth, our cash and fed funds position declined $1.6 billion to end the quarter at $1.3 billion. We continued to have very little wholesale funding with only $150 million in brokerage CDs and no FHLB advances at year end. Our risk-based regulatory capital ratios were essentially flat compared to Q3 and our TCE ratio improved approximately 40 basis points to 7.2%. Ending TBV per share rose back above $40 to end the year. Turning to credit, as John noted, we continue to have excellent credit results, though we recorded a higher provision expense due to economic forecast changes. We had minimal net charge off for the quarter in the year one and two basis points respectively, and in fact, excluding DDA overdraft charge-offs, we had net loan recoveries for both the quarter and the year. NPLs were up $8 million ending at 36 basis points of loans caused by a $9 million increase in acquired SBA NPLs, which are generally 75% government guaranteed. So net unguaranteed NPLs were almost flat. As John mentioned, criticized and classified assets were down significantly with a $12 million decline in substandard loans and an $85 million decline in special mention loans. Our $47 million in provision expense was up $23 million from Q3 and was not due to a deterioration in credit, but rather due primarily to changes in economic forecast with growth a secondary factor. $33 million of this provision expense was for loan losses and $14 million was for the reserve for unfunded commitments. As noted on Slide 31, the ending reserve was 118 basis points of loans with another $67 million in the reserve for unfunded commitments. The combined total was a percentage of loans is up approximately nine basis points from Q3. Finally, I'll note that we've included some additional credit information on loan categories of interest and Slides 33 and 34. Thank you. Good morning, everyone. I guess maybe if I could start just with a question around resi mortgage and what you would expect to see that do on balance sheet, and that's been a nice additive portion of growth, but I think you just said, will you might have more mortgage going to the secondary market next year. What's the driver of that? Is that pricing or is that more that you're reaching more of a concentration limit on your balance sheet or how can we think about that, the interplay there on mortgage? Yeah. Hey, it's Steven. Steve yeah, it's been a really nice year for residential mortgage and if you think about the volatility in that in that business, particularly with the rates, it's changed a lot since the beginning of the year. I think at the beginning of the year, the 30-year fixed rate mortgage was somewhere in the 3% to 3.25%. It hit a high of about 7% I think 7%, 7.5%, in the late third quarter. We have a slide in the deck which talks, I think its Page 15 in the deck, and it describes sort of the balance sheet growth over the last three years in residential mortgage. And what you'll see in that graph if you look at it is, when rates were very low in 2020 and early '21, we strength the residential portfolio and then and sold a lot of our production in the secondary market when rates or when gain on sale margins were high. And then you can see as rates started rising, we started putting more of that on our balance sheet. So if you kind of looked at our three-year cycle, we grew about $950 million, but we shrink some and we grew some depending on the balance sheet management side. So it was about 6% CAGR over the course of a three-year period. As we sort of normalize that, I would think that, our residential mortgage will grow about the same as the rest of our loan book, and I think we've got to mid-single digits. So, just to kind of give you some perspective, we've grown 6% CAGR over the course of a three-year period. But clearly, residential rates have come down and the secondary market is a little bit more attractive than it was a few months ago. Okay, that makes a lot of sense. Thanks Steve. And then I think last quarter you said an 80% to 85% kind of loan-to-deposit ratio by year end '23. Obviously, we're already that 83% level. So do you think that moves higher than that 85% range at this point. And then is the 24% cycle deposit beta still the right number to think about or given how much outperformance you've had to date do you think it's better than that? Yeah, this is Steve again. I guess from a loan-to-deposit ratio, let's talk about our guidance and really -- it really hasn't changed a whole lot. I think our starting point changed a little bit on the deposit side and that's why we had a little bit higher deposit rate. But what we were -- our goal is for 2023 is to grow loans mid-single digits and keep deposits roughly flat or maybe slightly up, but somewhere in that area. We have that page, but let me take a bigger picture just for a second. And I think you're trying to get to the question about margin. So let me kind of just talk to that a little bit. John mentioned it on the call, but we had a great year on margin expansion and I think we have a Page 12 in the deck that talks about kind of the progression of net interest margin from the fourth quarter of last year to the quarter this year and NIM's up 120 basis points. I've never seen that in my career from the last -- from the last fourth quarter, and it's actually at 41 basis points this quarter. So as we talk about guidance for margin, I'm going to give you the same guidance for 2023 that we had in October with just one update. So as you think about the assumptions for margin, there's really three things. It's the size of the interest earning assets, it's the assumption of interest rates, and it's the last question you asked, which was the deposit data assumption. So in October, when we have this call, we gave a guidance about $40 billion average interest earning assets based in '23 and we're starting out a little smaller than that, but probably under little larger. So there's really no change to that guidance. On the last earnings call, as it relates to interest rates, on the last earnings call in October, the Moody's consensus forecast was for fed funds to peak out at 4.75% in 2023. I think in the last forecast, it's moved up 25 basis points to peak out at 5% and then there to be a 25 basis point decrease by the fourth quarter. So if you kind of average it out, it's basically the same for 2023. The question you ask on Page 20 is our deposit data and it shows our cycle to deposit -- cycle to deposit beta is at 5% versus our historical at 24% from last time and we just continue to model the same deposit by beta as lifecycle. And then based on the interest rate forecast deposit beta, we would expect deposit cost to get in that 1.15% to 1.25%, that second part of the year, which is about a 100 basis points from where we were there this past quarter and as we think about that timing, we would expect, 40% to 50% of that to happen in the first quarter with the remainder of that over the -- of the rest of the year. So with all that, I'd just say, during our last call, we guided to -- in '23, we guided to a 3.60% to 3.80% NIM range for 2023. And our guidance -- or our assumptions really haven't changed on any assumptions, but we are increasing our NIM guide to 3.70% to 3.90% for 2023. And that increase really is due to the 10 basis point re-class of the interest cost on the swap collateral that is now in noninterest income. Our noninterest -- our net interest income guide increases by 10 basis points, and it decreases by the same amount to noninterest income, but total revenue is the same. But really, our guidance is essentially the same just with the whole geography change. So it's a long-winded answer. But hopefully, that gives you the pieces and parts as we're thinking about '23. Yes. Extremely helpful color, Steve. And if I could just squeeze in one last one. Just maybe more high level here. John, you noted three years since you announced the larger MOE here, and you still have an advantage currency, and as you said, in really some of the markets in the country. But if you were to do incremental M&A over the next, let's call it, two years, what would be, do you think, your focus there? Is it still deepening further in your current markets? Would you look to expand into other strong Southeast markets? Or how do you think about the franchise over the next couple of years? Sure, Stephen. I think this question was asked last quarter and really, our thoughts on M&A have not changed. Our view is that as we look into 2023, M&A is going to be pretty slow for a couple of reasons. I mean, right now, there's just not a lot of clarity as it relates to the regulatory approval process, and there's not a lot of clarity as it relates to potential recession risk. I think the whole industry is going to be slow on M&A in 2023. I believe it's likely to pick up towards the end of the year as banks begin to meet and think about the future earnings stream. If you've got an inverted yield curve, it's likely that earnings are going to flatten off in 2024, and people will be more enthused about M&A than they are today. Our thought process -- we've built the company in high-growth markets. And typically, the type of target that makes the most sense for us is something that's about 10% our size to one third of our size. And our preference is our existing high-growth markets. It's easier to get synergies, and we've got markets that are four of the six fastest-growing states in the country. So that would be our preference. If we ever left the existing footprint that we have today, we would look for similar kind of growth characteristics. But if you look at the GDP of the six states we're in, it would represent the fourth largest GDP in the world. So we've got a lot of opportunities to fish where we're at. Just a follow-up on the deposit beta conversation. Your betas has just been so incredible. And I think the call for them to stay at about a 24% level is obviously going to be industry-leading. And so is there a way to just -- I think a lot of it is because of your deposit composition, right? You've got so much in check, and it's a very granular portfolio, but we're seeing betas really accelerate across the industry. So is there a way to kind of explain why the beta won't accelerate as much as you're seeing some peers? Is it -- and maybe within that, kind of talk about the balance -- or the deposit composition. Are you expecting much change in that composition or for your kind of balance of CDs, checking and DDAs to remain about the same? And then maybe give us a sense as to the betas within each deposit category just to kind of show that maybe some of your higher cost categories really are having a beta like everybody else, but it's your mix that's driving this better performance. Sure, Catherine. It's Steve, and that's a mouthful of a question, but I think I get your questions. So let me kind of -- I'll go back to Page 18 is our sort of our deposit discussion. And I think you laid out a couple of these things and then help me -- I'll try to expand on that. 61% on Page 18, 61% of our deposits are in checking accounts. And typically, those are the warehouse accounts for commercial, small business and retail. Our peers are at 43%. So if I were to point to one thing, I think that would probably be the reason that we think the overall deposit beta is at 24%. When you look at the different pieces, it's not just commercial. It's not just small business. It's not retail. It's really almost one third, one third, one third in each of those categories, and you can see the various average checking balances. Having said all that, it is clearly a battle on the deposit front. And the most sensitive things that are going to be to interest rates on deposit accounts are going to be money markets and CDs. And like everyone else, we're feeling the same thing. And that's why I think as we look at the next year and if we look at those deposit betas, and we assume that we end the year about 100 basis points higher than where we are today, a lot of that -- we think 40% to 50% of that gets front-loaded into the first quarter. And the reason for that is we certainly are feeling the pressure on the money market CD side. And as of January 1, we raised rates across the board. So I think that area of the balance sheet is going to feel much more rate-sensitive than our checking accounts. And our job, of course, is to continue to grow core clients to protect the deposit franchise, which is, as you know, the most important part of our balance sheet. So as you see volatility in rates and how the yield curve has changed over the past 12 months, it was going to catch up. It is catching up for sure, but we still feel good today about our total cycle beta. And assuming that the Fed stops raising rates here in the next quarter or so, we'll see a lag. It'll definitely continue to increase some, but we like sort of our position and that NIM guide kind of has all that put together. So hopefully, that's helpful. And Catherine, its Will. I would -- just to elaborate a little bit. Obviously, this cycle is a little different than ones we've seen in the past. And we're giving you our best estimates based on what we see thus far, but we're certainly out there balancing the same battle everyone else is. We do feel like we entered it with a really healthy core deposit base and mix. And we've really allowed our market leaders who are closest to the customers and the ability to negotiate with clients on a one-off basis and rather than us trying to make all the decisions from headquarters. So that's our strategy thus far. And hopefully, we'll be successful and have a say somewhat like last time, but it is a different environment. Of course, we acknowledge that. For sure. Okay. That's duty helpful. And maybe the other question is this is just on the on the reclass of the interest cost of the swap collateral that you disclosed this quarter. I saw it's about $8.4 million today as -- and that's been increasing, obviously, as rates have been going up over the past couple of quarters. So as we think about what -- if we're trying to model what that number is, is it fairly steady at this $8.4 million, assuming the Fed maybe up a little bit with just 2 more hikes? And then as it plateaus, this is about where that level should be? Or is there something more with rates changing that drives what that number is over the next few quarters? Yes, Catherine. There's really 2 pieces to it, and it's not easy to predict. That's the short answer. But there are 2 factors. Now we're talking about the amount of collateral we post. And the amount of the collateral is really dependent on the 10-year treasury, essentially. And then the cost of that collateral is depending on the Fed funds rate. So -- and if you think about it, really, we're sort of at a neutral point in the 10 year is around 2%. So as rates come down, less collateral posted to us, the tender rate comes down. As the Fed fund rate moves up or down, the interest thereon moves up or down. So it's kind of hard to predict. I think Steve's numbers -- he was just given -- he was assuming about $10 million a quarter in that 10 basis point comment he made a few minutes ago about margin dollar -- moving the margin dollars from noninterest income, but it's a little bit of a swag at this point. Great. Okay. I guess my big picture was thinking that there wasn't -- it wasn't like that's going away, and that's part of the guidance for the NIM. I mean it should be stable going forward, which helps. Yes. Catherine, I'd just say that it's about $800 million at the end of the quarter, give or take, a little bit. And if we're to close to 5% Fed funds rate, that's about $40 million a year, and that's sort of the assumption, and that's the 10 basis points on assets. Got it. That makes sense. Okay. Perfect. And then maybe my last question is just on the fee outlook. Has anything changed? The correspondent has been a little bit lighter than expected outside the reclass. So just any kind of thoughts on your forward guidance for fees as we enter '23? Yes. Catherine, fee income was a little over $63 million, 57 basis points of assets. Our last guidance was between 60 basis points and 70 basis points. But as Will mentioned earlier, we have some one-off events in mortgage servicing, SBA servicing, asset write-downs. I think that was $4.1 million or $4.2 million and of course, the reclass, the central collateral was another $8.5 million. So if you kind of threw all that out, it'd been up 68 basis points. So it has been kind of in the middle of the range. But as we kind of think about comparing the fourth quarter to future, until the Fed stops raising rates and some of our interest rate-sensitive businesses like mortgage and core deposit, we think it's probably similar, 55 to 65 basis points of assets. And then that's not decline of 10 basis points. But if the Fed stops raising rates, we would expect that to start picking back up again and -- for the noninterest income to average assets to increase back towards 60 to 70 basis points. So -- but we're in a transition period where NIM is obviously 120 basis points up. Noninterest income has fallen. My guess is, is when the Fed stops raising rates -- we've guided with you with the NIM, and probably the noninterest income businesses start moving back up towards the back half of the year if our interest rate forecast is right. Just on the expenses, just a couple of questions. Can you just remind us what the expectation is for the FDIC expense pickup is this quarter? And if you can kind of remind us what you're assuming for annual merit increases like in the first quarter. Just trying to get kind of a level set as we think about just kind of the first quarter within the context of roughly $950 million of NIE for the year. Yes. Michael, I don't have the precise FDIC insurance expense model in my head, so I can't answer that part of the question. We've modeled essentially a 4% merit increase across the footprint. And we do have some new hires. We're investing in a number of parts of our business across the footprint as a result of our strategic planning and strategic initiatives process that we just completed in the fall. And so there's some new hires coming in as well on some of that. And that will be come in throughout the course of the year as those initiatives begin, but all that's baked into that $950 million number that I referenced and expecting something in the low 2.30% in the first quarter. Like I said in my prepared remarks, and you know this, but there are factors that can cause that to move around a little bit. I mean loan production moving up or down will impact deferred loan costs. Production versus incentive goals will affect incentive compensation, things like that. So those are all variables that are in there, but that's our best estimate at this point. Perfect. And then just moving to credit. Obviously, you guys built the reserve this quarter. It seems obviously changing a little bit of the modeling inputs, but it seems pretty conservative, especially with criticized classified moving actually down again Q-on-Q. Is there anything that when you look out at the portfolio that kind of worries you? There's been a lot of talk around office and commercial real estate, maybe construction to some degree. I think this was asked every quarter. But just generally, how are you guys feeling about credit? And assuming the backdrop continues to soften or deteriorate, would we expect to see that reserve ratio continue to kind of grind higher under those pre-tense? Michael, it's John. I can maybe start on the asset quality. If Will has an opinion on CECL. I know I can tackle that. But as you mentioned, the asset quality is remarkably good right now. I mean charge-offs, 1 basis point is really all DDAs. So we've had net recoveries, loan recoveries in the quarter and in last year. Non-accruals did pick up, but it's almost entirely, as Will said, government-guaranteed SBA. So the nonguaranteed portion is basically flat. We've added some slides, too, Michael, you might be interested in Page 33 and 34 that kind of breaks out our underwriting loan-to-value debt service coverages on commercial real estate and then also our consumer portfolio. But as far as the areas that we kind of are focused on and we think could be challenging in the next year or two, small business naturally is one. I mentioned that pickup in SBA loans. But fortunately, we've got the guarantees there. But if you think about the pressure on small businesses with wage inflation, rent inflation, interest rate cost, that's an area to watch. It's very small for us, a couple of hundred million dollars, but the assisted living area with COVID, that, that continues to be something that we're working through, some weakness there. And on office, the metrics are all great right now for us. But there is this social demographic shift that's going on. We look at our office book, and it's about 4.4% of the total loan portfolio. Right now, we're at a 62% loan-to-value and a 1.67x debt service coverage. So it underwrites fine. I think the advantage for us on office is that we've done mostly smaller properties, 78% of them are under 150,000 square feet. And our average office loan is only $1.3 million. So 90% of the portfolio in office for us doesn't mature until 2025 or after. So hopefully, the office ship will be a slow-moving train, and our clients and us will be able to react as the market shifts. But those are the areas we're watching so far. We haven't seen the deterioration or past dues are stable, and special mention classifieds are coming down. Yes. On the CECL point, Michael, I guess a couple of things. One, our CECL model utilizes loss data from every bank we've acquired, excluding five or six banks dating back to 2004. And this is both of the companies making up our MOE. And that's about 60 or 61 banks in total, I think. Our loss drivers really vary by loan type, but they include South Atlantic region unemployment. The housing price index year-over-year change. The CRE price index year-over-year change, apartment rental vacancy rate and GDP for the South Atlantic region. So our future reserve levels or our future provisioning expense is going to depend upon changes and forecast for those loss drivers as well as our actual net losses, which, of course, brings down the reserve. We continue to be more conservative in our outlook than Moody's. Our reserve is about 20% to 25% higher than it would be under the straight Moody's baseline scenario, though Moody's has gotten a little more conservative showing more economic weakening this quarter. I don't think it's appropriate for me to comment on the validity of an accounting standard of FASB makes the rules, and we live by them. But if you look at our company over the last 3 years and you sum up the absolute value of our provision expense, positive and negative, and you get something north of $500 million. And over the same 3-year period, we've had cumulated net charge-offs of something around $12 million. I'm not suggesting that 1.5 basis points a year is a sustainable net charge-off level. But I think in our view, what's more important is not so much how much provision expense we have, but rather how much money we lose in net charge-offs, because until we charge it off, the provision expense really just moves from one form of capital to another. No, I certainly appreciate that. And John, I appreciate those slides put in the back, I forgot to mention those in the outset of the question. So it's good to hear. Just one final one for me, point of clarification. Obviously, the NIM guide moving up a little bit. That's the all-in in, correct? And if so, if you can just tell us what the expectation is for accretion -- or scheduled accretion is this year. Yes, Michael. Yes, that's right, all-in NIM between 3.70% and 3.90% for the year. The accretion, of course, I think in the fourth quarter was around $7 million, $7.5 million. I think we are modeling that around $20 million for full year of 2023. So it comes down a little bit. But all that's factored in the entire cut. . Yes. And just to reiterate, though, the move off essentially was the geography change with respect to the collateral. So as Steve said earlier, I just want to make sure that point is clear that we got -- it moves guidance up on the NIM but by a similar amount down on the noninterest income. So total revenue essentially where he was -- where we were guiding last quarter. Appreciate the guidance in terms of the expectations for loan growth. Obviously, you guys have had entered fourth quarter with plenty of excess liquidity or planned liquidity, took down cash a bit. How should we think about the funding of that loan growth? Is that securities runoff, a little bit more cash? Did you get a little bit more aggressive on wholesale borrowings? Just curious how you're thinking about the funding of the growth this year. Yes, David. This is Steve. Mid-single digits, let's say it's $1.5 billion of loan growth, give or take, a little bit is our expectation for 2023. We have about, I don't know, $800 million to $900 million coming off the investment portfolio, so we'll use that cash. And then with our guide with deposits, somewhere between flatten up $500 million to $600 million is sort of the expectation for the year. And then as it relates to deposits, as Will mentioned on the call, at the end of the year, I think we had $150 million or so of broker that's been out there for, I don't know, three or four years, and no wholesale borrowings at the Federal Home Loan Bank. I think as we kind of go through this period, I would expect -- I think let me go back. In 2019 -- at the end of 2019, I think we had a little over $1 billion, $1.2 billion between broker and FHLB. It wouldn't surprise me if over the course of the next 12 months, we had something similar to that. But bottom line is pretty close to flat on deposits, a little bit up. Okay. Appreciate that. And then curious, just a final question for me. In terms of onboarding of new loans this quarter, just curious where you're seeing new loan yields on new production this quarter versus last. Yes. David, our new loan production, I don't have in front of me the fourth quarter. I think in December, it was approaching 6% or so on the new loan production. I think our overall portfolio yield as a spot day at the end of the quarter was a little less than 5%, but close to 5%. So essentially, you're -- portfolio is around 5%. I think we ended in line with the quarter was around 43% I think was the average. I think our ending was a little less than 5%, and we're putting on loans close to 6%, give or take. All right. So thank you, and those are good questions. And as always, we appreciate your interest in joining us on a busy earnings call morning. So appreciate that. If you have any follow-up questions in your models, don't hesitate to give us a ring. Hope you guys have a great day.
EarningCall_944	Hello, and welcome to the LyondellBasell Teleconference. At the request of LyondellBasell, this conference is being recorded for instant replay purposes. [Operator Instructions] I would now like to turn the conference over to Mr. David Kinney, Head of Investor Relations. Sir, you may begin. Thank you, operator. Before we begin the discussion, I would like to point out that a slide presentation accompanies today's call is available on our website at www.lyondellbasell.com/investorrelations. Today, we will be discussing our business results while making reference to some forward-looking statements and non-GAAP financial measures. We believe the forward-looking statements are based upon reasonable assumptions and the alternative measures are useful to investors. Nonetheless, the forward-looking statements are subject to significant risk and uncertainty. We encourage you to learn more about the factors that could lead our actual results to differ by reviewing the cautionary statements in the presentation slides and our regulatory filings, which are also available on our Investor Relations website. Comments made on this call will be in regard to our underlying business results using non-GAAP financial measures such as EBITDA and earnings per share, excluding identified items. Additional documents on our Investor website provide reconciliations of the non-GAAP financial measures to GAAP financial measures, together with other disclosures, including the earnings release and our business results discussion. A recording of this call will be available by telephone beginning at 1:00 p.m. Eastern Time today until March 3 by calling (877) 660-6853 in the United States and (201) 612-7415 outside the United States. The access code for both numbers is 13734290. Joining today's call will be Peter Vanacker, LyondellBasell's Chief Executive Officer; our CFO, Michael McMurray; Ken Lane, our Executive Vice President of Global Olefins and Polyolefins; Kim Foley, our EVP of Intermediates and Derivatives and Refining; and Torkel Rhenman, our EVP of Advanced Polymer Solutions. During today's call, we will focus on the fourth quarter and full year 2022 results, current market dynamics and our near-term outlook. Thank you, David, and welcome to all of you. We appreciate you joining us today as we discuss our fourth quarter and full year 2022 results. Let's begin with our safety results on Slide number 3. LyondellBasell's employees and contractors delivered an outstanding safety performance during 2022. Injury rates at our company have consistently been among the lowest for our industry. But last year, we reduced the rate of injuries across our global workforce by roughly [0.5] to 0.12 injuries per 200,000 hours worked. At our Bayport complex outside of Houston, our team finished 2022 with over 6 million consecutive safe work hours, a new company record. Simply put, a consistent focus on safe work is embedded in our company's DNA and provides a solid foundation for extending that shared focus across other dimensions of the company's culture. Let's now turn to Slide number 4 to discuss our financial results. 2022 was a very challenging year characterized by a war in Ukraine, evolving responses to the COVID pandemic, energy volatility, inflation and rapidly changing monetary policies. At LyondellBasell, our portfolio of businesses continued to provide value for our global customers with products and solutions that are essential for modern society. In '22, LyondellBasell delivered earnings of $12.46 per share with EBITDA of $6.5 billion. Cash generation was exceptional and resulted in $6.1 billion of cash from operations; second only to our 2021 results. We ended the year with $6 billion of liquidity supported by a strong investment rate balance sheet. Interim invested capital was 16%, far exceeding our cost of capital. In addition to our focus on safety, we are sharpening our strategic focus to maximize value for our customers, shareholders and society under a range of scenarios. On Slide number 5, we outlined our progress on delivering value from this strategy over the past year. Our leadership in cost management and operational excellence enabled LyondellBasell to hold fixed costs well below inflation, and quickly adjust operating rates in response to evolving market conditions. Our diverse global business portfolio provided outstanding cash generation during a challenging year. And at the same time, we positioned the portfolio for changing times with decisions to exit refining and sell our Australian polypropylene business. We established a new business unit, focused on establishing leadership in providing circular and low-carbon solutions for our customers. And we are advancing our supply chains, production capacity and sustainable assets to serve rapidly growing markets for these circular and low-carbon products. Last quarter, we announced our increased focus on capturing value as we continue to manage costs. We expect our value enhancement program will generate at least $750 million in recurring annual EBITDA by the end of 2025. Our increased focus helped drive a [13 percent point] improvement in cash conversion in 2022. That further bolstered our capital structure and supported generous shareholder returns. On Slide number 6, I would like to highlight our recent decisions to accelerate progress on our climate targets and create more value by doing so. In order to meet the goals of the Paris Climate Agreement, climate scientists believe that global warming should be limited to no more than 1.5 degrees Celsius above pre-industrial levels. In December, we announced our decision to increase LyondellBasell's 2030 targets for reducing scope 1 and Scope 2 emissions to 42% and established a new Scope 3 emission reduction target of 30% relative to 2020 levels. Targets are now aligned with the science-based guidance and the 1.5 degree Celsius scenario. In addition, as we continue to make progress in sourcing, favorably priced renewable electricity, we have increased our 2030 goal to procure at least 75% of our global power generation needs from renewable and low-carbon sources. Earlier this week, we announced our first 2 renewable power purchase agreements in Europe and 2 additional agreements in the United States. Altogether, we now have 8 agreements in place for 930 megawatts of renewable power capacity, which represents roughly 1/3 of our global needs. These agreements will prevent nearly 1 million tons of annual greenhouse gas emissions. All of this work supports our goal to become net zero in Scope 1 and Scope 2 emissions by 2050. At the same time, we continued to build global businesses that will sell at least 2 million tons of recycled and renewable base polymers by 2030. On Slide number 7, let's take a look at how we are building our Circle brands of recycled and renewable base polymers. During the fourth quarter, we announced progress in developing 4 new plastic waste sorting and recycling facilities in Houston, Germany, India and China. These facilities provide a strong foundation for a robust global supply chain for plastic grade feedstocks. And with our 3 product platforms, CirculenRecover for mechanical recycling, CirculenRevive for advanced recycling, and CirculenRenew for renewable-based feedstocks, LyondellBasell will be able to match feedstocks and products with the highest value solutions for our customers. The combination of our focus, detail, technologies and global platforms provides LyondellBasell with powerful advantages to build the world's leading circular and low-carbon Solutions business. Now with that, I will turn the call over to Michael first, and then to each of our business leaders who will describe our financial and segment results in more detail. Thank you, Peter, and good morning, everyone. Please turn to Slide 8, and let me begin by highlighting our excellent cash generation from our business portfolio during 2022. LyondellBasell generated a total of $6.1 billion of cash from operating activities over the past year. Our cash on hand increased to $2.2 billion at the end of the fourth quarter. During 2022, we achieved cash conversion of 96%, 13 percentage points higher than our 2021 cash conversion. In the fourth quarter, cash conversion reached an outstanding rate of 203%. This efficient and robust cash generation allowed the company to return a total of $3.7 billion to LyondellBasell shareholders in 2022. Let's continue with Slide 9 and review the details of our capital allocation over the past year. Our approach remains focused on disciplined capital allocation and strong returns for our shareholders. During 2022, cash from operating activities fully funded dividends, share repurchases and capital expenditures. We returned approximately 60% of the cash from operating activities to shareholders. This included $3.2 billion in quarterly and special dividends and $420 million in share repurchases. In May, we increased our quarterly dividend by 5%. This represents our 12th consecutive year of annual dividend growth. We continue to invest in maintenance and growth projects with $1.9 billion in capital expenditures. A significant portion of this capital funded the final stages of construction of our world-scale PO/TBA plant. Startup activities remain on track for the end of this quarter. Our transformation of is working across our company to rigorously manage and track the progress of our value enhancement program. We look forward to sharing the progress of this program at our Capital Markets Day in March. Now I'd like to provide an overview of the quarterly results for each of our segments on Slide 10. LyondellBasell's business portfolio delivered $865 million of EBITDA during the fourth quarter. Our results reflected margins stabilizing at the low levels seen towards the end of the third quarter. Moderating energy and feedstock costs provided modest offsets for compressed margins in our olefins and polyolefins businesses. Overall, OMP demand remained low, particularly in Europe and China. Intermediates and Derivatives results sequentially declined on lower volumes due to the quarterly timing of oxyfuel vessel shipments. Margins at our oxyfuels and refining businesses remained above historical averages as demand for fuels remained strong due to increasing global mobility. High cost for utilities and raw materials coupled with low seasonal demand negatively impacted our Advanced Polymer Solutions segment. Across the portfolio, a noncash LIFO inventory valuation charge impacts pretax fourth quarter results by approximately $90 million. Fourth quarter LIFO charges were approximately $15 million for O&P Americas segment, $50 million for the O&P [EII] segment each for the intermediates and derivatives in APS segments, $15 million for the Technology segment and a $40 million benefit for the refining segment. As a reminder, volatility in natural gas prices impacts our cost for not only gas, but also steam and electricity. We estimate that a $1 per million BTU change in the price of natural gas impacts the energy cost of our directly operated assets by approximately $175 million per year across the company with 80% of this impact in North America and 20% in Europe. These estimates do not include the impact of gas price on feedstock cost. Before I turn the call over to Ken and then to each of our business leaders, who will describe our segment results in more detail, let me address some of your annual modeling questions for 2023 on Slide 11. As our new world-scale PO/TBA plant ramps up, we expect to produce and sell about half of the asset's nameplate capacity in 2023. We remain confident that our value enhancement program can achieve recurring annual EBITDA of $150 million by the end of 2023 through the execution of about 1,000 projects. In order to achieve this benefit, we expect to incur a similar amount of onetime capital and operational cost of about $150 million, with the majority of these costs allocated to capital. Major planned maintenance for 2023 included a turnaround at one of our Midwest ethylene crackers in the O&P Americas segment, turnarounds at our acetyls assets and 3 propylene oxide plant turnarounds within our I&D segment. Based on expected volumes and margins, we estimate that lost production associated with all of this maintenance downtime will impact 2023 EBITDA and by approximately $290 million. While routine maintenance costs are expensed, maintenance costs arising from turnarounds of major production units are capitalized and included in our capital expenditure forecast. During the fourth quarter, we recognized costs related to the exit from our refining business, which impacted EBITDA by $73 million. As I mentioned last quarter, we expect the business will incur similar EBITDA impacts during each quarter of 2023. We will also recognize about $55 million each quarter for depreciation charges to reflect cost accrued for asset decommissioning that will be incurred after the asset shuts down. We expect that our capital expenditures will decline by about $300 million to approximately $1.6 billion this year with the completion of the PO/TBA plant and disciplined spend resulting from the current business environment. Approximately $500 million of CapEx is targeted towards profit-generating growth projects with the remaining balance supporting sustaining maintenance. We expect that this year's capital requirements for the value enhancement program will be funded within our $1.6 billion CapEx budget. Other financial metrics worth noting include net interest expense, depreciation and amortization, pension related estimates and tax rates. We expect 2023 net interest expense will be approximately $405 million. Depreciation and amortization charges for 2023 are expected to be $1.4 billion, which includes the [$202 million] of additional refinery depreciation charges related to asset decommissioning. We plan to make regular pension contributions in 2023, totaling about $65 million with approximately $105 million of pension expense for the year. We expect our effective tax rate will be approximately 20% and our cash tax rate will be lower than our ETR. Thank you, Michael. Let's begin the segment discussions on Slide 12 with the performance of our Olefins and Polyolefins Americas segment. Fourth quarter O&P Americas EBITDA was $359 million. Prices and margins stabilized at the low levels we saw at the end of the third quarter. Market demand declined, and we also saw customer destocking during the quarter. That, combined with new polymer capacity resulted in well-supplied markets. We operated our assets at approximately 75% of nameplate capacity to match the reduced market demand and manage working capital. During January, we have seen modest improvements in domestic and export demand. Normalization of logistics constraints have facilitated increased export volumes. Also, moderating feedstock and energy costs are providing some margin tailwinds. As a result, we expect to operate our O&P Americas asset at an average of approximately 80% during the first quarter. Looking back at 2022, I want to highlight our progress on developing our Circulen business. We have established projects for classic waste sorting facilities that will be used to provide feedstock for our circular recover and certain the Revive product lines. We are also moving phoned our usage of olefins feedstocks produced from renewable sources such as used cooking oil. During 2022, we processed 15,000 tons of renewable feedstocks at our Channelview, Texas cracker, to produce ethylene, propylene and ultimately, polyethylene and polypropylene that we sold to customers at premium prices under our Circular brand. Last year, 4 of our U.S. manufacturing sites attained the ISCC Plus certification for certain grades of polyethylene and polypropylene. This enables LyondellBasell to offer customers mass balance certificates for these products and serve the market's rapidly growing demand. We are delivering these new circular new products to our customers and proving that polymers can be more sustainable and used in any application where virgin polymer is used. Now please turn to Slide 13 to review the performance of our Olefins and Polyolefins, Europe, Asia and International segment. In Europe, macroeconomic pressures were exacerbated by high inflation and energy costs that curtailed operations at our customers and pressured consumer demand. LyondellBasell operated our O&P assets at rates of approximately 60% during the fourth quarter. LIFO inventory charges were $50 million during the quarter. All of this combined to result in a fourth quarter EBITDA loss of $152 million. European energy costs have considerably moderated in January, and demand is showing some signs of improvement over the extremely low level seen in December. We have completed repairs and we started our integrated cracker in France at the end of 2022 and expect to operate our European assets at a rate of 80% during the first quarter. As in the Americas, we continue to focus on long-term strategies to support our Circulen and Low Carbon Solutions business in Europe and Asia. During October, we announced new partnerships for plastic waste sorting facilities in Germany and China, and a fully automated mechanical recycling facility in India. These partnerships will allow us to swiftly develop fit-for-purpose plants in each region to supply feedstocks for our circular products has served a rapidly growing market for circular solutions. In November, we announced our decision to move forward with engineering to build our first commercial scale advanced recycling plant in Germany. This plant will utilize LyondellBasell's proprietary MoReTec technology to convert plastic waste from our waste sorting facility into pyrolysis oil that can be used as a feedstock to produce new plastic resins in a circular process. We are moving rapidly to build circular and low-carbon solutions for our industry at an unmatched scale. Thank you, Ken. Please turn to Slide 14 as we take a look at our intermediates and Derivatives segment. Fourth quarter EBITDA was $291 million. Styrene margins improved due to lower feedstock costs. Oxyfuel margins remained well above historical fourth quarter averages. Oxyfuel volumes declined as the timing of the vessel sailings resulted in unusually high third quarter volumes. We operated our assets at rates of approximately 75%. Our propylene oxide and styrene joint venture in the Netherlands is expected to restart this month after 3 months of downtime in response to volatile European energy costs and lower demand. We look forward to initial volumes from the new PO/TBA asset in Houston by the end of the quarter. We plan to operate our assets across the IND segment at approximately 80% in the first quarter. In January, we are encouraged by unseasonably strong oxyfuel margins with low butane feedstock costs and strong oxyfuel blend premiums. We expect relatively stable margins for the segment for the first quarter. We developed multiyear maintenance schedules to ensure that our plants can safely and reliably serve our customers. As it works out, 2023 will be a heavy year for maintenance across several of our PO/TBA assets. Maintenance is scheduled for 2 of our 3 PO/TBA plants at our Bayport, Texas facility in the second and fourth quarters. Our [indiscernible] PO/TBA facility in the Netherlands will also undergo maintenance from September through November. We expect the ramp-up in volumes of our new plant will be partially offset by loss production from this planned maintenance. Nonetheless, the incremental 2023 PO and TBA volumes should be sufficient to capture typical market growth. In 2024, we expect less scheduled maintenance and the full year of production from our new assets will provide additional volumes to serve market growth. Now let's turn to Slide 15 and discuss the results of the Refining segment. Fourth quarter EBITDA included a LIFO inventory valuation benefit of approximately $40 million. Results increased on higher margins and slightly higher volumes following the third of the planned maintenances, offset by the disruptions of the December freeze. In the fourth quarter, the Maya 2-1-1 spread modestly increased to $48 per barrel, remaining well above historical averages. Despite unplanned downtime, we operated the refinery at 85% of capacity with an average crude rate of 229,000 barrels per day. In January, the Maya 2-1-1 spreads have also been unseasonally strong at more than $50 per barrel, driven by strong discounts for heavy crudes. We expect to operate the refinery at approximately 85% of capacity in the first quarter. Finally, I would like to recognize our team at the refinery for finishing the year with 0 recordable injuries in 2022. This is the first time such a record has been achieved in the 104-year history of this facility. Our team is dedicated to safely and reliably operating these assets until we exit the business. Thank you, Kim. Now let's review the results of our Advanced Polymer Solutions segment on Slide 16. Fourth quarter EBITDA declined to $3 million. Margins remain pressured by feedstock and energy costs as well as the $25 million noncash LIFO inventory valuation charge. Volumes fell on lower seasonal demand exacerbated by high power prices that impacted our European customers' businesses. In the fourth quarter, we embarked on a journey to transform the APS segment. Our goal is to sharpen our focus on customer service and product development to maximize value for our customers and for LyondellBasell. With increased autonomy and accountability, we are developing a more agile operating model with meaningful media and segment growth strategies. As part of this transformation, the Catalloy and polybutene businesses will be moved from APS and reintegrated into the O&P segment beginning January 1, 2023. This move will allow the APS team to sharpen their focus on the compounding business, distinct from the Polymer business of Cattaloy and polybutene, which serves our O&P value chain. From a portfolio point of view, we estimate APS will shift approximately $200 million of annual EBITDA between O&P Americas and O&P EAI segments very equally. We plan to provide additional information regarding the impact of this change in March. I strongly believe that our APS platform has a lot of potential and I look forward to reporting on our team's progress in delivering on this transformation during our Capital Markets Day in March. Thank you, Torkel. And to the entire LyondellBasell team, thank you again for all the hard work in delivering strong results during a challenging year. To close out on the segments, let's turn to Slide 17 and discuss the results for our technology business on behalf of Jim Seward. During the fourth quarter, reduced global polyolefin industry operating rates resulted in lower catalyst volumes, licensing revenue moderated due to the timing of milestones for revenue recognition. We estimate that the first quarter results for the Technology segment will be similar to fourth quarter 2022 as catalyst volumes improve, offset by moderating licensing revenue. Our technology team is hard at work advancing engineering on LyondellBasell's first commercial advanced recycling plant. This plant will leverage on proprietary MoReTec technology to extract sale from most consumer mixed plastic waste by closing the loop and producing feedstocks for our Italian crackers. Our technology provides distinct advantages by reducing energy consumption, improving yields through innovative process designs and catalysis. Let me now summarize our results and first quarter outlook with Slide 18. Despite highly targets, our team is capturing value and moving forward on our strategic priorities. Most importantly, we are sharpening our focus on leveraging the scale of our clear portfolio to deliver resilient results. We remain focused on LyondellBasell's core values. Last year's outstanding safety performance speaks to the depth with which safety is ingrained in our corporate culture. Our goal is to expand our core petro foundations to encompass a more comprehensive passion for value creation. This week, we welcomed Trisha Conley to our Executive Committee as Executive Vice President, People and Culture. Trisha will play a pivotal role in leading LyondellBasell's vision and strategy to enhance the employee experience, elevate our organizational performance and create the best and most inspiring culture in our industry. In 2022, our businesses were pressured by the effects of the war, volatile energy costs emergence from the pandemic and monetary policy. We responded by matching our reduction with changing demand, leveraging our global business portfolio and maximizing cash generation. Over the past year, our businesses generated over $6 billion of cash from operations and returned $3.7 billion to shareholders in dividends and share repurchases. Lander focus and commitment to shareholder returns remains strong. The more annuity formed circular and carbon solutions business, we are laser-focused on meeting the needs of our customers, brand owners and society. Our decarbonization goals are now aligned with science-based guidance, and we have made substantial progress towards our 2030 goal to procure 75% of our electricity from renewable and low-carbon sources. The Circular and Low Carbon Solutions business is well positioned to address the challenges of sustainability and plastic waste. By building an end-to-end business with robust supply chains, proprietary technology for transforming materials and our global manufacturing and marketing network, we're confident that we can build a large-scale and valuable leadership position in this exciting and expanding market. And our focus on sustainability is gaining recognition. In December, we were honored to be awarded the EcoVadis Gold Medal for sustainability performance with a 91st percentile ranking. The EcoVadis platform is valued by procurement professionals for assisting in the identification and evaluation of sustainable supply solutions. We expect modest improvements in the first quarter from moderating energy and feedstock costs, stable demand and the absence of fourth quarter life for charges. Normalizing supply chains or enabling improved trade flows from our advantaged feedstock positions in North America and the Middle East. Nonetheless, we will continue to maintain focus and discipline to ensure that operating rates across our global portfolio are matched to market conditions. As the year progresses, we anticipate seasonal demand improvements during the second and third quarter. And we're keeping a close eye on China's emergence from Covet and potential benefits from increased economic activity during the second half of 2023. The most exciting challenge during my first 8 months as the CEO of LyondellBasell has been the process of identifying and building a compelling strategy that generates substantial value for our customers, suppliers, employees, communities and shareholders over the next decade. We've shared some initial decisions with you already, but much more is ahead. As you will have recognized, we have waited until the Capital Markets Day, but started moving ahead with great focus and speed in the right direction. On Slide 19, we ask that you save the date for March 14, when we will share more details on our forward strategy at our Capital Markets Day in New York, and we hope that you can all join us virtually or in person. Yes. Just had a quick question on China reopening. What do you see in terms of inventory in China at the ports? And then maybe you can make a comment on your China joint venture with Bora and where you -- what were the operating rates there? Thanks, P.J. This is Peter. Let me take your question first and then potentially Ken can also add to that. When we talk about China, it's still early stage to say that we see a sustainable recovery. We expect -- I mean that, that will take probably another 3, 4 months until we see that recovery is actually happening. So we're still very modest in our expectations on China. But at least, I mean, we know that there has been the opening. So the government has changed their way. I mean, how to look at that -- at COVID. And Bora, still hanging in there, I would say. Not very positive because of the situation and because of capacity utilization rates locally in the market being at technical minimums. Ken? Yes, that's right. We continue to operate the joint venture of technical minimums. We've seen -- in two weeks, we're seeing a little bit of improvement in consumer demand, but it's really far too early to say that that's going to continue. Margins are continuing to be challenged. So we're seeing red load spread there still. So even with that improvement of demand, it's not translating yet into improved spreads. So -- we're watching that very closely, of course, P.J. I wanted to just drill into the EAI segment here. Is the EBITDA loss-making a result of just the fixed cost absorption of running at 60% or were cash margins negative in the region in the quarter? And Ken, you mentioned demand improving. Is that sufficient to drive operating rates from 60% to 80%. Do you think that margins will remain stable? Or do you see risk of that given others may restart with lower and lower energy costs as well? Thank you, Steve. Good question. And the other aspect that I would add, I mean, to what you -- to your question is, of course, also on the energy costs. As you know, I mean, energy costs have also moderated on a still very high level. [indiscernible] factor of 8 more expensive versus the United States, but at least, I mean, we're not at that peak anymore also helped them by the winter that has been very moderate so far in Europe. So I would hand over -- I mean, to give a bit more color to what is happening in the market to Ken. Yes. Thank you. And just to remind you, we did have that LIFO charge in the fourth quarter of $50 million. So -- but looking at what we see coming out of the fourth quarter, we hit a very low point there because demand was coming off, energy costs were high. They moderated at the end of the quarter, and we're seeing that continue in the first quarter. We also had our [indiscernible] fracker down during the fourth quarter. So -- that's why our operating rates were lower. Those repairs are complete, the fracker is back up. Similar to what we see in China, we're seeing some improvement in consumer demand. But again, I would say it's still early. Let's not call it a win yet, but we're definitely seeing some early signs of consumer demand improving there. So overall, the margin environment is going to improve mainly because of what Peter had said around the energy costs. Great. Could you just give your outlook on various regional operating rates and what's been happening across NGL and feedstocks? Could you just give us your latest update on the NGL front and what that just generally means for the progression of integrated [PE] margins throughout the year? Sure. Yes, I'll take that. Listen, NGL production continues to increase. So we expect that to be a tailwind, especially for our position here in North America. The oil and gas ratio is going to be continue -- or continue to be favorable for our portfolio. We don't see that really changing. We do expect there could be some strengthening in the oil price as we go through the year just as demand potentially comes back with China reopening. So all in all, I would say that the environment today should be better than where we were in the second half of last year around feedstock synergy in our portfolio. And I think nat gas, I mean, [indiscernible] to $40 back to where it was in the first half of 2021. This is Bhavesh Lodaya for John. You highlighted improving operating rates in North America in the first quarter. As we think about 2023, what type of U.S. domestic demand growth do you expect? And then as we think about like a further recovery in operating rates back to like historical levels, how much of that depends on rising exports and reducing some of the logistic constraints out there? It's a very broad question, of course. I mean, let me try to digest to put it in different buckets here. I mean, needless to say that when we talk about the demand for mature goods with high inflation rates, which are still high with interest rates that continue to go up with new house builds and houses being sold still being very -- a very low base, yes, it's clear that we expect that the demand for durable goods will continue to be at least for the foreseeable future depressed. What we have seen on the other hand side, as we have seen in other cycles, is that demand for nondurable goods is relatively stable, not to say, I mean, in certain areas, even strong. So that has led to the fact that we have given this guidance that we say, I mean, we are now operating in the Americas at 80% utilization. And Ken already talked about the European utilization rates, which was [indiscernible] at 80%. In the I&D, I mean, you know that we have a start-up of the PO/TBA sands, as we alluded to and Kim said, starting up at the end of this quarter, which will add, I mean, a bit more volumes of propylene oxide -- but let's not overreact on that either because we have, of course, our scheduled shutdowns, turnarounds that we have moved to the periods when we are starting up, I mean, the new facilities. Stock we'll be able to grow a bit, but operating assets currently is at 80%. Also here, a tick higher than it was at the end of last year. A two-part question. When you think about the shutdown of your refinery at the end of 2023, does that mean that there are reduced operating rates in the fourth quarter of 2023? That is, do you have to really prepare to shut it down or you get to the end of the year and you shut it down? Second question is, you gave a sensitivity to natural gas price changes. You said every dollar per MMBtu is [$175 million]. And you said 20% is in Europe. So that's roughly 35 million MMBtus. The European gas price today is maybe $17 an MMBtu. And last year, it averaged $37. So it's down $20. $20 times 35, $700 million. So is that the benefit for 2023 if gas prices in Europe stay where they are relative to last year? Have I done the calculation correctly? Thank you, Jeff. Very good questions. I mean, talking about the refinery, as we have said, I mean, we want to shut down the refinery in Houston by the end of 2023. So that has not changed in our opinion. The rationale for that has not changed either. And of course, there is some preparation that needs to be done in order to be hydrocarbon free by the end of the year. So Kim, if you want to add something on that question? I would just tell the audience that we're working through the detailed plans of how to do that. As you alluded, you can do that with a slow ramp down? Or are you going to do that by just pulling the plug on the 31st [of the year], and we're working through the different scenarios to make sure that we have the most efficient an effective shutdown in clearing process. Answer your second question, of course, I mean, if you just do the math, then you make up to that conclusion. But let's not forget that in Europe, our teams have done an excellent job by also increasing prices on one hand side, on the other hand side, also implementing energy surcharges. So you can't actually net that out the way you did, Jeff. Congrats, Michael and David on the Institutional Investor Magazine recognition, well deserved. Michael, you made good progress on working capital in 2022, and I'm wondering what the expectation is for 2023. And in terms of uses of cash, there was a breather on buybacks here in the fourth quarter. CapEx is coming down in '23. What are your thoughts in terms of a resumption of the buybacks? So good question. So I think, first, I mean I just -- I'd point out again that the cash generation in 2022 was extremely strong. Excellent execution by the businesses from a working capital perspective during the year. In the fourth quarter, in particular, longer-term perspective as well. Kind of turning to this year and looking forward, I would say that, I think, first and foremost, our capital allocation priorities remain unchanged. And you all know that we have a reputation for generating strong cash flow and returning to gain cash flow to our shareholders, and that expectation has not changed. Thinking specifically about 2023, I would point out that CapEx is going to be down materially. So expectations for capital is about $1.5 billion. It is going to be a tale of 2 halves for this year with an expectation that the second half gets stronger. As we move here into the first quarter, it's my expectation that working capital should be flattish. But as I look towards the balance of the year, I actually hope to consume some working capital with better sales and better pricing. And then remember, our growth investments are starting to pay dividends as well, in particular, with the start-up of PO/TBA. And so again, as I think about the full year, it's my expectation, and I'm looking at Peter and he's nodding at me. But we will continue to return meaningful cash to shareholders, including growing our recurring dividend. Shifting back to polyethylene. Could you give us what you anticipate a reasonable range of outcomes is for Chinese polyethylene demand growth during 2023? And how much of that you think will need to be sourced from the ex-China market? And if you also had a view on what their demand growth actually turned out to be in 2022, that would be helpful. Yes, we are very close to that. Vincent, thank you for the question. Look, our view for the last 2 years is the demand for polyethylene in China has been relatively flat. So when you talk about a range of outcomes for 2023, if you look historically, after 2 years like that, you would expect to see a significant snapback in growth, but it doesn't mean that that's a guarantee. So you could see anything from flat to plus 8%. It's very hard to call. That's why that's one of the markets that we watch very closely just because it is largely the price that are in the market. And will drive the absorption of all the new capacity that has come on. But we'll watch it closely and hope to see some more signs of recovery in the near future and more to come. I have a long-winded question. So U.S. ethylene and polyethylene capacity has -- there's a cost advantage. And there's long-standing thesis that due to cost advantage, U.S. can export to anywhere in the world almost as much as necessary. It's not what's happening right now, right? You and the rest of the industry has lower capacity utilization. So why is there not an increase in export? Is it not economical or other logistical limitations that don't allow it? And could this change as we go through 2023 such that your utilization rates go up due to higher exports and there's no imbalance in the domestic market as a result? Alex, this is Ken. I'll take that question. We've -- during the quarter, we actually did see both as an industry but in LyondellBasell as well an increase in exports. Some of that was related to some improvement in demand overseas, some less imports coming into some of the closer markets like South America from other regions. But also the relief of some of those [indiscernible] logistics constraints that we were dealing with in the first 3 quarters of the year, it really started to free up in the fourth quarter. So I think that you're going to start to see that continue in the first quarter and we'll get back to a more normal level of exports for 2023. This is Richard on for Mike. Just wanted to touch on the value enhancement program. You've identified $150 million in cost savings for 2023. I know we're probably going to get more details on the call Markets Day. But any details early on in terms of what you've able to identify where are the buckets of savings are coming from? And then also just the cadence of the savings through this year would be great. Yes. Thank you, Richard. This is Peter. Good question. The process -- I mean, the value enhancement program is ramping up quite impressively, I must say. We've done the major sites in the United States. And since the beginning of the year -- I mean the 2 major sites actually in Germany. We're expanding now also to other sites as we speak during the next quarters, both in the United States as well as in Europe. more than 3,000 projects that have been identified so far. And it goes, I mean, from areas in the manufacturing side to procurements to commercial excellence, supply chain management. So it's a very broad portfolio of different projects. We will give a couple of examples during the Capital Markets Day to make it more tangible. Today, we are mainly focusing on projects that have a very fast payback time, not so much projects that add and increase capacity, which is logical if you look at where the market is, but it is a continuous stage gate process that we have, where we continue to prioritize projects based upon the returns and based upon what we are seeing in the marketplace. So stay tuned, I would say, to get more specifics on a couple of examples on the 14th of March at the Capital Markets Day. Two quick questions. One, in the increase in your operating rates across segments, does that contemplate some inventory build for the summer season? Or does that also -- or do you see that as kind of sell-through as well for Q1? And then on the polymers for Americas, what -- or what's your plan, I guess, for the split between U.S. sold and export this year versus next year? Do you have to improve your export percent meaningfully with the new capacity in North America? Thank you, Duffy. I mean, let me split it up in 2 parts on your working capital question on the inventory question. First of all, Kim will give a bit of overview on the PO side. And then Kim can also talk about the olefins, polyolefins. Thank you, Peter. So as it relates to the propylene oxide side, yes, we're building a a slight bit of working capital as a contingency for the startup. But once the startup is successful, which we have tremendous confidence in that inventory level will come down. And we expect throughout the year to operate at about 85% capacity based on the modest demand we see in propylene oxide right now. Yes. So I talk a little bit about O&P, and I want to just echo what Michael. It's -- the teams have done an outstanding job in the fourth quarter managing our assets to be able to maximize cash flow and really focused on producing the products that we need to deliver with customers. We'll continue to do that going forward as we see markets improve, we will increase our operating rates to match that, and that may end up as Michael said, in markets taking working capital, but that's a good thing because we're going to have a stronger business as a result. But I'm just very proud of the team and everything that they did to manage that during the fourth quarter, which was quite a difficult time. To your question around increase in exports, we're going to continue to to see an increase in exports, I think, in general from the United States market or from the Gulf Coast market, just with all the new capacity coming on. As a company, we have been increasing the portion of exports for us as we ramp up the capacity with the new hypers assets. We're going to continue to see that happen. But clearly, our strategy around channels to market is to find the highest value customers and segments and that tends to be closer to home. So we're always trying to find more business here and we use the exports to really optimize the portfolio. Can you discuss your view of the U.S. polyethylene contract pricing opportunities seems as though spot export prices have come up appreciably year-to-date, while producer inventory has been rationalized to some extent. So perhaps you can talk through what you're seeking currently and your level of confidence that will turn the corner and start to see contract prices move higher as the first quarter progresses? Thank you, Kevin. Well, it's clear that we continue to have price increases out there in the U.S. market. And we're hopeful that these price increases, we see at least there is a good development in the marketplace. Ken? Yes. So look, I'm confident we've seen strength in the export market that we did not see last year. So that's a good indication. And I think I mentioned this on the third quarter earnings call, we've sort of seen prices come down to all those parity with export pricing. So as you see exports go up, you should see domestic prices moving up, and I'm confident then the first quarter, we're going to see some increases here. Just on APS, I'd just be curious if you want to comment on what the normalized earnings of that residual business is -- I mean, if you move $200 million over, I think even looking prepandemic, maybe there's $200 million in residual, like $250 million residual. Schulman used to be about $200 million, and you've got some synergies on top of that. So curious if you could give us some color there. Definitely very good question, Josh. And this is one of the reasons why we have repositioned this APS business as well because we are, of course, not happy at all with the results in the APS business. And yes, there are lots of factors that they roll on market demand and higher costs that we have seen last year, energy cost feedstock costs -- so therefore, we have decided to mic reposition this business. And [indiscernible] like run it as a separate company within LyondellBasell. Michael, do you want to add? Yes. Peter, first, I just want to say and express that I'm excited to have the opportunity to lead the Advanced bottomer solutions business through the transformation that we're embarking on. And I see a lot of potential in this business. And I put it in place a team that I think really can deliver. And the steps that we're taking, this Catalloy and [PB-1], or polybutenes or where that we're -- we really view [indiscernible] as a better fit in the O&P segment. This enables the new, what I call the new APS, to be very focused on our core value-creating model of compounding and customer solutions for brand owners and OEMs. We did well on the integration and cost reductions, but our APS business needs a much more customer-centric operating model. And this is going to be part of the journey that we are now embarking on it with the transformation. And our focused improvements in customer intimacy, technical support and service levels I think will really allow us to fix this business and grow it in a profitable way. And I'm looking forward to share more about this transformation journey at the Capital Markets Day coming up. Peter, on your Circulen volumes, what are the price premiums youâre receiving and what types of margins are you realizing on these Circulen volumes? Yes. Good question, of course. As we go into the markets with an entire portfolio, so we have a reasonable part of the portfolio, we have the circular part of the portfolio, which is either mechanical recycled or advanced recycled. We are in the market â I mean, with the entire family. Yvonne will give more insights in our go-to market during the Capital Markets Day also with our aspirations that we have by having set up this strategic business units, Currently, this is a market which is extremely short. Demand is substantially higher than the supply in the market. So weâre completely sold out in the products that we have available. The premiums that we are getting are quite attractive. Yes. Iâm not going to put a number on it as we speak. Youâve heard numbers, I mean, from other calls. And I can say we are at least on that level. That said, Yvonne will be more insights on the aspirations that we have during the Capital Markets Day. Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to Mr. Vanacker for any final comments. Thank you very much, and thanks again. Very good questions, very thoughtful questions. And once again, I hope that you will join us on March 14 as we will then share how LyondellBasell will advance on our strategy and unlock substantial value over the coming years. As we have said in the prepared comments for this call, we have not waited until the Capital Markets Day. We have already put a lot of things into action. And the purpose of the Capital Markets Day is to go deeper into the more specifics on the different pillars of our new strategy. I wish you all a great weekend, and as usual, stay safe.
EarningCall_945	Good day, everyone, and welcome to the Greenhill Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions]. Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Patrick Suehnholz. Sir, please go ahead. Thank you. Good afternoon, and thank you all for joining us today for Greenhill's Fourth Quarter 2022 Financial Results Conference Call. I am Patrick Suehnholz, Greenhill's Head of Investor Relations. And joining me on the call today is Scott Bok, our Chairman and Chief Executive Officer. Today's call may include forward-looking statements. These statements are based on our current expectations regarding future events that, by their nature, are outside of the firm's control and are subject to known and unknown risks, uncertainties and assumptions. The firm's actual results and financial condition may differ possibly materially from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the firm's future results, please see our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date on which they are made. I would now like to turn the call over to Scott Bok. Thank you, Patrick. Our revenue was $95.8 million for the fourth quarter and $258.5 million for the year, and our earnings per share was $0.95 for the quarter and $0.15 for the year. Consistent with my commentary on the last couple of quarterly calls, our largest fees for 2022, all landed late in the year, and as a result, our second half revenue was more than double that of our first half. Yet our revenue outcome fell short of our even higher expectations as the slower pace of deal completions meant many more transaction processes carried over to the New Year than we expected. In recent years, we've seen particularly strong transaction completions in our fourth quarters, such that our backlog was somewhat depleted at the start of the next year, resulting in a weak first half revenue. Between the projects we carried into 2023, expectations for an improving operating environment as interest rate hikes wind down and the likelihood of improved advisory activity and restructuring as well as M&A, we expect a considerably stronger first half than we've seen in the last few years as well as a return to higher revenue and more typical profit margins for the full year ahead. Clearly, the market environment today remains challenging, but our predominantly public company client base remains ready, willing, and able to pursue strategic opportunities. And we are less reliant than many of our peers on financial sponsors, technology sector or other areas that have been most impacted by recent market conditions. With respect to where our 2022 revenue came from, the key sectors were industrial and telecom infrastructure. Those sectors should remain active, and we expect to see increased activity in energy, health care, mining and other sectors in the year ahead. We saw good diversity of 2022 revenue in a geographic sense with Canada, France and Spain, all important contributors. Australia made a solid contribution and carried a strong backlog into the New Year. It is worth noting that our 2022 revenue was negatively impacted by the fact that non-dollar currencies have been unusually weak, particularly in the second half of the year when many of our larger overseas fees were booked. Already, there has been a meaningful recovery in those currencies. And if the dollar declines further, we will further benefit as overseas fees translate into more dollar revenue. By type of advice, we saw less financing and restructuring work in 2022, but expect both those areas to be more active in the year ahead given relatively weak economic conditions and challenging credit markets. In our private capital advisory business, we've been in building mode the last couple of years, but we entered 2023 with an attractive backlog of primary fundraising assignments and our secondary transaction business has remained active globally. We continue to focus on our key strategic initiative of expanding our coverage of financial sponsors to supplement our historic public company client base. Sponsors are able to use every service we provide from M&A to financing, restructuring and fund raising. And expanding our financing advisory business, principally to help sponsors as well as other clients access the direct lending market remains a key objective as well. Across our businesses, we are aiming for 2023 to be a significant recruiting year. We announced one new managing director recruit today, and we are in dialogue with many interesting potential recruits principally in the U.S. market across key sectors where we want to expand. We also continue to develop our own talent as evidenced by the 4 Managing Director promotions referenced in our press release. Turning to our costs. Our compensation expense for the quarter was $44.4 -- $44.5 million and for the year-to-date was $179.8 million. The quarterly and annual figures were both lower than last year in absolute terms, but the resulting compensation ratio was higher than normal given our revenue outcome. An important objective for 2023 is to bring our compensation ratio back down to our target range. Our non-compensation costs were $18.3 million for the quarter and $58.1 million for the year, a bit higher than last year, given a loss on foreign currency movements, a somewhat unusual professional fee paid to a co-adviser, increased travel expenses and carrying 2 London leases while we built out some new space there. Looking ahead to 2023, we should not incur the kind of duplicative rent we have had in the last few years as we built out new locations for our 2 largest offices. We likewise do not expect to see the other various unusual items again. Our balance sheet at year-end remained in good shape with $104.3 million in cash. Our term loan balance remains at $271.9 million. Our loan matures in April 2024 and so we will look to optimize the timing of refinancing in coming months. In the next quarter or 2, we expect the trailing 4 quarter metrics that the credit markets focus on will have moved to a much improved place, and we are hopeful that credit market conditions will have continued to evolve to a more favorable place by then too so that we can achieve highly attractive terms just as we did in our 2 prior financings. We expect to deleverage significantly over the next few years, starting in 2023 given that the cost of our dividend is modest, and the liquidity of our stock is such a potential for further significant share repurchases is limited. During the fourth quarter, we repurchased a little over 1 million shares and share equivalents for a cost of about $9.5 million. And for the year, we repurchased almost 3 million shares for a cost of about $40 million. For 2023 through next January, our Board authorized the repurchase of an additional $30 million of stock and stock equivalents, which should be largely sufficient to offset equity grants to employees. Our Board also declared a quarterly dividend of $0.10 per share, consistent with recent quarters. This is a good place to note that in our press release, we speak of a transition in our CFO position. Harold Rodriguez will, after more than 20 years with us, shortly moved to a part-time advisory position as he prepares for retirement. And Mark Lasky will step into his CFO role. Mark has been with us for 10 years. And before that, spent 12 years in finance roles at Goldman Sachs, so he is well prepared for this role and Harold will continue to be around to help as needed. I will close with a brief note that our stock performance in 2022 was heavily impacted by the fact that by a very narrow margin in the spring, we slipped out of the primary small cap indexes. Based on our current market capitalization and the current metrics for those indexes, we are on track to be readmitted in 2023 and a strong start to this year would obviously make that even more likely. Maybe starting on, Scott, your comments just for an expectation for improving operating backdrop for 2023. I guess what are you seeing in the environment? Or any signs that maybe can you feel a bit better about how this year starting relative to 2022? I appreciate you coming into the year with a better backlog. But what you're seeing to make you feel better just around the tone of activity? And then if you can just weave in a little bit of kind of geographic perspective around that would be helpful. Sure. Good questions. Look, I put it this way. We felt like we were quite busy in the latter half of last year. The only kind of constraint, we felt like we had against us was things just sort of taking longer to get done than perhaps they normally do. So there's not a feeling that any of the things we perhaps thought at one point we're going to close in December have died. It's really just things are taking a bit longer to get done. So that's an encouraging sign. Look, I'd also say that, whereas a year ago, I think everybody was incredibly optimistic, right? That was before the Ukraine invasion and higher inflation and interest rates and all the rest. If you look at where we are now, we're kind of at probably very recently a sort of peak pessimism in some senses in the market. But clearly, rates are now starting to come down on the long end, inflation starting to come down. And the companies we talk to, look, they're going to still be cautious. They know that it's going to be a challenging operating environment for them in their own businesses through 2023, but I feel like people can now see to the other side, they can see a peaking in the Fed's interest rate hikes. And I think there's an increasing sense that to the extent there's a recession, it's not going to be a long run or a deep one. So frankly, I think it could turn out to be, in some ways, the opposite of last year. I mean, last year, the market was very, very optimistic in January. That turned out to be a very difficult year. This year, the market was probably very, very pessimistic in January, and it could be the year of a bounce back. Great. Just on capital return and deployment. So I appreciate kind of the focus this year is more on debt paydown. I think that makes sense. But you still have a relatively large repurchase authorization. So I guess, like is there any way to add some context around the ability to return capital through buybacks and maybe what would shift that interest maybe more towards buybacks? Is it just a lower stock price? Or are you pretty set on the debt paydown? I think where we are -- really the focus on -- the refocus kind of on debt pay down is more a function of constraints on buying back shares than it is on the desire to buy back shares. So as you all know, there are trading volume limitations on how any company can buy back shares, and we frankly bought back so many that we're now finding there's a pretty limited amount left that we can buy at any given time. So when we throw out as the new authorization for kind of the next 12 months, of $30 million. We think that's going to be not only about offset any shares that are vesting for employees. But at least it's important. We think that's about all we'd be able to do anyway. So what we're saying is a dividend in absolute dollar cost is quite modest. Share repurchase, we've kind of pushed that about as far as we can, at least for now. Obviously, if liquidity picks up and trading volume picks up and the share price picks up, then obviously, you can -- you will have the ability to buy back more. But as we sit here today, we kind of come by default to thinking that what we should focus on in the next year or 2 is deleveraging. Yes. Okay. Good color. Just last one, just thinking about kind of growth opportunity. If you can just maybe give us a couple of maybe the biggest priorities as you look at your business today, where you feel like you really want to lean in investment or where you're most excited about the ability to grow over the next couple of years? Sure. I think it's -- our focus -- I mean, we have a lot of recruiting dialogues going right now. It's a good market for recruiting talent. And I don't mean people who lost their jobs on Wall Street, but people who are just -- have been through a tough year, wherever they are and are considering a move most often from a big bank to a firm like ours. Our main focus is definitely the U.S. I didn't answer your question actually earlier, you asked the second part of the question about geographic focus. We probably see the most near-term upside in the U.S., although I think the commodity focused markets of Australia and Canada, we are also quite positive on for the year ahead. And given that and given the fact that the U.S. market has proven really more resilient than the other markets in recent years, our recruiting will be, I think, mostly focused in the U.S. I think it will be mostly focused on M&A and mostly in people who add to our industry sector capabilities. And in that regard, probably our biggest gaps in terms of where we have the most white space, I would say, our health care and . But I would also say that the industrial space, which has been a really good one for us in the area that we're the most built out already, we think just kind of given the strength we have in that sector, that there are some additional subsectors that we're not in today that we should pursue because it kind of fills out the industrial portfolio in terms of coverage. So that's kind of how we are focusing our recruiting efforts today. So just looking at the quarterly comps that came in over the course of the year on compensation specifically. It looked like the nominal amount was relatively stable and consistent over the course of the year. I appreciate that, obviously, this will be dependent upon the revenue environment. But should we think about that quarterly run rate kind of in the low to mid-$40 million range on a quarterly basis being a decent floor as it relates to compensation as we look to the first several quarters of 2023. I wouldn't want to be too specific on that because, as you said, compensation really is a function of revenue. And secondly, I would throw out that it's also, to some degree, a function of recruiting and the higher the revenue is, the higher comp will be, the more successful we are in doing a lot of recruiting. And again, last year was a relatively quiet year for us in recruiting. We made some really important recruits but not as long a list as normal. Obviously, there's some cost that goes with that as well. But I would take our history, including this year as a bit of a guide, but obviously in terms of absolute numbers. But clearly, we want to both increase the revenue by quite a lot, and we want to see our comp ratio go back to its target range. So I think that's really about all I can -- all the guidance I can give on that right now. Okay. Great. And then in your prepared remarks and I think in your press release as well, you cited delays, I guess, towards the end of the year in terms of elongated time lines to deal closure. I guess is there any kind of common thread and through line that drove those delays and push back and is it fair to assume from your comments that we still should anticipate these deals to close relatively soon and kind of into the first half of 2023. Just kind of curious on both the factors and the expected timing of those elongated time lines? Okay. Good question. Look, the factors I think in what is obviously a very volatile market, it's a little bit of everything. I mean, I think regulators are not succeeding and blocking a lot of deals, but they certainly, I think, around the world have been a little bit slower to sort of approve deals and let them flow through. So that's one factor. I think the difficulty of getting financing is going to slow down some deals. But if you're creative and determined, companies and sponsors are finding ways to get things done. And then just the incredible volatility in markets, whether it's currencies, which would have been extraordinary volatile or the stock market, it makes it more complicated to sort of have that final negotiation and set a price and get people to sign the contract. So I think all those are factors in and things taking a bit longer than usual to get done towards the latter part of last year. But yes, look, I'm encouraged by the fact that I don't feel like really anything we were working on towards anything of significance as we're working on towards the end of the year, it died. I think it's just a matter of things taking a bit longer to get to the finish line than we probably would have guessed in the fall. Got it. And then last 1 for me, just more of a clarifying question as it relates to the non-comp side. It sounds like you had some one-offs in there that -- you did highlight as it relates to the build-out of the London office as well as -- it sounds like a co-advisory fee in there as well. Just curious if you could quantify any of those impacts as it relates to 2022 non-comp base that you don't really expect to recur in 2023 as we look to our models? I mean what I would say for non-comp for your modeling purposes, I think in our investor presentation, we continue to show our target, I think, $55 million to $60 million, which is what it has been, and we did fall in that range this year. And we -- the reason we didn't change that. I mean, clearly, we think a lot of -- a bunch of these kind of one-offs won't happen again certainly, but won't have duplicative rent of a major office again for a while, having just had that. But we think that there will clearly be more travel as M&A activity picks up. And that's all going to kind of net out to a number probably very similar in 2023 to what we had in 2022 and 2021 for that matter. It's been -- we've managed those costs pretty well. We've had some one-offs that were maybe offset by less travel. Now the travel is coming back and some of the one-offs are going away. So we're kind of in a total non-comp cost basis, we've been pretty much trading water for a while, which I think is a good -- is a positive thing. Scott, maybe we could just start on the strategic versus sponsor dichotomy. Maybe you just weigh up the strength of the dialogue across those 2 different groups of buyers and the differences between them? Sure. I think clearly, we're still in a market where strategics are the more active group. Obviously, a lot of them are investment grade. A lot of them have strong balance sheets, a lot of them have a fair amount of cash resources. So they're able to act. And frankly, right now, they're probably seeing less competition from the financial sponsor role than they might ordinarily. So we're more optimistic near-term about that. I'd say medium-term, though we remain very, very focused on growing our financial sponsor business for the simple reason that they -- that group still has an extraordinary amount of dry powder. They haven't put a lot of it to work just recently. They would like to see credit markets get a bit better before they really amp up that spending. And when that happens, I'm sure they will amp up that spending. But right now, we're a little more optimistic on the strategic side. And frankly, that's obviously near-term a positive for us because we have historically been a firm that skews more to that client base than to the sponsor base, even though one of our objectives is to start to balance those 2 out a little bit more. Okay. That makes sense. Maybe if you could just contextualize the strength of your restructuring business in the past quarter and what you see ahead? And then perhaps within the restructuring business, what parts are you seeing strength in? Is it debtor side, creditor side, traditional structuring or liability management? Okay. Good. Those are good questions, actually because last year was an unusually quiet year for us in restructuring. Obviously, it was a difficult financing environment. But yes, for most of the year, credit markets were really quite good. And there were a very low default rate. I'm sure you've seen statistics on that. And so there was just frankly very little activity, not that we didn't do any, but it was not a really exciting part of our business last year. I would say, toward the end of the year, we started seeing a significant pickup in opportunities. I would say that most of the activity is in what I would call like classic restructuring like companies that are in some degree of distress, not necessarily Chapter 11 style but some degree of distress. And by sector, I think it's pretty eclectic. We're still in an economy where I think corporate profits are quite good in most places. But there are pockets of companies out there that are exposed to higher commodity prices or higher interest rates or foreign currency movements. And so it's kind of an eclectic mix of opportunities. I would say there's not a lot of household names that are out there doing restructuring right now, but there's a big world of mid-cap opportunities, and we're seeing more of those come our way. Okay. That's clear. Just a follow-up there. You talked a little bit about the credit markets being open at the beginning of last year and that slowing or keeping the lid on restructuring opportunities. Obviously, we've seen those markets open up a little bit through the beginning of this year. So is that a potential headwind to the restructuring business? And I recognize your M&A business is far larger than restructuring, so that's probably a positive. But just how do we think about the impact on the restructuring business if financing markets continue to improve? Yes. Look, I think financing markets, I do expect, frankly, that they will continue to improve. But I mean they've got a long way to go to get back to being kind of available for everybody. So I think credit markets will be discerning, what I would call discerning for a good while. And I think there will be more sponsors and companies that we'll be able to get financing. But there are going to be many that won't be able to -- I mean, certainly, you look at how quite the leveraged loan market has been. I mean that will is starting to open, but it's opening not to everybody. So I think, frankly, my expectation. And of course, my hope for 2023 is I think there will be considerably more restructuring-type opportunities than they were in 2022. But I also think we're going to have a better M&A market off a relatively low base. And obviously, that would be the Goldilocks scenario for us and many of our peers. And I think if you just look at the way the markets are evolving, I think that's a real possibility. Thank you. And that was our last question. I appreciate everybody dialing in, and we look forward to speaking to you again next quarter, if not before. And ladies and gentlemen, with that, we'll conclude today's call and presentation. We thank you for joining. You may now disconnect your lines.
EarningCall_946	Good day and thank you for standing by and welcome to Southside Bancshares, Inc. Fourth Quarter and Year End 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Lindsey Bailes, Vice President, Investor Relations. Please go ahead. Thank you, Justin. Good morning everyone and welcome to Southside Bancshares' fourth quarter and year end 2022 earnings call. A transcript of today's call will be posted on southside.com under Investor Relations. During today's call and other disclosures and presentations, I will remind you that any forward-looking statements are subject to risks and uncertainties. Factors that could materially change our current forward-looking assumptions are described in our earnings release and our Form 10-K. Joining me today are Lee Gibson, President and CEO; and Julie Shamburger, CFO. First, Lee will share his comments on the quarter and then Julie will give an overview of our financial results. Good morning everyone and welcome to Southside Bancshares' fourth quarter and year-end earnings call for 2022. This morning, we reported excellent fourth quarter and annual results for 2022. Highlights for the quarter included earnings per share of $0.87, a return on average assets of 1.47%, a return on average tangible common equity of 21.35%, annualized linked quarter loan growth of 8.2%, a linked quarter, four basis point increase in our net interest margin, an efficiency ratio of 30 -- excuse me, 46.38%, and continued strong asset quality metrics. During 2022 of loans, net of PPP loans, increased 14.8% or $533.5 million. The net interest margin increased 16 basis points and the efficiency ratio decreased to 47.39%. I want to thank the entire Southside team for their continued contributions and efforts, which made these results possible. We're extremely pleased with our continued solid loan growth during the fourth quarter of 2022. Our loan pipeline, while not currently as strong as it was this time last year, remains solid and we are encouraged by the loan growth prospects for 2023. In addition, we are seeing advances in our construction portfolio increasing as loans that closed several quarters ago are now beginning to fund. Given the outlook for the markets we serve, we are budgeting for 9% loan growth during 2023. As previously mentioned, approximately $743 million of our available-for-sale municipal securities are hedged to the call day, with fair value swaps designed to reduce the overall fair value volatility of these securities. During the fourth quarter, this $743 million of fair value swaps began producing net interest income as the overnight suffer rate we received increased above the average fixed rate we pay. This was largely responsible for the linked quarter 31 basis point increase in the average yield on our tax-exempt municipal securities. In the month of December, we recorded approximately $645,000 of net interest income related to these swaps. During January 2023, we expect the net interest income associated with these swaps will increase to reflect the full effect of the mid-December increase an overnight sulfur, resulting from the increase in the federal funds rate. Should the federal reserve further increase the Fed funds rate we would anticipate a further increase in net interest income from these fair value swaps. Conversely, should the Federal Reserve at some point decrease the federal funds rate, net interest income associated with these fair value swaps would decline, at which time we would likely unwind some or all of these fair value swaps. The economic conditions in our markets remain solid, bolstered by continued company relocations and existing company expansions combined with population growth a result of continued migration from other states. The combination of increased mortgage rates and high building costs has resulted in reduced housing starts and decreased margins, moving this market closer to pre-pandemic levels. We look forward to successfully executing on our business model and what we consider to be the best state in the country in which to operate. Thank you, Lee. Good morning, everyone, and welcome to our call today. We are pleased to report a solid fourth quarter to end a strong year with 2022 net income of $105 million and diluted earnings per common share of $3.26. For the fourth quarter, we reported net income of $27.7 million, an increase of $717,000 on a linked-quarter basis and diluted earnings per common share of $0.87, a $0.03 increase linked quarter. For 2022, we reported organic -- record organic loan growth of $533.5 million, excluding PPP loans, a 14.8%increase from 2021. This was driven by our real estate portfolio with increases of $389.5 million in CRE, 11.8 million in construction, and $12.4 million in 1-4 family residential. Additionally, we had a $24 million increase in commercial loans, excluding PPP. Our loan portfolio increased $84.2 million to $4.15 billion linked quarter. The increase was driven primarily by strong growth within our commercial real estate loan portfolio with an increase of $85.8 million on a linked-quarter basis. The weighted average rate of new loans funded during the quarter was approximately 6.4%. We continue to experience strong asset quality metrics with non-performing assets of $10.9 million or 0.14% of total assets at December 31st, a decrease of $855,000 linked quarter. As of December 31st, our allowance for loan losses as a percentage of total loans was 0.88% compared to0.90% at September 30th. Our allowance for off-balance sheet credit exposures increased to $3.7 million on a linked-quarter basis due to a provision of $1.6 million compared to $200,000 in the last quarter. As of December 31st, our loans with oil and gas industry exposure were $111.3 million or 2.7% of total assets -- of total loans, excuse me. Our securities portfolio increased $50 million or 1.9% on a linked-quarter basis. The increase was driven by a decrease in unrealized losses in the portfolio and to a lesser extent, purchases of securities. During the fourth quarter, we transferred additional available for shelf securities with fair values of $175.8 million to held to maturity. At December 31st, we had a net unrealized loss in the AFS securities portfolio of $88.9 million compared to $168.3 million last quarter, a decrease of $79.5 million. As of December 31st, the unrealized gain on the hedged securities was approximately $21.6 million, partially offsetting the additional unrealized losses in the AFS securities portfolio. As of December 31, the duration in the entire securities portfolio was 10.7 million years and the duration of the AFS portfolio was 9.3 years. Our mix of loans and securities remained consistent on a linked-quarter basis at 61% and 39%, respectively. Our deposits increased $16.9 million or 0.3% on a linked-quarter basis. The linked quarter increase in deposits was due primarily to an increase in our public fund deposits, partially offset by a decrease in broker deposits. During the fourth quarter, we increased our stock repurchase plan authorization by 1 million shares. We purchased in [Indiscernible] shares during the fourth quarter at an average price per share of $35.03. Since year-end and through January 24th and 2023 and we have purchased 141,053 shares at an average price of $35.73. Our tax equivalent net interest margin increased on a linked-quarter basis to 3.40% from 3.36%, driven by the increase in the average yield on loans of 54 basis points and 21 basis points on the securities portfolio, partially offset by an increase in the average yield on interest-bearing liabilities of 56 basis points. The tax equivalent net interest spread decreased for the same period to $2.95 from 3.08%. For the three months ended December 31st, net interest income increased $1.3 million or 2.4% compared to the linked quarter. We also recorded $55,000 in purchased loan accretion this quarter. For the three months ended December 31st, 2022, non-interest income, excluding net loss on the sale of AFS securities increased $398,000 or 3.8% for the linked quarter. The increase was driven primarily by increases in deposit services income, trust income, and swap fee income included in other non-interest income. For the same three-month period, non-interest expense was $33.6 million, a slight increase from the prior quarter. For 2023, we have budgeted approximately $35.5 million in non-interest expense each quarter. The increase in the budgeted expense is primarily due to increases in salary expense, software expense, and the non-service component of our frozen retirement and restoration plan expense. Our fully taxable equivalent efficiency ratio at December 31st decreased to 46.8% from 47.42% as of September 30th, driven by the increase in net interest income. Income tax expense increased to $4.3 million compared to $3.9 million for the three months ended September 30th. Our effective tax rate increased to 13.4% for the fourth quarter from 12.6% in the previous quarter. At this time, we estimate an annual effective tax rate of 12.8% for 2023. Hey, we're doing well. So, Lee, I just wanted to unpack this walk contract you guys have that's coming on and going to start benefiting you guys. So, the you're receiving variable but paying fixed. What is the fixed rate that you guys are paying? Or I guess the better question is, what is like the net pickup in yield that you received from this favorable swap contract? When you say the favorable yield increase, it would -- okay, I'm not sure I understand that part of the question, but basically, we have probably somewhere between 20 and 30 of these swaps, and they have -- how many? Sorry, we have 84. So, we -- and they have different -- we started putting these on, I think, back in April of 2022 and the last one we put on was in early October. So, each one of them have fixed rates that we're paying that are different. Obviously, the last ones we put on had the highest fixed rate. And at this point in time, I think almost all of them were in a positive position on. And that's the reason, basically, during November was the first time we saw it turn positive, where we actually had net interest income and then it jumped to that $645,000 in December. There was a 50 basis point increase in SOFR corresponded with the increase in Fed funds but that was mid-December. So, we anticipate the rest of that increase in that net interest income will occur in January. And then should the Fed increase 25 basis points or whatever the amount is in February, then we'll continue to see increases. So, at this point, roughly that amount of our tax-free municipal securities are almost acting like a floating rate security at this point in time. And for the quarter, it had a 31 basis point increase are reflected a31 basis point increase in our yield on our taxable municipal -- excuse me, tax-free municipal securities. So, does that -- Yes. No, that very helpful. Yes. No, thank you for walking through that. And I'd imagine just with the majority of those being in a positive position that you would have a relatively sizable gain if you were to sell the swaps? We do have an overall gain in the swaps right now. It's -- I don't -- it was $21 million at year-end. And if changes based on the -- what happens with the longer term rates because these are swapped to the call date of the municipal securities. And I can give you the -- they handed me the average fixed rate of our coupon that we -- that we are paying is a 321. Okay, great. That's perfect. Yes, that's what I was looking forward really. Great. That's very helpful. Okay. So, then as we think about just the story of the margin as we move into 2023, you still saw a little bit of expansion this quarter. I mean the deposit costs are ticking up a little bit. Do you feel like you still have leverage on the asset pricing side, maybe to some of this accelerated or continuing deposit pressure? So, maybe we see the margin flat out and just hold the line for the remainder of the year. There's an expansion left. Do you feel like this quarter was a peak, just any commentary around the margin would be great? Sure. On loans, we do -- we have a fair amount of floating rate loans, I think, 46%, something like that of our loans float the new fixed rate loans that we are putting on or for the most part, I'd say in the $6 million is somewhere probably closer to $6.5 million. And then with the -- this almost $0.75 billion in tax exempt investment securities that float, that's going to help offset some of that, but we are seeing pressure on the deposit side, all the funding side. And so we feel like the beta there is probably going to be somewhere between 30% and 35% going forward. Margin, I think we stay where we are, plus or minus five to six basis points, somewhere in that range. And simply because if the future Fed funds increases are in not in 75 basis point increments, then I think there isn't going to be as much pressure moving forward to up those rates as significantly as when it was when it was 75 basis points. But I do think that we're going to continue to see a lot of pressure, pricing for deposits is extremely competitive. I'm sure that don't come as any surprise. And so we're -- there's no exception here at south side of that. You definitely not alone there. Just to clarify, that 30% to 35% deposit beta, is that interest-bearing deposits or total deposits? Awesome, great. And then last one, if I could just sneak one last one in here. Just what's the messaging on the buyback going forward? I mean it's been notable for you guys this past quarter. What's your further appetite here? At this point, we'll just -- we'll see how we work through the current allocation. And if the price is at such a point that we think it's appropriate for us to expand the buyback, we will at that time. Good, thanks for taking my question. We're just curious, like some other banks, it looked like the period end balance of Federal Home Loan Bank advances were up maybe double or so over the average. Just are those mostly overnight and overnight advances. And would that be something you might likely lean into to the extent deposit funding doesn't come through? Just kind of trying to think about how you want to fund your 9% loan growth target. Does -- do you plan to stay levered and keep the bond book where it is? Or hopefully, you can grow the deposits to do both, but just any color there would be helpful? Sure. Last year, in 2022, we were able to get some favorable pricing in the broker deposits, money market environment, and we replaced for our cash flow swaps, and we replaced a lot of the home loan bank. In fact, I think at one point, we had all of it replaced with the home loan bank. Now, that has slipped. And so at this point in time, the more favorable funding is at the home loan bank. So, what you're seeing there is mostly a flip from broker deposits to cover those cash flow swaps into the home loan bank advances. At this point in time, we did have $30 million that rolled off in the first quarter of cash flow swaps, and I'm looking at our funding person to make sure, Okay. 25 -- excuse me, $25 million. So, we're down to about $350million in those cash flow swaps. So, when you take -- excuse me, $550 million in those cash flow swaps. So, when you look at our broker deposits and when you look at our home loan bank advances. I think it's important to note that $550 million of that is basically fixed pricing on that. But we do have some overnight funding at Home Loan Bank at this point in time simply because it's one of the cheaper places to go to get additional wholesale funding. Is that number-- Yes, yes. Well, I have those numbers in the queue. Like you're paying like 113 basis points on those on those-- on the $575 million. Is that correct? Yes. And so the one that rolled off, I think, was at 140 something, wouldn't it or somewhere in that range. We'll find it and let you know. Okay. Okay. Great. Okay, great. And then just on your loan growth, I mean, 9%, maybe that was a touch higher than maybe I expected given kind of what's going on in the market. But it sounds like you've got a number of construction projects that you planned that you plan on funding up. Anything else in there is kind of a big driver in any new lenders. Just trying to kind of get a better sense of what's kind of driving your loan growth target? We do have some new lenders and some of the lenders that came on in 2021 -- even 2020 and 2021 are really hitting their own. In Houston, 300-- approximately $300 million of our loan growth this year was in Houston. And as you know, we opened an LPO down there in early 2020. And they weren't able to do much with the pandemic, but they really come into their own in 2022. And then one of the other lenders or two of the other lenders that we hired had relationships in Houston as well. So, we're anticipating that that's going to continue at this point in time. We're not expecting that 14.8% loan growth. But at this point in time, we feel like 9% is achievable. And if that changes, we will update that on future quarterly calls. Got it. And then just a follow-up on my first question, we kind of got bogged down there in the swap talk. But the 9% loan growth target. Do you think you can fund that flu with deposits or aside on what's going on with swapping back and forth between brokered and FHLB, but do you anticipate bringing the [Indiscernible] book down? Or just kind of just some way to think about the size of the balance sheet and kind of how you plan to fund it? We could bring the bond portfolio down some. There's probably, depending on what happens to long-term rates, limit on what we'd be willing to do there. But we could probably fairly easily fund a quarter of that loan growth by reducing the bond portfolio. We are anticipating some deposit growth. It's not going to be cheap if it's interest-bearing deposits, but we are looking at some other opportunities to be able to fund. And then -- I'm sorry, the January maturity, okay. But if -- whatever the balance is that we don't have -- and we would look to the broker market or to the home loan bank advances market, whichever was the better course for us to take for that additional funding. And thank you. [Operator Instructions] And our next question comes from Brett Rabatin from Hovde Group. Your line is now open. Good. Thanks. Could you just provide a little color on the remaining maturity profile of the securities book there? What do you have maturing in the short-term? Yes, maturing in the short term. I know we have monthly amounts that come off the mortgage portfolio. They're not huge. I think we've got about $11 million or $12 million MBS pool that matures in March, and it's at a fairly low rate. Other than that, and then we have probably about to $20 million in municipals that while they're not going to mature, they will come up on their call dates and that have 4% or higher coupons. And if they don't mature, we're going to see a nice pickup in yield on that. In terms of what's coming off on the MBS portfolio, it's probably about $2 million to $3 million a month, somewhere in that range. Great, that's really helpful. And then one more, if I could. Just wanted to get your thoughts on CRE. Are you planning on doing any sort of credit review on that book? And then also wanted to get your thoughts on office space as well? Okay. In terms of credit reviews on CRE, really what we do, probably every six months or so, and we just did one in the fall. So, we'll have one coming up probably here in the spring, early spring. We go through and we take a look at all the credits above a certain dollar amount, and I believe that dollar amounts $5 million. So, we get an update from the officer on just about everything and take a look at what the -- their average rents are, the vacancy rates, things of that nature, just see if there have been any changes and then any changes in the financial condition of the borrower. So, that's something we do at least twice a year, and it's not just limited to CRE, but it's all of our credits. In terms of office, we're extremely careful on office. I'm not saying we don't make office loans, but we look at the quality of the tenants that are in there. We look at how long they are tied up for when those leases come due. And those typically require a fair amount of equity going in, and we look for really solid debt service coverage ratio. So, office is not probably at the top of our list right now, but it's -- there are some good office loans out there to make. You just have to be very selective and make sure that the borrower is somebody that has a lot of familiarity and experience in that in that area and that the tenant role is such that you feel like for the life of the loan, you're in pretty good shape. So, those we look at extra hard. And thank you. And I am showing no further questions. I would now like to turn the call back over to Lee Gibson, President and CEO, for closing remarks. All right. Thank you very much to everyone for joining us today. We appreciate the opportunity to answer your questions along with your interest in Southside Bancshares. In closing, we're excited about our prospects for 2023 and look forward to reporting first quarter results to you during our next earnings call in April. This concludes the call. Thank you again.
EarningCall_947	Hello, and a warm welcome to this Epiroc Q4 Results Presentation. My name is Karin Larsson, and I'm Head of IR here at Epiroc. With me today, I have our CEO, Helena Hedblom; and our CFO, HÃ¥kan Folin. They will briefly present the results before we do a Q&A session. Please note today that you need to register in advance to receive the phone numbers to the Q&A session. The link is provided in the invitation as well as on our homepage. Thank you, Karin. So starting with the full-year highlights for 2022. A strong performance in a challenging market. On the demand side, the customer activity remained high, and we won many large equipment orders, and we had a strong development in the aftermarket. During the year, we handled significant supply chain challenges, including disruptions as a consequence of the war in Ukraine. And in March, we stopped deliveries into Russia, which at the time was our fourth largest market. But despite all this, the organization executed well and we delivered record results and profitable growth. So well done to everyone. We also launched many groundbreaking innovations, and we made several acquisitions that help customers increase safety and productivity as well as reduce emissions. Demand is continuously increasing for electrification, digitalization, and automation solutions, and we strengthened our position as a market leader in these areas. So all in all, it was a record year for Epiroc. So moving on to the fourth quarter then, the demand remained high. That said, large equipment orders are lumpy in nature. And in the fourth quarter, we did not receive as many large orders as in the previous quarters. We had around 400 million of large orders in Q4. Service continued to grow strongly, supported by a high customer activity. So after a period of strong growth, the easing supply challenges in combination with a good output level from our production sites led to record high revenues and operating profit. We also had a high acquisition pace in the quarter, and we finalized four acquisitions with a combined annual revenues of SEK 1.9 billion. And on top of this, we signed another two. We also launched many innovations, but some of them are more game-changing than others. And one example is our collaboration with Roy Hill and ASI Mining in Australia to create the world's largest autonomous mine. And the goal is to convert Roy Hill's haul trucks regardless of OEM supplier from manned to autonomous use. And you might remember our announcement a few years back. Well, the testing phase has been a success. In fact, the mixed fleet that is now running autonomously proved to be more productive and safe than manual use. I will tell you more about this later on. Another successful milestone is Avatel's first commercial blast in Agnico Eagle's Kittila mine in Finland. The Avatel is the world's first semi-automated charging system for underground use. It is and will be a game changer for the mining industry as it significantly improves safety during the charging cycle. The Avatel has been created in collaboration with Orica, a world leader in commercial explosives and advanced blasting systems. So a few words on the financials in the quarter. In total, our orders increased 18%, though with some help from currency and acquisitions. Organically, excluding Russia, we achieved 3% growth. We did, as I said, not received as many large orders as in the previous quarters. Large orders are lumpy, but we still have a good pipeline of potential orders ahead. And in Q1, we have already announced one large order from African Rainbow Minerals for use at a platinum mine in South Africa. In total, the orders received in the fourth quarter was SEK 13.7 billion, and sequentially, it's up 4% organically. Our revenues were record high at SEK 13.9 billion and grew 8% organically, and our adjusted margin increased to 23.7%. Our cash flow was lower than last year and amounted to SEK 1.5 billion. So after a period of strong growth in equipment with long lead times due to supply chain disruptions, we have a large portion of work in progress as well as receivables. So back to one of my favorite topics, innovation. I did already mention the milestone we achieved with Avatel, and safety is, as you know, always prioritized. Another purpose with our innovations is to reduce emissions. And therefore, we are particularly happy to take our battery electric offering one step further. We are collaborating with SSAB, a Swedish quality steel manufacturer, and we have created a 42 tons battery electric mine truck made by fossil-free steel. So to use fossil-free steel in this mine truck saves 10 tons of carbon emissions per bucket. And on the topic of electrification, we have the widest offering in the market today, and we see great demand for all our battery electric machines. In fact, we received the first battery electric order from an underground infrastructure customer in the quarter for a tunneling project. So it's good to see that our offering is also attractive for the infrastructure segment as well. In addition to providing the best machines, we also provide critical battery electric infrastructure solutions on site, which enable the electrification. And as we have a standardized approach to our battery solution with all its benefits, we also take this approach when it comes to the charging solutions. So in Q4, we joined the CharIN, which is a leading global association with over 300 members promoting interoperability based on the combined charging system. So we want to make it easy for our customers to do the transformation into electrification. And finally, then back to the world's largest autonomous mixed fleet solution, of which we are very proud of, of course. I will show you a short movie where Roy Hill can tell you about the project, the success and the next step. So to make our customers more successful is something that really inspires me. And if you didn't know it, I actually started my career working in the R&D department. And I have learned by experience that even though we invest more than ever in R&D, around 3% of revenue, we cannot do all by ourselves. So to really drive and accelerate the transformation, we collaborate with the best, and we also acquire companies as well. And since the end of September, we have announced and completed six acquisitions. Four acquisitions of companies with combined annual revenues of more than SEK 1.9 billion and 700 employees were completed. So let me briefly present all of them. So CR is a strong player in ground engagement tools. So by this acquisition, we are entering into a new niche of productivity increase in consumables. Mernok Elektronik gives us products and capabilities to roll out the highest level of collision avoidance systems in the world. Remote Control Technologies makes Epiroc the world-leading automation solution provider, not only for surface and underground rock drilling, but also for underground loading and haulage. And the solution enables automation of any brand. So the key in this solution is that we can now just as with electrification, retrofit any machine out there. And this is valuable to customers that wants to speed up the automation journey. Wain-Roy strengthens our presence in the North American construction market and increases our manufacturing capacity for advanced attachments in that region. Radlink is a provider of wireless communication infrastructure, both on surface and underground and enables a smooth implementation of automation. And then we have Geoscan. It complements Epiroc's offering with orebody knowledge. So it's short -- in short, it's an automated way of analyzing the drill core and make the drilling process more productive. As a matter of fact, I have one drill core with me here. So this is how it looks like. In addition, I can mention one acquisition that was announced already before the quarter, but not yet finalized AARD Mining Equipment, and it complements Epiroc's underground offering with low-profile equipment, which is commonly used in Africa. So this also gives us a good manufacturing footprint in South Africa. And speaking of footprint. At year-end, we had more than 7,100 service technicians. So our relentless focus on aftermarket and service has proven to be right so many years now. And in total, our aftermarket revenues represent 65% of our revenues. And the fourth quarter was strong in service with high customer activity and organic growth of 4%. If we exclude Russia, it was actually up 11% organic, and it was strong all over the line. We continue to land large rebuild orders and even further widening our offering. The realization of the Parts & Service division is now in place. So we will be closer to the customer. We will be more precise in our offering. We will be faster in responding to our customer needs. And we will be a stronger productivity partner. Tools & Attachments on the other side had a somewhat weaker development. Sequentially, the organic order growth was plus 4%. However, it was down versus Q4 last year when attachments had a particularly strong development. And just as in Q3, exploration is somewhat weaker. So my next slide is about operational excellence. So one important success factor is to deliver spare parts and consumables when customers need them. And in the quarter, we opened a new regional distribution center in Santiago in Chile. It will further strengthen our service to customers in the South American region by improving availability and optimizing inventory levels. Already today, we have distribution centers in Sweden, in U.S., in South Africa, in Belgium and next in line is Singapore. And speaking about inventory, with a net working capital of SEK 18.6 billion, we can certainly do better, and HÃ¥kan will elaborate on this later. But following a period of strong equipment growth with lead times of around nine to 12 months and extended freight times, it's naturally to tie up capital. Another improvement is the new organization for battery assembly in Orebro in Sweden. So with a strong and accelerating demand for our battery electric offering, we need to safeguard that we are efficient and have scale in production. So looking at units, the battery electric machines are still representing a small portion of all machines sold. But year-on-year, we have seen the numbers increase threefold. Our standardized approach when it comes to BEVs has many advantages. It enables a quicker rollout of new BEV models, and it gives us scale advantage in production going forward. So in short, we are ready to meet the increasing demand. So moving on then to another favorite topic is sustainability. At year-end, we were almost 17,000 employees in the group, roughly 1,300 were added through acquisitions throughout the year. So if you are listening, a warm welcome to the Epiroc family. Our commitment to increase the number of women in operational roles as well as Managers is visible in the numbers. So both the proportion of women employees and women Managers at the end of the period increased. We're putting a strong focus on inclusion and diversity at Epiroc. And personally, I'm convinced that diversity leads to increased creativity, innovation and ultimately, better results for Epiroc. So it's then pleasing to see that Epiroc was named a European diversity leader by Financial Times in the quarter, and we scored a top 20% position. In our annual employee survey, our Inclusion and Diversity Index improved as well. One thing that did not improve though, was the total recordable injury frequency rate, or in other words, the frequency of recordable work-related injuries of illness for each one million hours worked. And already today, we have many initiatives in place to improve this and more will be added. I want every Epiroc employee to know that this is really on top of agenda. Moving on to the environmental impact then. Again, we have lowered our emissions from operations, 31% year-on-year. And this improvement is driven by several initiatives, including the installation of solar panels and a higher share of renewable electricity. However, due to a strong period of growth, the emissions from transport have increased in absolute numbers despite an improved mix, where we utilize sea freight to a greater extent than ever before. Thank you, Helena. Eight quarters in a row, our profit has increased. We ended the year at a record level of SEK 3.2 billion, corresponding to an increase of 25%. And if we add back the cost for the long-term incentive program, we landed an adjusted operating profit at SEK 3.3 billion. The margin adjusted came in at 23.7%, which is a great achievement from the organization. If we look into the details, our operating profit increased 25% to SEK 3.2 billion. We had a strong organic contribution of 2.5 percentage points. We got some help from the currency as well, but some headwinds from acquisitions. And on the group, we had a dilution effect from acquisition, which was 0.8 percentage points. Item affecting comparability was minus SEK 67 million, which is representing the provisions for the share-based long-term incentive program. Previous year also included a positive revaluation effect related to Mobilaris of SEK 167 million. The reported operating margin was 23.2%. And as I said, excluding items affecting comparability, it was 23.7%. We go into a bit more detail then and start with Equipment & Service. And excluding Russia, the orders received increased 7% organically. Of the total growth of 24%, acquisitions contributed a bit 14% and currency with another 12%. The orders received also included orders on hand from the acquired companies, and these have a positive impact of approximately 11%, mainly RCT and Radlink. And of the four completed acquisitions in the quarters, three of these are reporting into Equipment & Service. For equipment specifically, excluding Russia, orders received increased 1% and while the increase as much as 11% for service, excluding Russia. So as you see, we continue our very strong growth journey in our service business. And this is driven by two things. It's a combination of a high activity level among our customers as well as an increased customer share. We had a strong organic development in revenues, up 12%, and I will cover the profit bridge now on the next page. So the operating profit for Equipment & Service increased 22% to SEK 2.8 billion. It was supported by strong organic growth in currency, but negatively impacted by dilutions from acquisitions. And just as with the group, the previous year was impacted by this positive revaluation effect for Mobilaris. Operating margin was down -- was 25.7%, down from previous year or SEK 27.3 million. However adjusted, the margin was up to 25.7% versus 25.4% last year. Dilutions from acquisition was 1.1% in the segment. If we then move on to Tools & Attachments, order increased 5% to SEK 2.9 billion. Excluding Russia, orders received decreased 4% organically. We had positive contribution from currency, 10%, acquisition, 2%. Sequentially for Tools & Attachments, orders were up 4% organically. And as Helena said, Q4 last year, attachment had a particularly strong development, so the comparables are tough. The profit bridge for Tools & Attachment is rather easy this time. Operating profit increased 9% to SEK 523 million, and operating margin was 17.5%. It was supported by currency, but negatively impacted by higher costs. We had somewhat lower output from our manufacturing site, thereby impacting under absorption costs as well as some M&A-related costs in the quarter. And as you have seen, we announced two acquisitions within this segment this quarter. Continuing then on the cost side. Our cost increased in the quarter and around half of the increase versus last year is due to acquisition and currency. Also, the strong growth, higher activity levels as well as investments in R&D are also part of the explanation. Cash flow in the quarter was SEK 1.5 billion, operating cash flow. Normally, Q4 is a strong cash flow quarter. And even if we had good contribution from profit, we also had a few headwinds. Main one is the change in working capital, but also taxes paid and net financial items limited the operating cash flow to some extent. This slide is a new one. As I think that the working capital development requires some additional comments. Working capital was up 33% year-on-year if we exclude acquisitions and currency. This is not the level where we're happy about, but there are a few things that explain the development here. Following a period of strong equipment growth where we have lead times over around nine to 12 months and extended sea freight lead times as well, inventory is building up. And in addition, there are disruptions in the supply chain that also impact the aftermarket negatively. And on top of that, the general cost inflation on input material has an impact on our working capital level. But this is definitely a focus area for us, and we expect to see a positive development of the working capital ratio in the coming year. If we then move over to capital efficiency. The high acquisition pace is, of course, reflected in our net debt and also in our capital employed levels. And after paying SEK 4.2 billion for acquisitions in the quarter and also paying SEK 1.8 billion in dividend, we ended the period with a net debt level of SEK 3.7 billion. And this corresponds to a net debt-to-EBITDA ratio of 0.28. Our return on capital employed has improved this year by almost two percentage points from 26.1% up to 28.0%, and this is mainly due to our improved operating results. Next slide now is about dividend. We have a goal of providing long-term stable and rising dividend to our shareholders. And the dividend should correspond to 50% of net profit over the cycle. And the Board proposes to the AGM, which is on the 23rd of May, that we should pay SEK 3.40 per share in dividend, which is equivalent to 49% of net profit, and it's also an increase of 30% from previous year. The dividend will be paid in two installments, record dates on May 25 and October 24. And before I leave the word back to you, Helen, again, I would just like to emphasize that these strong financial results that had the honor to present today, it's really coming from a teamwork by everyone here at Epiroc. So thank you all for a very good 2022. Thank you, HÃ¥kan. So then I would like to briefly conclude the quarter. Our employees are our greatest asset, and I'm proud of all the hard work and all the achievements. It was a strong, but challenging 2022. We had a high customer activity in Q4. We delivered profitable growth with record high operating profit. We dare to think new and take innovations to the market that will transform the industry. So as we enter 2023, Epiroc stands stronger than ever. And in the short-term, we expect that the underlying demand, both for equipment and aftermarket will remain at a high level. So thank you, and Karin, over to you. Yes. Thank you, Helena. Thank you, HÃ¥kan. Well done. Before I open up the Q&A session, if you don't or if you haven't already signed up to our Capital Markets Day in Orebro in June, please do. We have limited seats and registrations is open. So now with this beautiful picture of our Smart Truck T35E, the world's first ever top hammer battery electric drill, I open up the Q&A session. And today, we do it, so you need to register first. Operator, please open the line. Good afternoon Helena, HÃ¥kan and Karin. Three, if I can, probably two for HÃ¥kan. HÃ¥kan, first of all, on your recognition of orders in hand, from acquired companies or RCT and Radlink that's about SEK 1 billion or so that you are recognizing automation license fees, I guess. Can you help us understand a little bit what exactly? So these are subscription contract, are they and you are now recognizing all of that in your order intake? And so when we model out structure impact in 2023 from these two companies, assuming you say, subscription contracts sort of two or three year duration, should we think of book-to-bill of some 0.6x, 0.7x? That would be helpful if I can start there, please. So We haven't gone into the split of these contracts, what they are. RCT, as I mentioned, the automation company, Radlink, it's more about the infrastructure for the mine. So they have a somewhat different type of business, and we won't specify exactly what type of contracts and how much comes from each of the companies. But some of them would be subscription fees, yes. But I'm sorry, I won't go into too much of that details actually. Okay. It will be helpful, of course, so we can model out that sort of structure impact correctly over the next few quarters. But I'll leave it there. That will be helpful. Thank you, HÃ¥kan. And secondly, maybe a slightly bigger picture. Can you help me a little bit with thinking about equipment and service margins for 2023. I appreciate it's not your favorite topic in terms of forward-looking guidance. I'm not looking for that, but consensus is looking for stable margins year-over-year. Can you help us maybe talk through some of the key headwinds and some of the key tailwinds you see to that? Maybe if I can help you along, particularly mix, which should be quite a meaningful headwind for you this year on margins. How to think about the ramp in equipment? Can we get to sort of a more normalized mix in equipment and served from what has been a very unusual mix over the last couple of years? And also within that, can I ask you to the ramp in battery electric deliveries in 2023? Should we think of that as being dilutive to your equipment margins and potentially quite a significant headwind? Thank you. No, I think the mix, of course, as we have talked about for many quarters, of course, with more equipment, we will expect -- you can expect a mix effect. But I think as we have continuously been growing very successful as well in the aftermarket. So -- but of course, when we get the pace up in production when it comes to equipment, of course, you will see that effect. I think on deliveries when it comes to battery machines, that will not, I would say, dilute or be more costly than other type of machines that we deliver. Thirdly, and if I can, finally, Helena. Obviously, a big acquisition, I think the biggest in the five year history of Epiroc announced with CR. I thought, quite interesting entry into ground engaging tools. We didn't get a chance to catch up after that announcement. Help us a little bit, if you would just briefly on some of the synergies you see with your core T&A business? And maybe talk a little bit about what you see in terms of driving, which you say, more of a premiumization of ground engaging tools, particularly, I guess, in construction applications? No, but we see great. The ground engagement tools business is very similar to tools and attachments, actually. It's material, it's heat treatment, it's productivity product. So it's very -- the type of contracts that you have with customers are very similar to the consumables set up. But when it comes to us, it's very also similar to our attachment business where it is OEM agnostic, and we can then put it on whatever carrier really. So I see this acquisition is a very strategic one. We're moving into a new niche. And of course, we have a strong footprint both when it comes to the Tools & Attachment sales force globally, but also we have a very good relationship with our surface customers where we already have people on site, for example, with maintenance people, et cetera. So that's how I see it. Very good strategic fit. I see also great opportunities in the construction area with these solutions as well as underground to produce more smart buckets. It's also a portion of CR. They are very advanced when it comes to the digital solution and building intelligence into the buckets, and the -- so I think also there, I see great opportunities. Hi, Helena, HÃ¥kan. I'm Klas at Citi. So the first question I had was on seasonality and thinking about orders. We know construction-led demand is typically stronger as we enter the spring, but trying to understand the mining side better large orders can improve as they're lumpy, as you said. But if we focus on underlying demand, do you think underlying first quarter orders could be higher quarter-on-quarter. And the reason for asking is that if we strip out the acquired backlog, calculate underlying orders in U.S. dollar to make this like-for-like, then expectations out there look pretty high, up 15% quarter-on-quarter. So yes, I'll start there. Thanks. I think as we have said many times, the large orders are always lumpy. But I think what has been good during Q4 now is the underlying activity levels among in all regions, I would say. So -- and also what we still see that roughly half of the capital equipment orders are for expansion projects. So 50% -- roughly 50% is replacement and 50% is expansion projects. I think -- so your question on if the underlying activity level will be higher in Q1, that was more. I think it's difficult to say. It will always vary when we have, of course, our definition of a large order and a lot of things can happen also with medium-sized orders that will -- can tilt it between quarters. But as I said also, we have already announced one large orders already in Africa now in January. But the good thing, though, and what we are focused on is the underlying -- it was the activity levels, and that is healthy. Yes. No, I totally get your comment on the market, what's out there. I'm just trying to understand, I mean, if I look history, it looks like first is stronger than the default. But at the same time, trying to understand where the mining companies typically order more first or fourth, right? I totally get the construction piece, but that was really my question because the U.S. dollar taking out the acquired backlog, expectations look quite high? My second and final one is on the drop-through, it's very solid even if you adjust for a lower corporate line. And we're seeing component costs going up a lot in the quarter. Value-add is going up quite a lot in Europe following the higher energy prices in the third and in the fourth. But you're still surprised positively on the drop-through. So I'm trying to understand if you had much higher pricing moving through the backlog in the fourth quarter versus the third, and if pricing year-over-year now in the P&L, will fade? Or do you think you will have still a similar level of pricing running through the P&L as we go through the year? You've been very good at compensating on cost. I'm just trying to understand the price levels through 2023 and if they moved up a lot in the fourth? Thank you. I would say it's been a gradual increase throughout 2022. We were quite -- or I would say, the organization out there were quite fast in terms of starting to increase prices, and we have continued doing that throughout the year. And like you say, cost inflation keeps going on. So we are all the time looking to see what we can do and increased prices, but also even more important, at the same time, add more value to our equipment that we are selling to our customers. So it's been a gradual journey throughout the year. And I think looking at what we see in terms of cost inflation, we will need to continue with this journey also in 2023. Will we do it at exactly the same pace? Remains to be seen. And again, by making sure that we actually add some value to our customers as well, they are not going to be prepared to just pay because we want to have a compensation. We need to bring something to them as well. And of course, for us, we started with the aftermarket because that's also what is turning faster. So I think in the beginning of the year, we had we got contribution from that. And then at the later part of the year, also the equipment started to give results. Hey, yes. Thank you very much for taking my questions. I will start with housekeeping one on the order intake. Would you be able to give us the number in SEK 1 million or SEK 1 billion, which impacted the order intake from backlogs, which you recognized from acquired companies. I understand it's about SEK 1 billion, but would you be able to give us any more precise number here, please? I would say it's close to SEK 1 billion. So I think that will be close enough, good enough, then it's very close to SEK 1 billion. So I don't have exactly the figure, but it's not SEK 1.2 billion or SEK 0.8 billion. It is close to SEK 1 billion. Yes, that's helpful. Thank you so much. And then if I do the simple exercise by subtracting this from your order intake and then converting it into dollars. The order intake in Q4 is frankly, quite materially lower in dollars compared to what it was at the beginning of this year. You had some phenomenal quarters in Q1, Q2, Q4 last year. And yet, during this period, your commentary on the order intake was that at a high level. Yet, the absolute number declined quite a bit. Would you be able to kind of comment on what was driving that? Yes, I think that if you -- Russia is obviously one big impact factor as well. If we look at the organic order intake, excluding Russia, it's up 3% compared to the similar quarter last year. So from that point of view, we are still growing actually if we exclude Russia. And then my final one, if I may, a more broader one. If you look at what the mining companies are reporting the big public ones. I mean the majority of them are actually missing their production targets for 2022. And absolute production levels of key commodities, be it gold, copper, et cetera, actually not impressive in 2022. Yet you and your peers are actually referring to very high customer activity and very high utilization. Would you be able to help us to reconcile those to sales? Because the idea would be if you utilize equipment more than you produce more. But I think it's due to the aging fleet. So we have seen this over many years now that the fleet out there is growing older for every year. And older machines need more spare parts, larger rebuilds, et cetera. But also, I would say that there is a lot of larger rebuilds taking place. Finally, customers also need to do larger rebuilds. So we have also seen -- that has really contributed to the growth during 2022. Yes, hi. Thanks for taking the questions. I wonder if we could talk about the profitability in Equipment & Service. I think the overall margin was flat, 26.1% year-on-year. I know you don't disclose it, but would it be possible just to talk directionally about whether service profitability was flat also versus equipment? And how they independently move on a year-on-year basis? That's the first question, if I could. If we look at the segment as such, adjusted was up slightly from 25.4% to 25.7%, but more or less flat you can say like you alluded to. And I wouldn't say there's a big difference in the service margin. It's fairly stable on a good level. So no major change. And if we look at the price -- we talked about price, gross price earlier. So If we took a -- look at the price/cost impact within your organic aspect of the bridge, could you just talk a little bit about how that's developing your major competitor is currently certainly in the second half of '22 seeing quite a significant dilutionary impact that they anticipate improving through the course of '23? You mentioned that you were quite quick to respond. I'm just trying to think about whether you have been doing better so far or whether you've got an improvement ahead of there? I wouldn't compare us to our competitors, but I would say that we were, as we said before, we were the decentralized organization, we're really quick out there seeing what was coming and making sure that we started adjust our pricing towards our customers. And that is, to a large extent, what you see in the organic -- what we're getting from the organic growth is, of course, a combination of increased costs that we are compensating for via the price and also volume-wise. But all in all, I would say, we were quite agile in terms of adjusting and in the organic portion there, it's partly -- it's definitely partly price included as well. Thanks. And last of all, if I could, could I get back to this order backlog from the acquisitions being put into the orders received? What made you decide to include backlog in orders received because that's not something you have done in the past? It's not something that is explained by the nature of those businesses, could you help us... And by doing that, what we actually want to do is we want to give you full transparency in terms of what you can expect us invoicing going forward. So that's actually the reason why we have done that, and it's the same way as we have done in previous quarters. But it's not been the magnitude as you have seen in this quarter. That's a big difference. But it's fair to say that the base is closer to SEK 12.8 billion, if you like, and not SEK 13.7 billion. So we should think about sequential demand removing that SEK 1 billion because that was not new orders received in the quarter that was in previous. Okay. So your comment is stable at the high level we should compare to the lower number that 2.8%, just to be clear? Good afternoon. I hope you can hear me. I also want to ask on the acquired backlog that you recognized in order intake. Is all of that sitting in the service business or what's the split between the different segments? The vast majority of it is sitting in the service business as the larger acquisitions were part of service. If you take sorry, Tools & Attachment, the one acquisition we closed there was rather small, so more or less, all of it is sitting in Equipment & Service. One asked question earlier, it was about software, et cetera. Yes. Okay. And then secondly, on Battery Electric Vehicles. Would you like to share how large part of your equipment orders that came from battery electric machines in 2022? And if the Lion's share of that is related to load and haul? So as I said, we have -- it has really started to take off, and we have -- it's threefold up compared to the previous year. We have not shared the numbers, but in relation to 2021, and it's up threefold. Okay. But it's in the billions or is it just a few hundred millions. Just if you could give an indication at least or... I will not indicate that. But I think also back to our offering, we have a very broad offering now when it comes to electrification in general. So it's both equipment, it's retrofits and it's also electrical infrastructure. And it's growing nicely. Yes, hi. Good afternoon. So I just wanted to ask about the profitability of the acquisitions. I mean, you've done a few now. And I wanted to ask firstly on what happened in this quarter, if we look at the bridge on equipment and service, even if we add back that capital gain that you had last year, it looks like a slightly negative from structure. So is there any sort of initial adjustments there? So that's number one. And number two, what should we expect in terms of dilution from the acquisitions that you've closed already? For Equipment & Service, we had the dilution of the acquisitions of 1.1% in the quarter or 0.8% on group level and 1.1% in Equipment & Service. I don't recall any other from the top -- last year, as you mentioned, we had this Mobilaris revaluation effect, but no other major structure this quarter in Equipment & Service. One should also remember, we are all the time showing EBIT and not EBITDA. So you will also have included in the dilution that we mentioned. You also have the amortization of intangibles. Well, I think also it's fair to say that when we acquire companies, we sell and find the companies with the same profitability level or the margin level that we set that. So of course, that is also -- I think we always see dilution in the beginning and then we work ourselves back to the level that we expect as a company. So I think that's a general statement. Okay. So put it this way, sorry, the level of dilution that you saw in Q4, that is pretty much what we should expect in Q1 as well. In that neighborhood, then we didn't have actually the acquisitions, the full quarter either. So if we look at when we have announced, when we closed the larger ones being Radlink and RCT, and they were not included in the full quarter. And then of course, once they included in the full quarter, it will be somewhat of a bigger impact. Thank you very much, everyone. It seems like we have no further questions. So either everything was crystal clear or you are holding back your questions. And we're happy to help you with those. HÃ¥kan, Helena and I, just reach out. And as always. We wish you successful investments, and we hope to see all of you soon again, thank you very much.
EarningCall_948	Hello, everyone, and welcome to the AmerisourceBergen Q1 FY 2023 Earnings Conference Call. My name is Bruno and I will be operating your call today. [Operator Instructions] Thank you. Good morning, good afternoon, and thank you all for joining us for this conference call to discuss AmerisourceBergen's fiscal 2023 first quarter results. I am Bennett Murphy, Senior Vice President, Head of Investor Relations and Treasury. Joining me today are Steve Collis, Chairman, President and CEO; and Jim Cleary, Executive Vice President and CFO. On today's call, we will be discussing non-GAAP financial measures. Reconciliation of these measures to GAAP are provided in today's press release, which is available on our website at investor.amerisourcebergen.com. We've also posted a slide presentation to accompany today's press release on our investor website. During the conference call, we will make forward-looking statements about our business and financial expectations on an adjusted non-GAAP basis, including, but not limited to, EPS, operating income, and income taxes. Forward-looking statements are based on management's current expectations and are subject to uncertainty and change. For a discussion of key risks and assumptions, we refer you to today's press release and our SEC filings, including our most recent 10-K. AmerisourceBergen assumes no obligation to update any forward-looking statements, and this call cannot be rebroadcast without the expressed permission of the company. You will have an opportunity to ask questions after todayâs remarks by management and we ask that you limit your questions to one per participant in order for us to get to as many participants as possible within the hour. Thank you, Bennett. Good morning and good afternoon to everyone on the call. Today, we will discuss AmerisourceBergen's fiscal 2023 first quarter results, our future under a new unified identity, and our impact from our position at the center of global pharmaceutical innovation and access. In the first quarter of fiscal 2023, we delivered solid financial results, with revenue of nearly $63 billion, representing 5% growth on a year-over-year basis along with adjusted EPS growth of 5%. These results reflect the resilience of our business as we focus on execution excellence, provided value-added solutions to our customers, and benefited from our strong market position. We also acted on opportunities to utilize our strong balance sheet to employ our value-creating approach to capital allocation. Our business continues to have strong fundamentals as we maintain our focus on providing a differentiated value proposition to our customers and partners up and down the health care value chain. Importantly, our performance underscores the strength of our pharmaceutical-centric strategy, as we leverage our expertise, capabilities and scale to drive our long-term sustainable growth. As we announced last week, our future includes operating under a new unified identity as Cencora. Our new name resonates with customers and team members across geographies, reflects who we are as a purpose-driven organization, and better represents our impact across pharmaceutical care. Cencora also aligns with our growth strategy and long-term vision of building on our leadership in pharmaceutical distribution and growing our high-margin, high-growth businesses. Importantly, while our name will be changing, our purpose and who we are as an organization remains the same. We remain united in our responsibility to create healthier futures as we focus on advancing our core business, enhancing our capabilities and growth and innovating to further drive our differentiation. We continue to advance our core business by providing our market-leading customers with a leading distribution network. Throughout our history, we have invested in our infrastructure to ensure that critical medications reach their destinations efficiently, reliably and securely. We also seek to be next-minded in our investments, and we have further enhanced our specialty distribution infrastructure with a new state-of-the-art facility on the West Coast, which we celebrated opening during the quarter. We are now even better positioned to support our customers and partners with the unique logistical needs and by facilitating patient access to their specialty medicines, we promote the continued rapid growth of specialty pharmaceuticals in the market now and in the pipeline for the future. To strengthen our role as the partner of choice for global pharma and biotech companies, we continue to plan for the future of healthcare delivery and enhance our capabilities accordingly. This includes building on our legacy of leadership in specialty medicines to support our customers' growing needs across a broad range of categories. We have recently expanded our portfolio of specialty solutions with the acquisition of PharmaLex, a leading provider of pharmaceutical services ranging from clinical development consulting to market authorization. PharmaLex enhances our capabilities with additional regulatory affairs, development consulting and scientific affairs, pharmacovigilance and quality management and compliance services in both the US and internationally. With these enhancements, the acquisition not only advances our strategic imperative of expanding on our leadership in specialty but also on investing in innovation to further drive our differentiation. With assets such as PharmaLex, our comprehensive portfolio of specialty distribution and commercialization solutions is uniquely positioned to serve pharma and biotechs across the product life cycle, lead specific logistical and market access needs and ultimately deliver the most innovative and promising treatments to the patients who need them. As we continue to support pharmaceutical innovation and access, we are focused on enhancing our differentiation by investing in our business to support our partners in bringing the latest scientific advancements to patients worldwide. In the area of cell and gene therapy, for example, we have many capabilities to serve our customers' current and future needs. This includes our technology-centric partnerships such as our integrated technology platform designed to accelerate patient access to prescribe cell and gene therapies and to deliver complete visibility throughout the treatment journey. This also includes investing in our global specialty logistics capabilities which range from facilitating decentralized clinical trials to providing white glove distribution of the most time- and temperature-sensitive therapies. With capabilities that ensure life-sustaining pharmaceuticals are consistently delivered on schedules at the right temperature and through the most complex situation, we have gained the trust of pharma and biotechs worldwide to be their partner of choice. This trust is built individually partner-by-partner, and behind each success story is the unparalleled dedication and talent of our team members who now include the team from PharmaLex. Our people are the foundation that drives our business forward and I'm humbled every day by the impact we make as we are guided by an unwavering pursuit of our purpose. United in our responsibility to create healthier futures, we embrace our role as a responsible business from a foundation of ethics, integrity, and transparency, we are committed to advancing our environmental, social, and governance initiatives to foster a positive impact on the planet and people while improving access and equity in health care. Last week, we published our seventh annual environmental, social, and governance report, which highlights the progress we made in fiscal 2022. I'm particularly proud of the progress we made to create a more diverse, equitable, and inclusive culture. In fiscal 2022, we established a center for excellence that oversees governance of DEI, including our DEI Global Counsel and employee resource groups, establish channels through which teams across the organization can better partner, collaborate and consult, and improve the way we measure our progress using a data-driven approach. In a similar fashion, our supplier diversity program has made great progress investing in minority-owned enterprises. I'm impressed by the direct, indirect, and community impacts of our $1.8 billion spend with small and diverse suppliers. Through our program, we have supported more than 11,000 jobs within our supply chain and in suppliers' communities. We remain committed to making a positive impact in our communities. In recent years, our business has been at the forefront of responding to global health care challenges including the COVID-19 pandemic and the mpox public health emergency. From these experiences, we have strengthened our public and private relationships and further evolved our capabilities to increase our agility and resiliency. We are well-positioned to solve for potential future challenges, in particular, those that disproportionately affect vulnerable populations due to our footprint, reach, and strong relationships with governments, manufacturers, providers, and community organizations. One significant global health issue that we are helping to address is antimicrobial resistance, which the World Health Organization, the US government, and the European Commission have each initiated action plans around. We recently led a call to action for health care distributors in partnership with GIRP, the umbrella organization for full-service health care distributors in Europe to explore public and private multi-sector collaborative efforts to drive a global response. ESG has become increasingly important to our stakeholders and to hold ourselves accountable to making progress in areas that further our business objectives and reinforce our ESG priorities. We are incorporating an ESG metric within our executive compensation program for fiscal 2023. Designed based on feedback we have collected, our ESG metrics includes three quantifiable components focused on business resiliency planning for climate-driven events, female representation in leadership roles globally and employee inclusion and engagement. As we continue to think about what the future holds for public health, pharmaceutical innovation, care delivery and more, we are also constantly evaluating our leadership to ensure that we have the right team driving our future success. This includes the individuals guiding our organization from the top and we are pleased to have welcomed Dr. Redonda Miller to our Board of Directors in January. The addition of Dr. Miller, who is President of Johns Hopkins Hospital, further illustrates our focus on adding key skill sets and diverse perspectives to help support our business strategy and delivering on our purpose. We also want to offer our sincere thanks and appreciation to Dr. Jane Haney and Mike Long for their meritorious service. Their advice, wisdom and counsel have helped shape the AmerisourceBergen of today. Looking forward to the rest of the year and beyond, we are powered by the resilience of our business and remain confident that our pharmaceutical-centric strategy will deliver long-term sustainable growth by enabling us to capture exciting opportunities in pharmaceutical innovation. We have a strong foundation in place, and our high margin, high-growth services reinforce the differentiated value we provide to our partners and customers, which in turn strengthens our relationships and bolsters our position at the center of global pharmaceutical innovation and access. As we continue to advance our foundation, enhance our capabilities and invest in innovation to further drive our differentiation, we remain purpose-driven and well-positioned to create significant shareholder value. Now I will turn the call over to Jim for a more in-depth review of our first quarter results and our updated guidance. Jim? Thanks, Steve. Good morning and good afternoon, everyone. Before I turn to our results, I want to join Steve in expressing my excitement on our recent announcement that we intend to change our name to Cencora in the second half of calendar 2023. By becoming Cencora, we will be able to better connect with our team members, customers and other stakeholders on a unified basis across our footprint, and Cencora will better represent our role and impact as a leading healthcare solutions organization supporting pharmaceutical innovation and access. Now turning to our first quarter results, and as a reminder, my remarks today will focus on our adjusted non-GAAP financial results unless otherwise stated. AmerisourceBergen delivered solid results in our first quarter that were mostly in line with our expectations. We finished the quarter with adjusted diluted EPS of $2.71, an increase of 5% over the prior year quarter. Adjusted EPS benefited from a lower share count as a result of our recent opportunistic share repurchases, and strong fundamentals in our business helped offset previously anticipated elevated expenses in the quarter. Our consolidated revenue was $62.8 billion up 5% driven by growth in our US Healthcare Solutions segment, which was offset by foreign currency pressure on the translation of our sales in the International Healthcare Solutions segment. While the US dollar weakened from the historically strong levels seen in the fourth quarter of fiscal 2022, the year-over-year comparison still created a headwind as expected, which I will discuss in more detail when reviewing segment level results. Consolidated gross profit was $2. 1 billion, up 5% due to growth in the US Healthcare Solutions segment. While each segment had better gross profit margins relative to the prior year quarter, consolidated gross profit margin was flat year-over-year as the foreign exchange impact on the higher-margin International Healthcare Solutions segment was a drag on margin growth at the consolidated level. Consolidated operating expenses were $1.4 billion, up 9.8% due to higher distribution, selling and administrative expenses to support revenue growth and reflecting inflationary impacts on certain operating expenses. As I called out on our November earnings call, we did not begin to see inflationary pressures in our business until towards the end of the March 2022 quarter. The higher expense growth rate in this year's first quarter was driven by a tougher comparison versus the prior year period. We expect the operating expense growth rate to decline sequentially in the subsequent quarters and to become a more normalized rate for the full year. Consolidated operating income was $734 million, a decrease of approximately 2% compared to the prior year quarter or up 4% on a constant currency basis. The as-reported decline was driven primarily by the impact of foreign currency translation for the International Healthcare Solutions segment, and was partially offset by growth in the US Healthcare Solutions segment, which I'll discuss in more detail when I review segment level results. Moving now to our net interest expense for the first quarter, net interest expense was $46 million, down approximately 14% due to higher interest income resulting from higher cash balances and interest rates on investments. Looking ahead, our average cash balances will be lower following the opportunistic share repurchases we announced in the quarter, the successful early completion of the PharmaLex acquisition, and the upcoming March 2023 debt repayment. Our lower invested cash balances will drive our net interest expense higher in the coming quarters and result in higher interest expense versus fiscal 2022, as I called out in November. Turning now to income taxes, our effective income tax rate was 19.1% compared to 21.2% in the prior year quarter. The lower tax rate for the quarter was in line with our expectations and we continue to expect our full year effective tax rate to be in the range of approximately 20% to 21%. Our diluted share count was 206.3 million shares, a 2.3% decline compared to the first quarter of fiscal 2022, driven by opportunistic share repurchases over the past several months, including $700 million of repurchases completed in November and December. Regarding our cash balance, we ended the quarter with approximately $1.7 billion of cash due to the timing of holidays around the PharmaLex acquisition closed at the beginning of January. We prefunded the acquisition on December 29, which resulted in a prepaid asset on our balance sheet and lower cash balance when we closed the quarter. In the quarter, adjusted free cash flow was $584 million, and we remain on track to achieve our adjusted free cash flow guidance of approximately $2 billion for the fiscal year. This completes the review of our consolidated results. Now I'll turn to our segment results for the first quarter. US Healthcare Solutions segment revenue was $56.2 billion, up approximately 6% for the quarter as we continued to see strong specialty sales and broad based solid growth in our human health distribution businesses. US Healthcare Solutions segment operating income increased by approximately 1% to $572 million. Sales to specialty physicians and health systems were once again strong in the quarter as our leadership in specialty continue to position us well to deliver growth including in biosimilars, where we are seeing good trends in oncology and more recently, ophthalmology. The strength in specialty and broad-based good utilization trends in human health distribution helped to offset the previously anticipated higher operating expenses, as well as softness in the animal health market. As has been widely discussed in the animal health industry, there are short-term pressures in both the companion and production animal markets. From a cadence perspective, however, some of the softness in our animal health business in the quarter is related to timing and will normalize in the second quarter. I will now turn to our International Healthcare Solutions segment. In the quarter, International Healthcare Solutions revenue was $6.6 billion, down 0.6% on a reported basis or up 17.7% on a constant currency basis. The as reported decline was driven by the impact of foreign currency translation on revenue for Alliance Healthcare as the business is more exposed to currency fluctuations. International Healthcare Solutions operating income was $161 million, down approximately 10% on a reported basis, driven by the impact of foreign currency translation on income for Alliance Healthcare and the divestiture of ProPharma Specialty, which represented approximately 3% of segment operating income in the first quarter of fiscal 2022. When looking at the segment on a constant currency basis, it delivered 11% operating income growth driven by solid underlying fundamentals and favorable manufacturer price adjustments this quarter in one of our developing market countries. From a cadence perspective last year, this price adjustment occurred in our second fiscal quarter. This price adjustment activity offset the negative impact of the decline in the value of the local currency. That completes the review of our segment level results. I will now discuss our updated fiscal 2023 guidance expectations. As a reminder, we do not provide forward-looking guidance on a GAAP basis, so the following metrics are provided on an adjusted non-GAAP basis. I will also provide certain guidance metrics on a constant currency basis. Full details of our fiscal 2023 guidance can be found on Pages 8 and 9 of our earnings presentation on our Investor Relations website. I'll begin with EPS. We are raising our full year diluted EPS guidance to a range of $11.50 to $11.75 up from our prior range of $11.30 to $11.60, representing growth of 4% to 7% on an as reported basis, or 6% to 9% on a constant currency basis. Our increased EPS guidance range is primarily a result of our opportunistic share repurchases in the first quarter, which results in our updated guidance on full year diluted average share count. We now expect our share count to be approximately 206 million shares, down from our previous range of 207 million to 209 million shares. Our increased EPS guidance range is also a result of the higher as-reported operating income and international health care solutions, partially offset by the reduced contribution from COVID in the US. Next, I would like to provide a brief update on COVID-19 treatment distribution contributions. In the first quarter, COVID-19 treatments contributed $0.12 to our consolidated EPS compared to $0.14 in the first quarter of last year, with about $0.09 in the US and $0.03 in our international segment. Given trends we have seen to-date, we now expect the full year contribution from COVID-19 treatment distribution to be in the range of $0.25 to $0.30, down from our previous range of $0.30 to $0.35 that we provided in November. For the rest of the year, the majority of the expected COVID contribution is in the US segment with just a few more pennies of contribution expected in the International segment for the year. To reflect the lower expected contribution from COVID treatment distribution, we are lowering the bottom end of our US healthcare solutions as reported operating income guidance. We now expect the segment to deliver as reported growth in the range of 1% to 4% growth widened from the prior range of 2% to 4% growth. Our guidance for the US Healthcare Solutions segment excluding COVID contributions remains unchanged at 5% to 7% growth in fiscal 2023. Now moving to the International Healthcare Solutions updated segment-level operating income assumptions. We are raising our as-reported operating income guidance for the International Healthcare Solutions segment to a range of a decline of 3% to growth of 1% from our previous range of a decline of 7% to a decline of 3%, driven by the general weakening of the US dollar and the incremental contribution from PharmaLex. The accretive and strategic deal is another example of how we create incremental value through capital deployment, and we are excited to welcome the PharmaLex team to AmerisourceBergen. PharmaLex's leading solutions built upon our existing capabilities and will allow us to deepen our partnerships with pharma manufacturers as we provide support throughout the cycle from clinical development to regulatory support and access strategies to providing logistics services. For additional operating income guidance measures for the International Healthcare Solutions segment, I would refer you to our investor presentation deck. These guidance measures also were increased driven by the general weakening of the US dollar and the incremental contribution from PharmaLex. In summary, regarding the updates we have made to guidance, there is no change in our guidance for as-reported consolidated adjusted operating income. And we are raising our adjusted EPS guidance for the full year, all while lowering our expectations for COVID contributions. Before I turn to my closing remarks, I would like to briefly discuss a few highlights about how we are working to ensure a resilient supply chain and mitigate our impact on climate change. As a crucial member of the global pharmaceutical supply chain, we play a key role in ensuring the safe and reliable supply of medications. We take this role seriously and have robust plans and teams in place to support supply chain resiliency. In fiscal 2022, we advance these efforts and expanded the scope of our physical risk assessment process to reflect our expanded footprint since we last conducted a physical risk assessment in 2020. In 2022, we included nearly 400 sites across 24 countries, up from 100 sites. The updated assessment will inform our business continuity planning process to help ensure the continuity of supply in the event of extreme weather or natural disasters. While we prepare for and adapt our business to address the impacts of a change in climate, we continue to look at ways we can reduce our carbon footprint and be good environmental stewards. As part of these efforts, in May 2022, we submitted a near-term target to reduce our greenhouse gas emissions to the science-based targets initiative for validation. In January, we learned the science-based targets initiative approved our near-term science-based emissions reduction target. In addition to the items Steve and I have discussed today, our recently published ESG report contains additional information on how we are living our purpose and creating healthier futures through our ESG initiatives. The report aligns with a number of leading ESG reporting standards and frameworks and key data points have been externally assured. I would encourage you to review the report's entirety on its dedicated microsite at esg.amerisourcebergen.com. In closing, our updated fiscal 2023 guidance reflects our continued strategic use of capital to create value for our stakeholders through a combination of returning capital to shareholders and investing in our business to further our value proposition for our partners. Powered by the continued resilience and growth of our business. As we progress through 2023, we remain focused on executing on our long-term strategy, and through our foundation and pharmaceutical distribution and complementary higher-margin, high-growth businesses, we are well positioned to create long-term sustainable growth. Hi, guys. Thanks very much for the question. I was wondering if you could talk about PharmaLex a little bit more. Obviously, that was nice to see the transaction closed early. And now that you've had it for a whole month, I was wondering if you could talk a little bit about what some of the early wins are in terms of from like a client perspective and sort of what they're most interested in, and what are some of the things that have been new to you since fully taking ownership of the asset. Hi. Good morning, Elizabeth, and thanks for the question. Maybe I could just start with some general comments about our approach to capital deployment. Literally, there's nothing this management team takes more seriously other than our reputation and capital deployment. It's our key opportunity, and we want to make sure that we leverage all the available dollars we have. Having said that, PharmaLex is a continuation of AmerisourceBergen's strategy of investing to further our leadership in specialty distribution and services. Our portfolio has literally been built through decades of significant organic and inorganic strategic investments, including this recently completed acquisition. This is complementary to our US existing manufacturer services platform, and also, you will recall that when we bought the Alliance business, we focused on their value-added services businesses, and in fact, pointed out that they had a higher percentage of the operating income coming from those services. So, we feel that this significantly enhances our international capabilities. AmerisourceBergen is focused on growing our higher-margin, higher-growth businesses. And particularly, we've identified this area as a robust area for us. Our goal is in the long term to be the first stop for any services that manufacturers would like to deploy our businesses like PharmaLex and AmerisourceBergen for. Let me also just say that I was literally two weeks ago with the PharmaLex management team. We've had some calls before, it was a pleasure to meet them in person. I've been very impressed with the approach that Bob Mauch and his leadership team have taken with this integration and with the merging of PharmaLex into our existing businesses. And I'm very excited about the opportunities ahead for this acquisition. Thank you. Perfect. Thank you so much for taking the question. Maybe if we can dive into the US segment for a bit. There's a number of moving pieces embedded within your reiterated 5% to 7% ex-COVID EBIT growth. You talked about some of the OpEx pressure you have that's annualizing over the course of the year versus last year. You talked about some of the variability in animal health. Along the other side, what's allowing you to drive forward with hitting that robust growth metrics, thinking through where some of the potential upside variability may be in volume versus price versus mix? Just curious to dig a little bit more into some of the good stuff there that's putting you basically within the general range that you would typically have as part of your long-term guidance from last year's Analyst Day? Yes. Thank you, Michael, for asking that question and I think really kind of a key point and a key takeaway is that we really have continued strong performance in our US business and strong performance in specialty and broadly across human health distribution, and we're seeing continued strong utilization trends. And so that's true in the US, and it's really true at Alliance also where we saw international strong performance and utilization trends during the quarter. I called out in my prepared remarks as you referenced that COVID came in below our expectations during the quarter. And as I said in the prepared remarks, we had a softer quarter for animal health and higher OpEx growth rate during the quarter, but we expect that to normalize for the full year. And really kind of, I think, the key takeaway is just strong performance and execution both in specialty and broadly across human health distribution, and that's kind of evidenced in our maintaining that guidance rate, excluding COVID of 5% to 7% in the US segment. And as reported, excluding COVID, on a consolidated basis, improving our adjusted operating income guidance from 3% to 5% to 4% to 6%. Great. Thank you. Can you speak a little bit more about what you're seeing in terms of underlying utilization trends in that international wholesaling business? And have there been any surprises in the most recent quarter that we should be aware of, and how should we be thinking about the quarterly cadence for the balance of the year there? And just more broadly, kind of on international, in the next five years or so, does your international segment and footprint and integration across that business look vastly different to you? And just with the name change and just thinking about how you think about the contribution of international over the next five years or so. Thanks. Yes, I'll start with some to the question, Erin, and then I'm sure Steve will want to comment also. So in the international business, we're seeing good utilization trends and performance. Alliance had another strong quarter. If we look at our guidance update that we've done in the International segment, as I mentioned during the prepared remarks, on an as-reported basis, we increased our guidance by 4 percentage points at the low end of the range, and 4 percentage points at the high end of the range. And that's essentially evenly split by the impact of FX since the dollar has generally weakened since we put out guidance and also the early close of PharmaLex. And so each of those things is worth about 2 percentage points. But overall, in terms of the execution of the business, or I should say the performance of the business, we're seeing really good execution by the management team and a good utilization trends. The one thing I'll comment on, and I did mention this in the prepared remarks, is there was a price increase in a developing market that happened in the first quarter of this fiscal year that happened in the second quarter of last fiscal year. So that will impact the cadence just a bit. Steve? Yes, thanks, Erin. I think AmerisourceBergen is very is very consistently facing -- is trying to really be squarely in the prescription drug market, our services and distribution are anchored around the prescription market. I've been impressed with Alliance. It's now our seventh quarter reporting them, and they've been very resilient. We have strong market positions in almost every country we're in. and where we've had to, we've complemented it. Some of the smaller markets, for example, Norway and Netherlands, we're in retail. We've also got a very strong Alloga business, which was one of the most interesting aspects of this integration and acquisition for us. We're aligning that very closely with our ICS business, which is being more closely aligned with World Courier in the past historically and is focused on the more complex therapies. And Alliance Alloga business has a very strong basis in core pharmaceutical products. So I'm also excited about what PharmaLex is going to bring to the equation. We have about 2,500 team members that we've added with PharmaLex and about 800 of them have PhD equivalent degrees. I go back to my experience and a lot smaller scale, but when we acquired Xcenda when I was at the specialty group, the uplift in talent and intellectual thought around the manufacturer was so important to the development of the specialty group, and I think that PharmaLex can be analogous to our European and international business growth. So, we're -- I think we're just are very well-positioned. I like what this acquisition is going to bring to us. And Jim just has one more comment I'd like to make. Yes, thanks. Just one thing I do want to say, Erin, thanks very much for the question on international, I do want to say, of course, as you look at our business overall, our operating income mix is about 80% in the US and 20% international. Thank you. A question on US health care, I see you pretty consistently called out specialty to physician practices as a growth driver. And I noticed the last quarter or two, we haven't seen mail called out, recognizing it could be reading too much into the -- a few words here. But I'm curious, is there any change to distribution activity or self-distribution for the largest mail and specialty clients, and I know there's been some discussion that we could see biosimilar source directly as we see larger volumes in the pharmacy benefit. Any thoughts on those trends? So, Eric, thanks for the question. No, we -- AmerisourceBergen is focused on following the prescription dollar -- so we have a broad segment of our customers, and I think it's well known that Express Scripts Cigna is our lead customer in that area. They are a fast-growing customer and we're not going to comment too specifically on them. But some of the customers do source Part D, more specifically Part D products directly and we'll see that, that trend could continue. But it's just really one segment of our portfolio of customers, and we're happy with the relationship. We want to do the best job we can as a distributor for them. And the needs of large complex customers like Express Scripts are very different than the needs of some of our smaller customers that tend to use our services more readily. So, probably that's all on that. Jim, anything you'd add? Yes, thanks for taking the questions. You mentioned before opportunistic share repurchases over the last few months. Can you talk about sort of what the capacity you have to continue to do that if, for example, Walgreens was to continue to take down its stake in the company, can you kind of give us a sense for sort of where you are in terms of that? Yes. We obviously, we feel very good about the opportunistic share repurchases we've done over the past several months. And as you know, we've successfully collaborated with Walgreens on their two latest sales, repurchasing about $700 million in shares in conjunction with those sales. And we view these as a good opportunity to repurchase shares. And we continue to maintain a collaborative relationship with WBA. And we would expect to work together on any future plan sales, including potentially repurchasing shares. And that's as a result of our very strong financial position, which continues, of course, and our focus on opportunistic share repurchases. And so if they do decide to sell additional shares, we would view it as an opportunity to repurchase. Good morning, guys and thanks for taking the questions. Jim, I'm going to take a shot at kind of two numbers related questions. I guess number one is with the closing of PharmaLex, can you say whether or not manufacturer services is now greater than 50% of gross profits in the International segment? And my brief follow-up would be is that if we look at the macro level, specialty drugs are now approaching 50% of kind of total sales in the Pharmaceutical segment. Is it safe to assume that, that mix is kind of reflective of ABC's US drug sales mix as well? Thank you. Yes, and so there was a lot there, and we specifically do not break out the percentage of manufacturer services. But I will say that those sorts of services are a really important part of our international business, just like they are in the US business. And I think one kind of key thing to call out is you'll note that our operating margin is significantly higher in the International segment than it is in the US segment. And the reason for that is those higher-margin services businesses are a higher percentage of sales in our international segment than they are in the US segment. And they're driven historically by things like World Courier, of course. But Alloga also, which is Alliance's very successful 3PL business and some of alliances services business. And now it's an even greater percentage of the business given the exciting acquisition of PharmaLex. And so that's just a little bit of commentary on the international market. And you asked about specialty products. In some cases, a number of the specialty products in the international market are 3PL. And so I think you also asked about the US business. And of course, specialty continues to be a driver for us in the US market, as you know, very well. And we're a leader in the specialty business, both for physician practices and for non-physician parts of the business, and it's really kind of a leading part of our legacy businesses that Steve started many years ago and a super important part of our future through our key partnerships. Thanks very much. Two, if I might, and they're both somewhat related in terms of when you first outlined the guardrails on fiscal 2023 outlook versus the updates today. First one, HUMIRA. I know pound-for-pound, it's not as important as certain other drugs due to the channel of administration. But have your views changed at all now that we have front and center, we have the launch here? Have you had any change in perspective on the dynamics of that particularly large biosimilar in the market? And then second and somewhat correlated on the guidance timing through the last seven, eight months, whatever it is, the corporate name change in rebranding, maybe a bit of a silly question, but there will be some expenses associated with that absorbed in guidance or is it incremental? I guess, when you first laid out the guardrails on fiscal 2023, were you assuming some expenses here or is this a newer topic that you've just subsequently absorbed? And if you could quantify that impact on the expense and capitalization side, it might be interesting? Thanks so much. Thanks. Good to hear from you Eric. So, I'll start off. Obviously, we've talked about this for a while, and it seems like it was never going to be here. But of course, our first biosimilar HUMIRA launched this week, and it's an important drug for the US health system, by some measures, the largest drug in history. And the introduction is going to be an important creator of headroom for the new innovative therapies that AmerisourceBergen is so well-positioned to serve our stakeholders in. So, that's important. The first -- so we're interested to see how the trends go. And again, in July, we'll see some more entrants, and some of them have different clinical aspects to them as you well know. But we've said consistently that Part B is our sweet spot. This is very much a Part D drug, and it will be incrementally better for us in margins, but it's mostly mail order. And as was pointed out previously, some of our Express Scripts, for example, and other customers in that category could be ordering directly, and they have limited locations, and it's a much easier distribution function for manufacturers to fill. So, not -- it won't change our guidance or anything too much, but it is a very serious milestone in biosimilars, and we'll look to see how the market absorbs this product. Jim, anything on the other guidance aspects? Yes, Eric had asked about the name change and some of the costs and whatnot related to the name change. And Eric, we aren't going to get into a lot of specifics at this time, but I will say that the spend will be spread out over the next three years, and it really happens in three phases. The first is planning and preparation, the second is launch, and the third is ongoing brand migration and a majority of these costs will be GAAP only as they are nonrecurring in nature. And then a portion of the cost will be capitalized and depreciated over time and recorded against our adjusted non-GAAP results. I'll also comment that with regard to amortization of some of our existing trade names, there will be an increase in amortization expense, and it will be recorded and disclosed beginning in our March quarter and as a reminder, amortization expense relating to trade names is accounted for as a GAAP-only expense and is not included in our adjusted results. Great. Thanks. Good morning. Thanks for squeezing me back in here. Just a general question around Europe. There's been some chatter in the marketplace about the possibility of expansion, the ability for entities in certain European countries to be able to potentially source drug inventory from other external European countries that may lead to lower drug costs. I guess I'm just curious if you have any high-level thoughts around this and at least maybe directionally, maybe talk about how this could impact your international operations. Thanks. Yes, so not a key area of focus for us. There is definitely a parallel trade market in Europe, which is actually highly regulated. But I haven't heard that there's any intention. This is not something we focus on. I haven't heard that there's any intention to expand that. And we really don't have much further insight on that. Jim, do you agree? Hey, good morning. Just a quick question. Steve, how are you thinking about macro in the US? It looks like the US business is holding up pretty well, but as I think about your guidance for the year, how should we be thinking about the assumptions you've baked in, in terms of the expected hitting of the recession sometime in the middle of this year? Thanks. Yes, we, AmerisourceBergen, I think if we prove one thing, and our industry, in fact, has proved that we are pretty resilient. And what's important to us is that our -- the patients that we ultimately serve are able to access products. And the payer systems, both the commercial and government systems, continue to work very well. And I think I've told the story many times and in 2009, which is my first year running the full-on drug wholesale business in that time, and of course, the whole world was melting down. And we had less than $4 million or $5 million in bad debt. So but key for all of our businesses, whether it's Europe or US, is continued patient access to care. And in many cases, we are working with single-payer systems. But I just want to stress that one of the beauties about AmerisourceBergen is we go through many cycles, but the core and the specialty businesses and the manufacturer services we provide are so fundamental to the health systems. And then we are also very good at adapting to whatever changes we need to make. So I would say COVID is an extremely applicable application of that. We really were able to adjust so many of our businesses to go virtual and really had one month of disruption, I would say, because of just so much of the economy moving inside. But other than that, I have to say that AmerisourceBergen has proven through all sorts of cycles that we are very resilient and carry on producing earnings and cash flow, which is very important. Jim? Well, Steve, I would just echo that. From my perspective, it's just one of the â just one of the wonderful things about our company and our industry is our proven resilience. Well, that wraps it up for today. And Jim, thank you for ending on that keyword, resilience. I would say that we had an excellent quarter, and I'm excited about the Cencora name change. And whether we're talking about AmerisourceBergen or in the future Cencora, we are highly differentiated and well-positioned for long-term growth anchored in our core distribution and specialty services and also with our very high potential customer base. And we'll continue to benefit from growth in the pharmaceutical market, driven by patient demographics, prescription utilization trends, and continued innovation.
EarningCall_949	Good afternoon, everyone. Before the conference call begins, let me remind you that during this call management will be making comments and statements regarding its financial outlook, its plans and objectives. These statements represent the forward-looking statements that involve risks and uncertainties as those terms are defined under the federal securities laws. Investors are cautioned that any such forward-looking statements are not guarantees of future events, performance or results. The company's actual results may differ materially from its current expectations. Please refer to the risk and other uncertainties disclosed under the forward-looking information in today's press release, as well as the company's SEC filings for more details on the risks and uncertainties that may cause actual results to differ materially. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call, except as may be required by applicable law. You will also hear management refer to non-GAAP or adjusted measurements during this discussion. While these figures are not a substitute for GAAP measurements, management uses these figures to aid in monitoring the company's ongoing financial performance from quarter-to-quarter and year-to-year on a regular basis and from benchmarking against other medical technology companies. Adjusted net income and adjusted earnings per share measure the income of the company, excluding credit or charges that are considered by the company to be special or outside of its normal ongoing operations. These adjusting items are specified in the reconciliation supporting the company's earnings releases posted to the company's website. With these required announcements completed, I will turn the call over to Curt Hartman, CONMEDs Chair of the Board, President and Chief Executive Officer for opening remarks, Mr. Hartman. Thank you, Justin. Good afternoon and thank you for joining us for CONMED's fourth quarter and full-year 2022 earnings call. With me on the call is Todd Garner, Executive Vice President and Chief Financial Officer. Today, I'll provide a brief overview of the financial and operating performance for the fourth quarter and full-year. Todd will then provide a more detailed analysis of our financial performance and discuss our 2023 financial guidance. After that, we'll open the call to your questions. Our Q4 results were materially impacted by our warehouse management software implementation in October as indicated by our November 14 suspension of guidance. Total sales for the fourth quarter were $250.9 million, representing a year-over-year decrease of 8.4% as reported and a decrease of 7% in constant currency. Clearly, the lack of ability to ship customer orders in a timely fashion resulted in both delayed revenue and lost sales opportunity as customers supported surgeries with competitive products. This disruption also took our sales teams out of their normal business routines and cost us new opportunities typically associated with the fourth quarter. We know our customers perform surgery daily with minimal inventory on hand independent or reliable stream of products support their needs. In this regard, we came up short in Q4 and in many cases customers found alternative solutions. However, customers choose CONMED products over competing products for a reason and we're working hard to regain their trust and have them return to the CONMED brand following the system implementation issues. Given the revenue shortfall in the quarter, fourth quarter earnings also suffered with GAAP net income of $26.6 million. This compares to net income of $24.4 million in the fourth quarter of 2021. Excluding special items that affected comparability, our adjusted net income of $12.9 million decreased 61.3% year-over-year and our adjusted diluted net earnings per share of $0.42, decreased 60.7% year-over-year. For the full-year, sales reached $1.045 billion, representing a year over increase of 3.4% as reported and a 4.6 % increase in constant currency. The 2022 GAAP net loss totaled $80.6 million, compared to net income of $62.5 million in 2021. Excluding special items that affected comparability, our adjusted net income of $85 million decreased 14.5% year-over-year and our adjusted diluted net earnings per share of $2.65 decreased 17.4% year -over-year. Looking back at 2022, we strengthened the broader business to include two fantastic acquisitions, which are both off to a great start quantitatively and qualitatively. We also locked in the majority of our debt at 2.25% interest rate for five years with the new convertible notes. We continue the development and strengthening our new product introduction process and this difficult experience in Q4 will make us even better at delivering to our customers. From a market perspective, we believe the surgical environment trended more favorably in the fourth quarter with stability in procedures and subtle increases in staffing levels across the healthcare system, all of which are encouraging signs moving forward. The overall environment has more stability than at this point a year ago, while noting there are still areas of uncertainty around recessionary pressures. As we step into 2023, we're laser focused on basic execution to deliver top line growth and leverage earnings growth. Further, we believe we've assembled a high growth portfolio through a disciplined combination of organic and inorganic development across both general surgery and orthopedic categories. And as you will hear from Todd, we have more clarity on our gross margin outlook in the years ahead. While 2022 did not end as we had planned, the strategic outlook for CONMED remains strong on both the top and the bottom line and this will benefit patients, customers, employees and shareholders in the quarters and years ahead. Overall, I remain honored to work with this executive team and beyond impressed by their commitment and persistence in pursuing what is in the best interest of CONMED. They and all of our global employees and related partners remain committed to our growth strategies. In 2023, we will define success by staying focused on our people and ensuring the financial growth and health of the company, while remaining committed to our strategy to drive above market growth in both revenue and earnings. With that, I'll turn the call over to Todd, who will provide a more detailed analysis of our financial performance and discuss our financial guidance. Todd? Curt? All sales growth numbers I referenced today will be given in constant currency. The reconciliation to GAAP numbers is included in our press release. As usual, we have included an investor deck on our website that summarizes the results of the quarter and our updated guidance. For the fourth quarter of 2022, our total sales decreased 7.0%. Our best estimate of the revenue impact from our warehouse software implementation is in the neighborhood of $65 million. Our end customer backlog at year-end, due to this disruption was approximately $30 million, which included the impact of shutting down the warehouse for the last three days of the year to perform a complete physical inventory. History has shown that when supply disruptions in our industry are resolved, the original supplier wins back the vast majority of business loss during the temporary disruption. We know that our customers were well aware of the substitute products prior to our delivery problems and they choose CONMED to use for a specific reason. Those reasons still exist today and we are even more energized to be excellent partners to our customers. Revenue from the recent acquisitions was $12.5 million in the quarter. As Curt said, both In2Bones and Biorez are off to strong starts and exceeded our expectations in 2022. These products were unaffected by the warehouse disruption as they are not shipped from that location. For Q4, our sales in the U.S. decreased 3.9% versus the prior year quarter, those of our U.S. sales decreased 3.9% and our international sales decreased 10.6%. The U.S. is where the majority of In2Bones and Biorez are sold. We estimate that the impact from the warehouse disruption was similar in percentage in the U.S. and OUS. The U.S. was impacted immediately while our international geographies initially benefited from inventory held in our regional distribution centers. Because of that, the remediation efforts first focused intensely on U.S. customers. As the duration of the issue extended, the international channel was depleted and the end customer there was impacted later in the quarter. We've made good improvement in shipping globally and we are shipping at or above normal daily volumes. As of this week, our end customer backlog from the affected warehouse is approximately $10 million. So we're making progress, but we're not where we want to be yet and we still have work to do to replenish our distribution channels and increase our shipping capacity for future expected growth. We will continue to focus and improve until we have turned this weakness into a strength. Worldwide Orthopedics revenue decreased 0.3% in the fourth quarter. In the U.S. Orthopedic sales grew 15% and internationally orthopedic sales decreased 9%. Obviously, the U.S. is seeing most of the benefit from the acquisitions. Total worldwide general surgery revenue decreased 12.0% in the quarter. U.S. general surgery revenue declined 11.5%, while internationally general surgery revenue decreased 13.1%. We estimate that the sales impact from the warehouse disruption was fairly balanced across the portfolio with a little more impact felt on the general surgery side. For the full-year of 2022, our total sales increased 4.6%. Revenue from the recent acquisitions was $24.8 million in 2022. For the full-year, our sales in the U.S. increased 4.8% versus the prior year and our international sales increased 4.3%. Worldwide Orthopedics revenue increased 6.5% for the full-year of 2022. In the U.S. Orthopedic sales grew 9.2% and internationally Orthopedics sales increased 5.0%. Total worldwide general surgery revenue increased 3.1% for the full-year 2022. U.S. general surgery revenue grew 3.0%, while internationally general surgery revenue increased 3.2%. Now let's move to the expense side of the income statement. We will discuss expenses and profitability in the fourth quarter and the year excluding special items, which include charges for acquisitions and contingent consideration, legal matters, restructuring and software implementation costs, debt refinancing and extinguishment costs, amortization of intangible assets and amortization of deferred financing fees and debt discount net of tax. Adjusted gross margin for the fourth quarter was 54.2%, a decrease of 270 basis points from the prior year quarter. The majority of the decline is due to the cost deflation we're all dealing with in 2022. The gross margin was lower than we expected due to the significant revenue miss and certain period expenses recognized in Q4. For the full -year, adjusted gross margin was 55.3%, a decrease of 90 basis points from 2021. We told you back in the spring that freight and material cost increases had cost us approximately 300 basis points in gross margin, since the 2019 baseline. As we updated that analysis for the end of â22, it shows inflationary costs of 330 basis points in total. There has been some relief on the freight side, but the full impact of material cost inflation was higher for the full-year 2022 than what we had seen back in the spring. When we add in the labor component to that metric, we estimate the total inflationary costs have decreased our gross margin by approximately 400 basis points in the last three years. Adjusted gross margin in 2019 were 55.4%. So that means that our improving mix and cost savings over the past three years have essentially offset the impact of inflation over that time period. Research and development expense for the fourth quarter was 4.9% of sales, 80 basis points higher than the prior year quarter. For the full-year 2022, R&D expense was 4.5% of sales, 20 basis points higher than 2021. Fourth quarter adjusted SG&A expenses were 39.7% of sales an increase of 300 basis points over the prior year quarter, because of the miss sales in Q4 2022. For the full-year, adjusted SG&A expenses were 38.8%, so 50 basis points higher than 2021. On an adjusted basis, interest expense was $7.9 million in the fourth quarter and $24.0 million for the full-year. The adjusted effective tax rate was 26.5% in Q4. This was higher than anticipated as the lower income reduces the credits, we are able to take against the income. For the full -year, our adjusted effective tax rate was 23.5%. Fourth quarter GAAP net income was $26.6 million, this compares to GAAP net income of $24.4 million in Q4 2021. GAAP earnings per diluted share were $0.86 this quarter, compared to $0.75 a year ago. For the full-year, GAAP net loss was $80.6 million, compared to GAAP net income of $62.5 million in 2021. GAAP net loss per diluted share was $2.68 in 2022, compared to GAAP net income of $1.94 in 2021. Excluding the impact of special items discussed earlier in the fourth quarter, we reported adjusted net income of $12.9 million, a decrease of 61.3%, compared to the fourth quarter of 2021. Our Q4 adjusted diluted net earnings per share were $0.42, a decrease of 60.7%, compared to the prior year quarter. Excluding the impact of special items discussed earlier for the full-year 2022, we reported adjusted net income of $85.0 million, a decrease of 14.5%, compared to 2021. Our full-year adjusted diluted net earnings per share were $2.65, a decrease of 17.4%, compared to the prior year. Turning to the balance sheet. Our cash balance at the end of the year was $28.9 million, compared to $33.4 million as of September 30. Accounts receivable days as of December 31 were 69 days, compared to 65 at the end of Q3. Inventory days at year-end were 251 compared to 222 at September 30. Obviously, this was meaningfully impacted by the sales shortfall in the quarter. We expect this metric to reduce significantly as we progress through 2023. Long-term debt at the end of the year was $985.1 million versus $1.36 as of September 30. We reclassified the remaining $69.6 million of the 2019 convertible notes to short-term liabilities. Our leverage ratio on December 31, 2022 was 5.6 times, compared to 5.0 times on September 30. The increase is due to the dip in EBITDA in Q4 of 2022. This metric is debt divided by the last 12 months of EBITDA. So this lower Q4 will be in the calculation until Q4 of 2023. We expect adjusted EBITDA for the full-year 2023 in the neighborhood of $240 million. We expect our leverage to drop below 5 times in Q3 of this year and be below 4.25 times by the end of 2023, and in the low-3s by the end of 2024. Cash used for operations in the quarter was $11.6 million, compared to cash flow from operations of $33.8 million in the fourth quarter of 2021. Cash flow provided from operations for the full-year 2022 was $33.4 million, compared to $111.8 million in 2021. The biggest driver of this difference was the significant levels of inventory built in 2022. We expect operating cash flow around $130 million in 2023. Capital expenditures in the fourth quarter were $5.7 million, compared to $3.2 million a year ago. For the full-year, capital expenditures were $21.8 million, compared to $14.9 million in 2021. Now let's turn to financial guidance. We expect reported revenue for the full-year to be between $1.170 billion and $1.220 billion. This includes currency headwinds of 150 to 200 basis points. We've included the detail of the different components of our financial guidance in the investor deck associated with this call, which can be found on our website. As a reminder, we closed on In2Bones in June of 2022 and we closed on Biorez in August. So essentially, both become organic in the second half of the year. So what you see in the reconciliation is basically the revenue from the acquisitions in the first half of the year. For adjusted gross margins, the improving mix of the portfolio is strong and will continue to drive meaningful benefits in the future. For 2023, we think mix, including the acquisitions, should drive between 110 and 140 basis points of benefit. However, 2023 has some specific challenges on the margin side. FX is a meaningful headwind of between 40 and 60 basis points and we continue to digest the inflationary costs discussed earlier and we will be temporarily slowing production in our slower moving product lines to bring our inventory balance down. This all results in total gross margin improvement of 20 to 50 basis points in 2023. As we look beyond 2023, we expect at least 150 basis point improvement in 2024 and around 250 basis points in 2025. We believe we're on a path to have around 60% adjusted gross margins at the end of 2025. As a percentage of sales, we expect adjusted SG&A to be between 37.0% and 37.4% in 2023 and R&D expense to be in the mid-4s as a percentage of sales. We expect adjusted interest expense to be between $32.3 million and $32.8 million in 2023. We expect the adjusted effective tax rate to be around 25% in 2023. We expect adjusted EPS in 2023 to be between $3.20 and $3.45. That includes an FX headwind between $0.20 and $0.25. As we look at the first quarter, we expect reported revenue between $262 million and $272 million. That includes about 300 basis points of FX headwind based on the December 31 rates. We see this headwind decreasing each quarter throughout the year. We expect adjusted EPS in Q1 to be between $0.58 and $0.63 inclusive of FX headwind. The full-year FX headwind on the bottom is almost all in the first half of the year split fairly evenly between Q1 and Q2. 2023 will have one less selling day overall than 2022. The way our calendar falls, Q1 will have one extra day and Q3 will have two fewer days. We feel very good about the exciting revenue growth and profitability potential from the portfolio we have built, including our recent acquisitions. We have a self-inflicted wound we need to recover from quickly, we're focused on that. We're moving back on offense and we will be a better and stronger company because of these experiences and focus. And thank you. [Operator Instructions] And our first question comes from Travis Steed from Bank of America Securities. Your line is now open. Hi, good afternoon, everybody. Thanks for taking the question. I guess, I wanted to understand any impact from the Q4 issues going over into Q1? How to think about the Q1 impact? And what's assumed in the guide per share recapture? It sounds like you're assuming all this comes back pretty immediately. Are you seeing signs of that now? I'm just trying think if there were some at a risk, because there's been some examples in that type last year where the share didn't come back quite as fast as the company's thoughts? So just want to make sure we understand being -- what's being assumed in the guidance? Yes. So we ended the year, our back order was $30 million and we just said that it's about $10 million right now, so we've had a good January, made some good improvements. We've got some more to go. We're focused on that. The way I think about it, Travis, is the impact to sales should be the biggest in Q1, right? Because we're closer to the issue, and as we get further from the issue, there should be decreasing impact, right? And we do expect that we'll get the vast majority of those customers in that volume back. We may not get it all, but we do expect we'll get the vast majority of that. And that's what's assumed in the guidance. And I would just point out that obviously the backlog benefits the start of the year. So where you have the biggest hole to fill and to make up for, you also have the biggest -- that's where you have the big benefit of catching up on the backlog. So we feel good about the -- about our guidance today and are focused on executing and winning the size of those customer paths. Okay. And I don't know if you do, did you give a dollar amount of how to think about the inflection in Q1? And then the other question was just wanted to understand the U.S. and OUS impact. And it sounds like things maybe got worse, but the issue is ended the quarter, I think we're talking [Indiscernible] was more of an issue -- the U.S. issue at that point, but now it's impacting kind of both U.S. and OUS and if not, the OUS have lingered even further into 2023? Yes, that's correct. So no, we can't estimate the exact impact of the catch up we have to do in Q1. We think it'll be the biggest negative impact, which is offset by the biggest positive impact, right? And then so it would be impossible to really quantify that quarter-to-quarter. Our focus is to earn that business back as quick as possible obviously. And you are correct, when we first talked about this and we expected to resolve quicker than it was, it was U.S. focus, we felt like that the buffer of inventory in our OUS distribution centers would protect us. It did protect us for a time, but because the issue took longer to resolve than we all wanted it to. Those international geographies were impacted later in the quarter. And so as we roll into 2023, the U.S. has recovered better and faster because the remediation efforts were first on that side of the business and we're making up good strides on international, but international is probably more impacted at the start of the year here than U. S. is. And thank you. And one moment for our next question. Our next question comes from Robbie Marcus from JPMorgan. Your line is now open. Great. Thanks for taking the questions. Maybe we could just go back to how this -- the warehouse management disruption began, why it happened? I imagine these things are implemented all the time. What was different at CONMED and what are the processes you put in place to prevent it from happening again? Well, I would start by saying we all agree the remediation has taken longer than we expected. And I think you have to look at CONMED has one main warehouse. We have international distribution centers. The main warehouse is the warehouse that we put the system in place. And as we work through the issues, we took a very deliberate approach to identification and prioritization of those issues. While at the same time working daily to ship customer orders. And ultimately, we identified a lot more areas of remediation that were needed than we anticipated in the early stages. I think the way I think about it is the solutions when operating in a state-of-the-art software package require both technical and operational remediation and the technical remediation require comprehensive user and system validation and we're also dealing with a substantial amount of what I would refer to as pure change management. And I say that because the warehouse that we upgraded was very manual operation, very much a paper individual people driven operation versus a system. And I refer to it as going from a warehouse, kind of, vintage 1980 to vintage 20 20, thatâs a quantum step. And while we thought our work pre-install had positioned us to do that, we obviously did not do a comprehensive enough set of validation, user verifications that captured all the base user cases. It's important to note as Todd said, we've got the overall backlog down to $10 million and we're making great progress. And the learnings will pull out of this will obviously come from a comprehensive after-action review and any further software platform work that we do, which there's none in the foreseeable future at this point in time, would obviously benefit from these lessons. So again, better today than we were, took longer than we wanted, but long-term this is the right solution to allow CONMED to scale from an operational standpoint. Great. And maybe just a follow-up question, I appreciate all the color on guidance and some of the long-term outlook commentary. But if I just focus on â23 guidance, looks like sales and EPS range came down just a bit at the upper end. I imagine some of that is due to how long this is has lasted versus your original expectations when you provided guidance. But maybe just help us understand what's assumed in your market and recovery and customer capture assumptions at the low-end and the high-end, I think would be really helpful. Thanks. Sure. Yes, you're right, Robbie. When we gave that initial guide with the disclosure of the warehouse issue, we gave it wider than normal range because it was two months prior to and we normally do it on this call. And the difference today and then is essentially we've taken a little bit off the top of both of those ranges. But we're back to what the range that we would normally give on this call for the year. So that's $50 million on the top and $0.25 range on the bottom. So this is our very typical where we would -- how we would start the year. And you're right, I think the adjustment, we're still very bullish on the business. The sales force is very bullish. We know we can win; the fact is that our sales force was put on defense in the fourth quarter and it's lasted longer than it was supposed to. And so our focus is to get them on offense as quickly as possible. And we're laser focused on that, so we're moving back to offense and that's what's assumed in the guide. And does that include sort of normal market volumes, procedure volumes and I imagine at the high-end of the range full recapture of share? Yes. I think that our view is similar to what you've heard from others that the environment is modestly improving, right? It's stabilized. So, yes, inherent in this guide is that is, kind of, status quo -- sorry, status quo for macro factors. And thank you. And one moment for our next question. And our next question comes from Rick Wise from Stifel. Your line is now open. Good afternoon to you both. Maybe just taking the software implementation issue in the opposite direction. Help us understand, I mean, I think we all understand generally that having a software system or going to a modern system as opposed to a hand managed system, Curt, is impactful. But how do we think about the benefits? When you start to see those benefits? What kind of assumptions you're making about them in terms of sales, implementation, cash on the financial side, cash working capital efficiency, et cetera. So what do you expect? When do we start to see the positive, not just the recovery. That's a great question. And it goes back to the reason you do these things. One is efficiency in the location efficiency in movement of product into the location, through the location and out of the location, whether that be to the end customer or international distribution centers. And that is a very tangible benefit. And as we sit here today, we're already seeing some of that efficiency, our incoming receiving operations are materially more efficient than they were pre-implementation of the software. It's one of the areas that we did get right on the implementation. And so we see those things more broadly across the entirety of the warehouse, which warehouse operations are about receiving, replenishing and then picking, packing and shipping. And when we get all of these areas, lined up the way they should be with all of the requisite operational efficiencies and warehouse alignment, we believe we'll see that. And hopefully as we go day-by-day, week-by-week, we see this efficiency gains more subtly. And we're on this call a year from now and we're proud of the system we have and we're proud of the output that we have and it means moving inventory faster, which allows our manufacturing and sales ops planning team to do a better job with inventory management, because we've got better controls, better oversight, better visibility on the global inventory network. So those are all kind of the things we would go after when you put a system like this in place. Hard sitting here today for me to say exactly when, because we're still working our way through some of these inherent issues that we ran into. But again, as Todd said in his comments, we've got the backlog down to $10 million, we've made very good progress. As I said, the changes that have been required take comprehensive verification and validation and we're trying to be very thoughtful to not make things worse as we're trying to move forward. And I'd say we've been successful on that. Albeit a little bit slower than we had hoped. Okay. Maybe, Curt, you could talk in a little more detail about general surgery. Obviously, in terms of the performance, I mean U.S., OUS both were pressured a little more than the ortho side. Maybe help us understand some of the moving pieces there? And just again, how do you break it out between the warehouse issues something environmental or capital? And maybe I'm thinking about it wrong, but if I say to myself, if the smoke business which is such a significant chunk now it's growing at 20%-plus, which thank you for sharing that again. Gosh, you must be feeling some real pressure elsewhere. And so where is that -- what kind of recovery or improvement have you assumed in giving us the 2023 guidance? Thank you. When you look at CONMED in total, about 55% of our revenue comes out of General Surgery. So every product we sell outside of the two acquisitions goes through that warehouse. So the impact of the warehouse slowdown is proportionately going to be larger on revenue for General Surgery. General Surgery also has a mix of products that go through the large packhouse, especially in our AET business, the GI business. And so as you slow down those large orders moving through the pack houses, it's going to have a more material impact on general surgery. And I would assign a warehouse slowdown then takes your sales force out of its offensive mode. And they playing defense trying to move product around across their territory with the available product to ensure customers have what they need, when they need it. And when you're doing that, you're certainly not in offense, you're not in a position to look for new business, you're not in a position to try to grow your existing customer base. And I think that's all a ramifications of the warehouse issues. I personally feel like the fourth quarter was a good surgical procedure quarter. I feel like there were subtle gains in staffing that are starting to show in the environment. That's not to say there are pockets where there are still issues with surgical procedure volumes and staffing levels. But generally those two things are both improving or certainly what we saw in the fourth quarter. Feel very good about our General Surgery and our Orthopedic business today. And it's unfortunate that this is clouding the outcomes of those businesses. Because I think we have very good portfolios and very good commercial teams that are very focused on their customers. Rick, I want to make it -- I just want to make a clarifying comment just so nobody's confused. When you refer to the 20% plus growth, that is of course our expectation on an annual basis for the combined Buffalo Filter and Airseal product line. And that is in our deck, you're correct, we continue to expect that. That's a key part of our growth drivers. But it's on the growth driverâs deck. It's forward-looking. I want to be clear, those product lines combined did not grow 20% in Q4. Because of the warehouse issue. So I want to make sure nobody's confused by that. But we continue to expect moving forward that they will be above that 20% growth mark. And thank you. And one moment for our next question. And our next question comes from Matt O'Brien from Piper Sandler. Your line is now open. Excellent. So I don't want to focus on this too much, but Curt or Todd, the top line number did come down $10 million from what you guys talked about couple months ago and I know you got better information now. Is that specific to something in General Surgery, something in Orthopedics? That you're a little less bullish about now? And then can you just talk about the share recapture specifically? I mean, $65 million in one quarter is a ton of revenue obviously, what are you seeing as far as getting that revenue back and your confidence in the visibility of getting that kind of share back going forward? And then I do have one follow-up. Thanks. Sure. Thanks, Matt. And good question. Let's make sure we're clear. So $65 million was the miss in Q4 to our estimate. $30 million is the backlog at the end of the quarter, right? So we had $30 million in orders that if we could have got it out the door, we would have sold $30 million more, right? Inclusive part of that was we shut the warehouse down for the last three days of the year to do a physical inventory to make sure that our books and records were clean and this thing didn't cause any issues on that side of the fence. So yes, $65 million was the miss, but $30 million was the back order. So that $30 million basically moves into 2023, right? So it helps 2023, but of course, you've got to go get that business back. Now some of that business, we got back before the quarter ended. Some of those customers, we were able to start serving again and we got them back in Q4. Some of them we've already gotten back in January. And we're going to continue to focus on taking care of our prior and existing customers. And then, of course, as you know, there's a ton of room to go get new customers. And so the biggest issue, so the $10 million -- we gave you a $60 million range back in November, you are correct that we took $10 million off the top end of that range. But we didn't take the entire range down $10 million. We took -- we went from a $60 million range, which is wider than we would normally give for the coming year. Back to a $50 million range and we did take that $10 million off of the top end of the range simply, because as Curt explained, by the sales force being on defense longer than we anticipated when we talked in November, you've got it -- that's going to bleed a little more into 2023 than we anticipated. Now the backlog is also bigger, so you get some benefit that carries into the year as well. But so we feel good about the revenue projections we've put forward. And let's see, did I miss any part of your question? No, that's it. The $10 million, I mean, was there any area where they're a little more defensive, I don't know if it's general surgery or ortho? It was about -- like we said, it was -- the impact from the $65 million was slightly more on the general surgery side, but it affected the whole portfolio. Except for it, it did not affect the new acquisitions. Got it. Got it. Appreciate that. And then the follow-up is on gross margins. Todd, I mean, it's something that we thought would get a lot better going forward. I mean, getting to 60%, I'm assuming you mean like at some point in 2025 versus the full-year number being 60%, correct me if I'm wrong, but where does that level of improvement come from? What's assumed as far as inflationary benefits over the next several years or some of the mix benefits as well, because that's quite a bit better than we expected. Again, knowing that you have been doing better, even offsetting some of these pressures over the last several years on the inflationary side? Well, that's what's interesting, right? I mean, if you really think about 400 basis points of inflation digested over the last three years and our margins have stayed flat, right? So that means if inflation just stayed flat and didn't even get better, we were on a pretty good mix tailwind to grow at that rate. And by the way, 2.5 of those three years did not have the benefit of the new acquisitions, which both come in at 80% gross margins. And of course, those are going to grow in size and contribution of mix, right? And so our mix story is powerful. I'll tell you, I feel good about this 60%, because I haven't assumed that we get that 400 basis points of inflation back. I mean, I think in reality, there will be -- there should be some recovery. But I'm assuming the labor stays where it is. I'm assuming that a lot of the material costs, some of those spot buys and things where you've paid exorbitant prices during this period, those will come down. But weâre not -- I don't think the index cost of 2019 on the material side is ever coming back, right? You're not ever getting back to those same levels. And so I'm not banking on a lot of improvement or reversal from inflation to get to those numbers. The mix part of our business by growing Airseal and Buffalo like we've talked about, these new acquisitions getting better operationally, which we're focused on we've got the ability to get there. And I think we've demonstrated oddly enough in these three years; I think we've demonstrated that to be able to offset the crazy inflation like we have. And I would just add to Todd's comment. He talked about offsetting costs; we have the most comprehensive cost reduction program today than we've ever had in my tenure at CONMED. And you put that with the right mix of products, good things happen. So you guys know us well Todd wouldn't put those numbers out here if we didn't have confidence. And thank you. And one moment for our next question. And our next question comes from Young Li from Jefferies. Your line is now open. Great. Thanks for taking our questions. So I heard the comments on AirSeal and Buffalo growing less than 20% in Q4, because of the disruption. I was wondering, if you can provide a little bit more color on the growth in Q4? I assume maybe some of those orders were higher prioritized if possible. Is it fair to assume that without the disruptions that business would have grown 20%-plus in Q4? Yes, we certainly would assume that. We were set up to have a really good quarter there. So I think without the disruption, it would have been there, but we're not going to give the specific growth rates there Young, but we continue to believe that, that's going to be a big growth driver for us. Especially, AirSeal if you think about it, we are now seven years post acquisition and that thing is growing as good as it ever has. I mean, there's no slowing down. And then of course, Buffalo is a lot younger in his tenure and a lot. A lot more penetration ahead of it. So we feel very good about that being a big contributor to growth for the coming years. And just on the Buffalo filter aspect, there's legislation in some very large geographies coming into play in 2023. And we know now from history that legislation after it's in play at some period of time does help. Those growth rates. They're big markets. I think it doubles the amount of the population in the U.S., thatâs covered. So that's another benefit to that market. I appreciate the additional color. I guess one more just maybe your thoughts around salesforce hiring for â23. How much of that was maybe a little bit impacted or delayed since you had to pivot and focus on the warehouse situation? I think you typically would have hired and trained them for 20 23 by now? Yes, I'm going to separate the topic from the warehouse. We do typically do salesforce expansions in the first part of the New Year. But I'm going to go back to June, July as a leadership team, we took a very hard look at our overall headcount and looked at the recessionary elements in the global marketplace and said is now the time that we want to be expanding or do we want to perhaps move a little bit sideways and we made a decision then to prioritize our hiring to be more backfill, driven versus expansion driven. We want to understand more where the market may be going if there is recessionary headwinds in 2023. And so as that relates to the salesforce, we have done some expansion, but I would put it more on the minimal side relative to prior years. So salesforce expansion happened, but probably on the lower end of our typical range of expansion. And thank you. And one moment for our next question. And our next question comes from Mike Matson from Needham. Your line is now open. Yes, thanks. Just following up on the questions on the salesforce. I understand the decision around not expanding it, but you know, just curious if you did anything to try to retain the reps after, kind of, a difficult fourth quarter. I imagine a lot of them probably didn't end up hitting their quotas. So they -- was there some kind of retention comp or something like that given wasn't really something within their sort of control and is there any risk of sort of turnover happening there? Great question, Mike. We -- in the U.S. and outside the U.S., we do have pursuit of quota mentality. And we have the ability to track that with great regularity and great frequency and prior to the installation of the warehouse system, we knew where every individual reps stood and after the implementation and at the end of the year we knew where reps stood and we had a couple different set of metrics that we were tracking relative to that. And in spite of some of our issues, we had plenty of reps that made their original quota and we had plenty of reps that were at their quota before the installation. So we think we came up with a fair approach for our salesforces. And recognition of their accomplishments and we've actually at this point in time already had our sales meeting and I would say coming out of our sales meeting I was very bullish. That was -- we were completely transparent with our salesforce to understand that we couldn't give them everything, because we had not yet had this call. But we felt like we were very transparent. We felt they left their very engaged across the portfolio of products. And that's inclusive of the acquisition. It's the first time we've had the In2Bones organization at a sales meeting and I had the opportunity to interact with our salesforce. We have every one of our orthopedics reps now trained and certified on Biorez, so we feel very good about how they left our sales meeting and how they're feeling about this year. Can I guarantee you that we will not lose people? I can't, but I feel we've done everything possible to retain our salesforce, our best and our brightest. And one moment for our next question. And our next question comes from Matthew Mishan from KeyBanc. Your line is now open. Hey, guys. Thank you for taking the questions guys. Most of mine have been asked and answered probably several times at this point. So I'll just go with this one, I think you guys said the overall environment has more stability. I think that's the first time I've heard you guys like say something like that probably in several years. Could you just expand on kind of what you're seeing in the overall environment that you're seeing and that's given you the opportunity to kind of, to feel better about the overall macro? I think there's a couple of answers to that question, Matt. I start on the commercial side, itâs both factual and anecdotal, how our selling organizations feeling about the marketplace procedure volumes they're seeing, they're participating in. How are the data around procedure trends and surgical staff and hospital staff levels moving. And all the data that I've seen on that would show net adds to those elements. And then there's just calm conversations that the entirety of the executive team has with health system administration and folks that operate at a different level within the health delivery network. And all of those conversations are lining up to show that the fourth quarter showed improvement and we're coming into the New Year with those things stable to moving in a more positive direction. The other side of this is what Todd was talking about is more in the manufacturing environment. We are not back to normal, I don't want to imply that, but there is more [Indiscernible] in the manufacturing environment and supply chain, notwithstanding some of the issues that are going on in China. But I think the basics of supply are returning slowly to normal. I want to be careful here, there are certain electronic components that are still under a constrained approach. And if you have older electronics under a more constrained approach, because everybody's moving towards new electronics. And I think you've heard that from several people, but there is a more sense of normality there as well. So on both sides of the business, we feel like things are stable to improving, notwithstanding a few outliers. Not -- the world is not perfect, but it's not getting worse and it shows signs and is moving in a more favorable direction. You'll appreciate this, Matt. I was going to say it's the first time we've said it in three years because it's the first time it's been true in three years. I think, that's pretty fair too. And just last one for me, just I know a lot of you're going at the AOS in March. You got two new acquisitions on the ortho side. Like anything you want to kind of preview or kind of highlight that you'll be showing or showcases with those acquisitions? That's a great question. We will have one physical booth presence this year that will be inclusive of the In2Bones organization, as well as the Biorez as part of CONMEDs orthopedic business and the bio braced technology. And we will do our normal surgeon presentation in the booth and we haven't formally published that schedule yet, so I don't want to get ahead of the organization. But suspect we'll have sessions that focus on foot and ankle and bio brace from leading surgeons. And we're super excited about that agenda. We're super excited about having both of those as part of the offering. And then you should assume that the core of CONMEDâs orthopedics business will -- we'll also be highlighting newer products in the portfolio. And we'll allow them to do that versus on a phone call. But we're excited about academy. We've got a lot going into this year and there's a couple other really big trade shows in 2023. [Indiscernible] is going to be in the States this year, that's typically every other year. There's a great show in September that we go to OSAT and those are great trade shows for CONMED's orthopedics business. On the general surgery side, there's lesser big shows, I mean, AORN is a very big show and we've got a wonderful portfolio there. And then our AET business goes to some smaller localized shows, but has a couple of big shows. And we have some nice products there. One that I came out of the sales meeting really encouraged by and the sales force, very encouraged by. So we're excited about the organic portfolio. As much as we are in the inorganic portfolio and just got to get in front of our customers. And thank you. And I'm showing no further questions. I would now like to turn the call back over to Curt Hartman for closing remarks. All right. Thank you, Justin, and thank you everybody for being with us today. And we look forward to speaking with you during our next earnings call and wish you all a good evening. Thank you.
EarningCall_950	Good morning. Welcome to todayâs Colgate-Palmolive 2022 Fourth Quarter and Year End Earnings Conference Call. This call is being recorded and is being simulcast live at www.colgatepalmolive.com. Now for opening remarks, Iâd like to turn this call over to Chief Investor Relations Officer and Senior Vice President, M&A, John Faucher. Thanks, Allison. Good morning. And welcome to our 2022 fourth quarter and full year earnings release conference call. This is John Faucher. Todayâs conference call will include forward-looking statements. Actual results could differ materially from these statements. Please refer to the earnings press release and related prepared materials, and our most recent filings with the SEC, including our 2021 annual report on Form 10-K and subsequent SEC filings, all available on Colgateâs website, for a discussion of the factors that could cause actual results to differ materially from these statements. This conference call will also include a discussion of non-GAAP financial measures, including those identified in tables eight and nine of the earnings press release. A full reconciliation to the corresponding GAAP financial measures is included in the earnings press release and is available on Colgateâs website. Joining me on the call this morning are Noel Wallace, Chairman, President and Chief Executive Officer; and Stan Sutula, Chief Financial Officer. Noel will provide you with his thoughts on our Q4 results and our 2023 outlook. We will then open it up for Q&A. Noel? Thanks, John, and thank you all for joining us this morning and I wish all of you a very Happy New Year. So I mostly wanted to focus on the year ahead today, as I think we are well positioned to deliver strong results in 2023, even as we plan for a difficult macroeconomic environment and continued uncertainty. That said, as we mentioned in the prepared remarks, we are pleased with the progress we made in 2022. We delivered organic sales growth in all four of our categories, including double-digit organic sales growth in Pet Nutrition and high single-digit organic growth in Oral Care. 2022 was our fourth straight year of delivering organic sales growth either in line or ahead of our 3% to 5% long-term target range and we delivered within or ahead of that range in every quarter over that time period, 16 consecutive quarters in all. And is the continuing strengthening of our strategy that has allowed us to grow consistently through different operating environments, as each year has presented its own challenges and its opportunities. But if we stay focused on driving the core, leveraging our capabilities across our portfolio, innovating in faster growth adjacencies and tapping into faster growth channels and markets, we will continue to grow. And in 2023, as we continue to execute on our strategy, we expect to accelerate earnings growth and generate incremental cash flow to drive shareholder value. Why are we well positioned for this year despite all of the uncertainty in the world today? It starts with our portfolio. We operate in four highly focused categories. Growing categories that consumers use every day and where they look to trusted brands to help themselves and their pets lead healthier lives. The focus on healthier lives means these consumers are motivated by science-driven innovation with professional endorsement, which is an area of particular strength for us. And the importance of trust in our categories helps keep private label penetration relatively low and allows for premiumization behind differentiated benefits. And within these categories, we have strong market shares. With most of our revenues coming from brands that have a number one or number two market shares on a global basis. The second reason is our focus on building, sharing and scaling capabilities to drive growth. I will continue to talk about our digital transformation as it impacts everything we do. This year we benefited from continued efficiencies in our digital media spending through data-driven modeling. Our efforts on innovation need to deliver over the long-term, not just the launch year, and we have shifted our resources to deliver more breakthrough and transformational innovation. In our prepared commentary, we talked about the share gains we are seeing in the whitening segment of the toothpaste category. Itâs a long-term strategy of launching Optic White Renewal and then Optic White Pro Series in the U.S. or our new MPS whitening technology where we are launching around the world, which leverages our superior R&D capabilities to drive long-term share growth. And on top of that, we continue to launch at-home whitening and professional whitening products to enhance our credibility and expand our presence in the premium segment. And our focus on building revenue growth management capabilities, particularly through increased use of data and analytics is driving our pricing growth in ways beyond just list price increases. And the third reason is our strong balance sheet. Our combined financial resources provide us the flexibility to reinvest in our portfolio or pursue value-enhancing acquisitions like our pet food acquisitions, which enables us to drive faster growth. The final reason we are well positioned is the efforts we have put into offsetting the extraordinary cost increases we have seen over the past several years. We have driven consistent pricing and we look to take additional pricing in the first half of this year. Our Funding the Growth program delivered another strong year in 2022 and we expect even higher levels of savings in 2023. We announced our global productivity initiative one year ago and we began to see the benefits in our numbers in the second half of 2022. We expect even greater savings in 2023 to help fund investment and drive operating margin expansion. So we believe we are well prepared for 2023, but thereâs still a lot of uncertainty in the world. The macroeconomic environment outlook remains volatile, which can impact consumer spending. China remains a question mark as the country emerges from COVID lockdowns. While raw materials and foreign exchange remain headwinds, they look less onerous now. But as we learned last year, that can change quickly. So we head into 2023 with topline momentum and a proven strategy, with the right brands, the right capabilities and the right efficiency drivers to deliver topline growth and improve our bottomline performance. Hey, guys. I just wanted to touch on the organic sales growth guidance for next year coming off a strong Q4 result and the strong pricing we are seeing. I am assuming more than all of that perhaps is driven by pricing and volumes will be down slightly, A, maybe is that correct, and then B, it just be helpful to get a bit of commentary on each of those areas. What are you seeing from a competitive standpoint on the pricing front, and then B, as you think about volume and the demand elasticity you are seeing from a consumer standpoint to pricing, any changes sequentially at all and how are you feeling about that front heading into 2023 here? Thanks. Yeah. Thanks, Dara. Good morning. So, again, letâs recap quickly, obviously, the strong topline growth or organic growth that we have seen across the business. We are very pleased, obviously, with finishing the year with strong momentum. Obviously, the pricing that we put into the P&L, particularly if you look on a two-year stack basis up to 15.5%, so sequentially up as we moved out of the quarter. So we have continued to take a lot of pricing and we will continue to see the benefits of that as we move into 2023. Volume continues to be a challenge across the world, as you have heard, I think, throughout the earnings season, categories have pulled back and thatâs expected given the magnitude of pricing that we have seen go into all geographies around the world. Our sense is will see continued pricing in the first half of this year, which we think will have a drag on volumes for the categories that we have seen particularly in the back half of this year, but that will begin to improve in the second half of the year. . I think the other aspect on the organic guidance is really a question mark on the economic vibrance of the various markets around the world. We have seen Europe obviously under significant pressure with double-digit inflation. Categories have been soft. Elasticity is a little bit higher in Europe than the rest of the world. Obviously, China is a big question mark. Infection rates remain high. Yeah, a lot of euphoria about China reopening, but as you have seen in the fourth quarter, volumes have been very soft in China for the categories in which we compete, and we see that continuing, quite frankly, in the first quarter, that will improve as we move through the back half of the year to be sure. But that will bring, I think, a question mark to everyone in terms of uncertainty on where China goes and the impact that has. Pricing will need to continue to go through the categories in the first half of this year. As we announced in the prepared remarks, we will be taking more pricing and thereâs a real question mark, given the magnitude of the pricing that we have seen in the back half of 2022 and the pricing implementation in 2023, the impact that we will have on the consumer. So far, if I give an overarching comment to elasticities, they have been very much in line with where we have expected. So, overall, we think we feel good about the organic range. We feel very confident that we are within that range and if things continue to stay where they are and we continue to see the share growth that we are seeing across the world and the response to our innovation, hopefully we could be at the top end of that range or better. Thank you and Happy New Year to you too. So I have a broader question on volumes. On the minus 4% globally, which compares, I guess, favorably to some of your competitors that reported so far. What was the impact of retail destocking, if any, in Filorga. I mean I appreciate you put it in the prepared remarks, obviously impacted more Europe. So I was wondering if you can kind of breach that gap. And also a good segue from your last comments, Noel, on Europe, you have said obviously more pressured. What are the -- and I understand that it was mostly Personal Care and hand soap. Is there anything you can add to that in terms of like the exit rate and also the exit rate for China? Thank you. Sure. Thanks, Andrea. Good morning. So let me talk a little bit about volume performance around the world and more sequentially as we went through the quarter. Volume improved in the fourth quarter versus third quarter and that volume improvement came despite obviously an incremental point of advertising, excuse me, of pricing, which you saw at 12.5%. So, overall, we are pretty pleased. Some of the drawbacks on volume, as we discussed in the prepared remarks, obviously, skin health had a challenging quarter from inventory reductions, particularly in the online world. We saw those inventory reductions, particularly here in the North America business, and obviously, a significant inventory and volume softness in China due to COVID on the Filorga business. So that really pulled down quite a bit of the volume. You obviously have the Russia impact, which we would quantify to roughly around 30 basis points. Elasticity, as I mentioned early on, were very much in line and consistent around the world, slightly higher elasticities in Europe, but that should be expected and consistent with history, but very much in line with where we expected. A little bit more inventory reduction in India than we expected, particularly in the rural as the rural business has not come back nearly as quickly as we anticipated in the fourth quarter. We expect that, though, to come back in 2023. So, overall, that was very much driven by some inventory reductions we saw on skin, a little bit in the drug classic [ph] trade in the U.S. Likewise, the softness that we saw -- a continued softness we saw in the China skincare business. But, overall, volumes improved versus the third quarter and to a certain extent, more or less where we expected. We did not expect a further deceleration of inventory pullback in the U.S. on the skin business. So in terms of exit rates for Europe, if I characterize Europe in general, a strong share growth across the Board and mid-to-high single-digit organic sales growth in Oral Care and in Home Care, which as you rightfully pointed out, was offset by the weakness in Personal Care, which was principally Filorga, China. But, overall, shares are strong in Europe. We seem to be getting our pricing through. Negotiations continue to go quite well. However, categories have been rather soft in Europe given the amount of pricing that, that market has experienced and the sheer inflation that the European economies are incurring today. So, overall, I feel pretty good about Europe. The good news is the shares are strong and we are getting the pricing through and we feel we are set up for a good year in 2023. Hi. On your commentary on share, you seem quite pleased with share trends. Can you maybe just dig into that a little bit volume versus value, are your shares -- do your shares look -- are you equally as happy with your share in volume terms as opposed to in value? Sure. I just characterized Europe, where we felt very good about where we ended up, particularly in Oral Care. North America, as you have seen the data, we are up or flat in eight to 12 categories. Importantly, good -- very strong Oral Care growth both in the year and in the quarter, so pretty good there. Latin America shares in general are flat and we feel good about where we are from a Latin America standpoint, given the sheer amount of pricing that we have taken. I think thatâs a representative of some of the strong innovation that we put into the market in the back half. Asia, I will characterize it as quite strong, particularly the e-commerce business, a little softness in the brick-and-mortar business. But, overall, e-commerce continues to perform very, very well and Africa, Middle East, strong as well. So, overall, we feel very good about the momentum we have had on market shares in value terms. Volume pretty much consistent with that, a little softer, particularly in Europe on the volume side in terms of our volume shares, and thatâs, I think, response to just the sheer amount of pricing that we have taken in that market. And as I mentioned earlier, obviously, a little softness in the Asian markets on volume, a lot of value going through those markets in general in the categories has been quite soft, but our volume shares in Asia seem to be holding up okay. Noel, if I just take your comments around some incremental pricing, I think, you said, productivity is expected to accelerate, if I look at raw material outlook of several hundred million of inflation and Red Collar, the gross margin negative impact should be easing sequentially. I am coming up with potentially significant gross margin expansion and I realize reality is often so much different than what we can see in the models. But I wonder if you can just maybe help frame that a bit more for me, because it does imply maybe you are leaving some room for investment. But, again, perhaps, I am missing something in this -- in the development of the key drivers here and I wonder if you could just help clarify that a bit more for me? Thanks. Yeah. Let me take the kind of strategically how we position the P&L particularly around growth and investment and then I will let Stan take you through some of the constructs on how we built internally gross margin and operating margins. As you rightly said, we are really pleased with the operating margin improvement that we are seeing moving through the P&L and that will continue allowing us to fund more advertisers. So as the prepared remarks indicated, we intend to continue to invest behind the business and we have seen great response to the strategy that we have executed over the last couple of years. Obviously, the core adjacencies and channels behind increased investment is driving very strong organic growth in the category and up 5% dollar in the quarter despite significant foreign exchange headwinds. We talked obviously through the back half of this year, the need to continue to invest in Hillâs business once we had more capacity coming online, and that has obviously started to happen in the fourth quarter, and we expect that to obviously continue as we move into 2023. So we will continue to accelerate our investments in the Hillâs business in order to reap the benefits of the incremental capacity that we have. Good momentum on Oral Care and strong innovation and a lot of pricing that we have taken across a broad section of categories and we want to ensure that we have the investment there to generate to get the pricing seated in the marketplace and continue to drive consumption growth for our retailers. So, overall, it will be another year of good investment, a good share growth we expected, and obviously, good topline growth coming through the P&L. Let me turn it over to Stan to kind of take you through how we bridged some of the aspects around gross margin and operating margin. Sure. Thanks, Noel. And on gross profit margin, you started to see some progress, right? North America, Latin America and Africa, Eurasia, you saw improvements in the operating margin in the fourth quarter. As we look at gross profit, Noel, highlighted the pricing, that significant flow-through will help in 2022. The productivity will be a tailwind here and while material and Ranpak in particular will still be a headwind that moderates coming off of 2022. So, as you look at gross profit margin expansion, thatâs going to be a benefit. But keep in mind, as you work down, we are going to have investments in advertising. We expect to increase that on a dollars and percent of sales. But also keep in mind, as you go down the income statement that interest expense is going to be up year-to-year. Thatâs driven predominantly by increase in rates and also by slightly increased debt levels as we carry Red Collar in for the full year. And also taxes, so taxes around the world, in particular in recessionary environments, potentially being out there, we expect our tax position will be slightly higher on a year-on-year basis. So, while the operating margin or EBIT margin we expect will be up nicely, that will be partially offset by interest and taxes, delivering low-to-mid single-digit EPS growth. Thanks, Operator, and good morning, everyone. So I wanted to ask on the gross margin as well, which for the quarter was a bit of a surprise. So in your prepared remarks, you mentioned a number of key drivers as to why it came in below your expectations. But can you maybe unpack where the biggest variance was, whether it be sales mix, commodities versus some of these startup costs and manufacturing variances? And then just maybe following up on Chrisâ question, when we think about the path-forward, you mentioned several hundred million dollars of inflation for raw materials and packaging. Is there any way to kind of frame that, is that $300 million to $400 million, is it something higher? I just think itâs kind of important to understand kind of the gross margin bridge as we think about next year? Thanks. Sure. As you saw in the fourth quarter, obviously, a continued difficult environment in terms of raw material inflation, another 900 basis points on top of what we had in the third quarter in terms of a headwind on gross profit. A good percentage of that continues to be ag prices, which obviously, have continued to move south on us. And in fact, if you look at the first half versus second half, Peter, ag prices were up 25%. So, obviously, that continued to impact the Hillâs business. On top of that, as we integrated the three Red Collar facilities and began transitioning some of the high capacity volume business that we had in our own plants. We obviously incurred some startup costs and some variances moving through the P&L that obviously impacted margin in the quarter as well. And then Iâd also characterize, as I mentioned, that obviously, the inventory reductions we saw in skin health and the drag from China on the skin health business likewise had a mix impact in the quarter. With that, let me turn it over to Stan to see if he has any more information in terms of how he wants -- we want to characterize how we are thinking about raw materials for next year. Yeah. The raw materials continue, as Noel highlighted, to be a headwind for us and your range is probably in the right ballpark here as you think about that on a year-on-year basis. But I would emphasize, it has been volatile. So things have moved up and down pretty significantly here, and in particular, the agriculture and how that applies to Hillâs, those have not moderated, up in the second half, as Noel talked about at 25%, and as we look ahead, we think that will continue to be the primary headwind in raw and pack. The other volatile one is natural gas. Now fortunately, thatâs been a benefit here in terms of moderating in the late second half and fourth quarter. But we expect that could be volatile as well heading into particularly the back half of 2023. So a combination of those two primarily we think are the drivers as you look at raw impact going into the year. Now we have laid out our pricing actions and are funding the growth savings that we look to drive, combined with our productivity. And I will just mention Red Collar will moderate, but itâs still going to be an impact on a full year basis and itâs important to realize that. So that will moderate through the year on a full year basis, it will still be an impact on overall gross margin. Hey. Thanks. Good morning, everyone. Question for Noel and then perhaps, John, you may want to jump in on this as well. Just with respect to the impairment charge on the skin care assets and just more broadly, how this may be informing the view around capital deployment. So we can all appreciate the noncash charge. Not hugely surprising, you guys have been pretty open about some of the challenges in the business also realized higher rates when you perform the impairment test so all that kind of makes sense. But I guess just given this dynamic, it sort of back to the question, does it give you any pause in terms of how you stress the assets that you may be looking at, broadly does it increase your bias towards internal investment and returning cash to shareholders versus M&A? And then maybe perhaps just from an M&A perspective, an update on any books broadly that you may be seeing and whether private market values have started to come in a bit given higher rates and what we see in the public markets? So thanks for all that. Sure and good morning, Kevin. I think you characterized that well. So let me just recap quickly a couple aspects of skin health and I will turn it over to Stan and John for the second part of your question. The impairment was obviously based on three issues. The biggest change is our outlook on growth in China. You have seen, I think, external numbers that the Beauty segment has taken a significant hit in the last three months to six months, in fact, imports were down 20%. And given the prolonged impact of COVID in China, particularly as it impacts travel retail, which were a significant portion of our businesses, we obviously then decided to rebase the outlook in years going forward and particularly 2023 in a much more conservative position to ensure that we can deliver on the growth aspects moving forward. Secondly, the situation in China regarding tourism around the world, as you followed our business on Filorga, it really went with Chinese travel, and as Chinese travel opens up potentially in the back half, we will see an improvement. But we assumed in the impairment that, that will continue to be a headwind for us as we move through at least the first six months of the year, slightly improving as we move through the back half of the year. And then as you well can understand the significant rise in interest rates has lowered the value in our discounted cash flow. But let me step back for a moment. Again, we continue to be very confident in our strategy around skin health. Obviously, the short-term impacts that we have had related to China, we believe ultimately, we will get behind us, but we have obviously been conservative in our assumptions on Filorga. We went into 2022, assuming China would open up and it didnât. But we feel good about where we are. We have seen some early signs, certainly in the early part of the year, particularly across our European business on Filorga to give us quite a bit of encouragement. Our U.S. business continues to be very, very strong, despite the inventory pullback that we saw in the fourth quarter. If I take our online business specifically, our share growth was up 300 basis points online in the back half of last year and on the year, which is terrific. Obviously, we incurred that share growth despite, obviously, inventories getting reduced. We do expect some of those inventories to come back slightly, but we are obviously assuming a considerable amount of conservatism there because we canât be sure that particularly the online retailers will take inventory up as quickly as they took it down. Our business overall continues to grow very, very nicely, particularly in the professional channel, which is the core part of our PCA and Elta business, and we have a good innovation plan coming on stream for 2023. So, overall, we still feel very good about the strategy behind skin health. Need China to turn and you have heard a lot of discussions about the uncertainty in China, but we think we have positioned the brand. So, obviously, as China comes back, we will be in a position to reap the benefits of that. The only thing Iâd add on, Filorga, is if you go back and look at the timing of when we purchased it late 2019, itâs built off of very strong growth in China at the time and very strong growth in the travel retail, and then obviously, the pandemic hit, nobody had insight to that. The underlying brand is really strong. Thereâs going to be new innovation. We have got the advertising to support it to bring it to market. We are still confident in the long-term success of this brand. So thatâs what Iâd add on Filorga. Kevin, the only thing I would say relative to M&A strategy and capital deployment is our preference is still to deploy capital internally to our projects, because we are a big believer in return on invested capital and that generates the highest incremental returns. And so if you look at the investment we are making at Hillâs and capacity, if you look at the investment we are making on some of our sustainability projects, Red Collar honestly is a little bit of both, right? Itâs M&A, but it also is an investment in internal growth, because we think that Hillâs is one of the best growth engines we have. So I donât think thereâs any change in our capital allocation strategy, invest internally, we would like to pay a healthy dividend and the Board helps us develop the dividend strategy longer term. Then we will look at projects when the valuations are appropriate and we will see what happens with valuations in the market right now. I think the market is still somewhat influx from that standpoint. And the capital allocation, I think, as we look at that return $2.9 billion to shareholders. We had $900 million of net share buyback. We have paid dividends since 1895 and 60 consecutive years of increasing it. So our capital allocation strategy hasnât changed. We think itâs the right long-term strategy and we think our investment in M&A is appropriate when we donât have a better internal investment to do or to fill opportunities for us to fill out our model. My question is around Oral Care, because you have obviously made great improvements here, particularly on pricing or hearing on the portfolio. So could you give us a sense of how your game plan is pivoting as macros potentially get a bit more choppy and elasticity get a little bit more elastic. Obviously, high single-digit growth in Oral Care is fantastic, but whatâs your view on the state of the consumer in the U.S. and developed markets as a whole, and how that -- and how does that influence your view on potential trade-up versus trade-down in 2023? Thank you. Sure. Good morning, Olivia. Again, as I mentioned earlier, Oral Care had a really, really strong year, high single-digit growth across the year and the quarter and we were high single-digit in Oral Care on three of the last four quarters and toothbrushes specifically up double-digit three of the last four quarters. Some of that was some easier comps as we were lapping some of the supply chain challenges that we had last year. But the important aspect there is share growth up on the year for both Oral -- toothpaste and toothbrushes. Specifically around elasticity, I think, it comes back to the strategy that we talked about for a couple of years now, which is the flexibility in our portfolio. We continue to innovate across all price points and we cover a wide gamut of price points, from opening to now, obviously pushing a lot more of the super premium segment, which you saw some of the examples of the success we are having in the whitening segment in that regard. So, overall, our categories -- our portfolio is well positioned for this environment. We spend a lot of time as we work through the operations around the world to ensure that we have value-added benefits to every price point within our portfolio and we are flexing our portfolio in different ways over the last couple of years and we are seeing that certainly translate into improved performance. Elmex would be a great example. Taking Elmex very selectively in the pharmy channel -- pharmacy channel around the world has allowed us to grow incremental share in those businesses. The other aspect Iâd say is our core re-launches. We will have a significant core re-launch coming on the India business next year. We have re-launched our core business in some of our bigger markets around the world and that has helped some of the premium innovations come on incrementally to the franchise moving forward. So we feel pretty good about where we are with Oral Care. Elasticity is exactly where we expected and I think driven by a combination of the flexibility we have in our portfolio in addition to the innovation that we are bringing to the marketplace. â¦ maybe you could provide some -- a little bit more context on what you are seeing on the ground in China right now. Itâs interesting you mentioned you think the recovery will happen in the back half, so I think there has been projections by other companies and just by looking at some of the mobility data that things might start improving around March to April and we are already starting to see kind of we track the metro activity in China and starting to see some real improvements there. So just curious on your thoughts there given how important that business is for the -- on the margin side given the skin care mix? Sure. As I mentioned, we had strong performance in China on the Colgate side of the business. Our Holly & Hazel business up nicely mid single digits, our Colgate business up nicely mid-to-high single digits. So, overall, we feel very good about the transformation that we put in place over the last couple of years across our China business. Our brick-and-mortar business is a little soft. But as I mentioned, thatâs, I think, characteristic with the lack of mobility around the country and as mobility improves, as you say, and if it improves earlier, by all means, we should benefit from that as we continue to expand our distribution in that marketplace. But it continues to be highly, highly uncertain. Obviously, the Chinese New Year, everyone is waiting very carefully to see the impacts of that. Thereâs a lot of euphoria, but infection rates are still very, very high and things could change very, very quickly there. The comment I made about the back half is not only mobility within the country, which I think will probably, as you say, improve more quickly, but itâs more external mobility in terms of more international travel, which would benefit the Filorga business. But again, we feel good from the success that we are having from a market share growth. Our -- as I mentioned earlier, our e-commerce business was up almost 300 basis points on the year this year and that is again a reflection of the strategy and some of the good innovation we brought into the market. If the markets improve, we shall -- certainly see the benefits of moving through our P&L earlier than we anticipated. But I would be quite cautious on China at this point. But over the long -- medium- and long-term, we are very optimistic about the growth opportunities there. So Mr. Faucher talked about the healthy growth contribution from Hillâs, and obviously, the topline lift has been really last few years. Itâs surprising, though, to see penny profit actually contracting this year. Can you unpack the drivers and I imagine within that, you are going to come back to some of the ag inflation. So, I guess, I will tag on to that. Ag -- the ag complex seems like itâs one of the easiest ones to hedge out. I imagine you are hedged out, and therefore, have good visibility to it, assuming that part of the contribution is related to ag? Whatâs impeded your ability to price that through? Thank you. Yeah. Thanks, Jason. As you said, we have coming off of some of the challenging capacity issues that we had in the third quarter, we feel like we have certainly turned the corner on that business. Again, a double-digit growth in the quarter, thatâs 27% growth on a two-year stack basis and we have delivered double-digit growth on the Hillâs business 10 to 12 quarters and we feel with the capacity improvements that we have and obviously the continued increased investments that we feel we are in a very good position to deliver sustained profitable growth moving forward. Now, as I mentioned, ag prices were just up 25% half-to-half. Now you take that on the year versus last year, thatâs significantly more. I will let Stan talk in a moment to our hedging strategy, which is very minimal around ag prices. So we donât get a lot of -- we donât do a lot of hedging there. But, overall, itâs taking pricing. Itâs making sure that we continue to move through the transition aspects of incorp -- integrating three plants and moving capacity from our existing plants into those plants. So thereâs startup costs associated with that, obviously, we are building a new web plant, which should open up towards the back half of the year. We have the startup costs associated with that running through the P&L. But all of it is around building investment ability for the future for us and our ability to continue to sustain the strong topline and the strong investment structure that we have by investing in capacity and allowing us to do the things that we do so well in the marketplace. So we feel good about where the business is. Obviously, the ag prices will be where they are and we are taking pricing, as you have seen both in the fourth quarter and plan to take more pricing in the first half of this year. But, again, if ag prices come back, things will get better, but we at this point donât expect any short-term benefits for ag coming back. Yeah. Thanks, Jason and Noel. So what Iâd add on to that is, we donât have a large hedging program against ag and thatâs a philosophy for us. So we look, we do partial hedges there in ag. We donât do that in most other categories. But just while we have highlighted ag, there are other areas here like chicken livers, other specialty products that come in as part of the diets that make us more complex, as well as all the amino acids and everything else. Those have all had inflation as well. So while agriculture products have had the most significant, we have also had those and things like the AVM flu do have a ripple effect into the availability of those products. So as we look, we have also integrated now four plants through acquisitions, one from Nutriamo earlier in the year and then the three from Red Collar. So we took those over on September 30th. That integration has gone well. But as you would expect, there are startup costs that go along with that. As we bring Tonganoxie online, thatâs our new wet plant in Kansas in the second half of the year. We are very excited about that plan. It has great automation. Itâs going to be, I think, a great addition to the portfolio. But that has startup costs in 2023, in particular, in the first half as we hire staffing, get the staffing right heading into or going live. So important here on Hillâs, we see a great market opportunity, science-based, our research center really supports that. We are investing the advertising behind that to drive that capability and to drive that demand and we think that serves us well for the long-term. So we expect margin improvement heading into 2023 in Hillâs. We are excited about that market opportunity and what it represents to the company. We also think it fits really well in our overall portfolio with a science based approach. Jason, Iâd throw one other point, which I think is relevant to not only Hills, but to other aspects or other questions that have come up this morning. And that is the foreign exchange impact in Europe in the quarter, obviously, the second largest business outside the U.S. for Hillâs is Europe and Europe had 11% headwind in foreign exchange and that obviously moved through the Colgate side of the business as well. Now you have seen the significant pricing that we are taking, but obviously, the transactional impact as well as the translational impact of that foreign exchange moved through in the fourth quarter, and certainly, dampened a little bit of the penny profit that we would have expected. Hey. Thank you. So picking up a little bit on what you were just talking about in terms of startup costs, but also the manufacturing variances and the negative mix that Noel you alluded to earlier with respect to the fourth quarter. I guess, a couple of questions related to that. One is, I assume thatâs lumped into the raw materials, the 920-basis-point negative impact of raw materials, I donât know where else it would go. So if thatâs the case, I guess, is there a way to quantify what those sort of to me, non-raw materials costs would have been or were in the quarter as a headwind, number one. Number two, how we think about those carrying over and phasing at least into the -- I presume the first half of 2023. And then just to clarify and round it out is, are those are those impacts embedded in the several hundred million dollar raw and packaging materials inflation outlook for next year, just because I think itâs a little bit different than raw and packaging materials as sort of narrowly defined. Thatâs really my -- those are my main questions. If you could also talk a little bit about how you are thinking about Red Collar phasing through the year, and just operationally, what that entails, if there are costs, whether cash costs or costs that are notable going to the P&L as you do transition the private label product over to Hillâs, just that would be helpful to understand? Thank you. Sure. Steve, let me take a very topline kind of strategically how we are integrating Red Collar and deliberate plans that we have take -- we have taken to ensure a successful integration into the Colgate-Palmolive Company. First, itâs three significant plants that we are obviously integrating. And as we have talked about for the better part of a year, all of our existing facilities on Hillâs have been running full out, and obviously, that is a very inefficient way to run your supply chain. Now we have obviously been investing in improved capacity, obviously, with the plants in addition to the Tonganoxie in addition to the plant that we purchased in Italy. But again, integrating those into the system to ensure one quality mechanisms are where they need to be, ensuring the lines are capable of the flexibility and the formulations and the sophistication of our formulations, making sure that, obviously, the all aspects of the science driven approach that we have taken to our formulas is well understood and by the culture of the organizations that we are integrating into the company. All of that has been very, very methodical. We are not going -- given that we need the capacity, we are not going to rush ourselves into doing this too quickly. So we have been very careful to ensure long-term success as we built the plans to bring that volume into the Colgate business over time. So, with that, let me turn it over to Stan. He will take you through a little bit of how we planned for Red Collar and how we are thinking about the ongoing startup costs associated with that. Yeah. So letâs start with Red Collar first. So as Red Collar comes in and we cut over production over time and this will be over an elongated period of time. There are a few things that have to happen. One, and of course, I should start, all of this is baked into our guidance. So as we planned this out, this is all incorporated within our guidance. So first, as we take the Red Collar facilities and migrate those over to produce Hillâs formulas, there is investment that has to go into that. We have incorporated that into our capital and we have incorporated any income statement impact into the numbers. And that really centers around what Red Collar was producing was much simpler formulas for us and for others, and our diets, our formulas are much more complex, in particular, in the prescription diet area, which is why I think they are such valuable to consumers. So that involves additional mixing, additional ability and testing, quality testing as we go in, and that will require capital investment into those facilities, all planned all on track. The variances that we have in total, so let me step back to there, the variances that we have in total go into gross profit so that as they are going through, we expect that those will get better. We expect that those will get better as we get some relief on the overall manufacturing as those Red Collar facilities come fully on board and produce more of Hillâs formulas. That allows us to go in and do more efficiency planning within the existing facilities. So as we think about Tonganoxie, thatâs, again, the new wet food plant that will come online in the second half of 2023. In the beginning, we do have some startup costs there and those startup costs, again, are around things like bubble staffing as we bring the staff on board and get them trained and so we expect that, that will contribute in the second half, but it becomes a headwind in the first half around Hillâs. So thinking about Red Collar, keep in mind that this was acquired and was in for the full quarter of Q4 of 2022. So we will wrap around from an impact here in Q4 of 2023. But as we go forward, you should think that the impact to margin is roughly in line with what we saw in fourth quarter. So it would be a benefit to the topline and given that the private label activity is at a much lower margin that will impact margin through the year but at a slightly decreasing rate. Great. Thank you very much. A couple of follow-up questions. One, you mentioned in the press release or the comments that there was an e-commerce inventory drawdown on skin health. Can you just clarify exactly what brands that was and why that would be happening? And then Iâd like to just kind of talk a little bit more about Hillâs. One question that we are getting is, what was the effect of private label on the organic number. So if you took private label out, was the volume growth actually down 100 basis points, so a clarification on that. And then bigger picture, if we could kind of scope out and look at the whole pet food area in general, you guys are obviously premium and have been gaining share a long time. Can you talk about historically potential trade-down impact given a tougher consumer environment and how you may be adapting to that and what your volume assumptions are for pet in 2023? Thank you. Yeah. Good morning, Rob. Thank you. Let me take the e-commerce question first. A good year for e-commerce, as I mentioned, itâs up to 14% of our sales. We continue to see strong growth throughout the year, and importantly, in the most important markets around the world, we continue to see strong share growth. So, overall, we feel a lot of the work that we put into our digital transformation has paid out quite nicely in the consumption that we are seeing across the board, whether thatâs our skin business, whether thatâs our U.S. Oral Care business or our Hillâs business, we are performing quite well. And we are sharing those capabilities very nicely across the enterprise, and as I have talked to you before in the past, obviously, Hillâs was at the forefront of that and a lot of the skill sets that we built in our Hillâs organization have certainly translated now across the enterprise and we are using those benefits to grow our e-commerce business, both on a share basis and a topline basis. The inventory drawdown was on PCA and Elta in the U.S. in the online channel, which is their number one retail channel. As you know, they sell through the profession and they sell online through the big online retailers. The big online retailers took significant inventory out of the system in the fourth quarter. These are very high priced items, as you are well aware, and they felt, I guess, managing their working capital that they were going to take those down in the fourth quarter. The good news, as I mentioned earlier, we didnât see a significant impact on our consumption. Our shares were actually up and the more important news is that we started to see that inventory rebuild itself slowly, I would say, in the first quarter of this year, particularly January. Now thatâs not to say that at the end of the quarter, we may see more draw downs. But in any case, the good news is we start to see some improvements there. But it was on the PCA and Elta business in the U.S. And likewise, on the Filorga business in China with the significant lockdowns that we saw across China in the fourth quarter and coming out of the third quarter, we saw significant inventory reductions in the online business there as well. Relative to private label, let me characterize, I guess, first Oral Care. So Oral Care private label in the U.S. is about 0.9 share and that share is roughly flat on the quarter -- in the fourth quarter and flat on the year. Oral Care private label shares in Europe are around 3.5%, and likewise, that share is flat. We are seeing a little bit of growth in private label businesses, particularly in Europe on some of the Home Care businesses. Obviously, cleaners dish, and to a certain extent, fabric softener, as we have seen about 1 point of growth in the private label business there, but consistent with where we expected. So nothing unusual, and importantly, we donât see, obviously, given the benign levels of shares we have seen in Oral Care, we havenât seen a significant turnaround there. On the Hillâs trade-down, we have not seen trade-down thus far. If you go back to 2007, 2008, which we spent a lot of time looking at the premiumization of the category during that period. We did not see consumers pulling back on scientific -- scientifically proven Pet Nutrition. And we feel that given the strength of our innovation, and obviously, the strength of the investment that we are putting in the market, that we will be able to continue to manage that quite well. So, thanks, Noel. Rob, let me just pick up on the on the Hillâs organic and private label and how we are showing that. If you look at the press release, you stated, you saw net sales were up 20%, organic sales were up 14%. There is no private label in the organic sales. So we include in the net sales, but in organic, it will only be inorganic when it wraps around for the year, which will be in the fourth quarter. So when you see organic sales that represents true year-on-year with no private label benefit in that number. Similar to volume, you will see the volume in a press release at plus 10% and then organic volume at plus 0.5%. So volume expanded even outside of private label, you get a feel for the size of private label in the as reported volume number. So, again, that will be that way Q1 through Q3, and then in Q4, it will wrap around, because it will be in both years and be in the organic numbers. . Yeah. Thanks, and good morning, everyone. I want to go back to gross margin kind of looking backwards and then trying to think about it going forward. So I guess I am curious what happened to gross margin in 4Q, I mean, I hear all of what you talked about some things unexpected. But if you go back and look at what you said at the last call, you were locked in at least thatâs what I thought you said on, I assume a bunch of these raw materials, ag pieces. So was just the manufacturing variance of startup costs, et cetera, just much greater. And I guess the question going forward then is I hear you in modeling the question on this call is about, improving gross margin expectations and all these things that are potential tailwinds. But how much visibility do you have as you sit here today and what potentially is based in that could go wrong? And then kind of pushing it forward longer term, how do you think about -- how does the company think about the necessity to grow gross margins over so that you can hit the earnings algorithm for the business given where the topline expectations are and just how important that is and what line of sight you have to get back to a number, not that I am expecting you to comment on, you can get to 60% again, but if you can talk directionally to that that would be helpful as well? Thanks. Thanks, Mark. Let me start with the end, the last question first and provide some thoughts and I will have Stan walk through you a bit more of our assumptions once again. Listen, driving gross margin for our company has always been fundamental and itâs always been the fulcrum of our P&L, and as we laid out in the prepared comments, we expect gross profit to be up in 2023. I remind you that the gross profit was down 160 basis points in the fourth quarter, if -- when you exclude the impact of Red Collar. Some of the issues that we incurred in the fourth quarter, obviously, we had a mix issue with the lower skin health business that we mentioned. A little bit of a mix issue on Hillâs as well with more of the Science Diet business versus prescription diet, but we obviously had the elevated ag prices moving through there and the startup costs that as Stan mentioned earlier, that moved through the gross profit line. But step back, again, I mean, we are very focused on getting pricing in the P&L and you have seen that sequentially improve from third to fourth quarter. We expect that to benefit us next year. Now there are a lot of assumptions on where commodities go. We talked about a couple of hundred million dollars there. But remember where we were in the first quarter of this year. We had a lot of assumptions there and we got ahead of that very, very quickly in terms of where things move. Now if things move -- stay where they are, improve, obviously, we donât think we will be at the low end of our guidance. But we feel itâs a prudent and flexible place to be given the uncertainty that we have seen and the movement that we have seen, certainly, over the last six months to nine months in commodity prices not to mention foreign exchange. So let me turn it over to Stan to give you a little bit more color once again on where we are from some of our locks in our contracts. Yeah. So on gross profit and we look at raw and pack, we do lock in a majority of our commodities here at least 90 days out for the next quarter. But there is still conversion costs, thereâs still the manufacturing variances that we have to go through, labor cost that goes into that, et cetera. So when we look at this and for fourth quarter, the 250 basis point as reported decline in margin, again, private label drove about 90 points of that, so you are at 160 basis points. And as we look at prices here, again, it was 920 basis points, relatively consistent with Q3 and our conversion costs and some of the variances that we talked about had an impact overall on margin versus our original expectation. As we look going ahead, we are guiding for expansion of gross profit margin heading into 2023 and we think as we look at that, the components of that are going to be moderating commodities are on pack, improved pricing in RGM and then the productivity work that we have been doing across the Board will have a benefit here to margin. So the margin expansion again fuels that investment into advertising. So we do believe that margin expansion is a core component of foundation of our overall model and so that expansion into next year will fuel that model, which will allow us to deliver low-to-mid single-digit earnings growth. Hey. Thanks. Good morning. I know you have covered a lot of ground, but I just was curious, knowing that 4Q gross margins came in below what you had anticipated. You have obviously detailed the reasons a couple of times. I was just curious, the bottomline still delivered, frankly, so that means there were some choices made, perhaps, a little bit short term on lines within OpEx. So I was just curious kind of what are the areas that you may be pulled back on in the shorter term than how you kind of make those decisions and how we should think about the reinvestment in 2023? Thanks. Sure. Well, we didnât pull back on the advertising investment, obviously, that was down 20 basis on a percent to sales, but if you exclude Red Collar advertising was flat and on a local currency basis, Lauren, the advertising was up and that becomes fundamental to continue to build the momentum of the progress we have seen in 2022 to ensure that we deliver that continued momentum in 2023 and that was a very deliberate choice to sustain the investment moving through the quarter. Obviously, a little bit of softness in gross margin, as I mentioned, largely driven by mix of the Hillâs business coming in a little bit lower than we expected, as well as skin health, but we feel those are well under control. We have good visibility about where those two businesses are going. So we feel like we are in a pretty good position to continue to execute against our strategy, deliver gets the gross margin improvement in 2023. Obviously, the first half we have a bit more visibility, we donât have that visibility in the second half, but we will continue to execute against what we see in front of us and that is our need to take more pricing, get it into the P&L and ensure we have the investment to support that. The only thing Iâd add, Lauren, on that one is, look, we took actions early in the year, particularly around the global productivity initiative that started to pay off in the back half of the year. So we saw some of that flow through here hit in the back half of the year. And we manage the overhead lines carefully and because we are running the entire P&L up and down and those overhead lines, we prioritize within that. We want to make sure we support advertising, digital, analytics and then we make trade-offs within that, as you would expect us to do go forward. We think thatâs just a prudent way to run the business and we will continue to do that heading into 2023. Yeah. As I mentioned earlier, Lauren, we are very pleased with that middle part of the P&L around how we managed overheads, which given, obviously, the headwinds we have seen below that around interest expense, as well as tax, itâs extremely important that we got ahead of that. We delivered an additional 50 basis points of overhead on top of the 150 basis points that we had in the previous year. So we feel that structures us well to invest in strategically the areas that we think are fundamental to driving long-term growth. Those are the capabilities that we have talked about around digital transformation, improved capabilities around innovation, certainly as we restructure that part of the organization and making sure that we have that operating leverage to sustain the advertising investment, which is clearly driving a good topline growth for us. Hey. Thanks, Operator. Good morning, everyone. So my question is just around cash flow. Free cash flow conversion, if I am doing the math right was about 74% of net income this year. I think in absolute dollars, free cash flow down about $900 million. So maybe you can talk a little bit about, as we look forward, do we expect some of that free cash flow productivity to improve? And then maybe just related on, I know you have talked about net interest expense being higher for this year, just if you can put a number on that and also on capital spending? Thank you. All right. Let me hit the topline, and Bryan, good morning, by the way, and I will let Stan take you through some of the puts and takes. But, overall, cash flow -- our cash was down due to lower cash income, right? Obviously, that was the higher -- that was some choices that we made, particularly around working capital investments, a little bit increase in inventories as we were dealing with some of the supply chain disruptions we saw from suppliers and our need to sustain the consumption growth that we had in the marketplace, particularly some of the stronger consumption growth, but obviously, inventory days came up as a consequence of that. But we improved a bit a bit of that in the fourth quarter versus where we were in the third quarter. But clearly, it was driven by the lower cash profits driven by, obviously, the sustained foreign exchange hit as well as the challenges that we saw moving through gross margin on the year. CapEx was the other one, a deliberate choice for us, obviously, the growth that we have made -- the growth that we put into Hillâs, and the investment and the significant increase in capital expenditures there and some of the increases that John mentioned earlier around sustainability, which we think are extremely important to position us for where the markets are moving forward. And overall, I would say that we expect a very nice improvement in operating cash flow in 2023. Yeah. Let me pick up there on the cash flow. So, as Noel said, we do expect improvement in 2023 and itâs really going to be two-fold. One, the improvement in cash profits, as we have guided to, and second, the improvement in working capital. We see opportunities there. We have been conservative on our working capital here in 2022 and particularly around inventory. We wanted to make sure that we could restore fill rates across the board that we had enough inventory to supply. And in particular towards the late in the fourth quarter as China had impacts from COVID on manufacturing, we prudently brought in additional inventory to make sure we could fulfill clients over the year end. On -- so on cash flow, we expect improvement in both working capital and cash profits. On interest expense, you see in fourth quarter a material increase on a year-on-year basis, and again, really comes from two components. First, the impact that it has on floating rate debt, in particular, CP, thatâs up significantly, as you know. And then second, we are carrying a slightly higher debt level, though, quite comfortable within our range and our leverage metrics for heading into 2023. So as you think about that interest expense, it will be larger than the gap you saw in fourth quarter, simply because you get a full year of carrying the Red Collar of funding through the year. That said, we think we have highly competitive rates on our debt going through. We have great access to the markets that fund our overall model. So, on capital spending, as you saw from our press release, we spent just under $700 million. I expect that could go up a little bit as we look at 2023 and thatâs really in a couple of areas. First, we are going to complete Tonganoxie as that comes online in the second half. And that we talked already about the Red Collar facilities, we have great plans for those as we are going to significantly increase our overall capacity for our Hillâs business, which operates in a terrific segment and that investment obviously will have capital spending. In addition, we invest in sustainability type efforts like recyclable tube, which we think are important. We will continue to roll that out in a prudent manner and we continue to invest in IT capabilities, including our S/4HANA journey that we are well underway. So, overall, we are comfortable with the position heading into 2023 and that will expand cash flow at a material level on a year-on-year basis. Yeah. The only thing I would add is strategically these investments are all around positioning us for long-term growth and success. A lot of discussion goes into the choices we make around our capital investments. And the supply chain, and certainly, the IT team are very focused on ensuring that the money is being put into areas that are going to give us improved capabilities moving forward and allow us to weather some of the storms that you have seen over the last three years where we have recognized the challenges and generated real opportunities coming out of those and that certainly has driven the topline of the company. So, with that, let me just finish off. I think thatâs the end of the questions. Again, 2022 was another year of strong progress for the business in terms of sales, market shares and productivity that moved through the P&L, but more importantly, the capabilities that we are building across the organization. We are excited to see the leverage moving through the P&L and we will see that continue in 2023 that will allow us to deliver the investment to sustain good topline growth, and obviously, very focused on delivering shareholder value moving forward. We will see everyone, I hope down in CAGNY in February, where we can talk a little bit about more of our plans in terms of how we are seeing 2023 unfold. But Iâd be remiss not to thank all the Colgate people listening on the call for an extraordinary year in 2022, a lot of challenges, but we recognize the opportunities that we had in front of us and I wish all of you a happy and successful 2023. Thanks, everyone.
EarningCall_951	Hello, and welcome to the Ryanair Q3 FY '23 Results Conference Call. Throughout the call, all participants will be in listen-only mode. And afterwards, there will be a question-and-answer session. [Operator Instructions] Just to remind you, this conference call is being recorded. Okay. Good morning, ladies and gentlemen. You're all very welcome to the Q3 results conference call. I'm Michael O'Leary with the usual team here in Dublin. And Neil is joining us from London, where he's doing the media stuff this morning. I take the -- I'm not going to deal with the press release. The slide show and the management MD&A is largely dealt with. I'll take those as read and point you to the Investor Relations page on the website. A couple of quick comments on the Q3 numbers and the kind of outlook going forward. So we reported a very strong Q3, a profit of EUR211 million, which contrasts markedly with the other alleged low fare carriers in Europe, all of whom reported a significant Q3 loss. Our traffic was up 24% to EUR38.4 million, that's up 7% on the pre-COVID figures of FY '20. We're still the only airline that has materially returned to strong growth over our pre-COVID traffic numbers. We saw a strong rise in Q3 fares, up 14% of the pre-COVID levels. That was mainly due to a very strong October school mid-term and the Christmas and New Year kind of period. We saw very strong traffic at higher than expected airfares. That was why we had went out on the 4th of January with the trading upgrade. And thankfully, for a change, the Christmas trading wasn't disrupted by any adverse news flow on COVID or Ukraine. So we had a reasonably undisturbed but very strong Christmas and New Year period. We spent a lot of time, I agree with our union partners agreeing the pay restoration. Not alone have we agreed to pay restoration with almost all of our pilots and cabin crews, the only people outstanding are some of the Belgians. But we've also put in place a multiyear pay agreements, we take multiyear pay agreements onto the back of those deals, so that our crews can look forward to kind of guaranteed pay increases over the next four years -- four or five years, depending on which agreements they've done. I think, it's an example of how we continue to work well with our unions and with our people, both to preserve jobs during COVID, but also to reward them as we emerge out of COVID when, hopefully, we'll continue to avoid any further black swan events. Year-to-date unit cost, and I think this is the compelling store message, one of the two compelling messages this morning. There's been an extraordinary widening of the unit cost gap between us and every other airline in Europe. I would point you to Slide 4 of our industry presentation. Before COVID, we were already Europe's lowest cost airline on -- with a total cost per passenger, excluding fuel, assess seat cost per passenger of EUR31. Over the past nine months, that has -- we've managed to maintain that. Actually, it's gone down very marginally to EUR30 per seat, excluding fuel. But every other competitor has seen very significant cost increases, whereas we calculate their unit cost actually up 18%, EasyJet 42%, and Southwest in the states up 25%. And even the legacy carriers, who were already ridiculously high cost prior to COVID, we think Lufthansa have seen seat costs up 16% and IAG up 16%. And I think there's such a widening of that cost gap between us and every other airline. It's one of the reasons why we are continuing to grow so strongly, but also while profitability has rebounded strongly this year. And we are -- and I think that will be one of the themes of this morning's call. Thus far, we've taken delivery of 84 game changes up to the end of December. There are still some uncertainties as to whether we'll get all 51 aircraft that Boeing are scheduled to deliver to us by the end of May. At the moment, we think we're somewhere around 44, 45 aircraft. But it's a kind of a daily and weekly thing we worry about with Boeing because obviously, some of our growth into the summer of 2023 will be disrupted if we don't get those 51 aircraft out of Boeing. Nevertheless, we're seeing strong growth in all markets with 223 new routes announced for FY '24. We're seeing very strong market share gains. I think one of the things that we constantly decided to do with to go after market share, grab market share gains in those markets where incumbents were withdrawing capacity. So we've seen very strong gains in Italy, where ITA or Alitalia has reduced capacity in Portugal, where TAP has reduced capacity; in Poland, where Weeze appear to be taking capacity out; and also in Ireland and Spain, where the incumbents were very slow to recover their capacity as Europe emerged out of COVID. And I think the other thing we'd point to you this morning is that in H1, we've increased our fuel hedging now from 50% to 60% cover. We were able to take advantage of some weaker pricing there over recent weeks. We brought down the fuel hedging cost from $92 a barrel to $90 a barrel, that's for H1 FY '24. We remain 50% hedged at $92 a barrel for the H2 of FY '24. So we think we are in reasonably good shape. A couple of other themes then. I just want to talk to you about looking forward into this summer, we still see seat capacity constrained in Europe. It is quite clear that some of the legacy carriers are not restoring their pre-COVID capacity. Obviously, in Italy and Portugal, TAP and Alitalia are capacity constrained. Alitalia's fleet has reduced by almost 50%, TAP by 40%. We're seeing Lufthansa in Germany being very slow to restore pre-COVID capacity. The German market is a very interesting one this year. Recent figures suggest that it's only operating at 70% of its pre-COVID capacity. And we think that's a conscious decision by Lufthansa to constrain capacity, so they can drive up airfares, and airfares are seeing their highest increases in the German market. We have reduced some of our capacity in the German market or reallocated some of it where Frankfurt Main were increasing charges. We reallocate deployed capacity to Frankfurt-Hahn. We've increased capacity in Niederrhein and Nuremberg and some of the smaller bases there. But I think the German market is going to be one where Lufthansa will, being the national champion, will do what they generally do where they have a quasi-monopoly. They'll constrain capacity. They will increase pricing quite significantly, and we would be the beneficiary of that, even though Germany is one of our smaller markets. The other thing we point to is Weeze seem to be taking more and more capacity out of markets where they compete with us, Austria, Central and Eastern Europe and Italy regional and Italy domestic. There seem to be, I would have said, a flight of capacity out of those markets where they compete with us. And a lot of that capacity appears to be moving into the Middle East, which it would appear to us to be Weeze on a kind of campaign to find a market where they don't have to compete with Ryanair, which is a good sense of the strategy from their point of view. So I think there's going to be meaningly less capacity, short-haul capacity in those markets as a result of Weeze pivoting some of their capacity away from intra-EU and after the Middle East. Allied with that is, it is somewhere that we think there's going to be very strong transatlantic traffic, and there's the beginning of a recovery of Asian traffic. Now with the risk movement in the pre-COVID restrictions, the Asians will start returning to Europe this summer. They wonât reach their pre-COVID levels. But any recovery of the Asian traffic will, we believe, fill up a lot of the short-haul connecting and transfer flights of the legacy carriers, the Lufthansa, IAG and Air France KLM. The transatlantic traffic will also play a role in that. And therefore, we think and believe that there will be meaningfully less available capacity on European short-haul this summer. Europeans will continue to holiday at home. I think the strength of the dollar will militate against them going transatlantic. Asia is still effectively closed and not very welcoming for long-haul majorities from Europe. And so the outlook, I think, is reasonably robust for summer 2023. We're already seeing that in our forward bookings. As we've reported in the last couple of weeks, we see very strong forward bookings, both volumes and pricing into the February mid-term, into the Easter, which is in Q1 of next year, which is in the middle of April, and in summer 2023. At the moment, our bookings are running at or above where they were pre-COVID for the -- some of the peak months of the summer doesn't run right through the summer. And fares at the moment are running above where they were last summer. Now I think, therefore, everything is set fair for a reasonably strong Easter and a reasonably strong summer 2023. How strong will that be? We have no idea. And I can answer that 90% of the follow-on pricing, which would be, where do I think yields will be this summer? I don't know. But it looks at this point in time that they will be stronger. I think it is reasonable at this stage to expect that there will be a kind of mid- to high-single digit up on where they were in summer of 2022, but it's too early to say. We haven't yet finalized the budgets and we don't have an outlook for next year yet. But absent there being any adverse news flow on COVID, any adverse news flow on Ukraine or any other unforeseen black swan event. I think it is very reasonable at this point in time to suspect that we will have a second summer of rising fares. We will lead a second summer of rising fares because we will have materially higher oil prices. We were very well hedged last year into summer 2022. We're reasonably well hedged, but at higher price levels in December 2023. But the outlook on forward bookings, constrained capacity, strong return of transatlantic and Asian traffic to Europe and European holiday at home for the second year in a row means I think we will continue to see significant market share gains from Ryanair in those major markets where we're allocating capacity, Portugal, Spain, Italy, Greece and Central and Eastern Europe. We're also seeing strong growth in Ireland and the U.K. Fly Bs failure over the weekend is not unhelpful. Even though they don't have a lot of capacity, the failure is taking place at airports where we tend to be the -- we're going into Belfast, Birmingham, we're the largest airline. They're not big, but it's reasonably helpful and it will help our expansion this year. So we have very low cost going forward. The unit cost gap between us and all other airlines has materially widened as a result of COVID. And the work we've done during COVID, extending airport deals and working closely with our people and our union partners to restore, pay, lock and agree pay increases for the next coming years and that work continues. So we are on track this year. As I said, we raised the guidance to a range of EUR1.325 billion to EUR1.425 billion. We think, again, absent any disruptions in February or March, we will get to our 168 million traffic figure. And again, subject to getting reasonably close to 51 aircraft deliveries from Boeing, we think we are on track to get to 185 million passengers in FY '24. But we haven't yet finalized our budgets, we know that fuel will be higher. And I think there's a reasonable prospect that this summer, average fares will be up mid to high-single digits. It could be more. But generally speaking, when things look optimistic in this industry, some curveball is sent to keep all to keep our feet on the ground. So outlook is reasonably robust. There are challenges. Fuel will continue to be a challenge. I would caution the any irrational exuberance here. We are going to lose money in the fourth quarter. We don't have Easter in the fourth quarter. We are hiring a lot more and training a lot more pilots and cabin crew. We expect a lot less disruption at European airports this summer. We think the airports themselves, the handling agents and the other airlines will be appropriately staffed when we get to the summer schedule at the end of March. We do think ATC will be a shamble, particularly through Q1. So April, May, June will be very difficult. The French will be engaging in their kind of recreational striking. There will be frequent ATC strikes in France, where there will be HDC staff shortage on Saturday mornings, where the French will not turn up to work. German ATC will also be a real pinch point. A lot more flights are being rooted over German HTC because of the NATO exercise in Southern Poland because Russia being close. And German ATC is not staffed up or geared up to handle these kind of volumes. We're working closely with EUROCONTROL, the flow managers to try to route flights around Germany as best we can. But we think, certainly, in the first quarter and through the first half of the summer, ATC would be a major challenge will cause a lot of the flight delays and disruptions, and we're pushing very hard together with our other fellow members in A4E. There is a simple solution to a lot of this, and that is to separate the upper air space for the EUROCONTROL to take control of the overflights because if you could protect overflights during periods of national strikes. As they already do in Italy and in Greece, that would be a solution that would solve a lot of these problems. And yet we continue to hear the European Commission come up with all sorts of excuses why this can't be done. And it is another example where the European Commission is absolutely useless. They've had 24 years of abject failure on the single European sky. And when you give them a simple solution like protect the overflights during strikes, they won't take it. So we'll keep pushing for some solution on that. Well, that's all I have to add. Neil, do you want to take us through MD&A or highlight some things you want to raise? Yeah, I will. You deal with the unit cost advantage very well. We're still on track for our full year guidance. FY '23 is about EUR31 per passenger ex-fuel. So very pleased with the cost performance year-to-date. Hedging, again, Michael pointed out that we've increased our hedging into the summer of FY '24, about 60% hedging out to over $90 a barrel. But the other big differentiator between ourselves and everybody else is the strength of our balance sheet. Our balance sheet, strong investment grade, BBB positive outlook. We had EUR4.1 billion cash at the end of the quarter. That has actually increased to EUR4.4 billion today. And importantly, net debt, which is EUR960 million, down from EUR1.45 billion at the end of last year. And that's despite EUR1.3 billion in CapEx. So we've got another EUR700 million in CapEx between now at the back end of March. And then over the next 12 months to 15 months, we'll be very busy paying off maturing bonds of EUR1.6 billion out of cash resources and financing another EUR2.5 billion of CapEx next year and hopefully get the balance sheet back to a broadly net cash, net debt position by the back end of FY '24. Yeah. I think that's a little point we would want to emphasize. We might get to the Q&A. We are planning is this year, we're going to use those cash resources we have to pay down. We have an EUR850 million bond to pay off in March. There's a EUR750 million bond to pay off in August. We will not refinance those bonds. We will pay them down. Where we try to refinance them, even with our investment-grade balance sheet, we'd be looking at financing cost of between 4.5% or 5% currently. We have the cash resource to pay down that debt, and we intend to use the cash to pay down that debt and to fund CapEx. And I think many of our competitors, though, who entered COVID owning a considerable proportion of their fleet have exited COVID, having done lots to sales leaseback. Particularly, I think Weeze and EasyJet. But now most of the fleet is on operating leases. And the cost of those leases will be rising meaningfully through the remainder of this year as interest rates and cost of funds rise, whereas we'll be paying off debt. We own all of our fleet, about 98% or 95%, 98% of it will be unencumbered. And that will be another very significant point of widening between us and the unit cost between us and everybody else. In reality, I think we are now entering a summer where our average fare is lower than any of our competitors' ex-fuel unit costs in Europe. And that is probably explains why many of them are either so anxious to get out of our way or not or withdrawing capacity from markets where they previously claimed to wish to compete with us or in the case of EasyJet, they don't grow at all and have retreated to kind of fortress airports where because of slot restrictions, they are reasonably isolated from competition with Ryanair. The reality is, we are -- have a much lower cost base than any other airline in Europe. We intend to continue to use that cost base to pass on low fares to our customers. By doing so, we'll take more market share from all of the higher cost incumbents, and we have a flow of low cost aircraft deliveries from Boeing for the next three years that will enable us to maintain this reasonably strong rate of growth. And in a market, which we hope will be reasonably profitable as certainly in summer '23, rising airfares will help us to pay for higher oil prices in a marketplace where our competitors are currently still losing money and therefore, under much more pressure to get airfares up. Constrained capacity get airfares up to cover their higher cost. All right. Eddie, I might ask you just before we open up to Q&A, any themes you want to raise here from a kind of commercial point of view or market growth in Europe. But I think I'll probably start off just on the operational side because we want to make sure that we are as resilient as we were. Last year, we've had a particular focus over the last number of months, not only with our -- ensuring that we are fully resourced on our sales handling operations, but also have kind of a keen attention on third-party handlers so we can minimize as many of the delays as possible. Our punctuality has picked up so that we can -- over the last number of weeks and months, when there has been less capacity. But obviously, we can only control what we can control. So we want to ensure that we have, we are still going to be the most on-time and reliable airline in Europe this summer and that we continue to focus on. On the commercial side, we continue to close out long term deals with airports, and they're in very good shape at the moment, as we obviously try to drive down airport costs, where environmental taxes are still a challenge, which again are outside of our control. On the commercial side, we are, as you've alluded to already, I mean, we can't really see into what's going to happen next summer. But we're happy by what we see in terms of we don't see any particular weakness or any -- in any of the markets that we're in. We had that as we thought was a -- it turns out it's been a short-term blip in the U.K. market, which has now more than recovered. It looks like that was down to short-term perception issues with getting to and from airports, et cetera. So continued operational resilience. We look in a good shape airport cost-wise. And on the commercial side, while it's too early to say about the summer, we're happy with bookings on the booking curve. Thank you. [Operator Instructions] And our first question comes from the line of James Hollins at BNP Paribas. Please go ahead. Your line is open. Hi. Good morning, everyone. Yes, two for me, please. First of all, just on the -- for bare for me to annoy you by talking about some of yields. So let's talk about some capacity. You've talked about 125% of pre-COVID. Just for clarity, is that based on 124 max by then or is it the 114 you talked about on your video? I.e., could it go higher or lower depending on what Boeing do and maybe just your views on what going are up to at the moment? And the second one, you flagged quite a few times the U.S. and Asian traveler recovery. Just wondering if you could just maybe let us know what your normal year passenger proportion would be a base or is it really just about those sort of filling the capacity of the networks? Thanks. Thanks, James. Yeah. To our summer capacity, we're talking -- that's based on us getting all 124 MAXs out of Boeing, that would be the max growth we deliver. I think at this point in time, but it's a weekly call where it's a daily and a weekly management issue with Boeing. We are due to get 51 aircraft. We think and we're reasonably sure at this point in time that we'll get 45 aircraft by the end of June. I'm not sure we'll get the last five or six aircraft. But to be fair to Boeing, deliveries have clipped up in January. They are doing better on the deliveries that per day. We were struggling. Production was taking about 10 weeks. That looks like it's come down to nine and may come a little bit better may improve to 8.5. But we don't think we're going to get all 51 aircraft. Now the challenge for us is, if we don't get those aircraft by the end of June, we're not reasonably constant. We canât put them on sales. So we said to Boeing, we're not taking any aircraft. If you don't deliver aircraft by the end of June, we're not taking deliveries. We're too busy, take deliveries in July and August. That will not materially -- if we get 45 in by the end of June, we will hit, I think, 185 million passengers. We may move slightly some of the growth out of Q2 and into Q3. We'll take a couple of extra aircraft to temper, we might do a little bit of a winter growth as well. But if we get to 45 aircraft, we're close enough that I think we'll stick to 185. If we get all 51 aircraft, we could go a little bit over 185, not meaning there may be 186, 186.5 or something. But I think that 45 aircraft and no major ATC screw-up strikes. And those strikes are damaging to passenger numbers. The French we've taken two now, French had a [indiscernible] of 90, with the cancel about 40 flights. Berlin had some handling strike we canceled other 50 flights. Each of those cost us about 18,000 or 20,000 passengers on each of those days. So -- but it's based on those numbers. What are Boeing up to? Boeing are improving. They are -- they seem to have reducing the manufacturing time. Their target is about eight weeks. They're not at eight weeks yet. But we do think they'll remove or eliminate all of those backlogs during this summer peak period, June, July, August, and the situation will get better. We will be much more hopeful than if we are left short a couple of aircraft this summer. We'll pick it up in the winter. And we will have all of the -- that plus the 50 new aircraft well in time for summer of 2024. The reason I think the U.S. and Asian traffic is important is that in pre-COVID times, most of the legacy airlines would -- and I know certainly Lufthansa has said this publicly. 50% of their short-haul traffic in Europe in the summer is long-haul traffic transatlantic and Asians connecting across Europe. And therefore, while we have a reasonably -- I mean, we would not see much Asian traffic. We do see -- I think the transatlantic traffic is a high-single-digit percentage of our traffic in the summer. But it does fill up an awful lot of the legacy short-haul traffic around Europe and in a market where the legacies are either unwilling as in the case of Lufthansa, or unable as in the case of Alitalia, Air France, KLM to restore pre-COVID capacity. If they're filling up what is a smaller capacity during the summer with a significant growth of transatlantic and a return of Asian traffic. It generally kind of -- it adds to that kind of slightly net-net capacity down. Now, I know we'll come out of this and some analysts will do brilliant work researching all the slot filings for this year, say, no, no, capacity won't be down this year. It will be. The legacy guys are still filing for all the slots. But, Lufthansa, TAP are running around and canceling slot within kind of two-week scanning this last system so that they're able to block competition from us, particularly where we would go in and take up on new slots. But we're not able to go and take up those new slots more than two weeks' notice. We've complained to the European Commission about this, particularly in the case of TAP, who are doing it on a kind of structural weekly basis. But so capacity will be down pre-COVID. Demand, I think, for legacy short haul will be up and constrained because of the recovery of transatlantic in Asia. And that will generally mean I think stronger bookings and higher airfares for the short-haul point-to-point carriers, and Ryanair dominate that marketplace. And all goes well, I think, for this summer's traffic and pricing in a market where we will be the only air in operating at 25% more than our pre-COVID. Yeah. No. There's always some issues out there that comes up. No, no, no, we've done a study in the capacity is open on pre-COVID. It won't be. There is no appetite among the legacy guys to restore capacity. They seem to be very comfortable with constraining capacity, particularly in Lufthansa in the German market where the Germans are being screwed for very high fares in a marketplace where they're a great national champion is just screwing them all for much higher airfares and not restoring capacity. But Lufthansa can't help themselves. Hi. Good morning, everyone. Just your -- any thoughts, comments on Fly BE, Michael, would be interesting is there anything for you? Don't really see it, but yes, just some comments. And then secondly, there's been some really good results being printed on the packaged holiday side. We've had EasyJet holidays, too. Would it be something you would revisit or are you just happy selling hotel rooms, flights as you're currently doing? Thanks. Thanks. Two good questions here. I think, slightly it is an interesting situation. Look, they're pretty small. I mean what slightly demonstrate is the incompetence of the CAA's regulatory function. I mean Fly BE should never have been allowed to get back in the air last year, having originally gone cost. They were never properly financed and the CAA, which is supposed to protect consumers by ensuring that you have airlines adequately financed in the UK, continues to demonstrate its own competence in exercising its regulatory bump. However, it has gone. It is material. I mean, as a couple of the airports where we operate, like we're going into Belfast this year to be fair, we're going into Belfast because the government has finally cut the domestic or domestic APD. Their second biggest airport is Birmingham, where we are the biggest airline there, and we will certainly be in talks already with Birmingham about expanding. And I think there will be some additional slots that will come up in Manchester, where I think we will continue to expand and are allocating more aircrafts. But in structural terms, they're so small. It's not going to make a lot of difference. It's reasonably helpful to our entry into Belfast and our growth in places like Manchester, Birmingham. But a lot of what Fly BE was doing was kind of domestic U.K. stuff. And that's not a big market for us, although it's not on help. On the package holiday side, I really don't pay much attention to the package holiday side. I think Jet 2 is a good operation well run. I remain hugely skeptical of EasyJetâs holiday operation. I never believe any of the profit figures they declare. I think it's just a reallocation of yields into some -- into their holiday operation. But be that as it may, I don't -- we're making enough money flying people around Europe short-haul, point-to-point, with a widening unit cost gap over everybody else. The last thing I need to be doing now is setting up an operation, negotiating for bedrooms and accommodation at all these places. It's a different marketplace. If you look at the performance of package holidays in Europe in the last number of years, TUI (ph), Thomas Cook, they've all gone posted various days. They've all need to be bailed out of various ages -- the Internet has completely disintermediated the package holiday business. There will always be a role for some element of package holidays. But for example does very well in Poland, where that market is growing, and the Poles are wedded to kind of package holidays. But over time, the demand for packaged holidays declines as you get more and more availability of low cost point-to-point air travel. And people just put together their own packages. That's not to say there isn't a role for the package holiday business. But I think it would just be a distraction to us continue to execute our business plan, which is to grow our fleet, grow our traffic to 225 million passengers over the next four years and do so in a manner that widens our unit cost leadership over the likes of Weeze and EasyJet and all the others and continue to take meaningful market share from everybody else. I think there's a role in certain niche markets for packaged holidays, but that's all as is. It's a niche market. Largely speaking, if you look at the kind of more mature market in the U.K., Germany, the package holiday business is gradually eroding as the availability of low cost point-to-point, why the -- as Ryanair expands and takes a huge proportion of the O&D market. Hi. Good morning, gentlemen. Two from me, please. First, on staff costs. So you mentioned that you've restored the pay reductions and there four or five year pay deals in place in most cases. Can you please give us an idea of clinical profile of those? And how we should expect your unit staff cost to evolve over the next four to five years? Second question is on your recent reentry into the Amadeus GDS. I mean, clearly, indirect distribution is something you've tried to avoid in the past. Is the decision here basically to target more corporate travel? And if so, how large do you think that opportunity is for you, please? Thanks. Thanks, Alex. Okay. We've restored to pay deals, but most of those pay restorations and they've all bolded and approved by the [indiscernible] and their unions our ally to four or five year pay deals over the next four or five years. In some cases, there's kind of pay, annual pay increases of 2%, 3% a year, and that would be the profile. What do we think on the labor cost over the next number of years? I think labor costs will edge upwards. We'll have a combination of -- we'll be promoting many more first officers to captains. We've been promoting many more junior to senior cabin crew. The rate of our headline rate growth is slowing down. Even as we take these additional aircraft, the headline rate of growth, which last year was 10% this year, we're 10% then. They begin to ease down towards 8%, 7%, 6%. And I think it's inevitable that within that, we would want to continue to reward our people. And I think, therefore, that the unit -- that unit cost will continue to rise but in a managed way and not something that will disturb our affect margins going forward. But we are committed to working with our people and their unions to raising pay where we think it is weak, it's safe to do so and we are continuing to work so that as we said even before we've rewarded shareholders, we rewarded our people with pay restoration and pay increases. I wouldn't want to get into any more detail not other than profile, other than to say, by the way, we're doing that in a marketplace where we've seen competitors with panicked pay restorations and panic pay increases, who a number of them seem to be short of staff at the moment, certainly crews. Most notably Weeze, who seem to be running around not just Europe or Latin America and other areas just be trying to hire pilots. We don't think to have that issue, but then I think we're a much more stable employer than Weeze proved to be during COVID. Eddie, do you want to give a quick flavor on why we've gone back into the GDSs and what the strategy will be? Yeah. Well, we were already with two GDSs with Travelport and Sabre. But I think we've increasingly seen with the profile of bases that we've opened across Europe and the connectivity that we've had and the growth in frequencies that business travelers want to access our fares. And a lot of the corporates go through these systems, whereby it manages their expenses. And that's primarily where we're going with Amadeus. It's primarily on the corporate business type customer who doesn't want to necessarily have the complication of going directly to ryanair.com, when it's able to manage the expenses of their employees. So we will -- that will be coming shortly. But we will look at any other distribution channels and some of these are nationally based as well where -- why there's a direct feed into corporate expense management. Hey. So the first question, I was wondering if you could talk a little bit about fuel efficiency in terms of the gallon proceeds or some of the metrics. I was just curious what you're seeing today and your expectation as you kind of head into fiscal year '24 and maybe the next couple of years, given that you're getting the MAX aircraft in the fleet and what we could expect on that front? And then secondly, I was just wondering if you could remind me on the lease extensions on the Airbus and NG fleet. And if there's any more that you're still working on? Okay, Savi. Thank you. I'm going to ask Thomas Fowler here as Director of Sustainability, just to talk about the fuel efficiency and what we're doing there. And Neil, maybe you might give an update on the lease situation on -- it's essentially the A320 fleet. Yeah. So Savi, just on the fuel efficiency on the markets like, I think as we well flagged before. We're seeing slightly better than the 16% fuel efficiency saving on the longer sectors and at the 16% on the shorter sector. So like, it's very hard to give you the exact per [indiscernible] and budget and allocation for like somewhere around that 16% figure as you see the MAXs coming in is not unreasonable. And also, we're also retrofitting the [indiscernible] 737 NGs with the scimitar winglets, which will be about 1.5% fuel save in a year. But most of that work will be done through the winter, when we're doing our maintenance schedule. So we won't see a big number this year, but we'll have a bit more color going into next year is how the maintenance season goes on that retrofit. Okay. And on the leases savvy, we extended 24 of the 29 A320 leases out as far as 2028. So that's very attractive lease rentals. And we've opportunistically now added a 737 NG former sister ship, which became available again at attractive levels that can mean to our fleet in December. But we're not usually interested or searching at this stage for secondhand aircrafts with the Boeing's coming in a more predictable fashion than before. Good. Thanks, Savi. I mean, I think it's fair to say, we're not out looking for additional lease aircraft, but where we are receiving offers. And if the offers are financially are opportunities interesting, we follow up on them. At the moment, we have more than 120 aircraft to 100 aircraft is take from Boeing or 120 over the next three years. And therefore, all of the growth will take place on these low-cost aircraft that are really extraordinarily fuel-efficient given that they're carrying 4% more passengers. Good morning. Just going back to staff, Michael, are competitors successfully pinching Ryanair pilots by offering higher pay or put another way, is pilot turnover any higher than normal? And if so, how are you addressing it? And then secondly, as Neil said, in terms of overall costs ex-fuel per pack, you're on track for EUR31 this year. What about the year to March '24? Can you get back to fiscal '19 levels of just below EUR30 or do things like labor costs hedging up start to make that tricky? Thanks. Okay. Thanks. We're not seeing any competitors. I mean, like I think it's kind of a side. A, there's a couple of issues. We operate 737s across Europe, almost all of our competitors are operating Airbus aircraft. So if you like, the inflation of the pilot pinching seems to be within the Airbus fleet in general terms. We are seeing some pilots say that there is certainly a restoration of the Gulf carriers out there looking to hire first officers who should know better, but don't and are attracted out to the Middle East. But the numbers are small And I put that in the context, like we currently have almost 1,200 cadets coming through our system. We've been hiring and training cadets assiduously over the last -- I would say, over the last two years, and so we have far more pilots coming through our system, then we have attrition. In expedited value, we may be a little bit over piloted for the next year or two. But we think that's a sensible place to be because we're expecting significant ATC disruptions, certainly through the first and possibly the second quarter of next year. But no, we see no pilot pinching. And I think to the extent there is pilot pinching is taking place between the Airbus operators. PA Pinching; EasyJet, EasyJet pinching. Weeze and Weeze's pitching. Valaris generally. On ex-fuel unit costs, I mean, again, I think the issue for us is not so much what's going to happen to our unit cost over the next 12 months. I think we will have a unit cost of about EUR31 by the time we get to the end of this year. I think the real opportunity here for investors and analysts, though, is what's going to happen to Weeze and EasyJet and Lufthansa and IAG's unit costs over the next 12 months. They've exploded over the last two years of COVID, principally huge cost inflation on aircraft ownership and lease costs, and that's going to continue to rise. They're generally operating and have airports where they are price takers of both airport fees and the handling charges that are rising materially, and I think you're going to see that continue to widen. I think also if you look at the way Weeze and to a lesser extent, where EasyJet has been out there, panicking over pay levels and recruitment seem to be recruitment changes. I think there pay and staff costs would be rising at a faster level than ours, particularly when we are adding aircraft that carry 4% more passengers and burning 14% or 16% less fuel. So I think the issue for our investors and analysts is not so much will our EUR31 go to EUR32 or stay at EUR31 in FY '24. But it's that the widening gap between our unit cost of EUR30. Weeze currently at EUR46 and EasyJet at EUR75. I think you're going to see that cost gap widen materially in the next year, particularly on aircraft and leasing and ownership side, where we're paying down debt and they're exposed to rising financing costs over the next 12 months. Hey. Good morning. I won't ask you another unit cost question though I was tempted. Maybe just on the guidance update from early January, you noted some softening, I think, in U.K. point of sale -- or sorry, on fairs, U.K. point of sale and maybe Ireland. Can you just expand on that a little bit? And have you seen any change or firming since the guidance update? Yes. Thanks, Duane. We thought -- I mean when we came out with the upgrade on the 4th of March, there was certainly something going on in the U.K. We saw weakness in U.K. outbound and Ireland UKP, which is quite a big market for us. We weren't sure at the time whether there was an awful lot of kind of coverage of -- there were strikes and train strikes and head strikes all over the place in the U.K. That didn't seem to last long. I mean, by the time we got to the middle of January in actual fact, U.K. outbound in Ireland UKP were one of our stronger booking markets. So it seems to have been a kind of a sort of a temporary malaise largely driven by kind of media. Maybe the U.K. hasn't quite got back to work yet, and the media coverage given to kind of transport strikes and difficulties to get in with border force and trained. Now we saw no impact on our daily both -- on our day-to-day load factors. People if there were train strikes for either driving to the airport into the airport anyway. But I'm pleased to say that, that has certainly disappeared through the remainder of January. We now see no market that we could point to as being weak. All markets are booking strongly into the February midterms, the Easter in the middle of April and through the summer, all markets look strong, booking robustly, booking strongly. I made the point publicly that we had a record -- we did our record weekend. We took 2 million bookings in the second weekend in January. And we had a record week 5 million. But first time in a week, we've ever take 5 million -- we've ever taken 5 million bookings. That won't happen every week. But bookings are stronger. Forward pricing is stronger. The kind of caution I would have at the moment is this won't continue. I generally tend to be a bit kind of nervous. When things are going very well, there's usually a curveball and somewhere to haunt us the nature of this industry. But looking around and absent any adverse development on Ukraine, COVID or some black swan event that we can't foresee, it all looks worryingly strong, I think, into April and into this summer, as long as French and German ATC don't [indiscernible] it all up in March, April, May, I think all operators in Europe will be positioned for a very strong summer of traffic and bookings and reasonable fair recovery. The difference between them and us, is that we'll be doing with an enormous unit cost advantage over where we other operate, right? The other operators who are currently loss making would probably be profitable this year. And we would hope to see into FY '24 another reasonable bounce in our profitability because of a very strong unit cost position, a very strong balance sheet and considerable growth in our market shares in all markets all markets across Europe. That's great, Michael. And maybe just for my follow-up. On the aircraft constraint side and on the kind of delivery pacing side, how much are you being held back into kind of calendar '23 here? So summer of '23 , how much larger would you be, how much larger would these passenger targets be if you had no aircraft constraints? Thanks for taking the question. Yeah. Really not. I mean I think really not a lot. Like if Boeing can get a 45 aircraft yield, they were originally going on to deliver 51 aircraft by the end of April. If we get 45-plus aircraft by the end of June, then there will be no constraint at all. We'll get to 185 million passengers. We would like to get to 51 aircraft, in which case, we might get to 185.5 million or 186 million. But really, we have it all in there. As long as if Boeing gets forced by aircraft by the end of June, that will be a dramatically better outlook than I think when we were doing the half year numbers in November, I was worried we could be down at around 35 aircraft, and we'd be looking at maybe 178 million, 180 million passengers. So to be fair to Boeing, we have been writing rightly critical of in recent years, certainly, the delivery and the production side has improved over the Christmas and into the New Year period. But it gets very tight and very fraud, very little would cause us to miss the delivery a couple of -- three or four aircraft deliveries missed at the end of June, means we're either canceling flights in July or we can't put those prices on sales. And the critical thing is we need to know those aircraft are coming at the end of May, so we can put them on sales through. If we can get them on sale with four or six weeksâ notice, we'll fill them into July and August. If we can't get them on sale, we won't sell them. But it's really a big FY '25. Yes. Good morning, everyone. Hi, Michael. Can you just talk about future aircraft deals? I'm just thinking more about size of plane. I mean do you think the optimal is the 197 or it looks like the MAX 10 may get, for example, certified, so 230 or whatever plus? And then kind of related to that, I see that maybe itâs for Neil. 20 F as your average lead age of eight years. Is that kind of the optimal fleet age number to be younger or older? And I'm thinking of things like maintenance CapEx, et cetera. Thanks a lot. Okay. Thanks. I ask you to the second question. I mean, again, Stephen, my response on the size of playing questions, again, it's a bit like we wish do you prefer Airbus or Boeing. I prefer whichever cheaper, which has got the cheaper seat. Size of aircraft, I would always take a bigger aircraft as long as I'm getting a cheaper seats per our per seat price. Now we are -- we broke off negotiations with Boeing. I think it's fair to say they have -- we're back talking to Boeing again about new aircraft, but not in any serious way. I don't expect anything significant coming for the next number of months. Boeing have been distracted up until the end of December where they were going to get the MAX the redesign of the Max 10. Can Congress are going to approve that or extend that deadline that the guillotine deadline at the end of December? I would be of the view we have been surprised -- pleasantly surprised by the performance of the MAX A200. The 197 seat is a perfect aircraft for us in terms of high frequency operation. We get 4% more seats than 18% less or 16% less fuel consumption. I would be very willing to look at going up to the MAX 10, whenever the MAX 10 gets still not certified, whenever it's certified and they're able to deliver it, as long as there's a reasonable discount for the additional 30 seats because the additional 30 seats means we're going to start taking hits on yield where you allocate that aircraft and also probably going to take a kind of hit on turnaround. But I'm entirely -- would be entirely opportunistic. I put it this way, if we got the extra 30 seats for free, I would -- we'll be ordering all MAX 10s going forward. Boeing will probably come some busted a reason why you've got to pay extra for the extra 30 seats and in which case then we would take all we'd be looking at additional A200. So it's entirely down to pricing. Whichever aircraft gets us the cheaper per seat cost would be the aircraft that I would favor. Yeah. Sure, Stephen. Eight years is a relatively young fleet. In the past, we would have flipped out aircraft at eight years because we just had such big order books back in 2005, 2006, and we were running out of warranties. We're absolutely no difficulty running the fleet older. And in fact, the scimitar winglets, which reduced the fuel for about 1.5%, adds to the longevity of the aircraft. They do get more expensive to maintain, particularly when you're up to maybe 16, 17, 18-year checks. But we've got a lot of very young aircraft in the fleet, nowhere close to that and on the warranties for the next few years. So no, eight years is good, and we're happy to let the fleet age a little bit over the next few years. Good morning. On Italy, you talked about your market share of 40%. How does Lufthansa potentially taking the stake in ITA impact the Italian market in your view? And then secondly, you talked about the fares in your comments. For the March quarter, should we expect a similar 14% increase that we saw in the December quarter. We've heard from EasyJet suggesting higher fare increase for the March quarter. Yeah. Okay. Let me do the first one first. Italy, our market share is actually, I think, is now above [indiscernible]. There's been a dramatic withdrawal, I think, in the Italian market of Weeze through this time last year. We're opening bases in Venice, in Wastania (ph), and one basin Palermo, all of which they've now closed as a kind of cover for. Now they have switched some of those aircraft into Milan and into Rome, where they appear to be now more intent on linking those the two main cities initially with Riyadh, Kuwait City, Reykjavik and all those other exciting medium haul destinations that Italians never knew they want to go to. But I think there's probably a reasonable growth for them in that and it's a market where they don't have to compete with Ryanair. But there is dramatically less capacity on the Italian domestic. And we are actually continuing to grow in those markets. We have this -- so we're adding extra flights into Castilian. We're into Venice. We're adding more aircraft in Naples, in -- we recently -- we're coming close to agreeing airport deal extensions with a number of Castilian and Southern Italian airports, and I think we'll see more growth by us in the Italian marketplace. Lufthansa coming in and acquiring ITA, I think, will have no effect whatsoever on that. I think they'll do exactly what Lufthansa have done in every other acquisition of Sabina, Swiss, Austrian, they will run Asia to feed flights and traffic out of Italy into the two main hubs, Munich and Frankfurt. There will be no new route growth out of Italy to anywhere. And they will be very happy and content to put up prices and shovels loss of Italians. And I think transatlantic and Asian visitors down into Italy using Munich and the Frankfurt hub. I think what they will also try to do, though, is use their lobbying muscle as they have in Germany to try to imposed restrictions or limit the way Italian airports can kind of grow and try to -- they do the usual lobbying games around trying to persuade the Italian government in some way should protect Asia or Lufthansa, have less competition, more slot restrictions, that all Italian airports should charge the same fees as Rome and Milan which is something they pushed hard after the German market as well, which is one of the reasons why the German market has only recovered 70% of its pre-COVID traffic, and German consumers and business are paying much higher airfares. So I think the only impact on the Italian market would be Lufthansa lobbying, but there certainly won't be any ITA growth out of that. And we are allocating another, I think we're probably another 15, 16 aircraft into the Italian market this year, continue to grow the domestic markets. We're looking at more capacity in almost all of our Italian airports. And I think we will get to 50% market share in Italy within the next two years based on current trends. Maybe please, do you want to give us a question let's be cautious now. I don't think -- I think we should be reasonably cautious on pricing up to March. But what are you seeing there on pricing up to the end of the fourth quarter? Yeah. I think based on what we've seen already in Q3, I think we see total revenue per passenger coming really hope the same kind of percentage levels as they were in pre-COVID I think it's on the basis of what we've seen was a strong new year, which we pretty much January don't what we're seeing for February mid-term looks good, but it's still a lot on what will happen and the close in mid-term book because I think a lot is dependent on. Okay. And again, I would caution everybody that is subject to there being no adverse COVID, no adverse Ukraine. And as always, when things look is good, no [indiscernible] Black Swan event that arrive out and over to haunt us. Thanks, Tracy. Next question, please. Hi. Thanks, Michael. Thanks, again. I got two questions here. So firstly, on the load factor, if you look at December came at 92%. Given the seasonality impact that we normally see in Q4 versus Q3, could we expect the Q4 load factor to come in below Q or what is going to see that uptick into Q4, March quarter? And secondly, on the cost, what has been the initial discussions from ATC on proposed increase in charges for 2023? Those are my two questions. Thank you. Okay. Load factor, I wouldn't get into that kind of -- I would expect to see the load factor in Q4 maybe 1 percentage points or 2 percentage points behind where it was in Q3. Again, we know Easter in April. Most of what drives the load factor in Q3 is you have a strong October, school midterms in October and then most of Eastern New Year falls into December. But we would never get into a quarterly load factor kind of forecast there. ATC charges are going to be up this year. I'm not again â Tracy, do you want to give us a figure on that? It's pretty much the same as last year. We'll probably see between route charges and ATC, which can pretty much out of our control, is probably close to the overall passenger. We have to care for some of it goes into route chart, some of it goes into airport charges, the ATC forecast will do their port charges. Thanks, guys. You might will be slow to talk about this yet, but on shareholder returns, are you still kind of talking about maybe splitting that between dividends and buybacks in terms of size, should we use what you guys used to do in terms of relative to free cash flow going forward? And in terms of timing, when you do get that net debt back down to zero, should we kind of be modeling that to be starting pretty much immediately after that? And then also back on the fleet delivery. So you noted you were talking to Boeing again. And I'd just like to hear what are the material benefits that you having in MAX 10, are the part suitably with MAX 8 still significant? And would you consider an Airbus order or to your points, if there's pilot pinching in Europe as a result of the Airbus? Would that keep you away from that going that way? Cheers. Thanks, Conor. Welcome to the call. Good to see Morgan Stanley back covering both of the sector again. Shareholder returns. Look, we have huge draws on cash this year. We have a bond repaying of EUR850 million in March. There's a EUR750 million in August, and we have subject to Boeing deliveries, we think next year, we're probably about EUR2.3 billion, EUR2.4 billion in CapEx. So I don't foresee any shareholder returns this year. But we do expect with reasonable trading this year to get to zero net debt by the end of this fiscal year. So we're at zero net debt by March 2024. I think we will be looking at some shareholder returns at that time. I think shareholders who did put their hands in their pockets unlike kind of Heathrow shareholders, Ryanair shareholders, we had raised EUR400 million from shareholders during COVID that was critical to what raising additional bond financing, getting through COVID without any kind of state aid unlike our competitors. And I think we're committed firstly, to restoring the pay and agreeing pay increase with our people. Secondly, to keeping fares low for our customers. But then once all that's done and we can see a way clear to having a zero net debt position again on the balance sheet, then we will return to shareholder returns. But it will be -- we're looking at probably the spring of 2024 before we start to consider that. I think in future shareholder returns, we'll be more modest. I don't think we'll do big buyback. I think we're looking at modest dividends on, hopefully, on an annualized basis. If earnings and cash flows allow, I think, the one thing going forward is that we will have a -- no matter what happens, even if we do another order with Boeing, the rate of CapEx going forward will be smaller because the amount of aircraft, the net fleet additions will be smaller going forward in a period from FY '27 onwards. I expect us to be growing at kind of 4% or 5% a year, not 10% a year. And hopefully, that will allow us to have a more consistent dividend stream for our shareholders. Also, we're in a rising interest rate environment, I think shareholders will welcome and appreciate a dividend stream from Ryanair, but I don't see us doing large share buybacks in the future. They've proven difficult in the past. And to make them effective, I think the much better way of returning some -- giving our shareholders some reasonable return would be modest dividend stream going forward. Fleet deliveries going forward. Look, again, I think I've dealt with the Boeing side of the house we look at an air force order, yes, we would, again, like I've always been entirely opportunistic when it comes to aircraft. We would buy whichever aircraft is cheaper Airbus though have a much longer order book than Boeing. Boeing have obviously been disrupted by the grounding of the MAX for a number of years. Airbus have capitalized on that and the fact that due to the trade war between the Americans and the Chinese, Airbus is a beneficiary of Chinese aircraft orders at the moment. The Boeing order book is much weaker. Boeing does need to, I think, signed up a number of -- get some orders in the books for the next couple of years. So it's unlikely. I mean, everything we see at the moment is Airbus are pricing not materially. That's good for us and that most of our competitors in Europe are Airbus operators and paying much higher prices for aircraft than we are for our Boeing orders at the moment. But again, looking at the kind of the second hand or the leasing opportunities, we jumped on the opportunity there to extend '24, the louder leases from 2024 to 2028 because they were fee to do so. I couldn't care less whether we operate a Boeing or an Airbus aircraft, if there's a material cost advantage per seat, then we would order that aircraft. I don't believe that there would be -- would that decision be affected by some pilot plant within the Airbus fleet around Europe. Honestly, Europe, and I think I've been saying this for a number of years, the capacity growth in Europe is stabilizing over the next number of years. You don't have a lot of new entrees, there is no new entrants. There's no interest cost of financing arising -- there will be no startup low-fare carriers because I think Ryanair is the barrier to entry in most European airports. Consolidation, I think you see Lufthansa eyeing up ITA. I think IAG will do a deal with TAP before the year is out. And then I do believe that EasyJet and Weeze, we get marked up as well. And I think you're looking at a much more mature market for air travel in Europe in the next four or five years, where not unlike North America for the last 10 years, it's been reasonably stable capacity and a bit more pricing or upward pressure on pricing within that marketplace. Europe has been the beneficiary of 20 years of deregulation, very low-cost airfares. I mean the airfares across Europe, thanks to Ryanair, are generally significantly cheaper than trading fares from the airports into the city centers. But I think that we're coming to the end of that kind of mad cap capacity expansion and therefore, a much more sensible industry outlook in Europe for the next number of years. But in that, I don't think it makes much difference whether it's Airbus or Boeing. There won't be a shortage of pilots around Europe for the next five, 10 years. And certainly, if you look at the kind of growth in trading we've seen in our cadet programs over the last couple of years, there is no shortage of people willing to sign up to become pilots, recognize that it's a very well-paid job. They do -- they are highly skilled, but they're certainly not overworked with the kind of restrictions of 900 flight hours a year. It's still an average of 18 hours a week. They're well trained. They're well paid, and we're very proud of the pilots, the crews we have in Ryanair. Yeah. Hi. Good morning. Just one broader subject in matter. ESG had a very successful conference in Dublin in December, probably more a question for Tom. Just wondering what sort of key developments we could expect this year to further that? Is that kind of additional staff offtake agreement as an example? And then a second part, a second question. Are you as yet seeing cost benefits of this improvement in terms of negotiation with airports in order to kind of further embed your unit cost advantage or do you think that will become an increasing feature in future years. Thanks, Mike. Yeah. Look, I think the one big thing we did December in fac that retrofit of the winglet 1.5% saving on the NG fleet. But I think as we roll forward, looking at more staff offtake MOUs in a couple of more key regions over this year. And obviously, game changer aircraft coming in as well. There's a benefit over the next 12 months, but to be close to the retrofit of the winglets and the safe [indiscernible]. Great. I think cost benefit efforts, I mean, look, we are seeing across Europe, we are in active negotiations with a huge number of airports who have suffered dramatic traffic declines as a result of COVID, either their incumbent carriers that failed or their incumbent carriers that cut capacity and are not restoring. I would point in particular to the airports in Italy, airports in Central Europe where with are coating capacity or not growing [indiscernible] is growing. We have a huge number of Weeze customer airports who are now talking to us, I think recognizing that Weeze are not growing or not able to grow in their markets. The U.K. has been a particular source of growth as well. I mean, we've done very good extension. The core deal, which is with Lufthansa, was done during COVID now runs out to 2029. But across UKPs, we're seeing meaningful growth in markets in Birmingham, Manchester, Bristol, Belfast, Glasgow, Edinburgh, all of whom are struggling to recover their pre-COVID traffic and are turning to Ryanair to deliver that growth. In Spain as well, we've seen a â Ed, do you want to add any... I mean, like if you see what's happening in Spain, particularly in post recovery there, whereby the Spanish government, there's no doubt are leaning on AENA (ph), with their pushing then charges. But like AENA as ever, are already signaling that they're going to increase them by 2027. But there are -- when you look at what the Spanish government are saying, they're saying, look, Ryanair is potentially valuable in the regions. Not just for tourism, but for connectivity. So you having that pressure downwards. You see what's happened in Portugal, whereby we have had a sort of a -- where the regulator intervened on there. And we saw reductions in charges at Faroe and Porto and Ryanair, we pitch and put extra aircraft in those places, but also then you see in places like Madera and the Azores and Lisbon charges rising where there's no growth going into those. So I think it's happening at not just at an airport level, but also at a national level. But you do see some outliers there in airports that are just hoping that things are going to bounce back and have no idea where that's going to come from because the legacy carriers are not coming back. EasyJet is not growing and it has moved further east. So I think there's still a shakeout to come on some of those airports as well, whereby they'll realize that the traffic is coming back, and they're going to have to stimulate or incentivize Ryanair to come in and fill those capacity gaps. Yes. Hi. Just one question from me. You mentioned those impressive market share gains in many European markets, Italy, Spain, U.K., Ireland. Obviously, two of the largest markets in Europe are still missing in that business, France and Germany. And obviously, totally aware that you allocate capacity in, let's say, opportunistic way. Those two markets are obviously high cost, but they are also high-yielding markets. So especially in Germany with Lufthansa being so restrictive on capacity. I mean, you mentioned that. I'm still wondering when we are kind of nearing that tipping point when the high yield environment in those markets would compensate for the higher costs. And therefore, it would make it worthwhile for you to start allocating more growth to those markets. Yeah. Good question, Johannes. Two points I'd make on that. Firstly, we allocate capacity where the airports are in those airports who want most, which is the airports who are going to kind of bid for it with efficient growth incentive schemes. And at the moment, that's taking place in bigger markets like Italy, Austria, Poland, Ireland, to be fair to Dublin Airport, who I've been a long-term critical, I had a very good COVID recovery scheme last year, and they're working on an extension of that into this year. And in the U.K. as well, these are major markets where we are taking extraordinary lump sum market share gain. France, we're growing in, but France has always been a particularly peculiar market. It's a market that there isn't much outbound travel. We have increased pasta-based in Beauvais, Marseille to Toulouse. But it's too small to put in there. And our market share gain, while we're gaining market share, it's small. Not back -- we've no huge desire. I think unless you do something significant in Paris or domestic France, you're not going to have a significant market share in the French market. And I have no desire to be in either charge to goal or orally or in the French domestic marketplace. Germany is much more interesting. I mean, we have -- you see the kind of the outgo date, what happens as a result of the lobbying might of Germany, the great German National Champion recipient of EUR13 billion in stage eight, because there was a bit of a COVID crisis. So the German government immediately gives them everything they want. The competition rules are suspended for all German M&A. If Lufthansa wants to buy something in Germany, they're way through Phase 1, no remedies nothing at all. And what you get now is, in the last two years, the EasyJet has significantly reversed out of Berlin. We reduced capacity in Berlin. We closed the base in Frankfurt, Main. And for no reason then Frankfurt Main were unable to extend the five year low-cost growth deal we had with them because they haven't managed to open the low-cost T3 in Frankfurt. I think what you'll see in Germany this year is traffic will remain at about 70%, 75% pre-COVID. A number of the bigger German airports with a notable extension of the tool of [indiscernible] Munich and Frankfurt will see meaningful traffic declines. And I think what will happen is after a year or 18 months of that, the German airports will finally -- some German airports will wake up and realize that Lufthansa is never going to grow at their airport and they'll need someone like Ryanair in there to grow. They will come back to us with growth incentive fees.. But it is very difficult in Germany for airports to do that because German rules and regulations, which are largely written by Lufthansa, make it difficult for airports that are underserved to discount and to engage in low cost or in growth incentive schemes. But it will come because the market will continue to suffer. German consumers will continue to suffer because we've got to keep being screwed by Lufthansa for extraordinarily high airfares. But like if the German suffer for one year or 18 months, that's not the worst thing in the world. At that stage, we'll have completed our growth in Italy. We'll have based on our growth in Spain and others, and we will have additional aircraft. And we'll probably return to looking at growing in the German marketplace. But for the moment, we're very happy to leave it to Lufthansa and Lufthansa to do what it does best, which is crew German consumers wherever they have a monopoly. And I think in 12 or 18 months' time, that will encourage more German airports or a change in the German regulations that will be much more outward looking and a lot less about protecting Lufthansa at some kind of national champion of high fares. But there's lots of growth out there. And we certainly -- Central Europe is a market that is growing very strongly for us. It did get disrupted, and it was the market that was most disrupted by the â invasion of Ukraine. We are very committed to returning to Ukraine as soon as it is safe to do so. We're hiring quite a number of Ukraine pilots and cabin crews specifically so that we can reopen -- we can restore basis in Ukraine if or whenever it's safe to do so when hopefully, the Russians are successfully repulsed from Ukraine. But we have far more growth opportunities that we have in front of us the next four or five years. We could readily deploy all of the 130 additional aircraft we are taking from Boeing over the next three years this summer if we needed to. We don't, obviously. And where there's more and more airports coming to us looking or coming to Eddie on the new routes team, looking for additional growth. So France and Germany can wait. And while they're waiting, I think they will sow the seeds of a much more favorable growth environment for Ryanair expansion there in the next couple of years once they've had 12 or 18 months of stagnation or high fares. Thank you. We have time for one further question that comes from the line of Harry Gowers at JPMorgan. Please go ahead. Your line is open. Hi. Good morning. Yeah. Just a quick one on ancillaries, if I can. So obviously, it continues to go well. So any early thinking on how much year-on-year growth, if you can maybe squeeze out of ancillary per pax in year-end to March '24? Thanks. Yeah, I wouldn't get in too much detail on it. I don't expect there'll be much additional growth in ancillaries on a per passenger basis. We expect ancillaries to continue to grow in line or maybe 1 percentage points or 2 percentage points ahead of traffic growth for the next year or two. We are still seeing customers switching into buying those services like the reserved seats priority boarding. We're certainly beginning to see the start of meaningful growth in duty-free sales on all the routes to and from the U.K. I think that's been an area where a number of airports who are very focused on adding U.K. routes or connecting U.K. routes because the airports can get advantage of duty free. It's one thing I'm always made that when an airport like Heathrow is there looking for further cost increases. John Holland Kaye is very vocal on everything except the benefit Heathrow from these Duty Free sales at the moment. But thankfully, Heathrow is not an airport which we operate. But it's certainly, I think, going to be -- so we would hope to see some additional growth in onboard Duty Free sales on the 40% routes we operate that operate to and from the U.K. But other that, I don't think there's anything significant in ancillaries for the next year or two. And certainly, when we finalize the budget between now and the end of March, we would hope to see traffic grow 10% in the next 12 months and ancillaries probably add another 1% or 2% on top of that. It will be a fairly modest budget for ancillary growth. Okay, folks. So thank you very much for taking part of the call. Again, I think we've had a strong Q3. Q4 will be loss-making, which is always helpful. I think we just take some of the irrational exuberance out of this. We are growing strongly. I think Easter and the summer looks good. If I could leave you with any two parting, one parting thought. And that is I would refer you to the slide -- investor slide presentation. We put them on the website. Look at Page 4, which is the unit cost gap between us and every other airline in Europe and how that has materially widened during COVID. I think that widening -- that cost cap will widen further in the next 12 months, particularly as the competition are paying higher financing and lease costs for their operating leased aircraft. And the other side to look at is Slide 9, which is the very strong market share gains. We will continue, we think, to take significant market share. We're going to add between 45 and 51 aircraft in the summer of 2023 in a marketplace where nobody else is adding any capacity. Yes, Weeze are taking some aircraft deliveries. But more -- a majority of that is being diverted towards serving routes into the Middle East, which is a market in which we don't compete. And as long as there are no black swan events and there is a reasonably strong recovery or transatlantic traffic and Asian traffic into Europe in the summer of 2023, then I would be modestly hopeful that we will see a strong first half of FY '24. Easter will be in Q1. We would hope to see a reasonably strong trading environment into Q2. As long as it's not disrupted by French and German ATC, we will be continuing to add capacity. We'll be continuing to keep fares low or significantly lower than any competitor because we're the airline delivering growth. And we would hope that, that will result in a second year of strong operating profit for Ryanair in the next 12 months. If it does, we will then be able to fund the pay increases we're committed to with our crews, our pilots and cabin crew. We will pay down the debt at, the bonds in March and in August. We would hope to get very close to zero net debt by March 2024. And then you have my word speaking as a large shareholder, that we will be addressing shareholder returns in the spring of 2024 as our priority. Thank you very much, everybody. And Neil is doing a couple of investor meetings in London. I think he's in London and Frankfurt and Paris in the next three days. If anybody would like a meeting or to attend one of the group meetings that Sydney and Davies are kindly hosting, please contact us through Sydney or Davies that we try and put you in. Otherwise, anybody wants to come over here and meet with us in the next couple of months, we'll be happy to see you here in Dublin. And hopefully, we can avoid any black swans or any disruption to trading, not just for us, but for the rest of the industry, I think after two years of COVID and then the Ukraine invasion, this is an industry that deserves one or two disruption-free trading years. Thanks very much, everybody. Hope to see you all soon, and thank you.
EarningCall_952	Good morning and welcome to the RLI Corp Fourth Quarter Earnings Teleconference. After management's prepared remarks, we'll be opening the conference up for question-and-answer session. Before we get started, let me remind everyone that through the course of the teleconference, RLI management may make comments that reflect their intentions, beliefs and expectations for the future. As always, these forward-looking statements are subject to certain factors and uncertainties which could cause actual results to differ materially. Please refer to the risk factors described in the company's various SEC filings, including in the Annual Report on Form 10-K as supplemented in Forms 10-Q, all of which should be reviewed carefully. The company has filed a Form 8-K with the Securities and Exchange Commission that contains the press release announcing third quarter results. During the call RLI management may refer to operating earnings and operating -- and earnings per share from operations, which are non-GAAP measures of financial results. RLI's operating earnings and earnings per share from operations consist of net earnings after the elimination of after tax realized gains or losses and after tax, unrealized gains or losses on equity securities. Additionally, operating earnings and operating EPS exclude equity and earnings of Maui Jim and related taxes due to the sales of RLI's investment. RLI's management believes these measures are useful in gauging core operating performance across reporting periods that may not be comparable to other companies' definitions of operating earnings. The Form 8-K contains a reconciliation between operating earnings and net earnings. The Form 8-K and press release are available on the company's website at www.rlicorp.com. Participating with me are Craig Kliethermes, President and CEO; Jen Klobnak, Chief Operating Officer; Todd Bryant, Chief Financial Officer. Todd, will kick things off with the financial results for the quarter. Craig and Jen will offer some commentary on current market conditions, our product portfolio and possibly reinsurance just to get there. After our prepared remarks, we'll take your questions. Then Craig, will close with some final thoughts. Yesterday we reported fourth quarter operating earnings of $1.53 per share. With both underwriting and investments contributing. Overall, we posted a combined ratio of 82.1 for the quarter and experienced continued topline growth, which was up 14% in the quarter. On a full-year basis, gross premiums written increased 16% and we posted an 84.4 combined ratio, marking our 27th consecutive year of underwriting profitability. Investment income advanced nearly 60% in the quarter and closed the year at 25%. Reinvestment rates moved higher, as did our invested asset-base driven largely by funds received from the sale of Maui Jim. Operating cash-flow was negative for the quarter. As we paid $116 million in taxes on the gain from the sale of Maui Jim. This amount is included as a reduction to operating cash-flow, while the cash proceeds received from the sale are reflected as cash-flow from investing in the third-quarter. Apart from this nuance, Operating cash-flow was very similar to last year on both a quarter and year-to-date basis. Realized losses of $3 million in the quarter were the result of adjustments to Maui Jim's pre-close financials, which increased our equity in Maui earnings and correspondingly decreased on realized gain recorded on the sale. This adjustment had no impact on net earnings. For equity securities, change in unrealized gains and losses reflects a $34 million gain in the quarter as the market rallied in closing the year. As mentioned on prior calls, large movements in equity prices between periods can have a significant impact on-net earnings. But you can see on the comparative quarterly and year-to-date results. Craig and Jim will talk more about the market and premium in a minute, but at a high-level, all three segments experienced growth as we continue to benefit from favorable market conditions and most areas of our business. From an underwriting income perspective, the quarter's combined ratio was 82.1 compared to 80.7 a year-ago. Our loss ratio increased 2.6 points, due to higher weather-related losses. In the quarter, we incurred $8 million in storm losses. $7 million in property and $1 million in casualty from a number of named storms. At the same time, we reduced our estimate of net losses from Hurricane Ian by $2 million, which is now at the bottom of our initial range estimate. Claim volume in severity has come in below initial expectations for the storm, which occurred very late in the third-quarter. From a prior year's perspective, we continue to benefit from favorable reserve development. Casualty posted $40 million of favorable loss emergence with contributions from a number of product lines. Property posted $4 million in favorable emergence, these largely to reductions in reserves for prior year's storms. In addition, we experienced improvements in the current year's underlying loss ratios for both property and casualty. Year-to-date, property's underlying loss ratio declined 4 points compared to last year, due lower attritional losses in both inland marine and commercial fired, while casualties declined one point aided by the shift in mix of -- in business mix and overall rate increases. Moving to expenses, compared to last year, our quarterly expense ratio decreased 1.2 points to 40.3. On a full-year basis, our expense ratio declined 0.8 points to 39.5. Both results are reflective of improved leverage on our expense base, as net premiums earned continued to grow. Turning to investments. Total return performance improved and came in at 2.3% during the fourth-quarter and minus 11.5% for the year. Without question, it was a difficult year for the markets. So as a long-term investor, we were encouraged by stabilizing equities and higher bond yields, which are accruing to investment income. In the quarter, we continue to invest in high-quality bonds with incremental cash-flow and net and have yet to pivot towards riskier assets. Apart from a short-lived short-term portfolio associated with the Maui Jim proceeds, new money yields continue to exceed 4%. Moving to other investments. We recorded $7 million in investee earnings in the quarter, with Maui Jim contributing $3 million and Prime posting $4 million. The result for Maui was due to the true-up of pre-close financials, as I mentioned previously. This adjustment had no impact on-net earnings for the quarter as realized gains were reduced by equal amount. As noted in the press release, we have excluded earnings from Maui Jim from operating earnings. As such, this adjustment does not affect those earnings either. On a year-to-date basis, investee earnings are down significantly, due largely the transaction related expenses incurred by Maui Jim from a company sale. As a reminder, we received $687 million in exchange for our shares in Maui Jim in the third quarter. Final proceeds remain subject to customary post-closing working capital and other adjustments. We expect most of that adjustment process to conclude during the first half of 2023 and could modestly increase this amount. For 2022, our net earnings with realized gains, investee earnings, taxes and other sales related amounts reflect $434 million or $9.49 per share from the sale of our minority investment. The combination of solid underwriting investment results took book value per share to $25.89, up 25% from year end 2021, inclusive of dividends. This growth benefited from a gain associated with the sale of Maui Jim, a portion of which was returned to shareholders nearly at $7 per share special dividend in December. All-in all, a very good quarter and strong finish to the year. As Todd mentioned, we finished the year with continued momentum, reporting excellent underwriting results and double-digit growth for the quarter. 2022 marks our 27th consecutive year of underwriting profit on both a net and gross basis. Now benefited from back-to-back years of top-line growth in excess of 15% and another year of rate increases in excess of underlying loss trends across the property and casualty segments. This has result to the very good returns that we are pleased to report to our shareholders. Our underwriters have been able to grow almost all the products within our portfolio, but there are few pockets where we still face stiff competition. And hard reboot in the reinsurance market continued multifaceted inflation and weakened balance sheets should provide a stronger backbone to the industry's underwriting discipline and be supportive of more firming. Assuming the competitive environment response rationally, we anticipate rate increases and disruption that should create new opportunities for profitable growth. We've already seen additional improvement and price terms and conditions in the property market at the end of 2022. Over the last decade, we've been able to access low attaching earnings protection from high quality reinsurers at favorable prices. At each reinsurance renewal, we evaluate the risk reward equation carefully, using our actuarial team and reinsurance brokers to inform decision making. Given our conservative balance sheet, diversified portfolio of specialty products and underlying profitability, we have always retained the optionality to take more net, where the expected reinsurance ceded margins exceed fair return. We believe the cost of property reinsurance increased beyond that point at one-one. As a result, we adjusted our retention and co-participations accordingly and are comfortable with our new reinsurance structured. We remain optimistic about the expected underlying profitability of our portfolio. We believe, we are in a strong position to capitalize on disruption that we expect too soon. I will turn it over to Jen, who will provide more detail on the quarterly results and the reinsurance placements made on Monday morning. From a product portfolio standpoint, the property segment led our top and bottom-line for the quarter. Premium grew by 40%, while underwriting profit increased 61% with all major sub-products contributing. Premium in our E&S property book grew by 54% including material rate increases for all coverages. The hurricane rate increased from 29% for the quarter and has been accelerating throughout 2022. We believe this trend will continue given the disorderly market conditions, that are further supported by increased reinsurance costs. I'll provide more detail on our reinsurance renewal towards the end of my comments. It's worth noting that our E&S property division achieved both a gross and net underwriting profit for the year, notwithstanding our second-largest natural catastrophe loss in RLI's history. Our Marine product groups also exhibited strong growth with premium of 17%, including a 6% rate change for the quarter. Marine is now a consistent contributor to our bottom-line and this quarter was no exception. They experienced very little loss activity in the quarter and their growth over-time that help to right size their expense ratio. Finally, our Hawaii Homeowners product grew premium by 17% due to our local underwriters efforts. The Hawaii team is committed to providing responsive service, which has helped us win new accounts. Overall, we are very pleased with the property segments 62 combined ratio for the quarter. Turning to the Surety segment, premium was up 5% in the quarter, which was split between contract and commercial surety. Contract surety premium continues to experience a lift from inflation and the cost of construction project and increased public spending on infrastructure projects. We also won some new accounts through our active marketing efforts. Commercial Surety experienced growth by expanding both existing and new account relationships. Surety produced an underwriting profit with very little loss activity in the quarter. We continue to carefully pursue growth opportunities, while monitoring the financial results of our principles closely, given the evolving economic environment. The Casualty segment's premium grew by 4% in the quarter, despite some headwinds. The public D&O market is under pressure, we exited accounts with unreasonable changes in terms and conditions and provided a 9% rate decrease on our renewal. The exit from Cyber Liability and reps and warranties business also affected the quarter-over-quarter premium comparison. Excluding that premium reduction, and casting our executive products group, the casualty segment would have grown 10%. Energy Casualty is another area in which we are retrenching, specifically in excess layers. We wrote almost $14 million of excess energy liability business in the 2022 calendar year that will be run-off throughout 2023. Our Transportation business unit grew 13% in the fourth quarter, although we are seeing a lot of competition in the truck market. Rate increased 8% in the quarter driven by public and specialty commercial autos, which are experiencing more stable market conditions. Personal umbrella was up 16%, as we continue to collaborate with our production partners to improve our processes and better meet customer needs. The personal umbrella market continues to be disruptive, as many of our competitors for standalone umbrella have significantly reduced their appetite or left the space altogether. E&S casualty grew premium by 7% with more opportunities available outside of the competitive New York City construction markets. Rate increases in excess liability business were 8% for the quarter. When looking at our bottom-line results, I also have to mention our professional services and small commercial group. This product group is in a fairly stable environment and has been quietly growing. Premium increased 9% for the quarter and they achieved a very good combined ratio. This group supports the construction industry on an admitted basis and covers classes of business ranging from architect to small to mid-sized contractors. The expertise we have developed in underwriting and claim handling over-time, continues to meet the needs of our customers. Now I'll turn your attention to our reinsurance purchased on January 1. We renewed about 2/3s of our reinsurance coverage this month. The reinsurance market changed abruptly in the fourth quarter. Casualty treaty coverage renewed as expiring with rate change estimated at flat to up 15% on a risk-adjusted basis depending on the line of business. We increased co-participations marginally to balance the increased retention that I'll talk about in our property business. I would describe the casualty reinsurance market as orderly compared to the property and catastrophe revenue. As our property per risk treaty has done loss impacted over the last few years, we renewed it with an estimated 40% risk-adjusted rate increase, an increase to first dollar retention to $2 million. We renewed our catastrophe treaty with a roughly 45% of risk-adjusted rate increase and an increase in first dollar retention from $25 million to $50 million. Coverage is similar to expiry, including renewing our expiring reinsurance treaty limits for hurricane coverage and adjusting our limits for earthquakes to match our exposure. We have the advantage of writing almost all critical CAT risk on E&S papers, which means we can adjust rates and terms and conditions very quickly. Throughout the latter half of 2022, we had already been tightening terms and conditions, reducing commission and increasing our benchmark pricing of property CAT business, anticipating the increase in reinsurance costs. We have been writing catastrophe insurance for about 40 years. The last-time we materially increased our catastrophe retention was in 2007. Since that time, our property segment's premium has grown over 140%. Our consolidated premium has more than doubled and shareholders' equity has grown over 50%. We maintained our retention, because the economics made sense. Our reinsurance strategy going-forward were primarily focus on buying traditional reinsurance from financially secure partner in supporting correct term and have a high regard for our business model and disciplined underwriting. We will supplement the support with additional capital sources to replace the reinsurers, but become less relevant and commoditize their role. We will continue to assess our reinsurance purchases to maintain a balance in the risk-reward economics. Given the increase in cost at January 1, we anticipate further rate increases on our primary business and believe the E&S property market remains attractive. A great quarter and another year of differentiating underwriting results. We believe, we are in-depth risk managers, the proof is ultimately determined by results. Each day, we seek better ways to be the most profitable, diversified portfolio of specialized products in our industry, while meeting the risk transfer needs of our customers. We do this by adapting and reoptimizing our portfolio and weighing opportunities subject to the constraints we control and those we operate within. We will continue to serve our customers' needs with a focus on stability and consistency. We will work to grow our business that are profitable, invest in new and existing businesses that provide opportunity and from time-to-time rehabilitate or exit the key products that may be required. Our ability to be agile and adapt to the market environment is reflected in the 27 consecutive years of underwriting profit we have delivered to shareholders. The engine of our success is founded in the 1,000 associate owners who show-up every day, focused on the long-term success of their company with a vested interest in delivering the best outcomes for our customers and our shareholders. I want to thank all our RLI's associate owners for another tremendous effort in 2022 and for taking care of our customers with their specialized knowledge and expertise, outstanding service, stable appetite for risk transfer and deep relationships that are forged and reinforced over a long period of time. Well, good morning, everyone. Thanks for the comments. Can we go back to the discussion on the reinsurance renewal for 01/01/2023. I believe, I'm -- the retention has moved up to $50 million. Can you give us a sense? I know things have changed, but how that would have affected with the higher retention. The reported CAT loss on a net basis for 2022 and 2021, have you had that higher retention? I'll have a look back to '21, this is Jen by the way, but I can tell you for Ian, it was probably $10 million to $25 million of additional net loss depending on which underlying treaties we're treating, so that's a rough estimate. The other thing Greg, to note there and I think if you think we could just put a square number to it, but as Jen mentioned, we range it. Because, you don't know, how some of those property per risk treaty will play. And the other thing to really, think about from a rate increase that we have gotten and are continuing to get. There's a lot more dollars in that property bucket that play well as far as the total underwriting results there from this segment. I understand. That makes sense. Can we pivot just given the reserve development. I know you commented about prior year development. And your view on accident year loss ratios. So I'm just curious, some of the numbers you reported sort of counterintuitive, just because of all the inflationary pressures we've heard about. What's your -- when you think about specifically the casualty and property segment. What's your view on sort of a loss pick - accident loss pick assumptions in '23 versus where they were in '22, et cetera. This is Todd, Greg. I think really the items you mentioned whether we want to call it inflation or social inflation, what you read about out there. That certainly influences are actuarial view. I think you'll see it really in 2022 and normally you're going to see it in the year. I think we've talked about that Craig mentioned to from a loss cost trend standpoint. So we do believe it's adequate in total and really in most areas. But I know we've talked before as well that our actuaries, they're going to weigh all that in, they're going to typically take the longer-term trends, but they are influenced in periods -- shorter periods of uncertainty or inflation, other factors, over a short-term trends are a bit higher, that's going to influence the initial booking ratio. It can also influence how long we hold-on to those initial fix and potentially expand loss reporting period. So all those things factor into the view, whether it be on casualty, all our other segments, so that has an influence there. Okay. Thanks for that color. I guess -- and just as a follow-up, my -- well, another question that would be my last question, which is, now that your property cat program has renewed, what's -- is it changing sort of your strategy as it relates to growing your property business? Or does it reinforce the strategy you have in place? Or how does this -- how does the reinsurance -- the increased retentions change sort of the matrix of ROI as we think about '23 and '24? That's my last question. Sure. Thanks, Greg. This is Jen. I would say that our catastrophe strategy is constantly evolving. So things that are in that space are happening all the time, whether there are events or no events can impact how you're approaching that segment and the various costs driving that business and this range over time as well. So this latest chapter, we are revisiting and have revisited throughout 2022, as we anticipated some change in the reinsurance market. And Ian, of course, provided something to talk about. And so that also had us looking at what we need to do. Throughout 2022, we had been increasing rates throughout the year, and we anticipate that, that trend is likely to continue. We've honed in on terms and conditions, watching deductibles, co-insurers, things of that nature to make sure that we are properly covering the exposure, but also sharing the loss with our insureds where that makes sense, depending on all of the factors that drive the outcome. So part of it is premium, but part of it is coverage as well. So you have to see how all that kind of comes together. So going forward, it's going to be similar to before. We're going to be very active if an event happens and helping our insurers during that time, put boots on the ground, which is what we've emphasized a lot in 2022. That gives us really the best sense of what's needed in that market and how we need to continue to evolve. That's really the best input, it's from our insureds and also our producers to some extent as well. So I would say we're not intending to grow exposure significantly in 2023. We're looking more to optimize what we have on the books. And so that's reflected in the fact that we did not buy additional reinsurance limit on January 1st. So we'll work within the capacity we have at this point in time and continue to have really attractive returns, hopefully, on that portfolio. Hi. Good morning, and thank you for taking my questions. I have two questions regarding the property. One is with the increased rates, but also the increased retention, is it reasonable to think of more seasonal volatility of your earnings stream with higher margins in non-cat quarters and obviously a little more impact in cat quarters? And then as a follow-up to that question, we've heard tell of potentially more capital coming back to the market in the June reinsurance renewal period. If some of that seems reasonable, does that provide you an opportunity at the June renewal period to add on some additional coverage that might cover some of the increased retention that you've taken down at this point in time? So, Casey, this is Craig. I'm going to jump in here, although I think Jen is fully capable to answer the question. But the -- I mean, certainly, there'll be a little more volatility. I mean, although I would argue there's a lot more premium, that's going to be -- that's going to offset some of that volatility. So, we're gaining a lot more premium in the pool. So from a ratio standpoint, I'm not sure that you're going to create a lot more volatility from a seasonal standpoint. But certainly, there will be more by raising your retention. To answer your second question, absolutely, are we -- will we be open to adapting our strategy, as Jen says, it changes every day, the depth to the constraints that we have. If there's opportunity for capital to re-enter the market or come back to the market and realize that the rates were a little bit above what we believe were fair, certainly, we would take advantage of the opportunity. We think there's going to be plenty of opportunity out there. So, as Jen mentioned, we optimize their portfolio and we're going to have -- I mean, we're going to have a lot of options in regards to what we want to write, what we don't want to write. We've already seen that, by the way, in the last couple of months of 2022. We expect to continue to see that. And if you recall, last year, just to your point, I mean, we added capacity during the year as we saw there was opportunity. If we continue to see the opportunity and acquire that capital at a reasonable price, we would certainly take advantage of it. Yes. I'll just add, if I can. As you think about volatility, we did retain a little bit more on the Casualty side too, and we'll continue to evaluate that through the year as we renew other reinsurance coverage. The point being, we have a very diversed product portfolio. And while a lot of our products behave very well on a consistent basis, there is some that have a miss one quarter or another. And the diversity of our portfolio steps in, and has produced very good results overall. So if you look at our results over the 27 years, there are segments that have had an underwriting loss in one of those years, but the other segment stepped up and provided us a nice underwriting profit on a gross basis even for those years. So, I think you know, that diverse portfolio is really a big plus for us, and I would point to that a little bit to answer your forwarded question. Right. Thank you. Secondly, with a fairly large increase in your NII, and I heard your comment that some of that may have come from investing short-term proceeds from Maui Jim. Do you have a number that is more of a -- reflective of a recurring NII rate? I mean, how much should we strip out of that $28 million that was sort of bonus money that came before you paid out the dividend and then the taxes? Yes. Hey Casey, it's Aaron. I'll take that one. Yes, fortunately, short-term rates were higher than they've been in a long period -- over a long period of time. And cash actually has a return on it these days, which did help us in the quarter. It probably represents about $4 million of kind of bonus investment income in the quarter from those short-term proceeds that were invested very quickly after we received them on 9/30. Great, thanks, good morning. One quick question and one maybe bigger-picture. On the quick side. Todd, if I didn't miss here, you talked about adjusting the accident year picks for Casualty and Property but not surety, which had a phenomenal underlying loss ratio. Did I just miss here or is there something else going on in surety? Nothing else going on, Meyer. I mean, I think we're being cautious there. Certainly, given the economy of that type of thing. I mentioned specifically property because it was larger on the current accident year, if you will the four points. And casualty, just because it's a much bigger book and certainly weighs in on things there have been, nothing unique on the surety side now. Okay, fair enough. And then, I'm thinking about, Jen's comments about maybe sort of the overall exposure base in property? And I'm wondering, whether when you look-back the portion of excess capital that you retained from the Maui Jim proceeds? Looking back to that seemed like it was the right about now that you have better clarity on reinsurance. Yes, with -- sorry, this is Jen again. With our diverse portfolio, we kind of look at the entire portfolio as we evaluate our capital adequacy. And I would say, given the growth of our portfolio over the last few years, in particular, you think about what drives the need for capital, that additional capital really does support the current and some near-term growth that we think could happen in the future. And Meyer, I'll just to add. And Todd may just help you here too. I mean, I do think that retaining that amount of capital gave us the flexibility to -- and the options that we talked about is increasing co-participations and retentions that gave us some flexibility in regards to what we want to do. I think we didn't want to be totally at the mercy of the reinsurance market, given the abrupt change in appetite results. So, I don't know if we actually use all that, but it gave us the flexibility. So... Yes. Good morning. I guess continuing on the reinsurance theme, as you correctly prognosticated. When you think about trying to pass along your 40% rate increase to customers on renewal business, on property and cat-exposed business, I mean, what does that amount to sort of a 20% or 25% rate increase that your customers would need to take in order to match the increase that you've paid? Well, so this is Jen. I would say we've already built in some rate increase throughout 2022, anticipating this cost. And I'd like to take a moment to talk about our customers. So as we look at our renewal process, we call it 30 days to 60 days out, so that we can help our insureds manage their business. So they've got a lot of increased costs already. They've got increased employee costs, they have, in some cases, increased gas in transportation costs, all kinds of costs that are going up were one component of their business. And we try to help manage their ability to stay in business by not taking too drastic of actions. In contrast, I would say, the reinsurance market acted a little more quickly on their change in both attempted change in coverage as well as cost. And so, it's difficult to turn on a dime and pass that along, nor is it really something you want to do when you're trying to be very consistent in the primary market. So, we'll continue to push on each renewal what make sense. I mean, we are individually underwriting this business, but particularly in the state of Florida, for example. So as the business comes in, we're looking at all the details of that exposure and that location and the various dynamics in that area to understand what has changed from the prior year. And yes, our costs have gone up. So yes, we will increase costs to some extent. But we're going to try to manage it over time so that our insurers can continue to be in business. The danger of this abrupt change is that the insurance marketplace actually decreases, because people will attempt to buy less coverage or less limit. And once they start doing that, that's never going to come back. And that's a shame for the industry because then the opportunity decreases. So, in partnership with our brokers who are accepting a little bit less commission, we're able to provide that change in coverage and terms a little more gracefully to our insurers. Well, I was just going to add, Mark, but just in addition, we did after updating our benchmark pricing for the additional reinsurance costs, I mean, we still believe that our business is priced above our benchmark pricing to hit a targeted return. It doesn't mean we're not going to try to get more rate and pass some of this along, but we also want people to be comfortable that we believe current market pricing is still in excess of what we think what our benchmark pricing is. So, a lot more of the market, I mean go out Okay. I mean, that's helpful. And Jen's comment, I mean, was actually going to sort of be my next question was, are you seeing any evidence that customers are basically doing what you did in raising retentions and lowering -- changing their limit strategy such that -- I mean I know from your perspective, you might be getting whatever a 20% rate increase, but in fact, the actual amount of premium growth would be considerably smaller than that. Are you seeing that behavior yet? Or that's something that we would anticipate over 2023? Yes, Mark. We are seeing that particularly in Florida, where insurers are buying full-limit coverage for their fire exposure, but not for the wind exposure. And they have to work with their banks or their mortgage providers to make sure that, that all passes muster. But that is something that we're witnessing starting to creep into this environment. That's definitely consistent with some comments that one of the insurance brokers made earlier this week. Was there something you were adding, Craig, I'm sorry? Obviously, deductibles are certainly increasing on a percentage basis. So, I mean the management deductibles are increasing pretty much across the market, not just us. Okay. Thanks for all of that. And then you had mentioned in the comments that you were pulling back from some of the cyber liability business. Is that something you can quantify in terms of how many dollars of annual premium run rate that had been just really to run rate what the outlook would be for the upcoming year? Sure, Mark. We actually exited that business in the -- during the fourth quarter last year. So, this was the year of runoff, which we've just completed for large account cyber facility. Yes, no problem. I had that confused. My mistake. And then changing gears over on the investment side. I almost feel obliged to ask Craig what he's going to do with the Maui Jim proceeds even though I already know the answer because I've been asking it for a year now. But, I guess that's what I'm going to ask is, are you still considering or evaluating other equity investee opportunities? Or is that something that you're content with just the prime business and if an opportunity falls in your lap, you'll look at it, but you're not really seeking anything there? I'll say some and maybe Aaron will join in. But I mean, we're certainly always looking for opportunities. Every day, we look for opportunities. So if we find a good opportunity for an investment in that, we would take advantage of that. I'll only add, Mark, old habits die hard, I guess, in asking those questions around Maui Jim proceeds. We are investing every day, general account assets of the Company. And the Maui Jim situation going all the way back to the mid-'90s was a very unique situation for us, definitely. Then we tend to look a lot more things as Craig mentioned, a little closer to home I'll call them in terms of in our space or around our space, but we do look a lot. Hey, thanks. Good morning. Apologies in advance for another reinsurance question, but, can you help us - thanks, how are you? Can you help us just with maybe the question is kind of how did the dollar spend change on the property side? And I know rates went up 40%, 45% across the two treaties. But obviously, you're retaining a lot more of the most expensive layers. So, as we think about kind of gross net retention, like what sort of order magnitude or dollars, if you can, might the dollar spend change there? Let's see. This is Jen. I would say our -- it will depend, of course, ultimately on what our rate change is for 2023. So, we're not anticipating a material change given we expect to see -- the rate increases will continue to some extent. But there is some additional cost, obviously. So, might be a point or two of retention, that's lower, but it's not going to be significant. Well, thank you. Will take all help we can get. You have the cheese, that's gone right now. Will take all the help we can get. There are no further questions at this time, so I would turn the conference back over to Mr. Craig Kliethermes for some closing remarks. Sure. Thank you all for joining us. Again, we think it was a good quarter, good year. We're just going to get back to work. Talk to you next quarter. We're just going to keep you up on what we do. Thank you. Ladies and gentlemen, if you wish to wish to access the replay for this call, you may need to do so by dialing 1 (866) 813-9403 with an ID of 627187. This concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.
EarningCall_953	Good day, and thank you for standing by. Welcome to the Q4 2022 Midland States Bancorp Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakersâ presentation, there'll be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to your host today, Tony Rossi of Financial Profiles. You may begin. Thank you, Kevin. Good morning, everyone and thank you for joining us today for the Midland States Bancorp fourth quarter 2022 earnings call. Joining us from Midland's management team are Jeff Ludwig, President and Chief Executive Officer; and Eric Lemke, Chief Financial Officer. We will be using a slide presentation as part of our discussion this morning. If you've not done so already, please visit the Webcasts and Presentations page of Midland's Investor Relations website to download a copy of the presentation. 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 Midland States 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 factors are discussed in the company's SEC filings which are available on the company's website. 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 website, 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, everyone. Welcome to the Midland States earnings call. I'm going to start on Slide 3. Our fourth quarter performance capped a very successful year in which we generated a record level of earnings for the company. One of our goals over the past few years was to bring our level of returns more in line with our peer group and we believe our performance this year reflects the strong progress we have made in this area. For the full year, we generated a return on average assets of 1.31%, up from 1.18% in 2021 and a return on average tangible equity of 20.8%, up from 17.9% in 2021. Our improved profitability represents our strong execution on our strategies to generate profitable growth and realize more operating leverage, while at the same time prudently managing our growth as reflected in our continued strong credit quality. We have built a stronger, more diversified franchise with higher quality, more consistent sources of income, which has resulted in the steady improvement we have seen in our financial performance. Specific to the fourth quarter, we continued to generate strong financial performance despite moderating our level of loan growth given the likelihood of economic conditions weakening in 2023. We generated net income of $29.7 million, or $1.30 per share, which included $17.5 million gain we realized on the termination of forward starting FHLB interest rate swaps and $6.7 million in charges we took on commercial mortgage servicing rights and impairment on other real estate owned. On a core earnings basis, we continue to generate a higher level of profitability with adjusted pre-tax pre-provision earnings coming in at $33.2 million. We were able to continue generating solid loan growth even while being more selective in our new loan production. Our total loans increased at a 7% annualized rate with most of the growth coming in our commercial portfolio. Our Equipment Finance business has had another strong quarter, which contributed to the growth in commercial loans as this portfolio has now surpassed $1.1 billion. Our Community Bank group continues to be highly productive and with the increased exposure to higher growth markets we are seeing a larger volume of attractive lending opportunities, which has enabled us to continue generating solid loan growth while being conservative in our underwriting and pricing. We are seeing good contributions across our footprint, but in particular, we are seeing increased production out of our Eastern Illinois markets, which includes the Chicago MSA and the St. Louis market, where we have made investments to increase our business development capabilities over the past couple of years. For the full year, our Eastern Illinois loan portfolio increased 22%, while our St. Louis loan portfolio increased 40%. We also saw double-digit deposit growth in these markets as our teams are doing an excellent job of developing full banking relationships. As I indicated earlier, we have generated a higher level of earnings and loan growth over the past few years, while maintaining a conservative approach to risk management. As a result, we continue to see good asset quality trends. While we had a slight increase in non-performing loans in the fourth quarter, our net charge-offs were just 3 basis points of average loans. And importantly, at this point, we continue to see generally healthy trends across the portfolio with no meaningful change in delinquencies or watch list loans. Our strong financial performance continues to enhance the value of our franchise. During the fourth quarter, our book value per share increased 2.4% while our tangible book value per share increased 4%. And with the exception of our total capital ratio, which decreased due to the payoff of $40 million in subordinated debt in the fourth quarter, all of our capital ratios increased from the end of the prior quarter, as we continue to make progress on one of the most important financial goals. At this point, I'm going to turn the call over to Eric to provide some additional details around our fourth quarter performance. Eric? Thanks, Jeff and again, good morning, everyone. Before we move on, I would like to note that this is our first quarter reporting net income available to common shareholders following the capital we raised through the preferred stock offering in August. Our fourth quarter financials included the payment of the preferred stock dividend for the fourth quarter, as well as the portion of the third quarter after the stock was issued. Going forward, without the stub period included the impact to net income available to common shareholders will be $0.04 per share less per quarter. Now moving on to Slide 4, we'll take a look at our loan portfolio. Our total loans increased to $108 million from the end of the prior quarter. Most of the growth came in our commercial and construction portfolios, which more than offset a small decline in our commercial real estate portfolio. Equipment Finance was the largest contributor to the commercial loan growth as the fourth quarter is typically a seasonally strong period in this business. We also had a small increase in our consumer loan portfolio, which was attributable to an increase in loans generated through our new partnership with LendingPoint which more than offset a small decrease in our GreenSky portfolio. Jeff will talk more about our relationship with GreenSky later in the call. Now turning to Slide 5, we'll look at our deposits. We had a small decrease in total deposits from the prior quarter, largely due to declines in non-interest bearing and savings deposits. The decline in non-interest bearing deposits was primarily due to lower period end balances of commercial FHA servicing deposits as well as more commercial depositors moving some of their excess liquidity to interest bearing accounts in order to capitalize on the higher rates now being offered. As we indicated on our last call. We have selectively raised rates on deposits in order to continue funding our loan growth. We continue to see the opportunity to add high quality lending relationships with new commercial clients that we believe we can expand over time and we believe it is in the best interest of the company and our shareholders to add these relationships, even if the results in near term upward pressure on our deposit costs in order to fund the initial loans. Now looking at Slide 6, we'll walk through the trends in our net interest income and margin. The net interest income was down slightly from the prior quarter as a higher average balance of interest earning assets was offset by a decline in our net interest margin. Our net interest margin decreased 13 basis points from the prior quarter as the increase in our cost of deposits exceeded the increase we saw on earning asset yields. We've been able to generate our strong loan growth, without compromising on loan pricing and as a result, we continue to see positive trends in our average rate on new originations. In the month of December, the average rate on our new and renewed loans was 7.1%, an increase of 150 basis points from the month of September. In particular, we are seeing higher rates on commercial loans including equipment financing. As we indicated on our last call, we plan to take some steps to move the balance sheet into a more neutral position in terms of interest rate sensitivity and the termination of the forward-starting interest rate swaps has done that. Our goal this year is to try to keep our net interest margin relatively stable. The rapid increase in interest rates impacted our cost of funds significantly in the fourth quarter. However, if interest rate increases slow or moderate. It will allow our fixed rate assets to reprice and stabilize our margin going forward. Turning to Slide 7, we'll look at the trends in our Wealth Management business. Our assets under administration increased by $150 million from the end of the prior quarter, due to both market performance and inflows from new clients. The increase in assets under administration resulted in a slight increase in our wealth management revenue compared to the prior quarter. On Slide 8, we will look at non-interest income. We had $33.8 million in non-interest income in the fourth quarter, which included the $17.5 million gain from the termination of the forward-starting interest rate swaps. Excluding this gain, most fee generating areas were relatively consistent with the prior quarter. As we indicated on our last call, we are currently in the process of selling the commercial mortgage servicing rights portfolio, which will eliminate a source of earnings volatility. We are working with a potential buyer and expect the transaction to close during the second half of the year. We expect to retain the servicing deposits related to the commercial mortgage servicing rights portfolio. However, they will reprice to market rate upon completion of the sale. Now turning to Slide 9, we'll review our non-interest expense. Our non-interest expense was up from the prior quarter, primarily due to two non-recurring items. First, as part of the sale of the commercial MSR portfolio, we recorded a $3.3 million loss on MSRs held for sale to reflect the current valuation. And second, we recorded an other real estate owned impairment charges of $3.5 million. All the other areas of non-interest expense were relatively consistent with the prior quarter. For the near-term, we expect our operating expense to be in the range of $43 million to $44 million per quarter. Turning to Slide 10, we'll look at our asset quality trends. Our non-performing loans increased $2.5 million from the end of the prior quarter, which is entirely attributable to one commercial real estate loan. Within the consumer portfolio, the delinquency rate remains exceptionally low and should any deterioration begin to occur, we have approximately $41 million in an escrow account that is available to cover any losses on the GreenSky portfolio. As Jeff mentioned earlier, we had an extremely low level of loss in the portfolio in the fourth quarter with net charge-offs of just 3 basis points of average loans. We recorded a provision for credit losses on loans of $3 million, which was largely related to growth in total loans, changes in the mix of the portfolio and the impact of negative economic forecasts. On Slide 11, we show the components of the change in our allowance for credit loss from the end of the prior quarter with the provision being well in excess of net charge-offs, in the fourth quarter, our ACL increased by approximately $2.4 million, and the ACL to total loans increased by 2 basis points to 97 basis points. The increase in ACL was driven by growth in total loans, changes in the mix of the portfolio and changes in forecasts from weakening economic conditions. And finally, on Slide 12, we show our ACL broken out by portfolio. The most significant increases in coverage came in our commercial owner occupied CRE and construction and land portfolios. All right. Thanks, Eric. We'll wrap up on Slide 13 with some comments on our outlook and priorities for 2023. It's clear that the possibility of a recession is going to make 2023 a challenging year, but with the stronger franchise and earnings quality that we have built, we believe that we could continue to generate strong financial performance and a higher level of profitability while we maintain our more conservative approach to new loan production until economic conditions improve. At this point, it is difficult to provide a forecast for our level of expected loan growth given the uncertain economic environment, but we believe that we will continue to grow our total loans as a result of a more productive commercial banking team we have built, the greater exposure we have to higher growth markets like Chicago and St. Louis and the continued growth of the Equipment Finance business. Given the success we are having in generating commercial loan growth, and with the loan deposit ratio at 99%, we are now planning to accelerate our exit from the GreenSky partnership. On Tuesday of this week, we provided notice to GreenSky that we will exit the program in October of this year. Our required notice period under the contract. The contract includes certain minimum loan originations through the notice period and we have indicated the GreenSky that we will waive those minimums in order to lower our overall balances in the program. We believe that exiting the partnership will have a positive impact on our liquidity and capital, while having a relatively minimal impact on earnings. The average yield on this portfolio is currently 5%. As loans in the program pay off, the cash flow can be profitably invested in either loan originations or within the securities portfolio or used to pay-off some of our higher cost funding sources. As we've talked about over the past few quarters, one of our newer initiatives is building our Banking-as-a-Service platform, which we believe can be an important contributor to the continued profitable long-term growth of the franchise. We are being very selective in our approach to adding new partnerships in this initiative. So that we can ensure that any partners we add meet our high standards of risk management. During 2023, our primary focus will be adding partners that can contribute to deposit gathering. We are going to maintain disciplined expense management, while we focus on getting more leverage from our significant investments we have made in both banking talent and technology over the past few years. As we do this, we believe that we can keep our expense growth rate below our revenue growth rate which should help support our continued strong profitability. We have significantly strengthened our commercial banking team over the past few years and we are very happy with the group. We currently have and don't anticipate making any meaningful additions in the near term as we focus on keeping our expense levels relatively stable. However, we are making investments in the wealth management business in terms of adding some new personnel and enhancing our platform, which we believe will enable us to improve our business development efforts, increase our client base and grow the fee income that this business generates. In terms of the outlook for credit, we believe that our loan portfolio will continue to perform well given that we have a well-diversified portfolio with limited exposure to those areas that are most likely to be impacted by a recession. Most notably, office and retail commercial real estate, small business loans and subprime consumer loans. At the beginning of last year, we indicated that we are open to considering small strategic M&A opportunities that could further improve our deposit base, increase our exposure in higher growth markets or build the wealth management business. Our branch acquisition in Northern Illinois in June fit this criteria perfectly and enabled us to add low cost deposits and increase our exposure to the Chicago MSA without disrupting the organization's focus on the execution of strategies that have generated a strong improvement we have seen in our financial performance. In 2023, we will continue to be open to the same type of opportunities. And as we have mentioned in the past few earnings calls, we are focused on strengthening our capital ratios to better support the continued growth of our franchise. With the higher level of profitability that we are now generating and the lower level of balance sheet growth that we expect this year, we believe that we can continue to increase our capital ratios as we move through the year. While we expect the operating environment to be a challenging year with the strong execution we are seeing throughout the organization, we believe that we will continue to enhance the long-term value of our franchise in 2023. Wanted to check in on the loan growth side. I respect that you said, a little uncertain on the growth rate. Could you remind me the impact of GreenSky and what that would mean from a balance standpoint and then even any sort of high level thoughts on growth as you talk about being a little guarded, in other words, just Q4 growth indicative of a guarded, but yet still growing portfolio? Yeah. So, we didn't -- I'll provide some wide guide rails to GreenSky. We think at a very high level, we think the GreenSky balances could come down anywhere between $100 million and $300 million this year, depending on sort of the loan originations that we get from GreenSky during this, what we call this notice period. We've asked for GreenSky to reduce our origination, I think they're receptive to that. We're not exactly sure how that could go. If it goes, like, we would like it to, it will be on the higher end of that range and if it doesn't to be on the lower end of that range. So that's sort of from a total loan point of view, that will be a headwind. And so from there, we think we can grow the portfolio a little bit. So the commercial business and the equipment business will sort of help offset that and grow a little bit. Great. Thank you for that. And maybe just jumping over to the fee income outlook, kind of a similar kind of question, I guess, given the MSR sale, kind of expected in the latter part of the year, given your wealth management push, the puts and takes of that line item, I guess, on a core basis, kind of $16 million run rate, how should we think about kind of growth of the fee income layered in with that MSR sale? Thanks. Yeah. I think that's about right. I think that's -- you're looking at it how we think it will go. I think -- we think we can grow wealth management, that revenue is going to -- it won't leave until the end of -- more towards the end of the year. And so that growth in wealth should offset whatever we lose there, and we think we can probably do a little bit better this year than we did last year. Appreciate it. And the last housekeeping item. Eric, I think you mentioned on the preferred quarterly kind of a stub period in Q4, that comes down to, I got, $2.2 million. Is that fair on a quarterly basis? Hey. Good morning, guys. Hope you are â both doing well today. So my first question was regarding the outlook for margin. Eric, hoping you could just provide a little bit more color around kind of how you see things shaping up. Obviously, I understand the puts and takes for margins have responded this quarter the way it did. So kind of just wondering how you think about it kind of bottoming over the next quarter or so? Or do you think it could reverse sooner than that? I think kind of, Damon, how we sort of think about it is, we may, this month, in particular, see a little bit of near-term pressure on the margin just from some of the deposit costs that we sort of talked about, and from some of these deposit relationships that we brought in to fund our loan growth. But then if we can keep the Fed at 25 basis points or less and give our fixed rate portfolios a month or two after that to continue to catch up on rates, then I think we're kind of looking at a margin that's relatively stable past this month into the rest of the quarter. If you look at our equipment finance portfolio in general, we had a really solid fourth quarter at really good rates. Those are fixed rate loans, but the portfolio turns over fairly quickly. We've seen as much as 40% attrition in that portfolio. So we see some rate pick up with that each month. So I think we're kind of looking stable, plus or minus a few basis points for the next quarter. And then beyond that, we'll see how the economic conditions kind of play out. Got it. Fair enough. Okay. That's helpful. Thanks. And then with regards to the commentary about more cautious outlook for a recessionary environment. Can you give us a little guidance on the loan loss provision outlook. This quarter came in lower than it had three previous quarters. So just wondering if we should expect to go back to like maybe an average of what we saw during the first three quarters of 2022 or what are your thoughts on that? I'll take that one. Because as you know, Damon, that one is the hardest one I told on the income statement that is to predict. But as you mentioned, this was our lowest provision quarter of the year. We've been internally working really hard around asset quality around underwriting. We've probably tightened our credit box and pricing box up a little bit, which, over time, right, should help with loan losses, which then helps with the provision. I think we're expecting probably a little more provision than what we had in the current quarter, but not dramatically more over the year. Now if things really turn around for the worst then that changes as well. But I think if the environment kind of stays like this, and we don't go into a real deep recession, it's sort of a mild recession with like lots of folks are talking about, I don't think our provision should be much different than what we saw this year and could be better. Just want to kind of zoom out on the margin outlook, maybe kind of thinking about 2Q and the back half dynamics. Eric, I appreciate your comments earlier in terms of just trying to get the balance sheet to more neutral position. And I guess I'm trying to understand, with the termination of the swaps that you guys executed in the quarter, how does that kind of play out from just an earning asset yield expansion perspective going forward? And I guess also within that context, how are you guys kind of thinking about kind of what inning you're in, in terms of additional upward pressure on deposit costs? Yeah. I'll touch on some of that, and then Eric can follow up. On the interest rate swaps, these are forward starting, so they're not impacting the financial statements right now. They would have gone into play as we move through this year, and with our sort of more neutral view where we want to be and the fact that we're going to sort of roll GreenSky off, there's funding that we may not need as we go into 2024. So those are sort of the decisions we made around that and when the five-year rate got into the like 430s and 440s, the value there was just too good to pass up. So between all of those, we made the decision to move off of the forward starting swaps. On the deposit side, I think the way we viewed this year from the very beginning was, we needed to get ahead of the deposit costs. We have a higher loan-to-deposit ratio. We can't afford to let deposits just roll off our balance sheet, so we were very proactive starting in the first quarter of this year to be, one; get in front of our commercial clients begin to run some specials on the retail side and began to give rate to customers earlier in the cycle. So I would say, we're deeper in the game than others. If we want to do the baseball analogy, I don't know, maybe we're in the later innings. But depending on where the Fed goes from here, I mean, if they do 25 for the next couple of meetings, we can -- I think we have the ability to now lag some without losing deposits at this point. But it's a pretty fluid situation. We meet -- our teams are meeting every week. I'm involved every other week, talking about deposits, and that market is pretty dynamic right now with competition, doing lots of different things. But I think what we did early in the year is going to sort of help us a little more as we get into â23 around how much more the interest expense needs to increase. Eric, anything else? No. I think the other thing I would say is, Jeff talked about leveraging technology earlier in the call, and we've really been focused on technology and how it applies to our retail team. If you look at our -- we increased retail deposits by just short of 7% over the past year and by focusing on that sales culture and the technology, we think that can continue. And so we're hoping to continue to increase in that area in 2023, which will allow us to pull back on some of those other funding that we've put on the books as well. Got it. Under the scenario where the Fed maybe cuts rates a couple of times in the back half of this year as implied by the forward curve currently. I'd imagine that would be supportive of some margin expansion depending on loan growth dynamics as maybe you can kind of unwind some of the wholesale overnight borrowings that have been added to the balance sheet recently. Is that a fair scenario in terms of expecting some expansion just given some of the lagging earning asset repricing that we discussed earlier? Yeah. Nate, if that scenario happens, I think there'd be some benefit to us with some of the additional funding we've added that floats with Fed funds, seeing the Fed cut later in the year would definitely help. Okay. Great. And then just going back to the credit discussion. I think we've talked in the past that kind of normalized charge-off levels are maybe in the 25 basis point range historically. Is that kind of a fair scenario to think about this year, just based on kind of what you guys are seeing in terms of criticized classified trends as well as just obviously given some improvement in non-performers in the quarter or do you guys think that's maybe too high of an expectation for this year just based on how much the portfolio credit metrics have improved recently? Yeah. I mean I personally, so I think it's -- that's too high. We came in at 13 basis points this year. Yeah, I do think that's high. But depending on where this economy goes, that's hard -- is hard to predict. But again, what I said earlier, we're working real hard around here to get our credit quality metrics down closer to the peer group, which is going to then impact charge-offs. We saw some of that in the current quarter. One quarter is not a trend. So we're hoping as we move forward, we can minimize our charge-offs which then impacts the provision and really impacts the bottom line profitability of our company. So that's a big focus here and has been for the last couple of years. One thing, Nate, one thing I'd tag along to that too is, if you look at our ACL by portfolio, that page in the slide deck, as over the next year, we'll see some provisions just because of the remixing of our loan portfolio as GreenSky comes down. As we've talked about in the past, I mean, our ACL right now is at 97 basis points of total loans. The credit enhancements of GreenSky is only about 25 basis points to 30 basis points. So as that pays down, and we remix into other loan areas, you're going to see our ACL go more to that adjusted number that we disclosed, which is 113 at the end of the quarter. So there'll be some remixing in our allowance, and we'll see some provisions just related to that because of those loan portfolio changes. Okay. So yeah, under that scenario, I'd imagine the ACL as a percentage of loans maybe steadily rises this year, again, assuming maybe charge-offs are kind of low or similar to kind of what we've seen historically from you guys? Hey. Good morning, guys. This is Tim [indiscernible], actually on for Danny this morning. I was hoping if you guys could expand kind of on the plans on the BaaS partnerships. Just giving us an update on how talks of partnerships are going and then some of the nature of the deposits that could be coming in, are those interest-bearing, non-interest-bearing. Just any color there would be helpful. Yeah. So we've worked pretty hard this year sort of laying the foundation, both on the technology side and sort of the, I'll say, the risk management compliance governance side here, lots of sort of meetings. The key for us is to do this right. So slow is good. And we've looked at a fair amount of partners at this point and haven't sort of got to the -- we're going to do one of them yet. So it's like sales, right? You got to look at -- or it's like M&A. We got to look at a lot of banks before you buy the one that you're going to buy. So it's really important for us to get the first partnership really right with the right partner, and make sure that's going well before the next partner comes on. So this will be sort of the year where I think we can bring on a partner or two, and make sure that's going really well. We are focused solely on deposits at this point and partnerships that are deposit driven. In this rate environment, you can imagine that there's some rate involved here. It might be to the end customer. These are non-interest bearing accounts, but then there's some fee share or if you will, deposit placement fee arrangement from that fintech partner that is being negotiated on a lot of these, but I would say our position there is, we will not -- it will be at some margin less than Fed funds. And I think where we're targeting mostly now is like half of that number. So if we brought some of those funds on today, it would be materially cheaper than wholesale today. No, that's very helpful. Thank you. And if we could just go to the loan-to-deposit ratio here, it ticked up a little bit, just sitting just below 100%. Could you just remind us around where you could see that going or you're comfortable with that trending up towards? Yeah. I mean I think that's as high as we would like it to be. I mean, ideally, we would like to be probably closer to 90%. But banking is about cycles and there's -- we talk about our management meetings all the time. There's times where loans are coming in faster than deposits. There's times on deposits coming in faster loans. And unfortunately, they don't come in at the same rate all the time. And right now, loans have been coming in faster than the deposit side. So we're really focused on, as I talked about earlier on deposits and deposit gathering and that will continue as we move into the year -- into this year. We do think the loans are going to slow some, and that's going to sort of help us -- sort of move that loan to deposit ratio down. The unwinding of GreenSky is also going to help, and as we sort of unwind that cash flow, as I talked about, that -- those cash flows will either go into the investment portfolio or take some of this sort of higher cost non-core funding off the balance sheet at very frankly, minimal impact to the income statement. Now I appreciate the color there. And then just one more housecleaning item from us here. Tax rate kind of jumped around a little bit over the past few quarters. Any additional color on where that could shake out for 2023 would be helpful. Yes. Good question. I think it's going to be relatively stable where it was in the fourth quarter going into 2023. The tax rate jumps around a little bit as we've grown our revenues fairly significantly in 2022, our percentage of tax exempt income, say, from like a [indiscernible] portfolio dropped as a percentage of that total revenue or that total income. So I think the fourth quarter is probably a good measure going forward. Good morning. This is Brandon Rode (ph) on for Terry. I just have a couple of questions here. Good, good. I think on Slide 3, you mentioned you're being more selective in new loan production. Can you expand on that and if it's in a specific area like CRE or is it just broadly across the whole portfolio? It's broad. I think I would say, it's broad, although in the quarter, our CRE was down slightly. So we are being more selective in the CRE space. But I would say, it's mostly broadly looking at deals with even a more critical eye than maybe we were six months to eight months ago. Yeah. Okay. Thank you. Another one, the equipment finance portfolio reached about a little over $1 billion this quarter. Is there a size or how large relative to the whole portfolio would you be willing to grow those loans to? Yeah. It's roughly -- Yeah. It's roughly 17% or 18% right now. I think that's probably is about where we would want it to be that range. I don't want it to be 20 somewhere between 15 and 20, but on the lower end of that range would be sort of where I'd like to see it. Okay. Thank you. And your comment earlier was NIM stable in 2023. Net interest income kind of took a small step down in the fourth quarter. Do you see that trending lower through 2023 or is that holding stable as well? Maybe with your loan growth, can you expand on that, please? Yeah. I think we're real focused on dollars. Dollars is what pays the bills. The margin rate doesn't. So we -- I think we can grow dollars. There'll be a little pressure. GreenSky will provide a little pressure. But really, I think that's a flat move. And then it's how well can we grow the loan portfolio and the repricing of our fixed rate loans over time at these higher rates, even if we don't have a lot of loan growth, that's going to help. And if the rate -- if the Fed slows rates down, as I said earlier, if we're deeper in the game, that means we're -- we don't need to raise our deposit rates as much going forward. So as those assets reprice, we think the dollars could go up. And I'm not showing any further questions at this time. I'd like to turn the call back over to management for any closing remarks. Yeah. Thank you. So before we end the call today, I want to mention that we have decided to discontinue our practice of holding these quarterly earnings calls. After much consideration, we have determined that the benefit of the call doesn't justify the amount of time and resources required for preparing for and holding them. We will continue to have an active investor relations program and maintain a regular dialogue with our analysts and both current and potential shareholders. And where appropriate, we will expand disclosures in our earnings release and investor presentation to provide information that was typically discussed on these calls. And with that, I'd like to thank everybody for joining us today. Have a good day.
EarningCall_954	Good morning. My name is Lauren and I'll be your conference operator today. At this time, I would like to welcome everyone to the ATI Q4 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. A supplemental slide presentation to accompany the prepared remark can be found on the company's website. After the speaker's remarks, there'll be a question-and-answer session. [Operator instructions] At this time, I would like to turn over the call to Tom Wright, the Vice President, Investor Relations and FP&A. Tom, you may begin your conference. Thank you. Good morning and welcome to ATI's fourth quarter 2022 earnings calls. Today's discussion is being broadcast on our website. Participating in today's call are Bob Wetherbee, Board Chair, President and CEO; and Don Newman, Executive Vice President and CFO. Bob and Don will focus on our fourth quarter and full year highlights and key messages. Before starting our prepared remarks, I want to draw your attention to the supplemental presentation that accompanies this call. Those slides provide additional color and details on our results and outlook and can be found on our website ATImaterials.com. After our prepared remarks, we'll open the line for questions. As a reminder, all forward-looking statements are subject to various assumptions and caveats. These are noted in the earnings release and in the slide presentation. Now I'll turn the call over to Bob. Thanks, Tom. Good morning and thanks for joining us. We ended the year strong. ATI's quarterly revenue, once again topped a $1 billion. That's the second quarter in a row, we achieved this milestone. We ended the full year at a run rate of $4 billion in revenue, 37% higher than 2021. We're executing expertly against robust markets. We're meeting our commitments and getting better every day. Today I've summarized our performance in four key headlines. Headline one; we're achieving what we set out to do. In the fourth quarter, we delivered adjusted EBITDA of $140 million. This was driven by continued strength in our core aerospace and defence markets. Adjusted EPS of $0.53 surpassed the midpoint of our November guidance. The team is laser-focused on execution and it shows in our results. On a full year basis, ATI adjusted EBITDA was $549 million or 14% of sales and almost 400 basis point increase over 2021. Adjusted earnings per share was $1.99. We generated $148 million in free cash flow. Don will dive deeper into the financials in a few minutes. Headline two. Our deliberate actions and transformation are delivering the results we projected. It comes down to our team, our capabilities and optimizing our business with discipline. Let me add a little color here starting with our team. As 2022 began, we were on the frontlines of the war for talent, hiring nearly 1,000 new team members during the year. Now with our workforce largely in place, we're focused on accelerating. Our team is quickly moving up the learning curve, now cross-qualifying from one job to multiple jobs to gain flexibility. Their productivity and proficiency grow every day. To those 1,000 new employees, I say, you made a great decision to join ATI. We look forward to performing together and to our entire team, thank you for your hard work and focused efforts. You are driving ATI's success. Next up, our capabilities; we're optimizing our existing footprint to increase opportunity. When it comes to titanium and nickel melt, we're focused on two things; first, operational efficiency to increase output, and second, increasing inventory velocity. Some more color on titanium specifically. Russia's invasion of Ukraine has structurally disrupted the global titanium supply chain. An outcome of this tragic situation is the most significant titanium opportunity in years. Titanium product lead times have grown from eight weeks, just a few quarters ago to 60 weeks to 70 weeks today. We're operating with a disciplined controlled order entry process that leads to optimal use of our capacity. Last quarter, we shared our plans to increase near-term titanium melt capacity for aerospace and defence applications by 25% using our existing assets. Now we're revising this plan upward based on overwhelming customer commitments here in that the word contracts, we're increasing near-term capacity, not just by 25%, we'll increase by 35%. That's over the 2022 baseline. It requires only nominal CapEx, less than $10 million, which is included in our CapEx guidance. Clearly, demand is growing and the team is responding and we're responding quickly. It's been a busy 90 days. We've restarted a melt shop in Oregon, melting the first ingots a few weeks ago. It was actually out there last week. Put my hands safely on. It feels great to see the output. We expect production to ramp through the first half of 2023 and we'll start to see benefits from that capacity in the second half of this year. On top of that, our previously announced brownfield investment to further increase long-term titanium milk capacity is on track to produce first ingots by the end of 2024. Customers are committing to this capacity as well. This brownfield investment is within the scope of previously provided capital estimates. It's crucial to ATI's ability to meet the significant long-term titanium demand. Those of you listening to this call likely aren't the people placing orders for titanium these days, but you probably know some people that are and if you're speaking to anyone about it, my advice is to get those remaining contracts signed up soon. There's very little soon. There's very little capacity in 2023 that's unspoken for and that's increasingly true for 2024 and beyond. Some of our product lines actually have started customer commitments and bookings in early 2025. So it's a tight market. The specialty rolled products business transformation and footprint consolidation is nearly complete. We're on track to produce first coils at the new bright anneal furnace in Vandergrift, Pennsylvania, in the next 90 days. Full qualification and production will come soon after. This bright anneal furnace provides our customers with state-of-the-art sheet finishing capabilities and optimizes our operating footprint to significantly streamline production flow pass. My third headline today; we're performing in growing markets, especially our aerospace and defence core. Our repositioning to an aerospace and defence leader is well on its way. In the fourth quarter, our overall product mix attributed to aerospace and defence increased to 53% of total sales, up 12 points over the same period last year. In reality and for clarity, I think we have a good shot to see our A&D product mix go north of 60% by the back half of 2023. The progress we've made is really great and continues and we're well on our way to the 65% goal we've discussed with you guys earlier. Why is this important? These markets offer premium growth rates and higher margins compared to commoditized products and markets. Those factors provide great opportunity for ATI to generate cash and create shareholder value. It's worth noting that quarter-over-quarter jet engine and airframe sales were flat versus Q3. We attribute this primarily to efforts across the supply chain to control year-end inventory. This was accentuated by planned shutdowns and intentional order recalibrations in the near term to increase the industry's supply chain reliability for the longer term. We expect a strong growth trend to resume in the first quarter. The momentum in our core markets is driving profitable growth across the enterprise. In our HPMC segment, Q4 sales of commercial aerospace products increased by 85% compared to the prior year. Total aerospace and defence sales comprised 83% of HPMC revenue in the fourth quarter. Year-over-year, total HPMC segment sales climbed by over 40%. EBITDA margins expanded over 400 basis points. The strong operating margin growth reflects higher sales of next-gen jet engine products as well as higher operating levels. In the AA&S segment, commercial aero sales grew by 113% versus the prior year. Total A&D sales were over 30% of that segment's Q4 revenue. This mix improvement, along with the ongoing efficiency benefits of our transformation, drove a 30% increase in full year total AA&S sales. EBITDA margins improved by over 300 basis points versus 2021, a clear indication to me, and hopefully to you, that our transformation is paying off. Headline number four, the modest headwinds we're experiencing impact only a minor portion of our business, and that portion continues to get smaller. We see some recessionary softness in construction, mining and general industrial end markets. The good news, due to our transformation, a little more than 15% of our AA&S segment is exposed to those headwinds. That's a much smaller portion than in the past. We continue to face near-term softness in our Asian Precision Rolled Strip business. There's a lot of uncertainty there. While we see some positive signals, we're forecasting this business to remain at current levels or even modestly contract until we see a clear upward trend. What I can say for sure, we'll be ready when Asian demand picks up. Okay. Let's go to a quick review of our markets and what we see heading into 2023. These can be found on Slide 4 in the accompanying slides on our website. In commercial aerospace, as I mentioned earlier, we're in the most significant production ramp this industry has seen in several decades. ATI's 2022 jet engine sales doubled from the prior year, an astounding ramp rates. 2022 airframe sales grew 79% versus 2021. Recovery of the airframe market for ATI has lagged at engine throughout 2022. But looking ahead, that's changing. We've been watching for two signals to indicate the commercial aerospace market is at a critical positive inflection point. With some analysts, we'd call growth catalysts. I'm pleased to report we've seen both in recent weeks. On the narrow-body side, we've been awaiting increased clarity on future 737 MAX demand. December's mega order from India is a big step toward reducing inventory. Add to that, the Chinese Aviation Authorities declaration in January that the MAX is approved to return to service. And then just this week, Boeing announced a fourth 737 MAX assembly line in Everett, Washington. These are growth catalysts, number one. The second signal we've been watching for the resurgence of 787 production on the wide-body side. United Airlines order of 100 Boeing 787s was clearly good news on this front and reinforces exactly what we've been anticipating, even a little earlier than we expected. Positive growth catalyst, number two. We expect ATI airframe product shipments to accelerate throughout 2023. In our other core markets, defence, growth in global spending continues to create significant opportunities for ATI. In the near term, we're seeing a record level of demand for products like titanium armor going into new military vehicles. In the fourth quarter of 2022, ATI Defence sales grew 18% versus Q4 of 2021. The sequential increase was driven largely by accelerated support for the Navy's carrier and submarine fleets and increased shipments for military rotorcraft applications. We expect 2023 defence sales to be strong in these subsectors as well as ground vehicle armor and military aircraft. I think most of us saw the news of the Allied Nations sending tanks to support Ukraine. I think it's just one more reminder of how quickly things have escalated in terms of demand for defence materials. We expect that demand to be sustained for multiple years based on all the signals that we're getting from the federal government. In addition to our core A&D markets, we leverage our expertise to critical adjacent applications with aero-like characteristics. This includes specialty energy, medical and electronics. We're seeing growth in these markets, too. A little more color about these is on Slide 4 of the accompanying presentation on our website. I'll now turn the call over to Don to walk through financials and guidance. So I'll be back after that to conclude and take us into Q&A. Thanks Bob. Today, I'll share details on 3 areas of ATI's performance. One, our 2022 Q4 and full year results; two, the 2023 outlook; and three, updates on the 2025 targets shared during our investor conference. Let's start with highlights of our Q4 performance. As Bob noted, Q4 marked our second consecutive quarter with over $1 billion in revenue. Not only are sales up, we're on track with our strategy of shifting product mix to value-add. Aerospace and defence sales were 53% of total revenue in Q4, that's up from 51% in Q3 and up 1,200 basis points from Q4 2021. Q4 2022 EBITDA margins were 13.9% compared to 12.4% in Q4 2021. Value-add sales mix, increased production levels and diligent cost management all contributed to the margin percentage expansion. Fourth quarter EPS was $0.53, $0.01 higher than the midpoint of our guidance range. As we dig further into our performance, I'll highlight a few of the key takeaways as we see them. First, as you can clearly see in our numbers, sales are growing in the differentiated markets where we are valued the most. Secondly, we're improving profitability. Our significantly higher adjusted EBITDA reflects the benefits of our business transformation. Full year 2022 adjusted EBITDA was $549 million, an increase of $258 million and 89% from 2021. Compared to full year 2019, EBITDA increased 25% on revenue that is nearly $300 million below 2019 levels. Full year 2022 adjusted EBITDA margins were 14.3%. That's nearly 400 basis points better than 2021 and 360 basis points higher than 2019. These significant improvements reflect the impact of our transformation, structural cost reductions and continued focus on mix and price improvement. What else contributed to the year-over-year gains volume growth, increased metal prices, $34 million in COVID incentives and $10 million in tariff refunds. Those COVID incentives, by the way, helped to offset operating efficiencies as we hired and trained nearly 1,000 new workers. Pass-through revenues due to metal volatility dampened margin percentage performance since they typically generate little or even zero profits. Otherwise, we would have delivered even better margin percentages in 2022. 2022 adjusted EPS was $1.99, up from $0.13 per share in 2021. We recognize that cash generation is key to value creation. In 2022, we generated $148 million of free cash flow compared to our guidance of greater than $90 million. It is also significantly higher than our 2021 free cash flow of $6 million. Third, I want to share progress on two contributors to value creation, working capital and CapEx. We ended the year with managed working capital at 30% of revenue. Last quarter, I shared that we were targeting working capital to be in the low 30s by the end of 2022 and expected to hit our 30% target in 2023. The operating teams continue to amaze, outperforming expectations and hitting the 30% working capital target sooner than planned. It benefited 2022 cash generation and liquidity, and positions us for additional future improvements. One more note on working capital. In Q4, customers made advanced payments to lock in their 2023 production slots. This is another signal of strong titanium and nickel demand. This served to pull forward approximately $30 million of 2023 cash flow into Q4. When it comes to we continue to maintain strict discipline. Capital expenditures totalled approximately $130 million in 2022. We also accrued $38 million for capital items at year-end. This was due to supply chain equipment delays and resulting timing of payments. The accrued capital items will roll into 2023 CapEx. Even so, we expect to keep 2023 CapEx within the $250 million target we set in our last February's investor conference. More on that in a minute. The fourth key takeaway to highlight our strong balance sheet, which provides a stable foundation for value creation. We closed out 2022 with more than $1.1 billion of liquidity. That includes $584 million in cash and $538 million available under the ABL facility. The net debt ratio was 2.2x at the close of 2022, down from 4x at the beginning of the year, great headway on our goal to delever the balance sheet. When it comes to pension, we are now 88% funded on a GAAP basis. Our net pension liability at the end of 2022 was $219 million, down from $396 million at the end of 2021. What accounts for the drop in that liability? Increases in discount rates and company contributions, offset by negative asset returns. The 20% negative asset returns in 2022 reflect pullback in the broader financial markets. Asset returns and discount rates can change from period to period, but I want to be clear, we remain focused on executing the pension glide path. Our strategy remains the same, and we are advancing. We are near completion of our current stock buyback program. In 2022, we repurchased 5.2 million shares for a cash cost of $140 million at an average price of roughly $26.92 per share. We have $10 million remaining on the current Board approved program. Now let's talk about full year 2023 outlook. You'll see our targets captured on Slide 9 of the accompanying presentation on our website. Bob painted a clear picture of our markets. Bottom line for 2023, it will be another year of robust, meaningful growth driven by strong and growing markets. The demand is there. While inflation and supply chain challenged us, we successfully offset the impact in 2022 through pricing actions, pass-throughs and capturing offsetting efficiencies. While inflation seems to be slowing and the supply chain is normalizing, a degree of uncertainty is still expected in 2023. With the team well practiced and taking quick and deliberate action, we believe we can achieve similar success in offsetting negative factors. Postretirement benefit costs, which include pension and OPEB expense, will increase the net $36 million in 2023. That's within the estimated $30 million to $40 million range shared in our last earnings call. The expense increase is largely due to changes in actuarial discount rates and negative asset returns in 2022. The additional expense will not impact 2023 contributions to the plan. As a matter of fact, we made our 2023 voluntary contribution of $50 million earlier this week, planned on another $50 million contribution in 2024 as planned. We have made tremendous progress on the pension in recent years. Since 2013, total plan participants have declined more than 62% and there are now fewer than 900 active participants. We have also worked out net liabilities, executed numerous annuitization transactions and made voluntary contributions to the plan. We have a clear objective, execute the glide path strategy to eliminate pension impacts. Now what are EPS expectations for 2023? We expect 2023 adjusted EPS to be in the range of $2 to $2.30 per share. That includes a $0.24 impact from the postretirement expense increase. Nonrecurring items in 2022 and the increased postretirement expense in 2023 can impair visibility of our underlying EPS growth year-over-year. Removed from the equation impacts of COVID incentives, tariff refunds and the incremental postretirement expense, the result, underlying EPS is increasing roughly 40% year-over-year at the midpoint of our 2023 guidance. That's the bottom line about earnings. Now how are we thinking about cash generation? We expect full year 2023 free cash flow to be between $125 million and $175 million. As I shared, we generated $148 million of free cash in 2022. Now adjust for the $30 million of cash pulled forward by customers prepaying for production slots. That brings our 2022 free cash flow to roughly $120 million, closer to where we previously guided. Now think about the impact of 2023. Our 2023 free cash flow would have been $30 million higher than the present guidance. Again, let's remove the noise to understand the underlying growth. 2023 free cash flow at the midpoint of the range is essentially 50% higher than 2022 once you consider the impact of customer prepayments in Q4. We made solid progress improving working capital efficiencies in 2022, hitting our 30% target during a dynamic growth period. In 2023, we expect to make incremental improvement on our 30% working capital level. Overall, we expect managed working capital to be a $100 million use of cash in 2023, give or take. That magnitude is similar to the overall cash impact we saw from managed working capital in 2022. We anticipate 2023 capital expenditures will be in the range of $200 million to $240 million, including the $38 million carried over from 2022 into 2023. The high end of our range is still below the $250 million CapEx placeholder we shared at our investor conference. We are carefully managing our maintenance capital spend to ensure assets are in ramp ready condition. Our 2023 CapEx includes capital for the titanium melt brownfield expansion project and 35% production increase from existing assets. I do want to reinforce that this incremental capacity is largely committed under existing contracts. And as a reminder, we target returns of 30% or greater on growth projects. Let's talk about Q1. For the first quarter, we see continued strength in our core markets and continued softness in industrial and consumer demand. Our Asian Precision Rolled Strip business will likely continue to be impacted by COVID-related challenges. Those conditions could exist for the Asian business into Q2 as well. It is important to remember that the additional postretirement expense I mentioned earlier will create roughly $0.06 of incremental expense each quarter in 2023 relative to 2022 levels. We expect Q1 EPS to be in the range of $0.45 to $0.51 per share. Excluding the incremental postretirement benefit expense, the EPS range is modestly better than Q4 2022. Performance is obviously expected to ramp as the year unfolds, reflecting continued sales growth, added capacity and recovery in our Asian Precision Rolled Strip business in the second half. Before I go into the extended outlook, let me give you some context related to metal price pass-throughs to customers. Metal prices generally increased in 2022 from 2021 levels. We estimate full year 2022 pass-through revenues represented $300 million to $350 million over 2021 levels. Remember, pass-through revenues typically generate minimal profits and are generally dilutive to overall margin percentages. I thought that might be helpful as we now jump into our 2025 outlook. In our investor conference, we shared that we expected to see revenue grow at a compound annual rate of between 9% and 11% from 2021 to 2025. That would bring our 2025 revenue to $4.25 billion at the top end of the range. Last quarter, I shared that we expected to be at the top end of that CAGR range. We see many positive indicators in our business, including continued strength in our key end markets, pricing opportunities and added capacity. While we are not going to update our targets, I will share that we foresee potential upside to a 12% CAGR for the 2021 to 2025 period. Note that this growth assumes moderated metal prices, not the elevated levels that we've seen lately. I can save you the math on that additional growth potential, a 12% CAGR from the 2021 levels will result in 2025 revenue of roughly $4.4 billion. Our 2025 margin percentage targets remain at 18% to 20%. The aerospace ramp with its improved sales mix and higher volumes should expand margin percentages from current levels. Benefits of our ongoing transformation as well as growth in defence, energy, and/or advanced alloys and ultra-performance materials are expected to be accretive as well. These forces should drive growth well beyond 2025, but we'll save that discussion for another day. Given our growth trajectory, coupled with disciplined capital allocation, we see significant opportunity to create value for our shareholders. Thanks, Don. I completely agree with you on the significant opportunity that's in front of ATI as well as the fact they were well positioned to go get it. 2022 as a year of growth and preparation for us. Our strategic efforts put us in a strong position across ATI. The markets, ready; orders, in capabilities and equipment, running faster every day with capacity increasing and the team already hard at work. Now we're building on our momentum. We're accelerating to meet and exceed our 2025 targets. We're proud of our 2022 results. More specifically, I'm extremely proud of the team that produced them. We're looking forward to even more to come. We are proven to perform. Bob, I wanted to follow up on your opening continue remarks, Don, this may also be for you as well. I'm trying to get a sense of how to titanium going to affect your mix and margins as we look going forward. I'm wondering if titanium and alloy sales are going to be accretive to margins. And from what I'm gathering based on what you said, and correct me if I'm wrong, it looks like the impact is going to be in some time in '24, if not '25. Is that right? Yes, this is Don. I'll give you the short answer. Yes, as titanium increases in our mix, we would expect that to be accretive to our margins. And as far as timing goes, we're seeing it unfold now and it will continue to build momentum through 2024 and 2025. And second here, on your comments about defence, I wanted to know if you could take a little bit longer view on defence growth, how you're thinking about that and how you think that's going to reshape the portfolio and impact your mix. And since you're selling materials, where you own the IP, I'm just wondering how defence margins might compare with commercial margins. Yes. A couple of questions in there. I'll take the last one first. I think over time, defence margins will approach commercial aero margins for the same basic metal units commercial aerospace tends to have more differentiation in some of the more exotic titanium grades and nickel grades. But over time, for the common specifications, I think they'll be about the same because that's how we're going to manage our capacity. In terms of the opportunities, we are excited about what's going on in defence other than the tragedy in Ukraine that's driving ground vehicle sales. We feel well positioned with naval carriers, submarine fleets, we're benefiting, and we expect to see the benefits of the ACAS program, and those are huge long-term programs. We're excited about that. We've gotten some awards from the next-generation military vehicles, the Mobile Protected Firepower activity that's out there. We see those vehicles coming. Certainly, the Abrams tank is a heavy titanium user for lightweight reasons, and that's exciting and then all kinds of things, including more space. We put kind of defence kind of crosses over between what we see in commercial versus defence, but the commercial space and defence space is really picking up and we see opportunities a little bit longer term, but in our lifetime in hypersonics, right? So you put all those things together, it's a double-digit mid-teens kind of growth for the long term and again, based on differentiated materials that really bring value to the end product. So we feel well positioned and bottom line, lots of mission-critical platforms for the U.S. and all. I hope that -- does that help, Richard? Is this titanium debottlenecking, the 35% from 25% you had mentioned a couple of months ago. Does that involve rescoping the brownfield because I remember the brownfield was 35%. So is this staying at 60%? Or is this moving to 70%? It's additive to the total mix. So it does not change what we expect to get out of the brownfield investment. So you're right, our total capacity is actually -- is going up to closer to 70%. You did the math right. So we're excited about it. The long lead time items that are on the books order-wise it's going to be really big. We're happy actually that the demand has been so strong and the customer commitments have really been strong, which is why we raised the short-term demand or capacity number from the 25% to the 35%. And we were out there last week, put our hands on them, and it's pretty exciting to see the ramp is underway. We do. And it's moving from the talk about it to the commit to it phase and a lot of those commitments have been made based on what we're seeing in the market. I think probably the last 90 days, the reality of the demand in 2023 is coming to the market, and we're seeing lots of interest and our lead times are stretching out to show it. So the simple answer is yes. We feel the customers are committing and have committed in many cases, to the capacity. Do those involve some of these prepayments that you've mentioned? So it sounded like it was a $30 million tailwind to cash in the fourth quarter now, is that $30 million become a $30 million headwind as you ship against those commitments next year? Well, the way I would look at it, Phil is, number one, the indicator as to how strong the demand is in the market. that customers are willing to make those prepayments in order to reserve their slots. The reality is what's happened is that's cash flow that we would have expected to hit in 2023 that has been accelerated into Q4. Now we don't look at that as necessarily creating a divot for us in 2023. Clearly, when you look at our cash flow guidance for 2023, we didn't take that down by respect excuse me, $30 million. We set the midpoint at 150. So that's the way to look at it and I think that, again, the strongest takeaway that you can make on that -- those advanced payments are the demand, which we keep. We said it 50x already in the call, but demand is truly strong and our customers, this is not a blip. Our customers are seeing a sustained need for our materials, and it's going to increase from here. I want to start off asking start off asking about the profitability in HPMC. And how we should think about the drop-through in 2023. Some quarters were stronger than others in '22 that last quarter looked a little bit lighter than we expected and kind of moving from the 18% this year to the low to mid-20s out in 2025. How to think about that progression, whether it's kind of back-end weighted or more even across the years. Yes. I think the easiest way to think about it is, we've talked about incremental margins going forward north of 30%, I think is what I've shared. We still expect that, that is intact. We did note that with the additional $36 million of postretirement expense in 2023, that's going to create some earnings headwinds. It will also a bit dilutive to the overall margins for the business. This is not HPMC specific, but for the overall margins. The good news is we're going to more than make up for that that roughly 80 basis point to 90 basis point headwind due to the postretirement. Now when you think about HPMC, there's strong growth that we're seeing in that business. The mix is changing as we get more and more of the next-gen products that are being sold. So I think you should expect to see continued expansion into the kind of range that we talked about in our investor conference, which I believe we said expect for HPMC margins in the 20 -- kind of low to mid-20s, and we still see ourselves on track to accomplish that in that time frame. Okay. Excellent. And then on -- or I guess on the titanium, we think about the incremental titanium growth coming in 2023 -- on the airframe side. I guess, should we think about most of that coming in AA&S? And then you talked a little bit about the growth catalysts for 787, and we are at a place now where you think Boeing should be moving toward higher rates, but more -- I guess, is that the main driver of the increased demand that you're seeing? Or is it much more broad-based? And to the extent it's more broad-based, can you touch on the other drivers? Yes, a couple of questions in there, Seth. I think the question. The first one was around near-term titanium impact. So we're going to be ramping up here in the first half, and it takes a little while to go from melt to final product in the back half. So from a top line perspective, we'd expect $50 million, $60 million of top line revenue from this additional melt in 2023 is probably a good estimate that Don would let me get out there for you. And then in the second half, yes, clearly, in the second half, you asked about AA&S and HPMC, I think it could probably be 50-50 between the 2. It's titanium 64 for the most part. So it can go a lot of different ways. So if you're modeling it, I feel comfortable 50-50 between the 2 segments. I think that was the first set of questions. The second part was around 787 demand. And is that the principal issue I would say we're not done with the titanium share reapportionments from the prior sources. People still have material flowing from Russia, and they're working hard to get their supply chain resort or reaffirmed up for what they want. You remember the VSMPO guys are a very integrated business. And the alternative is not so integrated. So there's still a lot of work to be done, I think, in that supply chain. So we're seeing part of that still continuing. I can't speak for our customers. But we obviously exited our joint venture with the Russian and we did it for our customers. It just took us a little while to exit from that. So it's not unusual that they would do that. The widebodies in general, we've repositioned our mix that we're more and more agnostic as to which OEM we're supplying. And certainly, the wide-body phenomenon in the short term has been in the U.S. in terms of the shortfall, but Europe's been good. Airbus has been good on the wide-body and we're benefiting from our relationship with them there. So I think the catalyst that I would say is, yes, 87 demand, wide-body in general, realignment of supply chains. And then I think we're on the verge of starting to see some of that early 777 stuff. I know it's a ways before it enters into service. But I think that catalyst is coming very, very quickly, probably in the 2024 time frame given the long lead times that we see. So we're pretty excited across the board on widebody in general. And our long-term guidance when we did our 2025 guidance of about 100 narrow bodies, 20 wide bodies by 2025, those estimates are looking a little more conservative than we thought. So we're pretty excited about all the catalysts coming together. I wanted to ask you about lead times right now. How far out are you guys quoting on your various aerospace products, so airframe jet engines? And how has that changed over the last 6 months? Yes. So the last six months, good question, so one thing that's kind of gone on for us during the COVID pandemic was a shift from distributors as a key part, they're still important distributors, are a key part, but the team has done an excellent job of aligning more closely with OEM demand. So we are getting a few more direct signals than as a percentage of our mix in aerospace and defence. So that's been positive. I would say, today, depending on the part and the flow path, customers are willing to commit orders and some products into Q1 of 2025, believe it or not, so we do have a fairly controlled order entry program against those commitments. They have that kind of visibility, and they want to make sure they get their pipeline. Now I would say more of the milk products type things flat you could probably still get some titanium in Q4 of 2023. But those slots are going fast. So I'll let around. But -- and then the general more specialized alloy mill products that come out of our North Carolina melting probably into 2024, early 2024 if not Q2 of 2024. So where were we 6 months ago? I know where we were 8 quarters ago, and 8 quarters ago, you could place an order in the quarter and bid it, right? So that was 8 -- 6 to 8 weeks, and that was obviously in 2020, 2021, and those days are gone. So yes, really I would say the average lead time is 50, 60, 70 weeks depending on the product. Wow. Okay. And do you guys have any long-term contracts coming up for renewal over the next year? And I'm just curious like how pricing -- it sounds like this is a good environment for pricing to move higher, even on LTAs as they come for renewal. Is that meaningful in any way? We don't have any -- yes, I don't believe we have any major ones in 2023. They are kind of layered in. So 2024, 2025, probably 2025 will be the first major transition year to other contracts. Most of the big OEMs are out, we have quite a few that go to 2030, 2035, those kinds of numbers and most of those have inflationary or pricing pass-throughs. I would say for people who don't have contractual commitments or don't have long-term relationships, spot pricing is up significantly in the market. And it's the market price. So we're taking advantage of that opportunity. So I think there are pricing opportunities both on the raw material pass-through as well as just fundamental demand. Yes. Okay. And last one, just on the VSMPO opportunity. Where -- has Boeing moved a little more urgently? Have you heard from other OEMs besides Airbus who want to go ahead and lock up supply with you guys? Yes. I was in Seattle earlier this week enjoying a great celebration of final 747 being delivered. It was a great moment in history and proud to have been part of that. I think -- I do think all the OEMs are moving with urgency. I think the widebody recovery across the board is driving that. I think it's a complex issue. It's not as simple as just redirecting, Oh, yes, we'll buy this stuff over here and everything is going to be fine. It's a complex supply chain, complex and very important specifications. But I do think over the last 6 months, I think they have started. There's a lot of urgency everywhere I go. Anytime I get a phone call from a customer there's a reason for it, but we're in a great position to be able to take advantage of it. And I've been talking to more customers along with our Chief Operating Officer, Kim Fields. We talked a lot about to customers on a regular basis, and that's really trying to get clarity of demand, and they're working on it with urgency. Yes. So what I would say is there's a couple of elements that I would highlight. One, of course, when we think about capital deployment, we kind of have 3 legs to that stool. One is investing for growth. That's, for us, primarily focused on the CapEx. We've talked about our CapEx guide at $200 million to $240 million in 2023 and then the second leg on that stool is about delevering and so to us, there's 2 things that come to mind. One is the pension and first and foremost, we're making voluntary contributions to the pension plan. This year, we have a $50 million contribution. We actually made that contribution earlier this week. So that is out of the way for 2023. We have another $50 million contribution that we have planned for 2024. And then in terms of other debt actions, we really don't have any imminent debt maturities that we're going to have to deal with. So there's no repayments that are required when it comes to bank debt or anything of that sort. And nothing is planned. I don't plan to take out any of our ABL term loans or anything like that. And then the third leg, of course, is returning capital to shareholders. That's extraordinarily important to us. In 2020, we -- excuse me, 2022, we repurchased about $140 million of shares. We've got $10 million left on that $150 million program. So we'll finish that share repurchase program up in early 2022. And then, of course, we're expecting that we're going to generate a healthy amount of cash flow as the aero ramp unfolds. And our expectation is that we're going to put that money to work and returning capital to shareholders continues to be a very, very important thing to us, and so it will continue to be a feature. So at this point, the board has not approved additional share repurchases beyond the remainder of the existing program, but I wouldn't read anything into that fact because of the timing of an approval would be after we finish up the existing program. I hope that helps. Yes, sure. And then a question on longer-term free cash flow conversion. So looks like in 2023, you're targeting somewhere around 50% free cash flow conversion on net income close to the -- probably 25% or so, 20% on EBITDA. I think before you've talked about 90% free cash flow conversion, is the target in 2025, where it looks like you're targeting somewhere around $800 million or so, some $750 million, $800 million of EBITDA. What -- maybe the building blocks are free cash flow out there? Yes. So I'm happy to touch on that. Your math is right, by the way. If you do -- you take the EPS guidance and you back into cash and cash conversion, we're in that 50% range right now. We've made a significant improvement, by the way, in that metric over the last couple of years. But our stake in the ground is 2025 cash conversion of greater than 90%. And what's going to happen is, of course, everything on cash generation starts with profitability. Our profitability is -- has increased and is expected to increase significantly. That's going to play a key part. We're unlocking the efficiency in our managed working capital. So a huge step in that already in 2022 when we hit our target at 30%. We're going to continue to make progress and improve on that working capital efficiency. Another important part of it is going to be CapEx, capital spending. And so this year, our capital spending range has a midpoint of about $220 million. And what I shared previously still holds as you look at between now and 2025, what I expect is our CapEx spend is going to edge down. And by the time we get to 2025, I would expect our capital spending to be close to our depreciation rate and our depreciation rate at that point will be somewhere between probably $150 million and $170 million. So that's helpful as well. And so all those are some of the building blocks to improving this cash conversion metric. I also expect, by the way, that when we're out in the 2025 time frame, I still expect to be a limited cash taxpayer, which is going to be helpful in -- at least in that period when it comes to cash conversion. The first question is really -- we talked a lot about aerospace and defence. So I just we should probe some of the other end markets. I know they're deemphasized. But on the positive side, you sound more constructive on specialty energy. So just wondering for a little more color on that and if you've quantified any of the IRA benefit and timing. And then on the more cautious side, your industrial headwinds contrast with what we're hearing from others. So I'd love to get a little more color on that and why you're confident in the H2 timing for China demand recovering. Why not earlier? Why H2? That would be really helpful. All right. There's a lot in that one. Do you want to take the first one, Don on the China, or you want me to do. Sure. No, I'm happy to do it. As far as the China headwinds, the restrictions, of course, have fallen off significantly. The downside is there's more COVID. And so what we're seeing in our business and in a more broad circumstance. We're seeing those actual COVID cases that are creating the headwinds in China and we have seen that -- we saw that in kind of latter Q4. I think we've seen a bit of a step down in early Q1. And we'd like to see that headwind go away. We're just -- based upon the current pace of things, our expectations is that it's going to be with us in the first half. Now it could be that the COVID cases recover much quicker than we're planning. And our business is ready to roll. I can tell you that. But in an abundance of caution for how we view the business and the trajectory, our sense is it's going to take us the first half. That's right. I think the thing is we want to see it before we forecast it. That's the bottom line. Let's see it materialized because there's been a lot of ups and downs in that market over the last couple of years. I think your other question, Timna, was around oil and gas and energy in particular. I think we see strength specialty, specialty energy, yes, we definitely see the oil and gas side with the subsea, the offshore and the subsea systems, Nickel clad, various things, specialty alloy things for the deepwater or subsea systems. That's growing and continues to come back strong. We continue to see in the specialty side, lots of activity in next-generation technologies, civilian nuclear is actually coming back. So we feel pretty optimistic about those applications. And I would say, we've had a long history with fuel gas desulfurization of coal plants in Asia. And although that market kind of goes up and down a little bit with the nickel price in terms of how they want to purchase. But bottom line is we feel pretty good about those markets with continued growth, I would say, high single digits, low double-digit kind of growth through 2023 and you asked about inflation reduction act impact and timing. To be candid, we haven't factored that in. That would be an upside if it came. I'm not sure it will come to the markets we're serving. A lot of the opportunities we see for specialty energy actually are outside the United States. So probably not such a big impact for us. Okay. And if I could sneak one more in. You mentioned a couple of times in the outlook slides the ongoing or benefits from restoring trends and material sourcing. I just wonder if you can explain a little more what that means and along those same lines, I know in the past, you've talked about moly prices, molybdenum is exploded. Does that even matter anymore for you? All right. Let's see. There's a couple in there, Timna, you're getting like 6 today. That's pretty good. On molybdenum, we always care about molybdenum. But I think with the material pass-through, we work hard to pass it through and not take that risk. I think the team has done a good job of that. But it's always an issue in terms of how fast and what kind of pattern it goes up. So that's kind of number one. I think your second question was around reshoring. So the first and obvious one is in commercial aerospace. Second and less obvious one is in the medical space over the last few years, we had seen material purchases that were more common purchases. I wouldn't say commodity, but we're more standard moving to places like Russia, China, various other sources. I think that particular supply chain is interested in reshoring. We're also seeing some activity in the electronics space. Obviously, there's a huge activity if you're -- if you have been to Phoenix lately, you'll see a lot of building of chip manufacturing and we actually provide some specific materials that go into the precursors that go into chip manufacturing. That's been positive for us. And I think it's the surety of the supply chain, the surety of the quality. So between electronics and medical, I think those are probably 2 other good examples. And then we do a lot of work that has historically brought materials out of China. And I think the growing sensitivity to near-term supply chains of input materials -- everything we make is alloyed in one shape form or another, and those alloying ingredients come from all over the world. So we've been able to really focus on how do you near shore or reshore some of those kind of things. So hopefully, that's a couple of good examples to give you some color on where else that's going on. Thank you. That is now the end of the Q&A session. And I will now hand back over to Tom Wright For closing remarks. Thank you for joining us today. A replay of this call will be available on our website. This concludes the ATI fourth quarter earnings call.
EarningCall_955	Good evening, everyone. Thank you for your patience. Sorry for the delay. My name is Terence from Investor Relation. Thank you for attending CapitaLand Ascendas REIT Financial Results briefing for the year ended 31 December, '22. Today's briefing will include a presentation followed by a Q&A session. Please note that today's session is being recorded and will be available on our website after today [ph]. We'll now proceed with the presentation for the FY 2022 financial results by Ms. Yeow Kit Peng, Head of Capital Markets and Investor Relations. Kit Peng, please Happy New Year on behalf of CapitaLand Ascendas REIT; I wish you all good health and a successful year ahead. Let's now commence on the financial year FY 2022 without [Technical Difficulty] presentation. Okay, key highlights; we achieved strong results across all our asset classes, despite uncertain macroeconomic conditions. The portfolio occupancy hit a 10-year high of 94.6%, and we achieved high rental reversion of 8% for leases renewed in the financial year FY 2022. So together with our proactive and discipline approach to capital management, DPU rose by 3.5% to S$15.798. CapitaLand Capital Ascendas REIT is 20 years old. So since our listing in 2002, we have grown our AUM from under S$1 billion to S$16.43 billion today. We have expanded beyond Singapore and have a sizable presence in three other developed markets, namely US, Australia and the UK, Europe. The portfolio is well diversified and resilient. On a same-store basis, property valuation is stable at S$16.1 billion. So let's dive into some of the details. So, FY '22 versus FY '21, gross revenue increased by 10.3%, driven mainly by full year contributions from the 75% state in Galaxis, [indiscernible] in Singapore, the 11 data centers in Europe, UK, the 11 logistics properties in the US and of course better performance from our existing properties in Singapore. NPI rose, 5.2% to S$968.8 million despite cost pressures. Total amount for distribution rose in tandem to S$653.9 million. DPU rose 3.5% to S$15.798. This is second half versus first half financial FY 2022 performance. Gross revenue is 2.9% higher driven mainly by contributions from the seven logistics properties in Chicago, US. Net property income grew in tandem with gross revenue. Distribution income is stable at S$333.2 million despite an increase in borrowing costs. DPU is stable at S$7.925. So this is second half versus second half of the previous year. Gross revenue increased by 7.1% and this is largely driven by the logistics portfolio in US. So this is the Chicago as well as Kansas City and better performance in Singapore properties. Net property income increased 3.5% to S$491.8 million despite higher utilities expenses. So second half DPU increased 4.3% to S$7.925. Distribution, we adopt a semi-annual distribution frequency. So for the period of July to 31 December, 2022, a distribution of S$7.925 will be made. You will be receiving the dividends on 07 of March. Moving on to investment; so the highlights for the year; so on the acquisitions front, we continue to adopt a cautious approach to ensure that we only acquire good quality properties with strong tendon base and have promising long-term potential. So during the year, we completed S$223.4 million of acquisitions and all three acquisitions, sorry -- and all three acquisitions are in the robust logistics sector in the US and Australia. The logistics portfolio is currently sizeable at about S$4.1 billion and represents a significant 25% of our AUM. Next, we completed a redevelopment. This is UBIX in Singapore. It is a premium industrial property costing S$38.2 million. The new five story property enables us to secure a higher base rent, when we compare to the original two like industrial properties prior to the redevelopment. And during the year, we also completed two AEIs. Post the financial year, in the first queue this year, January, February, we completed two acquisitions. The first one is a high tech industrial property at Toa Payoh, and the second one is a cold storage facility at 1 Buroh Lane. NPIU for the two acquisitions is estimated at about the 6.8%, 6.9%. Capital management; Gearing is healthy at 36.3%. So our emphasis is to ensure healthy gearing levels during this uncertain business environment. We have a total borrowings of about S$6.3 billion. So during the year, we proactively term out S$1.3 billion of debt with fa panel of five to 10 years. So we have extended the debt maturity to 3.7 years. And this you can see, it is very well spread out such that less than 20% of our debt should come due for renewal in any one year to minimize refinancing risk. The healthy leverage of 36.3% as well as a high proportion of fixed rate debt of 79% enable us to moderate our interest expense, despite the significant rise interest rates. Cost [ph] of debt is 2.5% for FY 2022 and the finance at very healthy levels, far exceeding what is required by the bank covenants, for example, ICR is 5.2 times. This is above the one odd or two times threshold. Okay, A3 Moody's rating is maintained, providing us with financial flexibility and very strong access to capital. This is an interest rate sensitivity table. So about 79% of our debt is fixed. So the balance 21% is on floating rate, and based on that 21% proportion available debt a 100 basis points increase will result in a 2% decline in distribution. And then if we were to assume a 200 business points increase, then this will result in about 4% decline in distribution. Natural hedge; so to minimize the effects of any adverse exchange rate fluctuation, we have a high level of natural hedge of 74% for our overseas investments. Okay revaluation; as at 31 December, 2022, CLAR owned 227 properties worth S$16.4 billion. So on the same-store basis, there is no significant change in the valuation of our property portfolio. It is stable at S$16.1 billion. In local currency terms, higher valuations were achieved for our properties in Singapore, Australia and US. Although the valuations for data centers in the UK and Europe declined, these data centers accounted for about 4.4% of the total AUM of S$16.4 billion. So this is a strong demonstration of our acquisition strategy over the past few years. Our portfolio is well diversified and resilient. Our tenant's businesses are spread across more than 20 industries. This will reduce exposure through any one industry and lower customer concentration risk. So when one industry is challenge, another industry may be doing well. Portfolio occupancy, overall the portfolio occupancy recorded a 10-year high of 94.6%, driven by improvements in Singapore and Australia in the fourth quarter. So Singapore improved to 92.1%, so higher than the island-wide occupancy rate and this is due to higher leases at some logistics and high specification industrial properties. Australia increased further to 99.4% due to new leases in our business space, properties in Sydney and these tenants have signed up for pretty long leases of five years, 10 years. US, occupancy remained healthy at 94%. UK, Europe also very high at 99.4%. So based on new leases sign in the fourth quarter, the biomedical, engineering IT and data center sectors were the largest sources of demand by gross renter revenue. For FY the whole year, FY 2022, then the largest sources would be engineering, logistics, IT and data centers. Okay. We have here for the international portfolio, in the fourth quarter the logistics, IT and data center and education and media sectors were the largest sources of demand by gross renter revenue and for the full year, so tenants from logistics, biomedical, retail consumer sectors accounted for the largest portion of the new demand. Okay, renter reversions; overall, the portfolio achieved an average renter reversion of 8% for the full year. So this is in line with our guidance. You can see that the renter reversion for Singapore is 7%; Australia, 14.2%; US, 29.2% and 11.7% for UK Europe. So looking ahead, we expect the renter reversion to continue to be positive mid-single digit range, okay, well stable at 3.8 years. Okay? So we have the portfolio lease expiry on the portfolio basis here. So we have about 21% due for renewal in this financial year. So this quite normal level and in Singapore is about 26% coming due for renewal. In the first bar, you will see a darker shade of grey, and you will see a 3.8% there. So this refers to the five single lease properties you know, and many of them are likely to renew, Australia, 16.4% coming due, US 9.2%, UK-Europe, 9.4%. There are five ongoing projects worth S$617 million. They are undergoing development or redevelopment, EI and convert to suit, that will help us to improve on the returns of our existing portfolio. They are expected to complete between 2Q 2023 and 2Q 2025. So to conclude, we continue to face challenges from the rising interest rates, inflation and global economic uncertainties. These issues may have some impact on our tenant's businesses as well as on CLAR's operating costs, but we are confident to overcome all these challenges and we are well positioned to leverage on our strong financial position to take advantage of any growth opportunities should they arise to deliver a sustainable, return to unitholders. Thank you, Kit Peng. We have also representatives from the management on today's panel. May I invite William, CEO, Koo Lee Sze, CFO; and James Goh, Head of Portfolio Management and before we proceed to the Q&A, I would like to invite William to say a few words. William, please. Thanks for coming. Just wanted to make a few points; just to summarize what Kit Peng has presented. The first point is a very strong set of results. DPU has grown 3.5% against last year and we actually hit 10-year high in terms of occupancy. You also can see in terms of occupancy and the resilience that we have in our assets. Rental reversion is 8%. In 3Q, we about meet five plus; guidance was mid-single digit. We are happy that we actually hit that. Second point I want to make, I said despite all the global uncertainty, carrier expansions, worry and interest rate rises, valuation has been strong. It's been stable. In terms of same-store, slight decline, but 1%, but all stores increase. And third point I wanted to make known is that last year we actually celebrated 20th anniversary. We went overseas for past eight years. The main thing that I wanted to make known here that we have actually good knowledge from Singapore, and we'll transfer very good operational capabilities from Singapore to overseas, which is why we are able to maintain very strong performance across all our asset classes. And the last point is, as we look forward to 2023, there are still uncertainties around the macroeconomic environment. We will continue to safeguard and expand our business, but we will also definitely have a very cautious approach as we navigate this environment. Thanks. Hi, Mervin from JPMorgan. Happy New Year to William and team. Congrats to the stronger set of results. No wonder you guys are beaming before the start of the presentation. [Technical Difficulty] consensus and occupancy continues to improve. We haven't seen these occupancy levels for such a long time. How do you think you can sustain these levels? Or are you seeing some weakness? We're hearing job losses from the tech sector. I think see maybe some of these things on space. So we can touch on that. And second question I have in terms of borrowing costs, any guidance for this year? Thanks, Thanks for questions. This is a good set of occupancy that we achieved especially for Singapore. Moving forward, as we look at environment because of the construction delay [Technical Difficulty] because of the construction delay in terms of COVID. 2023, I think we were about 1.8 million square meters of space coming up. Next three years, falling after that is about 2.2 million square meters. Average demand, less than a million; but we are also hopeful that we can still capture this good leasing demand that's out there; primary reasons, because of the quality assets that we have. As for whether can maintain the occupancy, I think we will definitely want to maintain this lease. In fact, if you look at logistics across all our markets, it's full. I think there's no surprise. We're not the only one that's having full occupancy across our space. So even for logistics, any new supply will be very well absorbed. High-tech space has been in good demand. In fact, you see that our industry has been growing quite strongly. The other challenge of course then is business park space, which leads to your second question about tech space, shadow space layoffs. We find that we are comfortable with what we are seeing in terms of the leases that we have with our tech tenants. They're committed. Any of the shadow space that you hear in the market, majority unfortunate site majority are not with us. There are some space that, for example, talks about and yet they're not coming up from our space. So we are comfortable that they're continuing to be obligated to the leases. Other than that in the big tenants that we have, like [indiscernible], there's no news of that. Overseas, we are exposed to Pinterest, Stripe [ph], Microsoft, Oracle, but all these days very well. In fact, I think they're all still expanding, which is why I wanted to put up a slide on international new demand. If you turn to that slide, you will see that new demand is still strong across different industries, and that is the strength of a diversified tenant base, as well as different asset classes that we owned. Last question is borrowing cost. Kit Peng, do you want to take that? Okay. So we do have some refi coming up, but they are all in the second half of this year. The rates for these few refis will be higher, right? But the total refi amount is about less than S$700 million and our total borrowings is S$6 billion. So this is like 10% of our total borrowings. So the increase in the borrowing cost should be more gradual in that sense and also we mentioned that 79% of our debt is fixed. So, there's some exposure the 21%, but overall, because we have the high level of fixed, and a lot of this refi is only like 10% of our total borrowing. So that should help us to manage the interest expense. Probably, it depends on where the benchmark moves, how it moves, but yeah, probably three, three-ish. Great. Thanks, Terence. Hi William and team. Congrats once again on a very strong set of results. Just a few questions from me I think. Firstly, I would just like to understand a bit, given that a global backdrop is a little bit more modest in 2023, while you see good demand last year, I'm just wondering if you focus on, let's say economies where there's a more modest outlook or recessionary outlook, like in the US maybe in UK; could you give us more color on what you are seeing? And if any of the tenants at this point in time, be it logistics or in the business backspace, could seem a bit shakier. So that's one part of the comfort that we like to get. Second thing is on valuations, I see that valuations are quite steady, but I know we're also hearing on the ground that carriers are expanding. So I just wondering whether if in terms of acquisitions this year, you have capacity, I'm sure in time the market will support you, but what kind of level of activity should we expect this year, which markets and what kind of asset class? Sorry, every on broad base, some thoughts on that. Thanks. Thanks, Derek. Because of the assets that we have, if you focus on US and UK, let's put logistic aside. I think logistics in terms of demand continue very strong. In fact, I think the outlook for logistics across the four markets that we have is very positive. We also expect strong venture reversion in those in logistics space. So set aside, if you are looking at the other asset classes, so US business park and of course UK, Europe is DC. Business park, in terms of US, you see that there is still some challenge in terms of occupancy. We have experienced lower occupancy in Portland and Raleigh, but San Diego has actually shot up. But yet leasing activity in Portland has increased since 3Q, which we are hopeful that we will be able to capture some of this demand and we are not just focused on the tech tenants. We are focused on the various industry, which the new demand has shown in terms of 4Q as well as 2022 for international market. For Australia, in terms of Business Park, our business office, we left very little space in Brisbane. Sydney is full. First time I see our covered street at a 100%. Activities are coming back. They're coming back to work. So less worried about Australia Business Park. Than the Europe DC, Europe DC, in terms of when we bought the portfolio in Europe, there are some vacancies. They continue small vacancies. In fact, we only left with two data hall, 500 square meters and 700 square meters, very small. Demand is strong. We have actually renew from seven, 10 and 15; sorry, seven, 10 and 12 years for three year leases. So this actually shows that demand is strong. Our supply is continually very tight and we are also trying to work with authorities and consultants to increase our elasticity capacity. That will allow us to be able to provide more for our tenants. Shaky or not, I think there will be industries that is continue to be under stress. But we are hopeful that there continue to be demand coming from various industries. On your second, [Technical Difficulty] Singapore is probably the odd one. Compression, slight compression about 4 bps, 5 bps; UK, Europe is probably the largest 69 bps expansion. Australia is small, US is very stable. So you're talking about acquisition, I think it will show that perhaps across all landlords asset owners, the valuation will probably be also very stable. Small expansion, but allowed to be very stable. So moving forward, but acquisition is a different story. Whether you're prepared to sell at what buyers like us demand. So we've been quite consistent, given the high interest rate and where we are trading, we probably demand something between 6%, 7%. Assets, you look at our own valuations assets that we own, assets that any of our vendors own is probably still treating 5%, 6%. So in the past one year, I'll say that perhaps the mismatch in terms of pricing gap is between 100 bps to 150 bps. But we do see that in the last few months, it has actually narrowed down to perhaps 40 bps, 50 bps, which means that sellers have to take a discount of the evaluation, assuming the entire -- the markets that we are in the same experience. Some carry expansion, supported by renter growth. So valuation will be quite stable, but if they want to divest or they want to sell, they have to take the discount, given the fact that buyers like us will expect certain level of returns. So I don't know whether I answer your question. If you're looking for numbers, I hope to do better than last year. Just back to the rate question, right, I think given that now the market seems to be thinking that rates have peaked, do you think that this 40 bps, 50 bps gap between vendors and buyers like yourself could actually start the result on you taking, buttoning the bullet to buy, provided that I know you can still get in some form of accretion? So buyers like us hasn't changed I mentioned. We expect that kind of 6%, 7%. Why so is because even last year as we price any of these opportunities, we are looking forward towards a high interest cost. Sellers are not prepared to take the kind of discount last year. So I think that the price has narrowed. Yes, you are right. So we've been seeing a narrowing in the past few months. Perhaps the next few months, second half, we'll start to see probably more realistic expectation of prices, prices from the vendor. And I will say that that actually goes back down to certain markets and asset classes that we are interested in. Even our carrier expansion, Australia continued to be out of reach for us. As you look at my evaluation numbers as well, I'm still having a very strong 4%, 5% kind of cap rate. So quite outreach even for us to buy in Australia. For other countries, I think US is probably some location that it's worth spending more time in. The business park has the deals that we see in terms of a business park has such actually increase and the 40 bps to 50 bps are primary reasons, primary coming up from US business park. The other one will be data center in UK, in Europe. Our numbers has also shown that the carrier expansion is the valuation drop is quite significant as well. That will probably be across the board in that continent, which means that there like some acquisition opportunities. Singapore, despite I mentioned is a compression in my assets in my portfolio, but there are still opportunities out there as we have demonstrated buying two assets here in Singapore and we continue to hunt for good location, good assets in Singapore and Singapore being a lease. So as we looked at and JDC gives a 30-year lease by the time the term ends. We are able to transact, you left at 8 years to 7 years to 10 years. So that makes it very attractive for us in terms of cushion. I just want to check on the performance fees, right? Can I just check whether you kind of waive it for FY '22 because your growth is 3.5%, right? Okay. The growth is 3.5%, but performance fee, we compare against pre-performance fee of last year. So against pre-performance fee is about 2.3%, which means there's no performance fee. Okay. All right. Just one last one for me, right? For the rent reversions, can you sort of share with us the reversions for Australia and US, if we were to factor in the TIs [ph] as well as the incentives, if any? So, yeah thanks Brandon. If we look at the US, typically on renewals, the TIs would be half of what would be a new lease and a lot of that would be factored into the rents as well. So I would say that this is a pretty clean reversion number that you see here. And for Australia is less pronounced as well going forward. So, and many of this happening in our Australian office rather than logistics, since most of our logistics properties in Australia are single lit, and hence they are not calculated inside our table here. Hi. Vijay [ph] from RHB. Happy New Year. I have a couple of questions, maybe I'll take it one by one. Firstly, on this topic of acquisitions, you noticed that the carriers, you mentioned that the cap rates have expanded. So how do we think, is this a opportunity for divestment potentially in Australia, which you can consider doing at this point of time and maybe this year, maybe, would your acquisition and divestment match together in terms of value? Is that something which you can think of? Definitely. If there's opportunity look at recycling some of this capital for better yielding acquisitions, that's something that we will consider. Okay. And maybe in acquisitions, would you be looking at single asset at this point of time or you think there is a portfolio opportunities in the market, which you can take on considering the market dislocations? We do see single assets opportunity as well as portfolio. Given this portfolio, you probably will be aware that that may require EFR. We definitely want to look at whether ability in the window if, let's say we going to do any portfolio deals. I would say in terms of any bottom in terms of single assets, I think it's still attractive given that the footprint that we have. So we'll be able to at least look at getting some advantage based on our footprint. If it's a portfolio, of course the challenge is the underlying assets performance mixed bag of good and more challenging assets is something that we probably got to take the decision proceeding with that portfolio acquisition. If there's, for example, challenges, that for example, vacancy in the portfolio or certain locations, maybe a few assets, but certain locations maybe a bit more challenging, we could deeper into whether we can manage those challenges. My next question is in terms of NPI margins. I noticed that half-on-half your NPI margin has in fact increased and you said lower utility expense in the second half. Maybe can you elaborate a bit on this and what sort of margins can we expect on a steady state going forward in 2023? First, I think on the higher level steady state, so if you look at MTM margin, you have noted a decline. Primary reason is of course, OpEx has increased. The other big bucket is utility costs. Utility cost gone or utility income goes up, but cost has gone up as well. So if you take that into account, the MTM margin will have a larger decline, but you had to strip up the utility, income and expense, in terms of MTM margin has been very stable, slight decline, but it's just attributed to OpEx increase. So in terms of steady state, I think we are still looking at that above 70%, 70%, 80% kind of margin. That's more for Singapore. Overseas is all very high, primary reason is because it's all pass through. Is that what we're looking at or... I guess, I got the answer. Sorry, my last question, in terms of AEIs and redevelopments, I think you kick started with Science Park and redevelopment last year, maybe is that something, which you would consider doing more this year? Has costs still within your range of doing redevelopments is that something which we can look forward in 2020? Good question. Vijay. You read my mind. So we have been doing the redevelopment AI, as I mentioned, we probably took a pause given the fact that COVID construction cost has gone up, but what we realized that flight to quality is very key, especially in this environment. So we will not stop holding back any AEIs or redevelopment. In fact the team has been working very hard to look at still opportunities for us to redevelop especially in Singapore. We have -- actually, I think the past I mentioned, we have assets that have been sitting on very good locations, the untapped plot ratio within the asset. So we work towards redevelopment to enhance the portfolio. And for example, as Kit Peng mention about UBIX, the rent that we have achieved is very strong. In fact, I think I mentioned before, it's probably about 20% higher than our underwriting. COVID has definitely helped to bring the money into this UBIX, and the environment currently we've -- that we can better enter. So we are actually able to capitalize on that. But we are mindful on the continued pressure on construction costs. So we got to look at how and where to spend the CapEx to make sure that it is meaningful. Especially now when construction costs is actually continue to be on the rise. We want be very watch our spending for CapEx. But definitely redevelopment is one on our plate right now and overseas. we continue to look at whether we can enhance, as I mentioned just now, especially for data center. We want to be able to increase our electricity supply so that we will require some CapEx to enhance that. And that will actually help us in terms of renewal and leasing. And then for overseas in US, there will still be some opportunity for us to look at in terms of redevelopment and to this. So for Singapore, I think we have to look at seven. In the past 6% will be fine. So for example, our science park redevelopment, with capital and development, we will achieving about 6.3% but today, in terms of this environment, we definitely looked at high enough. Hi, this is Terrence [ph] from UBS. Do you mind sharing what our 4Q 2022 reversions, which segment was driving this number and could you remind us if this is picking up against the third quarter and for the FY '23 guidelines for reversions? Also, similarly, which sector would be driving it or does it look probably similar to FY 2022? Terrence, if you donât mind, can you also flash on the screen, because the data is on the cable. I'll just run you through some of the numbers. Okay, so if you look at first we'll start with Singapore. It's fairly similar trends between 3Q and 4Q, and it's largely driven by logistics because that is really the hottest sector right now at double digit rent reversions for both quarters. I think at both business part and our industrial and data center segments, it tends to be more steady and a lot lower compared to logistics. If I move on to US, as you are aware, as we acquired both the Kansas and the Chicago portfolio in the US, one of the pieces that we had was that the rents were under marketed and this reversions is proving that TCs needs to be right because we have actually been able to surpass our own underwriting rents when we first made those acquisitions. So that explains for the high reversion that you're seeing at the logistics cluster, it comes from a mix of both Kansas and Chicago. I would say that in the business space, it's a mix of our legacy portfolio that we've first acquired when we went into the US in 2019. And it comes from a diverse mix of different geographies as well. What I would like to just add is that while occupancy has been challenging for us, I think one mitigating factor has been the strong reversion that we have been experiencing. So overall, the NPI hasn't declined, or if in fact it has been more or less stable, we haven't really seen a negative financial impact from the lower occupancy up till now. So for 2023, the reversions pattern that supports your guidance, will it look similar to FY 2022 in terms of the magnitude? Yeah, so I think in Singapore, the trends would remain actually the same. You'll see logistics continue to outperform the other sectors. In US, it would depend on the specific leads that come up for expiry. I would say that the very high reversions that we saw this year might not be repeated next year. Of course, we'll try our best, but we, we can't sort of promise that you will continue to be maintained at those levels. Sorry, one more. Clarification from Vijay's question for first quarter 2023, is the OpEx likely to be similar or higher than fourth quarter 2022? OpEx meaning inclusive of the utility costs electricity and same comment for NPI margins, is it likely going to be the same or lower factoring some of the service charges if you're in the midst of raising them? Okay, so OpEx is going to increase. If I just give a brief sort of trend of where we see utility costs on a unit rate basis, we have seen somewhere between 35% to 40% jump in the underlying unit rate between FY '21 and FY '22. So you saw a big increase in terms of OpEx. But similarly there was almost corresponding increase in terms of the revenues because we would have taken in the electricity income that we recover from our tenants. Next year, the trend is going to continue. We have locked in our unit rates and again, it's much higher than what we saw last year or what we saw in FY '22. So the same trend will continue. You would see our gross revenue continue to increase because the elect income would go up, but correspondingly that would also be higher expenses. And mathematically that would result in a lower margin, but I would say that underlying, if you were to strip away all of these noises, the underlying margins of all the financial performance and profitability of our assets wouldn't be -- would be unchanged year-on-year. So the short answer to your question is yes, margins will drop next year. There is stabilized one. Yeah, there is in size park. The other one will be the data center that they have. The sponsor assets come from leased CLD line. There is nothing from CLD. Other than that, the assets, the other assets, like now they just had TOP [ph] for Rochester Commons is probably -- it's not really for transaction. So yeah, we definitely were very keen to acquire from our sponsor. Thank you for the questions. Maybe let's move on to some questions that are online before we go on to the online questions. We'll come back. You join then? Okay. There's a question for Mr. Aaron [ph]. What are your thoughts on smaller logistics as opposed to big box out assets, particularly in Australia? What's my thoughts? I like last mile, primary reason is there the tenants key, as you have seen from a good demonstration, is our US logistics rent reversion. Supply is very limited in the last mile location and the tenants need the space and they're assuming they've been there. For 20 years, they are comfortable with the location. They definitely will come in for renewal. Renter has been increasing, whether it's in Australia, weather's in US, whether it's in Singapore. In Singapore, you see that we have double digit renter reversion across two quarters. That means that the asset class is very resilient across cycle and last mile location is not just for logistic player. Last mile location may be just for standard distribution owner who wants to have a place to store their goods. Big boxes has been interesting, but we have not been keen on that. Primary reason is pricings are rich for us, and big box is definitely very different market, which means that if you have a big box, there's always challenge. If you can't find a big tenant to take the big box, you have to chop it up, which means that will affect efficiency and sharing or loading base and all this becomes an issue. So definitely we prefer last month. Oh, yeah. Thanks. So two question from you. First just on the rental reversion, just to clarify, that is before taking into account tenant incentives, right? And if you look at tenant incentive across your portfolio, what sort of movement are you seeing for different asset classes? Yeah, okay. So thanks Joy. Tenant incentive, it's typically a CapEx item rather than being right, so it doesn't show up. But as I was saying for renewals, they tend to be a lot lower, particularly for office tenants. So I would say that with regards to the Aussie business based reversion, you wouldn't see a lot that the tenant incentive wouldn't have moved the figure too much. If you can just make a sort of general comment across your portfolio, what are you seeing in terms of key changes maybe? Okay. We haven't seen too much material changes. We haven't really seen it go up too much. Maybe I would say that for Australia TIs or tenant incentives is typically used to help them and to attract new tenants rather than as a reversion kind of incentive. And in this case, what we have done particularly for our vacant stubborn spaces in Australia is we have done speculative feed ups of vacant buildings. We do it for rather small units because this tend to appeal to your smaller occupiers who might not have the wherewithal expertise to carry out their own renovations, etcetera. And in that case, we put the CapEx up front, but we cut the TIs and then the TIs goes down to a very low level, but they get almost like a fully fitted, they just need to bring in their moveable furniture and they can start operating. So we have seen quite a lot of success there, which is why you see that our office occupancies across Sydney, across Brisbane, is close to a 100% right now. And besides that, I would say yeah, so just coming back to my earlier point, even in the US we haven't really seen too much changes in terms of tenant incentive. I would say that particularly for logistics where TI also plays a big part, it's really still a landlord's market. So we are able to dictate a lot of the terms and we don't necessarily need to push ourselves and go above market. Thank you. And second question, just on redevelopment. Early on, you mentioned about Singapore target 7%. Are you -- could you share what sort of target you will look at for US? And is US going to be a meaningful market for you down the road? We don't have a very big portfolio in US. So there's some opportunities here and there. In fact including Europe some redeveloped opportunities, if you really want to look that for logistics, some offsets are all we definitely can be able to improve or redevelop. Then in terms of EU, as we have demonstrated in our last case, for US, we are able to push up to about 90%. This will probably be what we are looking at for overseas market much higher than in Singapore, interest rate is definitely higher there. So we definitely, for us, given that the opportunity comes with -- hopefully comes with tenant, that will actually enhance the deal and we can be able to work to what's specking up for the tenant. In Singapore, if looking at our industrial or in our business park buildings, they're mainly multi-tenanted buildings, which is why if it's a tenant that comes along, it's good. If not, given the market, given the environment right now, flight to quality is probably better and easier to lease out a new space. Hi, I am Yew Kiang from CLSA. I recall last briefing you mentioned that you were to renew your utility contracts in October, November. Can you share how much higher when you renewed it, like versus the previous contracts? Okay. We came off a low base in 2021, right. We also did the renewal or rather we had new contract about that time. If you recall, I mentioned our utility cost 2022 versus 2021. I'm looking at 50% to 70% higher utility cost compared to the year before. So where we now close the year, I can tell you my utility cost has gone up by 64%. But that being said, the portion of the entire utility cost is two component the tenant, as well as the landlord. So the concern would always be are we able to fund the landlord, which we have increased the service charge, okay. For the tenant has been passed through, but not forgetting. So the tenant, maybe I'll just write as well, including the point I made for landlord utilities is about 8% of OpEx, if you recall. Now as it comes in, is in fact less than 7%. So depends on consumption and I want to make another point is that this is for Singapore, which is 60% of the portfolio, right? So if you look, there's increase, but with the entire business of getting higher renters new leases that's comes in, occupancy has gone up, definitely helped to cushion all this increase. So for current year, we have already did I think I mentioned we have actually contracted for two years and we have locked the rates for 2023. You can't actually -- you have to -- you have to get a license. I think you know that DC require -- the motor was lifted. EDB has actually caught for RFP. So you need to be able to be awarded the available power of 60 megawatt before you can start a new DC. So you can't expect. I'll come back to you. We have a question from [indiscernible]. It's regarding evaluation of our logistic properties in the US. What were their rental and occupancy assumptions as well as the outlook? Okay. We don't typically release such detailed information, but I can speak quite broadly in terms of how the properties are valued as well as the valuation methodology. We would typically have a combination of both capitalization method as well as DCF, and we take a simple average of those two methodologies. Now, in terms of the specific assumptions that goes into the valuation model, the value would take the market rents as the benchmark for that particular micro-market and I would also say that at least for our logistics properties, we are -- our in-place rents are typically at about 5% to 15% lower than what the market rent is. So there's some upside from there. Second, in terms of occupancy assumptions, they would typically, for the DCF, they would roll out a 10-year DCF looking at the lease expiries, and they would then put in certain assumptions in terms of how long they think that you would take for us to find a replacement tenant. But if, say for example, in this year, FY '23 for this is expiring, and if there are already tenants where we have already say pre-secured their renewals or where in advanced discussion, such information would then be passed to the value as well, so that they will take that into account and they might then reduce their period for such cases. So, I hope I've sufficiently answered that question. Hi William and team, just wanted to follow on service charge question, what is the coverage like for service charge? Have you fully passed on the tenants a certain percentage -- the increases utility cost. Okay. It's not passed on by way of service charge. We have to bear the cost, but we increase the service charge between 5% to 10%. So we have actually a higher service charge for about three months last year because we increased in October. So we'll have a full year of higher service charge for this year. That utility for the landlord is part of our landlord's OpEx, including everything else, cleaning, security and is actually passed on through service charge. Okay, so say in Singapore for a five-year debt, I think we can achieve below 4%. Then the other geographies generally they are probably in the 5% thereabouts five year, US or Australia. Frankly speaking, I don't think we will push any new redevelopment science park, given the fact that we are still constructing a million square feet there, we definitely got to feed it up and CLDS, another building across the road that need a free up. So yeah. David from Daiwa, just out of curiosity, I noticed you missed your performance fee this year. I'm just curious, when the sponsor gets a performance fee, is that part of your like compensation bonus, because you seem pretty broad about not hitting, getting a performance fee. Does that affect your total compensation? It's not in my balance. Okay. If you are asking for that, if we recall, we have been very equitable to all parties or stakeholders. When a need arises, we have customers even before the government require us to do renter rebate. We actually was quite early on decided to give rent rebate. If we call last year's performance fee, we also want to be equitable as the unit holders that stayed with us. We have actually waved off half of our performance fee, if you recall, right. So we want to be fair and we want to grow together with tenants as well as all unit holders. Hope to have your support, David.
EarningCall_956	Good morning and welcome to the Pitney Bowes Fourth Quarter Earnings 2022 Results Conference Call. Your lines have been placed in a listen-only mode during the conference call until the question-and-answer segment. Todayâs call is also being recorded. If you have any objections, please disconnect your lines at this time. I would now like to introduce your participants for todayâs conference call, Mr. Marc Lautenbach, President and Chief Executive Officer; Ms. Ana Chadwick, Executive Vice President and Chief Financial Officer; and Mr. Ned Zachar, Vice President, Investor Relations. Good morning, everybody. This is Ned Zachar. I manage the Investor Relations program for Pitney Bowes and Iâd like to welcome everyone to the call this morning. We very much appreciate your interest and participation. Part of my duties include covering the Safe Harbor information for these calls. Included in today's presentation are forward-looking statements about our future business and financial performance. Forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from our projections. For more information about these risks and uncertainties please see our earnings press release, our 2021 Form 10-K Annual Report and other reports filed with the SEC that are located on our website at www.pb.com and by clicking on Investor Relations. Please keep in mind that we do not undertake any obligation to update any forward-looking statements as a result of new information or developments. Also, for non-GAAP measures that are used in the press release or discussed in our presentation materials you can find reconciliations to the appropriate GAAP measures in the tables attached to our press release and also on our website. Additionally, we have provided a slide presentation and a spreadsheet with historical segment information on our Investor Relations website that summarizes many of the points we will discuss during todayâs call. You may have seen that one of our shareholders recently announced director nominations for the 2023 annual meeting. We issued a press release on January 23 with our response and we will not be answering any questions relating to the nominations on this call. Our format today is as follows: Marc Lautenbach, our President and Chief Executive Officer, will begin with opening remarks which will be followed by Ana Chadwick, our Chief Financial Officer, who will provide an in-depth discussion of our financial results. Thanks, Ned and good morning everyone. I appreciate everyone joining our call this morning. For the quarter, revenue is flat on a comparable basis after adjusting for currency, a divestiture, and a revenue presentation change that Ana will detail shortly. EBIT grew slightly and cash flow for the quarter was up strongly. SendTech and Presort continued a solid and predictable performance. In aggregate, the two businesses were essentially flat from a comparable revenue and profit perspective, and both businesses made good progress shifting their portfolios to growth. In Presort, this means marketing mail and bound to printed matter and for SendTech, shipping revenue. In North America SendTech, over 40% of our revenue is now coming from new products. They include our most recent award winning IoT device, the Cube, Mail Station, and [parcel point] [ph]. These products sit along our SaaS offerings, including PitneyShip and PitneyAnalytics. This is a direct result of investments we have made in this business. Margins at Presort continue to improve and are again within the long-term model. Again, these improvements in margin are a direct result of investments we have made in automation in the Presort business. In aggregate, these two businesses continued to perform well in a choppy market. I would also be remiss if I didn't add our financial services business performed very well. Finance receivables, an important harbinger of future growth, grew for the quarter and credit losses were minimal. Deposits, collections, and funding activities were all very well managed. In GEC, the headline is this. We made substantial progress across many important write-downs, but we're expecting to make even more progress. Specifically, our customer satisfaction increased 23 points over the course of the year. In the quarter, our network performance improved over 10 points on a year-to-year basis. These items helped us grow domestic parcel volumes by 16% in a difficult market. On the cost side, labor productivity improved 35% and transportation productivity improved close to 20%. All-in, gross margin per piece improved $0.50 on a year-to-year basis. Lots of good improvement, but we're expecting even better. When you boil it down, there were two issues. First, did not get enough heavyweight parcels within our volume. This depressed revenue per piece and ultimately gross margin too lower the positive levels. Second, our transportation improved close to 20%. We're counting on a 25% improvement. In order to continue to improve our transportation execution, we're enhancing our processes and implementing a new transportation management system in the first half of the year. Specific to mix, we are increasing our focus and our resources on markets that have higher weight parcels. A personal pipeline in backlog with plenty of higher rate parcels, so we have the opportunity, we just need to get that volume into our network. It will take a bit of time, but there's no shortage of opportunity. Our cross-border business continues to face headwinds due to the unprecedented strength of the dollar and potential changes to the way one of our largest clients will access our services in the middle of the year. As a result, I expect this business to continue to be under pressure for some time. So, in conclusion, relative to GEC, we moved the [bar forward] [ph], but we had the opportunity and the expectation to do even better. That said, our domestic volume [exit rate] [ph] was toward the high-end of what we guided to and our implementation and backlog pipeline is very strong. This is a good harbinger for the future as volume is still the principal factor in reaching our long-term profitability. A few words on capital allocation and our balance sheet. Thematically, our emphasis for capital allocation and our balance sheet continues to be around strategic flexibility. As I indicated at the outset, our cash performance was very strong for the quarter. Part of the performance was around timing of working capital, but there was also very good execution on collections, deposits, and funding. Also of importance, we renegotiated our revolver agreement, which will afford us more flexibility going forward. Finally, on an opportunistic basis, we began to purchase back tranches of our debt. We'll continue to pursue debt repurchases opportunistically. A final comment on the portfolio. Our board and I continue to believe our portfolio is coherent in the markets where we have a brand permission to win. That being said, we continue to look for opportunities to unlock shareholder value. Sometimes this means proactively looking for opportunities and other times it means reacting to in-bound inquiries. The sale of Borderfree in 2022 is an excellent and recent example of how there may be opportunities to simplify our portfolio further, even within larger business segments. So, in short, [like a portfolio] [ph], we will continue to look for opportunities to unlock value for our shareholders and that process is ongoing. Thank you, Marc, and good morning everyone. Before I begin my financial review, I'll note that the year-over-year revenue information I'm going to discuss is on a comparable basis. Adjustments include the impact of currency, the border free disposition effective as of July 1, and a change started in the fourth quarter due to a contract modification with USPS in the presentation of certain revenue from gross to net of pass-through shipping costs for our digital solutions. This revenue presentation change primarily affects Global Ecommerce and to a lesser extent SendTech. The change does not affect the profitability of those revenues. Also, unless otherwise noted, I will speak to other items such as EBIT, EBITDA, and EPS on an adjusted basis. The following is a high level review of the year-over-year comparison of our fourth quarter results. Total revenue for the quarter was 909 million, which is flat on a comparable basis. Gross profit for the company was 288 million, compared to 283 million for the same period last year, a 2% increase. Gross margin was 32%, up from 29% last year. EBITDA was 88 million, down slightly from 89 million a year ago. EBIT was 49 million, up from 47 million a year ago, which is a 5% increase. Interest expense was 37 million, up from last year's 35 million level. Corporate expenses for the quarter were 63 million, up 19 million from prior year, driven by the timing of variable compensation accrual. For the year, corporate expenses were 2% lower. Adjusted EPS was $0.06 in the quarter, the same as prior year. Turning to cash flow. GAAP cash from operating activities was 167 million in the quarter, compared to 85 million in 2021. Free cash flow was 108 million, compared to 39 million last year. The improvement in free cash flow was driven in-part by lower CapEx and favorable working capital items that were a drag earlier in the year. CapEx for the quarter was 27 million, down from 43 million in prior year. During the quarter, we paid 9 million in dividends and made 4 million in restructuring payments. I will now touch on the key annual data points for 2022. For the year, companywide revenues were 3.5 billion, similar to 2021 on a comparable basis. EBIT was 179 million, 12% lower than prior year. Adjusted EPS for the year was $0.15 versus $0.32 last year. GAAP EPS was $0.21 versus a $0.01 loss last year. Full-year cash from operations was 176 million, compared to 302 million in 2021. Free cash flow was 68 million, compared to 154 million. Capital spending was 125 million versus 184 million in 2021. At the end of the quarter, weighted average diluted shares outstanding were approximately 178 million. Looking at the balance sheet. Cash and short-term investments were approximately $681 million at quarter-end. Higher by approximately 75 million as compared to the third quarter of 2022. Total debt at year-end was 2.2 billion, compared to 2.3 billion at year-end 2021. The following segment information is summarized in our press release and slide presentation, both of which are posted on our Investor Relations website. I'll start with Presort. Presort revenues were 158 million in the quarter, which is a 1% improvement from last year. New customer additions and higher revenue per piece contributed to the revenue gain. Total sortation volume of 4 billion pieces was down 8% compared to prior year. EBIT for the quarter was 29 million, up 25% versus last year. EBIT margin was nearly 19%, which is a 360 basis point improvement versus fourth quarter 2021. Our ongoing investments in automation and sorter refresh is resulting in better productivity, which is driving the margin improvement. The important headline is Presortâs annual revenues topped 600 million for the first time with profitability levels in-line with our long-term model. Moving to SendTech. SendTech reported revenues of 341 million in the quarter, which was down fractionally compared to prior year on a comparable basis. Growth in shipping related revenues offset declines in financing, rentals, and supplies. Equipment sales continued their growth progression. SendTech EBIT was 106 million, compared to 109 million in prior year. EBIT margin for the quarter was stable at 31%. Shipping related revenue, which now comprises 14% of segment revenues increased 30% versus prior year and the SendTech team continues to build the shipping pipeline. I'll spend a moment on the performance of our financial services business inside of SendTech. Finance receivables are up 4% year-over-year and we continue to see healthy payment trends across our financing portfolio. 30-day delinquencies are now just 150 basis points, down 70 basis points year-over-year. At year-end, the finance portfolio totaled $1.2 billion. In summary, SendTech continued its solid performance and made strides in shipping, and financial services, both of which are positive indicators for the future of the business. Moving to Global Ecommerce. The Global Ecommerce segment made substantial progress in the quarter. Especially in the Domestic Parcel operations where gross profit improved significantly, compared to fourth quarter 2021. However, as Marc stated, the strong improvements fell short of our expectations. Global Ecommerce reported 410 million in revenues and grew slightly over prior year on a comparable basis. Total segment gross margin in the quarter was 27 million, compared to 17 million a year ago. Strong gross margin in Domestic Parcel growth total segment improvement. Segment EBITDA was negative 5.5 million, compared to negative 20 million in fourth quarter 2021. EBIT for Global Ecommerce improved 18 million from a loss of 41 million a year ago to a loss of 23 million. First, let's talk about where we saw improvement. Domestic Parcel volumes were up 16% year-over-year to 54 million. And as we expected, we exited the year with run rate volumes of roughly 200 million. In the context of an industry that is projecting to be down, the 16% gain highlights that our services resonate with our clients. For the quarter, Domestic Parcel gross profit improved 24 million year-over-year. For the full-year, gross profit for Parcel improved $0.35, which translates to $58 million. Let's note, in the quarter, we reduced production labor spend by 25% versus prior year, despite processing 16% [more Parcel] [ph]. This improvement is a direct result of our investments in automation, robotics, and technology. Service levels continue to itself and met or were near the 90% mark throughout the quarter. As a result, our net promoter scores improved 23 points to 27 for full-year 2022. Finally, our client pipeline is strong heading into 2023 with first quarter planned implementations running near double the rate it was in the first quarter 2022. On the other hand, in-spite of these improvements, we fell short of our EBITDA positive goal by 5.5 million, especially in December, the mix of volumes skewed toward lighter parcel rates, resulting in lower revenue and margin per parcel than we anticipated. To be clear, the lighter weight volumes are still profitable, but the difference in mix from what we expected caused the majority of the [mix] [ph] from our goal. Also, as Marc noted, transportation cost per Parcel decreased materially, compared to prior year driving approximately 20% productivity improvement, but fell short of our 25% expectation. We're taking specific actions to address these two areas. Let me now share some perspective on the full-year for Global Ecommerce. For the year, Global Ecommerce lost 22 million in EBITDA, similar to 2021, but in many respects the years were quite different. At the gross profit line, the improvement, excluding Borderfree was 34 million year-over-year. Let's unpack the gross profit, which more precisely illustrates the improvement in Domestic Parcel. In 2022, Domestic Parcel gross profit increased by 58 million. The remainder, cross-border, digital and fulfillment declined by 24 million, primarily due to lower volumes in a difficult macro environment. Overall, we are very pleased with the substantial increase in Domestic Parcel volumes and profitability this quarter. We continue to expect that Domestic Parcel will improve gross profit by 400 basis points in 2023 building on the 650 basis point increase in 2022. Domestic Parcel now represents approximately 75% of segment revenue, which bodes well for the future success of the segment. Though our financial results will be more seasonally driven than they have been in the past. Now, I'll shift the conversation to our capital structure. As you may have seen, we filed an 8-K on December 8 that details the adjustments we made in our credit agreement. We are pleased to have received the support of our lenders, which augment our financial flexibility during a period of substantial volatility in the capital markets. We have begun to buyback our debt at a discount. To date, we have purchased approximately 10 million across the [2024 and 2027] [ph] maturities and plan to continue to do so opportunistically. Anticipating a question regarding our [2024 maturity] [ph], we expect that cash, cash flow and revolver access will be ample to meet that obligation should a cost effective capital market solution not be available. I'll conclude my remarks with perspective on 2023. We expect flat-to-mid single-digit revenue growth on a comparable basis. We expect percentage EBIT growth to outpace revenue growth as Global Ecommerce profitability continues to improve. Finally, we expect Global Ecommerce to be EBITDA positive in 2023, driven largely by continued gross margin expansion in Domestic Parcel and partially offset by increasing macro uncertainties and softness in cross-border. We are providing the following additional perspective on 2023. We are reaffirming our CapEx expectations of approximately 115 million. Also, higher interest rates will result in roughly $30 million of incremental interest expense, compared to prior year. And finally, we expect our effective tax rate to be approximately 25%. In closing, SendTech and Presort continue to deliver solid and predictable performance. In Global Ecommerce, we made significant progress, especially in Domestic Parcel and look forward to continuing this momentum into 2023. Good morning, guys. Could you talk a little bit further on the Global Ecommerce side and how you're looking at strategic alternatives for that business? I think, I can hear the disappointment in another negative EBITDA year, would you be open or consider selling part of the business, shutting part of the business? And I know you talked about being EBITDA positive this year, but what are other options you might explore? Yes. So, appreciate the question. The first thing is, we did have the expectation to do slightly more. It would not be accurate, however say we're disappointed. There's a lot of progress there. So, I'd start with that. In terms of alternatives that we work for not just Global Ecommerce, but for any business, what I've said for 10 years is if a business is worth more to somebody else than it is to us then it's a serious offer. We would certainly contemplate that. And if you look at the last 10 years, whether it be divestiture of the software business or [indiscernible] or other assets, [we've hold through] [ph] that. Most recently, the divestiture of Borderfree, I think, speaks to your question. That was a portion of Global Ecommerce. It was something that we like the business. We continue to be in cross-border, but it was worth more to globally than it was to us. So, we would look at any alternative that we think unlocks value for our shareholder whether it be shutting something down, selling something or indeed selling the whole business, but we do think, as I said, that business continues to be a coherent part of our portfolio and we're optimistic about how we go forward. I appreciate that, Marc. Thank you. And would you mind commenting further on SendTech? You talked a couple of interesting comments I thought. One about 40% of your sales coming from new products now, but also seeing declines last year in finance rentals and supplies that were partially offset by shipping. Can you talk about some of the dynamics in SendTech and how you see that on a unit basis for 2023? Sure. So, I mean there's two different currents running through the SendTech business. The first is the Mail business, which continues to experience secular decline, that hasn't changed. The other current is shipping revenue, which continues to be a good market. And aggregate those two markets together are about a $6 billion business that's growing. So, our expectation is shipping revenue becomes a higher and higher percent of the total business and continues to grow. You know Ana said, 20% that those two dynamics begin to cancel each other out. And as you look at SendTech overall, it was essentially flat last year. From a unit perspective, equipment revenue is probably the easiest way to think about that. Equipment revenue was up low single digits for the quarter and for the year. That's kind of the confluence of those two dynamics coming together. So, I like that business. I would say SendTech and Presort together provide balance for the business in our balance sheet as we continue to improve Global Ecommerce. And Mark, when you say Mail continues to experience secular decline, could you quantify that secular decline number at all about where you guys continue see that? I mean, so First Class Mail is, I would say down high-single-digits, you know 5% to 10% depending on the quarter, marking Mails down a little bit less. So, it's â I would say single-digit declines depending on which segment of mail. That's great. And then just a last one for me. Ana, could you comment on just expectations for free cash flow for 2023? I think you gave us pieces, but just curious from your model how that looks on a total free cash flow basis for 2023? Yes. So, as you commented, I gave you the pieces there on EBIT CapEx, interest, and tax. The hard one to call here is a little bit around working capital and that's why we gave you the pieces. As the business moves to seasonal adjustments greater in the fourth quarter and calling out the movements in working capital is a little harder. That's why we moved the [path here] [ph] to give you the components. Yes, good morning and thank you for taking the questions. So, first on GEC. So, you talked about that the mix overall had a higher than expected volume of light weight parcels of hurting profitability or maybe less than expected, I guess, this is a better choice of words, but was this really, you think more of a result of new client wins that these new clients that you signed on, did that have most significant impact from this or was it just a mix of old clients just shipping more light volume? Just wanted to get a better sense of that. That's great question. So, there's a couple of things that are true. We had a very successful quarter in bringing on new clients. I would say those new clients did have a slightly lower weight than average. However we plan for that. What was different than what we expected is from our existing customers, think of that as same store sales for lack of a better term. In weeks 49, 50, and 51, read that as the last couple of weeks of the quarter, we didn't get as much volume from them as we expected. We still got more volume than we had the previous quarters and good performance, but we're expecting slightly more. So, if you look at same store sales, they were â we got good increases from many of our clients. It was just slightly less than we expected those last two or three weeks. Understood. Okay. So, now looking forward, when you're going out and targeting new clients, are you going to be more, kind of diligent as far as who you assess as to who you, kind of bring on to make sure that you have a better mix of heavier weight parcels? Is that how you're thinking about managing that or maybe could you just talk a little bit more how are you thinking about trying to be more profitable in GEC? Sure. So, one thing that I understand that's really important and I don't want people to lose sight of is, even the light weight parcels were positive from a gross margin perspective. So, as long as our network is under capacity, we'll take that volume. It adds to profitability, it's accretive to absolute margins etcetera. We will within the total pipeline be more diligent if you will, in terms of realizing the higher weight stuff and we will skew our marketing and sales resources to get more higher weight stuff too. So, it's not that I don't like the lower weight stuff, I like it. As long as our networks under capacity, we'll take more of it, but it's also true that our sales and marketing and our management system will be more skewed to ensure that we get higher weight stuff. And that's, you know â my comment on the backlog is important. So, we've got a big backlog right now and we've got plenty of higher weight stuff in there. We just need to get that stuff into the network. Hold on a second, if you will. If you look at our revenue per piece for last year in our domestic business, it was up double-digit. So, I know there's always a fear that you chase lower margin stuff, but if you look at our revenue per piece last year, it was up 12% to 15%. So that gives you a fair amount of assurance that the team is focused on bringing in the right mix at the right price. Okay. Thanks for that explanation. And then as far as the unallocated, the corporate expenses, those came in higher than expected? I know, Ana, you talked about the incentive comp or timing of that impacting, going forward, how should we expect unallocated corporate expenses to flow through for the year? Yes. So, what we're expecting is, as a company for performance, we expect to replenish or relevelize some of our incentive compensation as we move into 2023. And we are continuing as I mentioned last quarter to have a very strict cost program. So, the net of those two you should see pull through. Okay. Thanks. And then lastly, as far as the 2023 guidance, can you give us a sense as to how should we think about the different segments? And as far as quarterly progress, given what's going on with the economy, do you expect things to be softer in the first half versus the back half or I don't want to put words in your mouth, but how should we think about the quarterly progression, if you could give us any color as far as the revenue outlook for the year that would be very helpful? Thank you. Sure. Sure. As I mentioned, I think the biggest driver here will be the growth in Global Ecommerce, especially around our Domestic Parcel and we anticipate that to be more back-end loaded in the year, probably more fourth quarter than everything. So, I would anticipate our profile as a company to follow that as well. I also think, the entire â [indiscernible] a really important point, which I know you guys get. You know the seasonality of Global Ecommerce is heavily skewed to the fourth quarter and you can see it across the entire market. So, as I think about it, you've got SendTech and Presort that are pretty consistent throughout the year. You have GEC that is entering a more seasonal business, and it's also true as we bring on more customers that will also be realized in the back half of the year. So, it's a different, kind of skew than we're used to seeing, I think the market is seeing, but it's consistent with the overall dynamics within the industry. Good morning. Following up on the weight of the parcels, you talked about targeting a higher weight package, can you talk about what the average is now and the strategy to gain with additional higher weight volume? Average is about 2.5 pounds, I mean, between 2.4 pounds and 2.5 pounds. In the last couple of weeks of the quarter, it went closer to 2 pounds. I mean, so that was kind of the variance that we saw. We like that 2.5, I mean, you know, as I said, even at 2 pounds itâs got a positive contribution margin to the overall business. So, it's not that we don't like those business. It's just we've got to ensure that we get the right absolute number of higher weight parcels. So, we don't think about this as mix. We think about this, you know if we're targeting 200 plus million parcels within that, we need the right absolute percent of heavyweight â right absolute number of heavyweight parcels. So, as I said, within our backlog, the mix is â there's plenty of heavier weight parcels there. So, we'll have a higher degree of focus on those parcels. I would also say if you look at the mid-market in general, which is kind of where our principal hunting ground is, the mid-market within retail and marketplaces tends to have more higher weight parcels. So, I mean our [bias] [ph] in, kind of our go to market model is already skewed towards heavier with stuff. And I would say our compensation system is as well. So, we pay sensitive to profit, which is largely â although exclusively driven by weight and price. So, right now, our exit rate of the year, which we said in the fall of the year was between 195 million to 200 million parcels. I would say, we're kind of on the north end of that. So, a little bit above 200 million parcels. Think about a network that's got capacity for 300 million parcels. Our objective this year for that business is probably to be north of 220 million to 230 million parcels. So, that's kind of the basic math that we're looking at. So think of a market that's 70% or 75%. Okay. And on capital allocation, can we talk about CapEx and the mix by segment for 2023 in a quarterly â I see a disclosure roughly 40% for Global Ecommerce in 2022? And so, what's the sort of your expectation for each segment for 2023? Yes. The expectation would be â we'll be down, as I mentioned, on a year-over-year basis. And the expectation would be that we will have a little bit of a higher decline in globally commerce, so global ecommerce will be around [40-ish percent] [ph] still of the total. The interesting thing here to point out is that as we mentioned in 2022, we will continue to spend on optimization of the network rather than that expansion of capacity. We feel good with the capacity as Marc just noted. And the other segments will keep roughly similar proportions than what they've had in the past. So, [just] [ph] CapEx, I want to make two additional points. Put that CapEx number in context, two years ago, I believe we spent $190 million on CapEx or $185 million, I mean somewhere in that range on CapEx. That was largely around the build-out of the network to accommodate those 300 million parcels. So, the [110] [ph] is kind of in that context. The other point that I would say, if you look at the capital consumption of GEC, it is, as Ana said, down dramatically. We're still targeting for EBITDA minus CapEx and working to have a plan that number is positive. I've said, I've become a little more cautious about that dynamic in 2023 given the macroeconomic environment, but that's still what the team is reaching for. And just following up on ecommerce EBITDA, what â like how much of EBITDA on the domestic business versus the international business? And are those business â I'm guessing international is struggling more or they seem to be. Could you separate that or exit international? It doesn't turn EBITDA positive in 2023? Yes. So the way â the easiest way to think about it is from a gross margin perspective. And I want to point out what we mentioned is the dynamics are changing and as we move into 2023, Domestic Parcel will become even a greater proportion of that gross margin. As I mentioned, 650 basis improvement and an additional at least 400 basis points more as we go into 2023. So, we anticipate that more and more of our profitability will come from that domestic parcel. And 75% of revenues are already in that domestic parcel. So, it gives you a sense of the proportionality. This is my last question. But just to â I guess you could argue that just because something is a greater proportion doesn't necessarily mean or maybe if international is smaller, doesn't necessarily mean it's good, if you will or maybe if I could say differently, if it's still negative, is it worth keeping despite being a smaller proportion? Is it worth keeping? It depends a little bit on what you could fetch on the outside market. It's still positive from a gross margin perspective. I would say, as witnessed with the cross-border business and globally if it's worth more to somebody else than it is to us, then we would certainly consider any serious offer. So, our intend is all those businesses to contribute positively to the P&L going forward. I will say as you think about the business going forward, and the reason we're so fixated on the Domestic Parcel margins is that's where most of the appreciation comes from in the next couple of years. Hey, how's it going guys? It's Alek, I'm on for Ananda. So my question is regarding the December quarter. Maybe if you guys could provide a bit more color on to what extent macro impacted the December quarter relative to where Street expectations were at? Was it a little bit more macro focus or was Street just too high? Thank you. I don't think the Street was too high. I mean, as I said, we had higher expectations for the business. The principal variance was in Global Ecommerce and it was in those two line items I mentioned. One was revenue per piece in weeks 49, 50, and 51 was a little bit less than we thought. That cost us about $5 million and transportation costs well, they improved meaningfully year-to-year, that would also improve meaningfully quarter-to-quarter. So, we said north of 20% improvement year-to-year was also about the same quarter-to-quarter. We are expecting another probably $5 million of benefit there. So those two together were $10 million of EBIT that's kind of â that more than closes the $0.02 to the Street. Awesome. That was helpful. Thanks so much for that. And the second question, if I may. So, given your guidance of having EBIT outpaced revenue growth, you mentioned that was primarily â that's going to primarily be driven by Global Ecommerce. So, do you guys expect Global Ecommerce to be profitable in 2023? I mean think about this way. I mean, so it was [minus 22] [ph] from an EBITDA perspective last year, so EBITDA positive right there is $20 million to $25 million of improvement. We expect more than that, but that's just kind of the basic math. But you've got some headwinds of interest expense and other things that you're running against. Thanks. So, listen last to unpack about the quarter. I do miss if I didn't. And by thanking the Pitney Bowes team, I am continued to be pleased and impressed with people's commitment to this business. You saw it in our distribution centers where we have lots of volunteers to help in the middle of peak and not just first or second shift and not just in the good cities, but all over and third shift and that's a true sign of folks dedication to this business and to moving forward. So, as I said, our headline for the quarter is, we made lots of good progress across many different dimensions in Global Ecommerce, we're expecting to touch more. SendTech and Presort continue to be [steady performers] [ph] and we expect that to continue. So, as we move into 2023 there's lots of different currents running through the economy. We're a little more cautious about how we call the year. We've got much more focus on providing flexibility to accommodate different things that may happen in the environment. That being said, our focus continues to be as we get out of this economic moment and get to more calm waters how this business is positioned and continue to wipe our hand. We will certainly look at any strategic options that present themselves along the way, but I like how weâre positioned. So, thanks for your time this morning, and we'll talk soon. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.
EarningCall_957	Good day, and welcome, everyone, to the Blackstone Fourth Quarter and Full Year 2022 Investor Call. During the presentation, your lines will remain on listen-only. [Operator Instructions] I'd like to advise all parties that this conference is being recorded. Perfect. Thanks, Matt, and good morning, and welcome to Blackstone's fourth quarter conference call. Joining today are Steve Schwarzman, Chairman and CEO; and Jon Gray, President and Chief Operating Officer; and Michael Chae, Chief Financial Officer. Earlier this morning, we issued a press release and slide presentation, which are available on our website. We expect to file our 10-K report next month. I'd like to remind you that today's call may include forward-looking statements, which are uncertain and outside of the firm's control and may differ from actual results materially. We do not undertake any duty to update these statements. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our 10-K. We'll also refer to certain non-GAAP measures, and you'll find reconciliations in the press release on the shareholders page of our website. Also, please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Blackstone fund. This audiocast is copyrighted material of Blackstone and may not be duplicated without consent. On results, we reported GAAP net income for the quarter of $743 million. Distributable earnings were $1.3 billion or $1.07 per common share, and we declared a dividend of $0.91 per share, which will be paid to holders of record as of February 6. Well, thank you, Weston, and good morning, and thanks, everybody, for joining the call. 2022 represented the most challenging market environment since the global financial crisis. Central banks around the world embarked on one of the most aggressive tightening cycles in history. Combat the highest inflation in a generation. In the United States, we saw the highest level of inflation since 1981. Federal funds rate here rose from basically zero at the start of the year to 4.5%, the largest increase in 50 years. Equity markets fell sharply as a result with the S&P down 18% for the year, NASDAQ down 33%, public REIT index, not to be forgotten, down 25%. The intra-year movements were even more extreme, these indices down 26% to 37% at their lows. In credit, the high-yield and high-grade indices declined 11% and 13%, respectively. Overall, the 60:40 portfolio at one of the worst years on record. And against this extremely unfavorable market backdrop, Blackstone delivered earnings and dividend growth for our shareholders. Distributable earnings, for example, rose 7% to $6.6 billion in 2022, while fee-related earnings increased 9% to $4.4 billion, a record year for the firm on both metrics, despite the collapse in equity and debt markets. The fourth quarter, although we had fewer realizations due to the environment, we generated strong DE of $1.3 billion, reflective of the firm's substantial earnings power, which has grown dramatically over the past several years. Most importantly, Blackstone distinguished itself compared to almost all diversified liquid securities managers by preserving our limited partner's capital. The year in which the typical investor lost somewhere between 15% and 25% of their money, our limited partner investors had a highly differentiated outcome. Our flagship strategies in real estate, private credit and secondary's appreciated 7% to 10%, while those losses were recurring elsewhere. Our Hedge Fund Solutions business achieved a gross composite return of 5% with positive returns every quarter of the year. Our corporate private equity, tactical opportunities and liquid credit strategies were down only modestly for the year between 1% and 3%. One of Blackstone's core principles since our founding in 1985 involves the preservation of capital as a necessary component of the investments we make. We assess investment opportunities rigorously always with a focus on not losing our clients' money. In addition, of course, we seek returns that significantly exceed public market benchmarks over time. This year, we are proud that we again executed on this foundational principle. Our approach to investing has enabled us to grow from having no assets in 1985, to becoming the largest alternative asset manager in the world today. As you would expect, our investors are rewarding us, including remarkable inflows of $226 billion just in 2022, which drove 11% growth in assets under management to a record $975 billion. Our inflows this year alone qualify as a top 10 alternative manager out of the over 10,000 alternative managers globally. But Blackstone and others started in the alternatives business, institutional investors provided almost all of the capital for investment. That business remains robust today as institutions are continuing to increase allocations. The vast $85 trillion private wealth channel, a new generation of investors is starting to experience the benefits of alternatives as well, a development led by Blackstone, where we have the largest market share. 20 years ago, we started raising money in this channel by offering access to the same high-quality products we offer to institutions. Over a decade ago, we built a dedicated private wealth team, which today comprises approximately 300 people globally, where we invested significantly to establish the leading sales and service organization in our sector, interfacing with the largest wealth distribution systems. Six years ago, we launched our first large-scale customized products for individual investors. These products were designed to provide attractive returns by investing in longer term assets and therefore, capture the premium for liquidity, which is the basis of much of our business. And we structured these products to provide liquidity over time, subject to limits as it is essential to match the time horizon of investments with the duration of capital. This is a foundational principle of portfolio construction. And these products have worked exactly as intended. Blackstone's largest product in the private wealth channel, BREIT, has delivered 12. 5% net returns annually since inception six years ago, for its largest share class, earning over three times the public REIT index. Been a lot of talk about public REITs. We've out-earned them by three times. In 2022, BREIT's net return was over 8%, while equity and debt markets were melting. And its growth in net operating income, 2022 was 65% higher and public REITs through the latest available public data, thatâs some performance. Blackstone's second largest product in this area of BCRED, has achieved 8% net returns annually, significantly outperforming the relevant credit indices and is yielding over 10% today, exclusively in floating rate debts. The response to our performance has been extremely positive. In 2022, our sales in the private wealth channel totaled a remarkable $48 billion, not exactly what you're hearing in the media. In the fourth quarter, despite market headwinds, our sales were robust $8 billion, including $4 billion in our perpetual vehicles and $4 billion in other strategies. On a net basis, after repurchases, we saw positive net inflows in this channel of $3 billion overall in the fourth quarter with strong demand for our drawdown products. Specifically, our perpetual strategies saw moderate net outflows in the quarter of approximately $800 million. As one would expect, flows in these strategies are impacted by market cycles. We believe we're seeing a temporary decline in an otherwise very positive long-term growth trajectory. Firstly, speaking, I've been in finance for over 50 years and I'm frankly quite surprised by the intense external focus on the flows for BREIT at a time of cyclical lows in stock and bond markets. For those of us that build and create businesses, what's going on is highly predictable. It should be expected that flows from high net worth individuals would decline to nearly all types of new investments in this environment. Having navigated five major market declines in my career, I've learned that focusing just on what's happening at the bottom of cycles. This leads the public regarding likely future trends for appreciation and growth in well constructed and historically high-performing products. My experience is these market bottoms often last for relatively short periods of time are followed by a resumption of historic trends. At Blackstone, we are focused on the long term, not next month. And rather than simply counting balls and strikes, we're working to win the World Series. And as we all know, not all World Series are won four games to 0, all people remember is who won the World Series, and that is our intention, and that has been our experience with the vast bulk of our products. Our funds are built on performance and our consistent experience over nearly four decades has been that with strong returns, flows will follow. The need for very high-quality products in the private wealth channel is very substantial, and we're bringing something highly differentiated in terms of our portfolio and performance. What we've created for individual investors is so good that one of the most sophisticated institutions in the world contacted us and indicated they wanted to invest as well. Earlier this month, the University of California system invested $4 billion in BREIT and is investing an additional $500 million beyond that, which we announced yesterday with an effective six-year hold. This investment builds upon a 15-year relationship between our firms. I had the pleasure of meeting with UC's Chief Investment Officer over the holiday period, and he said they consider BREIT has one of the best positioned real estate portfolios in the United States. This investment provides BREIT with substantial additional firepower and flexibility, and represents a powerful affirmation of the portfolio and its performance. It also illustrates the significant advantages of buying products from Blackstone. Investors and our funds get access to the full capabilities of our firm, not just those of an individual portfolio manager, including our intellectual capital, relationships, creativity and the many other benefits that come from our leading market position. We use these advantages to drive the best outcomes possible for our customers. Our distribution partners understand this as well, and they've told us they plan to continue to expand their client's access to alternatives. Blackstone's commitment to the private wealth channel is stronger than ever. And we believe our performance in this cycle will ultimately provide impetus for significant growth in this area. Our returns in the face of adverse markets and adverse media are proof of concept and our disciplined approach to institutional asset management applies for the benefit of individuals as well. In closing, as we move into 2023, Blackstone is uniquely positioned to navigate the challenges of today's world on behalf of all of our investors. As a whole, our portfolio is in excellent shape with an emphasis on downside protection, as well as upside when asset values ultimately recover from this cycle. With almost $187 billion of dry powder, we have more capital than almost any other financial investor in the world to buy assets opportunistically when values are low and liquidity is scarce. We have lived through many cycles and have always emerged stronger, growing the firm to greater heights. Public market and investors who don't understand our model historically, upon the risk missing out on Blackstone's substantial long-term stock performance. Our people own 36% of Blackstone's equity. I can tell you, this is a group that is extremely bullish on our firm's prospects. Thank you, Steve. Good morning, everyone. The true measure of our success is the returns we generate for clients. Despite a very tough year for markets, we've continued to deliver for them. Nearly all our flagship strategies outperformed the relevant public indices in 2022, as Steve highlighted. The result of how we've positioned investor capital along with our value creation focus. We do not own the market. It matters where you invest. There is no better example of this than in real estate, where we've achieved 16% net returns annually in our global opportunistic funds across the many economic and interest rate cycles of the past 30 years. More recently, given our concerns around rising interest rates and inflation, we concentrated over 80% of our current real estate portfolio in sectors where strong cash flow growth could help offset these headwinds, including logistics, rental housing, life science office, hotels and data centers. Logistics is the largest exposure across Blackstone, comprising approximately 40% of the entire real estate portfolio. Fundamentals globally remain extraordinarily strong. In recent months, re-leasing spreads, the increase in rents as expiring leases roll over, were 65% in our US holdings, accelerating to a record 75% in December, approximately 50% in the UK and 30% in Europe overall; 20% in Australia and 100% in Canada. At the same time, construction starts for warehouses, along with most types of real estate are now falling sharply, which is further tightening and already constrained new supply pipeline. Of course, these exceptional fundamentals do not apply everywhere. In traditional US office, for example, secular challenges have been exacerbated in a post-pandemic world. We've written down the equity value of traditional US office assets dramatically since 2018. And fortunately, such assets represent only 2% of our global real estate portfolio versus approximately 50% 15 years ago. In private equity, our concentration in the travel and leisure, energy, and energy transition areas have had a meaningful impact on our results. We largely avoided unprofitable tech and did nothing in crypto. Our thematic approach has led to 14% year-over-year revenue growth in Q4 for our corporate private equity operating companies. Margins in our portfolio have proven to be resilient, reflective of our focus on high-quality businesses with pricing power. And in our non-insurance corporate credit business, with nearly $200 billion of total AUM. Over 90% of our investments are floating rate, which has benefited returns as rates moved higher. Finally, in BAM, we emphasize macro and quant strategies yielding outstanding results for our investors in liquid securities. The strength of our returns over decades, reinforces the Blackstone brand and allows us to serve investors in more areas. While the fundraising environment remains challenging, we are in a differentiated position with LPs globally. We're seeing the greatest demand today for private credit strategies, including from insurance clients and for infrastructure. In credit, the current environment is favorable for deployment given the significant increases in base rates and wider spreads. Moreover, our investors benefit from our direct origination capabilities, which is a key differentiator for insurance clients in particular. That's leading to robust growth in this area with $8 billion of inflows in Q4 from our large insurance mandates, bringing platform AUM to $160 billion and we have line of sight to over $250 billion over time from existing clients alone. This includes our resolution platform, where we recently announced an incremental $1 billion commitment from Nippon Life, Japan's leading life insurance company to help accelerate the company's growth. In infrastructure, we raised $3 billion in the fourth quarter and $10 billion in 2022, bringing AUM to $35 billion in just five years. Performance has been outstanding with 19% net returned annually since inception. Again, it's about where we chose to invest, including inflation protected areas like digital, transportation, and energy infrastructure. Turning to our drawdown fund business, we've raised approximately $100 billion to-date for the current vintage of flagships, advancing toward our $150 billion target. In corporate private equity, we've closed on over $15 billion for the new flagship and believe we will raise roughly a similar amount as the prior fund in a difficult private equity fundraising environment. In secondaries, we completed the fundraise for SP's flagship PE strategy at over $22 billion, the industry's largest, as well as SP's GP-led continuation fund at $2.7 billion. We also raised additional capital in Q4 for our renewables and energy transition-focused strategies in credit and private equity, targeting over $10 billion in aggregate. In real estate, we commenced fundraising for our latest debt vehicle, which we believe will be comparably sized to its $8 billion predecessor. And later this quarter, we expect to start raising our seventh European opportunistic strategy, targeting a similar size to the prior fund, which was â¬9.5 billion of third-party capital. As with fundraising, our global scale and our reputation as a partner of choice are key advantages in deploying capital, particularly when the world becomes challenging. Our largest commitment in Q4 was for a majority stake in Emerson Electric's Climate Technologies segment. This $14 billion corporate carve-out was the result of a year-long dialogue, completed at a time when traditional financing sources were largely unavailable. Emerson remains our partner in the investment. The ability to source, structure and finance such a complex transaction at scale in a difficult investment environment highlights the very best of Blackstone. Other investments in Q4 included CoreTrust in partnership with HCA, another bilateral discussion with a high-quality corporate and the privatization of Atlantia, one of the largest transportation infrastructure companies alongside the Benetton family. We're starting to see some interesting opportunities arise from the market dislocation, including from real estate funds seeking liquidity, leading to investments in logistics portfolios in Canada, the UK and Sweden, but it will take time for a volume of large-scale opportunities to emerge. Our latest fundraising cycle has positioned us very well with $187 billion of dry powder. In closing, we continue to see global LPs increase their allocation to alternatives and Blackstone is the leader in the space. For shareholders, our firm represents exceptional value. We've grown distributable earnings 20% annually for the past 10 years, more than double the rate of the market. We've done that while paying out nearly 100% of our earnings through dividends and buybacks. Moreover, the share count has barely grown over that decade, and we continue to operate with minimal net debt and no insurance liabilities. It is an extraordinary business model, and our brand and relationships with customers have never been stronger. Thanks, Jon, and good morning, everyone. Firm's results reflect strong performance in difficult markets. Our business continues to demonstrate remarkable resilience and fundamental strength in terms of investment returns, inflows and earnings power. I'll first review financial results and then we'll discuss investment performance and key elements of the forward outlook. Starting with results. Despite the challenging backdrop, fee-related earnings, net realizations and distributable earnings, all saw a meaningful positive growth for the full year, with FRE and DE reaching record levels, as Steve highlighted. FRE increased 9% to $4.4 billion or $3.65 per share, powered by very strong growth in management fees and healthy margin expansion, notwithstanding a decline in fee-related performance revenues. Our expansive breadth of growth engines and the activation of new drawdown funds throughout the year, lifted base management fees 25% to a record $6 billion for the year and the 52nd straight quarter of year-over-year base management fee growth at Blackstone. At the same time, FRE margin expanded 75 basis points to 57.1%, the highest level ever for a calendar year, reflective of the firm's robust margin position and ability to manage costs with discipline in a difficult environment. Fee-related performance revenues were $1.4 billion for the year, driven by strong returns across our perpetual strategies, with contribution from 12 discrete vehicles. Looking forward, the setup for this high-quality revenue stream in 2023, and beyond is quite favorable, which I'll discuss further in a moment. Distributable earnings increased 7% in 2022 to $6.6 billion or $5.17 per common share, driven by the growth in FRE, along with a 4% increase in net realizations. The shape of the year was impacted by our realization activity, which, of course, is market dependent. We saw a record first half driven by certain large realizations of note, while the pace of sales slowed in the second half, reflecting overall market activity levels. FRE remained a balance to earnings throughout the year, 2022 comprising four of the firm's five best quarters for FRE in history. In the fourth quarter, FRE was $1.1 billion or $0.88 per share. The year-over-year comparison was affected by the change in the crystallization schedule for BREIT's fee-related performance revenues in 2022. Previously, each full year's revenues crystallized in the fourth quarter, which moved to a quarterly crystallization in the first quarter of 2022. Notably, excluding these revenues, the firm's FRE growth in the fourth quarter was positive 7%, more in line with the full year. Distributable earnings in the fourth quarter of 2022 were $1.3 billion or $1.07 per common share, down from the prior year record quarter. Stepping back, despite a muted backdrop for realizations for much of the year, our distributable earnings were above or well above $1 per share every quarter for the past six consecutive quarters, which had only previously occurred three times in our history. This reflects well the elevation of our earnings power that is underway. Turning to investment performance. Against the volatile market backdrop of 2022, our funds protected investor capital. In the fourth quarter, the corporate private equity funds appreciated 3.8% with strength in our travel-related and energy holdings along with our publics broadly. Our portfolio companies are well positioned overall with continued strong revenue growth and resilient margins. In real estate, the Core+ and opportunistic funds depreciated 1.5% to 2% in the quarter. In the context of rising cost of capital, we've continued to increase cap rate assumptions across the portfolio, driving the fourth quarter decline. Notwithstanding this impact, our real estate strategy still saw significant appreciation for the full year due to robust cash flow growth across our holdings. Of note, 10-year yields have moved meaningfully lower since year-end, which, if sustained, should provide additional valuation support over time. In credit, the private credit strategy is appreciated 2.4% and the liquid strategies appreciated 3%, reflective of a resilient portfolio, generating strong current income against a stable backdrop for credit generally in the quarter. And in BAAM, the BPS gross composite return was 2.1% in the quarter, the 11th quarter in a row of positive performance. Overall, our portfolios are performing well in a challenging external operating environment. Turning to the outlook. First, as it relates to realizations, we expect sales activity to remain muted in the near-term given market conditions. And as always, when markets ultimately stabilize, we would expect realizations to reaccelerate as well. With respect to FRE, we continue to expect a material step-up over the next several years, led by the combination of first, our drawdown fundraising cycle; second, expanding contribution from perpetual strategies; and third, the substantial largely contractual growth of our dedicated insurance platform. In terms of the drawdown funds, the fee holiday for our global real estate flagship has ended, and 2023 will include a nearly full year contribution of management fees. We expect to launch the investment period for the corporate PE flagship later this year, subject to deployment which will be followed by an effective four-month fee holiday. We will launch various other funds in the coming quarters depending on deployment. In total, only $56 billion of our $150 billion target was earning management fees as of year-end. Federal strategies continue to grow in number and scale with over 50 discrete vehicles today, a combined fee AUM of our four flagship strategies BPPE, BREIT, BIP, and BCRED, grew 30% in 2022 to $184 million. This sets a substantially higher baseline for fee revenues entering the year. In addition to NAV-based management fees, over 30 of the perpetual vehicles are eligible to generate fee-related performance revenues, and the firm will continue to benefit from the layering effect of these revenues. We previously noted that the BPP platform has four times more AUM subject to crystallization in 2023 and 2022 concentrated in the second half of the year. Finally, in insurance, we ended 2022 with over $100 billion of AUM from our four large clients, generating $450 million of management fee revenue for the year. As these mandates grow over time, both organically and by contract, we anticipate fee revenues just from these mandates will more than double to approximately $1 billion in four to five years, including strong double-digit growth this year. These revenues carry attractive incremental margins given our extensive existing capabilities. In closing, despite the uncertainties in today's world, we entered the new year from a position of fundamental strength. Our earnings power is elevated dramatically for the past several years. And looking forward, we have great confidence in the future. So Infrastructure Partners is generating sizable inflows pretty much every quarter now, AUM is around $35 billion. What's been driving the improvement in fundraising momentum at Infra? Is it partly the inflation had qualities? Is it more contribution from the private wealth channel? And also, is PIF still matching every dollar of inflow? And I think that was up to $40 billion. So, Craig, I would say the key reason it's grown, echoing what Steve was saying in his remarks, is performance drives inflows. So, this vehicle, if you look in our filing, has delivered 19% net since inception five years ago, really remarkable for a fund that had a much lower targeted return, and so that's obviously attractive. I do think you hit on a key element, which is the inflation protected nature of hard assets, particularly in this portfolio. What it owns in transportation infrastructure, an area we went very long post pandemic, investing in Atlantia in Europe, the Autostrade in Europe, Signature Aviation here in the United States. That has been very positive for this fund, are pushing digital infrastructure, data centers and towers, where there's really strong underlying demand. And then energy and energy transition, of course, given what's going on. And so, it really has a really exceptional portfolio that investors find attractive in an inflationary environment. It's delivered very good performance. And in general, I would say our customers are under allocated to infrastructure and want to hold more here. And so, I think, it's one of the things that everybody has been so caught up on one product flows. Meanwhile, here's a product that didn't exist five years ago, has $35 billion of AUM, grew 53%, is delivering phenomenal performance, and I think we'll grow to be much, much larger than it is today. Specifically, you talked about private wealth. It's not really a product so far that we've tapped into the private wealth channel on. And then, as it relates to our partners at PIF, yes, they are still matching us up to a certain size under our agreement. We also in the number have some co-investments. So there's still some additional capital. But I would just say, the response from investors broadly here has been extraordinary. And what we've built from scratch, what Sean Klimczak, who runs that business has done, is truly exceptional, and we're really proud of this business and have a lot of optimism about the future. So, I think, Steve put it well earlier when talking about its essential to match the duration of assets with the capital. And there's a perception or reality in some ways that the quarterly liquidity products don't do that. Now, they work and you're protecting shareholders. So I understand, they hit the bottom line. So my question is, we've been talking about for a while now and experiencing retail, the private wealth channel contributing 30% to 50% of flows for the company. So I'm curious how you evaluate the client experience, the client being the SA, the platform, the end client that's asking for money and has to wait. And so, the bigger picture question is, do you still have confidence in that 30% to 50%, do you need some reinnovation of product wrapper? I know, I asked something like that last quarter, but we have thee months more of conversations. So I'd love to get your mark-to-market on all of that. Thanks, so much. Thanks, Glenn. I think what's fascinating is, when we talk to our clients, their experience versus the media narrative. So what we've heard from our clients is, they're quite pleased. They're quite pleased that they invested in a product that has produced 3 times the rate of return as the public REIT market. So they look at what's happened here is positive. Our clients and financial advisers understand that this was a semi-liquid product, that the basic trade-off was to trade some liquidity here for higher returns and that there were always, from day one, six plus years ago, limitations on liquidity. Now, there may be a small subset who've expressed some unhappiness. But frankly, the vast, vast majority of our customers are quite happy. And so we think about this, like a great restaurant that serves food, the weather outside is bad and the markets are tough back to Steve's comments. There are not quite as many people showing up right now, but the food is still really good. And we think as the world reverts, as we work through the backlog of redemptions, we're going to continue â we will see flows return. And by the way, we saw in 2020 a cessation of flows. You can look at products like this over time. People are just taking a snapshot of today, and they're focused on the flows. What I find fascinating was yesterday, we posted our 8-K saying that, same-store estimated NOI for BREIT was 13% for the full year, which is extraordinary for a portfolio of this size. No one covers that. What they're focused on is what the flows are next week. To us, what matters is delivering customer. So I do believe, fundamentally, as we get through this challenging period, people will come back to these products. I think as you talk about liquidity, could there be tweaks to these different products over time on the liquidity features, BCRED, for instance, does quarterly versus monthly. We're not changing anything today, but certainly, people are going to look at these. But at the end of the day, the product has delivered as designed. It's delivered strong performance. It's delivered on the liquidity promises it had, the media has created a different narrative, but the customers are fundamentally happy. That's why I believe as the world normalizes, we will again begin to see flows. Great. Thanks. Good morning. Just more of a bigger picture question around growth and innovation. I guess, if we look at your growth in recent years, many of the products that are contributing today did not exist 5 or 10 years ago. So, if we look out over the next 5 to 10 years, can you talk about some of the white space that you see for innovation for new business opportunities, opportunities for new strategies and just the overall opportunity set for Blackstone to innovate from here? And ultimately, how different might the Blackstone of 2030 look versus today? So, I think there is still enormous opportunity in the alternative space. When you look at it aggregately, it's roughly $10 trillion industry. We're about 10% of the industry. That compares to stocks and bonds over $200 trillion. If you throw in commercial real estate, residential real estate, other things, you can get up to $300 trillion. So I think there's a lot of room to grow, Mike. And I think where the most growth will happen as you've seen, if you think about sort of investments as a pyramid. At the very top are the highest returning strategies there, we've obviously done a great job in private equity, real estate, private equity growth, life sciences, but what we're seeing is a lot of growth in strategies where the return profiles are not as high longer duration strategies. We think about private credit is a huge area of opportunity, because investors, be it insurance companies or individual investors or institutions realizing now that they can lend directly to borrowers with help from somebody like Blackstone. That is a very, very big market, and we today are still a very small percentage of that. Specifically, we've talked a lot about insurance, but an industry where people are really now focused on performance and the incremental return that comes from originating private credit, we have this unique platform today that enables us to serve now four major clients. I don't see any reason why that platform cannot continue to grow. And as we have more scale, we can generate even more favorable returns. Infrastructure, which we just touched on, I think, there's a global opportunity. We started initially in the US that can certainly be a bigger global opportunity. I would say Asia, which I'm going to in a couple of weeks, in real estate, in private equity across the board, I think that's an area where there's a lot of growth. And just credit and yield products generally are attractive for us. And the secondaries market, which you've seen, which benefits from the rise of the alternative space can grow. So when we look out across our business, we still see lots of engines of growth. Even core plus real estate, we're still a tiny fraction of that market. And so, what we have, which is a great sort of special sauce of the firm, these wonderful people, but these relationships we've built up. So if you look at what's happened with Cal Regents, $4.5 billion committed in a short period of time, the transaction we did with Nippon Life that I referenced. We have a number of big investors who are looking at $1 billion plus commitments to various vehicles and funds. We've just got a lot of goodwill. And the key for us is to find the right talent to pursue some of these strategies and then scale it up. So again, our optimism remains high. And what's interesting versus the last really sharp down cycle in 2008, 2009 is clients are actually talking about increasing their allocation to alternatives, something that's very different than the sentiment back then, because investors continue to see the differentiated performance. Hi. Good morning. And thanks for taking the question. Wanted to dig into BPP and the outlook for growth in this product. So maybe first, have you gotten a reaction to the arrangement you made with UC and BREIT from customers of BPP? Maybe second, even outside of Mileway and BioMed, growth has been very strong for BPP. How's the outlook for growth over the next few years changed as it seems like growth has stalled more recently there? And then lastly, do you see other Mileway and BioMed opportunities for adjacency growth in BPP? And what might the nature of those adjacencies look like? Thank you, Ken. A few things. We haven't really heard much from our clients in the institutional world around BPP, vis-Ã -vis BREIT and the Cal Regents investment. I think there's a different dynamic, given the different liquidity profile in BPP, where investors recognize you need new inflows in order to get redemptions done. In terms of the outlook, what tends to happen in these open-ended vehicles during periods of market dislocation is, you do see a deceleration of flows. People want to sort of wait and watch. Capital allocation is more constrained. And you will see, in this area, a slowdown. By the way, it's happened in the past in the early 2000s in open-ended institutional real estate funds. It's happened in the 2008, 2009 period. And then as you come out of this, clients want to get invested in the fact that these funds can deploy the capital quickly into existing portfolios is attractive. But I would guess, in the near term here, this area won't grow as quickly as other parts of the firm, like infrastructure we were talking about. In terms of large-scale recapitalizations, creating more perpetual vehicles, I think that's an opportunity over time. We do it on a very selective basis. We're focused on maximizing returns for our customers. We have a number of these mild way, BioMed, Logicor, which is another large logistics platform. We have some smaller vehicles. Interestingly, BPP at $73 billion is made up of more than 30 different entities. So there's a lot of diversity in the customer base and the asset class here â and it's an area that we think can grow quite significantly over time. But in the near term, I think the growth will be a little more muted. Hi, everyone. Good morning. On private credit. I appreciate the color you had earlier on the US direct lending potential via your insurance relationships. Of course, the BDC can continue to grow as well that complex. But beyond these, can you talk about the broader institutional efforts? And if you have an eye on expansion into, say a fund complex or an evergreen for that asset class? We think there's a lot of opportunity in both the US and Europe on direct lending with institutional clients. You rightfully pointed out obviously BCRED has been quite successful in that space, serving the individual investors. Some of this is in the insurance clients, but institutional clients see the same thing. If you look at a transaction we did in private equity, with Emerson, their climate technology business, we borrowed there about one-third loan to value and the spreads were 60-plus over. And if you think about where base rates are and upfront fees, that is a very attractive return. And so institutional clients, large pension funds and sovereign wealth funds are seeing this, we have a number of SMAs. It is an area that we would like to and plan to grow over time. And I think that will be another feature. I think that's why this sort of direct lending capability, which has multiple ways to access capital can grow to be much larger than it is today. Great. Thanks. Good morning, folks. Just back on BREIT and BCRED. Just John, if you had a crystal ball, I guess, in the sort of near-term intermediate term on when you think the redemption requests might abate. And just in thinking about that, getting through the Asian investors, which, obviously, were a redeemer â heavier redeemers last year and then getting sort of burning through the â any of the folks that are not happier want to redeem and getting to those happy investors, so to speak. Just in terms of the redemption profile, when would you think you might burn through those requests and get to sort of more of a positive net positive profile. And if you can differentiate that with BCRED and then also just are there more potential institutional investor opportunities in BREIT like you see? Okay. A bunch of questions here. I guess I'd start by saying, we endured for a number of months of really negative press, as you know. And so, rebuilding momentum takes time. I think the good news is, if you talk with our distribution partners, financial advisers, underlying customers, the tone of those conversations has improved. There were a lot of concerns, many of which we saw as unfounded that needed to be addressed and the capital coming in from Cal Regents, $4 billion originally, another $500 million yesterday. It says a lot. It's a real affirmation. There's been a lot of discussion about that capital. But when you really look at what Cal Regents did, it was a subsidy we provided, Blackstone, not BREIT on the downside of about 4% annually. And so, unless BREIT performs for them, then they don't get the 11.25% that they're hoping to achieve. And that affirmation of the quality of the portfolio and the valuation of the portfolio was very important for outside investors and for our individual private wealth customers and their financial advisers. In terms of, would we do more of this? We've had some people reach out. There's a limit to the number of units we own. And we'll just wait and see, but we have had some folks reach out. We'll see what happens on that front. But we really like this transaction because, obviously, it gave a lot of valuable capital to BREIT. It gives -- from a Blackstone perspective, we think the product can really perform as we talked about previously. We just need to achieve an 8.7% return well below the product's historical returns in order to generate incremental gain. And then above 11.25%, we get even more in terms of incentive fee sharing. So we look at this as a transaction that makes a lot of sense for us, certainly very helpful for BREIT, particularly the duration of the capital, but we'll wait and see what happens in terms of more. On BCRED, and then I should answer, I guess, specifically on your question on timing, I'd say, the other positive sign out there, besides improved tone, is the majority of the redemptions we're seeing in January, it's still early, are coming from November and December unfulfilled requests. So that, to us, is encouraging. But because those are outstanding and because some investors now are making larger requests than they actually want to achieve, because they expect to be cut back, we expect here in January, we will see an uplift in redemptions. But then, to your point, we think over time, we'll be able to work down this backlog. Predicting the timing of that is not easy. I think, continued strong performance from us is obviously important, continued confidence from the investment community and rebuilding that momentum. So at this point, I wouldn't put a time line on it, but I would say I think the investment from Cal Regents was really important in terms of psychological confidence, but we're going to have to wait and see how this plays out. But we feel, what gives us our underlying confidence is what's happening in BREIT. The fact that, in November, rents in the portfolio were up 10%, the fact that the rents in place are 20% below market. And in our major sectors, rental housing and logistics in Q4, we saw almost a 30% decline in new permits or starts and now the 10-year treasury, which has been a real headwind on cap rates has come back down. So, that makes us feel better about the outlook. And that will be key, I think, to get more investors moving in our direction. On BCRED specifically, there we have continued to have positive net flows. The dynamic is a little different. There's less negativity around real estate. There's obviously the headwind on these vehicles -- Oh, sorry, less than around credit. Thank you for the correction. There's less pressure, negative press around the credit space there's a benefit from rising rates. And there, we -- again, we've positioned the portfolio 100% floating rate, 98% senior secured and the products yielding north of 10%, which should go higher as the Fed raises rates. So, I think the dynamic there is more positive. And again, I think performance will drive flows. Hey good morning everybody. Thanks for the question. I was hoping to zone in on your secondaries business. You guys raised the potential amount of capital for the latest fund. And it feels like there could be quite a bit of activity in the secondary space, given changes LPs are making and obviously, significant macro movements. So, as you think about velocity of capital in the secondaries business, both LP and GP-led transactions. How do you expect that to shake out? What does that mean for maybe additional product innovation and fundraising within the secondary franchise for Blackstone? Well, what anchors the secondaries business is that growth in alternatives we've talked about. We just continue to see that industry grow our industry grow it has been now for 30-plus years, and we don't see that slowing down. And of course, investors at times will want liquidity. Today, about 1% of the industry trades, that's why there tend to be sizable discounts when you're investing in secondaries. What we've seen growth and, of course, is in the private equity space, but we also have funds dedicated to real estate and infrastructure. And as you pointed out, GP continuation, which is very popular now where general partners like an asset or company they own, bring in outside investors, and may invest from their new funds as well. And that scenario that we think can grow quite a bit. So, it feels to us like this is a business that's sort of coming into its own that the industry can grow to be much larger than it is because of the need for liquidity and the growth in underlying alternatives. I do think the deal side will be a bit slow here as buyers and sellers have to find equilibrium. But I'm with you, Alex, that in the back half of the year, I would expect we'll see a big pickup in activity. And our scale is a real competitive advantage because we can -- we're investing in 4,000-plus funds across all the geographies all the segments, and that gives us the ability to be a one-stop shop for the customer. So, it's another area where there should be real growth over time. This has now grown to be nearly a $70 billion business. Though by itself, it would be quite large. It just happens to be inside the Blackstone. Great. Thanks. Hoping you could just clarify some comments I believe I heard with respect to where you are on the sort of 12 to 18-month fundraising time horizon towards $150 billion. And specifically, what is sort of ahead of you where you see some of the larger sort of fundraising and what vehicles? What the sort of makeup of the remaining sort of target goal looks like? Thank you. Well, thanks. I'm not sure we put sort of specific times. What we really focus on is sort of the vintage of funds we're raising. And as we said and you pointed out, we had a $150 billion target that we've been talking about now for more than a year. The good news is we're at $100 billion, so we're two-thirds of the way through this. Obviously, large fundraises and secondaryâs, opportunistic global real estate, Asian real estate. We've made a lot of progress on our private equity fundraising. In the balance of the $50 billion, we're talking about raising a new BREIT 5 real estate debt fifth fund, which will be a meaningful chunk. We also said, we're going to kick off this quarter, our seventh European opportunistic real estate fund â¬9.5 billion of third-party capital last time, and we're going to target a similar size again. And then we have more to get raised in green energy, both credit and equity. We have some smaller DSP funds that are going to work their way through the system. And then we will launch at some point in 2023, the next vintage of our Life Science business. So we've got a bunch going out there. And the good news, I think, for us is we obviously are large in the US institutional community, but we're big in Canada. We're big in Europe, the Middle East, Asia. And as you know, we've got insurance clients, individual investors and obviously, our institutional clients. Interestingly, everybody is focused on the semi liquids. But if you looked in the fourth quarter, in the drawdown funds, we raised, I think, $3 billion roughly across breadth in BXG, our growth fund in some other areas from individual investors in our drawdown funds. And so that is just another tool we have in our toolkit to help us raise this capital. So we feel good about it, but I certainly would acknowledge it is a tougher environment than when we started. Thank you, and good morning. Just a follow-up on BPP. You talked a little bit about kind of slowing new commitments in the near or medium term. Just wondering in terms of existing clients and redemption requests, if those are elevated at all, whether that might be driven maybe by liquidity as in the retail channel or just buy some other reallocation. Also on that, to the extent that redemption requests were to be elevated either now or in the future does that impact at all your ability to collect performance fees? Thank you. Yeah. So on BPP, as we talked about, it's $73 billion. It's made up of a lot of vehicles. The majority, I believe, of which are today not open on redemptions. We have in aggregate. I think the number is about 7% outstanding redemption requests across that entire platform. But importantly, as we talked about earlier, institutional investors understand that liquidity comes from new inflows. And that's very different than the expectations in the private wealth channel. And so I think that's why it's just a different dynamic. And the short answer is, yes, I talked about it earlier in this kind of environment for a variety of reasons we expect we'll see less in the way of flows in some of these vehicles. They're not all the same. There may be more interest, for instance, in Core+ Asia real estate than maybe other geographies or other sectors. But this is an area, as I said, I expect the growth, the net growth in the near-term will be far more muted. But because if you look at it aggregately, where we position the portfolio, we feel quite good. So if you look at this in BPP, we've got something like â I think we've delivered 11% net across this platform over time. When you look at life science office buildings, logistics, residential, that's something like 70% of that portfolio. And so I think that, again, will be the key determinant. But right now, there are some near-term headwinds in that space. Hi, good morning everyone. Could you update us on how -- I know it's early, obviously, but how LP, like, institutional LP commitment discussions have evolved as we restarted the process in January. More specifically, any signs that the backup and PE fundraising is starting to clear? And then more broadly, could you frame any asset classes that you're seeing any meaningful shift in demand for positively or negatively? I would say this; the desire for our alternatives remains very strong. Here in the US, New York State, the legislature actually increased the allocation for the big three pension funds here by roughly one-third. You've heard some other CIOs publicly talk about wanting to increase allocation to alternatives I was in Europe a couple of weeks ago meeting with some large insurance companies and institutional investors. They wanted more in alternatives. There are some constraints today certainly related to over allocation in the PE area, specifically with US clients. There are some currency headwinds that's made it a little harder for overseas investors. And I would say there is a little bit of a shift. I think private credit is considered more attractive today. And so we see a lot of people moving in that direction. Infrastructure that we talked about earlier is considered quite attractive, secondary. And I would say opportunistic real estate, we've had a very good response both to our global fund, of course, and I expect we'll do fine with our European product as well. So I think these things tend to ebb and flow, but the overall path of travel is towards more alternatives, and that's obviously positive for the industry and positive for us. Hi. Thanks so much for taking my question. I wanted to ask about the FRE margin profile. You beat the consensus expectations up pretty nicely in the quarter. Just thinking about in fiscal 2023 and over the next few years, you've kind of indicated a sizable step-up in FRE. You indicated very high turns business to scale. Just wondering, if you could share your thoughts around FRE margin expectation for fiscal 2023 and how it should grow over the next couple of years? Thanks. Sure, Ben. I mean, I think look, the big pick -- as you know, we don't give spot guidance on every margin targets in the short-term. But our track record over time of sustained expansion, I think, is obviously evident. And I think in general, substantively, we do feel like we have a high degree of control and an appropriate level of discipline with respect to our cost structure. I would just say in terms of the near-term outlook, we remain confident in margin stability over the next year and also for the potential for continued expansion over time. In OpEx, I would kind of highlight, you did see we talked a lot sort in the course of 2022 about the resumption of T&E and sort of the difficult comparisons. And you did see a flattening of that year-over-year growth rate in other OpEx in the second half of the year. And so what I would say is in 2023, especially I think in sort of the last three quarters of the year, that year-over-year comparison will be even easier. So I would just say, in general, without giving specific targets, we feel good about margin stability and the possibility and potential for continued expansion over time without putting an exact time frame. Thanks. Good morning everyone. So you're clearly in a great position to deploy capital into the dislocation across markets with $187 billion of dry powder. A lot of this capital sits within your traditional drawdown funds and strategies. So how should we think about deployment activity moving forward for some of your retail products? Well, for the retail products, I think this is one of the reasons why getting this large slug of institutional capital was helpful. It gives us the potential to start doing that. Obviously, the activity levels, though overall will be related to flows. There's a correlation, of course, if we get new flows, net flows into BREIT and BCRED. And we think it is a good time, because you can buy assets, in some cases, at attractive prices because of the dislocation. So I think that's how we see the world today, and that's why over time, as we think capital comes back here, that will allow us in these private wealth channels to deploy more capital, that would be a very favorable thing. And there are no further questions in the queue. So let me hand it back over to Weston Tucker for closing remarks.
EarningCall_958	Hello, and welcome to the AMD Fiscal Fourth Quarter and Full Year 2022 Financial Results Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. Thank you, and welcome to AMD's fourth quarter and fiscal year-end 2022 financial results conference call. By now, you should have had the opportunity to review a copy of our earnings press release and accompanying slideware. If you've not reviewed these documents, they can be found on the Investor Relations page of amd.com. We will refer primarily to non-GAAP financial measures during this call. The full non-GAAP to GAAP reconciliations are available in today's press release and slides posted on our website. Participants in today's conference call are Dr. Lisa Su, our Chair and Chief Executive Officer; Jean Hu, our Executive Vice President, Chief Financial Officer and Treasurer; and Devinder Kumar, our Executive Vice President. This is a live call and will be replayed via webcast on our website. Before we begin, I would like to note that Mark Papermaster, Chief Technology Officer and Executive Vice President, Technology and Engineering, will attend the Morgan Stanley Technology, Media and Telecom Conference on Monday, March 6. And our first quarter 2023 quiet time is expected to begin at the close of business on Friday, March 17. Today's discussion contains forward-looking statements based on current beliefs, assumptions and expectations speak only as of today and as such, involve risks and uncertainties that could actually cause results to differ materially from our current expectations. Please refer to the cautionary statement in our press release for more information on factors that could cause actual results to differ materially. Before discussing our financial results, I wanted to make a few comments about our CFO transition. I'd like to start by thanking Devinder for all of his contributions to AMD over the last 39 years. During his tenure as CFO, we built a strong financial foundation that has enabled AMD's significant growth and success. On a personal note, his partnership and expertise have been invaluable to me. I know I speak for all of AMD when I say we appreciate all he has done for the company and wish him the best in his upcoming retirement. I also want to welcome our new EVP and CFO, Jean Hu, to our first AMD earnings call since joining us earlier this month. Jean's more than 14 years of public company CFO experience and proven track record of financial leadership make her an excellent addition to our team. I look forward to working closely with her as we continue to transform and scale our business. Now turning to the business results. 2022 was a strong year for AMD as we navigated the challenging macro environment to deliver best-in-class growth and record profitability driven by our Embedded and Data Center segments. We also transformed the company. We accelerated our Data Center business and closed our strategic acquisitions of Xilinx and Pensando, significantly diversifying our business and strengthening our financial model as our Data Center, Embedded product sales grew from $3.9 billion in 2021 to $10.6 billion in 2022. Looking at our financial results. Fourth quarter revenue increased 16% year-over-year to $5.6 billion, driven by significant growth in our Embedded and Data Center segments which accounted for more than 50% of overall revenue in the quarter. On a full year basis, we grew annual revenue 44% to $23.6 billion. We set annual records for revenue, gross margin and profitability driven largely by a 64% increase in our Data Center segment revenue and the strong performance of our Embedded segment following our Xilinx acquisition. Turning to the fourth quarter business results, starting with our Data Center segment. Revenue increased 42% year-over-year to $1.7 billion, led by increased adoption of our EPYC processors by cloud providers. In cloud, sales to North American hyperscalers more than doubled year-over-year as hyperscale customers continued moving more of their internal workloads and external instances to EPYC processors. EPYC processors now power more than 600 publicly available instances globally following the launches of new AMD-based instances from AWS, Microsoft and others in the quarter. In Enterprise, revenue declined year-over-year as demand slowed based on the macro environment. Against this backdrop, we continue expanding our pipeline and closed a number of new wins in the fourth quarter with Fortune 500 financial services, automotive, technology, energy and aerospace companies. In HPC, growing EPYC processor adoption was highlighted by the number of AMD-powered supercomputers on the latest Top 500 list increasing by 38% year-over-year. AMD now powers more than 100 of the world's fastest supercomputers and 15 of the top 20 most energy-efficient supercomputers in the world. To build our Data Center leadership, we launched our fourth gen EPYC processors this past November that deliver up to 2x faster performance in cloud, enterprise and HPC applications, and are up to 80% more energy efficient than the competition's most recently announced offerings. We are seeing very strong customer pull for fourth-gen EPYC CPUs, which complement our third-gen offerings with additional performance and capabilities. Initial cloud deployments are going very well, and we expect to ramp both internal workloads and public instances throughout 2023. For Enterprise, there are more than 140 fourth-gen EPYC platforms in development from HPE, Dell, Lenovo, Super Micro and others, an increase of 40% compared to the prior generation. Now looking at our broader Data Center portfolio. We had record sales of our Xilinx Data Center and networking products in the quarter, led by strong demand from financial services companies for our newly launched Alveo X3 series boards, optimized for low latency trading. Sales of our Pensando DPUs also ramped significantly from the prior quarter, driven by supply chain improvements and continued demand. We are very pleased with the customer reception of the Pensando technology with good long-term growth opportunities as DPUs become a standard component in the next generation of cloud and enterprise data centers. Data center GPU sales were down significantly from a year ago when we had shipments supporting the build-out of multiple Instinct MI250 accelerator supercomputer wins. In January, we previewed our next-generation MI300 accelerator that will be used for large model AI applications in cloud data centers and has been selected to power the 2-plus exaflop El Capitan exascale supercomputer at Lawrence Livermore National Laboratories. MI300 will be the industry's first data center chip that combines a CPU, GPU and memory into a single integrated design, delivering 8x more performance and 5x better efficiency for HPC and AI workloads, compared to our MI250 accelerator currently powering the world's fastest supercomputer. MI300 is on track to begin sampling to lead customers later this quarter and launch in the second half of 2023. Turning to our Client segment. Revenue declined 51% year-over-year to $903 million. We continue to ship below PC consumption in the fourth quarter as we focused on further reducing downstream inventory. While overall PC demand remains soft, desktop channel sell-through increased sequentially during the holiday season. We launched our latest generation Ryzen 7000 series notebook processors earlier in January, including our Ryzen 7040 CPU series that deliver leadership performance in battery life and are our first processors to feature Ryzen AI, the industry's only dedicated on-chip AI inference engine in an x86 processor. Ryzen AI is powered by the highly scalable XDNA architecture, which is the first integration of AMD and Xilinx IP, less than a year after closing the acquisition. We also launched our Ryzen 7045 series CPUs, our first mobile processor based on a triplet design that delivers significantly higher performance than the competition in gaming and content creation applications. We have more than 250 ultrathin gaming and commercial notebook design wins, spanning our full family of Ryzen 7000 series processors on track to launch this year, an increase of 25% year-over-year with the first notebooks planned to go on sale in February. Now turning to our Gaming segment. Revenue declined 7% year-over-year to $1.6 billion as lower gaming graphics sales more than offset higher semi-custom revenue. Semi-Custom SoC revenue grew year-over-year as demand for game consoles remained strong during the holidays. Gaming graphics revenue declined year-over-year as we further reduced desktop GPU downstream channel inventory. Channel sell-through of our Radeon RX GPUs increased sequentially, and we launched our high-end Radeon 7900 series GPUs to strong demand based on the performance of our new RDNA 3 architecture and 5-nanometer chiplet design. In January, we announced our first RDNA 3 mobile GPUs that have been selected to power new gaming notebooks from Dell Alienware, ASUS and others that are on track to begin shipping in the first half of 2023. Looking at our Embedded segment. Revenue increased significantly year-over-year to a record $1.4 billion. We had record sales across a number of our Embedded markets, including communications, automotive, industrial and healthcare, aerospace and defense, and test and emulation. In communications, we saw particular strength with expanded 5G wireless installations in India and ongoing wired infrastructure deployments with Tier 1 communications providers. Automotive growth was driven by the ramps of new [Ford] (ph) camera, 4D radar and infotainment wins across multiple customers. We recently announced multiple new wins for our automotive grade Zynq UltraScale + platforms with some of the largest vehicle equipment suppliers including Aisinâs next-generation automated parking assist system and DENSO's next-generation LiDAR platform that can improve the resolution required for autonomous driving and other industrial machine vision applications by 20x. We also continued to see strong growth with industrial and health care, aerospace and defense and tested and emulation customers in the quarter, driven by SAM expansion for our leadership-adaptive SoCs, new design win ramps and increased supply across multiple nodes. Taking a step back, as we approach the one year anniversary of the closing of our Xilinx acquisition next month, the integration has gone extremely well, and our Embedded business has become a major growth driver for AMD, strengthening our financial model and significantly diversifying our business. In addition, we are seeing substantial new revenue synergy opportunities as we combine Xilinx's industry-leading adaptive products and 6,000-plus customers with AMD's expanded breadth of compute products and scale. In summary, overall, 2022 was a strong year for AMD despite the weak PC market. We significantly grew our Data Center, Embedded and Gaming businesses and executed well across our product portfolio. As we enter 2023, we expect the overall demand environment to remain mixed with the second half stronger than the first half. In the PC market, we are planning for the PC TAM to be down approximately 10% for 2023. We expect to continue to ship below consumption in the first quarter to reduce downstream inventory, which is reflected in our guidance. In our Embedded and Data Center segments, we believe we are well positioned to grow revenue and gain share in 2023 based on the strength of our competitive positioning and leadership high-performance and adaptive product portfolio. We do see elevated levels of inventory with some cloud customers, which will lead to a softer first half and a stronger second half of the year. We continue working very closely with our customers to navigate the dynamic market conditions while also making the right strategic investments to exit the current cycle with an even stronger and more differentiated set of products to drive future growth. Over the next several years, one of our largest growth opportunities is in AI, which is in the early stages of transforming virtually every industry service and product. We expect AI adoption will accelerate significantly over the coming years and are incredibly excited about leveraging our broad portfolio of CPUs, GPUs and adaptive accelerators in combination with our software expertise to deliver differentiated solutions that can address the full spectrum of AI needs in training and inference across cloud, edge and client. Now I'd like to turn the call over to Jean to provide some additional color on our fourth quarter and full year financial results. Jean? 2022 was a very strong year for AMD. We had a record revenue, gross margin, profitability, and we generated significant free cash flow. The year was also highlighted by our strategic acquisitions of Xilinx and Pensando, expanding and diversifying our business portfolio. Fourth quarter 2022 revenue for $5.6 billion was up 16% from a year ago, driven by higher revenue in the Embedded and Data Center segment, partially offset by lower Client and the Gaming segment revenue. Gross margin was 51%, up 70 basis points from a year ago, primarily driven by richer product mix with higher revenue in Embedded and Data Center segment, partially offset by lower Client segment revenue. Operating expenses were $1.6 billion compared to $1.1 billion a year ago, driven by the inclusion of Xilinx OpEx and additional R&D and go-to-market investments to support the next phase of our revenue growth. Operating income declined $66 million from a year ago to $1.3 billion, and the operating margin was 23%, down from 27% a year ago. Net income was $1.1 billion flat year-over-year. Diluted earnings per share was $0.69 compared to $0.92 per share a year ago, primarily due to lower client operating income. Now turning to our reportable segment for the fourth quarter. Starting with the Data Center segment. Revenue was $1.7 billion, up 42% year-over-year, primarily driven by strong growth in third-generation EPYC server processor revenue and the early ramp of fourth-generation EPYC processors. Data center operating income was $444 million or 27% of revenue compared to $360 million or 32% a year ago. Higher operating income was driven primarily by stronger revenue, partially offset by higher R&D investment to support the top line revenue growth. Client segment revenue was $903 million, down 51% year-over-year due to reduced processor shipments resulting from a weak PC market and significant inventory correction across the PC supply chain. Client operating loss was $152 million compared to operating income of $530 million a year ago or 29% of revenue, primarily due to lower revenue. Gaming segment revenue was $1.6 billion, down 7% year-over-year due to lower gaming graphics revenue, partially offset by higher semi-customer product sales. Gaming operating income was $266 million or 16% of revenue compared to $407 million or 23% a year ago. The decrease was primarily due to lower graphics revenue. Embedded segment revenue was $1.4 billion, up $1.3 billion from a year ago, primarily due to the inclusion of Xilinx Embedded revenue. Embedded operating income was $699 million or 50% of revenue compared to $18 million or 25% a year ago, primarily driven by the inclusion of Xilinx. Turning to the balance sheet. We have a strong balance sheet with cash, cash equivalents and short-term investment of $5.9 billion at the end of the fourth quarter. During the quarter, we returned $250 million to shareholders through share repurchases. In 2022, we returned a total of $3.7 billion to shareholders which was 119% of free cash flow. We have $6.5 billion in remaining authorization to share repurchases. Free cash flow was $443 million compared to $736 million in the same quarter last year. Free cash flow decreased primarily due to higher inventory. Inventory was $3.8 billion, up approximately $402 million from the prior quarter, primarily driven by the inventory increase in advanced process nodes to support the ramp of new products. Now let me turn to our full year financial results. 2022 revenue was $23.6 billion, up 44% year-over-year, driven by increased Embedded, Data Center and the Gaming segment revenue, partially offset by lower Client segment revenue. On our combined AMD and Xilinx company basis, 2022 pro forma revenue was $24.1 billion, up 20% compared to $20.1 billion in 2021. Gross margin was 52%, up 370 basis points from the prior year, primarily driven by richer product mix with higher revenue from Embedded and Data Center segment, partially offset by lower Client segment revenue. Operating expenses were 26% of revenue compared to 24% in 2021. 2022 operating income was $6.3 billion, up $2.3 billion, an increase of 56% from a year ago resulting in operating margin of 27% compared to 25% in 2021, primarily driven by higher revenue and gross margin expansion. Net income was $5.5 billion compared to $3.4 billion, up 60% from the prior year. Earnings per share was $3.50 compared to $2.79 for the prior year, primarily due to Data Center growth and addition of Xilinx. Full year free cash flow was $3.1 billion, resulting free cash flow margin of 13% for the year. We invested approximately $1 billion in long-term supply chain capacity in 2022 to support our expectations for future revenue growth and increase market share. Let me now turn to our financial outlook. Today's outlook is based on current expectations and contemplates the current macro environment. For the first quarter of 2023, we expect revenue to be approximately $5.3 billion, plus or minus $300 million, a decrease of approximately 10% year-over-year and 5% sequentially. Year-over-year Data Center and Embedded segment revenue are expected to grow, offset by lower Client and Gaming segment revenue. Sequentially, Embedded segment revenue is expected to increase. Client and Gaming segment revenue are expected to decline largely consistent with seasonality. Data Center segment revenue is expected to decline due to elevated levels of inventory with some cloud customers. In addition, for Q1 2023, we expect non-GAAP gross margin to be approximately 50%; non-GAAP operating expenses to be approximately $1.6 billion; non-GAAP interest expense, taxes and other to be approximately $146 million based on a 13% effective tax rate. Diluted share count is expected to be approximately 1.62 billion shares. For the full year of 2023, we are not providing specific guidance due to the uncertainty in the macro environment. However, let me provide some color. Directionally, we expect Embedded and Data Center annual revenue to grow from 2022 based on the strength of our product portfolio and expected share gains. In addition, we expect Client and the Gaming segment revenue to decline based on the current demand environment. We expect non-GAAP gross margin to be approximately flattish in the first half and the expansion in the second half of the year. We expect to manage quarterly non-GAAP operating expenses flat with the fourth quarter until we see the demand environment improves. For modeling purpose, we expect non-GAAP effective tax rate for the year to be 13% and the diluted share count to be approximately 1.62 billion shares. In closing, we had a strong year with record revenue and profitability, driven by our leadership in product portfolio and the diversification of our business. Looking forward to 2023, as Lisa mentioned earlier, we'll continue to focus on executing our long-term growth strategy while driving financial discipline and operational excellence. We believe our leadership of products, growing customer momentum and strong financial foundation position us well for long-term profitable growth. Yes, thank you very much. Good afternoon. First of all, congratulations, Jean and congrats as well to Devinder I mean the last five years of the company have been remarkable. But I remember all the work you and your finance team did six or seven years ago to keep the foundation stable for what's happened since. So enjoy the retirement? My first question, Lisa, is just about the drivers of 2023? You guys talked in the prepared script about all the different crosscurrents that are kind of going on right now versus the strength of your portfolio versus some inventory digestion in the Data Center space and obviously what's going on in the PC market. But I've gotten about a zillion versions of the same question tonight, which was do you think the company can grow for the year 2023 overall? And if you could just kind of walk us through the drivers of the business as we work through the year? Thanks. Yes, absolutely, Matt. Thanks for the question. So there are lots of puts and takes in 2023, and we want to give you kind of some of the drivers. Our largest growth driver is certainly the Data Center. We are very positioned well with our product portfolio. We just launched our Genoa fourth gen EPYC. We also have Bergamo coming this year as well. When we talk to our cloud customers, what they're telling us is they appreciate the execution of our road map. And we have an opportunity to move more workloads to AMD as we go through the year. So we feel very good about our product positioning. As we mentioned in the prepared remarks, coming off of a very strong 2022, there is some inventory at some of the cloud customers. And so, we are expecting a softer first half and then a stronger second half, but we feel very good about our market share position and opportunity to grow with Data Center. Also on the embedded side, I would say we have a very strong portfolio there. The Xilinx business has done very well in 2022. It's a diversified set of markets. We see strength in a number of the end markets. And so, we think that's also a grower for AMD. On the other side, our Client and Gaming businesses, we believe, will decline. We have made good progress. When we look at the PC markets in the second half of the year of 2022, we were really trying to rebalance inventory. And I think we made progress exiting Q4. We're still expecting to ship below consumption in the first quarter and then sort of go from there. Our product portfolio is strong. We think there's an opportunity for growth as we go into the second half of the year. But we think overall for the year, Client will decline just given the TAM. And then on the Gaming segment, again, we're coming off of a very strong 2022. And so console demand has been actually quite strong. And given where we are in the cycle, we would expect gaming to be down on a year-over-year basis. But overall, I think lots of puts and takes, but we're positive on what we can do in terms of the Data Center and the embedded segments, given our product portfolio. And we'll watch the macro on the Client and Gaming and see how that plays out. Thank you very much Lisa for all the details there. I guess as my follow-up, I wanted to ask a question about gross margin. The margin, I guess, sequentially down a little bit into March. But I kind of wanted to focus on the drivers of the longer-term margin that's down, I guess, three or four points from where you were a few quarters ago despite more mix of the revenue coming from Embedded and Data Center? So if there's any way that you guys could try to quantify maybe how much of the margin headwind is from just lower client revenue? How much of it might be from any programs that you're working through to clear the channel? And how might we model? What are the drivers that we should think about in terms of the margin recovering? Thank you. Yes, maybe - so on the overall margin, the way to think about our business, Matt, is - and our margin is primarily driven by product mix. So as the Embedded and Data Center businesses are - grow, so the margin expansion grows with it. In terms of the sequential question that you had from Q4 to Q1, that's just a product of the mix. So with Data Center being lower sequentially that - that's that. We are also working through our client inventory clearing. What we're seeing in the PC business is, as we're going through this sort of normalization of inventory, especially on some of the older products, we do have more marketing programs and pricing incentives in place. We do expect that to normalize as we go through the first half of the year. And so as Jean said in the prepared remarks, we would expect margin expansion as we go into the second half with the growth in Data Center, Embedded and some normalization of the client business as well. Thanks for taking my question and thanks and best wishes to Devinder and Jean from my side as well. On the first one, Lisa, I think you mentioned some elevated inventory among your cloud customers. I was hoping you could give us some quantification of how elevated? Is it a one quarter issue? Is it a 2-quarter issue? Does it impact the pace of your Genoa ramp because I think coming into this year, the expectations were you could grow server sales by over 20%? Do you think that is still a possibility because I imagine you get some benefit from better Genoa pricing? So just puts and takes of how we should think about your Data Center business through this year? Yes, sure, Vivek. So look, we remain very bullish about our Data Center business. I mean I think the feedback that we've gotten on Genoa from our customer set is very strong. And as I said, the important thing is we are expanding workloads. In terms of where we believe the - as the inventory normalizes, each customer is different, so they have what they're trying to achieve in terms of inventory levels. Our expectation is that sort of the first half softness for cloud and then second half strength as that's worked through. But like I said, it's different for each customer. And then in terms of overall growth, as I said, we're very bullish on the overall growth of our Data Center business and the opportunity to gain share as we go through the year. And as we go through the ramp in Genoa, we do have more content with the higher core count that should also help ASPs. Got it. And then on the PC side and also kind of as it relates to the pricing environment, you mentioned the PC TAM is - could be down about 10%. But when we look at the shipments, right, from you and your competitor, they could be down as much as 40% or 50%, right, year-on-year in Q1. So do you think there's a possibility that the TAM assumption of just down 10% could be an optimistic one? Because I would imagine that would suggest the inventory clears out soon, but you're suggesting that it may not clear out until Q2. So I was just hoping you could give us some better sense for when the PC market starts recovering? And do you think it could become more price competitive before it recovers? Yes. So maybe just to make sure that we're just correlating the numbers. So my comment about PC TAM being down 10% was assuming, if you take a look at sort of what IDC just published for - in 2022 at about 290 million units, and that's more of a sell-through TAM versus a sell-in TAM. So we have been under shipping sort of the sell-through or consumption for the last two quarters in an attempt to renormalize that as soon as possible. In terms of do I think its conserve - I think it's in the ZIP code. I think it's in the ZIP code. So if you imagine 2023 sell-through TAM of about 260 million units, plus or minus, seems to be about the right number. We have made good progress in inventory normalization. We want to be cautious, obviously, heading into the year just given the macro environment. First quarter, we said would be roughly seasonal for PCs. I think second quarter - first quarter should be the bottom for us in PCs. We - and then grow from there into the second quarter and then into the second half. And I should note also, Vivek, I mean, we just launched our Ryzen 7000 Series with sort of our AI capabilities, both from a notebook and desktop standpoint. So, we feel good about the product road map in PCs. Obviously, we have to get through this normalization. Most of the focus is on continuing to differentiate our products and working with our customers to offer sort of very strong platforms. Hi guys. Thanks for taking my questions. I noted that you said that gross margins would expand in the second half, but you didn't give us any color on how much they might expand. Can you give us any idea like first half to second half? Or I mean just for the full year, do you think gross margins grow year-over-year from the 52% that you printed in 2022? Stacy, this is Jean. Let me take this question, then Lisa can add. As we talk about it, it's both our Embedded and Data Center segment have strong gross margins. So we feel pretty good about second half. We continue to have the growth of both Embedded and Data Center segment. The major headwind we are facing is really Client side, which if you think about the gross margin in the first half of 2022 versus the first half of 2023, the major impact is from the client revenue, inventory correction, which impact the gross margin in the Client segment. So going into second half, the normalization of the Client segment will help us to expand the gross margin. I think it really depends on how the Client segment will recover. That will drive the gross margin if it's going to go back to the first half of 2022 or expand beyond that level. But overall, we feel pretty good. Once we normalize the Client segment, our gross margin will continue to expand. Maybe what I would say, Stacy, is I think we've given you the puts and takes for where the margin goes. I think it depends a bit on what happens in the macro environment. But we do feel good about second half expansion, and we'll see sort of the relative recovery in macro as it relates to all of our segments. Got it. Thank you. I guess for my follow-up, maybe it follows up on that a little bit more just around the mix. I get how Data Center and Embedded should be growing in the second half versus the first half. But presumably, Client will, too, first half to second half, given that you are under shipping, it sounds like by a pretty wide margin right now. How do you feel about your mix just across the four businesses of the second half versus the first half? Do you think your Data Center plus Embedded mix, as a percentage of total revenue in the second half, is materially higher than it is in the first half? Or I mean could it even be not that different at all given the potential growth that you might see just from the channel normalization in clients? Yes. I think the way to think about it is, I think our Data Center grow - growth in the second half versus first half, we expect that to be significantly stronger. As it relates to clients, we would also expect it to be stronger. Again, depending a bit on macro and sort of how the TAM actually evolves. I think for the Embedded businesses, I would say that we expect to grow over the full year 2023 versus 2022. What we see right now is a fairly strong backlog and good visibility into the first half of the year. I'm not ready to say that Embedded will grow in the second half versus the first half, though, because we're coming off very strong growth already. And so I think those are the puts and takes. Good afternoon. Thank you so much for taking the question. Lisa, the pushback that we often get is AMD is doing really well, gaining share, but you're gaining share in relatively mature markets. And when it comes to AI, you do have a strategy, but you really haven't shown the product set, if you will. You talked about how you have CPU, GPU, FPGA and Pensando, and you're shipping samples of MI300, I guess, later this quarter and potentially launching in the second half. At what point do we, as analysts and investors, start to see your AI strategy materialize in the P&L and your profitability, if you will. Yes. Thanks for the question. We believe that AI is a huge driver of compute growth. And given our portfolio, it should be a driver of our growth as well. I think if you think about the product sets that we are putting sort of AI content in, you should expect MI300, of course, on the GPU training side. We just launched Ryzen AI in our PC portfolio. You can expect additional AI acceleration coming in our server portfolio as well. So you're going to see AI broadly across our road maps. In terms of when - we've talked before about sort of our Data Center GPU ambitions and the opportunity there. We see it as a large opportunity. As we go into the second half of the year and launch MI300, sort of the first user of MI300 will be the supercomputers or El Capitan, but we're working closely with some large cloud vendors as well to qualify MI300 in AI workloads. And we should expect that to be more of a meaningful contributor in 2024. So lots of focus on just a huge opportunity, lots of investments in software as well to bring the ecosystem with us. That's very helpful. And then, Lisa, as my follow-up, I had a question on profitability in your client business or your PC business. I think a year ago, margins were really high. Supply was relatively tight. Since then, with the inventory correction and perhaps a little bit more competition, your profit margins are down. You talked about the first half of this year still being sort of in digestion mode, and then in the second half, things normalizing. But would it be realistic to assume your gross margins in the Client business return to first half '22 levels? Or in hindsight, margins back then were perhaps - you were over-earning in that business given the environment? Yes. Sure. So I think on the Client segment, it's fair to say that we believe, given where we are with the client inventory levels, the first half will certainly be lower. We expect some improvement in the second half. But in terms of overall margin, we expect that the client business will be below the corporate average, and that's how we're modeling the client business. Thank you. Next question is coming from Aaron Rakers from Wells Fargo. Your line is now live. Aaron, perhaps your phone is on mute. Please pick up your handset. Yes. Thanks you for taking the questions. I guess the first question is going back to the Data Center piece of the business and specifically around the ramp of Genoa. I'm curious, is there any help that you can provide us with thinking about the ASP uplift you expect to see with the Genoa product cycle? And I guess at some point through 2023, how do we start to think about the Bergamo product cycle as well impacting the server CPU business? Sure. So Aaron, we started shipping Genoa in the third quarter that ramped into the fourth quarter and will continue to ramp through 2024. The way I think about - or the way you should think about the Genoa ramp is that it is a new platform for our customers. So they'll be introducing it - introducing first-in-cloud sort of internal workloads and then going to external workloads and then enterprise. So I think it will be throughout 2024. We have - I'm sorry, throughout 2023. We do have higher core counts on Genoa. So you would expect that, that will give us some ASP uplift as we go through to some of those higher core count products. Bergamo will launch in the first half of the year. We are on track for the Bergamo launch, and you'll see that become a larger contributor in the second half. So as we think about the Zen 4 ramp and the crossover to our Zen 3 ramp, it should be towards the end of the year, sort of in the fourth quarter, that you would see a crossover of sort of Zen 4 versus Zen 3, if that helps you. Yes, that's very helpful. And then as a quick follow-up, the business doesn't really ask that much about, but it's been doing phenomenally well here these last couple of quarters. It's actually the Xilinx business. I know it's within the Embedded largely. But your self-reporting, I think if I read the filings correctly, growing 40% plus on a like-for-like basis for Xilinx. I think your competitor also growing a solid pace. How do you think about the sustainability or durability of that demand in that Embedded or Xilinx business as we move through '23? Sure. So Aaron, that business has done very well. So the Xilinx business, I think our overall Embedded business continues to do well. When we look across the subsegments, there are puts and takes in the subsegments. But what we see is content is going up. So we had records in communications, industrial and health care, aerospace and defense, automotive. We have the Embedded processor content that's also going into automotive. So we feel very good about that business. I think as we look into 2023, I mentioned this in the question with Stacy. We have a very good visibility to the first half just given the lead times and the backlog. And the first half looks strong, so we expect to grow sequentially in the first quarter. As we go into the second half of the year, we're monitoring the overall demand environment. And just given how strong it's been, we are looking at whether there'll be some puts and takes in some of the end market segments there. But overall, I think the key point is the content, and our design win momentum is good, and we continue to ramp new design wins in the Xilinx business. Great, thank you. I wonder if you could talk to us about the puts and takes of PC market share in a down 10% environment. I would assume it helps you with consumers better than commercial, but what is your progress in terms of penetrating the notebook market and penetrating the commercial market where you could continue to gain share? Yes. Joe, we view that the opportunity - so first of all, I would say that in general, the PC market share numbers are probably a bit noisy right now, just given all of the sell-in, sell-through and the inventory dynamics that are being worked through. Actually, in the fourth quarter, we believe we gained a little bit of share in the PC market. As we go forward into 2023, we think our product portfolio is very strong. As we look at Ryzen 7000 and where it goes and where we are positioned in the commercial as well as the high-end consumer segments, we're not changing our strategy on PCs. Quite - a few years ago, we really focused on sort of the more premium segments. We have less penetration in the low end, which I think is helpful. And as we go forward, we're continuing to focus on commercial PCs and getting a larger footprint in there. I will say the enterprise work that we're doing on the server side, I think, links very well to the commercial PC work, and we're continuing to invest in sort of the sales and marketing resources to ramp that side of the business. Great. And then going back to the Genoa question that was asked a second ago, as you are in this kind of budget conscious environment, you're introducing a chip in a system that has pretty high platform cost. Does that slow the adoption at all? It seems like people - and your competitors dealing with some of the same issues. Just how does the current environment affect the rate at which Genoa will ramp? Yes. I would say, Joe, the total cost of ownership benefit of Genoa, particularly in some of the larger cloud workloads, is very, very significant. So I wouldn't say that, that's necessarily slowing the pace of adoption. It is a new platform though. So if you think about when we went from Rome to Milan, it was basically similar platforms. So I would say that, that ramp was a bit faster. But as it relates to Genoa, we had always expected that Milan and Genoa would coexist through 2023. And that we would have - we still have Milan instances that are just ramping now, and we expect that will continue through 2023. And so I really view this as the natural thing when we introduce Genoa at sort of the higher core count, that both will coexist. And as some of the platform costs come down, you'll see the Genoa cutover, and that's what I mentioned towards the fourth quarter of 2023. Thanks for letting me ask a question. And Jean, congrats on the new job. Lisa, I was hoping you could give a little bit of sequential color to just size the magnitude of the three segments that are going down in the first quarter and then Embedded going up. And really what I'm getting at there is, in an answer to a prior question, you talked about the mix being a headwind to gross margin. And I think, Jean, you cited Data Center dropping as a percent of the mix. So just trying to get the magnitude of just how much Data Center has to drop to make that outcome on the mix side be true. Sure, Ross. So let's see. We said the Client and Gaming segments would be seasonal. So you would expect that the Data Center would be more than seasonal. So maybe to help you size that, think about the Data Center sequential drop as double digit, whereas the Client and the Gaming segments are more like single digit, if that helps. Got it. Sorry for the nitpicky question. A bigger picture one for you then, Lisa, on competitive intensity. On one hand, I could see that the total cost of ownership benefits of these products, multicore, better performance, et cetera, could lead to higher ASPs, whether you're talking about the Data Center side or your Client business. On the other side, competitive intensity and overall demand is weaker. And at some point, you might even get deflationary costs on the foundry side of things. Can you talk a little bit about the pricing environment given those somewhat contradictory pressures? Sure. So maybe let me separate Data Center and Client because they're a little bit different. I think on the Data Center side, we would - we do see that, in general, the performance, the power performance, the total cost of ownership, selling the solution is the most important piece of it because the solutions are actually quite different in terms of what you can do between sort of fourth gen EPYC and sort of other solutions. The environment is always competitive, but we feel very good about the overall value proposition that we bring to both cloud and enterprise customers. I think on the client side, we've said for the last couple of quarters that the pricing environment is more aggressive. I think that normally happens when the industry is working on rebalancing. I think we're working on rebalancing our OEM partners are working on rebalancing. The retailers are working on rebalancing. And so, there are more incentives and more - a more aggressive pricing environment. I view that, that's primarily on, let's call it, older products let's call it previous generation products. And as we work through that, there will be some normalization as we think about our newer generation products where there's more capability added. So hopefully, that gives you a little bit of the puts and takes. And in terms of the cost environment, I think all of us in the industry have seen some elevated costs, but I think we also see - expect that to normalize too as everyone is sort of optimizing their CapEx spending. Hi, thanks for taking my question and congrats to Jean on the new seat. Two questions, if I may. First, on the PC side, can you give us a sense about roughly how far under consumption, you believe, you're shipping on the PC side, either in Q4 and Q1? And Lisa, correct me if I am wrong, I thought I heard you say in an answer to an earlier question that you expect the PC client, but just to grow into second quarter. So is that suggest that 1Q, you think is the bottom on the PC? And then I had a follow-up? Thank you. Sure, Mark. So we - so the first - the second question, yes. We do believe the first quarter is the bottom for our PC market - for our PC business, and we'll see some growth in the second quarter and then a seasonally higher second half. In terms of the under shipment, I mean, I think we're - we undershipped in Q3, we undershipped in Q4. We will undership, to a lesser extent, in Q1. So I think you can infer that from our guidance single-digit down. And then we'll be back to a more normal environment. Now just as a reminder though, the first half is not usually a - the first half is usually a seasonally weak client time anyways. So, we would expect more lift in the second half, not so much in the second quarter. Got you, okay. That's very helpful, thank you. And then a follow-up, if I may, on the - China is lifting, as they're lifting the COVID restrictions, I guess I would imagine that you would expect that ultimately, at some point, to translate into higher demand. And I'm wondering if you could just kind of share with us your thoughts about how that might play out? And could you remind us is, to the extent that you can help us understand of the risk to the supply side for you in the event that the COVID spreads rapidly as they lift the restrictions and impacts what you have on the supply side there? Thank you. Sure, Mark. So we've done a very good job in our supply chain in terms of risk mitigation. So we have - we don't believe that we have a significant risk as it relates to COVID future outbreaks, if there are any. As it relates to China recovery, I think we would benefit from a China recovery. It's very difficult to call. I mean we've seen, certainly in our Data Center business, we saw in the second half of the year and last year in the first half of this year that the China Data Center business has been weak for us. If there was a recovery, I think we would benefit from that. Similarly, some of the other consumer patterns as well. But it's very difficult to call. So we put that in the bucket of macro uncertainty, and we'll see how it plays out. Great, thanks ladies. Congrats on being the first all-female CEO, CFO team - that's means long time coming. So your gross margins held up pretty well for the Q1 guide despite high-margin Data Center business going down. So if the Data Center business remains weak and has a rough quarter in Q2, can we expect a similar gross margin resiliency? Yes, definitely. I think as I said earlier, the major impact on gross margin actually is the PC client side. The stabilization and the bottoming of client business really help us with the gross margin at the current level. Second half, we should see the expansion of gross margin. Sure and as my follow-up on your PC client business. So it - had its correction a little bit later than some of the other folks in the semi industry and was obviously a little bit steeper. Can you talk about why that happened and why we should - should or should not expect that or could that happen in the Data Center business as well? I guess, Chris, what I would say is I think the PC market has been volatile, and we did significantly - coming off the pandemic, there was very high demand during the pandemic, and I think we were all adjusting as we're looking at sort of the demand environment post pandemic and with macro uncertainty. I think the Data Center business we have you know again, we're heavily weighted towards cloud. And we have very good discussions with our overall customer set in terms of what they need. I think what's going in our favor in the Data Center is our workloads are expanding. And so, we've heard from all of our cloud customers that they're adopting both Milan and Genoa in more workloads than previous. And so I think that gives us good confidence. And frankly, the Data Center customers are also giving us good visibility into what they need for 2023. So there is an adjustment in the first half. And I think that's something that we understand. And we also expect that we're going to have to ramp up production in the second half as some of the demand resumes. And I think, the overall factor of compute in the cloud being a very important long-term driver is definitely there. So, we feel good about sort of where we're positioned. Hi, thanks a lot. Lisa, I had a question on your client business. I know that your competitor at times uses rebates and subsidies. But the numbers that are in their filings have gotten pretty vague. So I take it from your answer to a prior question that you think that's more on legacy parts? I guess I'm just kind of wondering what changes or impact that's had on your business? And I continue to hear these worries that it's going to have some lasting effect on your share and particularly on your margins? Thanks. Sure, Tim. So let me make a couple of points. I think all of us, as we participate in the PC industry, there are various parts of the ecosystem that we work with. We work with our OEMs we work with our retail partners. We work with our distribution and channel partners. And we're all working together to work through sort of the elevated inventory levels. As I said, I think we've made good progress on that. And I think we have much better visibility into the various pieces. As it relates to the pricing environment, I do believe that the pricing environment is - particularly when you're clearing older inventory or older generation products, is a bit more competitive. And we see that. As we look forward, the way we're modeling the client business is that we are modeling gross margins to be less than corporate average. That's different than our previous modeling. So previously, client was more like at corporate average. And I think given the - I think the nice thing is our business is quite a bit more diversified now. And so with our Data Center, Embedded businesses really being strong growth drivers, I think Client continues to be a good market overall. And as we work through this, we will see some of the normalization that Jean mentioned. Thank you well Lisa. And then I guess just as the last thing, you went through some puts and takes on the different pieces for the year, but I just wondered if I could just get you to kind of give a bias for what you think that the revenue for the year is the bias. It sounds to me like the bias is more up than down, but I just wanted to give you a chance to maybe confirm that or not? Thanks. I think, Tim, the answer is yes. But again, let's work through the next couple of quarters. And we feel good about how our products are positioned, and we just need to work through the macro and see how that plays out. Great, thank you. That concludes today's earnings call. Again, welcome to Jean, and we're delighted to have her on board, and much gratitude to Devinder for his 39 years of service and all his leadership and we look forward to touching base with all participants throughout the quarter. Thank you. Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
EarningCall_959	I would now like to turn the meeting over to Mr. Kevin Linder, SVP of Investor Relations. Please go ahead, Mr. Linder. Thank you, July. And good morning. With me to discuss CGI's first quarter fiscal 2023 results are George Schindler, our President and CEO, and Steve Perron, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9:00 AM Eastern Time on Wednesday, February 1, 2023. Supplemental slides as well as the press release we issued earlier this morning are available for download, along with our Q1 MD&A financial statements and accompanying notes, all of which have been filed with both SEDAR and EDGAR. Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied and CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The complete safe harbor statement is available in both our MD&A and press release as well as on cgi.com. We recommend our investors read it in its entirety. We are reporting our financial results in accordance with International Financial Reporting Standards or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted. We're also hosting our annual general meeting this morning. So we hope you'll join us live via the broadcast at 11 AM. I'll now turn it over to Steve to review our Q1 financials and then George will comment on our business and market outlook. Steve? Thank you, Kevin. And good morning, everyone. I'm pleased to share with you the results of our first quarter of fiscal 2023. In Q1, we delivered CAD 3.45 billion of revenue, up 11.6% year-over-year, or up 12.3% when excluding the impact of foreign exchange. Importantly, we delivered positive constant currency growth in all segments, all industry sectors and all service offerings. The following segments generated double-digit constant currency growth. Western and Southern Europe up 30%, Asia-Pacific up 23%, and UK and Australia up 18%. Total bookings were CAD 4 billion, generating a strong book-to-bill ratio of 117% for the quarter and 109% on a trailing 12-month basis. In the quarter, each of our client proximity segments had a book-to-bill the ratio above 100%. Our bookings were particularly strong in Europe this quarter led by UK and Australia with a book-to-bill ratio of 159%; Finland, Poland and Baltics with a book-to-bill of 143%; and Western and Southern Europe with a book-to-bill ratio of 123%. With respect to IP, we see ongoing demand for our business solutions and an increase in IP revenue across every geographic segment. IP as a percentage of total revenue improved to 21.7% in Q1. Our Q1 IP book-to-bill ratio was 128%, reflecting CGI sustained investment in forging new relationships with clients as well as enhancing our solutions. The strength of our overall bookings contributed to growing our global backlog, which now stands at CAD 25 billion, reaching an all-time high again this quarter. This represents 1.9 times revenue. On the profitability front, adjusted EBIT in Q1 was CAD 554.1 million, up 6.3% year-over-year. This represents an EBIT margin of 16.1%, stable sequentially and down 80 basis points year-over-year. The decrease on a year-over-year basis was mainly due to the dilutive impact of prior-year acquisitions, which are in the process of being integrated to achieve their planned synergies as well as the expected increase in travel to support growing our business. Net earnings improved to CAD 382.4 million when compared to CAD 367.4 million in the first quarter last year. Diluted EPS was CAD 1.60, representing an increase of 7.4% year-over-year. When excluding integration and acquisition cost, net earnings improved to CAD 398.2 million for a margin of 11.5%. This compared to CAD 369.4 million in the same quarter last year. On the same basis, diluted EPS was CAD 1.66, an accretion of 10.7% when compared to CAD 1.50 in the same quarter last year. This improvement was mainly driven by the successful execution of our build and buy profitable growth strategy by our operations. Our effective tax rate in Q1 was 26% compared to 25.5% in the prior year. When excluding integration and acquisition costs, our effective tax rate was 25.7% compared to 25.5% last year. We continue to expect our tax rate for future quarters to be in the range of 24.5% to 26.5%. In the quarter, cash provided by operating activities was CAD 605 million compared to CAD 484 million in the prior year. This is mainly due to the five-day sequential improvement in our DSO, which now stands at 44 days, an improvement of 1 day on a year-over-year basis. Our targets remains at 45 days. Over the last 12 months, cash provided by operating activities was CAD 2 billion or 15% of revenue. In Q1, we invested CAD 93 million into our business and CAD 10 million to buy back our stock. We delivered a return on invested capital of 15.5% in the quarter, an increase of 20 basis points when compared to 15.3% in the year-ago period, demonstrating our efficient deployment of capital. Consistent with previous years, we reviewed our capital allocation plan to maximize shareholder returns. Our focus continues to be on delivering value for our shareholder by investing back in our business, pursuing accretive acquisitions, and repurchasing our stock and/or paying down our debt. As such, in line with our capital allocation strategy, yesterday, our Board of Directors approved the extension of the NCIB program until February 2024, authorizing us to repurchase for cancellation up to 18.8 million shares over the next 12 months. Under the current program, we have invested CAD 657 million, repurchasing 6.4 million shares at a weighted average price of CAD 101.84. With a net debt to capitalization ratio of 24.1% at the end of December, as well as CAD 2.8 billion of cash readily available, and access to more if needed, CGI has the strength and the capital resources to support our build and buy profitable growth strategy. Now, I will turn to call to George to further discuss the insights on the quarter and outlook for our business and markets. George? Thank you, Steve. And good morning, everyone. CGI began fiscal year 2023 with positive momentum, delivering strong results that underscore our positioning as one of the few global firms with the scale, reach, capabilities, insights and commitment to be a partner of choice for our clients and employer of choice for our consultants and professionals and an investment of choice for our shareholders. In Q1, we delivered our fourth consecutive quarter of double-digit constant currency revenue growth, and once again delivered double-digit EPS accretion on an adjusted basis. Bookings were well over 100% of revenue, reaching CAD 4 billion, a record high. One-third of these bookings were comprised of new business engagements, and cash from operations was particularly strong this quarter, reaching a record high of over CAD 600 million. Our bookings in the quarter consisted of many long-term digitization engagements, which included the following wins. US Department of State extended its partnership with CGI's federal operations under a new 10-year agreement to continue delivery of US visa application services in India. This engagement includes the use of CGI's Atlas360 IP solution, which provides for improved efficiency, security, and customer experience. The UK government awarded CGI a four-year agreement to continue management of the cybersecurity analytics platform for one of the government's departments. This agreement adds new scope focused on iterative development, delivery and evolution of the platform, as well as development of a data as a service function focused on helping the government address evolving cyber threats. Sodexo, a world leader in food and facilities management services based in France, selected CGI as its global strategic partner for a five-year managed services agreement. CGI will leverage our proximity and offshore delivery model to reduce costs, improve time to market and drive the digital transformation of Sodexo's infrastructure. The Laurentian Bank of Canada awarded CGI a five-year expanded agreement to help the bank manage its digitization, while supporting its efforts to strengthen operational efficiencies and deliver and enhance customer experience, an initiative that will benefit from a co-innovation fund focused on transformation of the bank's ecosystem. And Airbus, a global aerospace manufacturer based in France, named CGI one of their major global partners to help drive the end-to-end digital transformation of their corporate and central services functions over the next five years. These services will leverage a combination of proximity and global delivery resources from CGI's operations in France, Spain, Germany, and India. Notably, we received all-time high satisfaction ratings from clients across every measure again this quarter. Importantly, one of the highest scores received was for the intent of clients to engage CGI again for future projects, demonstrating the strength of our team's ability to build ongoing, trusted relationships. The investments we are making in our end-to-end services and talent are generating value now and they are designed to further strengthen our capacity to meet evolving client demand for full scale enterprise digitization. With this in mind, I will highlight the positive impact these investments are generating for our operations, starting with managed services. As we communicated last quarter, we continue to see many clients prioritizing cost savings and placing a sharper focus on business case returns, while simultaneously advancing their digital transformation strategies. Investments we are making to increase business engineering capacity, enhance and modernize our managed services approach, integrate IP and BPS into our managed services offering and broaden the partner ecosystem have strengthened our overall value proposition, enabling CGI to best address clients' cost savings and digitization objectives. In the first quarter managed services bookings were up CAD 465 million or 26% when compared to the same quarter last year. This increase was driven by several large new wins in the quarter. Overall, managed services representative 56% of total bookings for a book-to-bill of 123%. We see broad based interest in new opportunities in both North America and Europe, particularly in energy and utilities, health, manufacturing and government. Turning now to CGI systems integration and business and strategic IT consulting services. We are focused on addressing the evolving client demand for consulting engagements in areas such as business model transformation, M&A strategy and integration, enterprise architecture and sustainability advisory, all to help clients advance their agility and future strategies. We also continue to prioritize employee certifications in the technology platforms of our global alliance partners. These certifications enabled us to generate nearly CAD 900 million in new Q1 systems integration win in support of partner technology platforms. SI&C bookings remained robust in the quarter, with a 110% book-to-bill as we delivered on client consulting priorities across industries and large scale modernization projects, with particular strength in government. Now moving to CGI's intellectual property based services and solutions. Client interest in our business solutions has been rising, with higher demand for CGI to help clients address the impact of economic pressures by deploying our IP. As such, we are investing in the creation of new business solutions to meet evolving demand, enrichment of existing solutions with embedded innovation and expansion of our IP go-to-market strategies to drive new client interest. For example, given the tightening credit markets around the world, we are seeing growing demand for CGI's industry-leading collection solutions. Notably, our transformed cloud native credit studio IP delivered through a SaaS based platform that now incorporates intelligent automation and machine learning. In Q1, we signed multiple client agreements for this renewed IP, including a nine-year engagement with Navy Federal Credit Union, the world's largest credit union serving over 12 million customers. As previously mentioned, another key initiative this year is the expansion of CGI's IP portfolio through go-to-market partnerships for client owned IP. For example, in the quarter, National Bank of Canada and CGI completed a new 10-year agreement for CGI to acquire ownership of the bank's financial planning advisor solution. The addition of this new client developed solution expands the capabilities of our market-leading Well360 [ph] product suite, which will also be delivered and managed for National Bank as a SaaS under this new agreement. On a year-over-year basis, IP bookings were up by more than CAD 330 million or 55% for a book-to-bill of 128%. We saw significant strength in the banking, communications and government sectors. Overall, diversified mix of our end-to-end along with our geographic presence and industry portfolio position CGI to continue to grow and create value for all stakeholders. Central to our ability to deliver value is our discipline in project execution and ongoing investments in operational excellence. We continue to evolve and balance our hiring and talent development strategies based on client demand, including in our near shore and offshore delivery centers of excellence, where we proactively manage each dimension to drive excellence in day-to-day operations. For example, the time from hire to train to bill for new university graduates has been shortened again this quarter, driving higher utilization in our global delivery centers and driving profitability on an ongoing basis. Overall, our team's quality of delivery and proven discipline, guided by the best practices and frameworks in CGI's management foundation, continues to result CGI's EBIT margin placing in the top quartile of our IT services peer group. A topic of importance to all of our stakeholders is CGI's environmental, social and governance strategy and progress. As such, we are proud to employ our expertise in collaboration with clients, educational institutions and local charities to improve the economic, social and environmental wellbeing of our shared community. And we are sustaining our investments in diversity and inclusion, CGI academia, and health and wellbeing as we continue to hire and provide career development opportunities in line with client demand. We follow UN principles and global best practices in setting our ESG objectives and targets globally, which are shared transparently with all stakeholders through the publication of CGI's annual ESG report, which will be available on cgi.com early next week. Looking ahead, as many clients navigate uncertainty in the markets they operate in, they continue to communicate their intent to sustain digitization investment across two key dimension â tactical initiatives to generate cost savings and connect enterprise processes and systems to enable greater operational resilience, and transformational initiatives to advance their progress on building new digital business models to generate incremental value. As highlighted today, CGI's many value propositions across our proven end-to-end portfolio of offerings and our consultants collaborate with clients every day to deliver the right balance of services and solutions to meet their objectives. Additionally, CGI's strong balance sheet enables us to rapidly act on our buy strategy, which is another key driver of CGI's profitable growth. The fragmentation of the IT services market remains high, driving a strong pipeline of merger opportunities and we plan to allocate CAD 1 billion of capital in 2023 to our M&A strategy. In closing, CGI's strong first quarter performance reinforces the confidence we have in our plans for 2023 to continue profitably growing at or ahead of the markets in which we operate and continue to deliver double-digit EPS accretion. Just a question on organic growth. We estimate organic growth was about 8% in the quarter. Is that in the ballpark in terms of what you're thinking? And then, it's averaged about 8% for the last four quarters. It's well above the historical average. Is there anything that you see unusual in the last year that has pushed up organic growth? Or do you see it as structural and sustainable at these levels going forward? We have seen that strong constant currency organic growth. And it really is, it's based on some of the investments I've been talking about in the last several quarters. It really is investments that we've been making to strengthen our value proposition. The managed services capacity, we anticipated the shift to managed services, invested in the managed services capacity. The IP, both on the software engineering side, but more importantly, on the go-to-market, you see the results driving the bookings there. Our consulting expertise, I always say that's the tip of the spear. We're really getting gaining more and more traction there. I mentioned last quarter the Forbes recognition we have as one of the top management consulting firms. And then, the partnerships that's helping to drive some of that sustained systems integration results. So, there are some structural items that we've had. Of course, demand plays into that, but certainly, the structural change we made is driving that growth. A follow-up there related to inflation and the impact on pricing and also the impact on your cost base. How do you see inflation and pricing changes impacting your growth? Like, how should we think about your margin structure through an inflationary period? Can you raise prices faster than your costs are going up? Or should they move in line? Well, it's not just growth. It's profitable growth. We've maintained those profit levels, and we expect to continue to be able to do that. I mentioned before, on the inflation side, we've been using and deploying global delivery as one of the elements of inflation. Of course, our IP does extremely well. The software, in many cases, we have even greater price elasticity than we have on labor. So that's a part of this. We've been moving our labor around. So to make sure that we have the right people on the right jobs at the right rates. And that's been going very well. Our teams have done an excellent job of essentially developing our people's careers and, therefore, driving the proper value propositions from our clients in rate increases. And of course, I mentioned on the larger longer term deals, we had built indexation, knowing that inflation was not going to stay at historic lows forever. We built that indexation into the contract. So, I have many examples where some of those contracts, as they come up for renewal, are increasing in healthy ways. Overall, on our cost base, as I mentioned before, because of that global delivery and because of the project rotations and because of the new college hires, which continues to be a larger percentage of our hires, the vast majority of our growth really is from those increased bookings and new business. But I will say that because we've been very diligent on this, probably a little bit of that inflation is in the growth. But it's not a large percentage of it. Congratulations on the quarter here. I wanted to actually get some color on the broader M&A outlook. I know 2022 was a good M&A year for the company and you have certain targets built up. So if you can provide some M&A outlook and how are you broadly seeing the trends in the public versus the private targets out there? The pipeline does remain strong for M&A. And we've included more IP related firms in that pipeline. And actually, even several captives that are also in that pipeline. So in general, the deals we're now looking at are larger. So, that's certainly good news. It's a focus we've had on that pipeline. Market is very fragmented. But getting those larger deals takes a little more time. And it's filled with pipeline mix of both public and private firms and mix of European firms and North American firms. So it's pretty balanced where operation is. I will tell you, though, it's â go back to the principles of CGI, it's right company, right place, right time. And certainly the time is right for us. And that's why we've allocated the capital to this in our plan. But we found some that were at the right price, but after due diligence, they weren't the right company. And so, that operational discipline is going to be key to achieving what we see as the long term accretion, not just the short term accretion, but the long term accretion of these mergers because it's really about building the long term profitable growth of CGI. Valuations are right now all over the map. So I would say patience is key in our operational discipline. But we have the capital, we have the appetite, we have the pipeline. You can assured that we'll be diligent in making the right calls. Just on that valuations that you mentioned, are you seeing a major variance in the valuations between the public and the private sector? It'd be hard to say that in general. Particularly on the private side, we see valuations all over the map, and so there isn't that tight correlation, I would say, just given some of the volatility even in the public firms. You don't have that anchor that you had in the past. Some of that can be very good if you find the right company. Just one more question on this M&A discussion here. So, we did see that your integration expenses, obviously, have gone up recently over the past few quarters. And it does make sense with all the acquisitions you've been doing. And given the M&A pipeline continues to stay strong, what is the best way for us, if you can guide us from a modeling standpoint as to how can we think about that bit of the expense line? It's a good question. It really varies, again, by the company that we're bringing in and also the geography, right? So, some of that integration costs can be a little bit higher, in certain geographies be a little bit lower. For example, when we do the next one in the United States, it's a little bit lower. So it's hard for me to quantify that for you. It's why we break it out and we show it to you with and without On the margins. I know margin was lower, and so there's some dilution. And you mentioned travel was up. But for the full year, George, are you still expecting some modest expansion year-over-year? Yeah. We do think that we can do that. The margin does remain strong. But we did call out some of the headwinds on business travel, which was planned. It's related to BD. And of course, you see that nice uptick on the bookings. But we think that the big shift in that is behind us. So we would manage any future additional travel with the business. So I go back to kind of our levers for margin expansion, which remain and remain strong. Mix of business, you see the nice uptick in the bookings in IP and managed services. That hasn't flowed through yet to the revenue. But when it does, we should get some pickup there. Global delivery, both offshore and the near shore is another opportunity for us. The merger synergies, as we bring the current acquisitions on board, and then the economies of scale as we grow. And the SG&A. So the expectation would be, as we move throughout the year, we should see some margin expansion. George, on your M&A comment, so you mentioned IT services captives in the pipeline. I didn't see IT. Are they just more difficult to come by in terms of potential targets? I thought I did mention that, but I certainly meant to that we do have more IP related firms in the deal pipeline. So in fact, in the near term pipeline. So, yeah, they continue to be a focus. And we're finding some that have both the services and the IP. Yes, that is a little more difficult, as I mentioned on the prior call, but we do see them. Now we just have to make sure we get the right company at the right price. We've seen a slowdown in Microsoft Azure's growth in their most recent results. It's still very high growth. And some of their issues regarding optimization of cloud aren't necessarily negative for you. But still, I think cloud has been a big driver of growth for IT services. What would you say is the impact of this slowing growth of cloud for Microsoft Azure on your business? I think there's not a direct correlation between Microsoft Azure and CGI. But indirectly, what I can say is, in support of some of what they're saying, is that now a lot of the enterprises that we work with are looking at how do I connect some of the work that I did on the back end to some of the work I did in the front end. This is why I highlighted some of the enterprise architecture work we're doing. They're still viewing some of that as tactical to then build on top of that on their bigger digitization strategies. But again, we play on multiple sides in helping our clients, and so that slowing growth doesn't really impact us. And I'll remind you that there's still a lot of work to be done in cloud, per se. But a lot of that work is helping the clients actually leverage the full power of the cloud. And that's some of the cloud factors we have on the application side. The cloud providers don't really play on that side, but, of course, we do. On the consulting front, you really sounded a beat on that segment of your business. We don't necessarily see that with every one of your peers. And consulting can also maybe be a canary in the coal mine in terms of the macro environment. What are you doing differently from your peers that you're seeing? Or is it just that you're starting from a lower base? I think it's a combination of a few things. Yes, we definitely are starting from a different base. So we're still building that expertise. And so, there's some natural uptick there. I think the other is that we really are focused on the areas that clients are spending on. Now, they do need help on sustainability, they do need help on the business model transformation. Because what we see is clients aren't just looking at the here and now. And the current economic landscape, again, depending on the economist you talk to, but they're really focused on what's the next business cycle. And they want to come out of this business cycle in a stronger place. And so, it's more pointed, focused efforts, and we've been investing in those areas, given where our starting point was. George, I think you've touched on this with some of the prior questions, but maybe you can be clearer. On the macro, clearly, you're still seeing good spending environments. But any change at all with customer behavior, the deals require greater level of scrutiny and sign of, the sales cycles longer. Are there any specific pockets where you might be seeing some of the macro weakness? Or is there nothing really to call out on that front? Yeah, no. I think it's a good question. And we've been anticipating a shift, we've been talking about a shift, and we definitely see that. We see more immediacy in the demand regarding those cost savings and sharper business case I've been talking about for the last couple quarters. So, there is more immediacy there. More cautionary in some of the broader digitization initiatives. We don't see anything stopping, but we definitely see a little more caution there. In general, those cost savings, part of that is some of the managed services deals that we're doing and some of the IP deals. That's typically a longer sales cycle in any environment. We actually see those shortening because there's more immediacy for that. I can tell you, I had a discussion with a COO of a large company. And when we really talked about the managed services opportunity, he sent an email literally five minutes after the call to his team and connected, our teams have that discussion. So those tend to be moving a little bit faster. The SI&C deals, which are shorter duration, typically shorter sales cycle, that's lengthening a little bit because of some of what I talked about, some of the caution. So, overall, we've anticipated this shift. Our go-to-market, our hiring, our staffing, everything is aligned to this. And you see that in the results of the bookings. But we definitely see that that shift happening. On the managed services side, it's pretty widespread. All industries, all geographies. On the SI&C side, it's strongest in government and the financial services. A little bit stronger in North America, as you might expect, than Europe on the SI&C side. Weakest probably in manufacturing and retail. So, the SI&C side, you see some weakening there. But counteracting that is very strong on the managed services side, particularly in manufacturing. And then, of course, IP is strong in all markets. For us, it's strongest in banking and government. Maybe that gives you a little bit of flavor what we're seeing. Yeah, there is some shift. We've anticipated. We've been talking about it. And our teams are pretty aligned around that, which is why you see the growth in the booking. Just a quick one on cash flow. Given that the mix is shifting a bit more towards managed services, should we expect room for further improvement on DSOs or not necessarily? Look, you have seen the DSO improvement just this quarter. Yes, we have some clients even that are prepaid us in Q1. Usually, we see that more in Q2 because of the annual maintenance that we are receiving. But, yes, it's usually managed services has a shorter DSO. I was hoping to dig in a little bit into the hiring strategies, lots of moving parts, at least from my perspective. Maybe you can talk about capacity relative to the strong demand you're seeing. Are you starting to see utilization moving higher, maybe if you're slowing down hiring, and how does the low cost delivery â look, I think you said 22%. It's been there for a few quarters. And so, is that an area that will move up? If you could just wrap up some of the comments together around the hiring strategy, that would be helpful. Look, the hiring is impacted a bit by the lower turnover that we're having. The fact is that, given some of what's going on in the marketplace, we've seen a pretty sharp decrease in the voluntary turnover on an annualized basis. Now, some of that, we always see a bit of a shift in the December quarter, just given the holidays at the end of the year, but we saw a sharper one this quarter. So that gives us a little more breathing room from a hiring perspective. But also that shift to managed services and the shift to intellectual property deals, you saw that in the pipeline, you'll start to see that flow through some as well because, on the IP, it's not a linear revenue to people like it is on the SI&C side, right, because you've got the IP generating revenue for you in a different way. And then the shift to managed services, many of those managed services deals, we actually rebadge people from the clients. So, that, again, lessens the pressure on the hiring. We don't have to hire as much in front. And then government is very strong, and government is a little more predictable, given the RFP process and the length of time for that, you can plan that out much easier. And so, yes, over time, we're very focused on utilization. We're looking to drive that that up. Having said that, the hiring for hot skills remains tight. And although it's easing some, it's not really eased yet. And so, we continue to make sure that we manage the hiring of those hot skills and the rates and projects that we put them in. So, definitely, a shift, but, again, one that we've planned for and one that we'll continue to manage closely, as we go through things. I'll just remind you, the IP and the managed services doesn't come online in the revenue over night. So, this will be something that will happen over the next few quarters. The second question would be around the new business mix. I think last quarter, you said that the pipeline was even better than the numbers reported then, they're consistent this quarter. And so, are you seeing consolidation happening? I imagine you're better positioned for efficiency and digitalization than some of the others, given the end-to-end coverage. And so, is that something that you're starting to see that was driving new business? Or is there something else? Yes. No, for sure that the combining some of that SI&C into the managed services deals to give our clients the best balance, which is what I talked about in the opening remarks, we're definitely seeing some of that. The IP is also generating new clients. I've mentioned we've been investing in go-to-market. Our IP has been a little more locked within the geography that was created. And so, part of the rationale for creating that global IP group and deploying resources towards that was to kind of strengthen that model. That's generating some new clients for the existing IP. And so, I think it's a combination of factors that's driving that. Last one for me, just high level, can you remind us about your exposure to AI? How it runs the business? How you participate in that just given all of the news flow around that? Yeah, a lot of discussion about that. I'll tell you two things. One, our clients in general are pretty cautious on deploying it for all the right reasons. But having said that, what we have the advantage of is we have our intellectual property, right? So we've got a couple of hundred solutions. We've got software engineering labs associated with that. That's kind of our R&D lab for this. And so, we're introducing AI and researching where it applies, how can it be used responsibly into the solutions on IP. And then when our clients are ready for that in a more full scale way, we'll be right there for them. Actually, it's a bit of a follow-up to Rob's question on AI. Like, when you look at different technologies, not specific to AI, but there's a lot of different things that are happening, how does CGI select those opportunities to pursue when it comes to making capital allocation decisions? We have a framework, intellectual property management framework. Actually, I chair that, along with the presidents of each of our operating units. But as part of that we also have a way to bring new ideas to kind of fast track, it's a combination of some. There's a pool of money where there's some CGI money and then some local money that goes into that. And then, as that looks like something that could scale, it's then brought to that IP management framework. And when I say IP, some of that is business solutions, but some of that can be accelerator, some of that can be technology solutions as well. That's a good way for us to do that type of work. The other is part of our lab that you always hear me say, innovation happens at the shop floor. And innovation for us is working with our clients. Sometimes we do that in conjunction with our clients as they look at leveraging new technology. And that's one of the reasons we have what we call emerging technology units that work across geographies, so that we can bring that to our clients. On the acquisition question, you talked about sort of having opportunities in different markets and IP in different geographies. You look back over the years, CGI has done acquisitions geographically and in IP. And IP, I guess the big one would have been AMS in terms of sort of changing and being transformational. If you kind of assess those acquisitions of the past, whether it's IP, large, small, medium size, like, is there a ranking in terms of returns in terms of what's better? Or I don't want to say worse, but the best returning assets from an acquisition standpoint? Well, it's a good question. They're all a bit different. And as you know, AMS had a lot of long term client relationships that were invaluable, just like the IP was very valuable. So it's kind of hard to rank those. It's funny that you mentioned that because, in a couple cases in our pipeline, we said this looks like an AMS company as far as having a combination of IP and services. But, look, again, just go back to what we're looking for when we're doing an acquisition, we're looking for, first and foremost, the cultural alignment. And the cultural alignment typically means for us having talented individuals within the company that have close relationships and bringing value to their clients. And that value, it's hard for me to rank whether that value is from a consulting which is very valuable, IP which is very valuable, SI which is very valuable, and managed services. But the key is that they have that close relationship, and that it's dynamic, and they continue to bring value. And that's what brings value to CGI in the long term. Just one last one for me. With respect to acquisitions, again, no doubt you have considerable strength in government. So when it comes to acquisitions, is that, let's say, one area that you think that you would sort of even further fortify your presence, given it is fairly sizable of the mix today? Would you just prefer to diversify the business away from that? Yeah. So, it's a little of both. I think the diversification is important. We're now at 35% government, which is a great place to be. But as we continue to grow the business and make acquisitions on the commercial side, it's going to be important for us to continue to grow in the government space. And the deals quite frankly are getting bigger in government, and so you need to have a certain scale. So we will continue to look at both. I was hoping you could talk a little bit about the visibility you have into the cost structure here, both in terms of pricing, utilization and attrition. Just curious if you've seen some normalization here versus the last few quarters. Normalization of the pricing and the cost structure, it's still pretty dynamic. Like I said, there's still the tight demand for some of the hot skills. And so, there is still some wages that are increasing. We've been managing that, as I mentioned, through the combination of global delivery, the college hires, etc. And then being able to pass that along. We're still seeing price elasticity point in time for the value added skills that our clients are looking for. So I think it will moderate over the next couple of quarters, but we haven't seen wholesale moderation yet in that environment. In your prepared remarks, you mentioned the prioritization of employee certifications and opportunities around supporting partner technology platforms. Just hoping to dig a little bit more into this opportunity and what phase of this process you're in? As you know, about a year ago, we announced the promotion of nine different strategic partnerships to a global level. And so, that's kind of the priority that we have. And then within those areas were work in conjunction with those partners because, by doing that, we're working with them at an executive level. What areas are they investing in? And therefore, what areas should we be investing in? Not the legacy, but where they're going and where they're heading. So that's what I mean by the prioritization. It's actually going quite well. We started from a position where we didn't have as much of that relationship, and so it's going very well. And we offer something to these platform providers that maybe others don't, given that strong base of intellectual property. And so, there's joint partnerships where we can go to market together, where we build some of our IP to run on top of their platforms, therefore it's not just us doing integration of their platform, but us helping to drive their platform further into the enterprises that they're in or that we're in. So, of course, we do that in an agnostic way, and in conjunction with our partners, just like they do with their SI partners. But it's where we find that synergy, it's good for everybody. It's good for us. It's good for our partner, and it's good for our clients. I wanted to do a double click on your European and Scandinavian markets where you're booking [Technical Difficulty] uncertain macro backdrop in the quarter. What do you think was driving some of that? Is it a better-than-expected macro outcome? Or is it some of the management changes that you've recently made? I would say it's more of the latter. We had some structural changes we needed to address. It's great to see that Scandinavia is now growing as an entity. We still have a little more work to do. You can see that in the numbers. And it's really now though, it's about shifting the mix of business. I always talk about the mix of business. And it's about shifting the mix of business. That takes a little more time. But returning to growth, addressing some of the cost structural items is really the difference maker there. And again, yeah, it's an interesting backdrop on the macro environment, but it's really about pivoting to the value added services that our clients are looking for, and that the team has done a great job of that pivot. I just wanted to ask on headcount growth. Looks like net headcount growth was pretty de minimis quarter-over-quarter. So just wanted to see if we can unpack that a little bit because I know, George, you referenced a little bit of choppiness as it relates to certain parts of digital right now, just in terms of a little client hesitancy in certain pockets of the business. So is the limited headcount growth just a reflection of the uncertain kind of way forward on demand from here? And I guess just in terms of managing our expectations, you just had a really strong book-to-bill quarter in the December quarter, would you expect that to soften to some extent in the March quarter just because of some of these cross currents that you referenced? What's interesting about that, it's really a combination of things. One, the December quarter, we don't tend to have people start in a December month because, typically, they're taking a week or two off. In Europe, maybe even two weeks plus. And so, that's not our strong hiring quarter. But it really is also that shift. And you're right, there is the shift from that T&M body-based business to the managed services outcome-based that comes with some people already, and then the intellectual property. So I would expect to see our headcount moderate a bit compared to the prior year where you know that the SI&C was extremely strong. Overall bookings, though, interestingly enough, the managed services comes with typically longer durations. And so, the bookings, I would â just looking at our pipeline, the deal size is up â duration is up, but the deal size is up. So, still have to close the deals, but that's what I see. So, I think it's not one-for-one with the shift, but the shift does play into that, for sure. I can tell you that the pipeline continues to be strong. The conversations are fruitful, but you can never predict that. That's why we always say look at the book-to-bill on a trailing 12 month, not on a quarter by quarter basis because, by definition, bookings are lumpy. Thank you, Julie. And thanks everyone for participating today. As a reminder, a replay of the call will be available either via our website or by dialing 877-674-7070 and using the passcode 308479 as well a podcast of this call will be available for download within a few hours. Follow-up questions can be directed to me at 1-905-973-8363. Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and ask that you please disconnect your lines. Thank you.
EarningCall_960	Thank you for standing by and welcome to First Western Financial Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. As a reminder today's call is being recorded. I would now like to turn the conference over to the host Mr. Tony Rossi of Financial Profiles. Sir, you may begin. Thank you, Valerie. Good morning, everyone, and thank you for joining us today for First Western Financial's fourth quarter 2022 earnings call. Joining us from First Western's management team are Scott Wylie, Chairman and Chief Executive Officer; and Julie Courkamp, Chief Financial and Chief Operating Officer. We will use a slide presentation as part of our discussion this morning. If you have not done so already, please visit the Events and Presentations page of First Western's Investor Relations website to download a copy of the presentation. 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 First Western Financial 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 factors are discussed in the company's SEC filings, which are available on the company's website. I would also direct you to read the disclaimers in our earnings release and investor presentation. 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 website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. We had a number of objectives that we wanted to accomplish in the fourth quarter. We wanted to increase our focus on deposit gathering in order to improve our liquidity and reduce our loan to deposit ratio. We wanted to continue to generate solid loan growth while tightening underwriting and pricing criteria given the potential for weakening and economic conditions. And we wanted to continue to effectively manage our expense levels. I'm pleased to report that we were able to accomplish all these objectives and continue to generate strong financial performance, although earnings were lower than the prior quarter due to the increase in interest expense that we saw as a result of our strong growth in deposits and the competitive environment, putting pressure on deposit class. Even with a tighter underwriting and pricing criteria, we still generated 21% annualized loan growth in the quarter with increases in each of our major portfolios. The strong loan growth that we continued to generate reflects our success and steadily growing our client base in Colorado, as well as the increase in contributions we're getting from the teams that we built to increase our presence in Arizona, Wyoming and the Montana markets. With the strong business development capabilities that we've built, we're able to generate a significant volume of high-quality lending opportunities, enabling us to continue generating strong loan growth while maintaining our prudent approach to risk management. Importantly, the growth rate we saw in total deposits was more than double our loan growth. We are particularly effective in expanding deposit relationships with a few larger clients, which accounted for a significant portion of the deposit inflows we saw in the fourth quarter. And as with our loan production, our increased presence in some of our newer markets was also contributor to the strong deposit growth in the fourth quarter. As we mentioned on our last call, our near-term objective was to get our loan deposit ratio down near 100% and we were able to achieve that with our strong growth in deposits during the fourth quarter along with our improving liquidity by reducing our loan to deposit ratio. During the fourth quarter we also increased our total capital ratio by 53 basis points to 12.37%. Moving to Slide four, we generated net income of 5.5 million, or $0.56 per diluted share in the fourth quarter, or $0.58 a share with acquisition related expenses excluded. Our strong profitability along with effective management investment portfolio has enabled us to continue to drive increases in both book value and tangible book value per share. In the fourth quarter, book value per share increased 2.5% from the prior quarter, while tangible book value increased 3%. During 2022, a year when most banks saw a significant declines, both metrics increased by more than 9% reflecting the strong value we're creating for shareholders. Turning to Slide five, we'll look at the trends in the loan portfolio. We had another strong quarter of loan growth, originating $182 million in loans. While this was down from the prior quarter, the average rate on new loan production increased by more than 100 basis points. So we're still generating strong production without compromising on pricing. Payoffs are also continuing to moderate. So more of our loan production is translating into net loan growth and our total loans held for investment increased 121 million for the end of the prior quarter. The growth was primarily driven by increases in our residential mortgage construction C&I portfolios, which offset a decline in our CRE portfolio, which is an area we're limiting new production as part of our overall approach to risk management ahead of a potential recession. As with the prior quarter, most of what we're adding the one to four family residential portfolio or jumbo arms that provide attractive risk adjusted yields. Moving to Slide 6, we'll take a closer look at our deposit trends. The success we had in deposit gathering resulted in 44% annualized growth in total deposits during the fourth quarter. We had a decline in non-interest-bearing deposits, which was largely attributable to some clients designed to move a portion of their excess liquidity into interest-bearing accounts to capitalize on the higher rates now being offered. We also made a decision to add some time deposits in order to lock in longer term fixed rate funding that we believe will enable us to more effectively manage our deposit costs going forward. Turning to Slide 7, Trust and Investment Management, our total assets under management increased by 189 million from the end of the prior quarter, which was primarily due to an increase in market values during the fourth quarter of 2022. Turning to Slide eight, we'll look at our gross revenue. Our total gross revenue was relatively consistent with the prior quarter as an increase in non-interest income offset most of the decrease we saw in net interest income. On a year-over-year basis, our gross revenue increased 23.8% from the fourth quarter of 2021, largely due to higher net interest income, resulting from both organic and acquisitive growth on our balance sheet. Turning to Slide nine, we'll look at the trends and net interest income and margin. Our net interest income decreased 4.6% from the prior quarter, due to the increase in interest expense resulting from our strong growth in total deposits, and an increase in our average cost of deposits. With our strong growth in deposits, we reduced our level of FHLB advances. And we continue to make adjustments to our level of wholesale borrowings going forward based on the trends we're seeing in loan production and deposit flows. Excluding the impact of PPP fees, and accretion on acquired loans, our net interest margin decreased 47 basis points to 3.31. The net decline in our net interest margin was due to an increase in our average cost of funds resulting from the higher rate environment and very competitive environment for deposit gathering. Given the competitive environment for deposit pricing, we believe it is likely that we will continue to see some pressure on our net interest margin in the first quarter. As we exited the year, due to the changes in the composition of the balance sheet, we have moved to a more neutral position in terms of interest rate sensitivity. And we have indicated in the past, we do not make bets in future direction of interest rates. Changes in our interest rate sensitivity are a function of the trends we see in loan production and deposit flows at any given point in time, with our primary focus being on generating growth in net interest income. Over the past few years as the growth in our commercial banking platform resulted in more commercial deposit relationships and an increase in non-interest-bearing deposits, we became more acid sensitive and saw significant expansion in our net interest margin. Now we are seeing a shift back to a more neutral position, which will serve us well in protecting our net interest margin when the Fed eventually starts to lower interest rates. Turning to Slide 10, our non-interest income increased 3.4% from the prior quarter, primarily due to higher bank fees and risk management and insurance fees. The higher bank fees was partially attributed to an increase in prepayment penalty fees, while the increase in risk management and insurance fees primarily reflects a seasonal bump that we typically see in the fourth quarter. The growth in these areas offset minor declines in trust and investment management fees, and net gain on mortgage loans, both of which are starting to stabilize relative to the larger declines we experienced earlier in 2022. The volume of locks on mortgage loans originated for sale declined 32% from the prior quarter, approximately 95% of the originations were purchased loans, and we are seeing very little demand for refinancing given the rise in mortgage rates. Turning to Slide 11, in our expenses. Our non-interest expense increased 3.3% from the prior quarter, primarily due to an increase in data processing costs resulting from non-recurring implementation charges relating to enhancements we have made to our trust and investment management platform. During 2022, we made significant investments and built new banking talent and technology that will contribute to our future growth and revenue and improvement in efficiencies. Following these investments, we expect the growth rate of non-interest expense to moderate in 2023, with most of the growth coming from annual salary increases. And for the first quarter of 2023, we expect non-interest expense to be in the range of 20 million to 21 million. Turning now to Slide 12, we'll look at our asset quality. On a broad basis, the loan portfolio continues to perform very well with another quarter of minimal losses, although we did see an increase in non-performing loans in the fourth quarter. The increase in non-performing loans is primarily attributed to one commercial loan. As we have indicated in the past, our underwriting criteria requires multiple sources of repayment. In this particular case, we have the assets of the business, a commercial property, and a personal guarantee from a high-net-worth client. As a result, we believe the loan is well secured, and there was no specific reserve required. We recorded provision for loan losses of 1.2 million, which was driven by the growth and changes in the mix of the loan portfolio. This puts our HFL to adjusted total loans at 78 basis points, which was relatively consistent with the end of the prior quarter, and reflective of our strong credit quality and the low level of losses that we have experienced in the portfolio. On January 1, we adopted the CECIL standard for allowance for credit losses. Our preliminary estimate is that our ACL to total loans ratio will be in the range of 75 to 90 basis points and a 30 to 45 basis point coverage on off balance sheet commitments. Turning to Slide 13. I'll wrap up with some comments about our outlook and priorities for 2023. What appears that the macroeconomic environment will be challenging this year, we believe we're well positioned to effectively manage through an economic downturn while continuing to generate profitable growth, particularly when economic conditions improve. With our conservatively underwritten, well diversified loan portfolio and the strength of clients that we serve, we expect to maintain strong asset quality as we have during prior periods of economic stress. In each of the past three years, we further tightened our already conservative underwriting criteria. As a result of the credits we've added to the portfolio over that time have a substantial cushion in their debt coverage ratios and loan to values to absorb any deterioration that occurs in cash flows or collateral values. We also have little or no exposure to the areas that are most likely to be impacted by a recession, such as office CRE, retail CRE, SBA or subprime consumer. We feel very comfortable with this small amount of office CRE that we have in the portfolio. These properties aren't in major metropolitan areas where the work-from-home trend has been most pronounced. They largely consist of smaller properties in high-end suburban areas with tenants in more recession-resistant industries like medical practices. In terms of new business development, we're going to continue to place an increased focus on core deposit gathering to fund our loan production. Our relationship anchors are focused on developing full relationships with both loans and deposits from clients, we expect this to result in better alignment between loan and deposit growth going forward. While we continue to be conservative and highly selective in our new loan production until economic conditions improve. We expect to be able to continue generating solid loan growth as new teams that we've added in Arizona, Wyoming and Montana continue to gain traction and increase our market share. One of our priorities for 2023 is increasing our business development in the trust and investment management area. We've made some adjustments in how this business operates which will free up our business development officers to spend more time meeting with potential new clients. We're also going to be adding a few new business development officers in various markets. We believe these efforts will not only help drive a higher level of growth in assets under management and fee income, but also contributed to balance sheet growth given our consistent success and expanding relationships with wealth management clients to include loans and deposits as well. Our investment area will not have a meaning and full impact on our overall expense level as we're reallocating resources from other parts of the business. And as Julie mentioned, now that our near-term investment in talent technologies support our long-term growth are largely completed, we expect to keep our expense growth rate well below our revenue growth rate this year resulting in increased operating leverage. We believe our increasing operating leverage a result of further earnings growth in 2023 with the second half of the year likely being stronger than the first half. It's now been about 4.5 years since our initial public offering, and I think we have successfully delivered on the strategy we outlined at that time for enhancing the value of our franchise. While navigating through a multiyear pandemic, we've generated strong organic growth by taking market share in our existing markets and expanding markets and complemented that with disciplined, well-priced and well-executed acquisitions. The balance sheet growth we generated has resulted in greater operating leverage and higher level of earnings and improved profitability. With our strong execution since the IPO, we've created significant value for the shareholders of tangible book value per share increasing by nearly 140%. We built a strong, high-performing culture and a very talented team that delivers exceptional client service and effectively communicates our value proposition to consistently bring in new relationships. With a strong team we've built, the attractive markets that we operate in and the highly productive business development capabilities we've developed, we believe we're well positioned to deliver another strong year in 2023 and create additional value for our shareholders. I wanted to talk about, first, the growth in deposits linked quarter. And I think, Scott, you mentioned some fairly sizable clients adding funds to the deposit mix. Can you talk maybe about the larger deposits this quarter and then the efforts to continue growing that? Would we expect that to continue in terms of the acceleration of the linked-quarter beta. Yes. So we talked a little bit about this. I think in the last two calls. Historically, we've seen that we've been able to operate the bank in a kind of a 90% to 95% loan-to-deposit ratio. And we've always kind of wondered -- we know where the next loan is coming from. We always kind of wonder where the next deposit is coming from. And I think what we've seen over the years is that our clients have liquidity and they're willing to bring it here. If we want it, we don't need to carry a bunch excess liquidity on our balance sheet that we're not making money with. So I think that's exactly what we saw in the fourth quarter. We told our relationship bankers, hey, we're not going to operate this thing with 108% loan-to-deposit ratio where we were in Q3. And we went out and increased our loans or deposits at a rate that was double our loan growth rate in Q4. So I do think that we really had nice success with that. And as we said in the prepared comments, a lot of that came from existing clients, which is exactly what we've seen over the prior 18 years here. And then my prior private banking operations. So yes, I do think that will continue into 2023. The comment you made towards the end of your question though, I just want to draw some attention to that. If you look at kind of quarter-by-quarter last year at our deposit beta. We did a pretty nice job, I think, as an organization in holding our deposit beta down in the first half of the year. And as we talked about last quarter, it's really been an unprecedented environment. I mean, in the 30-something years I've been doing this, we've certainly never seen deposit or Fed fund rates go up as fast as quickly buy as much as quickly as what we saw through the middle and latter parts of this year. And I feel like the relationship-based focus that we have here has really served us well. Of course, that came back in Q4 in an interesting way where we really saw a big spike in our cost of funds to the point where our net interest margin really came down, which we said we thought was going to happen in the last call and sure enough, it did. I think we guided in our comments that we're going to see continued pressure in Q1 of 2023. But you look at where our NIM is. For example, in Q4 at 332 when you compare that to historic NIMs at First Western or compared to other high fee banks like us, and 332 is a very strong number. So just looking forward, I think the interesting question, and I don't really know that we want to give guidance on this. But I guess my feeling is we should plan for the worst, but we can hope for something better than the worst. And I do think that if you look further into the year, we had a lot of pressure in Q4 to catch up on some of the deposit beta that we had kept low through the year. I don't personally think that's going to continue. I don't think we're going to see half a dozen or whatever it's been 75 basis point increases from the Fed this year. And so I don't think that these headline numbers are going to be in the media a time and our clients are going to be saying, hey, how come I'm getting 0 when Fed funds are 5, which we're hearing throughout the industry. I mean it's just going to be a different environment this year, I think. And if that's true, and I don't know if it is or if we're in a recession or whatever, we may get dealt, I mean we know from Page -- is it 6 that has our loan stuff on it? I think it's Page 6 of our slide deck. Page 5. Thank you. We have something like $100 million or $200 million in loans that pay off every quarter, and we produce something like $200 million or $300 million a quarter, at least last year. And so you do look at the impact of loans rolling off of 3% or 4%, and either renewing or new loans coming on at 7% or 8%. And it just feels to me like we're pretty well positioned from an already competitively high net interest margin compared to high fee bank peers, private banking peers, I think we're well positioned to see some growth later in the year but we're going to see that come down in Q1. And I don't know what's going to happen the rest of the year but just the dynamics that seem apparent today, leave room for upside later in the year. So that was a little bit of a long-winded answer to your question, Brett. I hope it was helpful. Yes, Scott. That was very helpful. And I would agree, you obviously did a good job last year managing the deposit cost has just gotten so competitive and essentially your competition is the treasury curve. So sort of is what it is. My follow-up question, I wanted to ask about the loan portfolio growth from here. 4Q was construction and residential. Obviously, you have slow growth from 21% linked quarter annualized in the fourth quarter. But wanted to get a sense of what the pipeline looked like, what you think you might grow this year and then any magnitude that you're expecting from pipeline perspective? Yes. We've historically said that we think we can grow loans in the mid-teens. I think, again, if you stand back a little further than just a quarterly look, we've kind of grown loans pretty consistently organically at least in the mid-teens. So with tighter standards, with higher spreads, could we grow loans in the mid-teens in 2023, well, I think so. We have the infrastructure in place. We've got some strong machine, I call it, in our existing offices. And then, we've added some more high-quality lenders in some of these new markets that we're in, Arizona, Western Wyoming and Montana. So yes, I mean, I think we're well positioned to see growth in deposits and loans in those markets in relationships, but it's just hard to tell right now. I think we're seeing clients that we're thinking about doing something that makes sense at 4% and maybe doesn't make sense at 8%. And these are sophisticated people, and they've been through cycles, and they don't need to do something. And maybe they will, maybe they won't. I would say right now, our pipelines are down, but they're sure not empty. There's plenty of activity going on, and people are doing things, and we're closing on new loans. Then I would just add, Brett, for the kind of the mix comment that you added into that question. We did see quite a bit of mortgage offering, mortgage production last year. And for us, it continues to be very strategically important to us. Like we've always said, it's a good new acquisition of clients and retaining existing clients tool for us to use. But we continue to be cognizant of generating appropriate risk adjusted returns on our capital. So you'll probably see us dial back our residential mortgage production from what we did at least in the prior year for the first couple of quarters this year as we look at our competitors what they're pricing those loans at, they're not quite as attractive as what we would want to put on our portfolio. So I don't think you'll see that same level of growth for us at least in the first part of this year unless things change. So the $20 million of sub-debt that was raised intra-quarter, is that solely just for growth purposes? Or was there any other thing you were thinking about when you raised that sub-debt? I'm not sure if there's anything else that's expiring or maturing. But what's the -- any color behind why the sub-debt raise? Yes. Well, we thought that going into a potential recession, more capital is better than less capital, and we didn't want to do a common raise. We don't need to because we've been able to generate good earnings here over these last few years to support the growth we've had. But we saw a window for an attractive non-rated raise. The one that was done before us, I think, closed at 8% of a regional bank. The one that was done after was 8.5%, we got ours done at 7%, 5-year fixed and gives us $20 million of surplus Tier-2 capital at the holding company that can be pushed down to the bank for additional common. It can be additional cash for the holding company. I mean we said general corp purposes, which is exactly what we plan to use it for. So it just seemed opportunistic and of course, it's non-dilutive. The impact on future EPS is minimal. And I think we don't know what's in the future. And when the windows like that is there, I think it makes sense to take advantage of it. All right. And the new commercial loan that entered into NPA, it sounds like it's not a huge risk given the dynamics you talked about. But just a little more color, what type of loan is that and when do you expect to have that loan resolved and back out of the NPA bucket? I think 3 weeks from Thursday. So these things are a process. A couple of points on that. It's a producer of a consumer product that probably got a little over their skis. That's a metaphor. I think are an indication of the strength of our credit process and of our borrowers here, as Julie said in her prepared comments that we always underwrite that resource through a payment. We've got the business assets. We've got the buildings. We've got some other commercial buildings, and we have a personal guarantee from a very strong borrower client. So we don't anticipate a loss there. I do expect that it's going to take a little time to work out just because it always seems to. But it didn't feel to us, or it doesn't seem to us to be indicative of anything like it's not some systemic problem that we have 3 other loans just like it that are all going to have problems or something like that. I mean it's just, I think, a one-off thing that, that we felt better putting on non-accrual in Q4. Okay. And then the commentary about the margin coming down in Q1. Any idea the magnitude of how much it could come down? Or any idea where the margin exited the quarter in December? Yes. In December, our NIM just for the month of was 306. So that's a little bit helpful to you to see where the [hide] [ph] meet us. And Scott touched on a lot of the NIM comments and the net interest income and market for deposits. So I think that will help you out. Okay. And last one for me. So $20 million to $21 million of expenses in Q1, should we expect a little bit of growth beyond that for the rest of the year? Or do you think they'll be able to hold that flat for the rest of the year? How should we think about kind of full year expenses? Well, we think this is a good time to be managing expenses. And so we talked about, what we talked before that our path to success is not cost-cutting, but we talked in the prepared comments about the fact that if we can keep our costs in line this year with last year and the only real cost increase that we'll see would be related to salary increases because we do an annual merit adjustment for people. I think that would be a successful expense control year for us. I do think we're in a place in the cycle where we want to be careful about growth. We want to be careful by expense growth in particular. And I think what we're trying to show you in the numbers here is, if we see continued revenue growth like we have seen over the past few quarters, especially in our core earnings. And then, net interest income by itself is up -- is it up 49% year-over-year for the fourth quarter, Julie, some number like that. And then we have these kind of hideous headwinds from -- on the fee income side. And I keep thinking at some point, it's not going to go lower. So if it goes higher, and then you've got good expense control. I mean that's all our formula for nice earnings acceleration. So that's where we're thinking on expense discipline. Thank you. One moment please. Our next question comes from the line of Matthew Clark of Piper Sandler. Your line is open. Just first one for me around the margin, if you had the spot rate on deposits, deposit costs or interest-bearing deposit costs at the end of the year? That's total. Okay. And then the risk management and insurance fees, you have the seasonal step-up this quarter, a little bit higher than a year ago fourth quarter. Anything, I guess, about this rate environment or just general macro environment that might have lifted that a little more than usual? Or is that kind of a reasonable level of activity for next year's fourth quarter? We can't seem to predict that. It seems to produce a pretty consistent amount year in, year out through the first three quarters of this year was below our expectation. And we thought we were going to have a strong fourth quarter, and we did. So I think higher fourth quarters than the prior three quarters is a good expectation whether we're going to hit the number next year like we did this year, I don't know. I mean, we've got a bigger platform [or perhaps] [ph] a bigger client base, more folks out there helping our clients with wealth planning that smoothly drives the risk in the life insurance business. So hopefully, that trends up over time and it will be cyclical where you're going to see more in the fourth quarter. Okay. Got it. Great. And then just kind of big picture. I think a number of banks have kind of suffered from generating probably stronger loan growth than they should have and not funding it with deposits or low-cost deposits. You guys obviously had excess deposit growth this quarter. But it was -- it came at a price. I guess what are your thoughts around kind of maybe tapping the brakes a little bit on loan growth. unless you can fund it with low -- truly low-cost deposits and not price-sensitive type balances? Well, honestly, we're not really thinking in terms of how to best manage NIM. We're thinking about how to grow the business with the clients that we want given the economic and competitive environment that we've handed. And we've talked about tightening credit standards. We talked about raising margins. We talked about the relationship focus. If you look at the actual trend line for loan production, it's gone from a little under 350, a little under 300, a little under 200 over the last three quarters. I think that is all indicative of how we're approaching loans. I think sometimes with banks that turn this big it off all the way. And certainly, in our market, we're seeing some of that. Then, you've got a problem turning it back on when the economy turns around. So I think to the extent we can keep our bankers focused on finding the relationships that we want, growing the relationships with existing clients, making sure that our clients and referral sources and our prospects are, see us as being in business and willing to do things that make sense, albeit under more stringent terms and more expensive. I think that's where we want to be. And if that slows our growth rate down the balance sheet in the interim here, I think that's fine. As I said, we're going to see a lot of lift. I expect, I don't, again, want to give guidance of this, but I expect that we're going to see a nice lift in our NIM going through this year if the Fed does, in fact, slow down rate increases, so we don't see all this deposit pressure. And as we reprice our loan portfolio. I think the math on that stuff works pretty nicely for us and Julie was talking about. We're not trying to make a big interest rate bet here. We're trying to run a balanced portfolio. And I think that, that's going to play out nicely over the course of 2023 as it was a historical a year. Thank you. One moment please. Our next question comes from the line of Bill Dezellem of Tieton. Your line is open. It's Tieton Capital Management. I have a group of questions. First of all, would you please expand further on the comment that you just made relative to some competitors are shutting off their lending machine and what opportunities that may create for you all with market share? Well, I don't know really what else to add. I mean I think we're seeing some banks are approaching this part of the cycle by saying we're not going to lend. And I think that does create opportunities for us with prospects that aren't here yet, or clients that have things that are a way that we can bring here. I would tell you; we are in very desirable markets. And so we continue to see new entrants to the markets, and Julie talked in her comments a little bit about people doing, I won't say stupid pricing, but pricing, certainly, we wouldn't do on resis, for example, on residential mortgages. We're just seeing things that are head scratches to us. But the beauty of our business model is, we don't have to do those things. We can focus on a different area. When one area looks like a competitive position, we don't want to be in. And of course, with mortgages, we're able to use the secondary market capabilities that we have to still support clients without having to put low-priced stuff on our books that we don't want. Maybe, Scott, the one thing that would be helpful is how prevalent are you finding -- just pulling back dramatically on lending by competitors? I don't know how to answer that, either Bill. We're in some very different markets from each other. What we see in Denver is different than what we see in the other front range markets. Obviously, the resort markets are different. Western Wyoming, continues to be a really interesting dynamic market. I would say we've had more success early in Montana than we expected. And then if you look at the Arizona, we've been able to take advantage there of attracting new lenders in. And a lot of the reason that the really high-quality people that you want to attract to First Western, the reason they want to join us is, as they see us as a growth-oriented company and not somebody that's turning it on, turning it off, turning it on. So it does spell opportunity for us. I just think that -- and I want to be clear, I've said it 2 or 3 times already, this is not the time to be pedal to the metal on growing loans. I mean this is a great time to be bringing in great relationships, fine, but we have been tightening credit standards. We've been tightening our underwriting stance and the terms. We've been expanding our NIM, expanding our credit spreads that we're charging clients, and we've been disciplined about that. And I think that's going to pay off for us in 2023 and beyond. Okay. Thank you. And two additional questions, if I may. Acquisition pipeline, would you please provide an update in terms of what you're seeing given all of the macro factors that you're talking about and whether that's causing some decide now would be a good time to sell? And then secondarily, the trust and investment management and systems enhancements, I know there was a one-time cost in the quarter, but more importantly, trying to understand what is it that you would anticipate those enhancements to do for that business, please? Yes. Great two small questions. Let me start with the acquisition pipeline. So I think what you hear out there is what we see, which is that it's a difficult time for acquisitions. I think with challenges with AOCI and with credit uncertainty, whatever, it's the hard time to get things done. We continue to spend time and effort on our corporate development program. I explained many times before, that we think that, that's a core competency here in that we have a process for doing that, and we continue our process people that we're interested in. Now we're interested in them. We call on them and visit with them and work on opportunities and we continue to do that. I would say there have been 2 or 3 deals in the latter half of last year that were of interest to us, and we're just priced in a range of them make any sense to us, and they did ultimately find a buyer at a price much higher than we would have paid. And so I wish them well. I think that's interesting. But we don't need to do those things. We don't need to scratch on those things. I mean I hope as investors, you guys see that we're disciplined about that stuff. If you look at our last 3 or 4 or also a team for that matter, acquisitions here, they've had very happy stories because we're disciplined about how we look at it, how we price them and we don't stretch on these things and do things that can come back and bite the shareholders. So are we going to do something this year? I don't know. We don't have anything that we'll be announcing tomorrow, but we continue to do our corporate development efforts. And if the right thing at the right price makes sense, we would love to include that as part of our growth story going forward. The second question, think about Teton systems. I don't know how far Julie we should go with this whole thing. But let me try a specific answer and a general answer and maybe if you want to add some more color to it, you would. But as an industry, private banking has a really difficult problem, which is we need our trust and our investment and our mortgage and our banking systems to talk to each other and they just don't. There's no vendor out there that has provided that in the 40 years that I've been doing this, even though some of them promise it, they don't work. And so what we've done historically here at First Western is, we've taken those 4 core systems and pulled the data out and then use the data to do the things that we need like client profitability and [issue] [ph] pricing and stuff like that, cross-selling, knowing the different products that individual relationship has with those sorts of things. Now if we can get comfortable with security, we think that there's an opportunity to migrate these core systems into cloud-based systems that are much more accessible for fintech solutions that are not just stuck in a core system ecosystem, right? That you can use the core as just the core, and then you can build systems around them that provide a lot better efficiency and effectiveness for internal use for our associates and for the client experience. And so what we've done this year, well, two years ago, we converted our loan processing system to an up-to-date system that kind of next generation that we think can support that sort of loan process efficiency. Two years ago, three years ago, we did that with our platform trading system that we use for investment management, which has all kinds of advantages internally and externally. This year, what we did in the fourth quarter is we took our trust core and our investment core and replace the incumbents with a new vendor that has a cloud-based solution that's integrated as one solution for both of those cores. And then for this year, we're hoping to do that with the banking core so that we've got ourselves in a place where all these things, even though they may not be able to talk to you to them, they'll all to talk to our overlays much more effectively and efficiently, and we can get away from being stuck in a single vendors ecosystem and have a lot more flexibility for our system going forward. And the nice thing is with this trust investment vendor, we're ending up, Julie, we finally breakeven is that -- I mean, we're hoping for some cost saves. I think -- Yes. And we'll see how -- once the dust settles and everything if there's some cost saves to be had there. But my point is, they're not costing us more. There are some onetime conversion cost to it and obviously some pain to the conversion as there always is, but that would be kind of a short-term and long-term answer to that, Julie, what I miss in there. No, I think you got it. I was going to touch on the efficiency for our processes and simplification for our associates, client experience improvement and then more accessible data. So those are kind of the key points for what we are hoping to accomplish out of this one. Thank you. One moment please. And it looks like we do have a follow-up question from Brett Rabatin. Your line is open. Just wanted to follow back up on fee income and make sure I understood the expectations for the year, kind of seasonality, maybe of the risk management and insurance fees. And then, just thinking about mortgage banking, some folks have made some hard decisions on that business line. But my guess is you're going to continue to try and work that business. So I just wanted to hear any thoughts around the mortgage expectations given, obviously, low levels at current times. Thanks. Yes. So obviously, we've had some pretty tough headwinds in our fee businesses as an industry and here at First Western that's true as well. The two big headwinds for our fee business has been on the mortgage side, and obviously, that was a big disappointment this year. But we know it's cyclical. We know it's strategic for us, like you said. So we're not going to go out of it. What we can do is manage expenses, which we've done. We've cut expenses now Julie 2x or 3x? We'll continue to assess that as production. We're typically slower this season. So we're definitely going to be assessing it as the months come in. And then, we've added some MLOs in Arizona, in particular. So I think our production -- our market share should improve MLOs are 100% commission. So there's no expense associated with that, if they're not producing and they are. So I think that's kind of the best you can do with that, given what the market gives you. If the consensus assumption, I mean you look at the NPA numbers for this year, and I seem pretty aggressive to me. But if those come true, I mean, we should see a better year, at least or at least flat to last year, in mortgages. And if we have good expense control or when we have good expense control there. I mean they're not going to get worse. It's either going to be flat or get better, I think. And then on the asset management side, the trust and investment management side, we think there's a ton of opportunity there. It's a really interesting time right now because when everybody is doing well and you're not paying much in fees compared to the 20% or 30% gains you're making whatever. It's hard to get people to move. It's hard to get people that meant that they need help because everything they bought into their [indiscernible] account or whatever went up. But in markets like this, they're not being so confident when [the spell] [ph] says them, hey, how come you lost all this money, it's nice to have a professional adviser that's helping them. And so we think it's an interesting time. We're actually very focused as a company right now on how we can strengthen our planning, trust and investment management, which are really kind of three different businesses. They're all very much integrated and overlapping, but the three different things. And we're doing some pretty significant things internally to upgrade that because we think it's a really good time right now to be out telling our story, which is a very powerful, differentiated unique story that fits nicely into the banking story we talk about all the time of delivering this team-based integrated private bank and trust service locally. It's hard to imagine they're going to go down much from where we are, and I think there's opportunity on the upside. Whether we realize that in 2023 or not, I don't know. But you go back to where we've come from, and we've come a long way in those businesses and our revenues have shown nice growth. And I think that this is an interesting time for us to be able to capitalize on the market environment. Thank you. I'm showing no further questions at this time. Let's turn the call back over to management for any closing remarks. Yes, I did have a couple of closing points I wanted to make, if I could. I mentioned in our prepared comments that if you step back a little look at the broader context, 5 years ago, pre-IPO, First Western was a $970 million bank with about $50 million in tangible book value. Today, we're approaching $3 billion. We have over $200 million in tangible book value. And we've done that without dilutive capital raises. In the meantime, we built out an infrastructure that can produce and support billions more in organic expansion, acquisition growth, and we're producing strong operating leverage and growth into the future, just as we have in proven in these interim years here since the IPO. I also want to recognize the hard work of our 365 First Westerners. I feel like in a pretty challenging year. We've managed to produce another great year of solid organic growth in revenues and core earnings in spite of some significant headwinds, we're well positioned for the challenges that 2023 may bring and especially if some of those 2022 headwinds turn to tailwinds, and these challenges that we've seen become opportunities for us. I think we have a really terrific future here. So thank you so much for dialing in and for your interest and support for First Western. We really appreciate it. Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.
EarningCall_961	Good morning. And welcome to the Omega Healthcare Investors Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After todayâs presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Michele Reber. Please go ahead. Thank you and good morning. With me today are Omegaâs CEO, Taylor Pickett; COO, Dan Booth; CFO, Bob Stephenson; and Megan Krull, Senior Vice President of Operations. Comments made during this conference call that are not historical facts may be forward-looking statements such as statements regarding our financial projections, dividend policy, portfolio restructurings, rent payments, financial condition or prospects of our operators, contemplate acquisitions, dispositions or transitions and our business and portfolio outlook generally. These forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially. Please see our press releases and our filings with the Securities and Exchange Commission, including, without limitation, our most recent report on Form 10-K, which identify specific factors that may cause actual results or events to differ materially from those described in forward-looking statements. During the call today, we will refer to some non-GAAP financial measures, such as NAREIT FFO, adjusted FFO, FAD and EBITDA. Reconciliations of these non-GAAP measures to the most comparable measure under generally accepted accounting principles, as well as an explanation of the usefulness of the non-GAAP measures are available under the Financial Information section of our website at www.omegahealthcare.com and in the case of NAREIT FFO and adjusted FFO, in our recently issued press release. In addition, certain operator coverage and financial information that we discuss is based on data provided by our operators that has not been independently verified by Omega. Thanks, Michele. Good morning. And thank you for joining our fourth quarter 2022 earnings conference call. Today I will discuss our fourth quarter financial results, operator restructurings and our expectations related to funds available for distribution. Our fourth quarter adjusted FFO is $0.73 per share and funds available for distribution are $0.70 per share. We have maintained our quarterly dividend of $0.67 per share. The dividend payout ratio is 92% of adjusted FFO and 96% of funds available for distribution. As expected, year-to-date FAD of $2.77 per share, exceeded our year-to-date dividend paid of $2.68 per share. Turning to operator restructurings, we have successfully concluded a number of operator restructurings, which have generally resulted in limited or no diminution in longer term funds available for distribution. Later, Dan will review some of our new and ongoing restructuring activity. As these are in process, the ultimate outcome is difficult to predict. However, based on operator discussions to-date, we believe our first quarter 2023 FAD will be less than our current dividend of $0.67 per share. We believe as these current restructurings are resolved and already completed restructurings, principally Agemo begin paying restructured rent, we will again return to a FAD run rate in excess of our current dividend. While we remain optimistic regarding the long-term skilled nursing facility industry prospects, we continue to remain cautious in the near-term as our operators contend with staffing issues and occupancy slowly heads back to pre-pandemic levels. Fortunately, some states have recognized the inflationary pressures facing our operators and have responded with supportive rate increases. We are appreciative and thankful for their support. Thank you, Taylor, and good morning. Turning to our financials for the fourth quarter, our NAREIT FFO for the fourth quarter was a loss of $30 million or a loss of $0.13 per share, as compared to $124 million or $0.50 per share for the fourth quarter of 2021. Our adjusted FFO was $177 million or $0.73 per share for the quarter and our FAD was $171 million or $0.70 per share and both excludes several items as outlined in our adjusted FFO and FAD reconciliation to net income found in our earnings release, as well as our fourth quarter financial supplemental posted to our website. Revenue for the fourth quarter was $145 million before adjusting for certain non-recurring items, compared to $250 million for the fourth quarter of 2021. The year-over-year decrease is primarily the result of incremental write-offs of straight-line accounts receivable and lease inducements in 2022 as a result of placing LaVie, Maplewood and two additional operators on a cash basis for revenue recognition. Consistent with historical practices, the $96 million of straight-line accounts receivable and lease inducements written off in the fourth quarter is excluded from our fourth quarter adjusted FFO and FAD calculations. Our fourth quarter 2022 FAD was flat compared to our third quarter 2022 FAD, as the decrease in cash revenues related to payments made by operators on a cash basis was offset by lower or favorable G&A expense due to the timing of professional services, as well as higher interest income from short-term balance sheet cash investments. In keeping with previous earnings calls, I will provide revenue, adjusted FFO and FAD commentary on certain operators, including updates on LaVie, Maplewood and Healthcare Homes, which were discussed in our January investor presentation. Dan will provide contractual and operational updates on these operators in his prepared talking points. First, regarding LaVie, in the fourth quarter of 2022, we placed LaVie on a cash basis of revenue recognition, recorded the $24.8 million received for rent in the quarter and wrote-off approximately $58 million of straight-line rent receivables and lease inducements through rental income. On December 30, we sold 11 LaVie facilities to a third-party for a sales price of $130 million, in which we provided $105 million in seller financing. In January 2023, LaVie paid $2.5 million or 34% in rent pursuant to the deferral agreement and we will only recognize revenue adjusted FFO and FAD in Q1 2023 to the extent cash is received from LaVie. As the LaVie 11 facility sale transaction, which included the $105 million in seller financing did not meet the accounting criteria to be recognized as a sale for GAAP purposes the assets will remain on our balance sheet and the cash interest payments received on the sellerâs note will not be included in revenue. However, the cash received will be added back when calculating adjusted FFO and FAD as the loan is paid in arrears. In Q1 2023, we would expect to receive and include approximately $1.4 million in adjusted FFO and FAD. Turning to Maplewood, as a result of our fourth quarter 2022 and first quarter of 2023 negotiations, during the fourth quarter of 2022, we placed Maplewood on a cash basis of revenue recognition. We recorded $20.2 million received for the fourth quarter rent and interest, and wrote-off approximately $29 million of straight-line rent receivables and lease inducements to rental income. In January 2023, Maplewood paid its full contractual rent of $5.8 million and one month of interest of $1.5 million on our secured revolving credit facility. As Maplewood is on a cash basis, we will only recognize revenue, adjusted FFO and FAD to the extent cash is received. Interest for the remainder of 2023 will be paid-in-kind and excluded from both adjusted FFO and FAD calculations. Agemo, starting in April of 2023, we expect Agemo to resume paying approximately $27.9 million in annual rent and interest, and both adjusted FFO and FAD will be reported as cash is received. Healthcare Homes, during the fourth quarter of 2022, Healthcare Homes paid all its contractual rent of approximately Â£5 million. Assuming Healthcare Homes defers all of its Q1 2023 rent and remains on a straight-line basis for revenue recognition, we would include the deferred revenue in NAREIT FFO and adjusted FFO. However, we will only recognize FAD based on cash received. In previous earnings releases and conference calls, we discussed Guardian and an operator representing 3.4% of Q1 2022 annualized contractual rent and mortgage interest. Both operators paid all contractual rent and interest due in the fourth quarter and remain current through January. Also, as discussed in previous calls, an operator representing 2.4% of our Q1 2022 contractual annualized rent and mortgage interest revenue was placed on a cash basis in the second quarter of 2022. In both the third and fourth quarters, the operator continued to underpay its rents, paying $2.5 million in Q3 and $1.5 million in Q4, which was recorded on a cash basis for both adjusted FFO and FAD purposes. Of the $2 million in January contractual rent owed, $500,000 was collected and we will only recognize revenue, adjusted FFO and FAD in Q1 2023 to the extent cash is received by this operator. Finally, we have previously discussed an operator representing 2.2% of our second quarter 2022 annualized contractual rent and mortgage interest. In the third and fourth quarter of 2022, we recorded $5.5 million and $3.8 million to both adjusted FFO and FAD after application of security deposits. This operator paid $310,000 in rent payments in January. As the operators on a cash basis and all security deposits have been exhausted, we will only recognize revenue, adjusted FFO and FAD in Q1 2023 to the extent cash is received. Turning to our balance sheet, as highlighted in previous calls, our balance sheet continues to remain strong. Thanks to the steps we have taken since the start of the pandemic to further improve our liquidity, capital stack, maturity ladder and overall cost of debt. At December 31, 2022, we had approximately all of our $1.45 billion revolving credit facility available for use, as well as $297 million in cash. Our next debt maturity is $350 million of 4.375% [ph] notes due in August. In 2020, we entered into $400 million of 10-year interest rate swaps at an average swap rate of 0.8675%. These swaps expire in 2024 and provide us with significant cost certainty when we refinance our 2023 bonds. The swaps are valued at approximately $90 million as of December 31st. At December 31st, 98% of our $5.3 billion in debt was at fixed rates and our net funded debt to annualized EBITDA was 5.3 times, consistent with all previous quarters this year and our fixed charge coverage ratio was 3.9 times. Itâs important to note, similar to NAREIT FFO, adjusted FFO and FAD, EBITDA and these liquidity calculations includes our ability to apply collateral and recognize revenue related to operatorâs non-payments previously discussed. To the extent that collateral becomes exhausted, a decrease in EBITDA will impact our liquidity ratios. Lastly, as a housekeeping item, effective for the fourth quarter of 2022, we adjusted our presentation of certain financial statement line items on our consolidated balance sheet to better align with similar companies in the healthcare real estate sector. Mortgage notes receivable has been renamed real estate loans receivable, other investments has been renamed non-real estate loans receivable and certain loans have been reclassified out of other investments into real estate loans receivable based on their underlying collateral. We provided a table in the press release reconciling the prior presentation with the current presentation. Thanks, Bob, and good morning, everyone. As of December 31, 2022, Omega had an operating asset portfolio of 901 facilities with approximately 90,000 operating beds. These facilities were spread across 65 third-party operators and located within 42 states in the United Kingdom. Trailing 12-month operator EBITDARM and EBITDAR coverage for our core portfolio as of September 30, 2022, decreased to 1.37 times and 1.04 times, respectively, versus 1.39 times and 1.06 times, respectively, for the trailing 12-month period ended June 30, 2022. During the third quarter of 2022, our operators cumulatively recorded approximately $18.6 million in federal stimulus funds as compared to approximately $29 million recorded during the second quarter. Trailing 12-month operator EBITDARM and EBITDAR coverage would have decreased during the third quarter of 2022 to 1.21 times and 0.88 times, respectively, as compared to 1.23 times and 0.90 times, respectively, for the second quarter when excluding the benefit of any federal stimulus funds. EBITDAR coverage for the standalone quarter ended 9/30/2022 for our core portfolio was 0.91 times, including federal stimulus and 0.83 times excluding the $18.6 million of federal stimulus funds. This compares to the standalone second quarter of 0.96 times and 0.84 times with and without $29 million in federal stimulus funds, respectively. Occupancy for our core portfolio has continued to trend up from a low of 74.6% in January of 2022 to 78.3% as of mid-January 2023 based upon preliminary reports from our operators. Turning to our senior housing portfolio. Today, our overall senior housing investment comprises 184 assisted living, independent living and memory care assets in the U.S. and the U.K. This portfolio on a pure-play basis had its trailing 12-month EBITDAR lease coverage increased to 0.97 times at the end of the third quarter, as compared to the end of the second quarter, which covered at 0.94 times. Based upon preliminary results, occupancy for this portfolio has remained steady at 85.3% as of mid-January 2023 versus 83% in January of 2022. Turning to portfolio matters, Agemo. The restructuring of Agemo concluded in the fourth quarter of 2022. In all, 22 facilities were sold to third-parties for $366 million. The remaining portfolio consisting of 11 facilities in Kentucky and 18 facilities in Tennessee are contractually obligated to resume rent and interest in April of 2023 in the amount of $27.9 million per annum. As part of the overall restructuring, the master lease with Agemo extended from December 31, 2030, to December 31, 2036. LaVie, during the latter part of 2022, LaVie, Omegaâs largest tenant, while continuing to pay full rent throughout 2022, began to anticipate imminent liquidity concerns as occupancy improvements were slower to materialize, labor costs continue to pose ongoing challenges, particularly in the widespread use of agency personnel and many other operating expenses such as food costs and supplies continue to increase in the face of inflationary pressures. Accordingly, during the fourth quarter, Omega and LaVie began earnest discussions around a portfolio restructuring that would involve an overall reduction in certain underperforming facilities. As part of that restructuring, Omega divested 11 facilities, 10 in Florida and one in Louisiana via sale to a third-party for a gross sales price of $130 million, of which Omega provided seller financing in the amount of $105 million. The seller financing is collateralized by mortgages on the 11 facilities, bears a fixed rate of interest of 8% and matures in five years. It is anticipated that as part of our restructuring, Omega would potentially sell an additional 16 facilities in the first half of 2023, subject to a host of conditions, including documentation, regulatory and other governmental approvals and third-party due diligence to name a few. Also, as part of this restructuring, Omega has agreed to a partial rent deferral in the first four months of 2023. The rent deferral equates to an approximately 66% discount to the full contractual rent. It should be noted that these restructuring discussions are ongoing and that the future outcome cannot be definitively quantified. Healthcare Homes, Healthcare Homes, Omegaâs largest operator in the U.K. with 42 care homes and annual rent of approximately Â£20 million, started dealing with liquidity issues in late 2022. These liquidity issues are predominantly driven by increased utility costs, increased agency costs and occupancy levels slightly below pre-pandemic levels. The increased utility costs are due to the timing of the expiration of their previous utility contracts in September of 2022. Even with government support, Healthcare Homes utility costs increased by over four-fold after the expiration of their previous in-place contracts. To assist Healthcare Homes with these liquidity issues, Omega has agreed to allow up to four months of rent deferral from January 2023 through April of 2023. Omega will continue to monitor Healthcare Homes liquidity needs to evaluate the potential for any future deferrals, as well as review certain underperforming facilities as potential divestiture candidates. Maplewood, in January of 2023, Omega restructured the Maplewood relationship, which is comprised of 17 high end senior housing facilities in upscale urban and suburban locations, predominantly located in the Northeast region of the United States. The restructuring was done to better align Maplewoodâs current cash flows with rent and interest obligations due to Omega. Although occupancy has now largely recovered at the Maplewood facilities, the pandemic caused a decline in their occupancy and similar to other operators, a long-term increase in labor costs. Also, as previously announced, construction constraints during the pandemic resulted in delayed openings and elevated costs at the Manhattan and Princeton developments. As part of our restructuring, Omega has agreed to, one, defer rent escalators through year-end 2025, two, deferred interest payments due on our secured credit facility by permitting payment-in-kind until cash flow permits future payments anticipated to begin in 2024, and three, increased the secured credit facility by $13 million to support near-term liquidity needs for lease-up at the Carnegie Hill facility in Manhattan and the Princeton facility. Please note, Maplewoodâs credit facility is secured by their contractual right to a portion of the net profits upon a sale of the portfolio. Omega anticipates all deferred payments will be repaid either through improved cash flow upon stabilization of the portfolio or through an allocation of proceeds from a sale of the portfolio. Both Carnegie Hill and Princeton continue to lease up as projected, based on the actual in-service dates with current occupancy levels of 57% and 86%, respectively. Other operators, as previously mentioned, an existing Omega operator representing approximately 2.4% of total rent, began to experience liquidity issues during 2022. Accordingly, this operator has failed to pay full contractual rent since March, and as such, Omega has utilized the security deposit in the amount of approximately $2 million to offset a portion of this rent shortfall. Omega is currently in discussions with this operator, which will likely result in the transition of this portfolio to a third-party sometime during the first quarter of 2023. In the second quarter of 2022, another Omega operator, representing approximately 2.2% of Omegaâs total rent began making only partial monthly rent payments, thus causing Omega to begin utilizing existing $5.4 million security deposit to offset shortfalls. As such, Omega and this operator began having discussions concerning potential sales and/or releases of this operatorâs portfolio. To that end, in the fourth quarter of 2022, Omega released three facilities to an unrelated third-party for an initial annual rent of $1.6 million. So far, in the first quarter of 2023, Omega has released an additional 16 facilities to third-party operators for an initial annual rent of $11.2 million, thus leaving only four remaining facilities with this operator. It is expected that these four facilities will likely be released in the coming months. As a result of these releases, including the remaining four facilities, Omega expects to receive new rent of roughly 77% of the previous operators former contractual rent or $17.3 million versus $22.4 million. Turning to new investments. On December 1, 2022, Omega closed on a $78 million purchase lease transaction for six facilities in North Carolina with an existing operator. Also on December 1, 2022, Omega closed on a sale-leaseback transaction for one facility in Pennsylvania with the same operator. Concurrently with these acquisitions, Omega amended the existing operatorâs master lease to include the seven facilities at an initial cash yield of 9%, with 2% annual escalators. Omegaâs new investments and capital expenditures for the quarter totaled $103 million. In 2022, Omega made new investments totaling $403 million, including $70 million for capital expenditures. Turning to dispositions, during the fourth quarter of 2022, Omega divested 33 facilities for a total sales price of $421 million. These sales numbers include 11 LaVie facilities and 20 of the 22 Agemo facilities mentioned earlier. In 2022, Omega sold a total of 77 facilities for approximately $859 million. Thanks, Dan, and good morning, everyone. While the announcement this week at the end, the public health emergency effective May 11th of this year, is perhaps not unexpected, it is not particularly ideal given some of the benefits that it provided the long-term care industry, which is still deeply entrenched in post pandemic recovery phase. Specifically, the three-day stay waiver was still tied to the PHE and will now end on May 11th. This waiver huge benefit to the industry during the height of the pandemic as the reimbursement associated with the ability to scale in place helped to offset some of the increased costs connected with managing COVID outbreaks. That said, the other major benefit of the PHE was the continuation of the enhanced 6.2% FMAP add-on. However, that had already been delinked from the PHE as a result of the Consolidated Appropriations Act of 2023, which passed in late 2022. That act provided for a phase-down of the add-on throughout 2023 from 6.2% in the first quarter to 5% in the second quarter, 2.5% in the third quarter and down to 1.5% in the fourth quarter with no add-on provided after 2023. It is too soon to tell what the impact of those reductions will have on the FMAP rate add-ons that certain states like Texas had been providing to skilled nursing providers. In terms of recovery, while occupancy is continuing to slowly rebound, not unexpectedly the recovery has tapered off slightly in these winter months. However, 31% of core facilities have now recovered from an occupancy perspective, up from 29% in the second quarter, while another 24% of core facilities that have not yet fully recovered are at or above 84% occupancy. Based on the January 2023 jobs report for Long-Term Care, ACA reported that as of December 2022, nursing homes are still down 13.3% of their workforce as compared to February 2020, with assisted living facilities faring somewhat better at a loss of 0.9%, with the rate of new job added slowed a bit to 2,740 jobs per month added from July 2022 through December 2022. But many of our operators are becoming more cautiously optimistic as despite the fact that the staffing shortages are still causing self-imposed admission bans, they are experiencing a moderation of agency usage and staffing turnover easing in general of late. While agency expense on a per patient day basis for our core portfolio for third quarter 2022 continues to be elevated at 6 times what it was in 2019, similar to where it was in second quarter 2022, the preliminary results we are seeing for September through November 2022 shows slightly more than a $2 per patient day decrease in agency expense over where it was in third quarter. We also continue to keep a close eye on Medicaid rate setting, particularly Texas and we are encouraged by recent payouts or announcement of payouts of American Rescue Act funds in both Texas and Ohio. Our hope is that as we exit the PHE and the enhanced FMAP winds down, the states, in particular, will rate set on pace with inflation or in excess thereof, if they have not already and that the federal government will not make any hasty move to provide for unfunded mandates. Hey. Good morning. Question for Bob and just to simplify for us listening, because there are a lot of moving pieces driven by revenue from operators, either resuming paying rent, no longer paying rent, and the application of security deposits. But can you give us the expected change in FAD from $171 million in the fourth quarter last year to the first quarter of this year and then maybe also the expected G&A in the first quarter? Yeah. Jonathan, I will try to summarize, itâs not that easy, because you are right, there are a lot of moving parts and I am only going to address the operators that we talked about on the -- in our presentation or in the press release. So the first one would be, so they paid us $24.8 million in Q4, I stated they paid $2.5 million in January, which was 34% pursuant to the deferral agreement. That equates to roughly $7.5 million for Q1. Plus, thereâs the seller financing note and remember notes are paid in arrears. So that would equate to another $1.4 million in Q1 or $9 million combined related to LaVie from a FAD standpoint Q1. Looking at Maplewood, they paid us $20.2 million in Q4 combined rent and interest. They paid, as I stated, $5.8 million in January for rent, $1.5 million in interest or combined $7.2 million. That equates to $17.3 million in rent, plus the $1.5 million in interest, because as we stated that, interest will be ticked for the remainder of the year. Those two combined roughly $18.8 million in FAD related to Maplewood in Q1. Agemo, pretty simple, they paid us nothing in Q4 or Q1, therefore, we donât anticipate Q1. However, they will start paying at an annual rate of $27.9 million starting in April. Healthcare Homes, they paid us Â£5 million in Q4. That equates to about $5.9 million, plus or minus. We agreed to defer rent through April, therefore no FAD in Q1. We will book AFFO and revenue as they remain on a straight-line revenue recognition basis. The 2.4% operator, they paid us $1.5 million in Q4, they paid us $0.5 million in January. We will only record FAD to the extent we get cash from them. Dan did mention we anticipate this portfolio to transition in Q1. The 2.2% operator, they paid us $3.8 million in Q4. They paid us $310,000 in January and similar to the 2.4, we will only record FAD as itâs collected. Dan mentioned we anticipate this portfolio to transition in Q1, is not stated, but if you take Danâs numbers, I think, thatâs going to translate to about $1.5 million of cash received, plus or minus depending on the transition timing related to that operator in Q1. And I think, lastly, you did ask the G&A -- about G&A. G&A was $8.8 million in Q4. G&A runs roughly $9 million to $12 million per quarter, and historically, our first quarter is typically high due to a number of factors, payroll taxes and really timing of professional as we do our 10-K, prepared for a proxy and things of that nature. Hopefully, that was short enough to answers your question. I will have to go back and add up the numbers, but I think we can get a sense of where we will shake out from fourth quarter to first quarter. So I appreciate that. And then my one follow-up for -- would be for Taylor on dividend coverage. You mentioned in yesterdayâs press release for an expected increase in the payout ratio and then in your prepared remarks earlier for an expected shortfall in the dividend coverage in the first quarter, and Bob, you just gave us the components of that. But given these building blocks of operators coming back online in the second quarter and hopefully more in the back half of the year, does that trajectory of improving cash flow give the Board comfort to maintain the current dividend. We are just trying to get a better sense of how they view the trade-offs between temporary shortfalls and returning that capital to shareholders? Thanks. Yeah. It definitely gives me comfort. I wonât speak for the whole Board because we make a decision every quarter based on what we see. But if you take the building blocks that Bob talked about, the next step is to connect the dots from Q1 to Q2 and so you have a number of operators in Q1 that are not paying or partially paying and we should see a big pickup in Q2. And so thatâs the piece thatâs missing, but to the -- with Agemo coming back on, the transition of the 2.4% operator, which should go at approximately the contractual rent, very little diminution. Those are big moving parts that are -- that get us back into a reasonably comfortable FAD from a dividend perspective. Great. Thanks. Just going back to the LaVie rent deferrals. I mean, how concerned should we be that down the road, this could turn into, I guess, some form of rent reduction. And then have you gamed out a scenario, where you could allow X amount of rent reductions and still kind of keep the dividend intact? Yeah. So on the LaVie question, we did identified, if you will, sort of the bottom tier of their assets in their portfolio and we discussed we have sold some of those already and we anticipate selling some other ones here in the first half of the year. And we think those two sales will bring the overall portfolio back into the black, back in the coverage that we have seen historically and that the rent deferrals will have a finite period of time. Got you. Thatâs helpful. And then just maybe on those potential asset sales that you mentioned. I mean it looks like thereâs still private appetite out there, but just maybe itâs cooled so much given sort of lack of bridge to HUD financing out there. I am curious what you are seeing in the transaction market and if any of these potential sales occur in the future, could we see seller financing to act on similar to the sale earlier this year, end of last year? Yeah. So the capital markets obviously have cooled, rates have gone up, itâs become more difficult, hence, the seller take back paper that we did in the fourth quarter. Right now, actually, our -- most of our restructures involve re-leases, not sales. So the capital markets donât come into play and thatâs kind of what we see out in the future a little bit more transitions via re-leases than actual asset sales. So we are hoping not to rely and we are open -- our new operators will not have to rely on the capital markets. Thanks, and good morning, everyone. Thanks for taking the question here. So, I guess, kind of similar to the first question in the Q&A, it is a little bit challenging to keep track of all the exact timing of some of the remedies and restructuring of the various operators. I guess, my question is the number of operators with rent coverage below 1.0, improving from 27 to 26 through September 30th. I guess if we did just try to fast forward beyond September 30th to today, you just think about all the announcements and restructurings you have disclosed in recent months. But if nothing else changed, but just taking those into account, what would the number of operators be in the sub-1.0 rent coverage category today pro forma for all your announced within restructuring, again, assuming no other changes to the other operators? Thanks. Specifically, how many -- there are -- we added obviously some new restructures in this quarter. So the number will go up the exact number of operators, like, I donât have that pro forma number. And bear in mind, those numbers donât include some of these rate increases that kicked in, in the latter half of last year and into this year. So thereâs just a lot of moving parts. Okay. All right. Thatâs fair. Separate question, I think you touched a little bit on some of the rate updates, but just curious if you can provide just a little more color on any particular state level skilled nursing rate update for 2023 for your SNF operators in some of your key states that really stood out that could be some potential positive relief as we think about the evolution of 2023? Thanks. Yeah. So if we look at our top 10 states, five of the states either in the latter half of last year or expected at some point this year, Indiana, Ohio, Michigan, Pennsylvania, Virginia, again, not all of those are set in Ohio, not quite yet, are looking at least a 10%-plus increase in rates and some of those, like Pennsylvania kicked in January, that was 17.5%. So we have got quite a few here in the mid- to high-teens as well. And then you have got California and North Carolina, who have FMAP funds still running through there and expecting to potentially put that into their rates in the future. So we donât see anything big on the horizon for those other than potentially FMAP converting into rates. New York is in our top 10, obviously, we donât have a SNF presence there and that leaves Florida and Texas. So, Florida, as you know, did a 7.8% increase in October of 2022. That helped several of our operators moved quite substantially in their coverage. But in the grand scheme of things wasnât quite as large as some of what these other states are doing. So we are watching them carefully. They are doing rate setting right now. So we are just hoping that they keep pace with inflation or beat it. But thatâs too soon to tell at this point. And then you have Texas, right? So you have got the FMAP potentially going away there. We think we are cautiously optimistic with the rate setting thatâs going to be happening in April, May and whatâs sort of been proposed at this point that, that will likely stay in place come September 1st when the rates kick in and it could be substantially higher than that, thereâs still some lobbying efforts going on and too soon to tell there. But those are our top 10 states. Yeah. Hi, everyone. Just kind of curious on that 2.2% operator, where you did the transition, itâs seems -- itâs a little hard to tell, but it seems like thereâs a rent cut associated with that transition. Could you kind of -- could you clarify that if there is a rent cut and what the size is? And then Iâd be curious to know if thatâs kind of indicative of maybe how operators under 1 time covered. What kind of support they might need? Yeah. So I indicated the cut was about -- well, the new rent, if you will, from all the transitions including the four that are still to come, we end up with rent approximately 77% of what it was previously, which is $17.3 million versus the old rent of $22.4 million, so call it, $5 million. And just to the second part of your question, is that indicative, I would be very careful kind of taking that as a broad brush analogy for other restructurings. I mentioned the 2.4% operator is in the process of transitioning and it will be no in rent there. We have done a smaller one thatâs so small we donât have to talk about it, Colorado assets and it was very much less than the discount we saw in this portfolio. This is a very old portfolio, the 2.2% portfolios, a very old portfolio that needed a lot of care and we are really happy to have moved it. But itâs not -- I would not paint that brush across the rest of them what we are doing. Okay. Thatâs good color. And then I wanted to kind of ask on the public health emergency ending. It sounds like the FMAP funding got decoupled from that ending. Could you kind of provide more color on that and maybe how the end and the phase out of the FMAP that might impact your tenants in your portfolio? Yeah. I mean the FMAP is interesting, right, because the fact that they decoupled it from the public health emergency is actually beneficial, because then they can sort of have it phased down throughout the year. We donât know what the states will do with that, right? Some of the states like Texas still have it in their language, have the FMAP tied to the public health emergency ending. So they will have to do something further to get that additional funding through the end of the year. But on the FMAP side, you have got -- in our top 10 states, we have got Florida, Indiana, Ohio, Michigan, Pennsylvania, so five of our states that really didnât have any FMAP rate. They might have given lump sums in the past or potentially those rates expired previously. So thereâs nothing affecting those ones. California had previously already announced that they were extending their 10% FMAP through the end of the year, so regardless of the public or the decoupling there through the end of the year. So they are good. Virginia has previously taken their FMAP rate and put it into their base rate and quality add-ons. So they had already sort of solved that problem previously, because at New York, we donât have a skilled presence. So that leaves Texas and North Carolina, which is the 2 that we are watching. Both of them have pretty substantial FMAP that ramp with the public health emergency. Texas, as I have mentioned, has it slated to continue or to go into their rate with the September 1st rate setting. We will see if that gets finalized, but we are pretty hopeful that it does. There might be a gap period, but I think Texas will probably step up on that piece of it now that thereâs additional funding. And then you have North Carolina, who thereâs a big push to get that into their July 1st rate setting of this year. So they will get FMAP through June, as determined in that state already, and then hopefully, they get it into the rate July 1st. So I think we are relatively covered there the last two states step up. Hi. Thank you for taking my question. Just going back to the PHE, I remember you just mentioned some of the waivers could go away. But I was wondering, do you expect any of the levers to stay in place and become permanent going forward? We donât. I mean, we hope that at some point in time, the ability to skill in place that three-day stay waiver would become policy, because it is good policy. But at this point, no, we donât expect anything to stay in place the PHE. Great. Thank you. And just going back to LaVie, we noticed that the new rate is 2%. Can you provide more color what was that rate prior to the cut? 8.1%. Okay. Thank you. And just last one for me, can you provide more color on acquisition opportunities and pricing in the U.S. and the U.K., and I guess, what is your plan for the year and where do you see opportunities? So we have seen activity actually pick up as of late. I wouldnât call it robust at this point, but it has picked up. Itâs picked up both in the states and in the U.K. So while we are not -- we donât predict what kind of deals we will do in the year, we have been active throughout these restructures, we anticipate continuing to be active. Hi. Yes. Good morning, all. Just following up on that acquisition question, the deals you guys did during the quarter pretty attractive cap rates there on a cash or GAAP basis. Just kind of curious, is that kind of what the market looks like when you are kind of doing deals that kind of 10%-plus GAAP yield, and if thatâs the case, how does one think about what your acquisition activity could look like in 2023? So the deals that we did in the fourth quarter, a lot of those deals had been in process, if you will, for quite some time, so that the yields that were could have been quoted back in even as far back as the second quarter. Our overall cap rates have gone up and so now we are quoting deals at probably about a 1% higher cap rate throughout 2023. So thatâs kind of what we are looking at in terms of changes in the market. Does that helpful, Tayo. Got you. Yeah. And does that -- just kind of given what those cap rates are in your applied cost of capital, it still seems like, again, you get to the cumulative transaction, so does that make you more interested in deal activity this year or no? I donât think it changes. I think -- itâs just a matter of sourcing good deals with quality credits and getting a return that makes sense in the current capital market. The one thing I would say, Tayo, just to add to what Dan spoke about is, Iâd love to put our $300 million of cash to work at 10%. So we are looking pretty hard at those type of opportunities. As you can model out, thatâs versus the overnight rate of something in the like 3. Thatâs pretty powerful. Got you. And then if you look in those one more on the regulatory front, one of the popular topics last year was Biden trying to push for minimum staffing levels at skilled nursing facilities. I have not heard much about that in 2023. Just curious if you could give any update on that initiative and kind of what you are hearing on that front? I mean itâs still operating in the background and you still have ACA pushing for something that is reasonable and funded and I think thatâs the big piece of it, right? It needs to be funded, because just thereâs not much staffing out there to begin with and so that problem needs to be solved. But we havenât heard anything substantial there. Yeah. Good morning, everybody. Just a couple of quick ones for me, I guess, excluding the named tenants, the 3%, 2.4% and the 2.2%, are you in active negotiations with any other tenants and what percentage of the portfolio would that be for either deferral, rent reductions, forgiveness loans, et cetera? So, yeah, thereâs active negotiations, but they are all small. They are all -- would be operators that would represent less than 1% of revenue. Okay. Thank you. And then, Bob, one for you maybe, as we model out interest income for the year in totality and you gave specific operators. But I guess maybe in totality, can you give us the sense of how much of that might be on non-accrual, how much is actual cash interest and then the paid-in-kind component. I donât know, as a percentage or dollars, whatever is easiest? Not off the top of my head. Again, because some of these, as Dan mentioned, like LaVie, part of that is still going on with that negotiation, as well as some of these others. And from FAD, remember thatâs only based on cash received. So I am not worried about the accrual side of it. Thanks. Good morning. My apologies if I missed this. Could you provide the average value per bed for the first 11 LaVie dispositions and the average value per bed anticipated on the next tranche of the dispositions? Okay. For that -- for the first group of sales that have already closed, how much lower do you think it would have traded if you didnât provide seller financing or could you find another buyer at all without seller financing? Were there other bidders in the tent with the financing or the seller financing needed to actually get it across the finish line? Okay. Last one for me. Megan, just as the months roll along and occupancy stays pretty low, are there any pockets of the portfolio, either regionally or kind of urban versus suburban, where you just think occupancy is structurally lower now in any part of the portfolio versus pre-COVID levels? I donât know that I would necessarily say structurally lower. I do think that there are certain areas that have more severe staffing issues thatâs affecting occupancy, and over time, if that gets corrected, you should see that come back. But I mean, we have over 50% of the portfolio thatâs either fully recovered or is 84% and above as they havenât recovered and so I think thatâs pretty telling as to where folks can get to. But I mean you have states like Florida has really bad staffing issues and they are not as recovered as the rest of the portfolio and we see that in various different places as well. Thanks. I want to go back to the interest income question and maybe ask it for the fourth quarter, the $25 million of interest income and then the $5 million on the non-real estate loans. How much of that is non-cash? Nick, again, not off the top of my head, I think, $2 million is non-cash and that is a little bit of pick. So, on the last answer, if an operator is on straight-line accounting, we do count that taken bad, as Nick, you and I have discussed in the past, but itâs a very small number, itâs $2 million. Okay. Thanks, Bob. The other question is on LaVie and the transaction that happened. So I am just wondering, I am trying to understand why thereâs any fee that was paid to LaVie in this, because it looks like what happened here is, if I am reading this as effectively you got no cash in from the sale. You got seller financing. You had the buyer pay a portion of the fee that you owed LaVie, which I am not sure why thereâs any feel to LaVie if they are not paying rent or not -- they are going to be pick on your term loan, why is there any money going to LaVie in this transaction? So thereâs no pick on the term loan. I am not sure what you meant there, but, yeah, there was ... Sorry, I said on the new -- I thought it says on the -- you amended the term loan, so itâs now payment-in-kind. So, yeah, the termination fee, if you will, was paid to LaVie to help them with their wind-down costs. I mean whenever thereâs a transition, thereâs associated obligations and liabilities associated with those buildings, so that was to sort of help them to operate and also help them pay out some of those wind-down costs. Okay. So I guess I am just -- I want to make sure I am understanding this. So then in the fourth quarter, you had this $36 million of acquisition merger transition related costs that ran through expenses that you add back then. Is that fee that net -- looks like itâs like a net $10 million fee that you guys paid to LaVie, is that then just -- you guys just totally added that back and itâs not coming out of AFFO or FAD? Okay. I guess I am just wondering why thatâs, like, how that makes sense. If you book the rent, the $25 million of rent, but effectively you paid $10 million to LaVie, why wouldnât it be a net $15 million of rent cash from LaVie? I am not following exactly what you are saying, Nick. But we take $10 million in cash, that piece is what you see in the FAD add-back as. I am sorry. I was just wondering like if you -- I mean if you guys are paying LaVie $10 million of cash as a fee, but then you are booking $25 million of revenue from them -- cash revenue, I mean, isnât that shouldnât really be $15 million, because you paid them $10 million? Yeah. I will call you and walk you through it. So you are confusing the rental payment and the transition pick on those $225 [ph]. Okay. Because the rent, the $24.8 million of received for rent in the quarter, that was -- I thought that was a cash rent number. Hi. Thank you for taking my follow-up. Maplewood, the expansion of the loan commitment there to $320 million, could you talk a little bit about what the reason for that was? Yeah. Maplewood, so the expansion of the loan commitments to Maplewood, I think, the commitment was expanded to about $320 million, which is an increase of about $70 million versus where it was before. Could you just talk a little bit about that kind of additional commitment you have made to them and what thatâs about? So $13 million of it, as I indicated, was the increase in the line itself and the other delta of $53-odd million is the pick. This concludes our question-and-answer session. I would like to turn the conference back over to Taylor Pickett for any closing remarks. Thank you. Thanks everyone for joining our call today. As always feel free to reach out to Matthew and Bob with follow-up questions. Have a great day.
EarningCall_962	Thank you. Good morning, and welcome to PacWest fourth quarter 2022 earnings conference call. With me today are; Paul Taylor, our President and CEO; Kevin Thompson, CFO; and Mark Yung, our COO and the leader of our venture banking business. Before I hand the call over to Paul, please note that we may make forward-looking statements during today's call that are subject to risks, uncertainties and assumptions. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, see our SEC filings including the 8-K filed yesterday afternoon, which is also available on the Companyâs website. Thank you, Bill. Good morning, everyone, and thank you for joining our call today. We've made several significant leadership changes in the fourth quarter that will set the stage for the future. Specifically, I assume the role of President and CEO, replacing our long-time CEO, Matt Wagner, who became the Executive Chairman; John Eggemeyer has become our Lead Director; and Kevin Thompson has joined us as new Chief Financial Officer. We announced a sharpened strategic vision and plan to build on the strengths of the company's deposit-focused community bank business operating as one team with a mission to maximize shareholder returns by exceeding customer expectations. PacWest has a long history of acquisitions that brought us great customers and talented employees, but also varied processes and different cultures. Now the time is right to focus on coming together to function even more uniformly and efficiently as one company, regardless of a business line or corporate function. We will simplify and improve our processes to deliver an even higher level of service to our customers and more valuable to our shareholders while meeting or exceeding our regulators' requirements for safety and soundness. This plan is the result of the past six months of work since I joined PacWest assessing and building a detailed strategic vision and tactical plan to maximize shareholder value. We are operating with a sense of urgency. Specifically, in the fourth quarter, the company made the decision to wind down its operations in premium finance and multifamily lending. In addition, the company is restructuring our subsidiary to realign its operations to improve profitability and reduce risk. These actions will help us refocus our efforts on our core businesses, accelerate our capital growth and improve operational efficiencies over time. In addition to the strategic decisions above, the company opportunistically sold $1 billion in bonds at a loss in the quarter, which was used to pay down higher cost funding and better position the balance sheet going forward. The management team has also initiated an operational efficiency strategy to control costs, reduce processing systems and define synergies across the company. We see opportunity for growth in earnings through focusing on our core business and customers and have created a list of financial performance metrics that we believe are achievable and where the bank should perform over time. These include building our CET1 ratio to 10-plus percent; low-cost core deposits equal to 40% or greater; return on assets of 150% or better; efficiency ratio of 45% or less; non-performing asset ratio of less than 50 basis points; and top quartile earnings per share growth. We believe that the actions taken in the fourth quarter are meaningful first steps towards our goals, but it comes out across. While our capital goals remain 10% CET1, our actions in the fourth quarter will delay the timing a little, and as such, we would expect our CET1 ratio to hit 9.75% by the end of 2023 and achieve our target of 10% early in 2024. This minor delay enables us to accelerate the balance sheet transformation. There are real challenges ahead with rising interest rates and a slowing economy, but there is [indiscernible] a significant opportunity for PacWest to improve our performance and return to shareholders, given our strong team, a great customer base and a plan to unlock additional value for our shareholders and employees. Thank you. Thanks, Paul. Strategically, the fourth quarter marks the beginning of the next chapter for PacWest. We want to highlight four main points: First and foremost, we announced a clear strategic vision around the Community Bank with an operational focus on unifying our businesses and eliminating silos to improve performance. Second, we are acting with a real sense of urgency, as you can see in the fourth quarter with the on sale and the exiting of two business lines and a significant restructuring of another. Third, we announced an aggressive operating target list to hold ourselves accountable and to set the bar what we believe this company should perform over time. Lastly, we like the industry are facing challenges in the current economic environment. We are 100% committed to managing the business through the cycle, preparing for whatever gets thrown at us. And now I'd like to turn things over to Kevin, our CFO, for some specific commentary on the financial results before we go into the Q&A session. Thank you, Bill. It's a pleasure to join the talented team at PacWest, and I look forward to working with all of you. The fourth quarter was characterized by various strategic actions to improve our profitability and capital position going forward. As Paul mentioned, our sale of $1 billion of available-for-sale securities resulted in a $49 million loss. We used the proceeds to pay down FHLB borrowings. As part of the efforts to restructure our Civic lending subsidiary, we recorded a goodwill impairment to $29 million. As a reminder, goodwill is a non-cash charge and has no impact on our regulatory capital ratios, cash flows or liquidity position. Finally, we are working to dramatically improve the overall operational efficiency of the bank. As a first step in this initiative, we recorded early retirement benefits and a severance expense of $5.7 million. Adjusting for these unusual items, in the fourth quarter, our earnings per share would have been $0.93, and our return on average assets would have been 1.15%. Loans and leases increased by $949 million in the quarter or by 3.4%, mostly connected to residential real estate mortgage and construction portfolios. Loan production yields increased to 7.55% from 5.92% in the prior quarter due to the mix and increasing market rates. Deposits decreased by $260 million in the quarter, driven mostly by outflows in the venture banking deposit portfolio. This was offset by increases in retail and brokered time deposits and wholesale non-maturity deposits at higher costs. The net interest margin decreased by 16 basis points in the quarter. With the unprecedented increase in interest rates, our cost of deposits increased by 67 basis points to 1.37% while our average [indiscernible] increased 61 basis points to 5.73%. As a result, our net interest income decreased by $12.2 million to $323 million in the quarter. Credit metrics remained strong in all our loan portfolios, the allowance for credit losses increased by $7.4 million to $292 million in the quarter, mostly due to loan growth, with an allowance for credit loss ratio of 1.02%. Non-performing assets remained low at 36 basis points of total loans and leases. Excluding the goodwill impairment of $29 million and $5.7 million related to early retirements and severance, non-interest expense decreased $3.5 million in the quarter. The decrease was due to lower services fees and lower intangible asset amortization, offset by higher customer-related expenses of $5.5 million. The efficiency ratio was 53.3% in the quarter. Looking at the full-year 2023, while we are just completing our budgeting process, I will share with you our current outlook. We plan to accrete capital through the year and to reach a CET1 ratio of around 9.75% by year-end and reach our CET1 goal of 10% in the early part of 2024. We expect loan balances to be flat for the year as part of our strategy to preserve capital and strengthen the balance sheet. We anticipate flat deposit balances as well with renewed focus on community banking and full deposit relationships. We currently expect two more 25 basis point rate increases from the Federal Reserve in 2023. This will impact our deposit and loan pricing, likely resulting in a flat net interest margin to the level experienced in 2022. With our strategic focus on operational efficiency, we plan to continue the course we took in the fourth quarter to reduce expenses. This includes tightening expense controls, especially around compensation and reducing costs related to vendors, discontinued business lines, facilities and projects. As a result, we expect a full-year efficiency ratio in the low 50% area, with a longer-term goal of mid-40%. Our credit quality continues to be strong, and we presently do not anticipate any increase reserves from current levels. Good morning. Hey, so Paul, I wanted to get your top level thoughts on the strategy going forward. Obviously, you mentioned youâre not doing any more premium finance, multifamily. I'm curious, what are the other business lines you want to lean into more, particularly of the national business lines? Yes. So as you look at our balance sheet, I mean, one thing we do very well and a lot of it is we do a lot of real estate. So that's one of the items we'll continue to do. And then in our community bank, we do a lot of more commercial focused, more relationship type real estate that will continue on. And then we also have some units that do some more C&I lending. But again, that's a nationwide business, and we'll continue to do that. This year, we really looked at each one of our business lines and the ones we've discontinued are more of a low yield, no relationship type business. So I mean that was a fairly easy decision to get rid of those. Okay. And then in regard to Civic, you mentioned there is some restructuring there. What is kind of the strategy for Civic going forward and the outlook for that? Yes. So we've taken â sort of taken all over, and we're integrated and into PacWest. We're still in the process of analyzing that. The one thing we know is that there's a lot more overhead than there should be. So we expect significant savings from that entity. And right now, we're looking at all the products that they offer and determining which ones of those products that we'll hang on to and go forward with. We've put Mark Yung, who's on the call here today in charge of Civic, and he is in Civic right now and he's helping us with those determinations. But at the end of the day, it will be a much more profitable company and lowering the risk profile of the company also. Maybe just on the portfolios or businesses that you're unwinding maybe just confirm the size of those portfolios. I think premium finance is over â just over $800 million, multifamily maybe isolate that piece and how much you think you might have in runoff from Civic thatâs more deliberate? I mean the other â and then as a related question to that, I mean, you talked about loans being flat for the year, does that include the kind of unwind or runoff of those three areas â some portion of those areas? Yes. So premium finance was about 800 â it's a little north of $850 million as we sit here today. On the multifamily stuff, there's kind of two different real tranches. There's a customer base multifamily business, which we're not exiting, and we're going to continue to service our core deposit customers. And we had a separate group that was originating small-balance multifamily. The small balance multifamily stuff that we're running off is a little over $3 billion. And I'll add, Matthew. Hi Matthew, good to hear your voice again. I will add that the flat loan growth for the year does anticipate the wind down of those entities. Okay. Great. And then as you're going through this restructuring process, the other, I guess, question is what kind of ROA do you think you can maintain on an operating basis kind of excluding any additional severance and other kind of unusual items this year? So as we look forward and throughout this year, we believe that we can maintain somewhere around a 110 ROA for the year, but it's going to be ramping up. So as you look at like December ROA is going to be about a 120, but I'm going to preface that. I mean, 2023 is going to be an interesting year. I don't think any of us quite know how it's going to go. I mean we've probably got some more increases from the Fed. Most economists believe we're going to go into some level of a recession. I'm not smart enough to figure out what level or how long or anything like that. But I mean, we will do well, but there could be some macro type items like that, that could cause some variation. And the actions we're taking now are in preparation, so that we're flexible and have a balance sheet that's prepared for that type of environment. Got it. And then just to close the loop on that ROA conversation. In terms of the denominator, you spoke about the loans being flattish, but what about overall assets and borrowings from here? I mean, is there a plan to sell more securities and pay off FHLB? Or how should we think about overall assets by the end of this year? Yes. I mean, quite honestly, we're looking at everything. Everything is on the table. As you look at PacWest balance sheet, it's about $41 billion. I mean there's an argument in there that a smaller balance sheet could be more profitable. We're sort of distressed in some areas. But again, that's part of the reason we sold the billion dollars in bonds. There was sort of a dip in the 10-year, and we had these groupings of bonds that we felt it was worthwhile to go ahead and sell them and take the loss, but we're looking at all those types of things. And it needs to be strategic. We're thinking of the long-term shareholder value here, what's the earn back. There's a level of liquidity we need to hold in the bond portfolio. Also, there's an element of patience in our unrealized losses, if you wait and the bonds mature overtime, those unrealized losses reverse. So we're being very strategic and thoughtful through this. Got it. And then on the expense side, you had some severance here this quarter. Just curious what the related savings or annualized savings that you expect from that? And it sounds like that's kind of the first step, as you mentioned in the release. It sounds like there's more. Any order of magnitude in terms of the potential cost saves we could see this year? Yes, annualized, it's probably about the level of severance that we saw going forward. And we have other â we have an operational efficiency focus right now, where we're looking at facilities, we're looking at projects. We're looking at compensation across the board. Are there things we can do more efficiently? We have a lot of systems and so much more to come in that area as we're working through our strategic plan. Hey. Good morning, everybody. You talked, Paul, about the $975 million getting $10 million. What are your thoughts on â I mean, this seems like a restructuring year. Like what are your thoughts on accelerating that with the capital raise? Again, I would say everything is on the table. I think the pricing of our stock has moved up a bit here. In the past week to weeks, but at levels that we've been at, it would be â I think it'd be very tough to raise stock. But again, that is on the table, but there's no plan to do that at this point in time. We did raise the preferred stock earlier in the year and that buoyed capital a bit. And again, we'd be very thoughtful about the earn back associated with that and shareholder dilution and other options that would dilute shareholders much less. Great. If I could â I think I heard in your prepared remarks, you don't think you need to add reserves from here. I guess wanted to hear that correctly. And I guess most of your â most... Well, I would preface that with this year. We really don't â I mean, as we see it today, we don't see any need to add any substantial reserves. We feel that we're adequate. I just talked to our Chief Credit Officer yesterday, and there's really no signs of any issues with credit quality or any concerns at this point in time. But again, we're probably going into a recession this year, and that could elevate credit issues, but we don't know that. Okay. Yes. I would just think you might get ahead of it just because the investors aren't buying your stock for current earnings. I get the limitations of CECL, but I'll step back. Thank you. And again, I just want to make sure it's very clear that we are very comfortable with our credit position at this time. PacWest is a very, very good credit shop. I've only been here a handful of months, but that's one of my biggest impressions is that PacWest is a very, very good credit shop. So on the runoff portfolios, Bill, that you laid out in terms of the size of premium finance and multifamily. I assume premium finance â I mean that's a pretty quick runoff right, kind of a pretty short-term portfolio is multifamily, should we assume that's more about a couple or three years of runoff, but maybe the bulk of it on the front-end? So on the multifamily, I would agree that's a reasonable assumption coming depending upon when things were underwriting and when they mature, it will kind of ebb and flow, but it will kind of pace itself out. Premium finance is a business that, clearly, we're exiting. We have communicated that to the borrowers, and we're going to work with them. I wouldn't expect it to be immediate. It's not going to be instantaneous, and we're going to work it out. Is there an opportunity to sell the premium finance business? I think we saw last year or year and a half ago or so, Texas Capital sold at their premium finance business to Truist. Is there any appetite in the market for that kind of business? Well, again, I would say that â again, everything is on the table. We look at that, but nothing on that right now. Okay. And then in terms of kind of the expectations on the deposit side, knowing that it sounds like the balance sheet is going to be pretty flat. Do you have a view or expectation for deposit flows in the DC space? Obviously, we've heard Silicon Valley talk a little more optimistically towards the back half of the year, but do you have any expectations in terms of maybe recovering some of those flows and remixing the deposit base later in the year from that channel? Well, I can tell you, we'd absolutely love to have venture deposits increase. Venture deposits are very, very hard to estimate. I'd have to tell you it's very frustrating. They come down quite a bit. As I look at this year, I mean, in the first half of the year, they seem to have sort of floored and we seem to be flat. We did have declines in the second half of the year, but they're nothing like we've seen in the past. So we would like to think we're about $11 billion in venture deposits. So we'd like to see them floor out somewhere around there, and that's sort of what we're planning for. They'll go down a little bit. And I hope we're right. Because then that will allow us to remix the deposit base, get out of some of the wholesale deposits and really dramatically decrease the cost of funds. It's a great low cost of funds to Paul's point. But at the same time, we will be very careful what assets we stack up against those deposits because of the element of volatility. And Mark, I would agree the softness kind of earlier in the year and we expected a better market towards the tail end of the year. And again, this market is very rate sensitive as well, right, the venture market. There's a tremendous amount of dry powder, but obviously, people are â have slowed down investment cadence with all the news that we saw here in Q4, and that's carrying through earlier part of this year. Hi. Thanks. Good morning. Thanks for taking the question. So I wanted to ask some follow-ups on the ROA discussion. You mentioned 1.1% for 2023 in December, getting to 1.2%. And then the overall target is 1.5%. Can you talk about the timing of getting to that 1.5%? Hello, David, good to hear your voice. As Paul mentioned earlier, 2023 is â it could be an interesting year. We could see a mild recession. We're expecting two more Federal Reserve rate increases of 25 basis points. And so we're very focused on armoring our balance sheet, being prepared from a liquidity perspective and making some big decisions and moves in terms of our operational efficiency going forward. So 2023, you may see a lot of noise because of that, but those should set us up really well in 2024 and 2025 to have a really good chance to get back to the great profitability this bank has seen in the past. [Indiscernible] expect a little bit. I'm not a very patient person, so we're going to push as hard as we can to get to these overall goals that we have and that we released yesterday. That's helpful. And should we expect any increased volatility around that target of 1.5%, given you're exiting a couple of stable businesses of multifamily and premium finance, but retaining the presumably more volatile Civic business. Can you discuss that? Yes. I mean there's going to be â we're going to take further actions as we go throughout the year and we're trying to have any more actions earlier in the year, so we can get a better run rate. So there will be some volatility, I would think that would be in the beginning of this year, and then it should smooth out as we get into the second half of this year and then into 2024. So David, in terms of volatility, a big part of this is to build a more consistent, stable earnings profile. And so the volatility has really been on the velocity of assets and that's a big part of the overall equation where you're looking at the risk reward of what you're doing in terms of yield. And then also, as Paul said, addressing the expense side as well. Yes. And that's just an overarching comment. I mean one of our goals, too, is to take the volatility out of PacWest earnings. I think PacWest earnings typically and historically have been a little volatile and they're hard to predict, and we're trying to get a better, smoother, more predictable earnings for The Street. Thanks for that. And then you mentioned that everything is kind of on the table in terms of potentially selling the premium finance business. I'll ask the same question on the multifamily portfolio. Would you consider selling that to accelerate that off the balance sheet? We definitely would. I believe that those are rates such that it would be very difficult to sell at this time without accepting a pretty significant loss. Did you mention â and did you mention on the Civic portfolio, $3.3 billion, did you say what the right size, how much of that could come down over time? Well, I think you're going to see it definitely come down. Again, we just installed Mark in there about â he's been there for about a week. And we're still trying to figure out the business PacWest had really adopted sort of a decentralized hands off method when they acquired it, and we're in there trying to figure it out and try to figure out what type â what offerings we're going to keep and which offerings we're going to eliminate. And of course, we had bought flow from the former entity in the past and like the asset, but werenât as familiar with the business. And so we like the asset. It's just trying to find the right size within our risk profile and our capital base going forward. But again, overall, I mean, it's around 10% of our earning assets, and we are going to shrink it below that. I think 10% is too big of a chunk, and we are also â the markets are opening up a little better in that area, and we are also looking at trying to sell some of that portfolio just to bring it down. And the last one for me is on venture banking. I noticed on Slide 11, you mentioned the FTX situation. I was curious, in what way does FTX impact your business? Are you guys banking crypto customers? No, this is Mark. Yes, the way it impacts is very simple, just increased scrutiny and responsibility and accountability by the VCs to their investors. So greater diligence, a slower cadence of deals. Hey, good morning. Hey, maybe just to start, I wanted to ask on the 30 to 89-day past due loans. I know those can specifically in Civic kind of bounce around a bit quarter-to-quarter. I guess since quarter end, have you seen those 30 to 89 past dues move lower? And if so, can you quantify the magnitude? And also whether or not you see any lost content there? Yes. So the answer is yes. It was kind of a confluence of how the month ended there and some still over from December. That number has come down pretty sizably already in the month. And so no, we're not worried about the â any particular fee or anything there. It's just kind of an ebbs and flow and how the month ended, Andrew. Yes. Okay. And then can you remind us the reserve you have against the Civic portfolio? I know it's a bit shorter duration? Yes. I don't think we've disclosed the specific reserves by portfolio, but you're right. For one of the products inside of Civic, it's 12 months. Our overall loss experience in 2022 is 8 bps. So you would imagine with a very low loss experience and a short tenure, I kind of leave you were the CECL reserves come out. Yes. Okay. And then maybe just a bigger picture. It's really good to see this plan announced and Paul, congrats on announcing in short order. So just maybe a bigger picture, can you help us understand how aligned you and the remainder of the management team is with kind of investors in terms of this plan, I guess, our incentive compensation targets aligned fully with this plan. Can you maybe just speak to that a bit? Yes. So this plan was put together, I brought the executive team together and we came up with this plan together. So there should be 100% buy-in, so very close connection. And then also, I would tell you that some of our overall goal targets that we have announced are in our incentive for 2023. Good morning, everyone. Paul, in July, you talked about there be some holes in technology given the number of acquisitions that PacWest had put together. I want to see how the â this improving your technology platform coincides with your new decisions to improve overall operating efficiency? Yes. So I mean, we're still on the same plan for technology. It's exactly â it's everything we need to do to be a bank in 2023. And Mark Yung, who's on the call, is in charge of that vision for new technology. Maybe Mark, you could give a quick rundown on that? Yes. I mean, our technology is very much centered around three values. One of them is cloud. Second one is really our digital banking API strategy. And our third one is our data stream. And those are fundamentally untouched. Obviously, we are focused here on operational efficiencies. So as Kevin mentioned, we're looking and revisiting every project, revisiting milestones, et cetera. But fundamentally, very much committed to the movement forward on those three fronts. Thanks. Good morning. Hello. I just want to circle back on deposits from a big picture beyond just the venture that you and Mark had described. Can the pricing on deposits alleviate anytime this year? I presume it's not this quarter, but just kind of want to compare the prices you have in paying the past two quarters and sort of what is possible as you continue to focus on the core deposit outlook? So I think deposits are going to be very challenging in 2023. I've read a lot of the earnings announcements from other banks and deposits, liquidity are getting a little stretched in the industry. We're no different than that. I would â we've got another couple of rate bumps. I think that the yield on deposits or the rate on deposits are going to remain sort of flat throughout the year. We're hoping that with mix changes, we can lower the cost. One of the things that our loan committee were requiring that you've got to have a deposit in order to get a loan, and we're challenging all of our lenders this year, and we're putting it in their incentives where they've got to gather deposits and a significant amount of deposits this year. We also have the standard CD specials, which aren't going to help rate, it will just help the volume of deposits, but that's sort of as I see deposits for 2023. And I'll add to that. We do expect two more Fed rate increases, 25 basis points each. And so we have had a cycle to date, overall deposit beta 34%. So we do anticipate some beta associated with that, some pressure in the first half of the year and then alleviate in the second half of the year. So our net interest margin possibly decreasing slightly first half and then increasing potentially above end of 2022 levels by end of year. So we're in an unprecedented period where deposit pricing where rates increased so quickly that deposit pricing fall and it takes a little time with our asset-sensitive balance sheet for the loan beta to catch up. So we should see some of that loan beta catching up here in the second half of the year and into next year. I think the bigger thing when you look at the P&L, though, Chris, is going to be the interplay between the remix on both sides of the balance sheet from both lower-yielding loans to higher-yielding loans and then on the deposit side. So there's going to be a lot of movement there. And I think in any particular quarter, you could see that bounce around. But the goal is obviously driving increased profitability, so to see the margin increase over time. No, that's all very helpful. And Bill, to your point, you can see that with the loan production yield just on its own this past quarter, to your point. There was once a team of folks at PacWest, several acquisitions ago, who were dedicated on just doing deposits, and we're incented as such. Is that something that can still work in 2023, 2024 as sort of dedicated teams to sell deposits only? I mean, listen, our business has always been deposit focus. So there's always been teams of people focused on deposits. And I would tell you, if you were on the internal call yesterday, Paul was pretty clear about it, it's all about deposits, deposits, deposits. So it's not just one group, Chris. It's everybody, from the lenders to the top of the house all the way to the front line. It is a reinvigorated core value. I mean that's the secret sauce of banking is low-cost deposits. And that's why we bother with a bank charter and deal with regulation is to get those deposits. So I mean, that's our biggest focus all the time. And we're tweaking incentive programs to be more deposit-focused as well as Paul mentioned earlier, that loans â any loans that are approved, in general, need to have a deposit relationship. Great. Thank you for all that reinforcement. Last question for me just goes back to the small uptick we saw in the criticized loans. Is that something that is possible this year? I know you mentioned obviously, recession influences some of that. Just curious if there's any particular background this quarter. Yes. So if you're talking about on the non-accruals, the bump there was, in particular, related to some Civic loans. We've already seen some of that back off, and we have an NPL sale that is being teed up. So we feel that's kind of ordinary course, Chris. I mean we did an NPL sale in, I think, last quarter, and we're not seeing anything indicative in credit. As Paul said, we feel really good about where the book is. The team has done a great job over the past years in terms of making sure that the underwriting is solid, and our team has going through everything with a fine-tooth comb. And if you were to look at our non-accruals, for example, it's really granular in there. Our top 20 NPLs, for example, averaged about $3 million. And they're all kind of stories and individual stuff. But if you look at the absolute level of non-performers at 36 basis points, it's pretty low compared to history. So you could see things bounce around. We don't see anything driving that, but just realize we're kind of operating at the lower end of stuff, but we're not concerned about anything in particular, although we are obviously paying a lot of attention given to where we think things are going. Good morning. A couple of model questions and a couple of strategic ones. Kevin, on the margin guide, I think you talked about 2022 as the baseline. Is that what you're thinking 350 is the baseline we should be thinking about for the 2023 average margin? Okay. That's good. And then with the flat loan guide, are you basically saying relatively flat earning assets, but the churn in earning assets likely leads to that lift later in the year. Is that another fair way to think about it? Okay. On provision, you guys are talking about flat reserves, flat loans, lower risk loans and clean credit, which suggests to me that may not need a provision in the model for 2023, but what kind ofâ¦ And we just got to preface that again with the year we're in, is that we could have a recession so that could be a little dynamic. We're planning, at this point in time, that it will not be dynamic, but we have to remember that. There's some replenishment of small charge-offs that happen over time mix shift. So there will still be some provision we anticipate, but not large. Okay. Good. Thank you for those two. In terms of the investments and some of the maybe changes you're going to try to make, do you need to make investments in lenders or refresh the community bank loan production machine? 2022 was a really good year for loan growth. We've got very seasoned, experienced lending teams. So I don't really anticipate we need to do anything like that. Again, I think our core competency here is credit. Okay. And then I guess the last one of all the metrics that you laid out, the one that stands out to me is the top quartile EPS growth. And can you talk to us a little bit about that? I know there's some restructuring and refreshing that you're doing, but is this something that we can start to see this momentum later in 2023? Jon, I think that right now, that there's a lot of wood to chop, right? I mean, Paul has been here as CEO for 28 days, I think, it is. I mean I think that there's a clear plan, a clear vision of where we want to get to. And if we can execute on that plan, I think the results are going to be pretty good for shareholders. And I think that the metrics we laid out are not the ultimate goal. This is kind of where we think there are. But I think if we do what we think we can do, we think that's possible. And listen, like we're not trying to be a mediocre, right? I mean we're trying to push ourselves to generate really strong top quartile results. Yes, the EPS growth, one is the one that stands out, right, the others with efficiency and returns and capital [indiscernible] something got to be a little bit different to the top quartile and EPS growth? Yes. I think if you look at the core earnings power of PacWest historically, I don't think that it's changed. And I think the goal is to take what has been top quartile and drive it better. And if we can get there from here, you will generate those types of results. Thanks for the follow-up. Just a couple of questions around the margin outlook. Can you speak to the cost of those FHLB borrowings that you ran off and the securities yields as well? I mean I would have thought you would have a pickup in the spread for the upcoming quarter to help mitigate some pressure here? That's right, Matthew. So the securities we've wound down, we're yielding about 3.93%. And we paid out FHLB of about 4.6%. So yes, there was a benefit there, but we also have loan growth that offset much of that, but that should be a benefit through the year that negative yield that we were experiencing. Okay. And then just the spot rate on interest-bearing deposits at the end of the year if you had it or total deposits to other one? Okay. And then just commentary around low-cost core deposits getting to 40%. It doesn't necessarily mean non-interest-bearing that are at 33%. I guess, were you trying to suggest the non-interest-bearing, you want to get that to 40%? Or is there some other portion of your deposit base you view as low cost that will help you get there? Well, first of all, we want to thank all of you for calling in and your interest in PacWest Bancorp. Our numbers are out on our online, and we're happy to talk to you at any time. So again, I appreciate you guys calling in.
EarningCall_963	I would now like to turn the conference over to your host, Ms. Jennifer Como, Senior Vice President and Global Head of Investor Relations. Ms. Como, you may begin. Thanks, Jordin. Good afternoon, everyone, and welcome to Visa's fiscal first quarter 2023 earnings call. Joining us today are Al Kelly, Visa's Chairman and Chief Executive Officer; Vasant Prabhu, Visa's Vice Chair and Chief Financial Officer; and Ryan McInerney, who will become the Chief Executive Officer of Visa next week. This call is being webcast on the Investor Relations section of our website at investor.visa.com. A replay will be archived on our site for 30 days. A slide deck containing financial and statistical highlights has been posted on our IR website. Let me also remind you that this presentation includes forward-looking statements. These statements are not guarantees of future performance, and our actual results could differ materially as the result of many factors. Additional information concerning those factors is available in our most recent reports on Form 10-K, which you can find on the SEC's website and the Investor Relations section of our website. For non-GAAP financial information disclosed in this call, the related GAAP measures and reconciliation are available in today's earnings release. Jennifer, thank you, and good afternoon, everybody, and thank you for joining us. Visa's performance in the first quarter of 2023 reflects stable domestic volumes and transactions and a continued recovery of cross-border travel. Total Q1 payments volume was up 7% year-over-year or 135% versus three years ago, flat with Q4. Excluding Russia and China, payments volume was up 12% or 146% of 2019. U.S. Q1 payments volume was up 9% year-over-year or 144% of 2019, down 1 point from Q4. International volume, excluding Russia and China, was up 15% or 147% of 2019, up 1 point from Q4. Q1 cross-border volumes, excluding intra-Europe, grew 31% year-over-year and 132% versus three years ago, up 5 points from Q4. Excluding Russia, cross-border year-over-year growth was higher by 4 points. Travel-related cross-border volumes rose 6 points from 112% of 2019 in Q4 to 118% in Q1, driven by Asia Pacific, helped by China lifting restrictions, continued modest improvements inbound into the United States and CEMEA benefiting from the FIFA World Cup. Processed transactions were up 10% year-over-year or 139% versus 2019, and we processed 571 million transactions a day during the quarter. Although first quarter net revenues grew -- altogether, I should say, first quarter net revenues grew 12% year-over-year and non-GAAP EPS was $2.18, up 21%. In each of our growth levers, consumer payments, new flows and value-added services, we saw strong revenue growth. In our consumer payments business, we made significant progress this quarter through large deals with traditional issuers and co-brands. And with the pandemic largely behind us, we saw many businesses focused on payments through Visa's new flows capabilities. In addition, we continue to develop and expand our global value-added services globally. Now let me explore each of these growth areas. In consumer payments, credentials grew 8% overall, 11% excluding Russia, with strong double-digit growth in the United States, India and Brazil. Tap-to-pay penetration of face-to-face transactions globally was 72%, excluding Russia and the United States. In the United States, we surpassed a notable 30%, with San Jose, San Francisco and New York City all above 50%. U.S. drugstores went above 40% for the first time in the United States, and nearly 65% of Costco's face-to-face credit transactions were made with a tap. In the United States, we had several important renewals. First, we renewed our partnership with Bank of America in the United States, maintaining our current debit and credit business, including their cash rewards, travel rewards, premium rewards and newly launched Premium Rewards Elite consumer credit cards. We're excited to continue to invest together in the growth of our joint business and to innovate with Bank of America to deliver enhanced capabilities and improved experiences for their customers. Second, we renewed with Commerce Bank, a top 25 Visa U.S. issuer across their consumer and commercial portfolios. Finally, we also renewed our agreement with Capital One. In Australia, we renewed our agreement with the country's largest independent payment solutions provider, Costco, with over 4 million cardholders for debit and prepaid and also signed a new agreement for credit issuance. Also in the region, we extended our exclusive relationship with Kiwibank, the largest New Zealand-owned bank. In Latin America, we renewed with ICBC Argentina, one of the largest issuers in the country, and with Banco do Brasil, one of the largest Visa issuers in the region. In addition, we entered into a new agreement with one of the largest banks in Panama, Banco Nacional de PanamÃ¡. Also in Latin America, we reached a new strategic deal with fintech platform, Tigo Money and parent company, Millicom, a leading provider of telecommunication services in the region. Visa and Millicom expect to offer Tigo Money's more than 5 million wallet users the ability to digitize their cash in an easy and secure way, making purchases wherever Visa is accepted with the Visa-Tigo Money Access Card. Another strategic fintech deal was with Niyo in India, a fast-growing cross-border focused neobank with 5 million customers. We've extended our relationship from debit into credit to grow cross-border spending with affluent as well as corporate customers. We're also happy to share that we renewed and extended our global partnership with HSBC. Our agreement covers consumer and commercial and it will foster growth and digital acceleration. This deal also cuts across all of Visa's five regions. As you know, Visa is the leader in travel co-brand globally, and I'm happy to report that we recently reached agreements with three important travel relationships. First, Qatar Airways' Privilege Club, which today has a split portfolio across networks around the world, has signed a new 10-year exclusive partnership with Visa to enhance and expand its portfolio of co-branded payment initiatives with key financial partners across key markets worldwide. This expanded partnership creates a new world of opportunities for our Visa customers and Privilege Club members to collect and spend Avios, the rewards currency of Privilege Club. Second, with Southwest Airlines in the United States, Visa will continue to be the exclusive payment network for their co-brand credit card issued by JPMorgan Chase. It represents one of the largest co-brand partnerships in the world. Third, with Star Alliance and HSBC in Australia, this is the world's first credit card created with an airline alliance and is issued exclusively on Visa Credit. At the time of the launch, it brought together seven Star Alliance carriers in a single credit card platform. Also, we recently advanced our co-brand partnership with Flipkart, one of India's leading digital commerce entities with a registered customer base of 450 million. So whether it's with traditional issuers or co-brand partners, we are continuing to position Visa well for the future. On to new flows, where this past quarter, new flows continued to grow with revenue up more than 20% in constant dollars led by strong growth in B2B payments volume and Visa Direct transactions. First, on the Visa Direct side, Visa Direct had 1.9 billion transactions in Q1, up 39% year-over-year, excluding Russia. We continue to grow globally. Non-U.S. Visa Direct transactions as a percentage of total transactions expanded nearly 20 points, excluding Russia, from Q1 '21 to Q1 '23. Building on the success of our remittance program with Standard Chartered Bank in Hong Kong, we recently launched Malaysia as an additional origination market spanning across six currency payers with more currencies to come. We also continue to bring existing use cases to new markets. First, in Australia, Visa Direct is now enabling driver payouts with DoorDash. Second, we launched our inaugural P2P program in South Africa with FNB, one of the country's largest banks to enable their 10 million active customers to move money within their mobile app using Visa Direct rails. Third, we launched our wallet cash payout program in Bangladesh with bKash. With this launch, the nearly 65 million bKash users can make wallet to money, bank transfers, 24/7 in near real time using Visa Direct. We are enabling several use cases, including seller payouts in the United States on Poshmark, a social media marketplace where more than 80 million registered users, and card top-offs with fintech, GoHenry. As a follow-on to the issuance deal we announced last quarter with them, GoHenry is enabling its members to top up their child's prepaid Visa card with Visa Direct first in the UK, with plans to expand this service across Europe in the future. In addition to Visa Direct, we had noteworthy developments in the B2B space this past quarter, where commercial payments volume grew 15% in constant dollars. In traditional issuance, we signed an agreement with Raiffeisen Bank for a new commercial credit partnership in addition to renewing customer -- consumer credit across their 3 million clients in Austria. And in the United States, we renewed with UBS for consumer credit and debit as well as several business credit portfolios and Visa Spend Clarity for business. Another issuing partnership was with Stone, one of the largest acquirers in Brazil focused on small businesses. Stone has recently become a Visa debit and credit issuer of cards that could be embedded digitally in its wallet. On the virtual card front, for accounts receivable and payable, we completed several agreements. First, Divvy, an expense management platform owned by BILL, has renewed its agreement to offer Visa virtual cards for small and midsized businesses in the United States as part of its expense and vendor payment solutions. Second, Viewpost converts U.S.-based B2B check payments to Visa virtual cards. And together, we are expanding card opportunities for issuers and corporates by offering a solution that can be deployed easily to every commercial business that still produces checks. Third, we've reached an agreement with Plate IQ, a leading end-to-end accounts payable automation provider in the United States with direct integrations to accounting systems. Plate IQ will be offering a Visa virtual card solution to commercial partners across multiple industries including restaurants and hospitality, retail and accounting and bookkeeping, among others. Fourth, in our Asia Pacific region, SUNRATE, a global payment and treasury management platform has launched Visa virtual cards as part of its solution for more than 1,000 B2B clients, including global online travel agencies and small business customers. Fleet issuance continues to grow as well. This quarter, we issued -- we signed with Zemo a European fleet and mobility solutions provider to issue Visa Open Loop fleet and fuel commercial cards as they expand from three European markets to 10. In the United States, Highnote, a cloud-native card issuance and embedded finance platform, expanded its relationship with Visa with a five-year card issuance agreement across credit, debit, virtual solutions and fleet. In addition, Highnote became certified as a Visa Fleet card processor, which provides businesses with more specific product category level controls and more detailed and faster data for real-time decisions on new fleet and fuel card programs. B2B is an active space for fintechs and Visa continues to partner with new players to drive innovation for businesses. A recent example is Konfio, a fintech in Mexico that has already issued approximately 50,000 Visa small business cards and recently expanded its agreement to issue Visa Business Infinite cards. In addition, they are positioned to grow acceptance in the market with their newly established acquiring business, Sr. Pago. Now moving to value-added services, which had about $1.7 billion in revenue this first quarter, up more than 20% in constant dollars. Remember that our focus for value-added services is threefold: one, to deepen client penetration of existing products; two, to build and launch new solutions; and three, to expand geographically. CyberSource is a great example on all three areas of focus. First, on deepening client penetration of existing products. CyberSource's Decision Manager offering provides broad capabilities to existing CyberSource clients and has experienced strong growth throughout the pandemic, more than doubling transactions in the last three years. In Q1, transactions utilizing Decision Manager grew in the low teens year-over-year, demonstrating the continued demand for this solution even as we enter a post-pandemic environment. Another area of growth we have mentioned is with acquirers who utilize CyberSource's capabilities to offer them to their merchant clients. In Q1, we signed agreements with several acquirers for gateway services, including Elavon in North America. In Saudi Arabia, Saudi British Bank has announced its strategic partnership with our CyberSource Payment Gateway and Risk Platform to enhance the overall capabilities of SABB's payment gateway with the aim of fostering the bank's growth in an evolving and dynamic e-commerce space. On extended geographically, we've continued our efforts to strengthen our global presence. Our non-U.S. CyberSource transactions have nearly quadrupled since the first quarter of 2019, and they now comprise the majority of our transactions, led in particular by the Asia Pacific region. CyberSource has also created new offerings. While historically, CyberSource has been an e-commerce capability, over the past few years, we have accelerated the product development of our card-present and omnichannel offerings, including with the acquisition of Payworks back in 2019. In the past quarter, we saw nearly 50% of year-over-year increase in card-present authorized CyberSource transactions. Other value-added services highlights this quarter include our innovative dispute capability through Verifi, which saw nearly 40% growth in cases processed this quarter as we expanded globally with more than 1/3 of our cases from outside North America. This rapid dispute resolution solution automatically resolves disputes between merchants and issuers through the acquirer of rails, reduce the average time to resolve a dispute from 24 days to typically seconds. And Tink, our open banking platform continue to deepen and develop relationships across Europe. Tink recently signed a master agreement with BNP Paribas to be their main open banking and money movement services provider for millions of customers across Europe. Tink is already live with several businesses in the group. 3 million customers use Tink's money management, data enrichment and transactions products at BNP Paribas Fortis in Belgium and BNL in Italy. Tink has also renewed and expanded its commitment with ABN AMRO to integrate Tink's Money Manager and data enrichment products into the bank's app for more than 3 million customers. In conclusion, in the first quarter, Visa delivered very strong results and continue to effectively execute our growth strategy. Vasant will go into detail on our thoughts for the rest of the year, but I'd like to make a few other brief closing comments. We will continue to manage our business for the medium to long term, and we'll invest in initiatives that are compelling and will provide future growth, all while being very mindful of the current environment. I continue to see a bright future for Visa as we look ahead to the rest of this year and beyond, and I believe we have the right strategy to continue to deliver great results. As we announced in November, effective February 1, 2023, I'll be stepping down as CEO and assuming the full-time role as Executive Chairman. I'm exceedingly grateful to the Board and leadership of Visa, in addition to all of our passionate 26,500 employee colleagues who helped make this job so rewarding. I'm proud of all that we have accomplished together since I started in 2016. Ryan McInerney will become Visa's CEO, and I cannot think of a finer leader to continue to position Visa at the center of money movement in increasingly innovative ways. I worked side-by-side with Ryan for almost 6.5 years. He knows our business, our clients and he is deeply respected by our employees. He and his team will do a great job, and I expect this transition to be totally seamless. With that in mind, and as Jennifer alluded to, I've asked Ryan to join the Q&A portion of our call today. But before that, let me hand it over to Vasant to provide financial highlights for the quarter and our thoughts on the second quarter and beyond. Thank you, Al. Good afternoon, everyone. Our fiscal first quarter results reflect sustained growth in domestic spending and continued recovery in cross-border travel. Net revenues were up 12%, GAAP EPS up 8%, non-GAAP EPS was up 21%. The strong dollar dragged down reported net revenue growth by almost 3 points and non-GAAP EPS growth by approximately 3.5 points. Discontinuation of operations in Russia reduced net revenue growth by about 4.5 points. Adjusted for Russia, net revenues were up almost 20% in constant dollars. Net revenue growth exceeded our expectations as value-added services and new flows growth were very strong, currency volatility stayed high and client incentives were lower than anticipated. A few key highlights. In constant dollars, global payments volume was up 7% year-over-year and 35% above 2019. Excluding China and adjusted for Russia, global payments volume was up 12% year-over-year and 46% higher than 2019. U.S. payments volume was up 9% year-over-year and 44% over 2019. In constant dollars, international payments volume, excluding China and Russia, was up 15% year-over-year and 47% above 2019. U.S. holiday spending growth was in the high single digits on a year-over-year basis and up more than 41% versus 2019. E-commerce maintained its share of retail spending versus last year, up over 5 points since 2019. Spending continues to smooth out over the holiday season with Black Friday and Cyber Monday still significant shopping days but less important post pandemic. Holiday spending around the globe was generally consistent with U.S. trends. The cross-border travel recovery continues. However, as expected, the pace of recovery has moderated as most borders are now open, including Japan in October and now China in January. As a reminder, we saw a very sharp cross-border travel recovery in October and November of 2021, which we are lapping. Indexed to 2019, cross-border travel volume, excluding transactions within Europe, rose 6 points in the first quarter versus a 20-point gain in the third quarter of fiscal year '22 and 10 points in the fourth quarter of fiscal year '22. New plans -- new flows and value-added services revenue sustained robust growth in excess of 20% in constant dollars. In the first quarter of fiscal year '23, we bought back approximately $3.1 billion in stock at an average price of $198.74. Contributions to the litigation escrow account, which have the same effect as a stock buyback, added another $350 million. We also distributed $945 million in dividends. Now on to the details. In the U.S., credit grew 10% year-over-year and 35% over 2019, lapping the credit recovery from last year, and as compared sequentially to last quarter, impacted by retail spending and fuel prices. U.S. debit grew 8%, up sequentially over last quarter. In level to 2019, debit grew 55% withstanding significantly above the pre-COVID trend line even as credit has recovered. U.S. card present spend grew 8% year-over-year, impacted by fuel prices and retail spend as compared sequentially to last quarter. U.S. card present spend was 26% above 2019. U.S. card not-present volume, excluding travel, grew 9% year-over-year and was 65% higher than 2019. E-commerce spend remains well above the pre-COVID trend line even as card-present spending has recovered. On the international front in constant dollars, Latin America was up 25% year-over-year and 107% higher than 2019. Our CEMEA region, excluding Russia, grew 25% year-over-year and was 108% higher than 2019 as we saw, all through FY '22, growth in both regions was fueled by client wins, cash digitization and acceptance expansion. Europe was up 10% year-over-year and 34% higher than 2019, impacted by a portfolio conversion that is now nearly complete in the UK. Ex UK, Europe volumes grew 28% year-over-year and was 71% above 2019, reflecting share gains in multiple markets. Ex portfolio conversions, volume trends in the UK remained stable. Asia Pacific, excluding China, continued to recover, up 16% year-over-year and 34% above 2019. Global processed transactions were up 10% year-over-year and 39% over 2019 levels. Constant dollar cross-border volume, excluding transactions within Europe but including Russia in prior periods, were up 31% year-over-year and 32% over 2019. Excluding Russia, year-over-year growth was higher by about 4 points. Cross-border card-not-present volume growth, excluding travel and excluding intra-Europe, grew 3% year-over-year and was 55% above 2019. Adjusted for cryptocurrency purchases and Russia, cross-border e-commerce spending grew in the low double digits. Cross-border card-not-present, excluding travel, represented over 40% of total cross-border volume in the first quarter. Cross-border travel spend, excluding intra-Europe, grew 63% year-over-year and is now 18% above 2019. The cross-border travel, excluding Europe, indexed to 2019 went from [114] in September to [121] in December. Travel in and out of Asia recovered sharply in the quarter by more than 12 points from the mid-70s indexed to 2019 to 85 for outbound and more than 90 for inbound helped by Japan. Japan alone improved by about 50 points since opening its borders in October. With China lifting restrictions on January 8, we expect more recovery to come. Europe inbound and outbound remained strong, with the travel indexed to 2019 in the 120s for outbound and 130s for inbound, both up slightly from the fourth quarter. Travel outbound from the U.S. to all geographies continues to be strong in the low 140s indexed to 2019, up 6 points from the fourth quarter. Travel inbound to the U.S. approached 2019 levels and improved 4 points in the quarter, likely due to the weakening dollar. Travel into Latin America and the Caribbean remained very strong and stable, indexing around 150 to 2019 levels. Travel in and out of CEMEA indexed in the 130s and mid-120s, respectively, relative to 2019, with outbound up more than 10 points in the quarter and inbound by more than 15, helped by the FIFA World Cup. Finally, some color on Mainland China post the removal of COVID zero policies. The 40-day Spring Festival season is underway in Mainland China, the world's largest travel event. Domestic travel is rising sharply. From a revenue standpoint, this will not contribute much. In terms of outbound mainland Chinese travel, this will pick up steam as more flight capacity is available, ticket prices moderate, new passports and visas are obtained and restrictions are lifted in some corridors. The initial destinations for mainland Chinese visitors look to be Hong Kong and Southeast Asia, in particular, Thailand, Singapore and Malaysia. Inbound travel to Mainland China has not increased much and may not until the COVID situation settles down. Moving now to a quick review of first quarter financial results. Service revenues grew 10% versus the 10% growth in fourth quarter constant dollar payments volume. Exchange rate drag was offset by growth from business mix, pricing and card benefits. Data processing revenues grew 6% versus the 10% process transactions growth. The primary reason is that our data processing revenues are impacted by Russia. However, our transactions growth is not. Adjusted for Russia, data processing revenues were up 10%. International transaction revenues were up 29% versus the 31% increase in constant dollar cross-border volumes, excluding intra-Europe. Revenue growth was helped by high currency volatility, although lower than the fourth quarter and pricing actions, which were offset by exchange rate shifts. Other revenues grew 31%, led by marketing and consulting services, pricing actions and acquisitions. Client incentives were 26% of gross revenues, below expectations due to some adjustments based on client performance and other items. For the year, we expect to renew about 20% of our payments volume with a good amount already completed in the first quarter. Revenue growth was robust across our three growth engines. Consumer payments growth was led by the recovery in cross-border volumes, high currency volatility and continued strong domestic volumes and transactions. New flows revenue growth was over 20% in constant dollars. Commercial card volumes grew 15% year-over-year and are up 45% versus 2019. Excluding Russia, Visa Direct transactions grew 39%. Value-added services revenue was also up over 20% in constant dollars, driven by higher volume, increased client penetration and select pricing actions. Currencycloud and Tink added about 0.5 point to revenue growth. GAAP operating expenses grew 25%. Non-GAAP operating expenses grew 15%. Non-GAAP operating expense growth was higher than expected, primarily due to a smaller exchange rate benefit. The primary drivers of expense growth were personnel costs from hiring activity in the second half of last year and into the first quarter, as well as G&A expenses driven by lower exchange rate benefits, higher travel and expenses from new acquisitions. Marketing increased 18%, primarily driven by the FIFA World Cup spend and client marketing. We recorded losses from our equity investments of $106 million. Excluding investment losses, non-GAAP non-operating expense was $7 million, benefiting from higher interest income due to rising rates and some other items. Our tax rate was lower than expected due to the resolution of a tax initiative coming in at 16% GAAP and 16.5% non-GAAP. GAAP EPS was $1.99, non-GAAP EPS was $2.18, up 21% over last year, inclusive of an approximately 3.5-point drag from the stronger dollar. Through the first three weeks of February, business trends have remained strong and stable. On a year-over-year basis, U.S. payments volume was up 14% with debit up 13% and credit up 14%. Lapping of Omicron-related weakness from last year has contributed to strong January month-to-date growth. The Omicron-related uptick will fade as we get into February. These trends are generally consistent with performance in major markets around the world. Processed transactions grew 14% year-over-year. Constant dollar cross-border volume, excluding transactions within Europe, grew 36% year-over-year and was 42% over 2019 and 32% over 2020. Card-not-present non-travel growth was 75% above 2019 and 52% above 2020. Travel-related cross-border volumes were 25% above 2019 and 20% above 2020. We are now past the pandemic recovery stage on domestic volumes and transactions. As such, starting next quarter, we will no longer provide comparisons to 2019 for payments volumes and processed transactions. Since the cross-border recovery is still ongoing, we will continue to provide comparisons to 2019 for cross-border volumes through this calendar year. Moving now to our outlook for the second quarter. For the second quarter, we are assuming that trends in domestic payments volume and processed transactions are sustained with some benefit from lapping Omicron in January last year. As a reminder, discontinuation of operations in Russia will impact reported payments volume growth rates in the second quarter. Russia will not impact reported processed transaction growth. Cross-border e-commerce trends have been stable, too, especially when you adjust for Russia and crypto-related volatility. We're resuming cross-border e-commerce growth rates sustained through the second quarter, ex Russia and crypto. The cross-border travel recovery continued generally in line with our expectations in the first quarter. We are assuming recent trends to sustain into the second quarter. We expect most of the Mainland China travel recovery in the second half and beyond for reasons I outlined earlier. We expect outbound travel from Mainland China to recover first. The pace of inbound travel recovery will depend on the COVID situation. Discontinuation of operations in Russia will reduce second quarter net revenue growth by almost 5 points since we recorded nearly two quarters' worth of service fees in the second quarter of fiscal year '22. Based on where the dollar is today and the forward curve, exchange rates will reduce reported net revenue growth in the second quarter by about 2 points. When you put all this together, our planning assumptions get us to mid-teens constant dollar net revenue growth in the second quarter on a run rate basis i.e., adjusted for Russia. With an almost 5-point Russia impact and a 2-point exchange rate headwind, reported nominal dollar Q2 net revenue growth would be in the high single digits. Client incentives were below our 26.5% to 27.5% range of gross revenues in the first quarter. Second quarter client incentives are expected to run higher at the upper end of the range, finishing the first half in the middle of the range. As we indicated in October, operating expenses growth rates will moderate through the year as we reduce the rate of increase as well as lap higher levels from last year. In the second quarter, non-GAAP operating expense growth in nominal dollars is expected to be 2 points to 3 points lower than the first quarter expense growth. Our third quarter non-GAAP operating expense growth rate is expected to decline an additional 2 points to 3 points, with a further 2 point to 3 point reduction in the fourth quarter. Non-GAAP results exclude certain acquisition-related items and the litigation provision from the third quarter last year. We currently expect non-GAAP non-operating expense to be in the $40 million to $50 million range in the second quarter, driven largely by higher interest income from our cash balances. Our tax rate is expected to be at the upper end of the 19% to 19.5% range for the rest of the year. With a non-GAAP 16.5% rate in the first quarter, the full year non-GAAP tax rate is now expected to range between 18.5% to 19%. As we said last quarter, should there be a recession or a geopolitical shock that impacts our business, slowing revenue growth below our planning assumptions in the second half, we will, of course, adjust our spending plans by reprioritizing investments, scaling back or delaying programs and pulling back as appropriate in personnel expenses, marketing spend, travel and other controllable categories. In a business like ours, this always requires a careful balance between short- and long-term considerations. We have contingency plans in place and will activate them should we need to. Our business has been resilient so far this year. Our first quarter performance has demonstrated strong consumer payments growth from cash digitization and client wins. New flows and value-added services momentum remains very strong. There is still much uncertainty from an economic standpoint in the months ahead. We will remain vigilant and ready to act. As we look past fiscal year '23, we remain as optimistic as we've ever been about the long-term growth potential of our business. Before I finish, this is a sad day for me personally. It's Al's last week as CEO. Al has been the best CEO I've worked for and I've worked for many in my career. Al is a wonderful human being, an exceptional leader with extraordinary business judgment. It has been an eventful six years. Despite a three-year global pandemic, revenues have almost doubled, non-GAAP EPS is up over 2.5x and our stock price has tripled during Al's tenure. I will miss you as CEO, Al, along with 26,500 or so others at Visa. Thanks, and congratulations to Al and Ryan as well. Vasant, as we think about your baseline plan forecast, how are you factoring in the economy? I mean, are we assuming resilient consumer, stable economy or are you assuming some mild downturn? Well, we went through what we call our planning assumptions last -- on the last call for the full year, and we told you we had assumed no recession. As you can see, business trends have been remarkably stable. The spend levels just around the world, they've indexed in the mid-140s for almost four quarters right now, and there's no evidence of a change in trend. That's reflected in our second quarter outlook. At this point, we're not changing any expectations for the second half. I mean, clearly, the dollar has weakened a bit so that will change the exchange rate impact in the second half, but we're not changing any of our views in the second half. I mean, they are planning assumptions. And if there is a slowdown, then we will react accordingly. So it's nice to see that -- it seems like from the trends you're seeing in Q1 and what you're guiding for Q2 is an element of conservatism based on the trends so far relative to what we could see in the second half, which I think is what The Street probably wanted. But when we just think about the underlying trends for a moment, I mean, some of the strength we're seeing, like debit being up still high single digits constant currency in the U.S. on really tough comps, combined with other services. Maybe you could just touch on what's the driving forces of both of those metrics because they were a little better than we thought. And I don't know if it's Visa Direct in the debit side helping or it's other factors on share, and then if you could comment on other revenue strength. Yes. On debit, it's what we told you earlier. In general, if you look at the -- looking at 2019 has kept us honest, so to speak. It's a good view of what's going on. And there's -- in total spend, it's remarkable stability. What's happening is as good spending slowed down a bit, services spending really took up all the slack. And so consumers have just shifted their spending but they're spending the same amount, and that's why debit has stayed resilient. Debit has been the biggest beneficiary of the move to digitization that happened globally and including in the U.S., more e-commerce, more tap-to-pay, more people using digital credentials just about on any payment occasion. So some people were worried that when things settle down, that debit might start to see some slowdown. But as you've seen, debit has stayed resilient even as credit has recovered, which has kept our overall payment volumes very stable. Those would be the big trends and the other question? And other revenue was helped by mostly marketing services and consulting revenue, a fair amount of that linked to the FIFA World Cup. There was a lot of client-related marketing and spending related to the World Cup. Clients ask us to activate a variety of programs and that certainly helped the revenue. Wanted to kind of double click on some of the comments you made around China. It sounds like you guys are looking towards that region as being a fairly big driver of continued recovery in cross-border travel. I think we heard this morning from your competitor that those volumes in aggregate seem to only be something like 1% to 2% of overall cross-border volumes pre COVID. So was wondering, given how much of a focus this is for investors as a driver of continued strong growth, can you put some guardrails around how we should be thinking about the magnitude of impact of China once it's fully reopened relative to kind of what we saw in the most recent quarter? Well, a couple of things. First, our numbers are fairly close to those of our competitor. We are -- as Vasant said, we really think that, first, we're going to see the travel outbound from China to Southeast Asia. I think it's going to be still a bit of time before we're going to see a Chinese traveler back in Europe at the level of pre pandemic or back in the United States at the level of pre-pandemic. And I think it's going to -- people are going to wait and see what's happening with COVID within China. So Vasant talked about the fact that we're not counting on any kind of recovery that inbound into China into the second half of the year. But my personal expectation is that we'll see probably a spread of three to five quarters before, starting in the second half before China gets back to a level of pre pandemic or 2019. So it is -- for us, it's -- we have built our plan around pretty much what Vasant said in his remarks and what I just said. And if China comes back faster than we're saying, then obviously, that will help us. If it comes back slower, it will have the opposite impact. Yes. I mean, in terms of thinking about the impact, you all and we all have been tracking how is our cross-border recovering relative to pre-COVID levels and are we back on the trend line and so on, as you know? And we've told you now for a few quarters that many corridors, and I went through a lot of that, are well above the 2019 level. The three that were not and are still not, U.S. is approaching -- U.S. inbound is approaching 2019 levels and was held back by the strong dollar, but Asia is still -- and I went through the numbers, quite a bit below 2019 levels. Most of Asia is open, only China isn't. So if Asia is going to get back to pre-COVID levels and back to the original trend line, that's where the China impact is going to be visible. And then you expect and we expect that cross-border travel index to keep improving through the year. For that to happen, we obviously need China to come back. So it is important. I had a question about the evolution of Visa Direct. You highlighted the plus 39% year-on-year growth ex Russia in the quarter. Over the last few years, you've been talking a lot with tap-to-pay and contactless about there being sort of this inflection point dynamic where you reach a certain level of critical mass and then growth really accelerates. Is this similar dynamic true for Visa Direct? And can you give us a sense for sort of how we should think about that evolve over the next couple of years? Well, I think, Lisa, you're absolutely right. We're focused in Visa Direct at this point on extending into new geographies, new use cases and more cross-border. I would say those are our focuses. Initially out of the chute, Visa Direct in a country goes through Phase 1, which tends to be P2P before you then get into things like gig economy payouts and transactions like remittances or insurance payments, those kinds of things. So in the United States, and every country is going to go through this kind of evolution where they'll start with P2P, get into things like gig economy payouts and then get into more sophistic and remittances and then more sophisticated use cases. And the United States is much further along that continuum. In other countries, we are -- some good progress kind of in that first phase or 2 but haven't gotten into more sophisticated use cases. And then in other geographies, frankly, we're still not there. So I think there's a tremendous amount of gas left in the tank in Visa Direct. When I look at the opportunities to take use cases to more sophisticated levels in more markets, to open up more markets and to put a real focus on cross-border Visa Direct transactions, which we'll have better yields to them as well. So I think your bottom line theory of your question is -- has some real legitimacy to it, although I would say that it will be probably a bit longer elevation -- a bit longer period of time before you meet the maturity simply because of the different amount of use cases, whereas tap-to-pay is really kind of a single type of initiative. Good job. I guess my question, rest of world debit is the one place where I guess, numbers were a little weaker than we had thought, negative 2% on constant currency. Is that just a function of portfolio deconversions, Russia, some of the one-off things? And when does that kind of inflect back into positive territory? I think, Dave, when you look at it ex China and ex Russia, it grew over 10%. And then, yes, the UK migrations, in particular, are happening at a faster pace than we thought. And as Vasant said in his remarks, they're almost fully migrated, so certainly, that is having a dragging impact on the growth as well. Al, could you give us your latest thoughts on sort of balance sheet deployment, M&A strategy, what you might be looking for, whether this environment is yielding more potential opportunities or deals? Or is it time maybe to not pursue additional deals as the macro environment remains volatile? Nothing has changed in our strategy. We're focused, first and foremost, on organic growth and then growing through M&A, and then from there, dividend and share buybacks in that order. Clearly, there's been a little bit of a burst of the balloon in terms of some of the valuations, in particular, in the fintech world. That's a helpful characteristic of the environment right now. But I think we will continue to look for capabilities and management teams that would bring more value to Visa than we could bring to ourselves organically. And we're in constant evaluation of options. We have a very good corporate development team. It's something that Ryan and Vasant, in particular, spent a good deal of time on. And when we see something that we think will make us better as a company and has a fair value attached to it, we're not afraid to go after it. And thanks for all the work and effort, Al, over time. And I wanted to address kind of a bigger picture question for you and maybe for Ryan, is that one of the questions we get a lot from investors is how do we think about kind of the challenges as we eventually reach some level of maturation of card penetration, especially in the U.S. and developed markets, especially given some of the preferences we've seen in other countries for them to develop domestic schemes or at least favor domestic schemes. So just wondering if you can provide a little bit of reflection on what we've seen thus far, and maybe, Ryan, some ideas on how we should think about kind of maturation and expansion issues going forward. I'll start, and then certainly, Ryan, can add. First, I would say that I believe deeply that there is tremendous opportunity in the card -- traditional card world, both in the consumer space as well as in the B2B space. There are still hundreds and hundreds of millions of people to bring into the financial mainstream. There are still trillions of dollars spent on cash and check. And when you look in the B2B space, we see a total addressable market of about $120 billion across carded opportunities, cross-border and payables and receivables, where I talked a bunch about a number of examples that we have worked on over the course of the last quarter. RTP systems are helping to digitize money movement. That's a good thing. If you look at the disruption caused by monetization in India, it ended up being extraordinarily positive in terms of what it's done in terms of growth in card credentials as well as acceptance, which by the way, I also should have said in the traditional world, there's still a tremendous opportunity to grow our acceptance footprint from the level that it's at today. These RTP systems are also helping us and we're leaning into them. They're helping us extend the reach of Visa Direct as we utilize them as part of our network-of-network strategies. They're helping us with open banking through Tink, where we can facilitate greater access to more developers on 1 end and more financial institutions on the other end. I think RTPs represent an opportunity for us to sell value-added services. And I still think the advantages of -- and the capabilities associated with the carded space are still far superior to account that the consumer protections, et cetera. And if you look at PICs in Brazil, you look at UPI in India, these things developed and were put in the marketplace, and we're seeing a fair amount of -- hearing a lot from clients in terms of fraud associated with these networks. And in many ways, that makes sense. They haven't spent the decades and hundreds of millions of dollars that Visa has to build security, fraud capability, risk management capabilities that help keep the ecosystem secure and trusted by consumers. And I think we have the opportunity over time in the A2A space to bring some of those capabilities and earn some good revenue and yield from them. So Ryan, what would you add to it? Not a lot to add to that, Al. It's great. I mean, James, just in short, we still see a ton of runway. We love our products. We love our people. We love our brand. We love our position and all these markets, whether they're mature or emerging around the world. So tons of runway. Al, I just wanted to ask a question about how when you look at the new business that you've won, let's say, in the past 12, maybe even 18 months or so, how that kind of sets Visa up as we think about the next, I would say the next two years, not really much beyond that. But the question really here is, is it tilting to take advantage more of debit trends, credit trends, global hospitality? And I'm kind of asking because MasterCard kind of called it out this morning is their positioning in travel, and it sounds like you were also kind of hinting at some positioning for your business. So I would just be interested to know what that new business pipeline that you brought in suggests over the course of the next two years for your company. Well, I'd say a couple of things, Dan. Number one, on the travel front, it's been a focus for us for a long time. And I think we have about 650 co-brands around the world. Many of them are travel co-brands, and I think we're the leading co-brand player on the planet. I think that when I look around the world, there's certainly opportunities with traditional issuers. We've made a lot of inroads in markets like Brazil and Chile, the Netherlands, Germany, Japan over the past year. We've had some great renewals in the United States over the last couple of years from JPMorgan Chase to Wells to the ones I talked about today in terms of Bank of America, Cap One, Commerce Bank. But we've also made great inroads with fintechs and neobanks. We have had a great track record of wins in the last 24 to 36 months. And a lot of these people are getting to scale in their particular markets. And I think for us, we have to have a wider lens in terms of who can provide services. We're trying to get -- make sure we get Visa cards in as many wallets as we can around the world. And then I'm going to come back to acceptance. One of the great ways to continue to grow our business is to grow our acceptance footprint, which still requires a lot of growth around the world. One of the places we've concentrated on that in the last 1.5 years is Latin America. And if you look at the ratio of spending in Latin America that went from -- moved from cash to PV in the last couple of years. Back in full year 2020, only 46% of Latin America's volume was PV, with 54% being cash. This past quarter, we just finished [59%] of their PV -- [69%] of their volume was purchase volume, so there was a 13-point swing in the Latin America region in the last not even quite three years. And that's a combination of winning with traditional FIs, winning with fintechs, having a localized market-by-market approach with a lot of good -- really good progress in countries that's out in Latin America like Brazil and Chile. Al, best wishes to you and we'll miss hearing from you on this call. Ryan, congratulations. Can you talk about how business growth strategy in organization that has evolved under your leadership? Are you starting to focus more or less on certain things or do some things differently? And Vasant very quickly, can you comment under your decel from your fourth fiscal quarter to 1Q? You talked about some of the dynamics, but how is that relative to your initial expectations? Harshita, I don't think we got the second half of your question because maybe we can knock that off, and then Ryan can talk -- you did? I think you were asking about -- you said decel, I'm assuming you meant deceleration between the first and the second? Yes. I mean, just a couple of things. The Russia impact is a little larger in the second quarter because we had almost two quarters' worth of service fees last year. Remember, we recognize service fees with a lag, so the service fees recognized in the first quarter were based on Q4 growth rates. So sequentially, Q1 was a little lower, so Q2 service fees will be impacted by that. Also, currency volatility is moderating as we speak. It has been moderating for a few weeks. And incentive growth is a little higher as you saw. So you put it all together, we were a little better than we expected. As you know, we thought we would be high single digits in the first quarter. We were higher for the reasons I mentioned, will be high single digits in the second quarter. That's our expectation right now. Yes, on the first part of your question, I've been a President now for close to 10 years, so I've been shoulder to shoulder with Al and Vasant and the rest of our team as we've made all of our key decisions, as we've developed our strategy, as we've executed our strategy. So probably won't or shouldn't surprise you, I'm going to continue to focus on the three growth pillars that we've laid out, consumer payments, new inflows and value-added services. And my priorities are going to be focused on doing everything that we can to accelerate our progress and accelerate our momentum. So how do we go to market, how do we work with clients, how do we ship product faster, how do we sell solutions more effectively to our clients? And to part of your question, how do we organize. So earlier this month, I announced a new organizational structure that really reflects our strategy that we talked with all of you about all the time. And we believe it's going to help us accelerate our progress in all 3 of those growth factors. To give you a quick sketch of that, Oliver Jenkyn, long-time Visa veteran, who many of you know, is going to lead a new global markets organization that includes driving our consumer payments growth in all of our markets around the world. So our five regional presidents will report to Oliver. Chris Newkirk, who formally led our strategy organization, is going to lead our new flows business unit reporting directly to me. Antony Cahill, who is our former Deputy CEO of Europe, is going to lead our value-added services business unit reporting directly to me. So our global markets team, our value-added services business unit, our new flows business unit, all will report directly to me. And then just to round that out a little bit, Jack Forestell, who also many of you know, will become our Chief Product and Strategy Officer and will partner closely with our President of Technology, Rajat Taneja. And the two of them are focused on delivering a robust product and innovation road map, shipping world-class products and services that help our clients grow their businesses and deepen their relationships with their customers. So that gives you a sense of where we are with strategy and the organization. Thanks for taking the question and congrats to Al and Ryan. I think you mentioned earlier that you're keeping the second half guidance unchanged. Can you just remind us what that guidance was from either a volume or a net revenue standpoint? Just because I think we have only the prior kind of full year guidance, and I know there's FX that's becoming less of a headwind as you get into the second half. Yes. When we talked to you last quarter, we said for the full year revenue growth would be somewhere in the mid-teens on a constant dollar basis adjusted for Russia. And then when you adjust for Russia and you adjust for a full year impact at that time of about 2 points on FX, it was going to be high single digits in nominal dollars. And so you know sort of where we are in Q1 and Q2. And exchange rates have moved around some so you can do some of the math. We're basically not changing any views on the second half right now because trends have been still fairly stable. The only thing you might want to change is what the exchange rate impact in the second half might be based on where these are right now. I also gave you fairly clear operating expense expectations. We were about 15% growth in the first quarter. We said growth will be 2 points to 3 points lower in nominal dollar terms in the second quarter, another 2 points to 3 points lower in the third quarter and another 2 points to 3 points lower in the fourth quarter. And that reflects what we had said last quarter that is expense growth will moderate through the year, both as we moderate the rate of increase when also as we lap higher levels of expenses from last year. So those pretty much are the sort of the broad outlines of what we said last quarter. And then we'll update you once again on our next call with any changes we might have based on trends. Thanks so much, and congrats to Al and Ryan. Excited for both of you. On the renewal front and new deal front, I'll ask on that if you don't mind. Any call-outs on pricing contract requirements, that kind of thing? I know you'd named a bunch of big names on the renewal front. MasterCard talked about the Citizens win there. Just curious what's happening in the whole balance of trade area? Well, it's a competitive world out there, Tien-tsin, as you well know. I think that there's a price that you need to get to and then a lot of it has to do with the combination of incumbency or not, the capabilities you have, what your line-up of customers' clients are in that market, what kind of experience you've had, what kind of innovative ideas you bring to the table, the other kinds of capabilities that we have in terms of services and new flows. So every deal is different and potentially hinging on on different things depending upon the needs of a particular client. And we tried to be very bespoke when we look at deals and talk to clients because their needs and their situation will always tend to be a bit different. And with that, we'd like to thank you for joining us today. If you have additional questions, please feel free to reach out to the Investor Relations team. Thanks again, and have a great day.
EarningCall_964	Ladies and gentlemen, good morning. Welcome to the fourth quarter 2022 results presentation. The conference must not be recorded for publication or broadcast. [Operator Instructions]. Before we start, I would like to draw your attention to our cautionary statement slide at the back of today's results presentation. Please also refer to the risk factors in our annual report together with disclosures in our SEC filings. On Slide 2, you can see our agenda for today. It's now my pleasure to hand over to Ralph Hamers, Group CEO. Thank you, Sarah. Good morning, everyone. Great that you're all on the call. I will take you through the results like I used to. In 2020, we delivered for our clients and shareholders, and that was in challenging market conditions. We provided sound advice to our clients, partnered with them to help achieve their goals. Our strategy and what differentiates UBS is clear. And as shown on this Slide 3 here, we are globally diversified with leading positions across the U.S., Asia Pacific, EMEA and Switzerland. We have outstanding client franchises, and they're unpinned by a balance sheet for all seasons, a strong risk culture and an intensified focus on costs. As you know, our business model is highly capital generative, supports both strong returns on capital as well as return of capital. If I move to Slide 4, you got basically a full year of hard work on one slide. Good financial results in 2022. We achieved our group financial targets for the full year, net profit of $7.6 billion, and our return on CET1 capital was 17%, and our cost-to-income ratio was 72.1%. Turning to Slide 5. Throughout 2022 , we were a source of strength for our clients, and we relentlessly focused on their needs while delivering for them across our platform. And you see the proof points here laid out across the different areas, invested assets, deposits, loans and the global markets activities. Across our $4 trillion in invested assets, we provided advice at bespoke services, seamless solutions. We helped our clients to reposition their portfolios in a world that was changing quickly, take advantage of longer-term opportunities as well. Net new fee-generating asset flows were $23 billion for the fourth quarter, representing a growth rate of 8%. This resulted in $60 billion of flows for the full year, which translates to a solid 4% growth rate in the context of a global equity market declines. We continue to capture for our clients. We continue to capture our client demand for higher-yielding products through our savings, our certificates of deposits, our money market funds. Money market inflows in Asset Management were $16 billion for the quarter, and 3/4 of that came from GWM clients. And this brought Asset Management total net new money to $25 billion for the year. Net new deposits turned positive in the fourth quarter driven by Switzerland and Asia Pacific. And for the full year, we delivered 17% net interest income growth in Wealth Management and P&C. In the Americas and Switzerland, we delivered positive net new lending in every quarter without relaxing our strict underwriting standards. And this resulted -- this result more than offset the continuing deleverage activity that we see in Asia Pacific. For our institutional clients, 2022 was a tale of 2 halves really. The first half of the year was driven by strong equity markets activities with foreign exchange and rates then taking spotlight in the second half. And through a wide range of market conditions, our diversified product mix in Global Markets and our agile way of allocating capital and resources where it needs to go, that allowed us to provide comprehensive services to our clients. Record performance in our equities franchise and second-best FRC performance on record helped offset the impact of industry-wide slowdowns in activity across Global Banking. As the leading global wealth manager, our diversified footprint empowers us to execute our strategy across regions to drive growth and efficiency. And you see an overview of the regional performance here on Slide 6. The regional picture is very important where that's where the business comes together for our clients. Just starting in the Americas, where our clients continue to turn to us for advice and solutions, client demand for our separately managed account offering remains strong with another $4 billion inflows in the fourth quarter. Net new money in SMAs totaled $21 billion for the full year. We also saw continued interest in alternatives, leading to $10 billion in net private market commitments for the year. In the U.S., we already have over 20% of the Barron's top 100 private wealth management teams, and we continue to recruit high-quality advisers in the second half of the year to support our industry-leading advisers productivity. Our recruiting efforts also supported $4 billion in net new fee-generating assets added in the fourth quarter and $17 billion for the full year. Our economists are projecting that '23 will be a challenging year for the U.S. economy as inflation and higher interest rates create headwinds for economic growth. And nevertheless, our priority for the region is to drive organic growth and build on our scale with our core wealth and GFIW clients. We will leverage our Investment Banking and Asset Management capabilities to deliver the whole of UBS to these clients. We will continue to invest in our digital capabilities to improve client connectivity to our advisers, and we will look to become the primary bank for our core clients by improving our banking capabilities. At the same time, our efforts to simplify processes and invest in infrastructure and controls will be complemented by strategic and tactical actions on cost to support improvements in our cost/income ratio. Now moving to our home market, Switzerland. The stability of the economy and our #1 position continues to support a record level of deposit and loan volumes, strong profitability and growth. Net new fee-generating assets flows were $5 billion in the fourth quarter, $9 billion for the full year, and that's a growth rate of 7%. We also saw $8 billion in net new deposits in the fourth quarter and $9 billion for the full year. For '23, our focus in Switzerland is to deliver above-market growth. We will continue to invest in our strategic technology initiatives and support our clients' transition to mobile banking while remaining disciplined on expenses. In EMEA, we maintained our momentum with clients in the fourth quarter as well with $11 billion in net new fee-generating assets for the quarter. We brought in $20 billion for the full year, and that's a 6% growth rate. That's supported by strong flows in the Middle East. In the Investment Bank, we had our best year on record for both revenue and profit before tax, supported by a record in Global Markets and outperformance in Global Banking as well. Elevated and volatile energy prices continue to have a significant impact on macroeconomic activity, although our economists are becoming more and more optimistic about the downturn being shallow. Our optimized EMEA footprint positions us well in the current macro environment, and this affords us the ability to be focused on targeted growth opportunities across Europe and the Middle East. So a strong year for EMEA. And lastly, Asia Pacific, the residual impact of the pandemic and concerns of economic growth consistently weighed on investor sentiment throughout the year. However, our clients' trust in our advice and capability led to 12% growth in net new fee-generating assets for the year. In the IB, we moved up 5 spots to claim the #1 position in equity capital markets for nondomestic banks for the full year. We delivered the best M&A on record. And we were recently named the Best Investment Bank in Asia and Australia by Finance Asia. Now the easing of COVID-related restrictions in China has led to a more optimistic outlook for 2023. We believe 5% economic growth is back on the table for China and are accelerating beginning in the next few -- acceleration of the growth beginning in the next few months. While client segment -- sentiment has improved, they are taking a wait-and-see approach so far. We remain well positioned to support our clients, both onshore and offshore, in China and the rest of Asia Pacific as activity resumes. Longer term, we remain focused on executing our strategy to capture growth. In October, we launched WE.UBS, the first digital wealth management platform from a global wealth manager in China. And in Southeast Asia, we are focusing on expanding our GFIW business to serve family offices, entrepreneurs, Asian technology firms to drive growth. And as you can see, technology is key to many of our achievements this year, and next year will be no different. So I'd like to take you through our technology delivery on the next slide. You can see some examples here on Slide 7, how we are investing our $4 billion technology budget to make technology differentiator through simplification, automation and by improving our clients' experience. And this transition also directly contributes to the bottom line with approximately $200 million in cost savings for 2023, and our plan is to continue to reinvest this. Let me give you some examples of how we're driving this. We now have 18,500 employees operating in Agile. In technology, 68% of these are engineers, and that compares to 55% when we started Agile. So basically, you see a 13% point increase, which is a 20% productivity improvement. And next to the efficiencies and the productivity improvement that this brings, it also delivers a faster delivery of technology change. So quicker time to market of improvements. We've also decommissioned 600 applications in 2022, and we have now 65% of our computing power on the cloud. As you can see in the next slide, we remain very well positioned for the current environment and maintain a balance sheet for all seasons. In '22, we generated $7.5 billion of capital, of which we distributed $7.3 billion, including a $5.6 billion share repurchase. Our capital liquidity ratios are strong. Our balance sheet is healthy. Our strong balance sheet and risk management discipline allows us to support our clients, meet regulatory requirements and deliver attractive and sustainable capital returns to shareholders. On Slide 9, you can see our progress on sustainability. As you know, sustainability is a core part of our strategy. We reduced our greenhouse gas emissions -- our own greenhouse gas emissions by another 11% as we upgrade buildings and continue to source 100% renewable electricity globally as well. We're proud of the progress that we're making on our objective to better reflect the diversity of our workforce and leadership positions. And we expanded our sustainable product offering, and we're proud to maintain our industry-leading ESG rating here as well. So the summary of the financial results, you see that on Slide 10. I've already mentioned the good performance for the full year. And for the quarter, we had strong flows and we managed it with discipline. We had solid results considering seasonality and the macroeconomic backdrop, which enabled us to wrap up the year comfortably within our targets. Slide 11, which is more or less looking forward, we leave our financial targets unchanged for '23. We're confident in our ability to deliver 15% to 18% return on CET1 capital and to stay within the range of 70% to 73% of cost/income ratio. Our capital guidance is also unchanged. At our current capital levels, we are in a strong position to fund business growth and a progressive dividend while returning excess capital to shareholders via some share repurchases. During the first 4 weeks of this year, we bought back $500 million worth of shares, and we are targeting at least $5 billion for '23. Thank you, Ralph. Good morning, everyone. Starting on Slide 13. In 2022, we delivered a good performance in a challenging environment. Our global franchise enabled us to meet our group financial targets both on a reported and underlying basis with strong cost control, risk management and capital returns. Now moving on to the quarter on Slide 14. Net profit was $1.7 billion with a reported return on CET1 of 14.7% and a cost/income ratio of 75.8%. The underlying performance is on the page, and the delta between reported and underlying is in the appendix. Revenue was down 8% and expense was down 13%. FX impacted both by approximately $200 million for a net effect of negative $25 million. The net credit loss expense was $7 million compared with the $27 million released last year, reflecting great stability in our credit metrics and strong risk management. The effective tax rate in the quarter was 14% plus compared with 21% a year ago due to deferred tax assets. For 2023, we expect it to be around 23%. Let's start with fourth quarter revenue on Slide 15. In addition to the usual seasonality, the macroeconomic environment led to depressed equity markets and low levels of client, M&A and capital market activity. However, we saw increased activity in fixed income and the benefit of higher rates. As such, our underlying revenue ex FX was down 9% with an increase from NII in GWM and P&C more than offset by lower asset-based and transaction fees as well as lower IB revenue. Moving to NII on Page 16 and starting with the top chart. In 2022, we added over $1 billion in net interest income with the benefit of higher rates partially offset by deposit volume and mix. In the bottom chart, you see the quarterly movements. NII of $2.1 billion was up $263 million or 14% quarter-on-quarter. This strong result reflects the benefit of our global franchise with every region contributing across GWM and P&C. Almost half of the increase was in Swiss francs and the rest mostly in euros and in U.S. dollars. As you would expect, the benefit of rates shown in the second bar was the main driver. Moving to deposit volumes. Total deposits rose 6% sequentially. This included $9 billion of net new deposits, which reflected a 7% annualized growth rate and with strong contributions in Switzerland and in APAC. We have seen continued demand for our products in both P&C and Wealth Management with the demand for our savings products exceeding sweep outflows. Moving to deposit mix. While the level of sweep outflows was similar to last quarter, we are seeing a deceleration of mix shifts in U.S. dollars, but some acceleration in euro. We haven't seen any shifts in Swiss francs yet, but we expect deposit mix impacts across currencies. Looking ahead, based on the current forwards, our exposure across Swiss francs, euros and U.S. dollars means we expect 2023 NII to be higher than 4Q '22 annualized. For 1Q '23, we anticipate a low to mid-single-digit increase versus 4Q '22. Now turning to costs on Page 17. For the full year, as you can see on the chart, expense was down 4% or up 0.7% ex litigation and FX. If you also exclude variable comp, expense was up 2.6%. Decisive and immediate actions on cost in the second half of the year have contributed to us achieving our cost/income ratio target for the full year despite a challenging revenue environment. Moving to the table at the bottom. This quarter's operating expense was down 13% year-on-year. Excluding litigation and FX, the number was up 1%. Inflationary pressures on salaries, higher technology costs and T&E were mostly offset by efficiencies. For 2023, we expect cost, ex litigation and FX, to increase by 2% to 3% year-on-year. We are managing the cost base and giving guidance, considering a range of economic scenarios. The guidance also reflects the annualization of last year's elevated inflation, continued investments and the expected benefit from efficiencies. Let's turn to these efficiencies on Slide 18. In 2021, we announced a $1 billion gross savings program to be achieved by 2023. I am pleased to report that we have already achieved $700 million to date, $100 million ahead of plan. To deliver that result, we effectively implemented a number of measures across the board, including restructuring, structural compensation adjustments, optimizing our footprint, reducing consultant and vendor spend, and executing our tech strategy with discipline. Through the addition of new initiatives, we are now expanding our gross cost savings program by 10% to $1.1 billion, and this is while absorbing FX headwinds of $100 million. We remain laser-focused on costs and committed to delivering the structural and tactical measures necessary to achieve both our guidance and our target cost/income ratio. Let's move to our businesses, starting with GWM on Page 19. GWM profit before tax in the quarter was $1.1 billion, down 14% on an underlying basis. Revenue was 5% lower than last year with asset base and transaction revenue down in all regions, partially offset by net interest income. We continue to actively manage deposits across margins, volumes and mix, driving NII up 35% year-on-year with positive net new deposits and continued impact of deleveraging on net new loans. Operating expense, ex litigation and FX, was flat year-on-year. Net new fee-generating assets were $23 billion in the quarter, an annualized growth rate of 8%. We had positive flows in all regions, mostly into advisory mandates and SMAs. For the past 12 months, we attracted $60 billion of net new fee-generating assets, which represents a 4% growth rate. Moving to Asset Management on Page 20 with a profit before tax of $124 million. Total revenue decreased 31% with lower net management fees driven by market headwinds and FX and lower performance fees. The cost/income ratio was 75% with lower revenue and expense down 4% as we benefited from FX and had lower personnel expenses. Net new money in the quarter was $11 billion, of which $16 billion went into money market funds as we successfully captured client demand for cash-like solutions. Excluding money market, we saw $4 billion inflows into sustainability focus and impact investments and $4 billion into SMAs, which were offset by outflows in our active equities and fixed income businesses as clients continued to rebalance portfolios. While the Asset Management business has been impacted by markets, the franchise has important capabilities in key areas of focus, namely sustainable investments with $178 billion of invested assets, real estate and private markets with over $100 billion and SMAs totaling $125 billion. Now on to the IB on Slide 21. The IB delivered $112 million in profit before tax and a 4% return on attributed equity. Revenue in Global Markets of $1.4 billion was down 8% ex FX against a record fourth quarter last year. In equities, high correlation and the ongoing macro uncertainty dampened client volume, particularly in derivatives and cash equities. Our performance in the U.S. was weaker year-on-year, and we are continuing to invest in the franchise to bolster our capabilities. However, we delivered the best 4Q on record in our FX, rates and credit business. Global Banking revenue was down 52%, in line with very low levels of industry activity across advisory and capital markets, but with strengths in APAC and EMEA. Operating expense was up 12% ex litigation and FX due to compensation adjustments that we made in 4Q '21. Despite a challenging 4Q, the IB has delivered another year of strong results with a return on attributed equity of 15%, better revenue on RWA than any U.S. peer and record revenue in equities, derivatives and solutions, financing and prime brokerage. This was achieved in a rapidly evolving market context and with one of the lowest banking fee pools on record, yet we had record M&A in APAC and we outperformed in EMEA. Wrapping up on the businesses with the excellent performance in P&C on Page 22. Profit before tax in the fourth quarter was CHF 504 million, the best quarter in over 10 years when excluding one-off gains. This result was largely driven by 21% higher NII combined with strong cost discipline. Overall, total revenue rose 10% year-on-year with small decreases in recurring net fee income and lower transaction-based income. We consistently engage with our clients and were able to deliver CHF 2 billion of net new investment products over the past 12 months, an annual growth rate of 8%. We also saw CHF 7 billion of net new deposits and CHF 4 billion of net new loans. We delivered a cost/income ratio of 54%, and costs were up 1% on an underlying basis. Included in these results are strong efficiencies and technology investments. A good proof point is the increase of 10 percentage points year-on-year in the share of Personal Banking clients that are active mobile users, which benefits our clients and creates operational efficiencies. Moving to capital on Page 23. At 14.2%, we maintained a strong capital position while delivering attractive capital returns. On the walk, starting at 14.4% at the end of last quarter, net profit contributed 50 basis points, offset by capital returns to our shareholders, also at around 50 basis points. The net currency effect was close to 0 quarter-on-quarter as the FX impacts on CET1 and RWA offset each other. Looking ahead, our guidance on regulatory-driven RWA remains consistent with last year, as shown in the appendix. Separately, we expect the introduction of the minimum tax in the U.S. to increase our cash tax rate and affect our CET1 capital accretion. Based on 2022 profitability, this would translate to around $250 million lower CET1 accretion, which would come back over time, as mentioned in our report. Wrapping up on Slide 24. For 2022, we are proud of what we delivered for our clients, for our employees and for our shareholders. We returned $7.3 billion of capital for a payout ratio of 95%. We are committed to our strategy, to disciplined execution and to creating value for our shareholders. We entered 2023 from a position of strength. We expect to support our client franchises and invest for growth while remaining committed to a progressive dividend and repurchasing over $5 billion of shares. First question is regarding Asia. And can you just talk a little bit about what you're seeing in Asia? You made a very brief comment, Ralph, but maybe a little bit more. Do you see any re-leveraging change? Do you see any change in transaction volume pickup or net new fee-generating asset pickup? And what should we look out first in that respect in Wealth Management? Secondly, in respect to forward curves, can you discuss what interest rates you use for the key markets in your assumptions on NII guidance for first quarter, but also more importantly, for '23? And what -- can you talk a little bit about betas in that respect and net interest income forward assumptions for '24, '25, what rates you're using at this point? Thank you, Kian. So the color I can give is limited, honestly, given the fact that beyond closing the year and this update, there's only like 3 weeks, 3.5 weeks of experience of what we see. But what we can tell you is that you did see also in the fourth quarter further deleveraging in Asia Pacific. We sense that towards the end of the quarter, that came to a halt there. So too early to say whether that is a stop or not, but that's what we saw. Then in terms of the mood in Asia, I think it's more upbeat. The markets, clients are surprised by the quick opening of China and the action-oriented approaches by the Chinese also to embrace the openness, to get the economic growth, to get investors in, regulators reaching out as well. So I think that's all very positive on one side. Then clearly, the new year started, everybody has their festivities. So the question there is really, how does it kind of -- how does this continue then? So for the moment, what we have seen in the recent rally is from our wealth clients, actually a wait-and-see-approach. So in terms of activity level and flows, wait-and-see as well. Sarah? Yes. In terms of the forwards, we are following the forwards, and we look at them all the time. And so you can use the forwards that are available now or as of Friday for your analysis. So when you think about the right expectations that we are seeing in the different markets, we are seeing that the Fed continues to increase probably until the first quarter and then stabilizes from there. And then that is SNB going to the 1.5% level, the SCB around the 3% and then coming down a bit. And the bank a bit learned a bit about that. So we are going exactly with the forward analysis as we do our analysis. In terms of the betas, what I can tell you is that we are really considering the mix of our businesses. We don't disclose specifically the betas. But we are considering all of the mix across GWM and P&C at the granular level. And what you are seeing is the experience that we have had is reflective of actually, so far, our models have been predictive on the better side. We have seen a fair bit of mix in the U.S. And as I mentioned, in terms of euro, we are seeing to see some mix. And in Swiss francs, we would expect it to come, but it hasn't come. The first question I wanted to ask you is regarding the cost/income target, which you have reiterated today for the midterm on 70% to 73%. It's been now -- when we look at the underlying profit level, so ex any one-offs, it's been 3 quarters that you've been outside that range. So what makes you think you can get back towards the range? And how quickly can we expect that you will get back towards that level of cost/income ratio already in the next few quarters? And the second question is just coming back to the net new money in APAC. I mean, obviously, you had a stronger-than-usual run rate in Switzerland, in Europe, but then not so much in APAC. You're talking about the wait-and-see approach. Would it be fair to say that some of the outflows that have been seen elsewhere may not yet have been transferred to one of the competitors and could be waiting to be picked up? Is that a fair assumption? So I will start with the second one and then Sarah can take you through the first one there. So on the flows in Asia, actually, we saw healthy flows in Asia throughout the year really in net new fee-generating assets and also in the fourth quarter at $3.4 billion. So that was actually more a continuation of flows coming through, very solid client relationships. If your question is to which stand is some of these flows related to the status of other financial institutions, we can only say that our growth is -- that is not the primary source of our growth at all. You should know and you do know that we're the #1 wealth manager in Asia. We have a very clear position around how we deal with our clients and also what our risk appetite is with clients. And therefore, it is more because of what we represent and what we do that we attract these flows than the other way around. Sarah? In terms of the cost/income ratio underlying, when you're looking at what's coming ahead, first of all, you have the benefit of rate. And so NII is continuing to be a strong contribution to our results. Second of all, you've got the contribution from the floats that we are continuing to generate. And after that, in terms of the equity market, obviously, there are different ranges of scenarios and everybody can make their assumptions there. In terms of the cost side, you're seeing us to be very rigorous there. And so the expense guidance that we gave you, 2% to 3%, ex FX and litigation, is of course reflected in our cost/income ratio guidance. One on capital return and then one on FX. If I look at capital return, you've guided greater than $5 billion for the buybacks. I know it'd be greater than the comment. I guess my question would be why did you not feel comfortable coming out with guidance that was more similar to full year '22, so the $5.6 billion that you executed? I know you flagged the CMT tax change in the U.S. But just trying to understand your rationale for why it'd be greater than $5 billion, which is obviously less than what you've achieved last year. And then my second question, just on FX. I know your cost guidance for the growth in 2023 is ex FX movements. Obviously, the FX move overall should be a tailwind this year for you in terms of profitability, but potentially a headwind to your cost line. So perhaps you could give us an idea of what you think the magnitude on revenues and costs would be based on current FX rates versus the '22 average. Yes, thank you, Andrew. I'll take the first one; Sarah, the second one. So on the capital guidance, I think if you compare our language that we used last year around this time and this time, it's more confident. Because last year, we basically gave you a guidance of around $5 billion. And now basically, we're giving you above $5 billion. And honestly, why don't we give precise numbers? Because it's not a precise business that we're in. So we have to deal with market circumstances, with developments, with sentiments, et cetera, et cetera, et cetera. And we think it is better to give you a guidance that we're confident in on delivering and then update you while the year goes by. Sarah? In terms of the FX, all I would give you as a reference point is that the FX was an impact, for example, this quarter of approximately $200 million in both directions, so both on the expense and on the revenue. And so that gives you an idea of what it could look like, but of course, it will depend on the FX cost. Two related questions, please, both on net new money flows. Firstly, your outlook comment has quite a cautious comment about client sentiment may affect flows. I know that's unchanged language from the previous quarter. I just wondered if there's anything specific in that, that you're seeing or if that's just general caution. That's my first question. And then the second one, slightly related. I know it's sensitive for you to talk about flows from or relating to your competitors. But I just wondered why you wouldn't be the natural home for outflows coming out of a competitor. You're saying that's not the primary source of your inflows, which is a bit surprising. Why wouldn't you be the natural home for some of those flows to relocate to? Thank you, Jeremy. So on the first one, it is general caution. So since you asked the question, so specifically, it is general caution. And it has to do, Jeremy, with the fact that we are at the start of the year, we see some positive signals around China opening up, could be a support of economic growth and constructive market environment. We see the LCM, the leverage capital markets, coming back to life a bit, which is normally a leading indicator for capital markets to open up as well. So those are positive signals. But on the other hand, we're waiting for inflation numbers and with that to get a sense for how strict central banks will have to move in order to curb that inflation to break it into a nonstructural inflation to a lower level and what the cost of that could be to the economy. So that's why we are generally cautious because these are the things that play. I do expect, in the next couple of weeks even, to have a bit more clarity certainly about inflation, central bank movements, China further opening up, corporate results coming through as well. So I do think that the next couple of weeks could give us some hints as to how firm market recovery could be. So -- and that -- but for the moment, it is general caution there. On the second question, there's many places where clients can go. In general, given the fact that we are the largest wealth manager in the world, there's not necessarily new clients for us, right? So we already deal with clients that others have as well. So although we are certainly the natural place for these clients to go to, they are generally already a client of ours. That is one aspect. And the other aspect is that there is a bit of a difference in risk appetite in some situations as well. So those are the 2. Thank you. I just wanted to ask on costs again. I mean given we commonly adjust for FX rates, I mean I understand you don't want to give any more guidance, but can you give us maybe like the FX mix on costs? Or if we think about the cost/income ratio, should FX effects basically be neutral for the cost/income ratio? And then in terms of the Investment Banking, you said 2022 is a good revenue year, but the cost/income ratio is 78%. Is that sort of like where you think on the cost/income ratio should be? Or do you think it should be trending down lower in the Investment Bank? Okay. So I'll start with the second question and Sarah will take the first one, Anke. So on the second one, basically, the way we look at our Investment Bank, as you know, is an Investment Bank that is -- has to return its cost of capital. And there is a combination here of the use of capital and it is a capital-light Investment Bank, as you know, and with that, therefore, also the consequences for the cost/income ratio. So since we are capital-light on the Investment Bank, we are best practice in the return on risk-weighted assets. The cost/income ratio may not be as competitively seen because we invest heavily in technology as well because that's the way we play in the Investment Bank. And therefore, the return in the Investment Bank, and we had the last 3 years a very good return, all 3 years good returns and also returning more than cost of capital, that is more for us the indicator that we manage the Investment Banking on than per se the cost/income ratio. Because in the markets that we play in, we need to continue to invest in technology and artificial intelligence because that's the game we play in the Investment Bank. So that, I hope, explains you as to how we look at the Investment Bank. And in terms of the cost/income ratio, you mentioned it and it's a great way to think about it, it is really very neutral in terms of how it's affected by FX. So the best way to think about it is that all of our guidance is standing regardless of the FX because on the cost/income ratio, both the numerator and the denominator of FX are affected in opposite directions. I've got another one on costs and then one on capital. On expenses, I'm actually a little bit surprised on the cost guide, 2% to 3%, given that previously, you've spoken ex variable compensation, but now you seem to bake that into the guide. Can you give us a bit of color about kind of base case for revenues opposite that, particularly in GWM, which is clearly comp is very much linked to the fee line there? So just a feel from your base cases on planning and why a switching guidance from kind of an underlying inflation figure to -- which excluded variable comp to one that's now all in. And then secondly, it's a bit of a technical question around Basel IV. I appreciate the slide in the appendix. Can you just give us a bit of a color about how the short-term inflation to your risk weight is front loading some of that Basel IV impact, so the relation between kind of the 2022 to 2023 inflation and what that's done to your 2025 Basel IV impact? And can you split that out a little bit between credit risk and operational risk? And how we should be thinking about the short term versus the longer term there and the interaction between the 2? In terms of the cost, we wanted to give you a guidance that is reflective of how we manage the place, which is on the total cost. And of course, I think ex FX and ex litigation is helpful in terms of the exclusions. The reason for the range is actually to consider different revenue outcomes as well as the different paces of investments that could be related to that. So that's really on the first one. On the second one, what you're seeing is exactly how you framed it in your question, which is that we are seeing some timing difference. So the total trip between the end of 2021 and the adoption of Basel is about that $30 billion that we talked about exactly a year ago. But we are able to offset the increases that happened along the way with reductions in the final adoption because it is addressing the same risks that have already been covered by some of the model updates that we put in place. So it's exactly as I think you expected, the framing of your question. In terms of where it's coming from, there is also one element that is interesting, which is that as you are moving from 2024 to 2025, because of the operational risk and how it's calculated, there is some of the exposure that just drops from the record, and so there is a little bit of help there. Can I just follow up on operational risk? I know Switzerland hasn't quite defined ILM, whereas Europe has gone to one. Do you know where the debate on that is? Because I assume you've got operational losses as part of the calculation on your Basel IV impact. I have one kind of follow-on question and then one different question. The follow-on question, I guess, come back to net new fee-generating asset growth. I guess there have been a few moving parts in 2022 driving that strong performance. But I'm just kind of curious if in 2023, given the China reopening, you would kind of put it as a base case that net new fee-generating asset growth should be stronger this year than last? And the second question, just relating to the medium-term investment plans and, in particular, on the digital side in the U.S., just curious to your thinking in terms of investment there with the wealth fund transaction not happening. Is that an area where we should expect some cost growth? Or is that segment of the market not something that you're looking to continue or looking to play into? Thank you, Amit. So on the first question, so you know that the way we look at net new fee-generating assets when we came out with our strategy over the last 2 years in thesis, but specifically also came around with guidance around net new fee-generating asset growth is that we expect this to grow around to 5%. Some years may be a bit below and some years a little bit higher, but it's the 5% that you can count on, and that's also the way we see things developing more or less. So that's on net new fee-generating assets. Now back to the U.S., just to kind of make that case once again, I think it's important that we are large in the U.S. We are a very well-recognized brand in the U.S. As I explained in my opening, we're very focused on our wealth clients and on our family office clients there as well. And those need financial advisers that need to be supported by digital tools. So we have launched the initial versions of an improved workstation. That will be further improved over time. Then we are working on further digitalization, some of the processes to support their business and increase their productivity as well. As you know, banking in itself is important to us as well in order to develop the product slate for them to be more successful also on the banking side. And since we started this, and this is before the update even, we have increased our banking business around deposits by $48 billion and the loans by $41 billion. So you see the banking business really coming through. And therefore, we need to continue to invest in that. Also in the process of supporting that flow into our bank in the U.S., it's important as well. Now if you read all these digital components that we have to deliver for the -- for our Wealth Management clients, then automatically, we are building a base that we can also then develop specific propositions for our workplace wealth clients that we have 2 million of. So that's the way you should look at it. Now honestly, I do think that, and most of the people who know me, think there is never an end to technology expenditures, and that will also not ever end in the U.S. So for us, this is more a program of continuation of investment and improvement and moving to an agile way working there as well, like we have done in many other parts of UBS. And then you will have a continuation of technology investments in order to improve each and every part of our franchise there to make it more efficient and make our financial advisers more productive. I've got two questions, both on wealth. The first one is literally a follow-up on your explanation about the kind of U.S. business over the last couple of years because, of course, we've talked over quarters about that kind of banking penetration, about business banking penetration, about the loan penetration as the way to grow that product franchise in the U.S. But Ralph, can I ask, when it comes to kind of deliverables going forward that you will be holding that kind of U.S. wealth business, too, what would be your key ones? Is it still about the deposits, the loan growth, the balances of which you've just mentioned? Or is it kind of more nuanced than that? So that's the first question. And the second question is about the Middle East as an opportunity in wealth. I think you very briefly mentioned it in the slides talking about EMEA flows or net flows. But can I just ask because, of course, we don't really focus on the region kind of as much as we probably should, how do you see it as the wealth franchise? What's the plan going forward? And actually, could you give us a sense just how much of those EMEA inflows were actually generated in MENA? So thank you, Magda. So on the first one, clearly, we go into much more details as to getting a feel for how the U.S. business is developing. But what is important here is that we are a top 5 player there. We are -- we have a very specific brand recognition there and we have to build on the strength of our brand there, which basically means that the core of our business is done through our financial advisers, if not almost all. And that is the crucial aspect of it, and what we want to do is for them to be much more productive. So in terms of the levers that we pull is financial adviser productivity, not only by supporting them with much better processes, but also with the right and more sophisticated products than everybody else can; also global products, which is basically where the UBS as a global wealth manager comes in, as a differentiating tool there as well. But on top of that, we are specifically recruiting those financial advisers that are more productive and that have higher net worth and ultra high net worth clients and are in those geographies where we expect much faster growth, general geographies where there is quite some entrepreneurial wealth creation because the fastest growth in the U.S. in the U.S. wealth pool comes from entrepreneurial wealth. So it is much more than just a couple of top lines. It is very specific as to where do we recruit our FAs, where do we expect the wealth creation to be, who have a proven track record through which we can work, how can we support them with sophisticated products, where does banking play a role there in the stickiness of those relationships so that they can continue to build a franchise. So there's a couple of indicators that we are looking at as to how we actually grow this business sustainably and not only tactically. That is the important element of our U.S. business. Now when it comes to the Middle East, it's not new to UBS that we bank the Middle East, but we are growing our teams there. Over the last 2 years, we did open our office in Qatar, in Doha. We have recruited people there. Beyond the wealth business, we also do services activities there as well. So we're committed to that. And you see on the back of recruiting teams in the Middle East, you see more clients coming through and also the flows coming from those clients. And in the fourth quarter, yes, there were also flows coming through there. These are the ultra high net worth individuals in the Middle East, so they come with high tickets. I would like to start with a question on NII, please, on your guidance. You're guiding quite specifically about what should happen between Q4 '22 and Q1 '23, but you're a bit less specific for the whole year. Do you see any reasonable scenario where on an FX-neutral basis, your NII in any of the following quarters, Q2 to Q4 '23, could be lower than it was or than it is expected to be in Q1 '23? And the second question, I guess, goes back somewhat to what Magdalena just asked in GWM and the U.S. business. Your Chairman toyed with the idea in the recent interview about publishing separate KPIs for the U.S. Wealth Management business. And I was wondering whether you would consider doing that. And given that you're currently not breaking out the U.S. business at all, whether that would require a change in the divisional setup. Thank you, Stefan. I will answer the last one and then Sarah will answer the first one. So on the last one, it's under consideration. So in terms of what you should expect, first of all, if you look at the forwards, that is what is underlying our guidance. So if you take different forwards, you could certainly see different scenarios going there. And we give you on each quarter more information very precisely about the following quarter, but we wanted also to cement that there is a very good story for the full year, which is why we gave you the annualized guidance. I'd like to drill down a bit more into Wealth Management Americas and discuss that, as the others have done. So I mean relative to other regions, as we've seen in Slide 31, that decline of 20% in PBT seems quite disappointing compared to the other regions. So I was wondering if you could give a bit more color on whether they're suffering a bit more on the deposit beta or migration side there and whether that represents a sea change going forward in the profit trajectory. And then perhaps you could -- maybe you could talk a bit more specifically about that structural difference in the Americas versus peers in the U.S. They didn't suffer such a big decline in PBT in the fourth quarter. It was rather flat or up. And then if you look at the cost/income ratio, your sort of 86%, it's still a good 60 percentage points higher than peers. So what are the differences here in UBS Americas versus U.S. peers? And what can you do here to really improve that? Thank you. So if you compare us with the peers in the Americas is that the peers that we compete with have a local banking business and which is very stable in terms of what -- if it comes to production of their business, of new clients as well as the stickiness of the money and the -- and with that, where they may need to price in order to manage the shift in the mix of the business. We're very much a wealth manager. That's what we do. And they are a combination of a wealth manager and some have a larger exposure to the local business, which generally comes with a bigger scale in that local business and with that, therefore, also a lower cost/income ratio. But Sarah, anything to add? No, we -- just obviously, this is also reflecting the level of investments that we are making in the region. And so as you see us addressing both the revenue as well as the expense, both in the investment side wallet share as well as the banking wallet share, and on the cost side, both our strategic and tactical, we certainly plan to improve. But it will take some time for the mix to start becoming more in line with what you are seeing in some of the peers that you're comparing to. Just one major question left from my side. We had 95% payout in 2022. I was wondering whether we should think about just below full payout as well for this year and this is the main determining factor on how large the buyback can be. Thank you, Benjamin. Thank you for trying again as well. But as you know, we have a very capital-generative model. Certainly, in an uncertain environment for us, the first priority is to have a strong balance sheet. And the second priority is that where we see growth that we can actually support that growth using capital as well. The third priority is that we have a dividend that we want to increase progressively in order to have a good mix between dividends and also share buyback. But since we feel we are undervalued, we find the buyback even more important, and therefore, we came out with this guidance that we have given. And again, I can't give you more than what we have given, which is the over $5 billion that we're confident with. And clearly, as the year progresses and there is further progress on it and we can update you on it as to where we are we think where this is going, we will certainly do so. I have two on Wealth Management. The first one, more on APAC, and we can see that your number of adviser is decreasing despite China reopening and probably a higher level of activity expected. So I wanted to know, how do you intend to capture this higher level of activity with potentially less advisers? And the second one is on the U.S. I'd like to know if it's possible to get a bit of color regarding the breakdown of your net inflows between an increase of share of wallet from existing clients versus new clients coming in at UBS U.S. Wealth Management. Thank you, Nicolas. So on the first one, we're not really kind of after a specific adviser count, so to say. For us, it is important that the advice that we have, they have the right clients, they have client -- there's right client relationships, they can increase the share of wallet. The productivity of each adviser is important to us as well, and that is what we truly manage on. And we feel that with the current level of advisers, and we continue to optimize that and clearly manage for performance and pay for performance, that we can certainly cope with some of the upside there. And clearly, we will continue to hire the right advisers as we have been doing up to now, and we will continue to do so also going forward. And on your question for the U.S., you can think of the inflows for this quarter as being about half-half related to net recruiting versus same store, and same store usually is exactly with the same clients. So that gives you a sense. Yes, I've got one on Global Wealth and one on litigation. So Global Wealth, actually just to follow on from the previous question, but in terms of the U.S. adviser numbers, I think you talked last quarter about having a strong hiring pipeline, but actually the adviser numbers look like they've dipped in the fourth quarter. So if you could just talk to what the hiring plan looks like for this year in the U.S. on the adviser front? And the second question, on litigation. The French tax case, it looks like the wording in the 4Q report is pretty much identical to the 3Q report. Is there any update on timing at all on that particular issue? Yes. On the second one, so what you have read is what you have read, and that is what we disclosed. And I can't give you more color there. Otherwise, it would have been in the disclosure anyway. So you read it well, Piers. On the first one, also there, we have a -- we will continue to recruit in the U.S. It's just that in the last year, when the markets were so high, we basically held back on recruitment in the first quarter and also the second quarter a bit. Because with every recruitment, you basically -- I mean you have to pay for the business they bring. So at that moment, we held back a bit and then we accelerated the recruitment, and we will continue the recruitment of FAs in the U.S. As I said, it's very important for us to get the FAs that come in at the level of productivity that is basically the market bench for us, right? So we are a market leader in terms of FA productivity. We want to keep it at that level as well. And therefore, we have to continue to kind of train our FAs, support them as well on one side; but in the other side, also recruit new FAs that come in with a higher productivity level, that come in with the higher wealth clients and that are in areas where we expect the wealth growth to be the fastest; so with that, therefore, also deliver that productivity. So no specific plans other than continuing to further improve the FA productivity, as we have been doing over the last couple of years. And actually, over the last couple of years, you've seen our FA count going down, while productivity continued -- overall productivity continue to be at least the same level, and that's where you saw that shift towards higher net worth individual clients, a higher productive FAs in geographies where we expect wealth to grow as well. And that is basically a campaign that we'll continue to run. Okay. In absence of further questions, let me thank you for being with us this morning. As Sarah and I noted, we delivered good results this year and continued to show our strategy performance well across the cycle. It was by no means an easy year, but it was a year of many achievements and strong execution across the regions. And I think that our pledge to stay very close to our clients, make sure that we can advise them through challenging times as well that, that creates the momentum that you have seen also in the fourth quarter and throughout the whole year. Now while macroeconomic outlook remains uncertain, our strategy and what differentiates us as UBS is clear. We're the only truly global wealth manager. We have outstanding client franchises. We have geographic diversification, which is very helpful. We underpin all of that by disciplined risk management, also disciplined cost management. That's what you have seen over the last couple of years as well with our savings program and executing on that savings program and actually increasing the savings program now as well. Our capital position is strong. Our balance sheet is healthy, and that puts us at a great position to serve our clients, deliver strong capital returns to our shareholders in the next year as well. Ladies and gentlemen, the webcast and Q&A session for analysts and investors is over. You may disconnect your lines. We will now take a short break and continue with media Q&A session at 9:45 U.K., 10:45 CET.
EarningCall_965	Good afternoon. Thank you for standing by. And welcome to the Wolfspeed Incorporated Second Quarter Fiscal Year 2023 Earnings Call. Currently, all participants are in listen-only mode. All lines have been placed on mute to prevent any background noise. After the speakersâ remarks, there will be a question-and-answer session. [Operator Instructions] We ask that you limit yourself to asking one question and one follow-up. Thank you. Please note todayâs call is being recorded. I would now like to hand the conference over to our first speaker today, Tyler Gronbach, Vice President of Investor Relations. Please go ahead. Thank you, and good afternoon, everyone. Welcome to Wolfspeedâs second quarter fiscal 2023 conference call. Today Wolfspeedâs CEO, Gregg Lowe; and Wolfspeedâs CFO, Neill Reynolds, will report on the results for the second quarter of fiscal year 2023. Please note that we will be presenting non-GAAP financial results during todayâs call, which is consistent with how management measures Wolfspeedâs results internally. Non-GAAP results are not in accordance with GAAP and may not be comparable to non-GAAP information provided by other companies. Non-GAAP information should be considered a supplement to and not a substitute for financial statements prepared in accordance with GAAP. A reconciliation to the most directly comparable GAAP measures is in our press release and posted in the Investor Relations section of our website along with a historical summary of other key metrics. Todayâs discussion includes forward-looking statements about our business outlook and we may make other forward-looking statements during the call. Such forward-looking statements are subject to numerous risks and uncertainties. Our press release today and the SEC filings noted in the release mention important factors that could cause actual results to differ materially, including risks related to the impact of the COVID-19 pandemic. During the Q&A session, we would ask that you limit yourself to one question and one follow-up so that we can accommodate as many questions as possible during todayâs call. If you have any additional questions, please feel free to contact us after the call. Thanks, Tyler, and good afternoon, everyone. Before we get into the results of the quarter, Iâd like to take a moment to remember our late founder and CTO, John Palmour. We had a celebration of life last weekend, during which we announced that we would dedicate our Siler City manufacturing facility in his memory, naming it The John Palmour Manufacturing Center for silicon carbide. All of us knew John, through his nickname JP, and so the nickname for our facility will be The JP. He worked for over 35 years to advance and promote silicon carbide and largely as a result of his efforts, the world is recognizing its potential. We believe that silicon carbide is on the cusp of mass adoption and that our long-term outlook remains on track. First, electric vehicles were the bright spot in the auto market in 2022, despite many headlines that auto sales have slowed. Global EV sales grew more than 65% year-over-year and represented 10% of the portfolio [ph] in the calendar year. We have seen this overwhelming demand play out at Wolfspeed, as our recent partnerships with industry leaders such as Jaguar Land Rover and Mercedes-Benz point to the strength in the demand for EVs and our ability to take share in this space. We remain confident in the industryâs strong long-term fundamentals and believe Wolfspeed is best positioned to capitalize on the rapidly growing demand. Second, our $1.5 billion of design-ins in the quarter point to continued robust demand for our power devices. To-date, 46% of our design-ins have converted to design-ins, representing more than 1,800 projects. We are coming off multiple quarters of record design-ins with a total of more than $16 billion of design-ins over the last three years. Now of course, there will be some variability in our design-in numbers from quarter-to-quarter based on timing of new agreements and decisions by customers. We anticipate that as our manufacturing capacities expand with new facilities, we will continue winning in the device marketplace. Third, we continue our market leadership position in the materials business, the aspect of our business with the highest barriers to entry. We recently announced an expanded agreement with another leading supplier of silicon carbide materials, which illustrates the intense demand for silicon carbide. From where we sit, the industry remains supply constraint and this will continue to be the case for the foreseeable future. It is clear to us that the opportunity in silicon carbide technology is generational given the pace of adoption we have experienced over the last few quarters. At our Investor Day, I remarked that I have not seen growth like this in my 30 years in semis and that view has not changed. While customer interest remains strong across both materials and power devices, as we discussed previously, silicon carbide production and manufacturing can present challenges along the way. Our Durham crystal growth operation, which is the worldâs largest silicon carbide materials factory, currently supplies our entire device business and a significant share of the merchant market. However, that is still not enough to support the massive accelerating demand for silicon carbide. With the intense growth in demand for both captive and merchant wafers comes to challenges of growing our materials output as well. We have continued to refine our crystal growth operations and had a recent breakthrough in our ability to grow taller bulls. The initial challenges in managing these taller bulls in our back-end processing have been resolved resulting in significantly higher yields. It will take a few months before we return to normal production schedule for these materials as the improved product makes its way through the WIP, but we are encouraged by the results that we have been able to achieve with these taller bulls. Long-term, The John Palmour Manufacturing Center for Silicon Carbide is critical to addressing the supply-demand disconnect that will support our expanding device footprint at both Mohawk Valley and a soon-to-be announced fab, as well as the ever growing demand for merchant wafers. Construction of The JP is progressing well since groundbreaking in September and things remain on track as we updated during our last Investor Day. Regarding the progress at Mohawk Valley, we previously said that we anticipate revenue flowing through the fab in the second half of fiscal 2023. We remain on a trajectory to meet that target, and that will largely depend on our ability to complete qualifications and ramp the supply of 200-millimeter wafers, which we believe we will achieve. We continue to successfully run test lots through Mohawk Valley, which gives us confidence that we are ready to begin scaling production and recognizing revenue from Mohawk Valley in the fourth quarter of this fiscal year. As a reminder, Mohawk Valley is a first of its kind fab, purpose built to produce next-generation silicon carbide power devices. We are in the final stages prior to scaling production in Mohawk Valley and one of my top priorities over the next few quarters is to ensure that we execute on that plan. We have a strong team and clear strategy in place and are confident in our ability to deliver strong results for our shareholders. While there may be some variability in our short-term results as we qualify and scale the worldâs first 200-millimeter silicon carbide device fab, while also scaling the first production of 200-millimeter silicon carbide wafers, we are well positioned to capitalize on the explosive growth that we see through the end of this decade. Thank you, Gregg, and good afternoon, everyone. During the fiscal second quarter of 2023, we generated revenue of $216 million at the low end of our guidance range, which represents a 10% sequential decline when compared to the $241.3 million in the fiscal first quarter of 2023 and growth of approximately 25% year-over-year. As Gregg mentioned, we continue to see strong demand for our silicon carbide solutions. However, the supply chain issues we discussed last quarter caused variability in our quarterly revenue in the second quarter with equipment spare part shortages limiting our Durham fab output, while at the same time, we continue to work through the ramp of our taller 150-millimeter bulls. I am pleased to report that we have made significant progress on both issues and they are currently processing these improvements through our production cycle. In terms of our power devices, which grew approximately 48% in the quarter versus last year, we saw strong performance ahead of our expectations mostly resolving the Durham spare parts supply chain issue we discussed last quarter. From a power device supply perspective, we now believe that we have achieved full capacity in our Durham wafer fab and virtually all future topline growth for power devices will come directly from the Mohawk Valley fab. From a materials perspective, we made very significant progress in improving yields on our taller 150-millimeter bulls. These yields are now comparable to our historical yields on shorter bulls. However, back-end wafer processing cycle times recovered later in the quarter than anticipated, resulting in lower than expected Q2 revenues for our materials products. We believe this past quarter represents the bottom of the revenue trough related to this issue as we exited the quarter at yields, cycle times and shipping rates that will all support future materials revenue growth. During the quarter, we also saw weaker demand for RF products due to secular headwinds with recession related pullback in 5G demand. This resulted in lower than expected revenue for RF devices, which we expect to remain weaker in the second half of this fiscal year. Non-GAAP gross margin in the second quarter was 33.6%, compared to 35.6% last quarter and 35.4% in the prior year period, representing 180-basis-point decline year-over-year. Gross margin was negatively impacted by the previously mentioned lower yields on the taller 150-millimeter bulls and lower output of the Durham fab due to the supply chain challenges. While we made significant progress on both issues in the quarter and expect to see improvement moving forward, they both represented a drag on gross margin during the second quarter. In addition, RF devices continue to be dilutive to our consolidated gross margin. As we discussed, because of the immense demand for our power devices, we have not been able to optimize the RF manufacturing footprint as we had previously planned. We expect our RF product line will negatively impact our consolidated gross margin by approximately [Audio Gap] basis points for the next few years. As a result of these items, we generated adjusted earnings per share of negative $0.11 in the fiscal second quarter, compared to negative $0.04 a quarter ago and negative $0.16 in the same period last year. Notably, adjusted EPS this quarter was favorably impacted by approximately $0.05 of non-repeatable events in other income and tax. Excluding these non-repeatable items from our earnings, we would have been at an approximately $0.16 loss per share during the quarter. Before I discuss our guidance, I will provide a quick overview of our balance sheet position. We ended the quarter with approximately $2.5 billion of cash and liquidity on our balance sheet to support our growth plans. DSO was 62 days, while inventory days on hand was 161 days, which is 26 days higher than Q1. Free cash flow during the quarter was negative $171 million, comprised of negative $67 million of operating cash flow and $104 million of net capital expenditures. During the quarter, we incurred start-up costs primarily related to the Mohawk Valley fab ramp, totaling approximately $38 million. Moving forward, we expect overall startup and underutilization charges for Mohawk Valley to wind down as we ramp the fab included a non-GAAP adjustment for these startup costs in the reconciliation table in our earnings release. In terms of our capital needs, since we last spoke, we have made great progress in securing funding for our greenfield facility construction and long-term capacity expansion plan. In November, we announced a successful convertible note offering anchored by one of our largest strategic partners BorgWarner. We were extremely encouraged by the demand we see in the marketplace and believe it sets us up well to secure further funding. Additionally, we are still evaluating other avenues of additional funding, including government funding in the United States and Europe, as well as upfront customer payments or investments, the capital markets and debt. As we stated previously, cost of capital and potential dilution is top of mind for us when we are pursuing additional capital. Now moving on to our fiscal third quarter outlook. We are targeting revenue in the range of $210 million to $230 million. Our revenue guidance reflects continued strong demand, as well as supply execution improvement in both our power device and materials product lines, partially offset by continued softness in RF demand. Our Q3 non-GAAP gross margin is expected to be in the range of 32% to 34% as we expect to see some improvement in both power device and materials products, offset by RF weakness due to the lower volumes. We expect non-GAAP operating expenses of approximately $98 million to $100 million for the third quarter of fiscal 2023. We expect Q3 non-GAAP operating loss to be between $22 million and $30 million, and non-operating net loss to be approximately $3 million. We believe that we will realize approximately $5 million to $7 million of non-GAAP tax benefits as a result and expect Q3 non-GAAP net loss to be between $15 million and $20 million or a loss of $0.12 per diluted share to $0.16 per diluted share. Our non-GAAP EPS target excludes acquired intangibles amortization, non-cash stock-based compensation, project transformation and transaction costs, factory start-up and underutilization costs and other items as outlined in our press release today. As always, our Q3 targets are based on several factors that could vary greatly, including supply chain dynamics, overall demand, product mix, factory productivity and the competitive environment. Thanks, Neill. Despite some macroeconomic pressures on the silicon semiconductor market, we are confident in our long-term outlook and the strong secular trend for the demand for silicon carbide. Our design-in number continues to be robust and the opportunity pipeline remains at a staggering $40 billion. We have a strong pipeline of design-ins across a wide range of applications, including automotive, industrial and energy. We are increasingly well positioned to capture a significant share of this opportunity and are committed to investing in the necessary infrastructure to support our growth. As far as our infrastructure goes, our focus on ramping Mohawk Valley will allow us to better scale our power device production, while our 200-millimeter materials capacity also scales. The learnings from Mohawk Valley have given us a blueprint on how we will approach the construction and ramp of our next fab. We should have an update for you on those plans very soon. The immense demand for both merchant and captive materials gives us further confidence in our decision to expand the Durham materials footprint and build The JP, dramatically expanding our materials capacity. This factory will be a game changer for our business and will allow us to increase supply at unprecedented levels compared to what is currently in the marketplace. We were encouraged by our convertible note offering in November and we are focused on effectively deploying this capital to further our capacity expansion plans and generate returns for our shareholders. Now there will be challenges as we ramp our new facilities, but we will attack them quickly and use our 35 years of experience to resolve them and keep progressing forward. Yeah. Hey, guys. Thanks for letting me ask a question. I -- Gregg, I wanted to ask about the revenue levels that came into the December quarter relative to perhaps what we were thinking. You talked about a couple of things, you talked about some bull-related issues, there were some equipment issues with your older fab in Durham and then you also talked about back-end issues in the materials business. I was curious if you could help us think about maybe what -- I am not asking for exact splits, but what the contribution was, the revenue miss from maybe each of these factors or if there was one that was materially bigger than the other? And also I noticed that the cadence of guidance going forward is a lot smaller than what you typically give. Your midpoint is only $4 million, $5 million higher. Is that because you are being conservative or you use -- you want to get a bigger better handle on these issues before you go back to guiding sort of bigger increases? And then I have a follow-up. Hey, Harsh. This is Neill. Let me take a shot here to start. Thereâs a -- like you said, thereâs a lot of moving pieces here. Let me just unpack that a little bit and then maybe think a little bit about where we are headed moving forward just based on some of the comments you made there. So, first of all, let me just say, overall, we are continuing to see very, very strong demand across both power devices and materials. And as we previously discussed, for both of those areas thatâs going to be much more of a supply situation rather than it being a demand situation. So bringing on supply is really the critical focus there. But what we did see in the quarter was a weakening in RF. RF markets were weaker. We did see some orders pushed out in the quarter. I mean, if you look back just back to Q1 versus what our outlook is this quarter, itâs approximately a 25% decrease. So as you look into Q3 and Q4 and even in the back half of the year, itâs about a $15 million decrease in revenue versus what our prior kind of expectations are. So weakening from a demand perspective and RF is a piece of this. Now you pointed out a couple of other areas. We had two issues last quarter we talked about. One was the lower yield than the 150-millimeter bulls and the taller bulls is on 150-millimeter. As we said in the prepared remarks, those issues have been resolved from a yield perspective. It took a little bit longer in the quarter to get to the cycle times and throughput. So we built a bit of inventory. So the shipping rates at the end of the quarter were a little bit slower. We saw that in increased inventory, but essentially, we are at the bottom of that issue, and we are on our way back up. The last one there was just on the Durham fab. So from a Durham fab perspective, we had some supply chain issues. This actually came in better than we anticipated. But for all intent and purpose now, the Durham fab is capped. We talked at Investor Day about a $400 million annual revenue coming out of Durham fab for power devices. Thatâs about $100 million a quarter, and we are going to be capped on that until we start ramping up Mohawk Valley. So I would think about future significant builds in revenue from a power device perspective are going to be coming from ramping up Mohawk Valley. And Harsh, I would just add to that, we are at an inflection point right now where we are running material through Mohawk Valley. We are planning for revenue coming out of that factory in the fourth quarter as we -- fourth quarter of this fiscal year as we qualify the product. The yields that we are seeing on the preproduction runs right now give us substantial confidence in being able to do that, and in fact, they are running higher than we would have anticipated at this point. So we are really, really happy with that. And I think as we ramp this facility, which, again, recall, just three years ago was a field of mud, we are going to see a substantial increase in capacity coming online, which obviously, will help us satisfy that substantial demand thatâs out there. Hey. Very helpful guys. And for my follow-up, actually, itâs a good segue into the Mohawk Valley schedule, so very pleased to hear fourth quarter, which is June quarter of revenue ramp. I have been already getting some questions from investors on how we should think about the revenue scaling to happen there. You have got a lot of pent-up demand, Gregg, and I think, the industry relies on basically two or three guys for much of the production of the vertical production, two guys actually, you are one of them. And so help us think about, if possible, how the scaling will happen for that fab as the rest of the calendar year goes on? Well, I will kick it off and then Neill can talk a little bit more detail. So we are anticipating revenue from that fab kind of think of it in the single-digit millions of dollars in that June quarter in the fourth quarter and then we would be ramping up beyond that. We are ramping up the supply of the 200-millimeter wafers for that at the same time. Thereâs probably going to be some puts and takes, and we will also ramp it up and I would describe it as a methodical process. So itâs not just sort of turn on everything at once. But we are very, very pleased with whatâs happening with the yields, as I mentioned, both the device yield and the process yields are looking really, really good right now. We expected that to eventually be the case. Itâs actually happening earlier than we anticipated. Yeah. And just to kind of frame up the revenue, as Gregg said, we thought we would probably have around single-digit kind of millions of revenue, maybe even in Q3 and more substantial growth in Q4, we start to ramp up the fab. We will see that push out about a quarter at this point. But itâs going to be a lot of moving pieces. Look, we are bringing up the first, as Gregg mentioned, the first 200-millimeter substrates, we are bringing up the Mohawk Valley fab for the first time. We are in the middle of qualification lots. We are matching that up with customer schedules in terms of qualification. So a lot of moving pieces. So that will probably create some variability here as we move forward. But from where we sit today, we really are on the cusp of bringing this project we have been working on for multiple years and bringing it to reality. Hey, guys. Good afternoon. Thanks for taking the questions. Maybe just a follow-up on Harshâs question, because thereâs been a lot of intense focus around the exact timing of Mohawk Valley ramp. Neill, you said thereâs a bit of a push out here, as you alluded to, I think, people are expecting some minimal revenue in the March quarter and then ramping through the back half of fiscal 2023. Now itâs June. So itâs a quarter behind. Is this a bull back-end processing issue, is it customer calls taking longer? I guess just a sense of maybe pinpointing what the issues are, I know thereâs moving pieces, but it almost sounds like as you are navigating this. Maybe frame for us kind of how you feel about the June quarter, these issues not repeating and maybe having even further push outs? And then I have a follow-up. Yeah. Thanks a lot, Brian. I would say that we are ramping this in kind of a conservative type way. We are bringing together, first off, the worldâs first 200-millimeter silicon carbide wafer fab on the worldâs first 200-millimeter silicon carbide wafers. So thereâs a lot of variability in here. We are very, very pleased with whatâs the results side of the fab right now. But the last thing we want to do after three years of hard work has sort of dropped the ball right as we go into the end zone. So we are going to ramp it up in a very methodical way. We have got material running through the factory right now. As I mentioned, itâs looking really good. We anticipate qualifying it and then shipping this first few millions of dollars of revenue in the June quarter. We have got customers lined up for that and then we will begin -- and then we will be ramping in the following quarters as well. So I think we feel pretty confident at this point that we will be able to do that. Thereâs going to be some puts and takes. We still have to qualify. But based on all the data we see today, we feel pretty confident in that. Okay. Fair enough. And then a follow-up for you, Gregg. I think you mentioned the design-ins, I call it, a 46% kind of conversion number. I think you were talking about in terms of projects. So I am taking that to assume its units. Is there somewhat of a kind of similar conversion metric you can provide in terms of design-ins to revenue, just whether thatâs in the quarter or something you have seen cumulatively and if thatâs sort of the right framework to think about success on the design-in pipeline going forward? Thank you, guys. Sure, Brian. So when we talk about that 46% number, thatâs the 46% of the design-ins that we have, have transitioned from design-in to design win, which means we are starting to ship initial production volume. So itâs a percentage of the projects, itâs not a percentage of the total dollars, itâs a percentage of the project. So think of it as 46% of the projects that we have won, where customers have given us a design-in have now transitioned into that initial phase of production ramp, which is really remains an astounding percentage to me. Itâs a lot faster than I would have anticipated. Most of those are going to be more industrial-type projects, because they typically have a shorter ramp profile compared to automotive, but we are seeing good traction on the automotive ones as well. So thatâs how to think about that. Okay. But presumably unless the project values, the project scope were to change, the projects converting at 46% or so would also translate pretty similarly on a dollar basis? Yeah. And what we do from a forecasting perspective is, we start with, obviously, our overall opportunity pipeline and then we have design-ins. And when we look at going from design-ins to revenue, we put a pretty conservative filter on that, assuming some projects arenât going to make it all the way through, some customers are going to not go into production with the project, a lot of things can happen in between now and then. So we have put a pretty conservative factor on there in terms of kind of framing the revenue compared to what the design-ins are and that 46% number gives us a lot of confidence in the amount of conservatism we have had on that. Hi. Thanks for taking my question. I guess for the first one in near-term and then maybe a longer term question on the second one. I know last quarter, there was the guidance about sort of exiting fiscal 2Q or the December quarter at roughly $1 billion run rate of revenue and based on sort of your commentary today, it seems more you are saying the scaling to that $1 billion sort of revenue run rate even when we think about fiscal 4Q, if you sort of put Mohawk aside, is maybe a bit difficult because RF demand has moderated and essentially your Durham has a bit more gap in terms of power devices. Am I getting that right, in terms of even moving sequentially from higher from March to June, it sounds like you are saying itâs a bit more limited in terms of getting to that $1 billion run rate or is that unchanged? And then I have a follow-up. Yeah. I think thatâs mostly correct. So let me just maybe just frame it up a bit just to make sure we are all kind of on the same page here. I think as we looked at this back in October and we were looking at this quarter, given the taller bull yield issues, the supply chain challenges and the Durham fab, our anticipation was to be maybe meeting that kind of $1 billion run rate, kind of $0.25 billion revenue number run rate sometime during Q3. As you can think about that as 2.25 -- between 2.25 and 2.50 sometime in Q3. Now RF has been a drag on that with the demand is about $15 million a quarter and we did anticipate having some revenue from Mohawk Valley, some smaller amounts potentially in the quarter, and that has now pushed out. So as you start to think about revenue timing going forward, with Durham now, I would say, essentially capped in what we had here, we see the RF numbers kind of staying lower. We are going to get a little bit of benefit off of the better yields and shipping rates in materials. So what we will see here is itâs really going to be a function of when and how we ramp Mohawk Valley. So essentially our revenue and even our margins for that matter will really be a function of the timing of Mohawk Valley. So it will be somewhat limited in the amount of revenue we can drive in the back half of this year outside of RF until we start bringing on more supply from Mohawk Valley and that timing is -- I think all roads are going to lead Mohawk Valley in that sense. Okay. Got it. And for my follow-up, I saw in your press release, you announced the partnership that you have with ZF and their press reports out there indicating you have agreement in terms of a new plant in Germany. Sort of maybe sort of a two part, one, sort of it seems like what you are indicating is you havenât really confirmed I made a decision yet on the new fab in Germany, and secondly, sort of tilting more towards Tier 1 suppliers like ZF and BorgWarner with some of your capacity announcements. Is that a change versus how you wanted to go to market with more sort of direct approach to the OEMs in the past? Just curious sort of given that more recently you have been more sort of announcing engagement with the Tier 1s? Thank you. Yeah. Thanks for the question. And recently, in fact, in early January, we made an announcement together with Mercedes. So we have had a consistent sort of theme of both Tier 1s and the OEMs in terms of announcements. OEMs that have been announced have been General Motors, Jaguar Land Rover, Mercedes. Tier 1s, of course, ZF, BorgWarner, number of others as well. So thereâs no change in that. I think we have been pretty consistent that we have been winning long-term agreements with both the OEMs and the Tier 1s, and as this transition from internal combustion engine to EV has such a dramatic change for the automotive makers, I think, you are going to see a lot of engagement in both of those. In terms of our next fab, we mentioned at our Investor Day that the demand for our products is so strong that we need to have a new fab in place kind of ramping up in the 2027 timeframe. If you subtract then from that the amount of time it would take us to build and ramp that factory. It says that we need to be starting to put that thing in place in 2023. And so what I would say is, just kind of stay tuned for that. We have got a lot of work going on there and as we make announcements on that, we will be able to comment on it. Hey, guys. Thanks for taking my question. I had a follow-up on the potential for new silicon carbide wafer processing facility since you brought it up in your prepared remarks, Gregg, I will probe a little bit deeper. The potential for that with a joint venture, would that mean the joint venture partner would take the bulk of the output of that facility, if not all of it, not too dissimilar from BorgWarner and Mohawk Valley? And how would such a build impact fiscal year 2024 CapEx relative to prior communication? Yeah. So, what I would say is, we really canât get into a lot of details on that. I would say just kind of stay tuned on that and then we can be very, very clear. And I will add there, Gary, just from a CapEx perspective, when we laid out the plan again of October as it relates to CapEx, I mean, as I have mentioned before, that really includes everything. We knew at that point we would need a second fab and a materials facility. And what we have laid out from a capital planning perspective includes all of those things and right now we donât see that any differently. Got it. Got it. And for my follow-up, when you announced Siler City, I believe the communication was that all that 200-millimeter output would be consumed internally. Has that view changed at all or will you be supporting some of these merchant LTSA wafer supply agreements with some of that output? And then maybe if you can just give us a sense of the trajectory of your wafer-related shipments based on some of these new LTSAs? Yeah. So basically we are at the early phase of really ramping up 200 millimeter and we are doing all we can to ramp it up and feed the Mohawk Valley fab. And we are also doing all we can to drive the cost and the commercialization of that product to a point where we can decide at that point what makes sense from a long-term agreement perspective. At this point, itâs looking like the vast majority of what we will do at The JP now will be 200 millimeter. We do have the ability if we wanted to, to run 150 there and so if there was continued need and demand for 150 millimeter, we could do that at The JP facility. But, yeah, the vast majority of what we are going to be doing in The JP is going to be the 200-millimeter. Thanks so much. Folks are getting a little bit more mature in the auto industry around their platforms. Can you talk a little bit about the cycle times that you are seeing in terms of some of the design-ins as they look at scaling some of these platforms into multiple vehicles and moving into multiple geographies? I would say we are seeing a couple of different things. First off, the cycle from when a customer begins thinking about implementing a new platform to when it goes into production, is still in that kind of that four-year to five-year range, I would say. Some of the more startup type companies can be a little bit faster, but thatâs kind of the range. What I would say is happening, though, is customers are taking the platform that they are going to use for vehicle X and they are reusing it for vehicle Y. And so obviously, the cycle time for that is dramatically shorter to be able to just kind of rinse and repeat and reapply the same platform for another vehicle. And we have seen that numerous times across just about, I donât know, about all of our design wins, but many of our design wins, we have seen where we were in one platform and now we are in two and now itâs four, and I think that kind of is driving some of the steeper ramp that we are seeing in the demand for the product. All right. Thatâs super helpful. And then in terms of some of the industrial applications, are you seeing anything new on the horizon that are real accelerants in terms of demand for you guys? Are there areas outside of automotive that are real highlights that we could think about as demand overs for fiscal 2024 and 2025? Yeah. We are seeing a lot of different applications. They tend to all be small individually and collectively they can be large. Thatâs -- anything thatâs basically converting energy at a high power high voltage range is really making a move towards silicon carbide. We are seeing that in solar systems. Wind systems are doing the same thing in terms of green energy server farms. We have got design-ins into non-vehicle, but other transportation applications like vertical takeoff and landing equipment and personal watercraft is another example where people are -- customers are designing it in. So, yeah, we are seeing it across a large number of different kinds of industrial applications. And in this regard, itâs really the exposure we have to that is really led by Aero. Thatâs done a really terrific job of getting us access to their footprint to be able to engage with customers. From a sales perspective, we have a relatively limited footprint in Aero, thatâs the largest sales footprint in the world and so they are able to go after customers across all different geographies and sizes to be able to penetrate that market and evangelize silicon carbide. Hey. Thanks. Hey, guys. Thanks for taking my questions. Gregg, first one to you, if you would, hey, and I donât want to trivialize how difficult it is in terms of what you are doing with 200-millimeter, but as you have sort of -- as we have gone through this process over the past three years and kind of forging this path, are there any lessons that you can share in terms of areas that things have kind of gone better in areas that maybe have gone a little bit worse that kind of gets you to the end result? And I am asking this question kind of on the eve of or in the -- when you do announce that second fab, how to sort of gauge time line relative to this first fab? And then I have a follow-up question. I would say a couple of things. First off, we built this fab during a crisis and we werenât expecting that. And nevertheless, three years from when it was a field of mud to today, we are beginning production. Itâs actually quite astounding, I think, what the team has accomplished. So, and I think they did that through really a good plan, but probably more importantly, a good adjustment when we were thrown curve balls and so forth, and you guys remember all those curve balls were. The second thing that I would say is from a super positive side of things, the decision to go fully 200-millimeter and to go fully automated was really solid. Originally, we were saying, well, maybe we will start it at 150 and then convert it to 200. I think that would have been such a distraction. We had to get to a point where we were confident in 200. But we did get to that point, oh, gosh, it was maybe two years ago I think. And I think kind of thank goodness, we did that because I think it would have been really difficult to convert a 150-millimeter fab to 200-millimeter. And I think the automation has been just stunningly awesome for us. I was talking to the team about process yield expectations and so forth, and the fact that we donât have humans interacting with these wafers that can be pretty brutal has been really positive. So I would say thatâs all -- I think those are some of the positive things. I think we have had obviously a number of different challenges, but the -- but I think the experience of the team has allowed us to kind of clear those challenges quickly as well. Got it. Thatâs helpful. And broad segue for maybe you and/or Neill. But as we think about the ramp thereâs -- and it sounds like your strategy -- some strategies are to build high buffer inventory and sort of ramp higher or harder and it sounds like you are still taking a very methodical approach just by the in terms of the ramp-up. But I am wondering if you could help us understand, if ramping on lower volume, you are going to be taking on the fixed cost and depreciation on a unit number, so or a unit basis, which I would think will have kind of a near-term headwind from a margin but how should we think about the crossover of those vectors, because at 200 millimeters you are going to have a fundamentally lower cost basis. So is that sort of a 40% load or utilization or 60% or where do you see that crossover where what might be a little bit of a headwind all else equal kind of becomes that tailwind to really accelerate things? Thanks. Yeah. I will kick it off and then kick it over. I will start it and then kick it over to Neill. We are definitely taking a more methodical approach. And as I mentioned before, we are in really good shape right now, we have got yields that are looking really nice right now and the last thing we want to do is just turn the accelerator too hard and kind of mess it up at the end here. So I think we are in the mode of letâs do this in a methodical way, letâs take it step-by-step. We are really pleased, I said, with the yields that we are seeing out of this, we will be qualifying the product in the fourth quarter and shipping to customers and then we will turn on the fab kind of step-by-step. Yeah. Just from -- just the overall cost and I think fixed cost absorption, I think, itâs kind of where your question is going, Jed, in terms of bringing on factory for the first time. First of all, I think, I donât know the exact number, but I think if you recall from the Investor Day, we said Mohawk Valley kind of breaks even. At least from a cash perspective from kind of that 30% to 40% kind of utilization level, which I think is probably still valid. Everything we are seeing now from wafer cost yields to the overall cost structure of the fab all looks pretty good. As we move forward, I think, I have talked about this before, what we will do to manage through this kind of early stage ramp is, we currently have a start-up cost that we back out that we give an update on every quarter. We will also think about an underutilization adjustment going forward to get the fab being marked to about 70% utilization and then we will start to wind that down as we build inventory in the fab. So right now, I think, what you see is kind of the peak start-up and underutilization number that will just start winding down over time and that should give people a really good view of what the fab capability is from a cost perspective, even at a relatively low level of utilization and what you see there is when we talk about the fab having die cost itâs 50% lower than our current cost in Durham, thatâs really based on the kind of lower utilization numbers. So we will be able to kind of manage through that. We will give an update on it every quarter, but we think we -- but I think everything I am seeing from a cost perspective thus far, thereâs a lot of confidence in the margins that we will see as we ramp up the fab. Hi. This is Blake Friedman on for Vivek. So just touching on the 5G weakness that was mentioned earlier. Just curious if itâs related to any specific geography and with weakness to continue in the second half, is there any way you can quantify how much you expect second half RF sales to be coming in relative to the first half? Yeah. From an RF perspective, Iâd say, overall, we are seeing a lot of choppiness across the customer base. So it probably depends on which customer each of the suppliers is dealing with. So I donât see -- but I do see some -- we do see flattening or even market weakness across a lot of different vectors as we look across the industry. I said earlier is we see that about a $15 million drag per quarter and -- versus what we had previously expected from a revenue standpoint and I think we will continue to see that as we work through the back half of the year. Got it. And then just kind of quickly to just touching on the CHIPS Act and your CapEx cadence moving forward. Is there any benefits there specifically that you can size or just even high level comments would be useful? Thanks. On the CHIPS Act, we are very pleased with how things have progressed. We are waiting on final regulations to come out, but clearly, not CHIPS Act we will -- I think we will get, like I said, the final regulations will come out, but the investment tax credit that came along with that was very positive as well and we have already started making some of those benefits into our numbers and itâs all in line with what we kind of anticipated when we laid out the plan last October. So no real changes there and we will continue to work with the government on the regulations as it relates to applying for additional funds. Thank you very much. Good afternoon, guys. For my first question, I wanted to ask a bit on the RF business. There was going to be this 100-millimeter, 150-millimeter transition and you guys talked about on the last call and then at the Analyst Day, the margin headwinds that were going to come from maybe not making that transition and that was pretty clear. But as I understood it, the reason for not making that transition was things were so tight in that facilities that you couldnât sort of shut things down to make the transition and if now we are seeing cyclical demand weakness in RF devices. Is there an opportunity to make that transition now and maybe you can just help me square that circle a bit? Thanks. Yeah. Just recall that, that facility also produces our power products as well and so thereâs really not -- although thereâs a little bit softer demand on RF, thereâs really still not that opportunity to make that transition. Got it. Okay. So itâs a shared facility then, Gregg, that you are leaning into any flex for the silicon carbide device side rather than making any transition, is that kind of the way to read it? Thatâs right. And changing out an RF line in a shared facility, it creates a lot of disturbance for everything and we just -- we canât afford to do that for our power device customers. Got it. Got it. That makes sense. As - I guess as my follow-up, I wanted to -- there were some -- we have had a lot of discussion here on the call about the timing of ramping Mohawk Valley and the variables to get there. I just wanted to double click on the 200-mil materials side and how are you guys thinking about the steps needed to really scale there to sort of feed the beast or I am just trying to get an understanding of checking off the boxes to really scale Mohawk. Are the things on your priority list, Gregg, on the material side on 200-mil or do you -- or are they still in the Mohawk Valley devices side and sort of where the variables are to the ramp? Itâs definitely both. And so we have got -- we are working, obviously, the fab itself and I have given you inputs on that, that thatâs going pretty well. A one quarter delay on revenue, notwithstanding, we feel real good about whatâs been going on there. We are expanding capacity on our Durham campus as we speak and turning on additional capacity this week for more to be able to feed more product into Mohawk Valley. We are -- that expansion kind of took over, I think, it was a basketball court and some other facilities and turned it into a 200-millimeter silicon carbide crystal growth operation in what we call Building 10. And then, of course, the big dramatic increase in that is going to come with the construction of The John Palmour manufacturing center for silicon carbide or The JP. That expansion we are estimating is going to increase our capacity by more than 10x. So itâs a giant capacity expansion and we are super happy that we made the decision back in September to kick that thing off. And to put things kind of in perspective, we made that announcement on a Friday at The Governorâs Mansion here in North Carolina and we had earthmoving equipment on site the following Monday. We knew we needed to go from decision to get stuff going very, very quickly. Hi. Thank you. I am filling in for George. Gregg and Tyler and Neill, maybe if you could stick to the demand that is coming from all your design wins and if you are to contrast and compare whatâs happening in Europe versus whatâs happening in the U.S.? Where do you see most demand coming from, especially given the tailwinds of your recent announcement with Mercedes? Thank you. I donât have the exact numbers in front of me. I can say we are winning very well in both the U.S. and in Europe. We have made announcements with GM and BorgWarner, the U.S.-based companies or North American-based companies. We have talked with -- we talked about Jaguar Land Rover, Mercedes setup, a European-based company. Some of those Tier 1s have business across the globe. So we are winning in Asian markets as well. But I donât have the exact breakout. But I would say kind of globally we are winning pretty nicely. Thank you, Gregg. And if we are to look at the $1.5 billion in design-in, is there -- could you assess how much of it has come in the U.S. versus Europe in terms of automotive wins? I donât have that breakout right now. But what I would say is, if it follows the pattern that we have seen over the last couple of quarters, itâs going to be pretty heavily automotive related, kind of think of it as 70%, 75% automotive related and then 25% would be either industrial type applications, RF applications and so forth. I am sorry, I donât have the regional breakout right handy. Thanks a lot, guys. First of all, I think, itâs fantastic, you name the facility after John. I think itâs really, really great, guys. A couple of things. First of all, Neill, housekeeping, can we give us a general breakdown of materials versus devices on this in terms of the revenue or you were not 50-50 yet, but can I get a general idea of where that is? Well, like I said, let me just point out a couple of things, Ed. So the Durham facility is now capped. I said about $400 million a year and that only provides power devices in that number. So about $100 million a quarter were kind of capped on power device revenue until we start seeing more revenue out of Mohawk Valley. Then from an RF device perspective, we are down about 25% from our peak, which back in Q1. So that represents about $15 million a quarter. So I think that should give you the pieces there. $15 million less than our previous expectations. Thatâs roughly, I think, approximately $15 million lower than where we were back in Q1. Yeah. Okay. And so given that itâs capped, given that your RF is all the way down, can you move some of the capacity, I imagine you canât. The RF line canât be converted and RTP cannot be converted to device, so you canât stop up the extra capacity, maybe freeing up an RF with devices and expand your RTP. You said Durham has capped at $100 million, but that didnât include RTP, right, so you have got some revenue coming out of RTP for devices, too, right? Yeah. We have actually -- Ed, we do have some power products going through the RTP facility. We have been working that for a little while to do as much as we can, utilizing some of the machines out of there, but basically thereâs just no room at the end right now. Yeah. I could imagine. And so if you capped at $100 million there, plus what we get out of RTP, then the real growth is just going to come out of materials, which I understand now that you have got the bull issue corrected could ramp, but until you get Siler City based on, I would expect and correct me if I am wrong, you are going to see rather limited ramp in revenue on materials, even though demand far exceed supply at this point. So that probably means, I am not looking for guidance, but just -- I just want to go a reality check on our kind of big picture view here that, with single-digit millions out of Mohawk Valley in June, we are going to be kind of flattish, slightly up revenue for most of the fiscal year. And then itâs all going to turn as you guess, I guess you said, Neill, on the ramp of Mohawk Valley for any real revenue growth in 2023. Is that a fair assessment? I think thatâs right. Ed, I think, we are going to see some -- we will see some modest pickup in materials as we get better performance off the longer bull. In reality, with the size of what we are talking about here, as Durham is capped, the capability of Mohawk Valley is just going to be tremendous. I think itâs something like 15% Mohawk Valley utilization already could double our power device revenue capabilities, kind of a digital thing here. Mohawk Valley turns on. I think we will start seeing the revenue growth pick up very quickly and if it doesnât, then we will kind of stay in this kind of maybe flattish to modestly up until we start to see that revenue get turned on. But when it does, we are going to see the first $1 million of revenue for a facility that can be north of $2 billion a year. So itâs got tremendous capability. Itâs got -- I think, like I said earlier, all roads are leading to -- we got to get Mohawk Valley off the ground and we are just on the cusp of doing that. Right Itâs clear thatâs the, like you pointed out, the digital, the 1 zero [ph] function here. Margins will probably decline then because as you turn it on, you are not going to have anywhere close to 30% or 50% utilization, so you are going to unutilization. So I appreciate you breaking that out. So I am just trying to get a concept because consensus was way off and it continues to be off here and so I want to get you calibrated for the rest of this year. And then to the point of Mohawk, have you provided customers with product that they are now qualifying or is that to come -- and is that the revenue that you recognize when you hand that over to them to qualify the pay for it? So I am just trying to get idea where we are on customer qualification for the material out of Mohawk Valley? We would give customers qualification material after we qualify and what we have done is we have talked to them about doing kind of parallel qualifications and kind of risk orders out of Mohawk Valley. Thereâs a tremendous amount of demand for the product. So we have got many customers that have kind of signed up for -- they would like to be first and they would have sort of a very rapid qualification process. Typically that qualification -- that second qualification is one where you are pushing pretty hard the customer to do things. We are seeing the opposite impact right now where customers are raising up their hands saying, can they please be first and so we anticipate that, that would go through relatively quickly. Hey, guys. Thanks for taking the question. Just wanted to drill on gross margins a little bit here. I am surprised with the guide down in March now that the kind of bull issue is behind and revenues kind of guided up modestly. So can you kind of talk about the levers you have for gross margins in the March and into the June quarter? And just to understand when you said before, when you rent Mohawk Valley, will that be immediately accretive to your non-GAAP gross margins or dilutive? Thanks. Yeah. So just a quick one on the transition in the margins. Yeah. We did have an improvement in the yield, as Gregg mentioned before, in the taller bulls. We had to get the cycle times to match that. We have subsequently been able to do that as well. But we did have a bit of an overhang there. So we will have some WIP we have got to work through on some of the inventory from last quarter that just got to work through the cycle. So thatâs going to kind of be a bit of a drag. But the underlying performance, Iâd say, both for the materials, taller bulls, as well as the Durham facility, where we had some issues last quarter. So these have worked itself through over the next couple of months and I think underlying performance then will start to improve. So Iâd say a bit of an overhang there from those things, but I think, overall, the underlying performance we should see improving. And then as it relates to Mohawk Valley, as we ramp the fab, we will see -- that will be accretive to non-GAAP gross margins and we will make an adjustment for underutilization there just to make -- just to ensure we can get kind of an apples-to-apples view of what their fab will look like from a quarter perspective and then we will continue to give updates every quarter as to what that number is. Got it. Thatâs helpful. And then as a follow-up, maybe CapEx for the year, given you are spending now in the first half, are you guys still targeting $1 billion net for the year and if so where is that spending going in the second half, can you help us think through what fabs or equipment for Shell and electric stuff [ph]? Yeah. So, yeah, $1 billion for the year. Thatâs correct. We should see a pickup in the back half of that, we have talked about that before. Thereâs some expansions that are going on in Durham right now. Gregg talked about turning on portions of the 200-millimeter. We will continue to expand the 200-millimeter substrate capacity on the Durham campus in and around Durham. Thatâs a big piece of whatâs going on now. And in addition to that, we will be working on bringing Siler City to the next phase and getting that facility completed. So I think those would be the bigger pieces. On top of that, we continue to invest in tools in Mohawk Valley and we will continue to tool that out as quickly as we can. So I think those would be kind of the big pieces of what we are going to be spending in the back half of the year. Great. Thanks for taking my questions. And maybe first just on the Mohawk Valley ramp-up and just trying to understand that, if the yields are ahead of your expectations, why the language now is more cautious on the ramp up? Just trying to understand where exactly is the remaining risk and uncertainty, where does that lie with the Mohawk Valley ramp up given that the finishing line is in size here? And kind of related to that as well, so we have a couple of million in the June quarter. How many quarters would it take to kind of hit that $150 million a quarter run rate to kind of get to help meet the like FY 2024 guide? And I have a follow-up on depreciation. Thanks a lot for the question, David. So we are exactly taking a conservative approach on this, because we are so happy with the results that we see right now. Itâs a -- if we try to jam too much in too quickly, it might cause an issue that is unexpected right now. So we just want to be methodical on that. We are not going to be lazy on it. I mean we are going to be pushing it as hard as it makes sense, but what we donât want to do is over stress it and cause an unexpected issue. We are real pleased with the results right now. Letâs just take it step-by-step and I think we will be well served by that. Yeah. And I think from a timing perspective, like I said, it depends on how many -- how much -- how many wafer starts we can get into the fab and kind of ramp it up at volume and once we do that, you should see a pretty nice ramp-up in revenue. I think we have got the pieces together. Itâs really just a matter of putting it all -- putting all these puzzle pieces together, ramped the 200-millimeter substrate driving starts into the fab, driving the power device back-end performance for test and inspect and all those types of things. So, and on top of that, we have got to match up with customer schedules in terms of what -- when they are going to accept material, we are watching all those variables up. So I think from an execution perspective, I think, it kind of goes relatively quickly, but there are a lot of variables. We just want to be very cautious there in terms of, look, thereâs a lot of pieces to get -- that we need to pull together to get off the ground. We are working through that right now, but if we can get the fab up and running, I think, if you look at the economics of what we are seeing and the technical capability of what we are seeing, that all looks on track. Okay. Thatâs helpful. And my follow-up on the -- just, Neill, on depreciation as you turn on the line in Mohawk Valley now. How should we be modeling on the depreciation side of things? And also just your comment earlier on the underutilization charge, I mean, would we be still excluding that from non-GAAP? Is there a certain utilization level where some of these costs move more into COGS and reflected in the non-GAAP and just if you could talk around that, that would be helpful? Thank you. Yeah. David, we will make a fixed cost adjustment for the depreciation and some of the other fixed costs for about a 70% fab utilization number and then adjust that every quarter. So right now what we had last quarter was a $38 million start-up number. So you can think about that as the run rate cost of running the fab and as we bring up the fab, that number will start to decline over time, and we will take more and more of that into inventory and that will just start to bleed off as we get to higher levels of utilization. Now any other performance cycle time yields, all these other things, I think, everyoneâs interested, that will kind of fall through. So we will have pretty good visibility as to what the performance is of the fab, just excluding some of the fixed costs related to the utilization. Well, thank you for joining us today. Iâd like to welcome Stacy Smith to our Board. Stacy is a great addition. Heâs got career that spans many, many years in the semiconductor industry and spans many different functions, including finance roles and operations roles, sales and marketing roles. So heâs going to bring a wealth of experience to our team and really look forward to locking arms with them as we as we move forward here. We are at an inflection point and very near the ramp in production of the worldâs first and the worldâs largest 200-millimeter wafer fab. We are excited about what itâs doing right now and look forward to continue driving that inflection point forward. Thank you very much for taking the time with us and look forward to chatting with you next quarter. Thank you.
EarningCall_966	Good day and thank you for standing by. Welcome to the Stellar Bancorp Inc. Fourth Quarter 2022 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] Please be advised todayâs conference is being recorded. I would now like to hand the conference over to your speaker today to Courtney Theriot, Chief Accounting Officer of Stellar Bank. Please go ahead. Good morning and thank you to all who have joined our call today. We would like to welcome you to our earnings call for the fourth quarter of 2022. This morningâs earnings call will be led by Stellarâs CEO Bob Franklin and CFO Paul Egge. Also in attendance today are Steve Retzloff, Executive Chairman of the company; Ray Vitulli, President of the company and CEO of the Bank and Joe West, Senior Executive Vice President and Chief Executive Credit Officer of the Bank. Before we begin, I need to remind everyone that some of the remarks made today constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend all such statements to be covered by the Safe Harbor provisions for forward-looking statements contained in the act. Also note that if we give guidance about future results, that guidance is only a reflection of managementâs beliefs at the time the statement is made and such beliefs are subject to change. We disclaim any obligation to publicly update any forward-looking statements, except as maybe required by law. Please see the last page of the text in this morningâs earnings release, which is available on our website at ir.stellarbancorpinc.com for additional information about the risk factors associated with forward-looking statements. At the conclusion of our remarks, we will open the line and allow time for questions. Thank you, Courtney, and good morning. Welcome to Stellar Bank Corpâs fourth quarter earnings call and our first ever combined organization. I will begin by thanking our dedicated staff that is working tirelessly to make Stellar Bank an outstanding organization. This is an all bank team effort and our team is responding to the challenge. We are divided by two operating systems, but we are fully engaged in supporting a successful system integration in February of 2023. Completion of this conversion is an important step in solidifying the combination of our two banks. The fourth quarter provides us with a first look at both our balance sheet adjusted for purchase accounting with market valuations and our income statement, which will provide insight into the expenses associated with our merger along with day 2 provisions. The fourth quarter is one dominated by purchase accounting adjustments, and merger related expenses. Our goal today is to help guide the reader of our financials to a core franchise and reveal the core earnings power created by our combination. We have also been proactive in our decision making, given the current interest rate environment and the economic environment. Throughout the fourth quarter, we look to make business decisions that best fit our current focus on liquidity, capital and credit. First of all, we took care to make proper reserves as we turn into a more challenging economic environment. Secondly, we sold some of our challenge credits, or more challenge credits, which would have been longer term workouts with uncertain outcomes, opting for certainty, which decreased our classified credits allowed and allowed us to realize great values greater than our indicated marks. And having to mark to market the CBTX securities portfolio for the transaction, net we own the securities today at market value. We felt that an opportune time to sell some of those securities and bolster our liquidity. Later, Paul and the team will provide more detail to aid and understanding the changes to our financials. Regulatory approval was a key factor in the timing of our closing between announcement and final approval, the interest rate environment changed significantly by the Federal Reserve increasing interest rates at a very rapid pace. Therefore, the purchase marks that were affected by interest rates have been a moving target. Today, a majority of that work is done. And we have had a chance to review the results. We have never been more bullish on the long term success of this financial combination. Our ability to deliver for our constituencies, our shareholders, our customers, our employees, and our communities in which we operate has never been better. However, in the near term, we cannot ignore the actions of the Federal Reserve is taking to slow our economy and contain inflation. We know from lessons learned in previous cycles to be cautious. The end of this interest rate cycle remains unclear, but we will be vigilant as to the effects on our customers and our operating economic environment. We will stay disciplined and managing our capital, our liquidity and the credit in our bank as we continue to build Stellar Bank. Our franchise resides in one of the most robust economies of the country. Our long-term future is bright, and we will stay determined to increase shareholder value. Our belief is that Stellar Bank is well positioned to deliver on that promise. Thanks Rob. Good morning, everybody. We are very pleased to be reporting our first quarter as a combined company as our merger went effective on the first day of October. For accounting and financial reporting purposes, all of our filings contain comparative information relative to Legacy ABTX financial results with historical shares and per share numbers adjusted for the reverse merger. But given the transformative nature of the merger to create Stellar, I will focus my commentary on the year now of Stellar. Thinking to what we believe are the most salient takeaways from our combined financial condition at the end of 2022, our Q4 operating performance and what it all means for our outlook. Then I'll turn the call back to Bob and he'll open it up for questions. Before diving in, I'll note that while I won't be directly referencing the accompanying investor presentation, there's a good amount of detail included in the presentation regarding merger accounting adjustments, non-GAAP items, and other information. So I'll start with our financial condition, which reflects the impact from purchase accounting and the strategies we executed in the fourth quarter. We ended the year with $10.9 billion in assets after accounting for the merger and results of operations for the quarter. As we previewed on our third quarter call, the fair value purchase accounting adjustments were meaningful given where the yield curve was at the effective time of the merger. The impact of losses in the securities portfolio to equity were already accounted for in AOCI, amounting to $69.8 million after tax. But the impact of bringing the CBTX loan portfolio over at fair value was even more significant as the fair value mark in the loan portfolio totaled $156.4 million and was mostly interest rate related. The combination of these items led to more goodwill resulting from the merger, incrementally impacting capital in tangible book value per share. Going forward will effectively earn that loan mark back through pretty significant purchase counting increasing the loan yield over the life of the acquired land. The next most significant merger accounting adjustment was the $138.1 million core deposit intangible created in the merger. This totaled of approximately 3.97% of core deposits, which is relatively high and reflective of the nature of the yield curve at 930 and the high quality composition of the CBTX deposit franchise. The resulting CDI will be amortized on an accelerated basis over 10 years using some of yearâs digits method. And this expense represents a partial offset to the beneficial dynamic of purchase accounting increasing revenue from the loan mart. The last significant merger related item I'll note is the Day 2 provision of loan losses for non-PCD loans under CECL, which totaled $28.2 million, along with a $5 million Day 2 provision for unfunded commitments on loans running through the income statement. We also bought over $7.5 million in allowance for credit losses on PCD lands, which did not run through the income statement. -- I progress during the quarter, we ended the quarter with $7.75 billion in loans, which after adjusting for the previously mentioned merger related fair value marked on loan reflects an increase in loans over the quarter of around $200 million. This represents what we feel like is an appropriate deceleration of loan growth from prior quarters given current market dynamics. During the quarter, we saw deposits decrease $116.9 million in the quarter from a combined $9.38 billion at $9 30 to $9.27 billion at the end of 2022. $100.7 million of this decrease came by way of interest bearing deposits. Even though we saw an incremental increase in noninterest-bearing deposits totaling $16 million, we feel great about our deposit composition with 45.6% of our deposits being transactional, noninterest-bearing deposits. The cost of our interest bearing deposits has continued to increase reflective of current industry markets and a fiercely competitive deposit market. So we feel very good about how we've been able to manage these dynamics, relatively speaking. Strategically we're really pleased with our balance sheet positioning going into 2023, particularly considering our loan deposit ratio of 83.7% solid capital levels and a strong quarter earnings power to support a healthy go-forward capital bill. Failing [ph] the earnings, our fourth quarter results were noisy. Our bottom line is $2.1 million in net income translating to $0.04 in EPS. These headline numbers were impacted significantly by merger related and non-recurring items, which obscure the continuation of many positive operating trends both ABTX and CBTX brought into the Stellar combination. First, net interest income and net interest margin were extremely strong. Thanks in part, to purchase counting increasing the loan yields. But even after adjusting for this, we're very proud of our revenue profile, notwithstanding market dynamics driving cost of funds upward. Headline NIM was 4.71% and after excluding for scanning accretion, adjusted net interest margin was 4.38%. Purchase counting accretion with $8.2 million in the quarter. The future recognition of purchase accounting accretion will be driven by scheduled and non-scheduled paydown behavior in the acquired portfolio. Our current expectations are for 2023 would be to recognize between $26 million and $30 million of purchase accounting accretion income into yield. This will be partially driven by our expectation that fewer lower yielding loans will pay down early in the current interest rate environment. Walking down the income statement, it's hard not to notice that outside provision for loan losses in the quarter totaling $44.8 million. We hit on this in the merger accounting discussion. But it's important to note that after excluding that pay to PCD provision of $28.2 million on non-PCD loans, and $5 million on provision for unfunded commitments, our quarterly provisioning amounted to $11.6 million, reflective of our more conservative view on credit given an increasing economic uncertainty, loan growth and changes in specific reserves. The total allowance for credit losses ended the year at $93.2 million, or 1.2% of loans. Before moving on, I should note that we did have a higher than usual net charge-off number during the quarter, totaling $5.7 million, of which $4.6 million related to the proactive sale of $35.4 million in month. These most of these loans came over with meaningful marks such that the actual sale netted again, despite the charge-off. This is a good segway into our non-interest income, which was also bolstered by these gains and other gains totaling $4 million. $1.9 million related to the loan sale we just mentioned, about $1 million came from the sale branch assets. And the remainder came from that strategic sale in October of more than $350 million and acquired securities to support our liquidity profile. And we -- Bob mentioned this and we discussed this on our prior earnings call. Moving on to non-interest expense. This is elevated in the quarter due to the recognition of $11.5 million in merger related expenses in the introduction of merger CDI amortization into our expense base, which totaled $6.3 million for the quarter. During 2023 scheduled CDI amortization expense from the merger will total $24.5 million in addition to the $2.3 million in scheduled CDI amortization from prior deals. Holding aside the M&A expense noise in the introduction of CDI amortization expense, we feel very good about our core operating expenses in the fourth quarter, a result of both negative ABTX and CBTX doing an exceptional job holding the line on non-interest expenses in an otherwise very inflationary environment. And we're proud of being able to do this without hindering growth since the merger analysis. From an overall performance standpoint, when you after excluding merger related expenses, and non-recurring, the non-recurring gains, purchase accounting accretion and that CDI amortization, we feel very good about where we set the bar for our adjusted pretax, pre-provision earnings power in the fourth quarter at Stellar -- at $53 million. This represents 1.92% of average assets. We believe this strong core operating earnings power will drive rapid capital builds. And once the non-recurring merger noise subsides, the remaining merger related accounting items will be additive to our core operating earnings power, since we expect merger related purchase accounting accretion to exceed the amortization of CDI trades in the merger. In summary, we feel pretty good about our combined positioning on earnings, liquidity, capital and credit, which we know will prepare us for a wide range of economic scenarios. As we look into 2023 and beyond, we are hyper focused on maintaining the absolute and relative financial and strategic gains from our merger. We feel well positioned to advance and advance our business, notwithstanding the potential challenges 2023 can bring. Thanks, Paul. And we'll be happy to answer some questions around trying to help folks get through this kind of noisy quarter. So, operator, we're ready for questions. [Operator Instructions] And our first question comes from the line of David Feaster with Raymond James. Your line is open. Please go ahead. Hey, good morning, everybody. I just wanted to just start maybe, with if you could just give us some color on the economic backdrop in Houston. Obviously, the economy's strong, but I was hoping you could kind of give us a pulse from your perspective on your client, how demand for loans is trending? And then also your appetite for credit. I mean, obviously, the economic backdrop is a bit uncertain. So where are you seeing? Where are you still seeing good risk adjusted returns? And ultimately, how do you think about loan growth for this year? David, I'll start on that. This is Ray. On the -- the economic background in Houston is still strong. We had -- don't have full 22 job numbers in yet. But that's expected to be somewhere around 150,000 and job growth for the year, which is a strong year. And, maybe tapered down a little bit in December. But there's still, that looks good. Our pipeline going into the fourth quarter, we knew was a little was less than the prior quarter. And that really manifested itself through less originations in the fourth quarter, but still really strong. Think about it, we presented about a billion in the third quarter and on a combined basis. And then about 850 or so in the fourth quarter. So kind of that knowing that the demand had tapered just a little bit in our pipeline, it did manifest that way and originations. I think I'll let Bob talk about kind of how we've, that's kind of the message around our approach to lending, given the uncertainties in the economic environment. But, but overall, we still have a healthy pipeline, even as we think about 2023. And think about our loan growth in 23, even all of that probably still in the low to mid-single digits, but turn it over to Bob. Yes, David, I think what we're trying to adjust to as well, what may happen in the future, which is for us is uncertainty, nobody likes uncertainty. I think we need to be in front of this stuff. So we're, we're enhancing our credit underwriting, making sure that we get to do the right things. And it slows things down a bit. But also in these rising interest rate environments, we see these cycles where at first, these rise -- the rising interest rates are sort of ignored, customers continue to buy at low cap rates, and then they start to find itâs very difficult to get things finance, at the rates that they are trying to buy the assets. So you start to see cycles of really repricing of those assets. So then we get to the point where people are hesitant, because now there's a lot of talk about when the rate is going to come back down again. So you give people I'm going to hold off on my project until maybe rates come down, I don't want to borrow at 8%. So there's a lot of we're in that phase where there's a lot of uncertainty. And so we want to be cautious around that as we move through the cycle, but we still have a decent pipeline. It's not as robust as what we had and in 2022, but we have some pretty substantial loan growth in 2022. So we think we do believe the Fed, we think the Fed is going to continue on to possibly have rates around that five and a quarter number. And so we have to be prepared for the effects of that. So we're watching our portfolio and watching what we put on. Okay, that that makes that makes sense. And kind of along the same line, this is where I think, the timing of the deal was really opportune, just given the economic backdrop. And, so I wanted to get an update, and we talked about the conversion and integration upcoming. I was hoping you could just maybe update us on the timing of the synergies is that timeline still on track, and then, just whether you've identified any other levers to pull just given the increased scale to help maybe decelerate expense growth and whether there's any change to that overall synergy target. No change in the synergy target. It has been invaluable in really offsetting what's been a very inflationary environment. As you know from prior calls, we've been able to hold the line and really pulled through a lot of merger cost savings up to this point there. We're going to be getting perhaps almost all the way there by mid-year. There's a couple of expense items that will drop off to, to absolutely finish things at the end of 2023. But that's relatively low, relatively small compared to the overall kind of success on cost saves. And also, we do continue to have more levers. I appreciate you're hitting on the fortuitous timing of the merger, because we feel like this merger gives us a lot more financial flexibility, going into uncertain times and more levers to potentially pursue additional cost savings. And we're just better off with combined scale to confront these uncertain times. And we'll be better off when we when it's time to get back on offense. Terrific. And so that this this kind of $68 million, you touched on the CDI and some of those impacts, but that's just kind of $68 million run rates, a pretty good starting base on a core basis. Actually, [Indiscernible] high. I look at kind of core expenses. Now that you have the introduction of that very large CDI expense coming from the merger. And core non-merger related and non-redundant expenses in 2022, is probably going to run 265 [ph] over the year, you can chop that into quarters as you see fit. But there's a broad target for us. Naturally, our execution will be a function of what's coming by way of opportunities. We're not going to shy away from opportunities. If the right people and or investments come along in 2023. But currently that's our target, give or take. Got it. And then just last one for me, I wanted to touch on the $35 million in loan sales. Sounds like we're just kind of cleaning things up just given the deal and the uncertain backdrop just kind of getting ahead of some issues, or some potential issues. But just curious, if you give us some color on that? What did you sell? Were these on the allegiance or CVPX side, or both? And then was there any anything unique in this pool where you're saying this is something maybe we want to pull back on or anything? We're a little bit that makes us a bit cautious at this point? Yes David, we had, what's unique to them is it was basically the hangover that we have from COVID. So we had about four or five credits, that were really struggling at post COVID. And we were having to put pretty heavy marks on those credits anyway. They were rocking along, they were still alive and still trying to be worked out. But it was going to be long term workouts for us with real uncertainty as to what the end might be. So we opted for certainty around what those losses might be. And those portfolios as we were able to come inside our marks. So that's that's really why we did. We sort of clear the COVID piece of that. Thank you. And one moment for our next question. And our next question comes from the line of Brad Milsaps with Piper Sandler. Your line is open. Please go ahead. Hey, good morning, guys. Thanks for all the color. Maybe I wanted to start with the coordinate interest margin. Paul, maybe could you give us an updated sense of, kind of what you feel like your maybe loan or earning asset data will be going forward as well as kind of hard to think about the, the interest bearing or the total deposit beta at the combined company, and how that would impact your core NIM? Certainly. Well, we're actually really proud of where our kind of cumulative beta is up to this point. And we've obviously had a measure of acceleration in the cost of funds here in the fourth quarter, but if you a lot of people calculated certain different ways that we're in the low end of the low teens relating to cumulative cycle deposit betas on the overall portfolio. This is hugely benefited from our very large -- spring deposit base. And that's been really powerful and hanging down that overall, holding down that overall deposit data. And ultimately, giving time for our loan betas to move really, our loans are going to be changed as a function of repricing opportunities. And for some loans, we have to wait there. So Ray can probably comment a little more on the composition of the loan portfolio. But we're, we feel good about the overall kind of pace of things notwithstanding the fact that we've seen the cost of deposit start to accelerate a little more to give time for that repricing on the asset side. And there's a little color on the loan yield side or at least average way to write on those loans in the -- for the fourth quarter. Loans came on it a weighted average rate of 664, which was a nice increase from the previous quarter. And then kind of just to sell a little bit of the entire quarter, we did have that towards the last half of the quarter loans are coming on at 690. So feel really good about where the new loan originations are, as far as that rate, the rate on those notes loans. That's helpful. Ray, can you give us a new kind of profile breakdown of kind of variable versus fixed? Stuff that would reprise me all the changes? Yes, so in the combination, obviously, we had community came with a higher concentration of floating in the total portfolio. But on a combined basis weâre around 58% fixed, 42% floating. And I'd have to where we are on the on the floating and kind of breaking through. I don't think I have that handy. Yes, sure. I mean, look like it looked like the lone beta was just under 30% in the quarter. So basically, you're that that should continue to improve as some of this repricing takes place. Right. Got it. Got it. Okay. And then, Paul, just, I think I heard you correctly. It looks like you have about a little over 150 million in discount in total that you'll recognize over the loss of loans, that's versus about 130 million of CDI or so that that you set up? Is that is that the way to think about it? That's the way to think about CDI. We gave you a little bit of guidance as to how that will scheduled expense that will come through. And we've been included that in the investor presentation. And I mentioned in my comments. But we're amortizing that on an accelerated basis. Got it? And then I know you had the loans that you sold and cleaned up this quarter. So that probably drove a little bit higher core provision. A lot of companies and they come together, because of the marks they, maybe have a really low provision, for a certain period of time. Can you sort of help us think about how you guys will be tackling that I know, there's a lot of moving parts with CECL and marks, etcetera. But just kind of curious how to think about sort of your core load loss provisioning? Right. I think where we sit right now is how we're looking at net loan growth in the future. If there's a lot of moving parts that got our provision, pardon me, our allowance for credit losses to 1.2% of loans. But kind of in a rule of thumb as to how we were looking at budgeting, we, we think that's appropriate for net loan growth expectations in 2023. There was a lot that went into it. And a big piece of that is a little bit of overseeing the economy. We definitely leaned a little bit more conservative relative to prior periods. And we believe that's appropriate. And we'll continue to keep our finger on the pulse and go for it. Got it. And then just final two for me, just for clarity. The 265 expense number, does that include CDI? And then what would be a good combined tax rate for the combined company? All right, so that includes CDI, but it doesn't include non-M&A expenses, and measure of expenses that we'll be rolling on mostly in the fourth quarter first quarter, I should say. So the need to make that distinction was it the last part of the question? Thank you. And one moment for our next question. Next question comes from line of Matt Olney with Stephens. Your line is open. Please go ahead. Thanks. Good morning, everybody. Just following up on that last question from from Brad on expenses. Bob, what's your estimate of the remaining noncore expenses we could see for the rest of the year. And then we'll head on to liquidity. I think you mentioned on the last call that you sold some securities immediately following the deal closing. Remind me of that amount of securities. And I guess from here, what kind of cash flow are you looking for from your existing securities in the portfolio in 2023? Sure thanks. We sold about just over 350 million in securities, which represented about 59% of the CBTX portfolio that was brought over. And after that sale, we're looking at annual cash flows, approximating the following a hair shorter $200 million a year, in the first couple of years. So we see a significant source of liquidity from a cash flow perspective coming out of the securities portfolio in the near term, to better position us. Okay, thanks for that, Paul. And then on the capital front, looks like the CT1s around 10%. It feels like that could build pretty quickly given the profitability here. But, any updated thoughts you have on capital, any other general capital actions being considered right now? I'd say the first capital action is the built. We -- as a byproduct of these, these merger accounting adjustments ended up with lower capital than we're used to carrying and lower capital than we expected to be carrying both merger. Obviously, a function of the industry environment. We wouldn't trade it, by the way, because we've got a great earnings stream that comes from this interest rate environment. But it did obviously put a transitory hit on kind of that initial capital ratios coming out of the deal here. We feel good about where we stand. But given all the uncertainties in the economy, we're looking forward to seeing that capital build relatively rapidly to give us more financial flexibility going forward to consider other capital strategies. But first and foremost, we want to see that build, we're fine with where it is. But we're more -- more is better in the current environment, and we look forward to seeing that builds first and foremost, such that we can be strategic down the line. Okay, thanks for that, Paul. And then I guess a clarification point from previously, I think you mentioned the expected CDI expense from the transaction in 2023, the $24.5 million in the presentation, did that include or exclude the additional $2 million from prior deals? Thank you. [Operator Instructions] And our next question comes from the line of Will Jones with KBW. Your line is open. Please go ahead. Hey, great, thanks. Good morning, guys. Paul, just wanted to follow up on the margin discussion. Paul, it sounds like you guys expect new deposit costs to accelerate a little bit from here. But you're also optimistic on the loan side with some repricing opportunities upcoming and getting good deals on your new loans coming on. It feels like just reading the whole picture that maybe the margin has a little bit of opportunity to expand from here maybe this is not a peak in the fourth quarter, I was hoping you could give us a little commentary on overhead margin, proceeds from here. Certainly, we, we feel like there is the possibility for additional upside, but we're not focused on that. We're focused on protecting what we feel is a superlative managers margin profile. And it's, it's more about protecting this on a go-forward, to the extent we can add to it incrementally, that will be crazy. But the real task in 2023 and beyond is protecting the advances we've really built into our business model through this merger. And the NIM profile is a big piece of that. So we're humbled by the current industry environment. So it's extremely competitive out there. But we are bullish about our ability to maintain the strategic and absolute advantages of merging our two companies here and creating solid. Great. Thatâs super helpful. Thank you for that. And then just thinking about the balance sheet as a whole, there's obviously a lot of moving pieces that do close with, the selling of some loans and the wind down of CBTX bonds. It's really left in a great spot. When you think about it, though, minimal wholesale reliance and good cash positions, Are you guys happy with where the balance sheet landed, post to close, is there any more heavy lifting to be done in terms of some restructuring. And then just given the added flexibility, you guys built into the balance sheet, did you feel like maybe you could be a little bit more aggressive on the loan growth in the coming year rate, I think you've mentioned a low to mid-single digit growth range, but you at least come at the high end of that? We want to afford ourselves the flexibility to be on the high end of that. But we don't want to be in a position where we need to be on the high end of that, this isn't the market to be a hero in and ultimately, we are managing our balance sheet for ultimate financial flexibility. We just don't want to find ourselves in a pitch relating to capital, liquidity or credit. And we'll continue to be strategic to keep ourselves in the higher [ph] category and all of those important subject. Yes. Well I think, we finally get an opportunity to shine as a core funded institution. And it's something that it's been a while since relationship banking and core funding has been celebrated. And I think this is, this is a better time to recognize the value of this franchise. So we're going to try to take advantage of that. And, and utilize that to help grow our franchise in the future. We feel like we're well capitalized. Nothing is off the table for us as far as the options that we have. And we're going to just see the -- what the right thing is to do. And it also provides us a good backdrop as we move through sort of a challenge more challenged economic times, at least uncertain. But there's no place I'd rather be than Houston, Texas to operate. Yes, totally understood. Thanks again, guys. And just one more if I sneak it in. The buyback, and you guys have talked about it before, just being a tool in the tool belt? Is that something that we can see, come to fruition here. Now, now that you have an idea of the pro forma capital, and just any thoughts you have about that would be great. Sure, we love and value always having that tool in our tool belt are in the near term, we're going to be focused on building capital. But we value the flexibility of having that as a tool. Thank you. And one moment, please. And we do have a follow up question from Matt Olney with Stephens. Your line has reopened. Please go ahead. Yes, thanks for taking the follow up. I just want to jump on and ask Paul more about some of the commentary around the core margin. I think you said Paul you want to make sure you protect the core margin in 2023. And we can interpret that loss of weight and curious any other color you can give us about protecting that margin? Should we assume thatâs around from the perspective of the bank being pretty asset sensitive kind of entering a time period of more rate uncertainty or how should we interpret that comment? I interpret it more strategic, and then maybe give you a preview of what you'll see when we put out our 10K. And that is, we are actually, at the current juncture, relatively neutral from an risk â standpoint. That said, we've generally benefited on net interest income in excess of our models by virtue of our betas and our models being more conservative. So there's, I would adjust that to say that there, there still is a asset sensitive lien, but it's not necessarily as pronounced as it was historically with legacy. Okay. And is that, would you characterize the bank is satisfied with the current interest rate positioning and the lien that you mentioned? Or are you suggesting there could be potentially additional actions in the future? We're continually evaluating how we manage the balance sheet right now. We feel good about the direction, the direction of our net interest income and the absolute value of our net interest, income and margin. And the real goal is to protect it and a real bonus, we're able to meaningfully grow. Thank you. And I'm sure no further questions and I'd like to hand the conference back over to CEO Bob Franklin for any further remarks.
EarningCall_967	Good morning, and welcome to Charter's fourth quarter 2022 investor call. The presentation that accompanies this call can be found on our website, ir.charter.com, under the Financial Information section. Before we proceed, I would like to remind you that there are a number of risk factors and other cautionary statements contained in our SEC filings, including our most recent 10-K filed this morning. We will not review those risk factors and other cautionary statements on this call. However, we encourage you to read them carefully. Various remarks that we make on this call concerning expectations, predictions, plans and prospects constitute forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results. Any forward-looking statements reflect management's current view only, and Charter undertakes no obligation to revise or update such statements or to make additional forward-looking statements in the future. During the course of today's call, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. These non-GAAP measures, as defined by Charter, may not be comparable to measures with similar titles used by other companies. Please also note that all growth rates noted on this call and in the presentation are calculated on a year-over-year basis, unless otherwise specified. Thanks, Stefan. We continued to execute well within a challenging market backdrop in 2022, and we remain excited about the industry's future and Charter's in particular. We added over 340,000 Internet customers in 2022 despite the previous pandemic pull forward and a low activity environment. We also continued to see very strong mobile line growth, with full year line in net additions of over 1.7 million. As of the end of 2022, we had 5.3 million total mobile lines. So we're growing mobile lines fast even in a low volume environment by saving customers hundreds and often thousands of dollars per year. That growth creates value for Charter and supports broadband growth. For the full year, we grew our consolidated revenue by 4.5% and our adjusted EBITDA by close to 5%. The planned December management transition with Tom moving to Executive Chairman is also going very well, and I'm pleased Tom will join us in today's Q&A. In 2023, in the coming years, we remain primarily focused on three broadband initiatives: evolution, expansion and execution. Each of these initiatives is designed to drive customer growth and long-term cash flow growth. Starting with evolution. Already in 2023 and over the next three years, we will evolve our network to ubiquitously offer symmetrical and multi-gigabit speeds. We'll deploy these new speed offerings at a much faster pace and at a much cheaper cost than our competitors, just $100 per passing. And we'll maintain our marketing speed claims. We're also evolving our go-to-market approach with increasing convergence. We recently launched Spectrum One, which combines our Internet, advanced WiFi and mobile products for the fastest seamless connectivity. During the fourth quarter, we saw continued sell-in of mobile to our large Internet base, and our Spectrum One converged offering helped drive our strongest quarter yet for mobile lines. The potential for mobile to be a significant driver of new Internet sales is still largely untapped as we educate nonsubscribers of the Spectrum One value proposition. With nearly 5.3 million lines created over a four-year period, it is clear that our converged customers have meaningfully lower Internet and customer relationship churn. And while some of that churn benefit may be self-selection, mobile drives better churn and ultimately, acquisitions for Charter. Our second area of focus is the expansion of our footprint. Line extension construction is an important part of our 2023 growth plan and beyond and offers good growth and returns to visibility. We hope to complete our RDOF build ahead of the original commitment, and that faster completion is good for our returns, the communities where we build, obviously, and it creates credibility for future subsidized builds and option value for future growth. As we also mentioned in December, we've been successful in winning a number of other state and local grants in 2022 and expect the same in 2023. And we expect, assuming a reasonable regulatory framework, to participate in the $42.5 billion BEAD program. The initial results of our rural construction initiative have been very promising. We constructed over 200,000 new rural passings in 2022, and penetration of passings open at least six months is ahead of our expectations at about 40%. Over time, we expect our rural construction initiative to be a significant contributor to our customer growth with attractive mid- to high-teen internal rates of return. And finally, we remain focused on executing on our core operating strategy, all to further improve customer experience, raise customer satisfaction and drive customer growth. We're doing that in a number of ways, including the continued digitization of our customer service model in ways that enhance the customer experience, accelerating our proactive maintenance initiative to address service issues before customers even see an impairment and investing in training and tenure for our employees to continue to improve our service and sales capabilities. Longer tenure leads to better execution with higher sales, lower service transactions, lower churn and more products per customer over time. So we have a large growth opportunity in front of us through network evolution, convergence and continued operational execution and a very unique opportunity to expand our footprint. We have a successful operating model to address the opportunities in front of us. It's the same strategy that we've deployed for years. It's about having the fastest connectivity and products and pricing and packaging that's difficult for customers to replicate, and putting that all together so that we provide more product into the household, more penetration across our passings and then marrying that with high-quality service with fewer service transactions and lower churn. That all drives higher long-term recurring cash flow. We then take that sustainable cash flow model and put it together with an innovative capital structure and a disciplined approach to ROI-driven capital allocation between organic investment expansion and/or M&A and buybacks, and you get Charter. So we have a great path in front of us to deliver long-term shareholder value creation, which means delivering for our customers, employees and local communities. Thanks, Chris. Before getting started, I want to remind you that we will be making a couple of changes to our reporting beginning next quarter. First, as we noted in our investor meeting in December, we'll include mobile service revenue in residential and SMB revenue as appropriate. We will no longer report mobile expenses separately, and both of these changes better reflect the converged and integrated nature of our mobile business and our operations and our offer structure. Second, we will provide additional line extension capital and rural disclosures. And finally, I want to note that while our fourth quarter results contain some modest impacts from Hurricane Ian, the overall impact of the hurricane on our financials and customer numbers was very small and doesn't warrant separate disclosure. Let's turn to our customer results on Slide 5. Including residential and SMB, we added 105,000 Internet customers in the fourth quarter and added 344,000 over the last 12 months. Video customers declined by 144,000 in the fourth quarter. Wireline voice declined by 233,000 and we added a record 615,000 mobile lines. For the full year, we added 1.7 million mobile lines. Although our Internet customer growth continued to be positive in the fourth quarter, activity levels remain low. During the quarter, we saw both lower Internet churn and lower Internet connects than in the fourth quarters of 2021, 2020 and 2019. Total churn, voluntary churn and non-plate churn were all lower year-over-year, and we're at all-time lows for the fourth quarter. Move return remains well below pre-pandemic levels, which also reduces our selling opportunity. Gross additions remain down across the footprint by similar amounts in overbuild and non-overbuild areas, similar to what we've seen in the past few quarters. In terms of competitive impact, some of the lower gross additions we see probably relate to DSL conversion going to a new entrant, fixed wireless, instead of coming to us. But given the issues with fixed wireless, product reliability and scalability, we expect those customers to find their way to us over the long term. In addition, we've seen a slightly higher pace of fiber overbuild recently. And I would also note that we've seen a small amount of market share return to mobile-only service over the past several quarters, the reversal of some COVID effects. Despite these challenges with lower market activity, our Spectrum One product is working. We remain in the early stages of offering converged packages of products and refinement to our approach continues, but we're very pleased with the results. Moving to financial results, starting on Slide 6. Over the last year, residential customers grew by 0.2% year-over-year. Residential revenue per customer relationship was flat year-over-year, with promotional rate step-ups and rate adjustments, offset by a higher mix of non-video customers and a higher mix of lower-priced video packages within our base. Also keep in mind that our residential revenue and ARPU does not reflect any mobile revenue, although that will change next quarter when we make the reporting adjustments I discussed a moment ago. In addition, we're allocating a portion of Spectrum One-related customer revenue from Internet to mobile revenue under GAAP. As Slide 6 shows, total residential revenue grew by 0.4% year-over-year. Turning to commercial. SMB revenue grew by 2.4% year-over-year, reflecting SMB customer growth of 3%. Enterprise revenue was up by 4.9% year-over-year. And excluding wholesale revenue, enterprise revenue grew by 9.1%, and enterprise PSUs grew by 4.4% year-over-year. Fourth quarter advertising revenue grew by 25% year-over-year, primarily driven by political revenue. Core ad revenue was down by 3%, with lower national and local advertising revenue, driven by the softening ad market, offset by our growing advanced advertising capabilities. Mobile revenue totaled $876 million, with $401 million of that revenue being device revenue. Other revenue grew by 4.9% year-over-year, mostly driven by higher rural construction initiatives subsidies, partly offset by lower processing fees and lower video CPE sold to customers. In total, consolidated fourth quarter revenue was up 3.5% year-over-year and up 4.5% for the full year 2022. Moving to operating expenses and adjusted EBITDA on Slide 7. In Q4, total operating expenses grew by $359 million or 4.6% year-over-year. Programming costs declined by 3.3% year-over-year due to a decline in video customers year-over-year, and a higher mix of lighter video packages, partly offset by higher programming rates. Looking at the full year 2023, we expect programming cost per video customer to be approximately flat year-over-year. Regulatory connectivity and produced content declined by 5.3%, primarily driven by lower regulatory and franchise fees and lower video CPE sold to customers. Cost to service customers increased by 5.8% year-over-year, driven by higher labor costs, higher fuel and freight costs and higher bad debt, partly offset by productivity improvements. Excluding bad debt from both years, cost to service customers grew by 4.9%. And while bad debt was higher year-over-year, it remained below pre-COVID level. As we noted in our December investor meeting, we're making very targeted adjustments to job structure, pay and benefits and career paths inside of our operations teams in order to build an even higher skilled and more tenured workforce, which drove the higher labor costs. These adjustments will add some pressure year-over-year to cost to service customers expense growth in the first half of this year. But that year-over-year growth should moderate in the second half of 2023. And we continue to expect additional efficiencies in cost to service customers over time as a result of the continued digitization of service, productivity improvements and our network evolution investment. Marketing expense grew by 6.9% year-over-year, primarily due to the higher staffing levels I mentioned and wages, which included targeted adjustments in our sales channels. Mobile expenses totaled $982 million and were comprised of mobile device costs tied to device revenue, customer acquisition and service and operating costs. And other expenses increased by 6.6%, primarily driven by higher labor costs and higher advertising sales expense related to higher political revenue. Adjusted EBITDA grew by 1.9% year-over-year in the quarter and 4.8% for the full year 2022. Turning to net income on Slide 8, we generated $1.2 billion of net income attributable to Charter shareholders in the fourth quarter compared to $1.6 billion in the fourth quarter of last year, with higher income tax and interest expense more than offsetting higher adjusted EBITDA. Turning to Slide 9. Capital expenditures totaled $2.9 billion in the fourth quarter and $9.4 billion for the full year 2022. Our total CapEx for the year reflects the timing of more accelerated equipment inventory receipts in December than expected. Fourth quarter capital spending of $2.9 billion rose above last year's fourth quarter spend of $2.1 billion, primarily driven by higher line extension spend driven by our rural construction initiative. Capital expenditures, excluding line extensions, increased from $1.6 billion in last year's fourth quarter to $2 billion this quarter, driven by investment in network evolution, higher customer premise equipment spend on advanced WiFi equipment and timing of spend. For the full year 2023, we continue to expect capital expenditures, excluding line extensions, to be between $6.5 billion and $6.8 billion. So excluding line extensions, we expect a small increase year-over-year in capital spend driven by the acceleration of network evolution spending and partly offset by declines in other areas. Following the expected completion of our network evolution initiative at the end of 2025 or the beginning of 2026, CapEx, excluding line extensions as a percentage of revenue, should decline to below 2022 level and continue to decline thereafter. Turning to line extensions. In 2023, we expect line extension capital expenditures to reach approximately $4 billion. We expect 2024 and 2025 line extension CapEx to look similar to our outlook for 2023 at approximately $4 billion per year. And our 2024 and 2025 line extension capital expenditure expectations, assume we win funding for or otherwise commit to additional rural spending. We also expect most BEAD money to begin to be appropriated in the 2024 timeframe with four-year build timelines from grants. At that time, we expect that our RDOF spend will begin to ramp down. We expect the BEAD program to present a unique and attractive opportunity for us to expand our network with subsidies, generating significant returns that solidly exceed our cost of capital. For our additional subsidized passings, we expect our net rural construction cost per passing to be closer to the roughly $3,000 per passing that we've incurred in our recent subsidized state and local builds than to our RDOF per passing costs. Our six-month penetration of passings in our newly built rural areas continues to be around 40%, and we expect penetrations in these areas to continue to grow. If you use the cost per passing that I mentioned a moment ago, a high broadband penetration assumption, which we think is reasonable, our current ARPU, excluding mobile, a high incremental margin based on low incremental overhead costs and a reasonable terminal multiple or perpetuity growth rate, you can clearly see the very attractive IRRs associated with our rural builds. Turning to Slide 10. We generated $1.1 billion of consolidated free cash flow this quarter versus $2.3 billion in the fourth quarter of last year. The decline was primarily driven by higher capital expenditures, mostly the result of our rural construction initiatives and by higher cash tax payments. For the full year, we generated $6.1 billion of free cash flow versus $8.7 billion in 2021. However, excluding cash taxes and our rural construction initiative, our full year free cash flow grew by 4%. We finished the quarter with $97.4 billion in debt principal. Our current run rate annualized cash interest is $5 billion. As of the end of the fourth quarter, our ratio of net debt to last 12-month adjusted EBITDA was 4.47x. We intend to stay at or just below the high end of our 4x to 4.5x target leverage range. During the quarter, we repurchased 3.6 million Charter shares and Charter Holdings common units totaling about $1.3 billion at an average price of $344 per share. For the full year, we repurchased 23.8 million Charter shares and Charter Holdings common units totaling approximately $11.7 billion. We have a proven operating balance sheet and capital allocation model that drives customer and financial growth and shareholder value. We've always prioritized investments that generate long-term growth, and those investments ultimately protect and extend our return of capital to shareholders. We continue to generate significant free cash flow and intend to both invest for long-term growth and simultaneously returned excess capital to shareholders in the form of buybacks. I'm wondering if you could give us a little bit more context around the strength we saw in wireless this quarter. How much of that is coming from selling into your existing base of customers versus new customers that you're bringing in the door? And really what I'm sort of trying to unpack is some way to kind of analyze the pull-through effect that the Spectrum One is having on broadband acquisition, separate from sort of the impact it has on lowering churn. And then you said that the opportunity for sort of driving this converged bundle is really untapped at this stage. Can you remind us of what penetration is of accounts with wireless at the moment? And where you think that could sort of potentially get to in the long term? And on the second question, Jonathan, I don't have the exact in front of me, but it's 3 million relationships roughly that have mobile and take the residential base of, what, 28 million, I guess you got to take SMB together so 30. So that gives you a sense there. On the impact of Spectrum One, I think the potential here for acquisition remains the biggest opportunity in terms of driving Internet net adds. Our wireless net additions in the quarter were largely driven by existing Internet upgrades still. So 75%, 80% of the lines came from existing Internet customers upgrading, which means they're paying lines, maybe get the second line for free or the third line paid for the majority of those being paying lines, which means the inverse of that is that new connects are also attaching with mobile as well. Even new connects -- new Internet connects are connected with mobile as well, although we're in a low transaction environment, which means we have lower gross adds. So there's a mathematical opportunity to increase both our Internet net adds and our convergence with even more mobile line adds as the market picks up. But there's the bigger opportunity, which is as we continue to message into the marketplace, the value and the benefits of a converged product, which really across our footprint, we're the only provider who can have those claims and have that better product and have that what we call gig-powered wireless. I think the real opportunity for Spectrum One convergence and wireless is to have a meaningful impact over time on Internet net additions, but it's early on. And I think because it's a completely new category, it's going to take a little while to educate into the marketplace. And the bulk of our wireless gains today are still coming from existing Internet customer upgrades. Chris, do you have a sense of how many of the broadband adds you might not have got, but for the Spectrum One offer with wireless? It's a tricky question because the customers are going in for a sale, and we're attaching global Internet at the same time. So I think the easier way to think about it is to think about our progression between Q3 and Q4 with a few caveats. One is there's always seasonality. Those are decent quarters typically in a year. The second caveat is that when you have a large amount of adds and a large amount of disconnects inside the business, which all of us do, that can create outsized variability and outsized conclusions on your net adds because of small -- a very small difference in your gross adds or a small difference in your churn can have an outsized impact on your net adds. Now as we hopefully return to a higher net add growth rate and that variability declines, but that mass still remains. So from a Q4 perspective, we still have low transaction volume for all the reasons that Jessica mentioned. And we had the other factors that Jessica mentioned, so people should go back to that. But the bridge between 75,000 roughly Internet net adds in Q3, we had a little more rural that was behind us, and Spectrum One was contributing as well. And I think both of those were contributors to the small uptick that we saw in Q4. The bigger issue we face, as we keep on saying, is just the lower transaction volume in the marketplace, means fewer selling opportunities -- which means fewer selling opportunities for Spectrum One and at the same time as we educate the marketplace on the benefits of that converged product. A couple for Jessica. Just wanted to confirm that the 4 billion of line extension you're calling out for '24, '25, that's sort of the other limit, assuming that you win in BEAD and it could be potentially low? Is that sort of a budgeting sort of expectation just for clarification? And then given the higher sort of CapEx you have next few years, can you help us think about what it means on taxes? Is there sort of new shield that we can get from the build? Yes. So the $4 billion, Vijay, I do think that it's kind of a budgeting exercise, but it's our expectation, and it's on the higher end of our expectations. But it all matters how much we win and subsidized builds. And so it really is a matter of sort of what's available and what makes sense from an ROI perspective for us to spend and to try to get additional passings and generate additional returns. But I think the $4 billion is where we think that we will be based on our expectation of what will happen right now. So that's probably the way to think about that. On the cash tax, our cash tax liability is always dependent on a number of different variables. We're a full cash taxpayer now. We've previously given guidance on taxes. If you look back, I think, at what we said in Q4 of 2021, and there's more CapEx in the plan now, which generally should reduce that liability. But because you don't have 100% deductibility, you don't get 100% credit for that anymore. As a result, I would look back at that guidance. And we might be slightly above the percentages that we gave there, maybe 1% or 2% higher, but you can generally sort of look back to that to think about how to estimate cash tax. So Vijay, on the rural build, clearly, we've disclosed what we've won so far on the state grants that primarily come out of ARPA and NTIA funds. The BEAD process is still in process. And so the rules have not been fully clarified. They need to be right in order for it to make sense for us to invest, and we think they will. But then once the maps are clarified, contested, then there will be grants given out to the states in terms of how the funds are distributed. And then the states will have their own process in terms of how they allocate that. So in some sense, our outlook here is really dependent on the rules that get set, the timing of the allocation to the state and then how the states distribute. And so we're trying to do our best to provide some outlook based on the best view that we have today. But a lot of that's not entirely in our hands, and we're going to do the best we can. And we'll continue to provide updates along the way to the extent that we have better information. Two questions, if I could. First, let's drill down on margins a little bit. I think it's hard for all of us to sort of make sense of the wireless margins given how fast the subscriber base is growing and therefore, how high customer acquisition costs might be. How should we think about -- particularly since we're not going to see it reported separately anymore, how should we think about the margin trajectory for wireless and therefore, the margin trajectory for the business overall as you go forward? And then just one more operating question. Can you just talk about the decision in your upgrade of your physical plant to not go all the way to symmetrical speeds, but to keep your downstream speeds higher than your upstream speeds? So Craig, on the margins question, I would tell you, first off, we wouldn't be willing to do the Spectrum One offer if we didn't have some space in margin. And so our margins in that business, if you exclude the subscriber acquisition costs, continue to be quite good. And they're getting better over time because we continue to drive down some of those business expenses on a per customer basis, things like the operating cost, what does it take to run billing and customer care. And actually, the reason that we're pushing those into our broader reporting is that we continue to integrate the business into our broader business. And so a lot of that activity we're dealing with a customer as one customer. And when you have a sales call, you're selling mobile and cable on the same call. When you have somebody call in with a question, you have agents who we'll be capable of dealing with both things. But I think the overall trajectory, we make margin on the customers today. We have offers in the mix that we're using to drive both mobile and broadband activity, but they work well for that. And I think we should think about them as being related to both that mobile and broadband activity. But we expect the margins to continue to grow. I think we gave some numbers in the presentation in December, and you can kind of see the trajectory that we're on there. I think that margin expansion continues when you think about the broader product. I'll comment a little bit on the network question. And the -- so your question was whether the choice to not upgrade to symmetrical. Just as a reminder for everybody, the first 15% of the upgrade is going to be with DOCSIS 3.1 high split using integrated CMTS. That will give us 2 -- up to 2 by 1, 15% footprint. So if we can make that one by one, we could make that somewhere in between and make it symmetrical. But -- so we have the capabilities. It's just based on our assessment of where the market value is. 5 by 1 in the 50% of the footprint. And then what we think is a base case is 10 by 1, using 1.8 gigahertz DOCSIS 4.0 RPD in 35% of the footprint. Now -- the reason we're choosing that you can mix and match where you allocate your bandwidth based on what you think the customer demand, the marketing claims and the actual product and device capabilities are. So we have flexibility to make, for example, you can make a symmetrical speed of product out there, depending on where you set the split. And those options remain available to us. It's our view right now that the upstream demand today is much more of a marketing campaign as opposed to any real product demand. And we want to lead in those marketing claims, which is why we're doing what we're doing. We also have from a marketing claims perspective from a symmetrical that what we'll be deploying here allows a fiber drop in the -- as a remote OLT inside of the node. So that gives us marketing claims across the entire footprint for 25 symmetrical and over time, 50 or 100-gig symmetrical. Hard to imagine what, when and how that would ever be needed, but it gives us the opportunity to do that and market it at least in these communities to have that type of speed, not different from what we do with enterprise already today. So we have a lot of flexibility. That's what I think we really like about this plan. We can go fast. We can do it at a low cost. We can reset the up and downstream, and we can pivot where we need to go at a very attractive price. We can do it at a faster pace and a cheaper cost than all of our competitors and be out in front of any potential overbuild with a better product for the long term. And Craig, this is Tom. I just want to add one thought to you the margin. The gross margin of the mobile business is actually a high-margin business. And it's improving with penetration, and it improves both at the gross level and the operating level. And relative to video, which is a low-margin business and declining, but has an impact on -- as the revenues decline in video has an impact on margin in a positive way, even more dramatically is the impact of the increased revenues that are coming in from mobile and the high margins associated with them. So the overall margin in the business is improving going forward. I wonder if, Chris -- two, if I can. One, Chris, can you just talk about the broadband market? Is penetration in your legacy footprint growing? And talk about the -- what you mentioned was incremental fiber competition and how that sort of evolves over time? And then second, Jessica, you gave a ton of detail on costs, and I appreciate it. Can you just quantify a little bit for us that increase in cost of service in the first half as well as the programming cost commentary, a lot of people wondering how are some programming numbers are flat in '23? So Phil, let me parse the market a little bit in the broadband market. Clearly, in areas where we don't have a gig overlap, we are growing and continue to grow despite a low transaction volume marketplace. And despite some of the rollback to post-pandemic rollback to mobile-only that Jessica described. I don't think it will go all the way back, but we're all seeing a little bit of that taking place. So growing in that space. Typically in a gig overlap area, you have newly minted overbuild and you have existing overbuilt and existing overbuild we're growing and newly minted. You have a small setback upfront because you have just have a new competitor in the marketplace. And to the extent you have a higher amount of that, that mix impacts where you're going. In the fourth quarter, based on all the passings analysis that we look at, we actually grew despite that higher fiber overbuild inside of our footprint in the fourth quarter, we actually grew in that space despite the mix contribution of additional overbuild. So I think that's positive. And so that's -- it's small. And as you can tell through the net add numbers. But I think it's promising for the future, and that's even prior to having the benefit of additional marketing claims through the network evolution as well as having clearly the wind behind our sales over time of additional network expansion and the promise of having a fundamentally different and better product than any of our competitors can have through a converged offering that has gig powered wireless. So those initiatives, they won't happen inside of Q1 or Q2, but they'll continue to steadily increase and improve our position and ability to grow. The biggest one would be, if we can get market volume coming back, that would actually be the biggest contributor of growth more than any of the things that I just mentioned. I'd note as a tangential and somebody will ask it, and so I'll comment on it. We have not -- as we've talked about, we've not seen any demonstrable impact on our churn as it relates to fixed wireless access. And we think it could have had some impact on our gross adds, particularly on ads that we would have pulled from DSL. But when some pricing actions were taken in December, we saw for the first time a very limited impact on our voluntary term, but not where you would have expected it. It's actually in our non-gig overlap and in our MDU footprint where you have higher churn to customers, higher tendency to move around, higher tendency to non-pay. And so it was a -- maybe it's just a blip, but there's two linings to that. One is that, for the first time, we saw a small amount of churn related to that. And the flip side is those customers tend to be very mobile, if you will. And I think given the experience of that product even more so are used for the return of them coming back to a proper broadband product with or without convergence. So on your other two questions, in cost to serve, quarter-over-quarter growth in Q4 was 5.8%. I would expect Q1 to look more like -- to look a bit like that. And then for it to sort of the year-over-year growth to decrease across the year until you're more in line with the sort of growth trajectory that we've seen before, which is really largely flat. For programming per sub cost, the reason that they remain flat year-over-year that, that's our expectation, really has to do with customer mix and whether customers are taking sort of packages that have larger channel sets or more premiums or whether they continue to be priced out of those packages and come into some skinnier packages where the programming cost per sub is less. So it's a mix issue, certainly not an issue that programmers are no longer raising rates. Sorry. No, I was just going to ask, do you have some room on -- we used to talk about the sort of small video package mix and how that might peak out at some point? Is that an issue anymore? Or can you kind of put people wherever you want in terms of packages? Maybe we'll ham and egg this between Tom and myself. But I want to go into talking about what we have headroom, and we have the ability to still create packages that create value for consumers. Our philosophy has always been to give the customers what they want. And typically, they want more programming and try to do that the best price we can. And so -- also based on their capacity of their wallet. And so having some of these packages actually allows us to sell more video product, which is to the benefit of the programmers. And that's -- you can see it in the results that we have still losses, but it's a lot lower than losses than other people in the marketplace. And that's a result of our ability to drive video based on what the consumer wants and what they can pay, and sometimes those are in conflict. So I think the -- that model has worked. It will continue to work. But I also think it already for -- as we look to the video space in the future, programmers need to see what we're doing and say, given where we are and given what they're doing themselves with direct-to-consumer and OTC effectively unbundling themselves. But if we had that package flexibility further than we do today, I think we could actually solve some of the problem that exists in the video space and grow for the benefit of programmers, but it's difficult for them to get their heads around that. It is. So I guess I'm ham or the egg, I'm not sure what you want me to be. We still have limitations on what we can do contractually, but we've been moving those limitations as we renew contracts. But the industry is structurally in a bad place from a video perspective, and you've got a really high-priced fat package with everything in it. And there are a lot of content companies whose pricing is a lot less and it separated out from that package can create a lot of value for consumers. But obviously, it's a different model. It requires different selling. And so we've been trying within those limitations to do what Chris said, which is to have the best product we can. But I would say that it's not a solved situation in terms of the way the marketplace is structured. And it's still structured in a way that continues to make video an expensive product for most consumers. I think Xumo could help. That's the design. Xumo could help a lot with that. If you take the very best of the Comcast platform, including the voice remote and pair that up in our footprint with Spectrum TV app and live video with all the different packages that we have that can be tailored to consumers appetite as well as their budget and combined with what they're probably already paying through SVOD, DTC, et cetera, in a single platform that allows them to consumed the video product in a single place with unified search, discovery, voice remote, both live as well as all the other content they have. I think that's pretty powerful. And to the extent that we're able to continue to change the requirements that Tom talked about in our programming agreements, I think we can sell more. I just wanted to follow up on the programming cost discussion, and then I had a quick housekeeping item on mobile, if I can. So on programming costs, the guide for it to be flat year-over-year is quite remarkable in many ways. Jessica, I know you just characterized it as a mix issue. I wanted to see if you're seeing an acceleration in subs taking these lighter packages or cord shaving overall. And relatedly, you've been very vocal about the tensions with programmers for many years now. Is there anything else to call out in terms of Charter maybe taking a harder line with programmers and recent renegotiations, whether it's in terms of pricing or even carriage of certain networks overall? Or maybe again, we shouldn't read into it, and it's purely just a consumer mix shift issue? And quickly, just a housekeeping question on wireless, as we all try to better understand the industry-wide postpaid phone trends, any chance you could help size how much of your 5.3 million mobile lines are phone versus tablets? I don't have it in front of me that split on the 5.3 million, but the vast, vast majority, we're in the connectivity business, and so we're selling mobile service. And to the extent that a customer wants additional devices, of course, we have that and we make it available. But our view here is driving Internet both acquisition as well as Internet churn and to drive profitability, but having an overall higher ARPU and you get that through selling the mobile service combined with the broadband service. Maybe you start with programming and jump... Yes. To clarify, on the guidance, it's programming cost per sub that is flat year-over-year. And the mix shift is not that that significantly different from what we have seen previously. The base is smaller. And so as the base -- the mix of incoming customers does differ from the base, but the mix shift isn't -- it's not that substantially different. In terms of position with programmers, Tom mentioned the margin issue that exists inside of video. And we've talked about the availability of that content really almost anywhere, in some cases, in many cases, for free because of piracy. We've been a long proponent Tom has been around the problems related to that. So I guess it's fair to say I don't know about harder line. It's just more indifferent about carriage of certain content at a higher increasing price when it's available all across the market at cheaper rates or even for free. And so that's not a harder line, that's just a reality of where we're at. The two biggest issues inside of the content category continued to be retrans, which is over-the-air content, which we're forced to pass on as a significant cost to our customers. And the development of sports and the other channels are important and put into what I was just describing, but those are the two biggest drivers of cost increases to consumer. I think at the Analyst Day, it was suggested that broadband net adds would be better in 2023 than 2022, and that 2023 would have EBITDA growth. And so I'm just wondering, I think, Chris, on the broadband net add side, kind of what gives you confidence that 2023 could be better than 2022? And then I guess, jump all, but maybe for Jessica, on EBITDA, do I remember that right? The expectation is EBITDA growth in 2023? And I know you guys are in a fan of guidance, but any -- what are the swing factors that can impact that? And any thoughts on cadence if you're willing to offer would be helpful. And then -- sorry, just -- I'll ask it all at once. Chris, I'm just curious as a follow-up. You said the pricing action, it was maybe just a blip that it was like the first time. But you've -- when you've had pricing actions in the past, you've had churn, right? So I wasn't sure what was -- what you saw for the first time when you mentioned a blip in churn? Yes. The 2023 broadband net adds, I said our goal is to have higher broadband net adds this year, and I think we will. The biggest variable that's out there is what's taking place in terms of market transaction volume, and that's the only one that gives me angst because it's the one you can't control. But we have a lot of things going in our favour, the -- starting with a lot of these initiatives that I've talked about. So clearly, with a bigger base of rural passings behind us and constructed increasing during the course of the year, I think the early -- small but early success of Spectrum One in driving Internet is only going to grow as that product takes hold. And I think the investments that we've made in our personnel, not to get too much into the weeds, but that labor cost increase that Jessica talked about, there are some pretty big actions that we took that were targeted. They were not peanut butter wage increases. They were targeted to drive an ROI, which means having longer-tenured employees who result in the sales force having better yields, selling better. And in the service infrastructure by having a longer tenure, they tend to do a better and faster job in addressing customer issues and avoid repeats, which not only reduces transactions, but reduces customer churn over time. And those benefits, because of where the labor market was for everybody last year, in order to get tenured investors the passage of time, but we've seen the lowest attrition rates at the back end of Q4 that I've seen in a very, very long time, if ever, in our service and sales functions. And I think that's going to -- that's a function of both the market as well as the investments that we've made. But ultimately, those investments collectively tie into both gross adds as well as to lower churn. And I'll go back to where I started, which is the biggest driver for us and the biggest uncertainty is market volume. But all else equal, that's our goal is to increase net adds this year. On the EBITDA side, as you said, we don't give EBITDA guidance, but certainly, we do expect growth in 2023. I think I drive it out of a few things. We have continued to have customer growth. I think we've talked about on the rate side. We have taken some small rate actions recently. And then we continue to believe that we have -- we continue to expect rates to be good across those customers. So driving revenue growth. I would remind you that we lapped last year's rate increases in April. So to your comment around timing, the second quarter is probably the space in which that's most challenged. But -- and then as Chris said, we've made these investments in tenure. We expect to gain better efficiencies both out of the tenure initiative, out of the continued digitization of the process that we have. We continue to improve in our operational efficiency, which drives sort of relative costs out of the business. And so I think we're pretty confident in generating that EBITDA growth year-over-year. You mentioned pricing action and maybe there was some confusion there, but I'll start with what we've done. We -- our philosophy hasn't changed. We're focused on trying to provide competitive products at the best price in the market and best packaging so that we can grow faster. But given what's happened in the video space, we continue to pass through rate increases for the programming increases that we've seen. And if you look back to the middle of last year, you can see it pretty dramatic, given where the economy was and if you're on people's mind, we did a pass-through in the middle of the year. You saw a big downgrade in video and voice. We've done some additional pass-through as well as a small increase on Internet lower than our competitors to maintain our competitiveness. And we did that for Internet-only inside of Q4, and we wanted to wait until you could combine that from a service experience, not to have the bill change twice for customers. So bundled Internet customers is just taking place at the beginning of -- bundled video with Internet customers taking place at the beginning of this year. The reaction there has been pretty muted. It's very low call volume, and given where the rest of the market has been and what we're doing is still maintaining our competitiveness. I am not seeing a big uptick in churns related to the price actions that we pass through. A few questions on the rural build. Jessica, thanks for all that detail at the beginning on the sort of non-RDOF pieces. I think you talked about $3,000 of passing net. So I guess a couple of things. Should we think about that as 5,000 gross? And do you guys have visibility into the timing of when you'll receive those subsidies and also sort of the accounting treatment revenue versus CapEx, so we can think about trying to give you those benefits as we layer on the spending? And then I don't know if you're willing to tell us what you think you'll build in '23. I'm guessing, no, but we can make our own assumptions. If we think you're going to build to, say, 500,000 rural passings in '23, is there any way to help us think about how many of those you'll sell into over the course of the year? I assume at this point, you guys are getting better at turning this stuff on and getting to market. So any help on the timeline and lag from what you've learned so far would be helpful. Yes. So I'm going to start at the bottom of the list, Ben. We expect to build around 300,000 subsidized rural passings in 2023, which are mostly RDOF and they're incremental to the normal business as usual pace of build. What I would do with those is we've given you information on how much penetration we get of those passings, the 40% at six months. We continue to grow after we hit that 40% at six months, but you can time them in that way. Our pace coming into the end of the year within the 15,000 to 20,000 passings per month range, and I would expect -- we're starting the year at that pace and we're going to end at a faster pace to get to that total of 300,000 number. The $3,000 per passing, so just to be clear, I think what I said was that we would be closer to the $3,000 that we've been in the more recent subsidized builds than to our RDOF amount. So weâre totally prescriptive around $3,000 exactly. But that is a net number. Our expectation on state subsidized and on the BEAD build is that those programs are likely to be structured in a way where the expenses count -- where the subsidies are accounted for as a capital offset and not as revenue. So we're going at it with net numbers. Gross build costs, I think, are a lot harder. And so we understand quite a bit now about what we need to -- about what we want in terms of driving economics and also sort of had some experience in bidding these passings and are seeing what's happening in the marketplace. But what you win impacts a lot about what those gross build costs are and they could be in a pretty wide range. So I don't have a number on that side. Just in terms of how we look at it, Ben. If you go back to the presentation that we used in December, I threw up an unnamed market with a footprint overlap. So you could take a look at how our strategy evolves between, I think, the colors were gray, gold and blue. Between our existing footprint, RDOF and the way that state grants and now BEAD and other grants weâll be doing. And so we can make the gross cost of our build lower as a result of the strategy in terms of how we approach the market and how we put these together. And so we can have a lower gross cost and therefore lower net cost than our competitors because of the existing footprint that we have, the existing or footprint that we're building. And I think that makes us not only a better economic participant, but a better and more reliable, trustworthy builder for the states in the build because we're the largest rural builder today. We've been successful at it. We're moving at a fast pace. We can get broadband to their constituents at a faster pace at a competitive price with great products, Internet and mobile, and most of these bidders aren't going to have mobile and they're not going to have a converged product, and that's something that we can bring to these communities. That's very helpful. Can I just ask a clarification from your comment. I think you guys talked about nonpaid churn, all forms of churn at record lows in Q4, including non-pay. But I think you also mentioned bad debt was coming back up. Just any comment on sort of the consumer, the low-end consumer. Some of your competitors have talked about non-pay churn normalizing. Was -- it didn't sound like we're seeing that, but I wanted to hear your thoughts? I think I'll let Jessica comment. It's still dramatically -- well, it's still much lower than it was pre-pandemic, and the churn is low. Bad debt has been slowly building back up. It's nowhere near back to where it was, but it has an impact on a year-over-year basis. In January, we typically don't talk to intra-quarter, we don't like to. But we're starting to see, and that may be the bridge between what some of our peers and competitors are saying. It's not dramatic, but we have seen a step up both in non-pay as well as bad debt. And I think that just reflects the overall economy. In some sense, you look at that and the upfront impact of that is negative. You don't like it. On the other hand, it's one of the indicators that the market is starting to normalize in terms of transaction volumes, you have a delay from when the bad news comes in and when the selling opportunity arises. So it's a double-edged sword. Yes. The other piece I would remind you we've talked about before, we're a big participant in ACP and a big proponent of that program. I think for our customers that are more prone to non-pay. We've endeavored to make sure that they recognize that, that program is available to them and to be part of the solution they're making Internet affordable for them. It has two impacts. One is that those customers don't churn as much as before. The other impact, though, is that on some of those customers that convert into the ACP program. We might be carrying a balance related to those customers that then ends up sort of flushing through in our bad debt computation. So while bad debt is higher on a numerical value basis, it's not necessarily connecting into a non-pay churn where we've converted the customer to being an ACP customer. Thank you, ladies and gentlemen. This does conclude today's conference call, and we appreciate your participation. You may disconnect at any time.
EarningCall_968	Good morning, ladies and gentlemen. And welcome to the Real Matters Q1 2023 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Friday, January 27, 2023. I would now like to turn the conference over to Lyne Beauregard. Please go ahead. Thank you, Operator, and good morning, everyone. Welcome to the Real Matters financial results conference call for the first quarter ended December 31, 2022. With me today are Real Mattersâ Chief Executive Officer, Brian Lang; and Chief Financial Officer, Bill Herman. This morning, before market opened, we issued a news release announcing our results for the three months ended December 31, 2022. The release, accompanying slide presentation, as well as the financial statements and MD&A are posted in the Investor Relations section of our website at realmatters.com. During the call, we may make certain forward-looking statements, which reflect the current expectations of management with respect to our business and the industry in which we operate. However, a number of the risks, uncertainties and other factors that could cause our results to differ materially from our expectations. Please see the slide entitled Cautionary Note regarding forward-looking information in the accompanying slide presentation for more detail. You can also find additional information about these risks in the Risk Factors section of the companyâs annual information form for the year ended September 30, 2022, which is available on SEDAR and in the Investor Relations section of our website. As a reminder, we refer to non-GAAP measures in our slide presentation, including net revenue, net revenue margins, adjusted EBITDA and adjusted EBITDA margin. Non-GAAP measures are described in our MD&A for the three months ended December 31, 2022, where you will also find reconciliations to the nearest IFRS measures. Thank you, Lyne. Good morning, everyone, and thank you for joining us on the call this morning. I will kick things off today with an overview of our first quarter performance and some of the key drivers behind our numbers. Bill will then take a deeper dive into our segment financials and I will wrap up the call with some brief remarks prior to taking questions. We reported consolidated revenues of $38.2 million, net revenue of $9.8 million and an adjusted EBITDA loss of $2.9 million in the first quarter, reflecting ongoing mortgage market headwinds, driven by a significantly higher interest rate environment. Our performance in the first quarter was in line with our focus on keeping the business EBITDA neutral on a full year basis and maintaining a strong balance sheet through this part of the mortgage market cycle. Beyond the impact of current market conditions, we made solid progress in the first quarter on the things that we can control. We continue to win market share, we added new clients and we achieved record high net revenue margins in our U.S. Appraisal segment. In U.S. Appraisal, we increased market share with five of our largest clients year-over-year. We launched three new lenders and one new channel with an existing Tier 1 client. We also launched two new lenders in U.S. Title and two new clients and three new channels in Canada. At the same time, we continue to optimize headcount and manage our cost base to align with a lower volume environment, reducing our consolidated OpEx by 43% year-over-year in the first quarter. Our cost saving measures allowed us to maintain sequentially flat adjusted EBITDA in our U.S. Title segment. We also ended the first quarter with a cash and cash equivalents balance of $45.1 million. While 30-year mortgage rates declined in the quarter, they were still up over 330 basis points from the first quarter 2022 and weekly mortgage applications as measured by the Mortgage Bankers Association were at a 26-year low at quarterâs end. At todayâs rates, the vast majority of mortgage refinances are cash out transactions. However, we continue to believe that the refinance market will return to more normalized levels in the future and we remain confident in our ability to scale the business to meet the demand of higher market volumes and to realize our fiscal 2025 financial targets. In U.S. Appraisal, purchase origination revenues were down 45% year-over-year in the first quarter, compared to an estimated addressable market decline of 48% and refinance origination revenues were down 83% year-over-year, consistent with the decline in the estimated addressable market for refinance activity. We had a record quarter for net revenue margins in U.S. Appraisal, which increased 640 basis points year-over-year to 27%, landing squarely in our fiscal 2025 net revenue margin target range for the segment. Our ability to direct more work to our top-performing appraisers allowed us to achieve higher margins, which also bolsters quality and drives faster turn times. This network effect is key to continuing to win additional market share with our clients. We continue to perform at the top of our Tier 1 lender scorecards in the first quarter and so, despite the lower overall volume environment, we were extremely pleased with the strong operational performance of our U.S. Appraisal business. U.S. Title segment revenues were down 85% year-over-year and down 92% for centralized title, principally reflecting an estimated 89% decline in refinance market origination volumes and changes in our client portfolio. We continue to adjust our cost base in U.S. Title in the first quarter to more closely align with current market volumes for refinance transactions, reducing our operating expenses by 64% year-over-year. During the first quarter, our sales team was highly engaged with existing and potential new clients at the annual Mortgage Bankers Association Convention, discussing how we can leverage our capabilities to better serve their needs and strategically expand our relationships, particularly in Title. Our focus remains on leveraging our current performance and various strategies to onboard new clients and build franchise value for the long-term. In Canada, we launched two new lenders, three new channels, and we increased market share with our three largest Appraisal clients. Canadian segment revenues were down 38% year-over-year on lower market volumes. However, net revenue margins increased 440 basis points to 17.9% and we increased adjusted EBITDA margins to 64.2%, compared to 57.7% in the first quarter of 2022. Thank you, Brian, and good morning, everyone. Turning to slides four and five for a closer look at our first quarter financial results. Consolidated revenues declined 65% in the first quarter of fiscal 2023 compared to the same quarter last year due to lower revenues across all three segments. U.S. Appraisal revenues declined 64% year-over-year to $28.3 million due in large part to lower addressable mortgage origination volumes, partially offset by net market share gains with existing clients and new client additions. U.S. Appraisal purchase and refinance origination revenues were down 45% and 83% year-over-year, respectively, and other revenues from home equity and default decreased a modest 1.5% on lower demand for home equity services. Transaction costs in U.S. Appraisal declined 67% year-over-year and net revenue declined 53% to $7.6 million. As Brian outlined earlier, net revenue margins increased 640 basis points compared to the same quarter last year to a record 27% as we leveraged our appraiser network in a lower market environment and service a greater proportion of standard properties. U.S. Appraisal operating expenses declined 33% to $5.3 million, down from $7.9 million in the first quarter of fiscal 2022, due in large part to lower salary and benefit costs. U.S. Appraisal segment adjusted EBITDA declined to $2.3 million from $8.5 million in the first quarter of fiscal 2022 and adjusted EBITDA margins contracted to 30.4% in the first quarter of fiscal 2023, which compares to the 51.9% we posted in the same quarter last year, owing in large part to lower addressable mortgage origination market volumes. Turning to our U.S. Title segment. Revenues declined 85% year-over-year, due primarily to lower refinance mortgage origination market volumes and changes in our client portfolio. Revenues attributable to centralized title services declined 92% year-over-year, while diversified title revenues totaled $0.2 million, representing a decline of $0.3 million from the first quarter of fiscal 2022. Other title revenues of $0.9 million, representing revenue from home equity services were down from the $1.4 million posted in the comparable prior year period. Transaction costs in our U.S. Title segment declined 72%, while net revenue margins contracted to 34.7%, down from the 66.4% we posted in the first quarter of fiscal 2022. The decline in net revenue margins was due to a higher proportion of lower margin home equity volume service and a lower proportion of incoming order volumes that closed. We continue to manage our operating expenses down in the quarter due to lower refinance mortgage origination market volumes. Operating expenses declined $6.6 million to $3.7 million in the first quarter of fiscal 2023, as we continue to adjust our cost structure in line with market conditions. The U.S. Title segment posted an adjusted EBITDA loss of $2.9 million in the first quarter of fiscal 2023, down from the positive $0.4 million we posted in the same quarter last year, owing to the impact of lower market volumes. As a result of the significant decline in rate refinance market volumes, we progressively reduced our U.S. Title operating expenses throughout fiscal 2022 and these initiatives continued in the first quarter of 2023. As Brian mentioned earlier, these cost cutting initiatives in the U.S. Title allowed us to maintain adjusted EBITDA that was flat on a sequential basis. In Canada, revenues declined 38% on a year-over-year basis to $7.5 million, while net revenue margins expanded by 440 basis points, as we leveraged our appraiser network in a lower market environment and realized higher net revenue margins from insurance inspection services. Canadian segment operating expenses declined $0.2 million and adjusted EBITDA margins increased to 64.2% from 57.7% in the same quarter last year. In total, first quarter consolidated net revenue was $9.8 million, compared to the $28.8 million we reported in the first quarter of fiscal 2022, due to lower reported net revenues across all three segments. Consolidated net revenue margins declined to 25.7% in the first quarter of fiscal 2023, down from the 26.7% we posted in the first quarter of fiscal 2022, principally reflecting lower margins in U.S. Title, owing in large part to lower refinance mortgage origination market volumes and the mix of services supplied in this segment. The margin decline in U.S. Title was partially offset by net revenue margin improvement in U.S. Appraisal and Canada. We have reduced consolidated operating expenses by 43% year-over-year to $13.2 million in the first quarter or $12.7 million when stock-based compensation is excluded, which largely reflects the changes we affected during the quarter and in fiscal 2022 in response to declining market volumes. We posted a consolidated adjusted EBITDA loss of $2.9 million in the first quarter of fiscal 2023, down from the positive $5.9 million in the same quarter last year. Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $45.1 million at December 31, 2022. As we noted during our fourth quarter and year-end conference call in November, we have paused activity on our NCIB in favor of conserving cash in this market environment. Thanks, Bill. Looking at our business from a fundamental perspective and the elements that we can control. We are very pleased with our performance in the first quarter. We made tremendous strides to ensure that our Title business is right-sized to market volumes during this point in the mortgage market cycle. At the same time, we maintain a long-term view of our investment in U.S. Title and the significant opportunity that it represents. We know the earnings power of this business in a normalized market volume environment, which our results have demonstrated in the past. Our existing client base and performance track record with lenders represents a tremendous asset and a significant opportunity for growth. We remain confident in our ability to add clients and grow market share, and ultimately, achieve our fiscal 2025 financial objectives under normalized market conditions. In the near-term, our focus will remain on keeping the business EBITDA neutral on a full year basis through this part of the mortgage market cycle. With a strong balance sheet and no debt, Real Matters has the financial strength to manage through the current downturn in the mortgage market and we are well positioned to scale back up when the mortgage market recovers. We continue to manage the business with a view of long-term growth, profitability and achieving our fiscal 2025 targets. Hi. Good morning. There were some strategic changes from one of your large Tier 1 customers earlier this year. Just wondering how your conversations with some of your other large customers are going in response to the strategic changing, but if thereâs anything you need to do on your end to respond to it? Thanks, Dan. I think you are referring, of course, to the Wells Fargo announcement. And so, I think, without getting too much into the Wells announcement, which has a very sort of limited impact on our business, just due to where they are focusing their changes. We really havenât heard anything like that from the other Tier 1s, Dan. So the focus of the conversations with them, frankly, from an operational standpoint have been much more focused on the market recovery and how they are thinking about running their operations when we start seeing the refi volume and the purchase volume begin to move. So I think they are being quite thoughtful around the operational side and the customer experience on the recovery. So thatâs really, I think, where the heart of the conversation has been outside of the Wells Fargo discussion. Yeah. So the Tier 1 title work that we are doing, we have been having conversations. The pipeline, I think, continues to be robust, Dan. And as I have mentioned in the past, this is not about if, itâs about when. So we are going to continue those conversations. We definitely see that second channel happening with our current Tier 1 this year and we continue to drive the sales funnel with -- as you have seen, we are bringing on new customers on the platform and continue very robust discussions with the other Tier 1s. Hi. Good morning. Brian, if you could maybe expand on just the kind of conversations with other lenders. I mean you talked about Wells Fargo, but in general, are they -- as you are signing some of these new customer wins and getting the new channels, are you thinking past the current downturn or are they more focused on just the market as it is now and looking to consolidate or just how forward thinking are they just being responsive and how does that affect the market are dynamic for you? Sure. So, good morning, Thanos. So, I would say, the definite focus of the big Tier 1s, we spent quite a bit of time with them in the last couple of quarters is on the recovery. So they are, of course, focused on capacity, but they are definitely looking beyond. I would say, quite a bit of feedback on some of the challenges that they had when we went through 2020 and 2021, and some of the challenging customer experiences. And so I would say the overall institutions are incredibly focused on making sure that that customer experience as the market recovers is very strong. So thatâs really, I think, where they are focused. They are definitely much more forward focused. And I would say that, that has only sort of continued over the last couple of quarters, where we saw some tough volume, I would say, they are definitely focused to the future right now, Thanos. Okay. And then how do we think about operating leverage and the recovery. So as volumes rebound, would you be able to keep corporate costs at similar levels or will some of the cost to come back? And then I think just historically is when volumes ramp is a bit of a lag initially, right, where you get a bit of a hit on the net revenue margin until you optimize for a given volume or how do we think about that in recovery? Well, I think, thatâs part of going through the exercise that we have gone through the past 12 months to 15 months, Thanos. I think we have got the business now in a place where we are running the business incredibly efficiently and because of the experience that we have had over the past 24 months, Thanos, going through the increase in volume and the decrease in volume, I think thereâs been a tremendous amount of institutional knowledge thatâs built up through that. So I think we are very well positioned right now from a staffing and a capacity standpoint to start taking on more volume. I think to your question around do we think we can maintain a somewhat similar cost base. That, of course, will be the focus for us. I think we are running quite lean and mean now and I foresee that into the future. So I think thatâs generally how we are setting ourselves up for success when we do start seeing more of a recovery. Thanks so much for taking my question. Can you talk a little bit about the competitive dynamics in both Appraisal and Title. I remember previously, you had mentioned that thereâs lots of these Appraisal companies are up for sale, but thereâs really no bids. I mean, has anything -- any changes there at what rate are some of these competitors disappearing and whatâs the competitive response, if any, in terms of like being more competitive on price or anything else that those competitors or even more challenges than you guys are doing? Thanks, Martin. Good morning. Yeah. So, I think, we compete, as you know, in the Tier 1 space with fairly significant other AMCs on the Appraisal side and large title insurance companies on the Title side. And so we have actually seen very little change in that space, Martin. And of course, as you know, we stay completely focused on performance and we have seen that we continue to remain at the top of scorecards on both sides of the ledger. So I think there hasnât been much change, both competitively, how they are competing with us nor within the space, your comments sort of around M&A activity going on within the market. Itâs not a lot of that has been going on. I think folks are quite focused on managing the operations in the environment, we will see how things go as we look forward and assume that over the next few quarters, we will start seeing some rebound in volume. So I think thatâs probably the best way to position it, Martin. We are not seeing much competitively on the scorecards, we continue to remain at the top of the scorecards and we are not really seeing that much activity in the market. Fantastic. Thanks. Just wondering any thoughts on the response from some of your big bank customers to how aggressive non-bank lenders have been here. I mean, strategically, itâs problematic to be losing mortgage market share, given how important that is to the overall customer relationship for the big banks. Are they doing anything that would sort of benefit you guys given the nature of your customer base? Yeah. So I think, well, I mean, unfortunately, when you look at our customer base, Martin, across the businesses, we are fortunately we have got a fairly diverse customer base and so we have got a pretty good balance of the big Tier 1 banks along with some of the big non-banks. So we are very fortunate to have that sort of balance in the portfolio. But to your point, the non-banks have definitely, I think, because most of them have more of a refinance focus, Martin, they found it very difficult with the market where it is. So I think they have had to work a little harder than they may have in the past, both to make sure they secure some of that refi volume, but also to start pushing their way into purchase. So I think one of the things that came out from that Wells Fargo announcement is their focus on making sure that their current customer base is very well serviced with mortgages. So I think all the Tier 1s definitely want to double down on that sort of dynamic and then we will see how things play out over the next little while. But if we see some rebound in purchase, which I think the market expects in the back half of this year, Martin, it will be very interesting to see how those Tier 1s respond and I think it will be a very dynamic market. Thatâs really interesting. Thanks so much. Last one for me. I am surprised that people are more upset about the spread between treasuries and mortgage rates. I mean, you donât need to be a Congress person to think that like someone needs to crack the whip here and make this spread come back. I mean, itâs a sort of a tax on potential homebuyers, right? Any thoughts there on when that spread might normalize and what like they have -- like what conditions need to be in place for that to start to happen? Yeah. I mean, as you mentioned, Martin, it is at sort of a historical high right now. We are up in the 280 basis points plus over the last couple of quarters. So it is significantly high. And our view is that thereâs opportunity there that as I think the rates were rising at the rate they were rising and I think as that we assume plateaus over the next few quarters, I think, we should see that spread start normalizing, as -- I think we have talked about before, Martin, the long-term spread is -- averages around 170 basis points. So to your point, we are quite a bit above that, and in our view, that should mean there could be opportunity again in the next few quarters, where there could be some compression around that, which, of course, we keep that 30-year down a little bit lower than itâs been up until now. So we will have to see how that plays out. And to your point, it is higher than usual and we assume that over time it will start making its way down. Yes. Thank you. You obviously have done a good job at keeping costs in check. In terms of the business going forward, can you maybe talk about areas that you may be investing in today or are you continuing to invest? Yeah. Sure. Good morning, Richard. Yeah. I mean, Richard, as you know, where we stay laser-focused is on our 2025 targets that we have laid out, both market share and margin targets. And so when we take a look at how we are investing, we continue to invest to ensure that we are driving market share. So on the performance side of the leisure, we continue to invest in our network in the platform and making sure that we are doubling down on the network and advancing towards those goals that we have set out from a market share standpoint. We also continue to invest in just the overall platform and our tech infrastructure and so we are going through quite a bit of work there. And the whole idea, of course, Richard, is in a time like this that we are ensuring that we are setting ourselves up for success on the other side of sort of the last 12-plus months of challenges on volume. So I think thatâs really where we are investing in. We have got -- I think the bench strength of the team is sort of at an all-time high right now simply because of the operating cost management that we have needed to do. So as I said a little bit earlier, I think, both on the Title business and on the Appraisal business, I think, the way in which we have now structured our teams sets us up very well for being able to manage our margins and costs as we look towards some more volume. Okay. And then, I guess, a related question on investments. No doubt the environment is challenging for a lot of companies. So with respect to these data prospects and potentially acquisitions there, has that kind of given you sort of ample time to make those evaluations and those takes you sort of closer to potentially consummating a transaction? Yeah. Exactly, Dan. So, I mean, that is, sorry, Richard, that is an area where we are spending a good chunk of time is taking a look at how we set ourselves up for success when we are able to start putting our shoulder into that third leg of the stool, the data monetization. So we are hunkered down, very much focused on operations in an environment like this. But to your point, working with our tech team, we are looking at Data 2.0 for the business longer term. Hi. Good morning. A couple of questions. Maybe the first one, you said, your focus is on EBITDA neutral on a full year basis and I know thereâs seasonality in the business. I think if we look at that on a quarter-over-quarter basis, I assume you are expecting EBITDA positive maybe in Q3 most likely. Any thoughts on how the cadence of EBITDA might go through the year? Good morning, Rob. Yeah. So, I mean, I think, the -- I think, we look at the year, itâs a bit of a tale of two halves on the year, which is the way the business in a more normalized environment works. So as you know, sort of Q1, Q2 are fall/winter and then we turn to spring/summer for Q3 and Q4. The expectation from sort of the external resources like the MBA has a very bullish Q3 spring market attached to it. So they are upwards in the sort of the mid-40% expectation. I think we are probably a little bit more conservative when we take a look at that and we are running the business to a slightly more conservative look on that. But I think thatâs the first two quarters, I think, are usually quite similar in nature. Second quarter is usually slightly lower, just historically. And then Q3 to Q4, we are looking for some spring momentum and not quite it, I think, what the market is expecting, at least the MBAs and Fannies and Freddies, but we are expecting a bump in Q3, Q4. So that will keep us focused on that EBITDA neutrality and getting that uplift in Q3 and Q4, Rob, for the -- for full fiscal year. Okay. Great. Thanks for that. And then, I think, you said that, you are in a lot of discussions with your Tier 1, probably, Tire 2 customers on the recovery. And so, I mean, given all the cost out that you are taking in the business, how do you give the Tier 1âs confidence that you can weather this and then be there to scale if thereâs a rebound in volumes. I mean, what sort of things are they looking at? Well, I mean, I got -- itâs fortunately for us, Rob, they stay very focused on performance. And so even in an environment like we are in now, where we have taken some costs out of the business to make the business more efficient. We are seeing the same type of scores on our scorecards. And so thatâs really, I think, where our customers fortunately stay very pointed, is on that. And they know they have just -- we have just come through two years where we scaled up and really outperformed our competitors through 2020 and into 2021 through, as you know, one of the fastest increase in at least the last 20 years to 30 years in volume and we were able to manage very handily through that. And one of the things that I always look at, Rob, is us becoming incredibly efficient, and therefore, having very minimal scaling up and down within the business because our network is what actually is what scales up and down with the volume. And so I think you saw that through 2020 and 2021, especially in our Canadian business. We didnât move our OpEx up in our Appraisal business. We had to move it up a little bit. With refi volumes, the way they were, we had to do more work on Title. And so thatâs, as you have seen us scale down, the goal will be, as the market starts normalizing, frankly, to keep our cost base very close to how we are operating today and only incrementally shift that, because of the capabilities of our network to really flex out when we do have those increases in volumes. Okay. And given the scorecard focus, is there any opportunity maybe lagging or are you seeing it happen now? Is there a consolidation on, I mean, a smaller number of nationwide vendors like yourself or is that something that you think would play out through a recovery if it was going to happen? Well, no. So I think there is -- there -- we already know there is some consolidation going on, Rob, because we have been a beneficiary of some of that consolidation. So I think Iâd assume for at least this quarter and potentially into next, but definitely, I think thereâs conversations going on right now at Tier 1s and some of the big Tier 2s to take a look at the group of vendors that they have and some of them still have, I think, in their view, too many right now. So I think we will definitely see some more of that consolidation this quarter and we will see into the back half of the year. Okay. And last question, just similar to Richardâs question around where the areas of investment are like. Maybe just if you could talk about where you are focusing the outbound sales effort. It sound -- it looks like you are adding new channels right now. But where is the time being spent. If you think about the time you spent on expanding the Tier 1 into Title opportunity versus the channels that you are adding versus new customers? Where is the effort being sent out. I will pass the line? Sure. I mean, Rob, itâs a pretty good mix across the Board, as you can imagine. So we had talked a little bit in the past around some focus on home equity, and so there has been some of that and thatâs, hence, the comment that I made around Tier 1 moving into that space last quarter. I donât think we are seeing quite the home equity bump that we would have expected and thatâs simply because I think the prime rate is quite high, which I think makes the cash out refi conversation, almost a more interesting conversation versus home equity. But across the Board, as you sort of see from the new customers that we have onboarded, Rob, that we are doing it across the businesses. I mean there, of course, is a real push on Title both that sort of home equity wedge strategy that we had, but also just going back at the performance equity that we have built with the Tier 1s and continuing to push that conversation and I think we have made the appropriate investments that some of those lenders would be looking for in the business. So I think we are in -- we are really well positioned right now. As I say, I think, itâs when, not if, on the title side. And Appraisal will just keep bringing on some of those outstanding customers that we donât already have on the platform over the next few quarters. Hi. Apologies if this has been covered, but rates are down, applications are up. How optimistic are you for the rest of 2023? Okay. Welcome back, Martin. Thatâs a good question, Martin. And I would say that, thereâs definitely been, I think, in the New Year as we have come back. Thereâs definitely in the market, I would say, a little bit more optimism and thatâs everything from the Fed, Bank of Canada starting to talk about potentially slowing down the rate increases, and of course, we saw that here in Canada on Wednesday. So I think thereâs probably some optimism around that. Martin, we talked a little earlier today around the spread. So thereâs maybe a little bit of optimism there. I think there continues to be demand in the market, as we have talked about the millennials in the past. So Iâd say thereâs some -- definitely some optimism there. Now the applications are up. They are up the last couple of weeks. We havenât seen that necessarily come through yet in orders. We have seen a very, very slight uptick, but we will have to see, Martin, how this plays out over the next couple of quarters. And really, the big indication for us will be the spring bounce and how much of a bounce we get in the spring, call it, March and really into April. I think that will really let us know if there is some real optimism and if the homeowners are back in, right? I mean -- as you know, this has been -- they have gone through what I would consider a bit of a rate shock over the past 12 months with the sort of historic increase in the rates. So if those can settle and I think this will become a much more normalized environment than I think that sort of trails out for us anyways to where we thought the market would be in 2025, which is, above this, but not that much above, because we thought it would be a fairly low normalized market and we will just have to -- we will have to see how all those elements play out, Martin. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
EarningCall_969	Ladies and gentlemen, good day, and welcome to the Tata Steel Analyst Call. Please note that this meeting is being recorded. [Operator Instructions] And now would now like to hand the conference over to Ms. Samita Shah. Thank you, and over to you, ma'am. Good afternoon, good morning and good evening to all of you joining us today. Welcome to this call and thank you for dialing-in. We have with us our CEO and MD, Mr. T.V. Narendran; and we have with us our ED and CFO, Mr. Chatterjee, who will discuss the results and walk you through any questions you may have. Our presentation, which describes the results, has been uploaded on our website. Do go through it if you haven't already, and we will take questions in audio mode as well as chat mode. Before I hand it over to them, I would just like to draw your attention to the clause on page two of the presentation, which the safe harbor clause, which essentially will cover the entire discussion today. Thank you. And over to you, Naren. Thanks Samita. Good day everyone. A bit of a narrative on the way we see the situation. The global operating environment has continued to be volatile during the quarter, amidst inflationary pressures, tightening financial conditions and the COVID overhang and among the key economies, the U.S. and EU witnessed a quarter-on-quarter decline in industrial output, while the Chinese GDP grew at its lowest pace since 1976. Given this backdrop, global steel prices continued to remain under pressure for most of the quarter and resulted in subdued steel spreads. In the EU, the steel spot spread, including energy and emission related cost went close $200. And in India, the economic activity remained resilient. However, depressed international prices weigh in on the sentiment. Moving to our performance. Tata Steel India deliver -- deliveries stood at 4.74 million tons and were up 7% year-on-year, primarily driven by the 11% growth in domestic deliveries. Our domestic deliveries grew at a faster pace than the Indian steel apparent consumption, which are about 8% year-on-year, and it reflects a strong market presence across segments and agile business model. Some of the highlights are value added segments like the oil and gas, infrastructure, solar and retail housing grew by about 17% on a year-on-year basis, in part due to the expanding product range and innovative solutions. Tata Tiscon, which is largely sold to retail customers, registered a best of our quarterly sales and we continue to expand our physical reach via new dealers and a virtual reach through Tata Steel Aashiyana, our eCommerce platform for individual home builders, and sales through Tata Steel Aashiyana have consistently grown over 50% in the last two years. Our sales to the MSME sector has grown 25% to 30% year-on-year in the last two quarters. We have moved from fracking six segments to 80 micro segments, we just help us understand customers better and enhance the ability to move material across micro segments based on demand. Looking ahead, we expect Indian steel prices to move higher based on improved expectations about the Chinese demand and the sustained government spending on infrastructure in India. The raw material costs are likely to remain range ground, and fourth quarter was also seasonally a stronger quarter in terms of deliveries, and we're looking to leverage the momentum. We continue to progress on expanding our capacity across multiple sites in India as we look to grow to 40 million tons in India. And view in terms of deliveries FY 2024 should fully reflect the 1 million tons per annum in large volumes while subsequent years, FY 2025 and FY 2026, will reflect the 5 million ton expansion in Kalinganagar Phase II and a 0.75 million ton setting up of the electric a furnace mill in Ludhiana. We are parallelly expanding our downstream operations at tinplate, wires and tubes. The ongoing expansion in tinplate is from 0.38 million tons per annum to 0.68 million tons per annum. The wire capacity is being expanded from 0.47 to 0.55 million tons per annum and the tubes capacity from 1.2 million tons per annum to 1.5 million tons per. Separately, phase commissioning of the 6 million ton pellet plant at Kalinganagar has begun and we should stop buying pellets from the second quarter of FY 2024, which will help reduce our costs. We are also looking to commission the PLTCM, which is a pickling line and tandem cold mill, which is part of the 2.2 million ton per annum CRM complex during this quarter. On slide 19, we have provided some domestic -- details of domestic deliveries across sectors. And over the years, while we have sold the volumes in automotive with share has also moved to around 15% of our total sales, and this is set to rise to the commissioning of the CRM complex and incremental capacity at Kalinganagar. Similarly, the growth in long products will drive an increase in the high margin retail housing business for us. Moving to Europe. The steel deliveries stood around 2 million tons in the third quarter, though the volumes were higher by 6% quarter-on-quarter basis, the sharp drop in realizations on subdued demand and elevated costs, including energy, have weighed on the steel spreads. Looking ahead, uncertainty purposes about supply demand fundamentals, despite the recent pickup in the EU prices driven by the hopes of a milder and shorter down cycle. Our steel realizations will remain subdued in fourth quarter, given the lag effects of some of the contracts. We continue to make progress on our sustainability journey to achieve net zero by 2045 via multiple pathways. We already started initiatives such as charging most scrap into our furnaces. Our products like TiscoBuild Green construction blocks and Dhurvi gold have had flagged as one of the input centers achieved solid-based utilization as well as the best customer needs for eco friendly solutions. Before I hand over to Koushik, I'm also happy to share that Tata Steel is only company in India to be recognized by the World Economic Forum as a global diversity, equity and inclusion lighthouse. And we've also been awarded a Great Place to Work Certification for the six time. Thank you, Naren. Good morning, good afternoon, and good evening to all those who have joined in. Let me give you a deeper sense of the financial performance. Our consolidated revenues for the quarter stood at about INR 57,084 crores, while EBITDA stood at INR 4154 crores which translated to a margin of about 7%. The standalone EBITDA margin was higher at about 18%. Overall, the profitability was affected by a sharp drop in the realizations and spreads in Europe during the quarter. So first is standalone at Tata Steel standalone India, the EBITDA stood at INR 5,334 crores, which translates to an EBITDA per ton of about INR 11,623, excluding the ForEx impact, the EBITDA stood at about INR 4,763 crores and was up by about 15% quarter-on-quarter. India steel prices remain subdued for most part of the quarter. The fall in long prices, long product prices were higher than in the flat products due to extended monsoon and the stoppage of construction in Delhi, in the NCR region as per the ruling of the National Green Tribunal. However, the raw material prices were also lower as coking coal prices declined by around $82 per ton on a consumption basis. The royalties also declined by about 14% quarter-on-quarter to INR 775 crores. Overall, the drop in costs more than offset the greater-than-expected decline in net realization, and that's led to the margin expense. At Tata Steel Europe, the EBITDA loss stood at about 166 million tons. As Naren mentioned, deliveries were up 6% quarter-on-quarter, but there was a sharp drop in realization within the quarter with revenue per ton being down by about GBP159 per ton. The sharp drop in realizations would have part due to the higher spot sales and subdued demand given the macro conditions in Europe and high stock of inventories with the customers. Costs were higher by about GBP31 per ton, while the coking coal consumption costs were down by about $95 per ton. Quarter-on-quarter there was an NRV markdown loss of about $55 million on the slab stocks being carried due to the forthcoming relining in Tata Steel Netherlands. Energy costs remain broadly stable on a quarter-on-quarter basis. The currency markets have also been very volatile, and there has been sharp movement between the USD/INR and the euro/INR to name a few. This has led to an FX impact on the intercompany loans provided over time and the result -- and this resulted in a ForEx gain of INR 1,427 crores at the consolidated level. Taxes for the quarter stood at about INR 2,905 crores and are fundamentally made of two parts, A recurrent tax in line with the profitability in India largely. And B, the non-cash deferred tax charge primarily due to the reduction in the surplus in the British Steel Pension Scheme as a part of the derisking, and I'm coming to that point soon. We made further progress during the quarter on derisking the British Steel Pension Scheme and expanded the insurance coverage from 30% to 60% now. This buy-in transaction and the actual movement during the quarter have led to the reduction of the surplus, but it still continues to be material in surplus. As mentioned in the previous quarter, the surplus reduction results in a reduction in the deferred tax liabilities in the OCI. But given the large amount of accumulated losses and the deferred tax assets in Tata Steel U.K., we have to limit the movement by recording and offsetting deferred tax expense in the profit and loss account, which is why you see a non-tax deferred charge in the profit and loss. Depending on market conditions, the residual insurance of about 40% liabilities will be completed in the first half of the calendar year 2023, and will be commensurate non-cash deferred tax expenses depending on the size of the scheme that we do. Moving to cash flow. The operating cash flow for the quarter stood at about INR 5,000 crores versus INR 1,700 crores in the previous quarter and primarily was driven by favorable working capital movement. The working capital release was due to reduction in inventory at Tata Steel U.K. and Tata Steel India on account of low commodity prices or lower inventory levels, but this was partly offset by increase in the slab stocks in Tata Steel Netherlands, as I mentioned earlier. As slab stock gets consumed over the next two quarters, we expect working capital release at Tata Steel Netherlands also over the relining period, which will be starting in April. We continue to invest in growth in Kalinganagar and in NINL, taking our capital expenditures to about INR 3,632 crores for the quarter. The nine months CapEx has been about INR 9,746 crores, and we will be targeting to spend around INR 3,000 crores in quarter 4 to ensure that we accelerate the completion of Tata Steel Kalinganagar expansion project. Our net debt has remained broadly stable at about INR 71,706 crores, and the liquidity remained strong at over INR 15,000 crores. We are not able to deleverage in this particular year due to very high volatility in the earnings and working capital. Our focus on completing the Tata Steel Kalinganagar project, acquisition of Neelachal, which was about INR 10,000 crores this year and the best ever dividends that we paid over INR 6,000 crores. Even after this, our net debt to EBITDA is within the long-term target levels of about 2%. Our long-term target for deleveraging continues to be the same. We will continue to restart the deleveraging in financial year 2023/24. And we continue to ensure that our target of 1 billion is fulfilled and met during the next -- past year and going forward. Looking ahead, the next few quarters are likely to be weaker for Tata Steel in Europe as markets continue to be subdued. And the realization for the fourth quarter are forecast to be weaker and drop will be higher than the drop expected in the coal and iron ore prices. Furthermore, Tata Steel Netherlands is undertaking the blast furnace relining in quarter 4 of FY 2024. We are working on minimizing the impact on all of these aspects, including the working capital and margins. Moreover, there are a few specific asset challenges, which we are investing. Some of the heavy in assets in Tata Steel U. K. are reaching the end of their useful life. Any long-term solution in the U.K. also is to address the rising cost of carbon and the local emission reduction goals. The U.K. government has provided us a framework of support for the proposed transition of Tata Steel U.K. to a low carbon configuration. This framework consists of potential partial capital expenditure grant policy on electricity pricing and regulatory intent to ensure a level playing field for being steel manufacturers. We are currently evaluating this offer of support. We're developing the options, investment options, which will be -- which has to be capital-efficient, economically viable, bankable and value accretive, which will be reviewed internally over the next couple of months and determine the way forward. In the interim, we will continue to run Tata Steel U.K. optimally for cash with minimal support from Tata Steel in India. The company had effectively guided to a certain set of numbers for India operations and for the Europe operations. Clearly, the earnings are far weaker than that. But it seems that the profitability is lower than peers as well. Can you walk us through as to what happened in the India business, in particular, if the cost reduction is lower than what we have seen in peers? And how this will trend over the coming quarters? So, Pinakin, in terms of cost reduction, I don't know if you can be more specific. But generally, one area where we had a slightly different issue in India as we were ramping up Neelachal. So if you look at it on a consolidated basis, you had the Neelachal business, which was incurring costs but not yet earning much revenue that we will get settle during this quarter because the production is coming up to peak and we selling that's certainly one area. But otherwise, I don't know of any specific area where our costs have trended differently. I don't know if it can be more specified maybe I can try and answer. Sure. I mean, we -- just given that the December quarter, the coking coal cost benefit that was supposed to be there, the margin expansion was probably -- markets thought that it could be higher than what we have seen. So, just trying to understand was there any particular realization of contract sales volume issue or where other than coking costs, some of the other expenditure did end up being higher than what was earlier thought in November. No. When we had met in November, I think the guidance on the realizations were not as pessimistic as it turned out to be, right? I mean, if you really look at we went into that quarter, we thought the prices will have reached its bottom and will start moving up or if not moving up, it will stay stable. But the realization Q3 in India has been about INR 2,000 less than Q2, right? Certainly. So, the margin expansion in Q3 was largely supposed to come from the drop in coal cost -- consumption cost, the coal consumption cost $90 a ton, which is what we have guided in November. We had said $90, I think we ended up close to that. But in terms of [technical difficulty], we had expected -- we didn't expect the prices to drop as much as it did, right? And by that it was already towards the end of December. And secondly, we were also hoping to get the relief on export duty earlier than when it came. It came only in the middle of November, whereas we have been hoping that it would have come earlier because the steel prices in the domestic markets were still quite low. We actually had a pretty good quarter as far as production is concerned. And I think at least in India, we havenât have issues. Sure. Fair enough. My second question is just going back to Neelachal and you said that it was -- it has been ramping up during this quarter. Now if you look at the medium term ROIC target of 15% on a INR 12,000 crore investment, it effectively implies a steady state through-cycle EBITDA of INR 2,000 crores from that acquisition. So, when can we see that kind of earnings come through from Neelachal, because clearly, at this point of time, it is a material drag on consolidated earnings? Yeah. So, Pinakin, basically in Neelachal we were EBITDA negative in the last quarter and that change obviously because one is we are today producing at least 50,000, 60,000 tons a month and we hope to take it to 80,000 tons a month of steel. I'm not talking of hot metal, hot metal, the blast furnace is already at 80,000, 90,000 tons a month, okay? So, we think go up, the billet production is there and they're selling the product at Tata Tiscon. So, next year, for instance, you will see 1 million tons of products in out of Neelachal, right? So, if the return on investment on Neelachal was also based on the expansion of Neelachal beyond the 1 million ton, we said the INR 12,000 crore valuation was not for a 1 million ton capacity, but both for the opportunity for us to increase the size, because if you look at 1 million capacity, we would have been closer to what we paid for Usha Martin or something like that, right, because the INR 5,000 crores. What we paid extra was for the iron ore, which is coming at premium, and we've paid for the land, which is 2,500 acres of land. That's what we've paid the premium for. So that -- to monetize that, we obviously need to expand Neelachal about 4 million to 5 million at least, which we will do. We'll go to our Board [technical difficulty] to 1 million tons. We were waiting for 1 million ton operating rate to be reached before we go and more capital to expand in Neelachal. Good afternoon everyone, and thanks for the opportunity. I have two questions. The first one is essentially on non-cash deferred tax of payment event or provision in the consolidated numbers. So, is it possible that theoretically if there is profit in Tata Steel Europe, then this can be offset at a later date? So theoretically, we can get a lower tax rate? Or is it that the profits have to be in Tata Steel U.K. for the offset sales to take this. Okay. The second question relates to the spreads in TSE. Now while in the prepared remarks you have mentioned that the drop in realization would be higher than the benefits of coking coal and/iron ore escalation whatever is there. Now will there be any NRV provisions in this quarter as well given that prices have moved up in Europe, 55 million was reported in last quarter, will there be something in this quarter also. And will we have EBITDA -- more EBITDA compression or will we end up with a number lower than what we have in this quarter on per ton basis. So, I think to answer that question, first is, we've kind of taken all the NRVs that we could estimate. As you know, the NRV is 0.2 point, it is at the end of the quarter. So, we had stopped up labs in mountain in Netherlands in anticipation of the blast furnace relining. And as the blast furnace relining will take about 120 days, you have to have enough stock to the business and service the customers. So this stock, which has been accumulated over the last six months almost, was on account of the fact that at that point of time, the coal prices were about 450 -- north of 450 iron ore prices were also high, which is why this NRV testing happened, and that's write-down of the NRV mark-to-market is what we have taken in this quarter. If the prices don't fall very sharply or significantly from here, I don't see any material NRVs. I can't rule out small changes in NRVs, but nothing material in that nature. And we are just now actually -- the other thing is, as I mentioned in my remarks, both in U.K. and Netherlands, we going to go run flat out for cash. And therefore, if that is the case, then we are also targeting significant stock level reductions from -- as far as practical to run the business. And therefore, end March inventory number should also look much lower, hence the risk of the NRV comes down. Great. Now, one as seated question that the annual contracts that are going to be negotiated maybe from FY 2023. The expectation is that they would be negotiated at a significantly lower level, given that what we in FY 2022. And the quarterly contract that possibly you will enter with in March and would again be at a significantly lower level because at that time Russia/Ukraine war was there, [indiscernible] over the moon. So, do you expect that contracts, monthly contracts or quarterly contracts will be negotiated lower and therefore, we can have the overhang of lower realization extending right into the first six months, let's say in FY 2024. So Amit, let me put it this way. The annual contracts that we had for last year, most of them were in excess of EUR 1,000 per ton. Okay? So this year, while the annual contracts are at a lower level, depending on which sector, which industry from maybe 100 to 150 or maximum of 200, but they're still higher than the spot prices. That's one point I wanted to make. Secondly, the spot prices are about as going up now, if you've seen it in Europe also it's gone up by about EUR50 a ton. We -- if you look at last quarter and there is an extension of Koushik's answer, the cost of Q3 is higher than the cost of Q2 because of these NRV provisions. So despite the coal being $90 per ton cheaper and iron ore being $20 per ton cheaper, our cost was GBP31 per ton higher in Q3 compared to Q2 only because of this NRV provision. So, when you look at Q4, we expect that the realizations in Europe will be about GBP70 per ton lower than Q3, but we expect cost to be at least GBP100 per ton lower on Q3 to Q4 basis. So, we see a margin expansion per ton this quarter. Of course, we are still looking at gas prices and many other moving parts just now, but at least from a margin per ton or EBITDA per ton point of view, hopefully, the worst is behind us as far as Q3 is concerned. Now going forward, the stocks that Koushik said, basically, we had to build about 700,000 tons of stock. That will start getting converted into cash. While the blast furnace will be down, the sales will not be down to the extent of what production is down, and that's what these slab stocks are going to do. So -- and since that NRV projection -- as the NRV correction has been done for the slab stocks, if the spot prices and the steel prices keep going up, we shouldn't have a problem. Okay. Hi. Thank you. I have two questions. First, if you can give us some indication as to what would be the relining CapEx and how long is the shutdown be? And in view of that, what is our cash fixed cost per ton in Europe, so at what EBITDA levels will not need support from India? That's my first question. So, I think, the blast furnace shutdown is planned at about 120 days. And the cash part of it is already -- itâs not the new cash also come in, but it's a question of also ordering has also been done over the last one year. So, some part of the cash has already gone up, and there will be some spend obviously as the relining happens because that's the period and it is in the ballpark of about EUR250 million to EUR75 million, and that is -- of which -- some of it has already been spent and some will be spent. And I think if I can put it the reverse way, the Tata Steel Netherlands actually sitting on EUR600 million of cash, so they don't require any money from India. So that's why I said that in my comments that we would look at running it on -- for cash. And we will minimize as much as we can. We're looking at driving it. And including in this quarter, there is almost about INR 1,000 crores of working capital release. So, we will continue to push that very high. Sure. Thank you. My second question on coking coal. While we understand your fourth quarter guidance, but given the news flows around the Australia/China trade opening up, how do you see coking coal prices trending on a more like six, nine-month basis from here. So, I think coking coal is obviously not as liquid a market as one would like it to be and hence is very vulnerable to be fluctuations. But generally, we do see unless this what do you call it, an odd event like the Russia/Ukraine situation. We see coking coal prices between $250 and $350. It will fluctuate in that range. There would be some weather event in Australia for which it may spike up or something else. But we are not seeing coking coal prices drop much below $250 in the short term or medium term because, honestly, there are not so many investments being made in coking coal because generally coal has seen a bad basket to invest in. So, this is where the challenge is, but I think this is the range that we can see coking coal prices. Today, it's gone up close to $350. Your question on China buying coking coal, well, I think one thing which China has done well as they managed for the last few years without buying Australian coking coal. So, they managed to be the quality they want it out of the facilities that they have. They've also been buying out of Russia. So, I'm not sure it will make such a material difference as we could have done three, four years back because they have developed ultimate sources over the last few years. Thank you. A couple of questions on Europe. First on the profitability, I believe a couple of years ago, the company was embarking about transformation program and that time we thoughtful is that these spreads of about EUR240, but then the company was looking at in cash breakeven. Given the current spreads area also about EUR200, but -- or 2,000 bps. At these levels, the company should have been possibly be at least EBITDA breakeven. Is there something maybe on the U.K. plants reaching end of life or is there anything else going on that is leading to the deviation from the targeted transformation plant saving. Thatâs the first question. Yeah. So Satyadeep, I think two things. One is, of course, our traditional view of spreads now needs to get corrected for energy costs and gas costs. Because traditionally, energy and gas was hardly -- and carbon together was less than 10% of the raw material costs, whereas it went up last year to almost 40%, right? So, it played a very material gold. Now it is coming back to around 10% to 20%. So, it's at a more reasonable level. So that is one thing that's why what we have traditionally seen is EUR225 and EUR250 spreads. We're assuming that gas and energy prices would be as high as it is today. So that's one change. Second point is, if you really split the U.K. and Netherlands, the Netherlands business has traditionally been EBITDA positive, cash positive, for sure, every year and pretty much all quarters. So, it's only -- last quarter is one of those quarters where it was EBITDA negative, but largely because of the NRV provisions that we had to make on the slab stock, which is itself was unusual situation as a build up to the last summer shutdown. U.K. is where we have a challenge because energy costs have always been higher and has become even higher. We have some challenges on end of life. So what happens in the end of life situation is the production levels are also not as stable as we would like it to be, and that leads to unplanned outage. So that's something that we are dealing with. So a lot of the underperformance has been in U.K. for the last quarter. Netherlands also has not had as good a quarter as they would normally have. So we expect in Netherlands, at least, obviously, operationally, this quarter was fine, but next quarter, we had this blast furnace relining after that things should come back to a stable state in Netherlands. The U.K. situation is slightly different. Cost situation is improving in both these places because industry prices have come back close to pre Ukraine levels. So that's the way we see it. I think Netherlands should continue to be cash positive and EBITDA positive, and should not need support from India. U.K. is what Koushik said, we will take a call going forward, what best to. Sorry to come back to that. Yes, it has -- it has given us the numbers that we were chasing. You should also keep in mind that Europe is today in a high inflation environment. So, the inflation is much higher than what we had thought two, three years back, and that also has an impact on cost. So, even if we have taken out a lot of costs, some of the costs because the inflationary pressures have gone up more than we had planned three years back. Understood. The second question is on CapEx. The $250 million to $275 million for relining, I think I was under impression that this is going to be partial relining given the eventual transition to DRI sometime in the future. It's just taking to partial declining seems somewhat high. And secondly, on the media reports indicate possibly a $1 billion last requirement for conversion for the U.K. If I understand it correctly, the idea is to convert to standalone year, given the scrap supplier there. The CapEx required for us should be I believe much lower than those media headlines, is there a thought behind maybe not just looking at standalone year for possibly exploring other options there, thatâs the question of CapEx. Yeah. So on the relining, it depends on -- if you're comparing to a relining cost in India, something obviously, $275 million looks high. But if you compare to what relining cost in Europe is comparable. Having said that, this blast furnace is expected to run at least till 2035, even in our transition plan. So that's why this is being relined for that kind of a life. The blast furnace, which will go down first will be the blast furnace, which is coming up for relining in 2026 or 2027. So we have two blast furnaces in Netherlands. So this is being planned to be run until 2035, even in a transition plan, Okay? That's one part. As far as U.K. is concerned, the media reports on the numbers are speculative. So I don't want to comment on that. But having said that, the proposal to the government was not just about an ES, but it was also about the hotspot mill, which is also coming to end of life and some of the other assets, which were important to keep the site sustainable. So that's why the amount of more than what we would spend typically on a year. But given what we've got from the government, we are looking at what then would be the next testing. What is the best that we can do with that kind of money that may be available to us and the policy support that we will get from the government. So, I think this is what we are working out based on the recent inputs that we had from the government. The next question is from Ashish Jain of Macquarie. Please go ahead. Ashish, we are unable to hear you. We request you to please send in your questions via chat. We will take it up in the chat question section. We will now move on to the next question. Yes. Hi. A couple of questions. Sir, first is, can you broadly give us some color on the assets that we have in Europe. I think in the prior question, you indicated that there are two furnaces in the Netherlands. One, what is due for relining it will be till 2035, are the other blast furnace, it has a relining due by 2026. Is that right? Correct. Sir, how should we understand the same aspect for the U.K. operations, whether in you indicate there are many assets reaching end of useful life. And if you could please put in perspective what you indicated that the framework that you are engaging with the U.K. government on practical grant level playing field. I don't know whether it refers to CBAM or something else. If you could marry both those verticals together, it would be great, sir. Sure. So in U.K., if you look at -- so one of the blast furnaces in the U.K. got relined about five, six years back, okay, or maybe 10 years back 2012, I think it was. So, typically, a blast furnace one is relined will run for anything from 15 years to 20 years. So, there is one blast furnace, which can go on for slightly longer. The other is due sooner. But more than the blast furnaces in U.K. So coke ovens, itâs a steel mill. There are many parts in the U.K. business, which -- where the assets are a bit old and need support. And that's where our proposal to the government was to say that infra-spending capital on assets, which anyway don't have a very long-term future, why don't we use that opportunity to transition into a greener process food, particularly given that the U.K. has a lot of scrap, which is it is exporting. But the challenge there was the energy cost in the U.K. even before Ukraine was twice the energy costs in Europe. So, our ask of the government was 50% -- at least 50% of the CapEx that we need to spend to be supported and there should be policy support on energy cost so that we are not disadvantaged compared to Europe. And thirdly, of course, the policy support that the European steel companies are getting in terms of Carbon Border Adjustment Mechanism, et cetera. The ask in general in Europe by steel companies of government is typically on these principles that at least 50% of the CapEx that is required to be supported as grants because the industry through its cash flows cannot justify spending out the CapEx that it needs for this transition. And secondly, OpEx support because when you transition from coal to gas and hydrogen, your input costs are less dependent on steel prices. When you're looking at metallurgical coal, there's a correlation between the metallurgical coal price and the steel price. But when you're starting to use gas and hydrogen, the correlation is not there because gas and hydrogen are used for other applications as well. So, the ask of the government is to also say that how do you protect the industry, if it's changing from one consumable to another, which is move vulnerable to other industries. The third point, of course, in Europe is about Carbon Border Adjustment Mechanism. So the last point is that we are also saying that there should be a level playing field, not only in terms of Carbon Border Adjustment Mechanism. But if there are some countries in Europe supporting their steel industry with let's say 50% of CapEx, then the other countries also need to consider that because otherwise, at the end of the transition, some of the steel companies in Europe will be disadvantaged compared to somebody else who's got more support from the government. So that has also been asked on the principle of support, and this is what has actually been discussed by us and our peers to the multiple governments that we -- in the countries that we operate. Right. Sir, thanks for the details. Sir, if I had to conclude on that point, what is the aspirational ROI. In the presentation we indicated 15%. So for standalone, whatever we do for U.K. operations, even factoring 50% hypothetically the government does contribute to the CapEx. What is the ROI that we are looking at a corresponding cost of capital? Just trying to make sense on the incremental ROC. So on that Ritesh, itâs more linked to the cost of capital. So what works for -- in India, for example, our WAC hurdles are more 12%. But in Europe, it will be around 10% -- 9%, 10%. That's the IRR hurdle for approval of CapEx. But the ROIC that we are looking for is always at about 15%. Sure. That's very useful. And I had a couple of questions for India operations. First is, do we see leeway to increase local steel prices are more referring to -- from an import parity mark standpoint. Second is volume guidance, if it's possible on FY 2025 basis given I think the Street will start to look at the company on 25 basis. And third is basically iron ore merchant sales, is there an opportunity that the company has over here, if at all, if you could detail any plans on this particular aspect. Thank you so much. So, I think steel prices is -- in India is also reflecting the trends in international prices. If you look at prices in Southeast Asia, they got up $100 in the last four weeks, and steel prices in India, we expect it to go up by that amount over January, February and certainly by March. So that's something which is mirroring what's happening in the international markets. The demand in India has been strong. There was in between a few shipments of imports which came from Russia, et cetera, but I don't see import as a big threat just yet. In between Japan, we're exporting a lot because the yen has gone to 145, the yen has also strengthened. So, I think we are in a much better situation today as far as import prices concern then we were two, three months back. And I also think, in any case, the steel prices in India, we need to find a better balance than we've seen in the last three, four months. I think that's reflected in the financials of the steel companies over the last two quarters. right? And particularly, if the industry needs to invest for growth, we need better cash flow than we've got in the last two quarters. So that's as far as steel prices are concerned. Sorry, what was the... So, I think there was a question on volumes. So, as you know, we don't give any volumes in the -- at this time. We will do that once we finalize our annual plan. But maybe you can just walk in through the broad sense what we expect. So, in terms of volumes next year you will see Neelachal at 1 million. We've not seen much of Neelachal this year because we started the plant within three months of acquiring it, but pretty much the steelmaking started in November. And we have today -- in fact, yesterday was the highest ever production that Neelachal is ever had. We produce 3,200 tons of steel yesterday in Neelachal. So that means the going rate is already at the capacity, right? So that is the incremental volume, which really come next year. We will also get some incremental volume out of the Kalinganagar. We have a new caster coming in that should be up. And Kalinganagar also today is actually producing at over 300,000 tons a month, which is like 3.6 million rate. So we'll get some additional volumes from the caster. We'll give guidance when you do the annual results. These are -- and through some debottlenecking will get some volumes out. But how much more, we will guide you in the next call. In two years, we will have the Ludhiana plant also up, which is 0.75 million. And by which time the Kalinganagar blast should have also started. Just continue on the previous question, you've given some color on FY 2024 numbers to get more an FY 2025, which is likely to be the valuation base for the Street. Could you walk us through the ramp-up sequence of Kalinganagar expansion -- post expansion? How long would it take to ramp up to a full capacity? So next year, what you will see is, firstly, the pellet plant would have ramped up by the end of the first quarter, which means we don't need to buy pellets, which means that the cost savings for Tata Steel. Secondly, the cold rolling mill, not the galvanizing line, but the cold rolling mill will be ready. So, we will have what we call full hot CR, which can be sold. So basically, the hot-rolled coil gets converted into cold roll. So there's no incremental volume, but there's incremental value which comes from that. Like I said, if we have the new caster in by the middle of next year, we will get some additional volumes from steel make because today we make more hot metal than the steel mill shops can consume. So, these are the areas where you will see the ramp-up. The blast furnace of Kalinganagar should come up only in FY 2025, and that's where you will see the ramp up. Typically blast furnaces ramp up fast unless you have a problem. The hot strip mill and the steel mill shops would also be ready. And once you have the steel -- once you have the blast furnace making hot metal, ramping up the steel mill shop and the hot strip mill is not an issue. If you remember the Kalinganagar Phase 1 ramp-up was one of the fastest for any greenfield site. I think we did it in about 16 months, the full ramp-up. So that's typically what it would take. We should keep in mind that it's going to be one of the biggest blast furnaces in India. So, we will obviously ramp up keeping the complexity of large furnaces in line. Thanks for this details. One more question from my side. If you look at the Tata Steel and its subsidiaries, there is spread which is opened up to around 12% to 15%, if we take the conversion ratios in account. So, in fact, if it will be back look at from this perspective, it would be market is pricing sometimes one to 1.5 years for a merger to continue it from this angle. Do you think that, that's a fair estimate by the market? Or do you see the merger progressing a bit faster than that? So Kirtan, I think we are at a stage where we have done the filing for -- to the SEBI and the regulators, and we will be looking at getting their clearances. And since some of them are listed companies, I think a year is the honorary course of business of the NCLT, we should be able to do that. I don't see 1.5 years. In Bhushan, we got delayed because of multiple reasons, but these are subsidiaries which being in our full follow. So, we are hoping that we can close it before one year. Thank you, Vinshi [ph]. I'll start with the questions on India. We have a question on auto. We had said that auto sector is 15% of our volumes. What would be the growth trajectory going forward for the company as an average? And what is our targeted mix from the auto sector for FY 2024? So, obviously, our growth in auto will depend largely on the pace at which auto growth because we already have a 50% market share and normally auto companies like to buy from at least two suppliers, if not more. So, we are not looking at a much higher market share than we have today. So, our growth in volumes will largely depend on the growth of market sector. Having said that, once the cold rolling mill with its galvanizing line and the annealing line comes in full, what is coming up just now is the -- what we call the PSPCL, which is basically the cold rolling mill. But the annealing and galvanizing facilities will be commissioned over the next 12 to 14 months. Once that comes in, then you will have a lot more to add to the product mix. So, while we have a very high market share, let's say, in hot roll coils, which is over 55%, 60% in some cases, in auto -- in cold rolled and galvanize we have in the 30% to 40% range. So, there is a room for us to increase our market share in the galvanized -- high end galvanized and cold roll anneal products, which we will do over the next three, four years. But overall, if you look at it, auto will always account for 15% to 20% of our overall volume. The other sector, which is quality conscious accrual base which we are pursuing in a big way is oil and gas. And I think the Kalinganagar plant is ideally suited for the oil and gas segment, and we are making a lot of headway there. So, we expect that also to account for a big chunk of our value-added sales going forward. There are two questions on the volume guidance, but I think we answered earlier, so I'll go to that. There is a question on iron ore marking sale. Why do we not do have -- why do we not do some merchant sales as an optionality is available. Yeah. That optionality is available with the requisite permissions that we need to take, which we've taken. We are doing some iron ore sales, but largely our iron ore is meant for captive use because what we are producing, we are consuming. Once the pellet plant is starting, we will be using more iron ore for the pellets because we don't have then by pellet. But having said that, whenever there is an opportunity to auction iron ore that we can't use because of the grades or because of the -- whether itâs fines or whatever, then we do that. And we -- I think one of the challenges today is not so much about auctioning it, but about the logistics of it. And I think we have done quite a few rakes of iron ore in the last two, three months. Not yet so material, but yes, it has started. There is then a question on RINL investment. Given our deleveraging target for year 2024 and ahead. Can we confirm that we are not going to bid for these assets? So I think what we've always said is our existing sites allow us the run rate grew to 40 million tons, right? So, I think our growth ambitions can be fulfilled from our existing sites. But it will be premature for us to emphatically say yes or no, because there's a competitive environment and why should we announce what we want to do or going to ahead of when you need to do it. And there's another question on India, which says can you assume 16,000 EBITDA per ton for Q4. So, as you all know, we don't give a quarterly guidance. So we will not comment on that. Just moving to Europe, there's a question that do we expect steel prices in Europe to benefit if CBAM proposal are implemented. Yes, certainly, because we should keep in mind that in Europe today we pay EUR80 per ton for CO2. I mean, obviously, we get three allowances. So even -- despite that, I think we paid something like EUR100 million a year. So the -- because the three allowances we get are not -- doesn't cover our needs fully, right? So that's a cost. We are paying and everyone else in Europe is paying today. And as those elements -- those three allowances go down, you will pay more. So that's why there is a CBAM because if somebody can make steel, which is more carbon inefficient and ship to Europe without the cost, that's very unfair on the European steel industry. If you look at Tata Steel in Netherlands, it is the second most carbon-efficient blast furnace in the world. It emits about 1.8 tons of carbon per ton of steel. So for blast furnace emitting that kind of carbon to pay EUR80 per ton, carbon cost and somebody who is, let's say, 2.5%, not paying that cost is certainly unfair. So we expect that CBAM will come in. We expect that steel prices in Europe will reflect the cost in Europe because some of those costs are unique to Europe and the industry will need that support. And there is a question around the energy costs, so given that the spreads have been -- our margins have been affected by coal costs and gas costs. Could the company please report that line separately under expenses for both Europe and India? Koushik to comment, but I would just say all of you know that we give a lot more information than any other steel company in the world actually any company in terms of the profit and loss details. The next question is comment I think, are we regretting not considering divesting our international business when the situation was favorable? Will we revisit this in the next up cycle? More of a comment. I think there is a question around debt reduction, do you expect the debt reduction in Q4 FY 2023. So we've -- actually, in this third quarter itself, we paid about INR 1300 crores, but it got offset by the currency valuation. So, my principle that I can articulate as a company is, we will look for all opportunities to reduce our debt. As I said in my comments that completion of Kalinganagar is a priority, but deleveraging is also a very important priority. And therefore, whenever we get opportunity, we'll do so. We do have some scheduled repayments ahead in 2024 coming up. So there will be a natural deleveraging itself. And then whatever we get from a surplus cash generation, we would look to prepay our leverage. There is a question of profitability of Europe for 4Q, says your commentary suggested that EBITDA per ton will further weakened over third quarter, can you please clarify? No, I think we said it will not -- it will improve compared to third quarter because while the -- I mean, our current estimate is the realizations on an average for Europe will be GBP70 per ton lower in Q4 compared to Q3, but the cost will be about GBP102 per ton lower, but we are watching all the costs very closely, including gas prices, energy costs which has dropped significantly over the last few weeks. The next question on Europe is on U.K. What is the going forward on U.K. given the package is inadequate? When can we see some concrete steps that you will take? So I think we are -- as I mentioned in my comments that we are looking at an optimal model, which is investable, bankable and fix the need of the company. This is not a excel model analysis, it's an engineering analysis and it's a technical analysis, which is under it. We've been doing it in the past when we look at as what Naren mentioned, as the broader configuration given the current offer of the development, we are going to look at it. We've already started looking at it, and we will come back to our Board and take guidance on that. So it will take a little bit of time, but not indefinitely. What is the kind of annual contract negotiation in Europe, can you give us a sense of how different it is. Yeah. So, like I said, it's depending on the industry itâs, I think, in the range of 50 to -- 150 to 200 in that range, lower than last year's annual contract prices. But most of last year's annual contract prices were higher than EUR1,000 per ton. So I think it's in the EUR850 to EUR1,000 range is what we see most of the contracts for this year, which is lower than last year, but higher than today's spot prices. The next question is on Europe in terms of the investigations around the environmental issues, can you please give us an update? Yeah. So, I think largely, it is to do with our operations in Netherlands. Obviously, we're responding to the various notices that we get, et cetera. There are issues related to the coke plant there and the emissions out of the coke plant and a few other instances of the past. What we have done over the last few years is one is, of course, we have a roadmap to continue to improve the situation. Having said that, I must also say, like I said before, that our Dutch plant is certainly one of the cleaner steel plants in the world, but we are conscious about the feedback from the community and from the regulators and constantly trying to improve the facilities that we have there. So that work goes on. There are obviously investigations going on. There are questions being asked, which we are responding to. We are cooperating with authorities and doing the best that we can. But having said that, I think we are a responsible corporate, and we will do whatever is the right thing to do. And one question before we go back to audio is on the products being this quarter. It's quite a large amount, can you please explain this and provide some details. So this is something which happens every quarter. Actually, there are gains and there are losses. So there is a Tata Steel investment in Tata Steel Holding, which is the holding company in Singapore for and it is done through a debt mechanism. So whenever there is an FX movement every quarter, it is adjusted. Sometimes it is negative, sometimes it's positive. And this quarter, as I mentioned, euro/dollar and euro/INR movements have been quite volatile, resulted in an FX gain, and that's been accounted for in the others. Thank you. We will go back. I have we have a few analysts for the audio questions, so we'll go back to you in the future. Thank you. Okay, ma'am. Moving back to the audio questions. The next question is from Sumangal Nevatia of Kotak Securities. Please go ahead. Sumangal, we are unable to hear you. We request you to please send in your questions via chat. We will take it up in the chat questions section. We move on to our next question. The next question is from Tarang Agarwal of Old Bridge Capital. Please go ahead. Hi. Three questions from me. Two on Europe and one on India. On Europe, given that your current contracts have been priced at anywhere between south of EUR1,000 per ton. But if I look at the total cost, even if I eliminate the NRV of EUR55 million, the total cost at least for the last four, five quarters has been trending north of EUR1,000 per ton. So, is there something that I'm missing here or from the point of view of how it's going to play out on a per ton basis? Yeah. Maybe we can connect because I think the question is not actually very clear. The numbers we are not able toâ¦ Sorry, the only thing I can think of is we have a lot of downstream assets in Europe. So, I don't know if there's any conclusion on those costs versus those realizations, anyway we can do that. But maybe Samita can clarify more specific. So in the past, we -- when we used to run the Tata Steel Europe, we used to use it in a very fungible manner, given the fact that Tata Steel Netherlands has a decarbonization project ahead of them, we are kind of escrowing and ensuring that we have that capital because that will be a very material investment that has to be done in TSN. But otherwise, cash moves freely across all entities. Okay. And my third question that's on the India business. Between BPR downstream, ITP and automotive, if you could give us a flavor in terms of how the realizations are different. So, in terms of realizations, automotive contracts, the tenures are different of these contracts, right? So, if you look at it, the automotive contracts are typically three months to six months depending on the customers. Now -- so if you have a rising market, the auto contracts look less attractive because the spot prices have gone up above the auto contracts. In a falling market, the auto prices will look better. So that always happens, particularly when there's a lot of volatility. But fundamentally, the reason why we pursue auto customers is that they are not price buyers. They look for buying from suppliers who are approved, right? So that means your competition is limited to whoever has the approval for supplies. And that's why segments like automotive, oil and gas are attractive because you're not reacting to spot prices moving up and down. IPP is there's a volume score because you have a large number of large customers, maybe tubers, earlier cold rollers, now there are not too many cold rollers who buy hot roll coils. They are all integrated. But these are the volume play, plus you have a value-added play in that. Downstream business for Tata Steel is very big. There our policy is more on transfer pricing, which is based on an onsite basis, but there is obviously a lag. So, if you look at some of the price increases that we take this quarter, by the time it passes on to our tubes division or the tinplate company on our answering policy, transfer pricing policies, it may be a month or two into the quarter or at the end of the quarter. So, there is a lag between that. But again, we see downstream like auto gives us stability in the business. IPP is more the one which you will leverage, when the stable businesses are picking up less volumes than we would like to sell them. Okay. Thanks. Thanks. Okay. First question is just some clarification on the U.K. topic. The entire transformation from BF to TAF, what is the estimated CapEx you're looking at? And what is the plan to fund the remaining 50%, assuming we get a 50% grant from the government? So I think if you have heard Naren a little while back, our original ask was for a configuration which had an EAF and also the downstream TSC or thin slab caster, so -- and the rolling mill. So that all was the configuration that we were discussing with the government. And we said for that, we need to get 50% support. I think what the government has given is partial of what our ask was. And therefore, we are relooking at what should be the resizing of the configuration, if to make it investable and bankable and value creative. So, I think these three are the foundations of what we are looking at. And I don't think what we had asked for has happened, and therefore, the original configuration is to be rethought. No. So at that point of time, it was multiples of the 300, which we had got. But I think -- let us not look at that because it's no longer relevant. What is relevant is what we will now work on and are working on and which matches up to the partial grant that the government is willing to give and then go back to the government and saying that this is what we can do at best. Okay. Got it. But given that the U.K. doesn't earn any free cash flow. And then how will the remaining part be funded? Will they raise debt? Or will there be some support from India entity. No. So that's why I'm saying that when you do the capital allocation, when we see, for example, say that this year's capital expenditure is say, INR12,000 crores, INR13,000 crores, et cetera. We think every entity into account, it's not an India alone. So, I think we -- and this is going to be almost like a new investment. It's not putting money into the current asset. So, this will be -- as I said, the financial closure of it will have elements of government support. It will have elements of Tata Steel support. Some thing if the existing business can give or can not give, then it will be externally funded. So, it will be a combination, but I yet don't know what will be that configuration, let's work towards it, and then we will certainly come out and talk about. Got it. That's very clear. And I mean, just hypothetically, if it's possible to discuss what could be plan B here? I mean, we've been in discussions with the government since more than two years now. Is there a fix timeline we are looking to close this? And what is plan B is divestment or shutting down the plant and auction for us? So, there is a plan B, there a plan C. But I think unless we cross the hurdle on the planning, now that the government has given us a formal proposal or a formal support structure. Let's work on this and see whether we get to that. Otherwise, there are consequences plan Bs and plan Cs that we can go for. And I think, to be honest, whatever we do, we also need to discuss with the other stakeholders there, the unions and everybody else. So, it only it would be fair for us to internally discuss before we announce whatever we want to do. Yeah. What is the outlook for MSR and coal cost for Inndia operations for the next quarter -- for this quarter, that is fourth quarter? Yeah. So the net realization for this quarter in India, we were expecting it to be about INR14,000, INR1,500 per ton higher than last quarter. I say this because while -- from December, the prices have been going up. I'm looking at the average of last quarter because October prices were quite high average of this quarter, that this one. In terms of coal, the coal costs are expected to be about $10 -- on a consumption basis of about $10 per ton lower this quarter compared to last quarter. The other point I want to make is this quarter between Europe and India, we'll also have about 0.5 million tons of additional volumes compared to last quarter. Okay. And just one more question. So, we understand that profitability in U.K. will improve in this quarter versus last quarter, what you highlighted. But let's say, over the next one year before your any transformation CapEx happens, do you think it can go back to, let's say, cash neutral situation or you will continue to have some support coming from India or, let's say, local level debt coming in Tata Steel Europe? So -- no, so I think we didn't say it would improve. I think what Naren's comment was it will not worsen is the point. And as you mentioned and I mentioned earlier also that we're coming to the end of life of some of the critical facilities, which will mean that there will be challenges on costs, and we are trying to run it in a most optimal manner, which will require the minimal support from India. That is what our target is, till we come to a decision, which is relating to what we have discussed fairly at length in this call and how do we look at the future as far as U.K. is concern. Sorry. So, just one pending question. I mean, when do we expect the commercial volumes from KPO 2, is it 1H 2025 or more like second half of FY 2025? Firstly, from next year, you will have the full CR, which is also part of the commercial volumes of KPO. But we should keep in mind that this is value-added to existing hot roll coils. It's not incremental volume, let me put it that way. Incremental volume will come from the next -- from FY 2025. I mean, some of the incremental volume will also come from the second half of this year, simply because we'll have an additional caster in the steel mill shop. We are still working out the volumes that will come out of it, and we will give you that guidance in the next analyst call. But -- so starting from this year, but most of it will start coming from FY 2025, where first half or second half, I think we'll give you guidance when we meet -- when we talk the next time. Got it. And just one last question. The Europe in the past, you said that $50, $60 per ton at the entire Europe level is very cash breakeven considering the CapEx, maintenance CapEx and interest obligations. I mean, when do we see we reaching to that level? Is it more towards the end of FY 2024 or more like an FY 2025 as we see today? When you say Europe, I think Netherlands is what we just mentioned. As far as U.K. is concerned, the levels are somewhere a little higher than that. So, Netherlands has always been EBITDA positive, cash positive. So, I think last quarter was an exception of being EBITDA negative. But I think on an annual basis, even last year and next year, there will be EBITDA positive for sure. In terms of cash positive, of course, next year, we have thoseâ¦ Stable Q-o-Q despite such challenges. Sir, my question is more on the coking coal side and the structural issue over this. Sir, you are being used to buying this coking coal at very high prices. And in fact -- sorry for that word, but arm-twisting or extend by the other side. Sir, if you take a step back and just look at it from an outsider, three steps back actually for -- as an outsider. Sir, this is opposed to be a mutually -- mutual long-term relationship in which both parties need each other. So -- but here is it -- this thing completely one-sided and also I believe the 90% of the volumes are sold on a linked to the index, where the index is recited by 10% of the spot. So this is -- it seems to be some sort of anomaly. Sir, what can we do to take a step back and say collectively be as in Tata Steel as a leader, not only in India, also in Asia because there are also poor regions that currently take a step back and say, okay, we need coal, coal guys need us and there is coal -- bit after making some profit on the same. So, can we have a new dialog or new system of pricing this as an, okay, we can pay you this much based on what we have made in the last quarter, last couple of quarters. And something like that the way we have negotiated with auto guys. So, what is the thinking on this. So, I think it's obviously in any commercial three markets, the power will shift from the customer to the supplier or supplier to the customer, right? So, when steel prices go up, we get a lot of noise from our customers saying that it shouldnât go up. And it's -- I think, in some sense, if you look at the coal company, they will tell you the same thing. The issue is that coking coal is not a very liquid market, unlike thermal coal, it's a very consolidated market. What is also happening is you have the big miners and you are the smaller miners. The smaller miners are not getting the funds that they used to get earlier, the financing or the insurance that they used to get earlier because coal in gender is seen a bad word without drawing a distinction between thermal coal and coking coal. You can theoretically do, without thermal coal you can't, do without coking coal for at least the next 30 years, right? So, there is the situation. For India, we are very dependent on Australia as a source. We are vulnerable to weather or climate events, and that makes the liquidity even worse or two years back, we had a problem in the railways there. So, these events happen, which shrink the coking coal prices. The part that you may -- point you made about the indexes a point where the steel industry globally has taken up both in Europe and in India saying that the index -- or most of our contracts are indexed, and that index we believe is not truly reflective of all the transactions in the market. This is something which is being discussed with the people who issued the index as well as between suppliers and customers. But I think, yes, we have a good long relationship with many of the suppliers, but they are doing -- they seem to be doing what is right for their shareholders, and we are doing what we think is right for our shareholders. So, I think we, obviously, have to find that balance. But I -- the challenge is going forward, this is not a sector which is getting a lot of investment for growth, because of the fact that it's cold. But India is already the largest importer of coking coal and Indian steel capacity is going to double over the next 10 years and will double again over the 10 years after that. So till such time, we have enough gas or hydrogen as an alternate to coking coal, we will be vulnerable to the volatility in the coking coal market. Okay. Sir, understood. So, even now without any weather event or extra, they're going for like 60% of that Asian benchmark steel price. They've always want like 50% to 60%, ideally it should have been 25% to 30% for everybody to -- they may -- let them like more margin, no problem. Let's make more ROC, no problem. It is not that they are like very, very handsome and we are making suboptimal. So that is the only concern. Sir, being a mutually -- mutual relationship long term, that's the only point I wanted to raise. Sir, apart from that, the net NRV losses and inventory losses across India and Europe, if you could quantify that please, this quarter, how much was that INR4,000 crores [ph]. There is no NRV as far as India is concerned. There was NRV to the extent of about $55 million in the -- as far as Europe is concern. Yeah. Sir, I had one question on iron ore sourcing for you. So, you have that iron ore mine at NINL. So, including that and other mines which you have, can you just lay out what iron ore sourcing change like over the next five, six years and also include let's say, once the existing mines -- mining lease gets over in 2030. So, basically, our desire is not to buy any iron ore, and we've not been buying iron ore. We've been buying pellets, because we are -- we have enough iron ore to take care of our iron ore needs, but we didn't have enough pellets to be care of our pellet needs. But where the pellet plant coming up in Kalinganagar, which has already come up and over the next few years, we'll build another pellet plant in the Angul facility, which is a Bhushan facility. We will be self-sufficient in pellets. So, hopefully, from the second quarter of the next financial year, we shouldn't be required to buy any pellets, and we want to keep it that way. The iron ore expansion is being planned to keep pace with our steel expansion, and so that will continue. As far as post 2030 is concerned, as of now we have about 550 million tons of iron ore reserves for post 2050 -- I mean, 2030 because we have the Gandhalpada mine, which is a greenfield mine which we bid for and got, which we will develop by the pace that will be needed. And then we have the Kalamang mine which has came to us from Bhushan, the Neelachal mine, which has come to us with the Neelachal acquisition. There's also [indiscernible] mine in Jharkhand, which has come to us with the Usha Martin acquisition. So, all this put together, we have, at this moment, about 550 million tons for post 2030. We will continue to participate in auctions as they come up going forward. We will also have options on our existing mines and we go out for auctions in 2030. Thank you very much. That was the last question for today. I would now like to hand the conference back to Ms. Samita Shah for closing coming. Over to you, ma'am. Thank you, Vinshi [ph]. Thank you everybody for joining us for this call. I hope lot of your questions were answered and found that useful. Look forward to connecting again at the next call. Thank you, and bye-bye.
EarningCall_970	Hello, everyone, and good morning. I am Gustavo Sechin, Head of Investor Relations of Santander Brasil. I would like to welcome and thank you for joining us for our full-year 2022 earnings conference call. As you know, this event is being streamed live from our studio at our corporate headquarters in Sao Paulo, and we will be dividing into three segments. In the first one, our CEO, Mario Leao, will discuss the strategic pillars that will drive our growth, as well the main highlights from 2022. In the second part, Angel Santodomingo, our CFO, will present our quarterly and full-year results. And finally, in the last segment, we will host a Q&A session, where analysts will have the opportunity to interact directly with us. As a reminder, I would like to give a few instructions of our today's meeting. These events feature simultaneous translation. Simply select your preferred language. And if you would like to ask a question during the Q&A session, just click the hand icon in the bottom of your screen. With that, I would like to turn it over to Mario, who will begin the presentation addressing our current contests. Please, Mario. Good morning, everyone. Thank you very much for joining us for our fourth quarter and full-year 2022 earnings call. It's a pleasure to be here again with everyone in a live and video format. I'll start today's presentation by discussing our performance in the past year, giving us the context and the wrap-up of 2022 and outlining my perspective, which is our senior management perspective on our potential going forward. First of all, I wanted to emphasize what we've been discussing for a few quarters already, which is our ability to effectively anticipate economic cycles. We've demonstrated this skill in the past, and we believe that our attitude to anticipate market trends has played an important role in bringing us where we are today. While our results are under pressure in the Individual segment and Consumer Finance, in part due to the expected deterioration in older vintages and client selectiveness, we view this as a natural part of the same growth cycle that led us to deliver a streak of record-breaking results over the past seven years. In addition to that, we had a subsequent event from a large company in our Wholesale division that impacted our results in this quarter. Although our current results may not be within our desired outcome so far, we are aware of and prepared to address the underlying causes. We have several growth opportunities ahead, which we described in our last earnings call, and we will be covering those in our session today. We are entering 2022 with a healthier balance sheet and better positioned to explore our growth initiatives going forward. With Selic rate declining, hopefully, and consumer spending expected to recover sometime in the second half of 2023, we project resumption in growth in our Consumer Finance business, which is the largest in the country. Although until then, we will keep selecting clients and rates will keep pressuring our results, particularly in markets. This growth will be achieved by continuing to prioritize business diversification; customer loyalty, we are going to talk more about that and cross-selling. We will accomplish all of this while keeping our focus on efficiency and maintaining our emphasis on reducing our cost to serve obsessively. On the next page, Slide 5, we are highlighting our ability to anticipate trends. We have proactively navigated through the credit cycle, resulting in improved loan vintages. Our provisions and asset quality are comparable with the current scenario, and we are in a good position to resume credit expansion as soon as we understand that market conditions are ideal. We are obviously granting credit, but we are already in our individual platform and consumer finance to do that more rapidly as we see conditions improve. As you can see from our figures, our cost of risk has been consistently more predictable than our peers throughout the cycles. This is an indication to the effectiveness of our risk models, for sure. We've also witnessed a better trend in our non-performing loan ratios compared to the industry. Even though riskier lines of credit lines have experienced a rise in NPLs across the banking sector, our numbers have remained comparably lower. Overdraft NPL, for example, rose by 189 basis points in the industry as a whole, whereas we saw a decrease of 37 basis points. The same is true for credit card NPL, which increased by 276 basis points in the overall industry and less than half 127 basis points for us. This is a result of our more selective lending approach and enhancement of our risk models. Looking at more recent loan vintages, we observe a healthier portfolio and a greater proportion of loans with lower risk levels. In fact, these newer vintages already account for almost half of our overall loan book, with 84% being AA to B rated loans. On Slide 6, we remind you of the pillars that will prepare our growth in the quarters ahead. We will cover in more details, our continuity in controlling credit costs, the franchise growth we are going to have in several different business lines, our DNA in efficiency and productivity, we are going to cover with some data and obviously, the expansion in several of our businesses, which we've been fostering since last year. And some of them already provided strong results last year, and they will keep growing at a rapid pace. Moving on to the next page, Slide 7. We provide some more data regarding our new vintages and our credit portfolio as a whole. Our credit quality in new vintages, as you can see in the upper left side, the new vintages are performing on an NPL basis much better than the old vintages. This is the data we showed already in the last quarter, which means that the more selectivity we've had in the new portfolios is paying off. On the right-hand side, we see the same on the basis of the over 30 M3. So different ways of looking at and underscoring the way we are approaching credit, which is a big machine. It's a big results machine for us, and we've been more selective, and it's paying off. Our loss absorption of new vintages comparing the level of financial margin we have with the cost of credit on a basis of 100 by the end of 2021 has decreased in personal loans in the first quarter of last year and has since improved back to very decent levels. The same has been seen in auto loans and credit cards. So the main message is, yes, we'll be more selective. Yes, that has caused us to increase less our financial margin than we would like. And with that, the related commissions like insurance. However, the costs associated with those new vintages will be much lower, and that's already been shown by the numbers here. Moving on to Slide 8. We move to the perspective on clients. Here we present a few metrics confirming that we are on the right track, consistently enhancing the customer experience and increasing transactionality. We have great opportunities inside our client base. And in 2023, we will focus even more on becoming the main financial service providers to our clients. Our most loyal customers base continue to grow, expanding by 5% in 2022, and we hope much more this year. Additionally, revenues from loyal customers rose by 41% in 12 months, meaning that we will continue to focus on turning more of our total clients, which has achieved 60 million, by the way, into active customers, and more of our active customers into loyal ones. We've also recently innovated by eliminating the minimum income required for clients to join our high income or select segment. Our target is to achieve 1 million customers in this category by 2023 as these are our most profitable and loyal clients by a wide margin. Moreover, as you can see on this slide, there are remarkable opportunities within our ecosystem and customer base. In 2022 alone, our Consumer Finance business was responsible for adding almost 400,000 new clients to the overall Santander, while our microfinance business called Prospera added more than 300,000. However, a crucial factor in obtaining our objectives is customer satisfaction. And among the metrics we track, obviously, the NPS, Net Promoter Score, is the most important one. Our overall NPS among individuals hit 54 points in the fourth quarter, an increase of 4 basis points with the onboarding reaching 71. And products deem important to client linkage like mortgage, credit cards, also increasing during the period. Although these results are not yet where we would like them to be, as you will see in the following slide, we are taking a lot of actions by making investments and further integrating our distribution platform. In Slide 9, we highlight our commitment to providing our clients with convenience 24 hours a day, 7 days a week through the availability and the integration of our channels, which is really paying off as shown in this page. Santander Brasil customers currently have the flexibility to choose the way they want to be served, whether it could be through automated or human service, all being supported by our analytics-driven approach of customer experience 24/7. In line with our strategy to grow our agribusiness portfolio, we are expanding our footprint in Brazil's countryside, with 51 new stores opened 2022 alone. We are observing a significant influx of clients in our stores on a daily basis, with over 13 million clients visiting our stores monthly, half of those non-clients. We are also noticing great opportunities for partnerships with other players in retail, and by this, increase our presence in Brazilian cities. Currently, we are at 44% of the municipalities, a result of a 3.3-fold increase in the number of points of sales during the quarter, and we have set a target to reach 40,000 points by the end of the year. Our digital channel has become the primary route for transactions as well as an important sales distribution channel. In 2022, the number of contracts increased by 70% with 97% of transactions taking place digitally. And finally, our remote channel has also been consolidating as an increasingly crucial touch point for human interaction outside of regular banking hours, with 50% of services being delivered during this period. Furthermore, we have reached 95% of first card resolutions, representing a 14 percentage point increase over the past two years. On Slide 10, let me highlight how we are focusing on maximizing efficiency while generating strong productivity gains. Although the number of transactions increased twofold in four years, we have managed to do it in an efficient way by reducing transaction unit costs in 40% in the same period. Our cost to serve fully digital clients decreased 31% in the last 12 months, reaching R$18. We are also making strategic investments in technology with 90% of our businesses now running on cloud and 84% of new implementations being done in real time. This is a result of the consolidation of our technology ecosystem and company under, first, our technology company. Finally, to close this topic, I'm pleased to announce that we recently launched SX TOOLS, a manufacturing company that will be focused on the delivery of products and services with excellence. On Slides 11 and 12, we provide a view of the key highlights from our business ecosystem during the period, in addition to providing a glimpse into where we believe our growth will come from in the future. In the investments business, I would like to point out two major fronts; the evolution of our AAA model for advisory services, where we are already expanding into 600 advisers by year-end and we will reach 1,300 by second quarter this year, and our outstanding performance in the digital open platform space through Toro. We have ambitious growth plans for the Investment segment as a whole. Credit cards, which act as a vital lever to build customer loyalty, featured among the best performance in terms of fees in 2022. We have obtained an all-time high turnover, culminating a record-setting year for this product. Part of this success can be attributed to our commitment to strengthening our ecosystem and the focus in our client ecosystem. In the insurance business, premiums have risen by 28% over the past few years, and we've set a target of R$15 billion by the end of 2023. In addition, we have achieved a 64% penetration rate in credit life insurance, which is an industry benchmark. In payroll loans, we have further enhanced the customer experience by expanding the digitalization of contracts, leading us to originate loans at an unprecedented rate outperforming the industry. And ConsÃ³rcio, another of our top performers showed a 42% growth in total origination in 2022. This is explained by the progress made in the customer experience and after sales service. On Slide 12, this year's achievement would not have been possible through without our ability to offer clients â the right solutions to our clients, which we expect to enhance even more this year and ahead. Our company segment or Empresas, had an exceptional year as highlighted on Slide 12. Revenues increased by 32% on a year-by-year basis. In SMEs, we achieved a record number of new clients reaching 43,000 per month. Moreover, our focus on transactionality result in an increase of 20% in insurance fees. In wholesale, we have managed to uphold our position as the leading FX bank in Brazil. We are also proud to have been recognized as the best cash management bank in Brazil and also, by the way, Latin America. We have great opportunities inside the segment, and we have set an ambitious target to increase in 13% of our company's portfolio in 2023. In agribusiness, we increased our share to 6%, having grown our portfolio to almost R$38 billion and have set a target of achieving R$50 billion by the end of this year. We currently have 300 employees dedicated exclusively to this segment. Lastly, in the auto segment, we are the market leader as a result of our comprehensive offering through Consumer Finance, Webmotors and strategic alliances with major automakers. Today, we hold a 22% market share in vehicle financing for individuals and a target to increase our credit portfolio by 18% this year. Finally, with that, I'd like to turn it over to Angel Santodomingo on my side, our CFO, for our highlights of the fourth quarter and 2022. I'll be back for the Q&A. Thank you. Thank you, Mario. Good morning, everybody. Good afternoon for those that are overseas. Pleasure being here again with you. So we go into the numbers, into the results specifically, starting in Slide 14 where we detail these numbers and our P&L. Main message about our numbers is that they reflect the moment of the cycle, where still revenues are impacted by prior decisions and provisions still have not started to improve. Our net profit, as you may see, amounted to almost R$13 million, R$12.9 billion last year. As we have stated throughout the year, our 2022 performance continues to be impacted by the most selective lending approach we have adopted in recent quarters; by our negative sensitivity to interest rates and also pressured by provisions coming from earlier vintages, as Mario has stated. Alongside with these three impacts, we have partially provisioned a subsequent event that occurred recently. With that in mind, let me go over a few of our key figures for the period. On the revenue front, total NII decreased by 6.8% in 12 months, with client NII exhibiting strong growth, but being more than offset by market NII due to the mentioned negative sensitivity to interest rates that you will know. In fees, the expansion of our customer base and greater transactionality led fees to increase by 2.3% over the period despite some pressure from credit-related commissions. And on the expense side, provisions grew in the quarter, impacted by this subsequent event. This is consistent with what I have been stating since our third Q 2021 earnings call. That's about one-year and something ago. Also, you can see that our delinquency ratios remain controlled during the period. Despite the challenges posed by inflation and salary agreements throughout 2022, general expenses have bounced by 7%, which is just slightly above Brazil's period inflation rate. Efficiency continues to remain a priority for us as corroborated by our 37% ratio for the year, 41% in the quarter, leading us to achieve our return on equity for the year of 16.3%. In next slide, in Slide 15, this is where we detail how our net interest income has evolved. Customer NII grew by a strong 22.4% compared to the same period in 2021. This is a direct reflection of our continued focus on customer acquisition and loyalty. When comparing 2022 fourth quarter to the previous quarter, product NII declined by almost 3%, 2.6%, due to the precautionary risk mitigation measures that we have implemented and we have already commented several times. However, in year-on-year terms, we continue to benefit from positive volume dynamics and improved funding performance. Consequently, the spreads are aligned to one-year ago. The quarterly decrease is primarily attributable again to changes in the mix of our loan portfolio and in the selectiveness of our production. On the other hand, as I have noted in prior quarters, market NII reflects our negative sensitivity to upward sales in the yield curve. As I have been repeating for some time now, this trend is expected to persist in 2023, also improving throughout the different quarters and will continue to be partially offset by our treasury results. In next slide, moving to Slide 16. Our loan origination and mix have been affected by this more selective lending strategy, reflecting our cycle anticipation measures. In spite of this, we still managed to go through our loan book while keeping risk levels under control. Our portfolio expanded by almost 6%, reaching almost R$490 billion. On large companies, we have had a slightly negative performance due to lower activities in receivables and ForEx impact. Excluding ForEx, this portfolio would have reduced only 0.5% in 4Q. The Individual segment showed the strongest growth during the quarter as secured credit lines, such as mortgage and payroll loans, drove the expansion of this loan book. On top of that, seasonality contributed to the robust performance of credit cards. Here, let me open up our emphasis to highlight that 65 of our individual loan book is collateralized. The SME segment also performed well in the period, partially due to the Pronampe and FGI. These are programs that are set up by the federal government and that we offer to our clients. On the liability side, our funding had a solid performance during the quarter, enabling us to maintain a strong liquidity position. Finally, our core equity Tier 1 capital ratio reached almost 11%, 10.8%, at the end of the period, indicating that this capital remains at a healthy level. It is worth noting that Resolution 229 from the Central Bank, which was originally scheduled to be implemented in January, has been postponed until July this year by the Central Bank. The changes outlined in this resolution will have a favorable impact on our capital of around 70 basis points. Slide 17. Looking at fees on the next â on this slide, you can see that we had a strong quarter with growth of above 7%, driven by seasonality. That's true influencing credit cards and the renewal of a specific client's insurance policy, but also driven by transactionality. The new consortium rule enacted by the Central Bank, the Brazilian Central Bank, had an impact on our figures, which were adjusted accordingly, as if you obviously remember, in the third quarter. Underlying growth of this product is strong and will continue like that as we announced in previous slides. The year-on-year performance can be attributed in part to our loan origination strategy as previously discussed. In terms of expenses, the reported figures keep evidencing that our commitment to cost control as our expenses grew slightly above the inflation rate for the period. Also, it is important to remember that the full effect of the salary agreements was felt during this quarter, which added some pressure to our expenses. On Slide 18, you can observe how our asset quality has evolved. A lot has been already said. But as expected, our NPL ratios, both for the 15 to 90 days and over 90 days on the left part of the slide, remain clearly under control throughout 2022. The performance of our newer loan vintages has shown a constructive trend. And as these vintages gain greater relevance in our loan book, we anticipate a healthier asset quality evolution. Finally, cost of risk reached 0.4 in 12 months. This is consistent with our past remarks regarding the impact of all older loan vintages and the subsequent event that we have already mentioned. Furthermore, our provisioning pace has not only covered prior vintages, but also contributed to increasing our coverage ratio, which hit 230% at the end of the quarter, higher than both the 3Q and pre-pandemic levels. Obviously, this number includes the subsequent event impact. Lastly, credit recovery once again performed well on an annual basis and will continue to be one of our key focus areas as it has been in the past. Thank you, Angel. So wrapping up everything we said, main messages regarding our 2022. So our approach to client selectivity, which was designed already late 2021 and executed throughout 2022, aligned to our sensitivity to interest rates; impacted total revenues, as we noticed before; also other loan vintages deteriorated as expected. And now we find ourselves in one of the challenging periods of longer credit cycle. So we'd like to say that the credit cycle individuals lasted for six, seven years. We had record-breaking years in client base, topline, bottom line. And now 2022 and for some part 2023, we will be running under the tougher part of the credit cycle, where we expand less our portfolio on a more selective basis. That will result in a better asset quality overall, and we will see that throughout the next two quarters for sure. Along with that, talking about our 2023 context. So we start 2023 under the same, I would say, restrictions or selectivity in our credit portfolio. So we didn't alter our view and appetite simply due to the calendar. We will have more and more strategy focused on client selectivity, client loyalty. Obviously, we want to keep growing our client base. 60 million is already a very large number. We are very proud of that. But more importantly than growing to 61 million and 62 million, which will deliver anyway, is bringing those customers to become active and those are active to become loyal. That is one of the key reasons why we're very confident on our 2023 and ahead. We will keep our culture of efficiency, productivity and obsession, like I say, on reducing our cost to serve. That's the only way we're going to have mass market client base in a profitable way. So we keep our culture or our DNA in looking at every opportunity we have in being more efficient, which means spending, but spending in a better way more and more. In terms of levers of growth, we have several different ways that keep us in senior management and, across the firm as a whole, keep us excited about the future. We keep being a growth story for several different angles. We have even more an enhanced balance sheet than we did in the last quarter. Our portfolio, like I have said, is already half represented by new vintages, and they've been performing better and better as we expected. We continue our rapid growth in several of our portfolios, such as companies across the board, PMIs, mid-corporates, large corporates, corporate and investment banking. We keep expanding those portfolios. And there are several layers in investments and commissions, which will have more and more representation in our overall portfolio. Together with that, we obviously prefer better results. We obviously prefer a 2022 of more growth. But those results are all expected, designed in some sense. And while we had a tougher macro context, we were spending a lot of time and energy in building hedges to the portfolio, building more seats that will grow and will generate more profits, which already did 2022. And we'll provide more growth and more good stories to share with the market throughout 2023 and beyond. And when markets are better in terms of macro context, we will have the largest consumer finance company to grow even further and a very, very strong and streamlined individual's credit platform as well. So we are optimistic about our growth prospects. We keep working very hard to contain the macro context we're operating on. And obviously, we are more and more confident that our decisions taken a year and change ago have been the right ones, and we're working towards expanding growth and resuming growth throughout the next quarters this year and ahead. Thank you, Mario. Thank you, Angel. We will now start our Q&A session. Our analysts will have the chance to ask questions during the Q&A, which will last for about 30 minutes. [Operator Instructions] So our first question is coming from Jorge Kuri from Morgan Stanley. Hi, Jorge. Hi everyone. Good morning. Thanks for taking the time to answer questions. I wanted to ask you if the numbers that were published on the press about your exposure to Americanas of R$3.7 billion are correct? Is that the exposure that you guys have? What type of guarantees do you have on the back of those loans? What percentage of that exposure has been provisioned already? What is your expectation for how that's going to turn out in the first quarter results as a fully NPL or will take 90 days to become NPL? How much of the R$1 billion in additional provisions quarter-on-quarter that we saw this quarter was for Americanas? What percentage of the Americanas exposure is provisions? And how do you expect to cover the rest of the provisions over the next couple of quarters? That's evidently very important for us and the rest of the markets to understand what is your net income power for the next couple of quarters if you still need to create another R$3 billion or so in provisions? Thank you. Jorge, nice to host you here. Thank you for participating and for raising questions as well. So the group Santander as a whole, and it's not different, Santander Brasil as the biggest operation we have in the group, we have not provided comments on specific names. That remains our stance towards the market. We understand the market is curious, anxious, and we understand it is relevant. We appreciate all that. But we have had that stance Jorge, and obviously, respectfully to you and to others that have questions, we will not comment on the particular case of the subsequent event. Yes, we have made one step in the direction of provisioning. You're going to notice in the numbers. And by looking at the levels or the scores that we report to the Central Bank, hopefully, you'll be able to understand more about how much we may. Like everyone â like every provision we have in our wholesale and also Minorista and also retail business, we always look at those portfolios as a film as a movie and not as a picture. So we will keep looking at this particular event, how it evolves. It is obviously in flux as you are all following through the press. So we will keep monitoring this throughout the year, like I understand most of the industry will. And as we evolve towards one direction or the other, we'll evaluate how much we provisioned versus how much we should keep doing. There's no preconceived decision as to how we move ahead. And again, that's the most we would like to share, given our stance of not commenting specific names, which remains the case. Thank you. Good morning everyone. So I have two questions. I know that you cannot talk about Americanas specifically. But can you give us the size of the supplier finance of the â not only for Americanas, but all the industry? And what has changed since the case of Americanas? So are you changing the prices? Are you changing the process? Are you trying to check Central Bank, the size of exposure with other players? So what has changed it? And my second question about the payroll loans. You mentioned in the press release that you are expecting an expansion of 26% of the payroll loan book in 2023 of last year. And also, I would say, probably one of the biggest expansion in a couple of years. What has changed in this business? The changes were internally in Santander or we are seeing any change in the industry, to explain this much stronger expectation of growth for payroll loans? Thank you. Thank you, Thiago. So I'll kick it off and Angel will complement. So starting with the â I wanted to cover firstly the strategy regarding â we call the supplier financing business. We call it confirming. Itâs a name we use it here. That is [indiscernible] right? This is one of our, I would say, key businesses among wholesale clients, both our corporate banking business and our corporate and investment Banking business, the ultra large clients. There are many anchors, like we call them, with whom we operate this product. It's a product that has been evolving throughout the years, has been reviewed thoroughly by not only regulators, auditors and alike. And we're very proud of the franchise we've built, to be honest, regarding the product. And we have, like I said, dozens of bankers with whom: A, we keep operating; B, we keep willing to operate and expand. And we keep having a healthy relationship with them as anchors and with their suppliers as those that are anticipating their receivables. We actually just launched last year, we have here in the presentation, a channel, which we call SX Integra which is a digital channel to which suppliers can anticipate their receivables on a self-serving format, which is already the largest self-serving or digital platform for receivables anticipation in supply chain financing. So we not only believe in the business, but we are expanding the ways to which we offer to anchors and suppliers alike. More facility, agility and obviously, capacity to serve. And in terms of our risk appetite, we remain committed to the product like we were before. In terms of exposure, that was your first question, what we do publish and release is our exposure to the retail sector, and I think if I remember what is very really around the 3%. So highly diversified portfolio, as always, with very low exposures as a percentage of the loan portfolio. This is something that it is included in our governance in our risk appetite limits and alerts, and we have the principle of highly diversifying exposures and risks. So just covering the [indiscernible] so the macro perspective I want to share regarding the payroll loans is that why we're expanding â well, obviously, we're expanding because we believe in the risk/reward proposition. We like the risk/reward proposition of all of our products, particularly in the moment where we have a tougher macro context with lower disposable income, et cetera. Payroll deductible loans are obviously healthier than clean consumer loans, like everyone else is looking at. So why we have focus is obviously because of the risk/reward proposition, but also because we believe we have a differentiated product here. The digital payroll loan or Consignado digital, we say in Portuguese, is a very, very efficient offering. And I would say, best-in-class where customers that are served to our app, payroll customers, they can really through a digital process that takes seconds. They can raise their payroll loans in a digital way. So part of our strategy has been digitalizing more and more our contracts. Last year, we had a record year of hundreds of hundreds of contracts of payroll contracts with anchors were digitalized. And the second part of our strategy to be wider is we obviously focused on INSS, the pension customers. We obviously focus on government-related but we have a very strong franchise in private sector payroll loans. We have a very large penetration given our cross-selling attitude. So our wholesale business is strong. We have a lot of payrolls with our wholesale clients. And we've been able to have payroll anchoring contracts with several of those wholesale customers, and that has been a very successful part of our strategy. So joining the digitalization effort, plus a private sector-oriented cross-selling effort with our wholesale business, together with a lot of emphasis in terms of our distribution retail network. Those three things together have been a success story for 2022, and we are very confident that with the same pillars, we will have an even stronger 2023 in payrolls. Hi, everyone. Good morning. So I have one question here and it's related to your capital base. You ended the year with a core capital of 10.8%. It's down quarter-on-quarter and year-on-year. So trying to understand here what's the minimum level that you would like to work with. Naturally, your profitability will likely be under pressure in the next two quarters, right? And you have a payout ratio of 50%, which is above average, right? So just trying to understand here how you see your capital. If you could see a change in the dividend policy, it would be interesting to know from you? Thanks. Thank you, Eduardo. Okay, let me elaborate a little bit around capital and payout. Yes, we did close 10.8% of core equity Tier 1. We have always said that we wanted to be at around 11%, and this is where we are and where we have been managing both risk-weighted assets growth and payout. You're right, our payout last year has been around 52%, 53%, which is a kind of a conclusion of how we see risk-weighted assets growth and how we see return on equity on a structural basis looking to the future. So as a reference, 50% payout may work. Obviously, we will adjust that according to the Board and according to each of the different years. But I mean on the long-term, this is where we kind of think about in terms of payout. In terms of capital, not only we are comfortable with this 11% that was mentioned. I also said throughout my presentation that we do have a new regulation, the famous 229 coming from the Central Bank, the Brazilian Central Bank, that it was due to start 1st of January, and it has been postponed to 1st of July this year, 2023, okay? This is a series of kind of advancing and getting closer to Basel III. But in conclusion, it means around 70 basis points to our core equity Tier 1, additional 70 basis points, 7-0, to our core equity Tier 1 ratio. So not only by profits and by growth, but also by this new regulation, we will again be well above the 11%, and we will probably have to manage that to get closer to the 11%. This is our strategy in view of our capital. Hi, guys. Good morning. I have basically two questions here related to one related to asset quality. So you mentioned that the new vintages are performing very better, and this should have embedded asset quality going forward. But when I look specifically for the quarter, it seems to me that NPL creation is, in fact, accelerating, especially we've put together the asset sale in the quarter. So just to understand if it's â maybe here is the peak and we should start to see us NPL creation specifically to perform better in coming quarters. And also, if you could comment on the asset quality for the renegotiated portfolio, if this is one of the reasons for this increase in NPL creation or if there is any change in the asset quality of the renegotiated portfolio? Thank you. Yes. Well, let me elaborate a little bit. In terms of quality of risk, I mean, I think â and we have been quite intense in this remark. I think that we all have to understand the through-the-cycle concept, okay. So we are managing a bank, not for this quarter, not for next year, next quarter. We are managing a bank through the cycle. And we've got a cycle now that, as we have said, it is pressured on the revenue side, and it still hasn't got better on the provisions on the quality of risk side. But what we are seeing is that, that selectiveness is provoking, as you said in your question, that the new vintages are far better than the ones we have been producing, let's say, four or five quarters ago. And we saw some numbers. Mario mentioned, the NPL, how it compares the new vintages with the old ones. In some cases, almost half of it or 70%, 60% of what it used to be. The different ratios, the loss absorption ratio, et cetera. So yes, we are seeing a quality where we want it to be and where we are producing with a strong growth levers, but with controlled quality. And this is basic to understand how the future may look like. In terms of NPL formation, in terms of renegotiation, all these things, you've got the numbers. I mean the renegotiation portfolio has more or less been stable. We have said quite openly since the first Q of this year that we have been proactive with our clients, absolutely proactive. We wanted to help them, and this is something that is both on a duty side, but also on an economic side. We made a campaign in January 2022, and we have throughout the year continued to be proactive in the renegotiation of this debt. So yes, it is something that, again, through the cycle view in this point of the cycle, we have all to understand. And the NPL formation, obviously, is a conclusion, as you perfectly said, of all what I have said in terms of quality, sale of portfolios, renegotiations, et cetera. Thank you. All right. Thank you. Thanks for the question again and hosting the call. I would like to change subjects a little bit to client NIMs, okay? We see it fell again this quarter about 50 bps, second one in a row. Related, we see client portfolio changes, some funding mix changes here as well. I would like to get your help to see how portfolio assignments or the renegotiation spreads had something to do with this NIM dynamic. So at the end, trying to understand the moving pieces as we look into NIMs for 2023. Any help here would be much appreciated? Thanks, Pedro. Great to have you here again. So I'll start, and then Angel can complement with the actual figures. So directionally speaking, which I think is an important thing for us to lever first angle, we're being more selective. So on a marginal basis, let's call it, healthy or active or even recent portfolio, which is already representing 50% or almost 50% of the overall portfolio, like I mentioned before, that portfolio because it is stricter in terms of risk appetite ratings on the higher end of our scale, that means those clients pay are fewer clients, of course, more competitive and clients which absorb lower rates naturally speaking. So the production of new assets, and I'm talking about new, new assets, compared to the maturity of older vintages, both maturities and provisioning of older vintages, that has a different spread dynamics naturally. It's by design, and you're seeing here some of the effects. Obviously, like myself and Angel mentioned before, the production of cost of credit in those portfolios will be lower, and it's already been shown, and that more and more will be visible in our results. The second angle is when we look at our renegotiation portfolio, which is one of the portfolios that grew most last year, as you can all see, that has to do with our attitude towards the credit cycle. We are proud to say we have a very strong individual credit engine here. And as we look at this through the cycle, we had to be more proactive last year. We actually had a campaign last year, which was this individual one, which you all followed, which allowed us to talk to clients on a more proactive basis. And earlier in the deterioration cycle. That caused our renegotiation portfolio to increase for sure. Some of that renegotiation, well, ends up being provisioned, of course, because although we renegotiate in some aspects. That buying time works for many clients, and it doesn't work for others. So yes, some of the effects you're seeing here has to do with the spread, the effective spread we have in our renegotiated portfolio, which tends to be lower as time passes than as they were compared to as they were before. Angel, I don't know if you want to complement. No, you're absolutely right. I mean just to add to this selectiveness argument, you have also the mix. We have shown to you. We are growing in real estate â mortgages, sorry. We are going in agro. We are growing in payrolls. I mean these types, we have a 65% collateralized exposure in individuals. So we have moved the balance sheet not only to a more solid one, but also to a more collateralized one, which also means, obviously, that has lower cost of risk and also means having lower cost of risk that the spread is lower. But if you remember from the presentation, we are at about one â I think it's one year or one year and four or five Qs at the same level in terms of spread. Okay? I think it was 10-point something, which means that we maintain â we've gone through an upward point, but we are maintaining past spreads in terms of portfolio, but obviously, much more comfort. And Pedro, if I may just quickly complement an angle which we don't talk much because obviously, the emphasis is more on individual than perhaps PMS. On our wholesale business, obviously, there is the subsequent event I won't cover, but the overall performance of our mid-corporates and large corporates business has been, over the credit cycle, including over the last many years, have been very, very healthy and record by record. The thing about this is we've been very selective in wholesale, in particular, so large corporate and ultra large corporates. We have been very selective, not due to credit appetite but due to marginal ROE. So we haven't grown more our wholesale business last year, particularly because â not because we didn't have the credit appetite, but because the spreads there were lower than we believed were fair for us to place our capital on those deals. That has marginally improved this year given the subsequent event. Let's see how it evolves throughout the year. I guess this was also asked before. Yes, we've seen a marginal increase in at least short-term spreads in wholesale. Let's look at whether that prevails throughout the year. And obviously, it's going to be positive because we are lighter, if you will, in our wholesale business because we're more conservative in terms of capital allocation here. All right. Thank you, Mario. Thank you, Angel. The next question is coming from Flavio Yoshida from Bank of America. Hi, Flavio. Good to see you. Hi. Good to see you guys. Thanks for the opportunity to ask questions. So I was remembering here and you guys were vocal on the fact that Santander was the first bank to become more conservative on loans turning more selective on origination in September of 2021, right, if I'm not wrong. However, we are still seeing deteriorating early NPL trends, right? It's even higher than pre-COVID levels. We still see high loan renegotiation levels and also high provisionings. So all of these were spreads trending down. So it seems that we are only seeing the negative effects of this change in strategy. So I was wondering if we are yet to see the positive effects of this change in strategy. And also, question related to this is, is there any signs you're expecting to see in order to improve your credit risk appetite? Is it like better NPLs, better macro or competitive environment? Okay. Thank you, Flavio. I mean, I think we have spoken several times about quality, et cetera. The 15 to 90 days is much more volatile, as I have said several times. If you go to the 90 days, it's basically stable during the last four, five quarters. It's stable if you compare it with last year, with two years ago. And we have shown the new vintages that we are far more comfortable. So all in all, again, it's a question of time. When will we open the pipeline again to other type of risks, obviously, we have tests and pilots test, all continuously being made when we see that things become to a profitable level so that we can reopen or reproduce in terms of volume growth. Okay. Thank you. Hi, Gustavo. Thank you for opportunity for asking questions. I would like to return to the loan growth. I guess, on Slide 12, you have some targets there like commercial loans growing 13%, agribusiness loans growing 33%, consumer finance that is basically out to loans growing 18% over year, and industry is growing at 7% today. So I would like to return to Flavio's questions on loan growth and just understand like the appetite of the bank because sometimes I hear Mario and Angel saying that makes too cautious. But those were they seem pretty strong, right, for 2022 loan growth. So I would like to ask this, like how you are seeing on growth? How much should Santander really grow? Because looking to those segments, you should be growing at double digits in 2023. And if I may, just on spreads. So you are saying basically that spreads will remain flattish, more or less in line with the fourth Q right? So if that's the case, maybe NII should grow â NII clients should grow below the volume. So is that fair? And is that a fair assumption for you in 2023? Thank you. Thank you, Yuri. I'll cover your â the first bulk of your question, which is more a strategic one, and then I'll ask Angel to cover the numbers per se. Your question is great, and I thank you for raising this. So when we share our ambition here, and it's obviously highlighted as an ambition, it's not a guidance, but it's where we are directed. We did it last quarter, as you may recall, and we're doing this again. And by the way, we're going to keep repeating this because we want to tell you how we're doing. We want to show where we're focused on a more accelerated path than overall. Are we going to grow so much in consumer loans unsecured? Probably not. Are we going to grow so much in other unsecured pieces of the business, although they have higher margins? Probably not. So we highlight here some of the angles at which we're going to grow at a more expedited way. And why we are doing this, not because we want to show you just numbers, but we believe that these portfolios are on a risk/reward basis. Given the customer base we have, given the customer base with whom we have risk appetite, these are the portfolios which we can grow at a more accelerated pace. So companies I mentioned before, we've performed our record year last year in all different pieces of the business. We have a growing but important May business. But then starting with the lower PMIs, mid-PMIs and large PMIs, record year. Middle corporates, large and ultra-large again, despite the subsequent event, we had a record year. So we're very comfortable that without any arrogance, we've evolved our maturity and expertise regarding this portfolio, and we are confident we can keep growing at a double-digit rate. Agro, the same thing and an even higher double-digit level. We believe we've expanded geographically enough. We've understood better the cycles, the vintages and the different commodities we operate in Brazil. And we're very comfortable that among wholesale and retail, it's not only a retail agribusiness, it's wholesale and retail. We're going to grow at an even higher pace than we did last year. And then Consumer Finance, which is secured, of course, because it has the auto there, but it's a portfolio which is always more volatile and has its own credit cost. We believe we've evolved a lot in our risk models last year. We believe we have the right partnerships with the big O&Ms. We believe we have a very strong distribution network with the retailers, the auto retailers, particularly in used cars, and we are very comfortable. Yes, we can grow here at the double-digit rate as well this year. In terms of volumes and NII, NIMs, et cetera, I mean we've got a country that will probably be growing at 1% - around 1% GDP, plus another 5%, around 5% inflation. So that's in number terms, 6%. You've got several of the bank's association saying 8% growth in terms of volume for 2023. You've got the public banks role, et cetera, et cetera. So it doesn't look like it's going to be a huge year in terms of volume growth. But as Mario said, we have clearly analyzed and stated for you which are the lines in which we want to grow. In terms of NII, clients, et cetera, obviously, I always say to you, let's calculate the NIM net of cost of risk because you always have one part which is where we produce, and the other part is what is the cost of risk that is happening linked to that. And obviously, in different timing. So it's not an easy one. But we are confident in terms of both NII clients and NIMs. Thank you, Angel. Thank you, Mario. So I would like to thank everyone for attending this conference call, which was my last as Head of Investor Relations as we will be assuming a new position in the group. At this point, I would like to take the opportunity to thank you all for such great partnership over the last two years. And also I would like to introduce Camila Stolf, please Camila, as the new Head of Investor Relations and will be in charge of the depart moving forward. Welcome, Camila. Thank you, Gustavo. And thank you, everyone, who's attending this video conference. Following this video conference, we and our entire Investor Relations team are going to be available for any further questions you may have. I look forward to meeting you in the coming months, hopefully, personally. Thank you, and have a great day.
EarningCall_971	Good morning, and welcome to the World Acceptance Corporation Third Quarter 2023 Earnings Conference Call. This call is being recorded. [Operator Instructions]. Before we begin, the Corporation has requested that I make the following announcement. The comments made during this conference call may contain certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. That represents the Corporation's expectations and beliefs concerning future events. Such forward-looking statements are about matters that are inherently subject to risks and uncertainties. Statements other than those of historical fact as well as those identified by the words, anticipate, estimate, intend, planned, expect, believe, may, will and should or any variations of the foregoing and similar expressions are forward-looking statements. Additional information regarding forward-looking statements and any factors that could cause actual results or performance to differ from the expectations expressed or implied in such forward-looking statements are included in the paragraph discussing forward-looking statements in today's earnings press release and in the Risk Factors section of the Corporation's most recent Form 10-K for the fiscal year ended March 31, 2022 and subsequent reports filed with or furnished to the SEC from time to time. The Corporation does not undertake any obligation to update any forward-looking statements it makes. At this time, it's my pleasure to turn the floor over to your host to Mr. Chad Prashad, President and Chief Executive Officer. Good morning, and thank you for joining our fiscal 2023 third quarter earnings call. Before we open up to questions, there are a few areas that I'd like to highlight. We are pleased with the trends that are emerging from recent policy changes. As we discussed during our most recent quarterly earnings call, we began adjusting our underwriting toward the end of our last fiscal year as the economic uncertainty was increasing. This was primarily due to three drivers, inflationary pressures on our customers' cash flow, delinquency normalization after a period of extraordinary portfolio growth and stimulus, and growing macroeconomic and recessionary concerns. The first trend, delinquency is showing positive trending. Our early-stage delinquency continues to decline month after month, while later stage will continue to result in elevated charge-offs into next quarter. Earlier in fiscal year 2023 we quickly reduced our exposure to our highest risk customers and successfully avoided the temptation to lend into the economic uncertainty. Now we are fortunate to be in a position of credit performance improvement during the fiscal year, especially with our new customers. Second, we are now beginning to carefully renormalize credit. The third quarter's book-to-look ratio increased slightly to around 25%. This is up from a low of around 20% during the second quarter. This compares to approximately 35% during the third quarter of fiscal years 2021 and 2022. The book-to-look reduction has been focused on our most risky applicants and has also resulted in significant reductions in recent first-pay default rates, which is a strong indicator of future credit performance. For example, new customer originations in the first quarter had a 16% lower first-pay default rate year-over-year when compared to the first quarter of the prior year. Second quarter new customer originations first-pay default rates were 38% lower year-over-year. While still early, our most recent third quarter first-pay default rates show a 30%-plus reduction compared to the third quarter of fiscal year 2022. To underscore how strong recent credit performance has been, the most recent two quarters have some of the lowest vintage first-pay default rates including pre-pandemic comparisons as well as the low first-pay default rates of vintages positively impacted by COVID stimulus. We're especially proud of the accomplishment considering the reports of increasing default and delinquency rates across several credit industries during the second half of calendar 2022. In addition to early indications of dramatic improvements in performance for these vintages, we continue to steadily improve the gross yields. New customer originations in our second quarter of 2023 had gross yields over 7% higher year-over-year when compared to the second quarter of fiscal year 2022, while the third quarter gross yields are over 25% higher, again at the same time at a 30%-plus reduction in first-pay default rates. Similar adjustments have been made for returning and refinance customers as well. These performance outcome are a result of incredibly hard work from our branch team members as well as their supporting leaders and trainers as well as corporate operations support, IT, analytics, HR and marketing teams. As mentioned, our increasing confidence in the early indications of performance, low delinquency and high gross yields allowed us to begin increasing marketing to new customers, our approval rates and our loan volume towards the end of the third quarter. For reference, new customer originations were 31% of the originations in the third quarter of 2022 and 45% in the third quarter of fiscal years 2019 and 2020. This quarter, new customer originations increased with each subsequent month to 55% of comparable December volumes in fiscal year 2019 and 2020 and 45% of the prior year's December. We expect to continue increasing our investments in marketing and new customer acquisition during the fourth quarter and into the next fiscal year. Finally, our world finance team is outstanding. I'm incredibly proud of our leaders at every level in the company and not just the great accomplishments that I mentioned earlier, but that they embrace opportunities with positivity, fun and grace. At this time, John Calmes, our Chief Financial and Strategy Officer, and I would like to open up to any questions you have. Thank you. We will now begin the question-and-answer session. [Operator Instructions] First question comes from John Rowan of Janney. Please go ahead. The incentive -- the $7 million of incentive change that you noted in the press release, is that a reversal? And if so, which line item is that? And I assume it would be in personnel. Is that correct? Yes, that is in the personnel expense. That's correct. And there was -- two things going on there. One portion is a reversal related to some officers who left the company during the quarter. And the other is a shift from the branch level of compensation from bonus to base pay. Okay. So what part -- I'm trying to figure out what the run rate is on that number going forward. Obviously, the reversal won't be there next quarter. I mean how much of the $6.9 million is a reversal as opposed to a change in comp? I don't have that number in front of me right now, but I believe it's around $3 million, but I can check that. So I mean, is it safe to assume that the $40.7 million, that next quarter, it's $45 million -- back to that $45 million because it would exclude that $3-ish million reversal? Okay. So I appreciate the non-GAAP numbers that you put in, but I mean your portfolio did come down. So I think just putting the -- taking the allowance -- or taking the provision now and putting the charge-offs in maybe overstating the impact of credit. But your allowance ratio did come down sequentially. Is that -- I'm trying to figure out why that came down if it was a change in the seasonal factors that you're using? Or what drove -- I'm looking at the number, it was saying, 12.9% versus 13.5% last quarter. Yes. So that is a big piece of it, right? So I mean, you can look at the seasonality factors in the earnings release, right? And you go from a factor of 1.05 to 0.94, right? So that is certainly a piece of it, which makes sense, right? I mean our -- the risk in the portfolio will be the lowest at December right before the tax refund season, right? But another big factor in that was just the shift in lower tenured customers, right? So obviously, that zero to five month bucket carries a much higher expected loss rate than the longer tenured buckets do. And as of December, that -- the zero to five month bucket makes up only 7.4% of the -- sorry, 7.1% of the portfolio. And that was at 9.8% at September, and 13.8% last December, right? So we've taken out a substantial amount of risk from the portfolio by reducing those new customer originations. Okay. But in the comments, and you talk about -- and I'm just trying to figure out how this impacts the portfolio going forward about increasing new customer originations. I'm trying to -- what was the comment that you made regarding increasing originations? Because you said even in the press release about increased loan originations toward the end of the quarter. That's right. So as we've been able to prove to ourselves that we could grow throughout this period at the same time is dramatically reducing the first-pay default rates within these vintages. We did begin to grow sequentially, November over October and December over November in terms of new customer investments. And we'll continue that into the fourth quarter and the next fiscal year as well. So to the earlier question, there's the seasonality factor. There's less of a risk in the overall portfolio as there's been less investment in new customers. But at the same time, the investments we're making in new customers over the last two quarters are much less risky than you would have historically seen. So that's also a factor into the overall reserve rate. Okay, and then I'm just trying to -- you talked about better originations. I mean, next quarter, does the loan portfolio go up or down from where it is today? Typically in the fourth quarter, we have a fair amount of runoff, and that's primarily driven to tax season and tax refunds. I don't think we have any expectation that this fourth quarter will be any different than prior fourth quarters in terms of runoff. And also the fourth quarter is not typically a quarter of a large investment in new customers. So I wouldn't expect us to grow at a higher rate in the fourth quarter this year than we have in any prior year. And then last question for me, where do you stand on your covenants, the waivers, and when would you potentially be refinancing your revolving credit facility? Thank you. Sure, yes. So we amended the credit facility in -- during the quarter, and we have plenty of room on all the covenants and there are no waivers as of the quarter end. And so we will look to extend that facility in this coming summer. Hey, thanks so much. Thanks for taking my question. Just a quick follow-up from John Rowan's questions. So it is encouraging to see that the first-pay defaults are improving. I'm just kind of wondering, all else being equal, if you can kind of play out how you think that's going to roll into delinquencies and losses because just the 25% is high, but are we now -- should we expect kind of going back to historical levels and sort of what's the cadence to get there? Thank you. Sure. Yes. So as you can see, the front-end delinquency as of December is much lower than it was in September and as well as it historically is at December, right? So medium term, that looks like -- it indicates that charge-offs start to come down. At December, the 90-day delinquency bucket is still relatively high, but it did come down from September. I think in dollars, it came down around $4 million, $5 million since September. And we expect that to continue to come down during Q4. At this point, during January, the 90-day bucket has already come down close to $6 million from December. And that's with charge-offs for January look to be lower than they were in December. And kind of looking forward, you can tell that February charge-offs should be lower than January and March should be lower than February, right? So all the trends look very positive. So we believe by the time we get to March, the delinquency picture should look pretty good and lead to lower charge-offs from that point. But that being said, but we do expect elevated charge-offs in Q4 relative to historicals. But they should be better from a growth standpoint compared to Q3. Okay. That's very helpful. Thank you. And helpful January data, I really appreciate that. The ADQs [ph] that came down $6 million. And then I guess in terms of the credit reserves, is the level that we see today anticipating those declines? Or should we be expecting further reductions in credit reserve allowances? No. So we haven't forecasted the declines that happened in January explicitly in the allowance, right? So a lot of that will be baked in, but there's nothing sort of additional -- no additional reductions for what we're seeing today. Okay. That's helpful. And last one for me, so I appreciate that the number of new customers or low-tenure customers has shrunk, and it had an impact. And now it seems like, okay, there's an opportunity to grow the business. You're going to be spending more in marketing. If you can maybe help us understand like now with the growth that you're anticipating going forward, going after new customers going forward, what's the difference in terms of the quality of new customers you're going after or maybe the learnings that you've had for what you're going after with new marketing going forward versus sort of the prior new customers that maybe had the -- generated some of the higher loss content recently? Yes, sure. So during the last two quarters, we had fairly dramatic reductions in our overall marketing spend, especially for new customers. So one of the main reasons that loan origination volumes declined within those two quarters isn't just a factor about the reduction in our overall approval rate. It has as much to do with driving new applications as anything else as well. So we feel fairly confident that many of the changes we've been able to make very successfully from an operational perspective, allow us to turn marketing back on and do it in a way that drives in applications that we know that we are very likely to approve and at the same time, be able to judge the risk accordingly and price them accordingly. So one of the factors in December's originations increasing has to do with turning that marketing back on, albeit to a much lower level than we've done historically. So that gives us confidence that as we turn or increase the marketing investment, we'll be able to drive those new customer applications and be able to approve them appropriately and as well as book them without having any dramatic reductions to first-pay success and without having any reductions to overall expected gross yields on those loans. Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Prashad for closing remarks. In closing, we are pleased with the changes to our portfolio and believe it will generate significant cash flow in the coming operating environment, fiscal 2024 and the fourth quarter of fiscal 2023. Thank you for taking the time to join us today. This concludes the third quarter earnings call for World Acceptance Corporation.
EarningCall_972	Good day, and welcome to the Altria Group 2022 Fourth Quarter and Full Year Earnings Conference Call. Todayâs call is scheduled to last about one hour, including remarks by Altriaâs management and the question-and-answer session. Representatives of the investment community and media on the call will be able to ask questions following the conclusion of the prepared remarks. I would now like to turn the call over to Mac Livingston, Vice President of Investor Relations for the Altria Client Services. Please go ahead, sir. This morning, Billy Gifford, Altriaâs CEO; and Sal Mancuso, our CFO, will discuss Altriaâs fourth quarter and full year business results. Earlier today, we issued a press release providing our results. The release, presentation, quarterly metrics and our latest corporate responsibility report are all available at altria.com. During our call today, unless otherwise stated, weâre comparing results to the same period in 2021. Our remarks contain forward-looking and cautionary statements and projections of future results. Please review the forward-looking and cautionary statements section at the end of todayâs earnings release for various factors that could cause actual results to differ materially from projections. Future dividend payments and share repurchases remain subject to the discretion of Altriaâs Board. Altria reports its financial results in accordance with U.S. Generally Accepted Accounting Principles. Todayâs call will contain various operating results on both a reported and adjusted basis. Adjusted results exclude special items that affect comparisons with reported results. Descriptions of these non-GAAP financial measures and reconciliations are included in todayâs earnings release and on our website at altria.com. Finally, all references in todayâs remarks to tobacco consumers or consumers within a specific tobacco category or segment refer to existing adult tobacco consumers 21 years of age or older. With that, Iâll turn the call over to Billy. It was an exciting year for Altria as our businesses delivered strong financial performance, and we continued to strategically invest toward our vision. We grew our adjusted diluted earnings per share by 5%, and our tobacco businesses remained resilient and successfully executed their strategies. We also returned significant cash to shareholders through dividends and share repurchases. Last year, we returned more than $8.4 billion to shareholders, outpacing our record returns from 2021 and representing the largest single year cash return since 2002. Our vision guided our actions, and we believe we made meaningful progress on our journey toward moving beyond smoking. Our teams took several steps forward during the year, including accelerating the growth of on! nicotine pouches, creating long-term optionality for our inhalable smoke-free product portfolio, enhancing our digital consumer engagement and continuing to advocate for tobacco harm reduction. Helix grew on! reported shipment volume to 82.5 million cans during its first full year of unconstrained manufacturing capacity, an increase of more than 70% versus the prior year. At retail, on! share momentum continued in the fourth quarter as the brand reached 5.9% of the total oral tobacco category and 24% of the nicotine pouch category. This impressive performance was driven by continued increases in brand awareness and adoption by smokers and dippers. Additionally, we believe Helix effectively managed on! promotional spend as the year progressed and reduced on! promotional spend per can by approximately 15% during the second half of the year compared to the first half. In oral tobacco product development, we are excited to announce we have finalized a new product design, which will provide tobacco consumers more smoke-free options within our portfolio. We also began regulatory preparations for the product, and we are encouraged by the initial research results and the response we have received from dippers and nicotine pouch users. We look forward to sharing more details and unveiling this innovative product at our Investor Day next month. Turning to our inhalable smoke-free portfolio. We created long-term optionality in the heated tobacco and e-vapor spaces. Internally, we have not yet finalized the design of our heated tobacco capsule product, but our teams continue to make progress. The consumer remains the focal point of our innovation system and our teams are tailoring the product to appeal to smokers who have not yet found a satisfying alternative to cigarettes. We also look forward to unveiling this exciting new product at our Investor Day next month as well. And in October, we announced a strategic partnership with JT Group, including a joint venture for the U.S. commercialization of heated tobacco stick products. Weâre encouraged by the initial collaboration between our teams and the pace at which they are operating. Horizon is optimizing team for the U.S. market and plans to begin regulatory preparations later this year. Weâre excited about the opportunity and are working diligently to bring Ploom to smokers in the U.S. In e-vapor, we previously announced we elected to be released from the noncompete obligations related to our JUUL investment. We retain our economic stake in JUUL. E-vapor remains the largest smoke-free category in the U.S. and the most successful category in transitioning U.S. smokers away from cigarettes. We believe the category can play an important role in harm reduction, and weâre continuing to evaluate all options to best compete in the category. Next, letâs discuss the progress we made to enhance our digital consumer engagement. We launched a new digital trade program last spring, and we believe this program enhances our ongoing commitment to responsible retail. The program includes multiple participation options for retailers. For those participating at the highest level we introduced incentives for retailers to include age and identity verification solutions in their digital platforms. And once the consumer is verified, retailers can then provide offers and messaging from our brands within the retailerâs app. Iâm excited to share that we implemented these solutions in more than 33,000 stores, exceeding the goal we outlined last year at CAGNY. Currently, consumers can view offers from our smokeable and more smokeless tobacco brands. But going forward, we expect to expand the program to include on! and other smoke-free brands. As we continue to broaden our digital reach, data will help us better understand each smokerâs journey and help them successfully transition to other smoke-free alternatives in our portfolio. Moving to the regulatory environment. We remain optimistic about the future of harm reduction in the U.S. We believe we have an unprecedented opportunity to lead the way in shifting millions of smokers to smoke-free alternatives, if we follow the science and foster innovation with the support of reasonable regulation. In December, the Reagan-Udall Foundation published its operational evaluation of the FDAâs Center for Tobacco Products. We were among the stakeholders who provided input into this evaluation. Among its recommendation, the report urges the FDA to clearly define product pathways and accelerate PMTA decision-making, take enforcement actions against manufacturers and products in violation of the law and address the need for risk communications to tobacco consumers. We agree these are important opportunities and believe that the FDA should direct its focus toward implementing a framework to advance harm reduction, rather than focusing on prohibition policies that we believe will further expand the illicit market and create other unintended consequences. Letâs now move to the operating environment. We estimate that total equivalized tobacco volumes declined 6% for the year and 1.7% over the past five years on a compounded annual basis. Combustible volumes declined by an estimated 7.8% last year as smokers faced increasing economic challenges. We are encouraged that smoke-free volumes were stable compared to the prior year at 3.8 billion equivalized units and now represent an estimated 26% of the total tobacco space. E-vapor has been a major contributor to the growth of smoke-free products over the five-year period. Although volumes declined by an estimated 1% year-over-year amid considerable regulatory uncertainty such as the FDA from denial order and subsequent temporary stay on JUUL products, which caused market disruptions for both consumers and retailers. In oral tobacco, volumes grew by an estimated 1.5%, driven by the continued adoption of all nicotine pouches. Turning to our financial outlook. Our plans for 2023 include a continuation of our strategy to balance earnings growth and shareholder returns with strategic investments towards our vision. For 2023, our planned investment areas include: continued smoke-free product research, development and regulatory preparations; digital consumer engagement; and marketplace activities in support of our smoke-free products. We believe the external environment will remain dynamic in 2023. We will continue to monitor the economy, including the impact of high inflation, tobacco consumer dynamics, and regulatory and legislative developments. Considering these factors, we expect to deliver 2023 full year adjusted diluted EPS in the range of $4.98 to $5.13. This range represents an adjusted diluted EPS growth rate of 3% to 6% from a $4.84 base in 2022. Before I turn it over to Sal, I would like to send a sincere thank you to our employees. I continue to be impressed by the talent within our companies and our ability to adapt and overcome challenges in a dynamic operating environment. The passion and dedication of our employee base is evident, and Iâm confident in our ability to execute our vision because of you. Also, Iâd like to honor the memory of Leo Kiely, the long-standing member of our Board who recently passed away. Leo served on our Board since 2011 and made many contributions to Altria, including as Chair of the Compensation and Talent Development Committee and as a member of the Innovation Committee. We will miss his leadership, guidance and friendship. Thanks, Billy. We were very fortunate to have Leoâs 12 years of service at Altria and our thoughts remain with the Kiely family. Moving to our results. Our tobacco businesses generated strong financial performance again this year and were responsive to changes in a dynamic external environment. In the fourth quarter, the smokeable products segment grew its adjusted operating companies income by 4% and expanded its adjusted OCI margins to 58.4%. The segment also reported robust net price realization of 13.5%. As a reminder, manufacturer price realization does not reflect retail price changes for smokers. For example, Marlboro net retail pack price increased 6.4% in the fourth quarter compared to last year. We continue to successfully execute against our strategy in the smokeable segment, maximizing profitability while balancing investments in Marlboro with funding the growth of smoke-free products. For the full year, smokeable segment adjusted OCI grew 2.9% to $10.7 billion, and adjusted OCI margins expanded by 1.4 percentage points to 59%. In smokeable segment net price realization for the year was 11.1%. In addition, over the past five years, the smokeable segment has grown adjusted OCI by $2.2 billion, representing a compounded annual growth rate of 4.7%. Over the same time period, adjusted OCI margins have expanded from 51% to 59%, an impressive increase of 8 percentage points. Turning to volumes. Our smokeable products segment reported domestic cigarette volumes declined 12.1% in the fourth quarter and 9.7% for the full year. When adjusted for calendar differences and trade inventory movements, domestic cigarette volumes for the fourth quarter and full year declined by an estimated 11% and 9.5%, respectively. At the industry level, when adjusted for trade inventory movements, calendar differences and other factors, we estimate that adjusted domestic cigarette volumes declined by 9% in the fourth quarter and by 8% for the full year. Next, letâs discuss retail share performance. Full year retail share for the industry discount segment increased 1.4 share points. We believe these results were driven by an increased pressure on smokersâ disposable income and increased competitive activity, including multiple branded discount offerings priced at deep discount levels. Marlboro retail share declined by 0.4 for the full year. Most of the full year share losses were attributable to the value options within the Marlboro brand family, such as Special Select and Marlboro 72s as some price-sensitive consumers continue to seek additional price relief. Meanwhile, the brandâs mainline non-menthol offerings, including the iconic red and gold pack varieties were resilient and performed well for the year. Marlboroâs share of the premium segment grew to 58.2% for the full year. Marlboro has performed better than many other premium brands over the last several years. In fact, over the past three years, Marlboro grew its share of premium by 1 full share point. We are encouraged by Marlboroâs resilient performance as the brand celebrates 50 years of leadership in the cigarette category. In cigars, reported cigar shipment volume decreased 4% for the full year. While Black & Mild continued to maintain its leadership in a profitable machine-made tip cigar segment. Next, we will move to the oral tobacco products segment. Full year segment adjusted OCI and adjusted OCI margins contracted as we continued to invest behind on!. Total segment reported shipment volume declined 2.4% for the year as growth in on! volume, which more than offset by lower reported MSP volumes. When adjusted for trade inventory movements and calendar differences, we estimate that full year total oral tobacco segment volumes declined by an estimated 2%. Full year oral tobacco products segment retail share declined 1.3 percentage points as declines in MST were partially offset by the continued growth of on!. Within the traditional smokeless category of MST and snus products, Copenhagenâs share performance has been stable over the last three years, declining only 0.3 from 2019, whereas the second largest traditional smokeless brand has ceded 1.6 share points. Overall, we continue to be encouraged by the performance of our oral tobacco products as on! grew volume and share in a competitive category and Copenhagen remained the category leader. Turning to our investment in ABI. We recorded $571 million of adjusted equity earnings for the full year, down 10.6% versus 2021. We continue to view the ABI stake as a financial investment, and our goal remains to maximize the long-term value of the investment for our shareholders. In our all other operating category, we have completed our wind-down of Philip Morris Capital Corporation and no finance assets remain. I would like to thank the many PMCC employees who contributed to its success over the years and to the other Altria employees who helped complete a successful wind-down. Finally, we continue to effectively manage our balance sheet while generating strong financial performance and returning significant cash to shareholders. These results were driven by our tobacco businesses that continue to be highly cash generative. Our year-end credit metrics remain strong. Our debt-to-EBITDA ratio was 2.1 times, down 0.4 over the past three years, and our weighted average coupon was 4%, a decrease of 0.2 over the past three years. We also expect to retire approximately $1.3 billion of notes coming due later this month with available cash. In addition, we returned more than $8.4 billion in cash to shareholders last year through dividends and share repurchases. These record cash returns included paying $6.6 billion in dividends and raising the dividend for the 57 time in 53 years. We also repurchased more than 38 million shares during the year, totaling $1.8 billion, which completed our previously authorized program. Earlier this week, our Board authorized a new $1 billion share repurchase program, which we expect to complete by the end of 2023. Thanks, Sal. While the calls are being compiled, Iâll remind you that todayâs earnings release and our non-GAAP reconciliations are available on altria.com. Weâve also posted our usual quarterly metrics, which include pricing, inventory and other items. As we mentioned during the call, we have exciting topics to discuss at our Investor Day next month. We look forward to having a fulsome conversation about our smoke-free future and we are excited to share more about our journey toward moving beyond smoking. Todd, weâll now transition to the Q&A period. So, I just wanted to start with the industry volume backdrop. I recognize you guys have kind of suspended the historical practice of offering industry guidance, and that makes good sense to me. But just hoping to get some color on how youâre thinking about the potential impact of the menthol ban in California if you think thatâs an incremental headwind for the year. Thanks. Sure. Yes, I think itâs a little early to say exactly what that headwind will be, Vivien. Certainly, it will be a headwind from the State of California having banned it. It went into effect, you remember in December. So, weâll see how that proceeds. But yes, I would say that would be a headwind as we enter 2023. Fantastic. Thanks for that. And then just pivoting to the oral tobacco segment, encouraging to hear some rationalization on the on! promo having fallen 15% in two half â22. Can you offer a little color on where that positions on! relative to the competitive set? Yes. We think itâs -- it actually -- we were very pleased with the results we -- as you mentioned, we reduced it 15% first half to second half and it continued its momentum and grew share. We think itâs a growing category, Vivien, and that the entire segment is growing, and we want to participate in that growth. So, weâre continuing to invest behind it. And as we move forward, I think you see the benefit of data analytics. And then, in the future, the application of what most people refer to as revenue growth management that weâve seen success in traditional smokeless as well as cigarettes. So, thatâs what you can expect from us as we move forward. Perfect. And just one last one for you, Sal, please, I recognize itâs premature for us to start modeling royalties from the IP litigation with British American Tobacco because thereâs certainly an appeals process. But if you could just contextualize how we should be thinking about that incremental revenue stream as litigation draws to a conclusion, please? Thank you. Yes, sure. Vivien, youâre right, there is an appeals process. We developed our guidance. We have not considered the royalty, any potential royalties in that guidance. But, as you know, with any year, you put plans in place and there are always puts and takes. So, I think itâs early to really think about how you might model that. Letâs see how the appeals process plays out. How would you characterize the current state of your consumer? And this builds on Vivienâs question, but just wanted to hear how youâre thinking about the puts and takes to figure out volumes in â23? Volume declines were clearly very elevated in â22. So, do you expect a more normalized year of mid-single-digit volume declines given easier comparisons and moderating gas prices? Yes. Vivien, I know youâre looking for -- Iâm sorry, Pamela, youâre looking for guidance on upcoming volume. Letâs talk about the headwinds and tailwinds as we progress through the year. Iâll talk about the consumer first because thatâs the most important when you think about volume. I think the consumer remains under pressure. We tried to highlight that it was the compounding of the inflationâs impact as we progressed through 2022. I think youâve heard as many predictions as I have had soft landing, no deep recession. So, I think even the experts from an economist standpoint are all over the board. We feel good about the guidance that we put out. We feel good about where the consumer is, but we want the adaptability and the flexibility to be able to move with the consumer needs. So I think the consumer will remain under pressure until we see some relief, if you will, from inflationary pressures in the marketplace. Gas prices is just one aspect. Thatâs -- we certainly have seen a decline, but nowhere near the lows we were seeing as we were pre-pandemic levels. So, gas prices can move around depending on China reopening and things of that nature. So, weâll see where that goes. I think when you think about volumes, itâs specifically combustible volume. Itâs important to remember that what weâre looking at is how the consumer is impacted. Tobacco, the industry is not immune to macroeconomic environment. Itâs just less impacted than other industry categories. And so, from that standpoint, historically, what weâve seen, Pamela, is that as the consumer is experiencing this rapid change in their economic condition, whether up or down, they make changes in their purchasing behavior and then it becomes more comfortable to them through time and they adjust various factors in their purchasing basket. So, it remains to be seen. Weâll see how the macroeconomic shapes up. But I would say thatâs the biggest thing and how that macroeconomic impacts purchasing behavior. Thanks. Thatâs helpful. And my other question is just on your 2023 earnings guidance, which reflects a slightly lower growth rate compared to your 4% to 7% guidance over the last several years. So, can you talk about the puts and takes influencing the outlook for â23? And how much incremental investment does this reflect behind reduced risk? And are there any other discrete factors contributing to the slight shift in the growth rate? Yes. I think, the last comment you made, I would say thereâs a slight shift. Weâre very excited about the guidance we put out. I think when you think about it, itâs really the uncertainty around the macroeconomic environment was the biggest impact to the overall guidance. And youâve mentioned it and you asked about that earlier. Itâs where does the macroeconomic environment go through as we progress through 2023 and how does that specifically impact our tobacco consumer across all categories? I had a question about your pricing. Just thinking about the strength in your net price realization and smokeables over the past several quarters, itâs been so darn robust. So I just wanted to hear from you how sustainable you think this is, especially in considering, I guess, the pressure on the consumer and some of the other things you called out? Sure, Bonnie. And Iâll be careful not to talk about future price increases. But the way we think about pricing, as you know, itâs an important part of the algorithm when youâre in a declining category. Remember, our strategy in that category is, maximize profitability over the long term while making appropriate investments in Marlboro in the growth areas. So we see that as the engine that does that. When you think about pricing, I think itâs important to really focusing on what Sal mentioned in his remarks. You see high price realization, but at retail to the consumer from a consumer-facing, Marlboro on average went up about -- just shy of 6.5%, 6.4%. So, the price increase to the consumer is much lower than what you see in the price realization. And we mentioned before price realization is really two components for us. Itâs list price, as you would expect, across the industry, but itâs also the implementation of RGM. And so, with that price realization and usually Bonnie, you or one of the other analysts will ask us about price gap, and itâs at 41%. I think itâs important to remember, as we get the data and really that data -- thatâs somewhat impersonal. Itâs consumer purchasing behavior through time. As we analyze that, what weâre able to do is the price gap varies locality to locality. It can vary store to store, and it can vary within -- even within the Marlboro franchise. You heard Sal talk about -- if you think about that overall price gap of 41%, you have the packing. So, take red and gold in the Marlboro franchise. If you look at total year 2022 to total year 2021, you can see it was very stable. Where weâre seeing it is in those packings or SKUs we have within Marlboro that are there for price-sensitive consumers to have a safe landing point. And so, weâll continue to implement those tools. As far as how do we think about pricing going forward, weâve shared with you whether itâs percent of discretionary income, a minutes work and when you benchmark the U.S. against other countries around the world, weâre still at the very low end of that. Yes. Thatâs actually super helpful. And that was going to be a question. Iâm pleased you kind of walked through the gap. Thatâs useful context. Just switching gears, if I may, a question on your oral tobacco business. You highlighted how strong on! volume growth has been and -- but in the context of that, your total oral tobacco revenue and profit growth has been under pressure with a fair amount of margin contraction. So, you did sort of touch on this. But hoping maybe you could talk a little bit further about maybe your strategy for turning around the entire oral tobacco business. Any key initiatives that you could highlight for us, and maybe youâll talk about this more in March? Yes. We will -- weâre certainly excited to be able to talk about it in March. Youâre exactly right. Within the old tobacco space, if you think about that total space, you have traditional moist smokeless tobacco and you have novel oral pouches. Some of the margin contraction youâre seeing is just true mix, right, as consumers are moving from traditional moist smokeless tobacco and novel oral growing, youâre going to have some mix impacts in that overall margin. We highlighted for you the reductions we made in promotional spend per can, but still had the minimum share. I think the biggest thing that weâre excited is to be able to unveil the product that we have designed and have locked down and be able to show at Investor Day what that product is and some of the research related to that. So, more to come at Investor Day. Okay. Final one for me, just speaking of that. Any more color you could provide on your smoke-free vision today and maybe just how confident you are that youâre going to be able to deliver on your long-term strategy? Iâm sure youâre going to talk through this in an investor meeting and Iâm excited to hear about it, but any sneak preview as to what youâre most excited about? I wonât necessarily give you a sneak preview because I donât want to get ahead of myself for Investor Day, weâd like to unveil it in total context and paint the solid picture for investors. So, I appreciate the question. I look forward to being to unveil that for you at Investor Day. Billy, you spoke in the release and in your prepared remarks about making sort of "meaningful progress" on the smoke-free portfolio. And you also mentioned strategic investments in division. But at the same time, your CapEx guide is flat versus last yearâs guidance. Youâre continuing to deliver all algorithm EPS growth. And I think as you said, to Pam, that any slight reduction is more driven by the macro environment, which presumably also implies little or no incremental P&L investment in NGPs as well. So my question is, what are the strategic investments that youâre talking about? How meaningful are they? And where can we see them in the financial statements? Yes. I think itâs a great question. I appreciate it. I think when you think about where those investments show up, itâs important to remember, theyâre not all incremental spend. Theyâre always puts and takes. Theyâre going to shift some of those -- the infrastructure that the combustible or traditional MST has bore the cost through history, and youâre going to shift that to the NGP space. We do have incremental investments around NGP product development, the regulatory preparations associated with that and the research associated with that. Hereâs an example for you, Callum. If you think about like even the digital consumer engagement, that weâre implementing in traditional smokeable or combustible and MST, and we mentioned in the remarks being able to transition that over. So, youâll see those costs will actually appear in the combustible and the smokeless before it appears in the NGP categories. So, thereâs a lot going underneath the surface, if you will, from an investment standpoint. But there are always puts and takes. Weâre trying to be wise with the investment but not restrict growing categories. I guess, the natural follow-up is, if I benchmark relative to your big competitors, both in the U.S. and internationally, the two biggest amongst them are spending literally billions of dollars a year. And my guess is instinctively, if youâre just talking about switching a portion of your cigarette spend, over into NGP, youâre not going to get anywhere close to that billions of dollars a year. And so, the question is, do you genuinely believe you can be successful if youâre spending so much less than those competitors? And then how? Yes, we do believe that weâre trying to really be driven by the consumer, learning from the global marketplace of products in the marketplace and use those as, if you will, a launch point for products and really trying to meet what the desires and needs of the consumers are in the marketplace that arenât met by those existing products in the marketplace. And so, we feel like we can achieve the vision. Weâve highlighted for you guys that we really believe we can navigate strong returns to shareholders at the same time, making the appropriate investments in these growing categories. And we believe we can do that. I think youâll continue to hear us talk about investments, and weâll provide a lot more detail of some of the progress weâve made at Investor Day. Hi. So, I have three questions. So, first one to you, Billy. We will have a new competitor next year in the U.S. market with IQOS. And when you were distributing IQOS, then the volumes were much lesser than any of us had expected. So, what did you find were the challenges when U.S. consumers came to IQOS? Yes. Itâs a great question. I appreciate you asking it, Gaurav. I think when you think about IQOS, it was really about the disciplined approach that we were taking to introduce in a brand-new category. The consumer in the U.S. was used to the e-vapor space. They had understood that. When youâre introducing a new category that requires some education on how to use the product and how to maintain the product that there is investment there that takes place. And we talked about the learnings we had as we went along the way. But I would say the biggest challenge is educating the consumer on the product and then meeting their desires. And I think thereâs still unmet needs in the marketplace. Sure. The next question and perhaps to you, Sal, is around MSA payments next year and how we should factor in inflation? And if you could just help us understand because I think there is confusion that how does that 3% number work versus inflation, or is it the change of inflation that we should be looking at? Gaurav, you are correct to point out that inflation is a factor when you think about MSA expense. A couple of points Iâll make. One is the high rate of inflation in 2022 has been accounted for and is already in the base. You are correct to point out that when you think about inflation related to MSA, thereâs 3% floor. So, even if inflation were measured below 3%, thereâd be a 3% increase in the MSA expense. And Iâll also remind you that inflation is measured at a point in time, December 31st current year to December 31st prior year. So, we have considered that when you think about 2023, there will be an elevated level of inflation. We have seen some receding of the rate of inflation, but still expect it to be elevated. So, we have considered that when we put together our guidance. And then finally, Iâll say, there are other factors besides inflation to consider when you think about MSA expense, including volume, shipment share and other such factors. Sure. And my last question is on share repurchases for next year, which at $1 billion or below what we thought and I think where most people were. And even though your EBITDA is growing -- youâre generating free cash flow after dividends, your leverage will anyway be down when you have the ABI stake. So, what mix you buy $2 billion of stock and not $1 billion? Well, first, let me say, weâre very happy that the Board authorized a $1 billion share repurchase. And if you think about capital allocation, I think we have a history of taking a balanced approach. So, as you know -- as I noted in our opening remarks, we plan on paying back about $1.3 billion in notes coming due with available cash. We continue to pay a strong dividend as well as the $1 billion share repurchase. Gaurav, I really have nothing to report on the ABI asset. We continue to do the analysis that we do with all capital allocations. And currently, we believe the best thing for the shareholder over the long term is to hold the asset. I just had a quick question for you on Marlboro. You have to be very happy with the resilient performance of Marlboro. And obviously, a round at though discount and deep discount share is accelerating, which has seemed to provide some risk to the brand. Iâm sure weâre not going to get your promotional program on this call. But I wonder if you could talk about how you see the brand performing in â23? And maybe more pointedly, have you increased promotions at a faster rate behind Marlboro to preserve that share where itâs doing so well there? Yes. Theyâre great questions, Chris. I think when you think about the resilience here at Marlboro, weâre very pleased with it. Weâre pleased with how itâs positioned with the consumer. We are pleased with that. Itâs still the aspirational brand within the cigarette space. I think when you think about your question on promotions, I would point to you that the high price realization actually shows that weâre able to be more effective and efficient on our Marlboro price promotion. I think it may be useful that -- I talked about Marlboro Red and Gold versus some of the price sensitive, but some of the tools that we have in place actually allow the precision. So, Iâll just walk through a quick example with three consumers. You have one consumer thatâs purchasing premium brands and occasionally pops up and buys a discount brand. The other consumer is continuing to flip flopping between premium and discount. And the third consumer is a discount consumer that occasionally pops up and smokes a premium cigarette. When you think about those consumers, youâre going to treat those differently to make them more of a continuous premium brand smoker. That discount smoker, you may never be able to get them to convert to a premium because of the condition -- the economic condition that theyâre in. So, as we move to personal value delivery as close as we can get to the consumer, we can tailor that across those three. And so thatâs where I refer to the price that being at the national level. Weâre doing this down at the local level and on our journey to move as close as we can get to the consumer. And so, that allows us to have Marlboro be resilient, address the consumersâ needs on a case-by-case basis, if we can get really close to the consumer and spend those resources accordingly to have a more consistent premium consumer through time. Thanks for that and the color there. I appreciate that. I had one other follow-up, which would be, you do have two relatively unique kind of profit drags this year, with PMCC winding down, obviously, pensions moving around. Could you give some more color around -- or context around the run, how much thatâs weighing on profitability this year? Yes, Chris, Iâll be -- so letâs talk about pensions for a moment. If you think about pensions, obviously, thereâs a P&L impact related to return on assets, changes in discount rate, but I would say the pension is really well funded. We have strong funding in that pension plan. Itâs actually fully funded. So, we feel really good about that. And I would say the changes in pension expense Iâll remind you a noncash. We have successfully completed the wind-down of PMCC. So, you are correct in that we had earnings and cash flow last year, and this year we will not. And it is a year -- on a year-over-year basis is a slight lag. But remember, PMCC was part of our all other category. It was -- so we consider it fairly immaterial to the total earnings of Altria. One for me, please, if you donât mind. On your smokeless business, especially on what weâve seen, the brand has been driven by strong discounting versus the main peer. Now, do you expect that to continue going forward or rather just closing the price gap between you and your main peer, even if you put your product -- promo spend per can is decreasing? Thank you. Sure. Thank you. I think when you think about it -- and this is not an excuse, itâs just facts. They had a first mover advantage. And when consumers -- to get consumers to have new brands in their consideration set, you have to induce trial. And thatâs what we feel like weâre doing. I would say, from a consumer standpoint, itâs still very small compared to the total nicotine space. So, weâre going to spend while -- and invest while the overall category is growing, so we can participate in that growth. We mentioned previously, it was intuitive that the adult dipper would move to the product pretty quickly and that the adult cigarette consumer, youâre going to have to induce trial and thatâs what weâre in the process of doing and are excited about the results thus far. I think through time, we did reduce the promotional spend per can. So, when you think about the price gap, if you will, the way you referred to it, to a competitive product in the marketplace, youâre going to invest while the category is growing, so you get these products in the consideration set. I talked about bringing some of the data analytics. I think you saw the benefit of that in this past year, but we have more to do there. And I think as we continue to progress and move forward, we feel good about it. I donât want you to think, though, itâs all discount. Itâs all priced off. Thatâs to induce trial. We really see it as a complete marketing ecosystem, if you will. And I hate to use the business term, but itâs surrounding the consumer and really meeting them where theyâre at in their journey and then supporting in that journey to fully transition over, if you will, from cigarettes to this novel oral pouch. And so, thatâs where weâre at. We feel good about the progress weâve made thus far, but we certainly have to continue to drive awareness of the induce trial. Thatâs very clear. Thank you. And yes, you are completely right. It has been fantastic progress for one. And if I could squeeze in just one more if you donât mind, is that Marlboro has indeed done very well, and congratulations for that. But for the rest of your portfolio, as small as it is versus Marlboro, what steps are you taking to defend your market share versus pressure, both from peers on the very top end of the price and the bottom end? Thank you. Yes. I would say if you look at growth, I would say the growth, if you look at competitors has really been at the very, very bottom end. Sal highlighted in his comments, there are a number of major manufacturers that have what we would consider branded discount priced in deep discount space. And so, when we look at total portfolios for some of those, we donât see the benefit of having gone down to that low price tier. They may grow one brand to the detriment of another brand within the discount space. So, we want to participate in the discount category. We think itâs important, but we certainly donât want to grow the discount category. And I think being premium focused where we feel the profitability and the high loyalty is in the cigarette space is an important place to play, and thatâs where weâre focused. And Sal highlighted for you, our premium brands are growing. Total premium share of the premium space is growing through time on the backs of Marlboro. So, weâre pleased with that. We talk about the RGM tools, so I wonât repeat that. But being able to continue to get closer to a consumer-by-consumer basis and meet them where theyâre at when they have needs is where weâre headed. And weâre excited about that progress. So I really appreciate your commentary, Sal, around the intent to pay down your upcoming euro maturity later this month. I guess, as we take a step back, your euro-denominated debt has really sort of come down, I guess, partly driven by sort of the income that youâre receiving from the ABI stake given that that was sort of a natural hedge. Given where sort of your euro exposure stands now in terms of your debt portfolio, are you with where that is, or is there a need to continue to grow that euro exposure over time, either synthetically or through outright issuance in that market? Yes. Priya, first, Iâm going to start my answer by just reiterating, I really have nothing to report. And as it pertains to ABI, we continue to believe holding the asset is in the best interest -- long-term interest of our stakeholders. Second, I would tell you that while we have flexibility, itâs really a market-by-market analysis and a transaction-by-transaction analysis related to what markets we may or may not enter as we think about managing our debt going forward. So, thatâs kind of how I would answer your question. At this time, we will open the Q&A to members of the media. [Operator Instructions] Weâll take our next question from Jennifer Maloney with The Wall Street Journal. My first question is about your JUUL valuation. I saw that you lowered the value of your stake to a price that values JUUL at $714 million. I wondered if you could explain the reasoning behind that valuation decrease. I was a little surprised because in the fourth quarter, JUUL resolved a large part of the litigation that it faced, which eliminated some of the uncertainty around the company. So, could you explain that valuation? Sure. Good morning, Jennifer. First, Iâll remind you that we had taken an impairment related to litigation, and we really captured it within kind of our overall discount rate of the JUUL assets. So, we had accounted for that. But on a quarterly basis, the way we account for JUUL is, has us run an analysis of the fair market value of the investment. Itâs not publicly traded, so we have to do an independent analysis. And from quarter-to-quarter, thereâs going to be changes, and weâve been pretty communicative about that. This quarter, it did -- our investment was reduced to $100 million and itâs really macro driven, itâs really macroeconomics and other factors that are considered when doing that analysis. Youâll note, Jennifer, when you build a discount rate, it starts with a risk-free rate. So certainly, the interest rate increases weâve seen through time are going to continue to impact it as long as theyâre still on an upward trajectory. Got it. My second question is a little more color around the consumer purchasing patterns right now. Can you talk a little bit more about what youâre seeing consumers doing? The volume has come down. So, is it because people are making fewer trips to the store to purchase cigarettes, or are they buying less each time? Can you sort of talk about what the actual pattern is? Yes. Itâs a great question. What weâre seeing is as we see mobility increase, if you will, the U.S. is coming out of the COVID pandemic, weâre actually seeing a return to more frequent trips. Remember, our consumer pre-COVID would go either every day or every other day. I think what youâre seeing and what consumers tend to do when they get under economic pressure is they reduce their number of nicotine occasions in a day. So through time, that factors into their purchasing behavior. You see a little bit, and we highlighted that, which was the consumers that are under dire economic conditions at times will either switch out or trade out to a cheaper brand. We try to give them a safe landing place within the Marlboro franchise. But as far as a number of trips, we havenât seen a reduction in the number of trips. Itâs more about through time, reducing their nicotine occasions. Thatâs correct. So remember, as we came into the -- thereâs no change in the overall trend, if you will, the long-term trend. As we went through COVID and there was less mobility, less societal pressures, we actually saw what we believe nicotine occasions go up. We see in -- when the economic conditions and the macroeconomic environment is greatly impacting the consumer, they will strict their nicotine occasions. As they become more comfortable with that they tend to return to a normal trend. Thank you. It appears at this time we have no further questions. Iâll turn the call back over to Mac Livingston, for any additional or closing remarks. Thanks to everyone for joining us. Please contact the Investor Relations team if you have further questions. Thanks, and have a great day.
EarningCall_973	Good evening, everyone. We'll just give a minute for everyone to join and then we will start. Hello, everyone. I'm Vipul Garg, Vice President of Investor Relations at MakeMyTrip Limited. And welcome to our Fiscal 2023 Third Quarter Earnings webinar. Today's event will be hosted by Deep Kalra, our company's Founder and Chairman. Joining him is Rajesh Magow, our Co-Founder and Group Chief Executive Officer; and Mohit Kabra, our Group Chief Financial Officer. As a reminder, this live event is being recorded by the Company and will be made available for replay on our IR website shortly after the conclusion of today's event. At the end of these prepared remarks, we will also be hosting a Q&A session. Furthermore, certain statements made during today's event may be considered forward-looking statements within the meaning of Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance, are subject to inherent uncertainties, and actual results may differ materially. Any forward-looking information relayed during this event speaks only as of this date, and the Company undertakes no obligation to update the information to reflect changed circumstances. Additional information concerning these statements are contained in the Risk Factors in Forward-Looking Statement section of the Company's annual report on Form 20-F filed with the SEC on July 12, 2022. Copies of these filings are available from the SEC or from the Company's investor relations department. Thank you, Vipul. Happy New Year and welcome everyone to our third quarter earnings call of fiscal 2023 or the last quarter of 2022. '22 started with a cautious optimism amid the Omicron third wave, but as the year progressed, we witnessed steady improvement in the COVID situation in India and most countries in the world, which helped demand led by leisure related travel. Indians increasingly took to traveling during the year and the demand recovery trends improved with each successive quarter. The reported quarter is the second high leisure travel season quarter of the year aided by winter and festival breaks and long weekends. We leveraged on this demand and executed our business strategies well to get back to full recovery over pre-pandemic levels in gross booking terms, while driving operating leverage from the cost optimization initiatives over the last few years. As a result, this has been our highest ever quarterly performance, both in terms of gross bookings and adjusted operating profit. Gross bookings for Q3 stood at $1.74 billion witnessing an increase of 64.4% year-on-year and 15.9% quarter-on-quarter in constant currency terms. Adjusted operating profit stood at $19.7 million versus profit of $13.2 million in Q3 fiscal year 2022. As we enter 2023, consumer sentiment continues to stay positive for travel, while we watch the COVID situation with China opening its borders, global inflation, and other macro challenges in the world closely. Trends suggest that, travelers are back on all travel segments with leisure, business, pilgrimage and corporate events and will continue to drive the growth in the coming years as well. While domestic travel led the recovery in 2022, we believe that full restoration of supply aided by some fair rationalization and easing of visa processes could help international travel recover to pre-pandemic levels soon with improved traveler's sentiment. During this quarter, the industry witnessed strong recovery in domestic aviation traffic, which is good news for the airlines and the other partners. Government is committed to the growth of the sector. And it is projected that in the next five years, government and other private entities are going to spend up to $12 billion on the infrastructure development of the airports. As per plan, in near future, there will be capacity expansion in many of the existing airports and new greenfield and brownfield airports will be set up. Recently, a second airport was operationalized in Goa with an annual capacity of 4.4 million passengers. Goa is among the most popular tourist destinations in the country and this will help drive tourism growth. A new terminal in Bangalore is now functional and expansion work in Delhi airport is underway. India is now the third largest aviation market globally, as per government data and initiatives are being taken to drive tourism and a traveler to smaller cities. In the last eight years, 72 new airports have come up in the country. In coming years, air travel growth will be driven by addition of new airports, infrastructure growth and increasing disposable income. All Indian Airlines place record orders of new aircrafts and this will help drive penetration further into smaller cities. Outlook for aviation market is favorable, and we expect a prolonged period of sustained growth on the back of these initiatives. Another important pillar for domestic tourism growth is ground transport and world class highways are a prerequisite for fast and seamless movement. This has been a focus area of government. The length of national highways has gone up by more than 50% from 91,287 kilometer as on April 2014 to more than 140,000 kilometer in March 2022. Government has set an ambitious target to develop 200,000 kilometers of national highway network by 2025. Similarly, for accommodations, the outlook continues to be robust. Almost all hotel chains have announced expansion and increasing their footprint in India. In next couple of years, there is an estimated increase of 25% in the number of hotels for these hotel chains. Coming to highlights of the reported quarter now, we restarted our brand campaign both on TV and digital media platforms for both MakeMyTrip and Goibibo. After a gap of 2.5 years, we launched 360-degree campaign to capture large chunk of festive demand. That campaign focused on relevant value propositions such as enhanced flexibility, book hotels, with no upfront payment, and numerous choices best suited to varied customer needs. For Goibibo, we ran a campaign promotion promoting daily steel deals on both hotels and flights a collection of deals unique to Goibibo. We deployed a digital focus campaign across platforms in order to target relevant consumer segments to drive efficient conversions. As for business segments now, starting with air business, we continue to add value for our customers through our industry first features. QuickBook feature for frequent fliers which was launched last quarter has led to a reduction of 15% in time taken for bookings for these travelers. During the quarter, we strengthened our free cancellation flow within 24 hours of booking. This is again an industry first initial. All these innovations help us remain the first choice of customer. We continue to maintain our leadership position in our market share in domestic air ticketing this quarter stood at 30.3%. We witnessed a jump in domestic air traffic during this high season quarter. Domestic a ticketing for us has gone beyond pre-pandemic levels while international air ticketing recovery is still lagging. Traffic to most of the domestic leisure destinations have now surpassed pre-pandemic levels and have started to grow. For international destinations, we witnessed steady recovery for short haul tourist destinations across Southeast Asia of Maldives and Middle East due to tourism demand. Demand for international long haul destinations however improved in this quarter, but still face high fares and visa backlog headwinds to full recovery. We expect this to normalize during this year as stated earlier. Our accommodation business which includes hotels packages and Homestay segment, with continued focus on expanding accommodation offering on our platform, our inventory is now comparable to pre-COVID levels. This has also helped us now offers stay options over more than 2,000 cities. Aided with seasonality, this quarter, we sold more than 53,000 unique properties, which is at par to pre-COVID levels. The recovery continues to be strong across all price points, barring the super budget segment of $20 or lower per room night stay. Overall gross booking for hotels has recovered to pre-pandemic levels on constant currency basis, on the back of strong growth in premium and medium premium segment, and partially aided by higher room tariffs. We continue to innovate and invest in our product. Book @Rs.1 launched last quarter that offered flexibility to the customers, which helped drive growth in longer advanced purchase bookings. goStays, which is our flagship program for certified budget hotels are now contributing to over 40% of the overall budget volume with much better customer experience and NPS. International outbound travel opened in March 22, 2022 and since then, we have been witnessing a steady recovery for short haul destinations. While we saw some slowdown in international travel bookings with COVID scare as China opened at the end of the quarter, but overall we witnessed good traction. And during 2023 we hope to see you travel to Europe and long haul destinations also returned fully. Homestays continue to lead recovery in overall accommodation category. 10,000 plus unique properties across 640 plus unique destinations have been sold during this quarter. During this quarter, we launched a new section of properties, called Hidden Gems, where every property in this set has unique USPs and are away from the center of the city. We also launched our brand campaigns specifically for Homestays to create more awareness among travelers that the campaign emphasized on the concept of state for every need and highlighted various day options, including pet friendly villas, pool villas, and villas best suited for large families. Moving to packages business, you would recall that last quarter we talked about how we have scaled up this business with the addition of holiday experts and franchisees we are now reaping the dividends in the high season quarter total packages, bookings are now more than 150% of pre-pandemic volumes with online channel leading the growth. Domestic packages are now more than twice of the pre pandemic volume and for international packages the recovery is now picking up. Our bus ticketing business revenue recovery was at around 113% as compared to same quarter pre-pandemic on constant currency basis. This quarter saw growth in inventory compared to pre-COVID with both number of private bus operators and the number of schedules being higher. Recovery in southern market, which has been traditionally strong for buses slower-than-expected as large IT workforce is still working remotely. This slowness has been made up by non-traditional markets in Central, North and East, which are witnessed growth and has an increasing number of bus operators are adopting online channels for their distribution in these regions. Our initiatives to drive high revenue through value-added inputs to our customers and partners have gathered steam in Q3. RedBus assurance program that protects the customer from bus cancellation has also seen increased traction. Our other ground transport services such as intercity cabs, rail tickets, et cetera, continue to scale well and gross booking value touched an all time hiring. We have now opened up our trip guarantee product for non-bookers. Also, wherein a user who has a waitlisted train ticket booked from any channel outside of MakeMyTrip, can buy a trip guarantee product by paying a small fee, if the ticket remains wait listed at the time of charting, the user is eligible for 3X refund, which you can use to book an alternative mode of transport. Business travel is now normalizing, and both our corporate platforms are growing at a robust pace. Active corporate count for myBiz has crossed 42,000 while on Q2T, which is our platform for large enterprises. Active customer count has reached 231 as compared to a 114 in December 2021. We have doubled the number of customers in last one year. On product side, on myBiz, we went live with enhanced workflows to support in-app approval and to support easy reconciliation we went live with our reporting module. The new reporting module allows corporate to customize and schedule reports according to needs of different corporates and their departments. myPartner, our travel agent platform, added 2,892 agents during the quarter, taking the overall number to the 34,600 plus. Quarterly repeat rate for buying travel agents is at a healthy 80 %. Coming to international businesses, our OTA business in GCC growing slowly and steadily, gross booking value grew 29.6% quarter-on-quarter. We launched our first radio brand campaign in November to increase MakeMyTrip awareness amongst Emirates, Arab and Western Experts in the UAE. We reached about 780,000 audience with presence across English and Arabic radio stations. Our RedBus international business is showing robust recovery in Malaysia. RedBus has more than doubled its business in Q3 as compared to the same period of pre-pandemic and emerged as a clear market leader with the 25% share of the overall market and running profitably. The same playbook is being replicated in other Big Bus markets in emerging countries in Southeast Asia and Latin America. With this, the contribution of international to overall bus business has now crossed double-digits in Q3. Thanks, Rajesh. Hello everyone and Happy New Year. With improved travel sentiment, we witnessed good uptake in this seasonally strong quarter and have delivered strong performance both in terms of business growth and profitability. Q3 gross bookings were at $1.74 billion witnessing a growth of 64.4% year-on-year and a 15.9% growth quarter-on-quarter in constant currency terms. Adjusted operating profit was at $19.7 million as compared to $20.2 million during the same quarter last year, an improvement of 48.6% year-on-year. As stated by Rajesh earlier, this is the highest level quarterly gross bookings and adjusted operating profit achieved by the Company. For the nine months ended 31st December '22 YTD gross bookings grew by 141% in constant currency terms and came in at $4.9 billion, while our YTD adjusted operating profit came in at about $51.3 million as compared to $11.2 million for the same quarter last year, witnessing a jump of over 4.6 times. Our air ticketing gross bookings for the quarter were at $1.1 billion, witnessing a growth of 71.6% year-on-year and 7.5% quarter-on-quarter on constant currency basis. As this was a high season quarter on expected lines that take rates normalized to about 6.6% compared to about 7.4% in the previous quarter. As a result, adjusted margin stood at about 70.2 million, registering strong 45.2% year-on-year growth in constant currency terms. Gross bookings for the hotels and packages segment were at $445.7 million, witnessing a strong growth of 55.4% year-on-year and 36.9% quarter-on-quarter on constant currency basis. Q3 is a seasonally strong quarter for tourism and travel. And we recorded a strong growth of over 150% year-on-year in our packages business due to the increase mix coming in from the packages business margins or take rates from this segment is stood at about 16.2% as compared to 17.2% in the previous quarter. Adjusted margin for our hotels and packages business is stood at $72 million in Q3 witnessing a growth of 45.3% year-on-year and 28.8% growth quarter-on-quarter in constant currency terms. In our bus ticketing business, gross bookings for the quarter were at $227.1 million growing at about 51.9% year-on-year and 24.1% on a quarter-on-quarter basis on constant currency terms. Take rates were at about 9%, which is in line with the previous quarters. Adjusted margin stood at $20.3 million were extremely strong year-on-year growth of 57.6% and a quarter-on-quarter growth of about 24% in constant currency terms. Our existent margin in all the other businesses in Q3 was at $9.6 million which is 79.1% growth on a year-on-year basis and 30.6% growth on a quarter-on-quarter basis in constant currency terms. In terms of operating expenses, the operating leverage in terms of rationalized fixed costs during the last few years and more efficient customer equation spends are helping us drive bottom-line gains with improving skill. The high season quarter also saw as we started our brand campaigns across the brands after a gap of over 2.5 years. Also the higher brand marketing expenses were more than offset by efficiencies in other marketing and promotional costs. Accordingly, overall marketing and sales promotion costs for the quarter came in at about 5.2% of gross bookings lower than the 5.4% in the previous quarter and lower than 5.6% in the same quarter last year. This has helped us achieve the highest level quarterly gross bookings surpassing the pre-pandemic peak and at the same time as your highest ever quarterly adjusted operating profit of $19.7 million. Thanks, Mohit. Anyone who wish to ask the questions now can click on the raise hand icon on their application and we will take the questions. We'll just wait for a minute for queue to assemble. The first question is from the line of Sachin Salgaonkar of Bank of America. Sachin, your line has been unmuted. You may unmute yourself and ask your question now please. Thanks Vipul. Good evening everyone. I have three questions. First question Mohit more as a follow-up to the comments what you made. Looking at the take rate at both at air ticking and hotels and packages, clearly, it looks like this time around as compared to historical 3Q, the decline was slightly higher. So, I just wanted to check apart from seasonality, is there anything else which is impacting these margins? And how should ideally one look at going ahead, should we see normalization now that the seasonality gets behind us? Sure, Sachin. If you like, like I was mentioning, particularly if you look at the hotels and packages business, overall, due to the high seasonality, packages kind of came in much stronger in terms of the overall mix, and packages, as you know is a low margin business. And that contributed significantly to a little bit of a dropping of margins for the segment as a whole. The other thing that we have been calling out is, if you will recollect that in the entire recovery process, the mix of the budget segment of hotels has been coming down, and therefore to some extent that's also kind of keeping the overall margins on the hotel side, on the lower end of our range. There is a good kind of probability of the overall margins improving on two cons, one, as the mix kind of gets restored more in favor of hotels, as we get to kind of regular seasonality. And the second is, as the mix from budget segment kind of in a keeps improving. So, I would say, possibly, there remains an upside of about a percentage point or so, for the margins to improve in the hotels and package segment, overall, compared to this particular quarter for the reasons that I've just explained. On the air ticking side, again, if you look at on a normalized basis, possibly we have been guided and the 6% plus kind of margins is where we see longer term kind of air ticking margin stabilizing, and tactically or kind of based on a quarter-on-quarter basis, depending upon how the load factors are and what is the kind of promotional activity that the airlines want to try in terms of driving load factors through our platforms, that will kind of marginally tweak the overall take rates for the domestic air ticking business. But otherwise, air ticking business longer term, I think this is a healthy margin to kind of remain at, and we believe, unless there is a significant kind of drop in the load factors, our margin should largely remain in line with this with a plus or minus kind of half a percentage point range. So, very broadly, this is how I would put it. Thanks Mohit. Second question, clearly this, as you rightly indicated was a seasonally stronger quarter and despite that, we did see the air ticketing revenues being down Q-o-Q, I did see the bookings are up. So just wanted to understand what happened and why was air ticketing revenue down? Yes, exactly the same thing. The link to the previous one, because the gross margins on the air ticking business have kind come down. That's how you see their revenue on kind of volume adjusted margin coming down a little bit. But the growth overall in terms of segments and gross bookings is higher. So -- and similarly, you would see, even on the marketing and promotional expenses, they have come lower than even the previous quarter for matter despite the marketing investment. So like I said, some of these promotional expenses as the kind of coming from the airlines can optically look at kind of, take the margin also higher, and take the overall marketing and promotional expense also higher. In this quarter because the incremental kind of promotional incentives provided by the airlines were on the lower end, that's how we are seeing that effect coming through, both in terms of the adjusted margin coming down and also the promotional and marketing expenses coming down. So, Mohit, thanks for that. I did look at that, obviously, there is a margin dip that's happened last quarter, 3Q and so on and so forth. How there, the airline revenues did not dip despite the take rate going down? So this time around, it has more to do with the promotional expenses, what you mentioned. No. See, promotional expenses don't come. I mean, look at overall adjusted margin, the promotional expenses don't make a difference. It is purely, the overall delta, if you look at it on a quarter-on-quarter basis it's gone down even compared to the previous quarter. So that's what's kind of causing the delta change on the margin side. And maybe if I can just add an additional point, Sachin, if you look at the numbers on as Mohit was explaining on gross bookings side and the air segments growth, it is positive. It's not a decline. It's like on a constant currency basis. It's 7%, 7.5%. The only additional point that I will make to what Mohit has already said. As I was indicating it earlier as part of my script as well, that the while domestic flights have recovered or domestic traffic has recovered, actually more than recovered to the pre-pandemic levels, international is still lagging behind. So, international bookings, international, especially long-haul flight bookings have not necessarily fully recovered. And in fact, towards the end of the quarter, second half of December because of the China opening up, there was a bit of a scare on COVID as well. Thankfully after one week, it sort of died down and things got started to get back to normal. But, all things considered because of the high fares with fuel prices going up or the overall focus, being on yield by all the airlines and the backlog of operational issues like backlog of visa clearance, et cetera. It continued to sort of play in terms of just putting international bookings under pressure. And that's really, just one more additional factor on just overall air despite being the high season, while the consumer sentiment made positive and people want to travel. But, if you if you continue to see high fares on the international side, then sort of plans get pushed if they are not necessarily essential travel related and stuff. So, I think that's the additional point you should keep in mind. Thanks, Rajesh. And last question is now that you guys got the incentive approval for MakeMyTrip ibibo, looks like, the key regulatory hurdle for a potential India listing is behind. So any thoughts in terms of timeline and how you guys are thinking about it? So from a regularly hurdle point of view, I think, this is kind of incrementally good step to kind of taking in the direction. But, like we have been calling out, tapping into the Indian capital market and is probably there on the agenda, but not necessarily in the near future. So, we are going to remain open to it. And we'll kind of clearly come back and update as and when we kind of are able to crystallize our plans around it. Thanks Sachin. The next question is from the line of Gaurav Rateria of Morgan Stanley. Gaurav, you may unmute yourself and ask the question. Thanks Vipul for giving me the opportunity. So, I have couple of questions. Firstly, when I look at the volumes in each of the individual segments, they haven't reached the pre-COVID levels compared to the same quarter during the pre-COVID. So, somehow, the recovery has been a little slower than expected. So, is it largely because of international in each of the segments? Or there is other some other phenomena going on? Two reasons, Guarav, if I could call it out. You will look at it overall, in terms of the market recovery. So if you look at even domestic air, the overall market recovery is at about 90%, whereas our recovery, it's kind of close to about 100% plus. So therefore, while we are growing ahead of the market, but the market recovery itself is at an industry level is lagging, the pre-pandemic segmented volumes. So that's one reason, and secondly, if you look at it in terms of the overall, air ticketing kind of a pace, like Rajesh was calling out international hasn't really kind of bounced back as strongly. So that's the other reason for the lag in the overall recovery for the air ticketing business as a whole. Second question, how should one look at the lower customer inducement charge as percentage of the gross booking? Is it that the competition or the competitive activity has subsided in the market? And hence, there is no need for that high customer inducement charge? Is it more tactical, like shift between branding versus customer inducement charge? How should one think about like overall ad and promotion spend, you have always been saying 5% to 6%. But it's kind of come out the lower end. So how should one think about it on a sustainable basis? No, I think on a sustained basis, like we've been saying possibly the range would be more like 5% to 6%, and a couple of things going in over there. One clearly is the extent of competitive activity that we're seeing in the market. And as you have seen that kind of makes a difference. Secondly and more importantly, I think it is also about building a certain amount of base of volumes, in each of the relevant or important segments, particularly including the hotels and kind of packages segment or in overall accommodation segment. There, if you see over the last, almost like six, seven years, we have gradually built -- robustly built volumes over there. And as is kind of inherent in the e-commerce models or the online models, as you build volume, customer acquisition costs start kind of panning out much better. So, I think there is about getting to a threshold pace. And therefore, you see why there has consistently been a decline in the marketing sales promotional expenses. Over the last, I would say, six, seven years, that reduction has kind of become sharper over the last few years as we've kind of crossed that threshold. Pretty much almost just kind of pre-COVID is what I would put it around. So, that's another factor apart from the fact that there is much lower competitive intensity particularly in the hotel segment. Last question, the cash balance if I compare versus last quarter, I think has come down from 466 to 449. Is there something missing? You have generated lots of like large EBIT during the quarter should have cash flow and should have gone up. So, how should one read the decline in cash? You are right. This being a seasonally high quarter, you know, usually we do see deployment and working capital during peak seasonality. And then you also see releases happening, as you kind of move into the lower seasonality quarter of quarters. So it's kind of largely linked to seasonality per se and nothing else over there. Thanks, Gaurav. Just to remind the participants, anyone who wishes to ask a question can click on the raise hand option. Next question is from the line of Aditya Suresh from Macquarie. Aditya, you can please unmute your line and ask the question now. Thank you, Vipul. I have a few questions. First question was just on the competitive dynamics which you mentioned. Can you elaborate a bit about kind of what's happening in the air segment in particular with Tier 3 getting kind of a new lease of life perhaps? So can you maybe speak about that a little bit and I do kind of note that your customer inducing cost, it could have marketing spent that it's kind of come down, but in absolute terms is still a fairly chunky number, in particularly in an environment where somebody competitors maybe kind of challenge for funding, at least the conditions are a bit tighter. So can you speak a little bit about that? One is the competitive intensity in Air or Cleartrip, et cetera? And two is, I think, part fiscal '24 fiscal '25, are you sticking with this 5% to 6% as growth of gross bookings as a guide? Or is there any kind of absolute kind of numbers I think about this as well? Aditya maybe I'll take the second part. And I'll invite Rajesh to kind of share more color on the first one. But on the second one, it may not be kind of, in the kind of growth situation that we are, it may not be kind of relevant to kind of look at absolute number per se, and therefore, looking at it in terms of a percentage of spend might be a better way to kind of look at it? And yes, we do kind of expect this to remain in the 5% to 6% range going forward as well. Yes, sure. Happy to happy to Mohit. Aditya to your first question, I think couple of first, important points, I just wanted to remind you and everyone. I think we should always keep in mind that our market share on domestic flights, as we've been sort of reporting out, is pretty healthy, we are at about 30% market share of the total market. And also the fact that for whatever it's worth the flight product for us has been fairly matured. And we continue to keep innovating, as I was also trying to highlight some of those unique features, that pretty much every quarter, we will end up sort of launching and that helps the customer confidence, that helps us becoming the first choice in the market and has been the case for a while. And that's precisely the reason no matter what the competitive dynamics might be in the market, we've been either gaining share or has been able to stabilize right around 30%. I think these are important points because I think they get lost in the noise often ideally. From our point of view, we've seen they actually work beautifully well, when it comes to the repeat rate over a period of time, the stickiness really come to your platform, if you continue to keep delivering the promise on the product side. Now as far as the sort of specific dynamics on every quarter of who's doing what and all that, frankly, I'm not sure that sort of you know, we've watched the competition. We obviously look at the competition very, very closely, et cetera, but we are not necessarily obsessed by of what's happening, specifically for a particular -- on a particular day of what kind of discounting that is happening and so on. I think our strategy has been very clear that, we have to continuously keep improving our product experience and eventually that sort of helps to get more and more customers and more and more market share, and keep managing your P&L or the unit economics accordingly, basis, whatever might be the dynamics in the marketplace. So -- and if you see the history for the last few quarters going into specifically on, let's say, domestic air market, there might be volatility. There may be specific quarters. You will see some more you competitive action, et cetera. But over a period of time, it sort of still stabilizes because never is -- that sort of deep discounting, et cetera, is never stable or never sustainable rather. So, you have to just sort of deal with that on a quarter-to-quarter basis. But from a long-term standpoint, we haven't really been shifting or moving or even have plans to shift or move our strategy in the domestic flight market for that matter or any of the products and services that we offer. Thanks, Rajesh. That's clear. I guess the second question was me trying to think about incremental EBITDA margins or incremental profit. You did kind of mention that was quite a few growth levers across different products. Now overtime, I think your employee expense has been a fairly large part of the at least as a proportion of revenue. Can you maybe touch on two things? One is, in terms of incrementally, how are you thinking about kind of staff expenses? That's one. And two is, therefore, do you have any guide in terms of incremental EBITDA margin, let's say, add $100 million next year, incrementing. I think it should be much more than that. But let's say, you did add 100. How much of that do you think is EBITDA? Hi, Aditya, maybe I'll take that. If you are looking in terms of fixed cost overall and growing kind of people cost in particular, they are kind of now despite, like, almost, three rounds of inflationary increases going through. They are still kind of below the prepayment levels in that manner of sorts and almost getting closer to that. But it's still kind of slightly behind the same quarter numbers for pre-pandemic. So that way, I think we have kind of done a significant amount of rationalization on the fixed cost. Clearly, it's not that they'll remain completely constant. They'll kind of possibly increase at a lower proportion than the growth in the volumes of the business. And secondly, large part of the increase is going to come in more in terms of inflationary increases because we don't really kind of planning any significant headcount increases per se in the business in the quarters or years to come. So, that's one part of the question that you asked. The other is, what is the margin expansion opportunity? Again, would kind of refrain from getting into shorter term kind of margin gain opportunities. But the longer-term, opportunity, clearly, that we kind of looking at is this is clearly an opportunity to take this business to at least possibly getting to about 1.5 percentage points of adjusted operating margin on a gross booking basis. Now whether that happens in a few quarters or in a couple of years, and clearly, it will it depend on multiple factors. But you can see this kind of, as in terms of the volume change that you see even on a year-on-year basis in terms of fiscal year '23 versus a fiscal year '22. And then the corresponding changes that you see playing out through an operating leverage on the bottom-line. That would be quite an indicative trend. I mean, I wouldn't necessarily say, the same trend would continue, but it would be indicative in nature. Thanks Aditya. Next question is from the line of Puneet Saraogi of Hill Fort Capital. Puneet, you can unmute yourself and ask the question now. This is Hari for Hill Fort Capital. I had couple of questions. My first question is on the working capital. But can you just double click on the working capital and why it's a higher in this quarter, seasonally? And how do we generally think about OCF in relation to EBITDA on an annual basis? My second question is whether an India listing is on the anvil at all or not? Puneet [ph], Maybe I'll take both and probably miss some of the earlier kinds of questions on this. But on the working capital side, like I said, this seasonality involved in the business and generally we do see kind of deployment happening in working capital during high season quarters and generally releases kind of coming through in the off seasonality. So, I think it's better to kind of look at it on a more like annual basis or a four quarter basis. On an annualized basis, I would just kind of suggest that, you need to bake-in some amount of deployment on the working capital linked to volume. So, that's on the overall kind of working capital in and the trend lines over there. And when it comes to your second questions, yes, I mean, one of the India capital markets are kind of open to e-commerce platforms, clearly, and we have seen some of the e-commerce kind of companies kind of go and tap into the Indian capital market. From our point of view, one of the key things is that, we not necessarily looking at any fundraising in the short-term, you're kind of sitting at a good amount of cash and cash equivalents on the balance sheet, including free cash, even if we were to kind of potentially look at setting aside certain amount for the convertible bonds that we had kind of raised two years back. Even setting, after setting that aside, we're kind of sitting on a healthy cash balance of close to over $250 million. So from that point of view, a tapping into the capital markets on an immediate basis doesn't seem like a requirement. But from an overall kind of investor value creation and from kind of leveraging the brand and multiple other things, we would kind of keep an eye on kind of tapping into the Indian capital market at some point in time. But like I said, probably there is no immediacy to it, but in the longer run, from an opportunity to kind of tap into capital markets, I think India will be a more preferred market then tapping it or going into the U.S. market once again. So, that's how I will put it. Thanks Hari. The next question is from the line of Vijit Jain of Citi. Vijit, you may please unmute yourself and ask your question now. Thank you, Vipul. Congrats on a great set of numbers. I have three questions. First is within the hotel segment, would you say that barring that super budget category, you called out sub $20 and at every other category perhaps with the exception of international is now back to pre-pandemic levels? That's my first question. And what would be international now as a percentage of your GBP? I know, last quarter, you guys had mentioned something earlier double digits? How is that moved in last quarter? And my last question is just you know, saying on this international theme, now, in the last two to three years, you've launched these programs, like my affiliate in myPartner, et cetera, you working with a lot of offline agents as well. I guess, my question is, how are you thinking about ramping up your international business in the next one to two years? What would be the focus areas there? And if you can shed more light on, how you're going to use even Ctrip partnership, et cetera to kind of ramp that business up? If you can talk a little bit more about that. Yes, sure. Vijit, no, I think it's a great question, given that the recovery is lagging behind, but you know, are we really prepared for when the business comes back and future growth on top of it? And the answer is Vijit, it's absolutely all set from our side, so, when you look at the levers that you could use potentially to grow international business, given the fact that it is an under penetrated online under penetrated sort of segment, even pre-pandemic, our growth rate was much higher both for international flights and hotels. We are almost sort of restless and waiting for that to sort of open up and from supply side multiple sources of supply on our platform, on the customer side whatever new features and innovation that we could sort of unlock in the international flights for example or for that matter for international hotel bookings. They're already. We all have been actually rolled out tested on the domestic side and we are expanding that to the international side. In terms of customer acquisitions, like you rightly pointed out, we made investment in some of the other channels also besides our own core B2C platforms, and they will definitely be sort of helping us grow or get the incremental demand on the international segment, because international segment -- international travel market, like I mentioned, it is under penetrated, which effectively means that there is more market offline available as well. So, we do have a channel which is myPartner, which is through the travel agents, we can reach out to that B2B2C sort of demand, coming our way as well. So, whether it is distribution channels or it is on the supply side, including, leveraging the international supply of trip.com and multiple sources of supply, and the product experience on our platform. So, on all fronts we have absolutely invested, and like I said, we are all set waiting for market to open up. Thanks Rajesh. I guess just my final question to Mohit. The brand campaigns spends that you mentioned in this quarter for both Goibibo and MakeMyTrip. How should we think about that on a going forward basis? I know you have mentioned in the past that some of these expenses are fungible between here and the customer incentive spending, et cetera. But just trying to get a handle on, how to think about it on a quarter to quarter basis? And secondly, the fixed cost overall, which you mentioned is still below pre-pandemic levels. We're almost there. I think last, we have is an approximate $14 million $15 million a quarter -- sorry a month type of a figure in terms of your fixed cost base, is that now closer to $17 million, $18 million? Hi, Vijit. So, if you look at it, I mean, the first question was maybe more on going to be the brand marketing kind of expenses. And generally, if you see historically, you kind of usually have kind of had higher kind of expenses on the brand marketing side, particularly in the high season quarter. So that's typically Q1 and Q3 from our fiscal year point of view, which is a pretty large. So generally, that is the -- those are these quarters where you cannot typically would see higher spends on this particular side. But overall, like I've always been calling out, see, overall customer acquisition cost is what is relevant. Some of it kind of possibly pays out with a shorter duration timeframe or some possibly have a longer kind of the lead time as well as a lag effect. But I think it's kind of relevant to look at it more in terms of a blended number. And before, I would just say that's the reason that we kind of call out the marketing and sales promotion kind of expenses together because that gives you a better kind of overall understandings of how customer retention costs are trending. So kind of looking at it in isolation, it may not be a great idea, but you can kind of budget for a slightly higher mix coming in from brand marketing expenses, particularly in the seasonal quarters. Got it. Thanks, Mohit. And my second question was just on the fixed cost base, where are we in terms of run rate? Yes. So if you look at it in terms of the run rate pre-COVID used to be almost like about $15 million to $16 million. We are is still just shared below $15 million in the reported quarter, that's what I was calling out that despite almost three inflationary business going through, we are slightly kind of below that run rate, so reasonably good on that. Thanks, Vijit. The next question is from the line of Aditya Chandrasekar of UBS. Aditya, you may please ask your question. Unmute by yourself and ask your question now. Yes. Hi. Thanks, Vipul. I have a question on the air side. So this has been seasonally strong quarter, right? And we also saw the passenger data, et cetera, from DGCA, I mean, being quite healthy with record highs, et cetera. Just wanted to understand like, was there a potential of a better growth on the air side? I mean, even ignoring international because we saw 4% kind of Q-o-Q growth and air gross bookings. So could that have been higher considering the large at volumes? Have we lost -- I mean, I don't think we have lost any market share, but just wanted to get a sense of could the growth be better or should it have been better in Q3 considering the volumes as well as it being seasonally strong? And how should we look at that going forward? Sure, Aditya. Like I had called out, if you really look at it, in terms of recovery during the reported quarter, domestic air rate recovery, the industry recovery was more about 95%, whereas our recovery was close to about 100%. So, from that way, if you look at it, possibly our kind of market share, kind of gains continue to kind of help us. And we are kind of growing ahead of the market. Could the overall industry growth been higher? Yes. I mean, clearly, the potential is there for the overall domestic industry numbers to kind of keep increasing. But quite a few challenges there in terms of the prevailing kind of inflationary pressures, et cetera, and the overall capacity and some of them are -- some amount of challenges being faced by the airlines also on the maintenance and spares availability, as a result of which, some of the kind of planes are also kind of right now grounded. So as all of this capacity comes back, hopefully in the coming quarters, we should see the industry expanding faster as well. Sorry Aditya. I was just going to add one more point. I think the important point is, given what we all sort of get excited about at times, including us, is the peak numbers for certain days. But I think the important point will be just to look at the full quarter numbers, even from sort of overall the domestic market traffic. And you will realize that was sort of up and down and overall as more he pointed out, can only the trafficker would recovery was for the market, it was about 95%. And if I can just give you additional data point on flight departures and given the fact that we just literally have every flight, and we sort of monitor that very, very closely as compared to what it used to be pre-pandemic was actually 92%. And then the reason for that was, is that, the load factors have been high, the airlines have been very, very careful in deploying more traffic, because they've all been and rightly so coming out of the tough period of pandemic focused on, higher load factors, more yield, per passenger, and thereby reducing the losses for them. As we get into the steady state market and all the sort of the health, the financial health of the airlines starts to improve with some of these results. And we're getting some news from Air India that they might turn profitable, et cetera. Some of these things that happen, it'll further stabilize. We'll get more capacity for sure, and then because of that, the demand and the growth will also come back. And just a very quick question on the marketing side again. So, next quarter, it came at 5.2%, even though we did TV campaigns, et cetera, after a while. I mean, you've mentioned multiple times that it probably stays in that 5%, 6% range. Do you think there's also a potential for it to come down also from these levels. Because going forward, if we kind of don't do some of these TV or ad campaigns, which we probably won't do quarter, right? And we are seeing efficiencies in the other side of the other marketing costs. So you think it could head to that 5% or be 4.8%, 4.9%, or you think largely 5% to 6% is where we should aim for? Like I was calling out, Aditya, we should be kind of currently estimated to remain in the 5% to 6% range. I think it's good that at least in the peak seasonality in the reported quarter, we were able to kind of keep it more closer to the lower end of the range while reviving the brand campaign. So, let's see, as we kind of keep making progress, we'll keep sharing color, but the current estimate remains 5% to 6%. Thanks Aditya. The next question is from the line of Tarbir Shahpuri of Nidara Capital. Tarbir, you may please unmute yourself and ask the question now. We were working on it. Give us some time. We are getting the structure ready. So hopefully soon we'll come back with the details. Thanks Tarbir. The next question is from the line and it will be the last question, we are out of time. It's with [Lester Poon] from Hong Kong. Lester, you may please unmute yourself and ask the question now. In the past, the management gave guidance that the adjustment operating margins will not be lower than 1% of their gross booking revenue. And for Q3, I did a quick calculation is about 1%, 2%. And Q3 already is a peak season. So does it mean that the other non-peak seasons, the percentage may fall below 1%, or you are confident that you can maintain the 1% in the future? Lester, let me take that. We're guided for this full fiscal year. We would kind of you know look at close to about 1%. And if you look at on YTD basis, we are kind of slightly better than the 1% that we are guided for. And therefore, we do believe that for the full year also as a whole, we should be able to kind of maintain that 1% run rate or be slightly above that, and we should know in about a quarter's time. We will share more color about the subsequent years as we kind of get into the new fiscal year. Yes, thank you, Vipul. And thank you, everyone. Thank you, everyone, for your patience, your time, and all the interesting questions. And then look forward to come back to you next quarter. Thanks a lot. I would just add that you know, in case we have not been able to take questions from any of your participants due to paucity of time, please feel free to you know writing to Vipul and we will try and get back to you as soon as we can. Thank you, Rajesh. Thank you, Mohit. This brings us to the end of the call. You may please disconnect. Thank you.
EarningCall_974	Greetings. Welcome to the L3Harris Technologies Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Rajeev Lalwani, Vice President, Investor Relations. Thank you, and you may now begin. Thank you, Rob. Good morning, and welcome to our fourth quarter 2022 earnings call. We published our investor letter after the market close yesterday. So today's call will primarily be focused on answering your questions. Joining me for the call are Chris Kubasik, our CEO; and Michelle Turner, our CFO. A few words on forward-looking statements and non-GAAP measures. Forward-looking statements involve risks, assumptions and uncertainties that could cause actual results to differ materially. For more information, please see our investor letter and SEC filings. A reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the Investor Relations section of our website, which is l3harris.com, where a replay of this call will also be available. Okay. Thank you, Rajeev, and good morning, everyone. As we reported yesterday, our fourth quarter came in ahead of expectations, and our 2023 guidance points to steady or improving trends. We've also been active on the M&A front, consistent with our strategy, as opportunities present themselves. Let's start with Q4. The team delivered a solid top line, up 6% organically, with Communications leading the way as we saw improvements in electronic component availability within tactical comms. This contributed to the second consecutive quarter of organic growth for our company. Segment margins were about what we expected, with ongoing pressures from macro factors, including inflated costs for material and labor. The net of this is EPS just above our recently guided midpoint and free cash flow at our $2 billion outlook. Turning to 2023. We're consistent with what we said on the last call: Expanding our revenue in the 2% to 4% range, including the Link 16 acquisition, while holding our industry-leading margins steady at about 15.5%. EPS adjusted for pension headwinds points to a stable operating results, and we're expecting an improving cash flow profile. Lastly, on recent M&A activity, we've previously discussed an opportunistic approach within our balanced capital allocation framework. We had opportunities to acquire two unique assets in ViaSat's Tactical Data Link business and Aerojet Rocketdyne. We closed TDL in 13 weeks and are off to a strong start with integration. In fact, our newest employees are already on the L3Harris payroll system and participating in our 401(k) and benefit programs. This acquisition positions us well to play a central role in networking and resiliency for global defense customers and fills in a needed capability as we develop our JADC2 solutions. Regarding Aerojet Rocketdyne, it's a national asset critical to future warfare that has a leadership position in propulsion, adding exposure to new growth markets for us with munitions, space exploration and hypersonics. It brings nearly $7 billion of backlog and tailwinds driven by global demand. With both of these acquisitions, we'll utilize our recent experience from our merger of equals. We expect much of the integration work for TDL to be complete once we bring Aerojet Rocketdyne into L3Harris. We'll hold an Investor Day later in the year to talk more about the strategy and outlook for our growing company. So we're building momentum with our strategy and look forward to executing on our performance first initiative in 2023. Thank you. Weâll now be conducting the question-and-answer session. [Operator Instructions] Thank you. And our first question comes from the line of Doug Harned with Bernstein. Please proceed with your question. Yeah. Well, this question is going to have a few parts, I'm afraid because I want to understand a little bit more about your case for Aerojet Rocketdyne. I mean, you've talked a lot about it being a valuable asset. It diversifies your portfolio. But as you've also said, it's been a merchant supplier. So trying to understand, there are a few things here. When you look at it, what are some of the specific parts of the company that have potential for revenue synergy? Second, are there some areas of cost reduction there beyond just corporate costs? Because I know the facilities are difficult to move, for example. And then last, when you're in this pre-close period, how do you ensure that the value of this asset doesn't deteriorate some over time? Okay. Well, thank you. Let me see if I can hit all of those. I'm sure there'll be several Aerojet Rocketdyne questions, but maybe I'll give a longer answer than usual and try to preempt some of those. So when we look at acquisitions, I'd like to start with the market. And when we're looking at the market data outside of platforms, the three largest global markets for defense are C2, which is command and control; sensors and weapons. So I'm very comfortable with how we're positioned on the first two, especially after the TDL acquisition. Our weapon presence in this $75 billion market is practically nonexistent. So we believe that weapons, munitions, missiles, whatever you want to call them, are absolutely aligned with the current and emerging customer demand. It is a growth market for the future fight. And solid rocket motors, especially for products like Javelin, STINGER, many that we know and hear about on a regular basis is a great way to position us in the missile and missile defense market. So I look at that from the munition side on the space, we have a long history of working with NASA and NOAA, so relative to space exploration and observation, we already have these relationships. We're honored or they're honored and soon us to be able to support SLS and Artemis, and there's visibility there for several years to come. And then the RL10 is a premium upper stage engine with well over 100 engines under contract with the ELA for the new Vulcan launch vehicle. And I think hypersonics doesn't really get the attention it deserves. And the other day, someone said hypersonics is the future. And the reality is hypersonics is now. And I think, this could be the crown jewel of the acquisition, and we believe there's significant growth opportunities that are well supported by the budget and the customers. So when I look at those three markets, I see growth. If I jump to the financials, if you will, as it relates to Aerojet Rocketdyne and what we can do, I mentioned the $7 billion of backlog, so longer cycle business gives us more visibility. I believe this will grow faster on the top line than our current portfolio. I believe we have the ability to improve margins and get those to be more in line with potentially what we're doing on a consolidated basis now over time. And there are several multi-year programs that will be coming up for renegotiation in the next year or two. And I believe as we continue to negotiate milestone payments, we'll be more cash favorable. So I throw that out there to maybe answer a couple of the questions. On the cost synergy, we believe there's something in the $50 million range easily from eliminating the public company cost and some of the duplicative overhead. You're right. We have no plans to move facilities, but I look at the footprint. We both have offices in D.C. We both have offices in Huntsville. There's some low-hanging fruit there, and we really didn't anticipate or plan at this point any synergies relative to supply chain. So we need to dig into that and of course, take the power of the new enterprise. So I think that that gets us on the - gets to your question, Doug, on cost synergies. And from L3Harris, we overachieved. And once we get into details, there's potential to continue to exceed those numbers from the cost synergy. Revenue synergy, given that these are new markets, and there's no overlap, we have no revenue synergies at this point in time. So that, I think, is a straightforward answer. I guess on the operations, it's clearly â I think we have great opportunities here to bring our skill set and enhance our â the performance of Aerojet Rocketdyne. And I look at what we did at L3Harris before the merger, look at the TR3 program as an example, and maybe our Waco facility. Both those locations are â the TR3 program was over budget in late. Waco facility was losing money. And with the scale of the new company, more talent, processes, policies, controls, the ability to attract new people, we were able to turn not only that program, but that business around. And I think those are the capabilities that we'll be able to bring to Aerojet Rocketdyne. Relative to pre-closing exposure, I don't think there's anything unique in this relative to other acquisitions. The integration team meets on a regular basis. I would think it's next week or the week after, we'll start having people on-site at some of these facilities as part of the integration process. As you would expect, Eileen Drake and I meet on a regular basis. So we, in fact, had a call yesterday and we have one every week and sometimes more. So I think that's how we're going to stay in touch, and we can do whatever we can to help them. I'm optimistic that this is going to be a very accretive and successful acquisition. We're excited. The employees are excited, and I apologize for the long answer, but I wanted to try to hit all five or six of your questions, Doug. Chris, I'll keep it to one following up from Doug's question though. When you looked at Aerojet and you look to the other levers you could pull on capital deployment, why did you think this is the best option for shareholders to go with versus continuing with the share buyback? Thank you. All right. Well, thank you. Well, first of all, it's consistent with our strategy. I think I've been talking for several years. We're building a new company to provide more competition within the industry and to give the DoD alternatives. So, I've been pretty consistent in saying we want to grow organically and inorganically. Different companies have different portfolios. And when I looked at the market and the team looked at the markets and we saw the focus and growth on munitions, it seemed to be a gap. So, we think over the long-term to mid-term, you're going to look back on this and see why this thing makes so much sense. I tried to lay out for Doug some of the strategy and some of the trends. But this company has some awesome employees and great technologies, and a great legacy and I think there's going to be continued growth in munitions and space and hypersonics for the long-term. Relative to capital deployment, yes, so that -- it was a -- I don't want to say it was a pretty easy decision, but it was consistent with what we wanted to do. There aren't that many assets available in this industry. And when they come to -- come available, you got to make a decision and act on them. And I'm excited that we got TDL done in 92 days and the integration is already underway. So, we can focus on getting Aerojet Rocketdyne approved and then start the integration. If you look at the investor letter, I think it's page 14, has a nice pie chart that kind of lays out our capital deployment over a five-year period and it shows us a fair amount of balance. But I don't foresee us doing any acquisitions for a couple of years, as you would imagine. We have some non-core assets that we're going to sell, and we're going to use those proceeds to bring down the debt over the next few years. We'll keep annual dividend increases and remain competitive, as you would imagine. And then we'll repurchase shares probably at least $500 million a year to absorb any dilution and depending on cash flow and other dynamics, that number could increase as we go forward. So, Rob, I think, hopefully, that answered your question. Thank you. Good morning, Chris and Michelle. Chris, just on your last point, you've clearly been busy augmenting the portfolio with TDL and Aerojet. But how do you think about IRAD spend in 2023 versus 2022? You noted in your EPS bridge us $0.10 of internal investment headwinds and input costs. So, what are some of the products that you're focused on and these technologies accelerators that you're working on? And how do they contribute to your top line returning to mid-single-digit growth? Yes. Good morning, Sheila. And yes, IRAD is something that we have been investing in year-over-year. We have industry-leading IRAD kind of in the 3.5% range. We've significantly increased what we call ERAD, our external R&D from customers. When I look at the two together, we're well over $2 billion. So we have a pretty good process to -- a very good process to prioritize how we spend that money. So I think through some of the exciting things, if I start in space, we're excited about the investments that we've made in some new optics that we'd refer to as replicated composite optics. Basically, this is a replacement for glass mirrors in telescopes made out of carbon graphite. So the exciting thing is it's about half the weight. It takes about two-thirds of the time to manufacture, and it's significantly less expensive. And we're going to be launching the first ever replicated optics in the middle of the year. So I think this is going to reduce risk. We'll see how it performs, but this could be a game changer for a satellite business. And the air and land domains with ViaSat, we're investing in the advanced Tactical Data Link with a lot more resiliency. So that's part of the whole strategy there to modernize Link 16. And I think we have the largest library of waveform. So we're very excited about that. And then, maybe on the maritime front, I'm pretty excited that our -- we've talked about our Iver vehicle in the past. This is our autonomous undersea vehicle, just recently has achieved the first ever repetitive submerged launch and recovery from a torpedo tube. This is a significant step for our company, and I think it gives us an opportunity to considerably enhance the nation's autonomous undersea capabilities. So trying to give you some tangible examples and each of those will result in new business programs of record and maybe give you some insight to what's coming out of all the money that we're spending, whether it's IRAD or ERAD. As you probably saw in the letter in other release, we have two new segment presidents join us this year, and I can speak for them and say as they went through our portfolio and looked at the IRAD and some of the things we're working on, both John and Sam were pretty excited about the potential. So thank you, Sheila. Michelle, are there any large ISR missionization contracts and the guides that haven't been finalized yet, particularly on the international side? I'm just trying to get a sense of whether there's any timing-related downside risk from that. Or if that's more just an upside opportunity, if one or more contracts do go your way? Thank you. Yes. No, I appreciate the question, Scott, and thanks for this, because it is important to note that, as we think about our guide for this year, we did take a different approach on a couple of things. Our ISR missionization business is one of them. So to directly answer your question, no, there are not any large international ISR pursuits in the plan. We do have one domestic pursuit, which we're anticipating in the first half of the year. We already have the aircraft. So that's minimizing the risk, and it's funded from a budgetary perspective. It's our C3D program. So we have four aircraft tied around that. And I think this is important, because as we walk through the guide that, this, along with supply chain, were the two key components when we think about how 2022 played out that's really influencing how we're thinking about our guide for 2023. And so I'll just hit supply chain upfront, because I'm assuming we're going to get the question. I'd be disappointed if we didn't get the question. But when we look at our guide for the current year, what we're assuming is something consistent with what we did in the second half of 2022. Coming off of the strong Q4 results, we're incredibly proud of all the teams across our product based businesses in particular. So I want to do a shout-out to our Tactical Communications team, WESCAM, PSPC, along with commercial aviation. We had a really strong finish to the year. And as we're building on that momentum coming into 2023, we're assuming that we're having consistent results in the second half of 2022 throughout the full year of the 2023 guide. And so to your point, Scott, around using what we learned in 2022 and influencing our 2023 outlook, there's really two key components. One was around the ISR missionization demand. And although we're continuing to pursue a handful of those programs with budgets being up, we're optimistic that we're going to be able to land a contract. We thought it was prudent at this point to not put that into our guide and it would be upside. Hey good morning guys. Thanks for taking the questions. Maybe just to go back to Aerojet and thinking about these cost synergies, I know they had previously executed on a $240 million cost takeout program. It seems like all of those savings went to the customers. And I'm just thinking about maybe the lack of margin expansion we've seen there. There's, obviously, been challenges in the rocket motor supply chain. I think Raytheon has been pretty outspoken there. Northrop is picking up, I think, the entire GMLRS motor production this year. What's the status of their production system? Do you think you have to make any investments? Is that contemplated in the cost synergies? And I guess maybe your level of confidence in margin expansion at that entity? Yeah. Thank you, Michael. We do have confidence in margin expansion. I think when you look at the customer, or you look at the portfolio mix they have, it's like everybody in the industry, it's a combination of cost plus and fixed price. So I'm not sure it would all go back to the customer. It should obviously -- they should be able to keep it on the fixed price. But that's in the past. I'm looking going forward. Like any of these acquisitions, there are systems that are fragmented or maybe older technology just like when we put L3 and Harris together. Our IT organization knows how to convert these. I used my reference to ViaSat, the fact that those employees are already on our systems, and it hasn't even been a month. So most of the challenges, challenged program, and I know they've talked about it at length, seems to be at one facility. Like I said, we'll have people down there in the next week or two. And everything has been contemplated in our business case. One of the benefits of being a large -- part of a larger organization, again, this is an acquisition, not a merger, I just like to make a -- an important distinction. We are buying them. They're about one-tenth of our market cap, and this will be a quick integration relative to decisions that need to be made, and a lot of their systems will migrate on to ours, whether it's benefits, payroll, et cetera. On the ERP manufacturing execution systems, they've been putting those in. We're familiar with those systems, familiar with those systems, familiar with the technology. And all that has been contemplated. With our scale, we have the capital. We have the IRAD. We prioritize it, and we have the ability to invest as they have been doing to make them world class. I wonder, if you could talk a little bit about the kind of the medium-term outlook for the Communications business. We recently saw a management change there, and the â the details of the management change suggest that you're looking for some really fresh and different thinking in a business that's been kind of the core of the earnings for the company. And we've seen some good growth in the radio budgets in recent years. But when we look out to the middle of the decade and beyond, it doesn't necessarily look as good. So, can you tell us about your medium-term thought process for communications? No. Absolutely, Seth. Yeah. I mean, Sam joined us at the beginning of the year. When I look â I know a few people were asking questions relative to Sam and the business. I mean, CS is a short-cycle business with a global footprint, a lot of Army and Marine business. And when I hired Sam, like I do everyone, I look first and foremost for someone who's a leader versus a manager. And everywhere he's been, he's had success strategically, operationally and financially. Whether it's Collins, Sikorsky, UTC, he's led production. He's led programs. He's familiar with foreign military sales, direct commercial sales and a lot of experience globally. So I have no doubt he's going to be very successful and add value to the corporation. When I look at the medium term on comms, I don't want to underestimate the significance of the ViaSat acquisition and the focus on â on JADC2 and the ability to connect the networks, which the customer has been talking about, it seems like, for a decade. And I'm sure there's frustration on their part that we haven't, as an industry, been able to â to get that across the goal line. So when I look at the tactical radio business, we continue to see growth in the low to mid-single digits, not only here domestically where the modernization is going to continue. Internationally, in the fourth quarter, we got another contract from Australia that has been a great customer of ours. So the visibility we see continues to look good as the modernization continues the need for resiliency continues. And then I still think there is ability for the â more of a soldier as a system that's been talked about, but never quite brought across the goal line. So we have the ENVG goggles. We have the radios. There's connectivity that can happen at the soldier level and also networks at a higher level. So it's a key part of our business. And I think anything, as I've said before, over the past year, you look at the war in Ukraine, the ability to communicate is critical to execute the fight of the future. And our resiliency and our capability is unique, and I think it's going to continue to grow for the foreseeable future. I was curious, Chris, if you could talk to where you guys are in the L3 kind of integration journey. Meaning a couple of years ago, you guys talked about $250 million of annual cost out for a number of years kind of moving from a holding company to an integrated business, et cetera, et cetera. I'm just curious where do you think you are on that journey? And then if you could just comment also on the supply chain and the pace of healing within it assumed in the guidance and what you saw in Q4? Thanks. Okay. Let me take the first part. I'll ask Michelle to talk about the supply chain. As part of our E3 continuous improvement initiative, I'd say we're never ever complete. We talked about a three-year plan to take out $500 million. We took out $660 million. We're going to stop trying to call out separately the one-time costs and the savings as we move into the next cycle of acquisitions. But I can assure it's an ongoing journey. I think we got the low-hanging fruit. We made a lot of progress. So, I'd say maybe we're two-thirds of the way through the integration. And when I look at the IT systems, the ERP systems have come down substantially. I think we used to say there were about 100. By the end of the year, we'll be in the 20s. So, that's good progress. We've got consistent manufacturing execution systems that we're implementing. The one in Greenville should be done this year. We have a couple in other facilities, done a good job on all the shared services. So, in that case, that would be done. The facility moves have been done. But the team is looking at each and every function and process and continuing to optimize it. So, like I said, we did the easy stuff and now we're going function-by-function, relooking at the policies, the procedures, the systems and continuing to look at ways to optimize the business, which will make us faster and ultimately take cash out. So, I'll go with two-thirds of the way through. I'll lateral to Michelle, see if she agrees with me and then have her give some supply chain insight. I always agree with you, Chris. But just to add a little bit more color, I think a great example of where we're continuing on this next phase is around our real estate and our footprint consolidation efforts. And so to Chris' point, we took the low-hanging fruit in the first couple of years. Byron Green and his real estate team have really been focused on what's the next phase of that. We're in the middle of a two-year plan to take out an additional 10% as a result -- 10% of our overall sites as a result of this current operating environment where we have more of a hybrid workforce. So, it's continuing to be an evolution that's going to continue to pay dividends for. It's really helping to offset some of the macro inflationary challenges that are permeating across the industry. And then just to give a little bit more color from a supply chain perspective, I talked about our 2023 guide. And the word I would use is -- to describe it as a balanced approach. Again, the guide assumes it's consistent with our second half 2022 performance. But just to make this a little bit more tangible, I think it's helpful to think about what's different as we think about 2023 versus what remains the same at the start of, say, 2022 or at the end of 2021. So, I'll illuminate a few things for you because I think it helps bound the risk as you think about our guidance. Frankly, it's how we're managing the business internally. So, what's the same? What's the same is we do continue to see hiccups from an overall supply chain ecosystem perspective. This is consistent across our industry and other industries. This is something that's become a bit of the new norm. What's also consistent is we do continue to be on a 90-day allocation process with our microelectronic chip manufacturers. And this is a really important point because even when we continue to see the improvements like we did within Q4, the reality is the insights that we're getting to our supply from a chip perspective is good for about 90 days out. Then it gets more nebulous as we get into the latter part of the year. And then finally, I know we've put some of this within our Q3 earnings call. But just a reminder, 25% of our portfolio, which is different than our peers, is tied to in product deliveries. But if we're short on chips or we're short on washers or nuts, we're not going to be able to deliver that radio or that turret. And so those things remain the same as you think about our 2023 guide. Now what is different, right? And we've been talking about a lot of this in 2022, but what's really different is those proactive actions that we took last year to be purposeful and focusing on the things we can control. They help to minimize the risk in 2023. And so just a reminder, engineering redesigns were a big focus for 2022. We get the full value of that benefit in 2023. Our alternate part bank within our Tactical Communications Systems business is up to 1,000 parts. That would have been at 100 parts in 2021. Our overall revenue base in terms of DPAS coverage, it's also increased double digits. So that aids in the prioritization of our supply and material availability. And then finally, I think this is the most important predictive indicator is the number of critical parts. When we started and we felt the most acute impact from supply chain was really in the second half of 2021. We had hundreds of critical part shortages at that time. Fast forward to where we are today, and we're in the 10s in terms of the impact and what we're having to manage through. So the way I would characterize this is we continue to see sequential improvement from a supply chain perspective. We're not out of the woods by any means. And so as a result, we're taking a balanced approach to 2023, and that's what's reflected in our guide. Hi. Thank you. So Michelle, just on the back of all of that, it seems like the positives are there might support higher margins in 2023. Now I know the guidance range allows for that. But what would cause the downside? Yeah. No, great questions. So let me walk through from a margin perspective. I'll start from the overall enterprise, right? To your point, Rob, we are assuming flattish margins, 15.4, 15.5-ish. From a headwind perspective, we are assuming continued macro inflationary challenges of about $400 million, so about 2.5% of our overall revenue. And we also have some headwinds from a mix perspective. Chris talked about where we're investing in space. Kelly and her team are doing phenomenal in terms of growing the business. At the same time, however, that will be a drag on our margins. As these new programs come on board, we typically book them at lower rates. And as we mitigate the risk, we start to see the profitability in those programs improve. So from a headwinds perspective, inflationary, challenges and mix, that is being offset by our continued strong E3 savings program, as Chris alluded to earlier. Real estate is a great example of that. Another great example is the voluntary retirement program that we announced at the end of Q3 last year. That's going to help to pay dividends and offset the merit increases that we're planning for from a human capital perspective. And then we've also assumed some level of commercial pricing. To your point, specifically, Rob, like what is the downside? The downside, from my perspective is this continuation of the unknown unknowns from an inflationary challenge perspective, right? There was a lot that permeated within 2022 that it felt like it was more of a reactionary year. And so, as a result, we're doing everything that we can to control the controllables. And we will prudently manage through that as we make our way through 2023. And I'll just chime in that, if you recall, last time we talked about the importance of our workforce, keeping them engaged and motivated and focusing on some of the attrition. And recall, in October, we talked about some of the things we're doing that are unique. Michelle mentioned the increased merit. We also held all the benefit costs flat from an employee perspective. We've increased the budget for spot awards to recognize performance and some of the other initiatives. And that was a headwind and investments of over $100 million that we're absorbing in 2023 and that provides a little bit of a drag, but it was the right thing to do, and I'm confident it's going to pay off. Hey. Good morning, guys. Chris, earlier you mentioned that the ViaSat deal closed 90 days ahead of expectations. Was this something that you did differently with this acquisition to help speed up the regulatory review? And how much of that playbook is applicable to the Aerojet Rocketdyne deal? Yes. Great question and good morning, Kristine. Yes, I said we closed it in 92 days. We have been forecasting mid-year. We made all the appropriate filings for HSR. We responded to all the questions within the 30-day period, for ViaSat that is. There are some international approvals. And I think when you just looked at it, it made a lot of sense, and we weren't sure how that process was going to play out. Relative to Aerojet Rocketdyne, mid-January, we made our HSR filing. We all know the FTC is reviewing it. We've been very responsive in answering their questions, and we'll see how that process works out. We're -- Eileen and I met with key customers jointly in the Pentagon to explain the rationale and answer their questions. So, I think it's just being transparent, being responsive and getting the data request in, in a timely manner, so the process can work. So we'll see how it plays out. But so far, everything is tracking. Good morning, Chris, Michelle. Hey, Chris, the TD acquisition seems like it's a really great fit, as you kind of highlighted that you had two kind of capabilities. Maybe you could just talk a little bit about, if you see like a big product upgrade cycle or with that road map or what kind of opportunity it is for L3. Thanks. Yes. Thanks, Peter. Now look, we've talked about Link 16 being on 20,000 platforms. And that really gives us the ability to upgrade and modernize. So when I mentioned the IRAD we're spending on the advanced data tactical link, that's an obvious fit. One of the things we focused on in the negotiation, this was a carve-out. So that's a little unique as to what we buy, what we don't buy. And we really wanted to get access to a relatively small piece of the business, which was the Link 16 to space and Link 16 and Viasat's on the SDA transport. Later this year will be a launch. We will have the first-ever Link 16 capability in space. And I think, again, that's kind of the hidden jewel in this thing. There's going to be Link 16 in space. The connectivity from space to air is a game changer to focus on resiliency. So relative to revenue synergies, we're very excited about the potential here with ViaSat. So the upgrade is going to happen. We're investing in new products. We also have the existing product production that's going well. So I think we're going to look back on this one. It's going to look pretty successful and pretty straightforward and off to a good start. So hopefully, that helps. Chris, last year, I'm going to try two, because I think they're quick. So your letter indicates you're getting compensated for inflation on new contracts. I was just wondering on existing fixed price contracts, is the government allowing you any adjustments based on higher unforeseen costs? And if so, would that the upside to your guide? Second question is Chris, just given your knowledge on â I asked this of your competitors. It seems to be just a general view that, as we move into a deficit reduction, defense is going to be the bill payer. I was kind of curious about, though, your view of sentiment on the Hill and for continued defense spending and funding modernization? Thanks. Yeah. Thanks, Rich. On the first one, we have not received any compensation for inflation on fixed price contracts nor have we asked for any. Similar to COVID expenses and others, we just absorbed it as part of the business. I just kind of feel like we survived the - these three years, and everything is looking much better on the upside. Obviously, if we got money, that would be upside. But as of now, we're just moving forward and focused on the new contracts. If something changes or if the DoD encourages us to bring forward a claim of some sort, we'll do it. But there have to be clear documentation. It's not as easy as you would think to prove that. On the deficit reduction, it's something we're all watching. I referenced in the letter. And we're excited to actually have a defense budget to start our fiscal year. So a shout-out to everybody in the lame-duck section â the lame-duck session for getting that done. And it's a big deal for us and a big deal for the industry and probably even a bigger deal for the Department of Defense. So I think that's the type of thing that gives us confidence in the future. I mean, one thing is for certain. It's really hard to predict how that's going to kind of play out. I'm really not in the camp that thinks DoD is going to be the bill payer. I know, there's some rhetoric around that. People say things to get different leadership positions in Congress. But when you look at the threats out there, it's just hard to justify flattening or reducing the defense budget, and it's a dangerous world. And that comes back to these acquisitions and looking what's going to matter at the end of the day and what the future fight is. And it's situational awareness with ISR, it's resilient comms, and it's munitions. So I like where we are relative to those positions, Rich. So I think with that, we'll wrap up. So I appreciate everybody calling in. I'm a big believer in momentum, and I feel like we have the beginning of some momentum with two consecutive quarters of growth, some acquisitions. I don't know if you can hear it in my voice and Michelle's, but we're really excited about the future and what the potential brings. And I know the initial feedback from the ViaSat employees has been all positive and the Aerojet Rocketdyne employees. And we've actually heard from many of the former Aerojet Rocketdyne employees who are also excited about the transaction. So, we're going to focus on the closing, get this deal done. And once it's closed, we're looking forward to connecting with any former Aerojet Rocketdyne employees and welcome them back if they're passionate about the mission. So, I think it's going to be an exciting couple of years. But before I sign off, I wanted to recognize and thank Dana Mehnert for his 38 years of service. As you know, Dana announced his retirement in Q4 and is assisting with a smooth transition. So, we appreciate that, Dana and wish him all the best in his future endeavors. And I want to turn it over to Michelle real quick. So, thank you, everyone, for joining the call today and for your continued interest in our company. Before we disconnect, I just want to take a minute. As many of you know, this will be Rajeev's last earnings call with us. And I want to thank you, Rajeev, for your contributions in our Investor Relations function, overall L3Harris and for me, personally, for my transition over the last year. We all wish you the very best in this next adventure. So, thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
EarningCall_975	Good morning, and welcome to the SB Financial Fourth Quarter 2022 Conference Call and Webcast. I'd like to inform you that this conference call is being recorded, and that all participants are in listen-only mode. We will begin with remarks by management, and then open the conference up to the investment community for questions and answers. Thank you. Good morning, everyone. I'd like to remind you that this conference call is being broadcast live over the Internet, and will be archived and available on our website at ir.yourstatebank.com. Joining me today are Mark Klein, Chairman, President and CEO; and Tony Cosentino, Chief Financial Officer. This call may contain forward-looking statements regarding SB Financial's performance, anticipated plans, operational results, and objectives. Forward-looking statements are based on management's expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied on our call today. We have identified a number of different factors within the forward-looking statements at the end of our earnings release, which you are encouraged to review. SB Financial undertakes no obligation to update any forward-looking statements except as required by law after the date of this call. In addition to the financial results presented in accordance with GAAP, this call will also contain certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. Highlights for the quarter net income of $3.5 million up 201,000 or 6% from the prior year quarter, and would have been up 38% excluding the effects of PPP program and the OMSR recapture. For full year of 2022, net income was $12.5 million with diluted and earnings per share for $1.77. When we exclude the impact of PPP and OMSR from both full year earnings, our results would be off by just $1.2 million or 9.3%. Return average assets of 1.08% with return on equity of just over 12. Net interest income of $10.9 million was up $1.8 million or just over 20% from the prior year as loan growth and increasing yields have offset the increase in deposit and other funding costs. Loan balances from the linked quarter rose $37 million. When we adjust for PPP balances, loans were up $141 million, or 17.2% compared to the prior year. Deposits grew from the linked quarter just slightly but were down $26 million from the prior year. Expenses were down from the linked quarter by 1.1% and for the year 11.2% decline. Mortgage origination volume for the quarter was just $51.2 million for the full year $313 million. The mortgage business line contributed $7.3 million in total revenue for 2022 compared to just over $20 million for 2021. This reduction of nearly $13 million in revenue was difficult to fully overcome in 2022. However, our strong long growth and expanding margins did reduce the negative impact. Asset quality metrics remain strong with NPAs at just 38 basis point. And for the second consecutive year, we reported net recoveries on loans. We continue to identify initiatives that will deliver our five key strategic initiatives with our revenue diversity and course growth, more scale through organic growth, more products and services, more households for scope, operational excellence and as always asset quality. Revenue diversity. For the full year our mortgage business line generated $313 million in volume well below our $600 million we produced in 2021. The impact of higher rates is evident and the percentage mix of volume for the full year with refinance of just 20% and purchase and construction lending of 80%. This compares to 2021 when we split between refinance and purchase volume at 49% and 51%, respectively. Since we began the mortgage business line expansion strategy in 2006, we have now originated over 5 billion in residential mortgages. Overall noninterest income decreased to $3.7 million from the prior year quarter of $6.6 million. The current quarter includes a mortgage servicing recapture of 86,000 compared to a recapture of 581,000 for the fourth quarter of last year. When we exclude the full impact of the mortgage business lines from both years, our year-over-year decline is just 8.5% compared to the adjusted level of a 43.6% decline. Looking forward, we fully expect Residential Mortgage volume to stabilize that's something near our traditional levels of production. In fact, we are adding more mortgage lenders across our footprint in 2023 to deliver annual reduction at that run rate of approximately 500 million. That said, in light of the pullback in volume this year, we did achieve greater efficiency in the business line as we right-sized our background support to align staffing with the current level of production. Our wealth management division faced risk headwinds this year as distributions exceeded assets under management while the market contraction further constrained their contribution to our net income. The equity markets were clearly under pressure during 2022. And that pressure was evident. And our year-over-year decline, we experience and assets under management. Total AUM were down just over $111 million for the year or 18% to finish 2022 at just $507 million. We delivered new assets of approximately $31 million, realized $66 million distributions and saw market corrections and reduced our level of assets under management by another $76 million. Despite these reductions, total revenue for the wealth business line was down just $86 million or 2.3% and finished the year at $3.7 million. We were able to keep our decline in revenue closer to neutral due to pricing adjustments that we implemented late 2021 and the lift we experienced from a renewed emphasis on our brokerage platform, which increased revenue this year by 24%. Second initiative, more scale. Loan growth in the quarter was quite strong as we were up $37 million from linked quarter and as I mentioned $141 million or over 17% net of PPP for the -- from the prior year quarter. All of our regional markets continue to make inroads with solid pipelines, and targeted calling as we implement our new CRM system. With this quarterly growth noted we have now grown our loan portfolio consistently over every linked quarter during 2022. We are committed to adding an additional lender and two of our key growth markets Columbus, Ohio and Fort Wayne, Indiana and leverage our newer one year presence and the Indianapolis market in 2023. We also intend to place more emphasis on the C&I arena in 2023 to provide lift to not only our level of higher earning assets, but also more lower cost transactional deposits to fund those loans as well. As a result of our quarterly and annual loan growth, our loan to deposit ratio reached a new post pandemic high of 88.5%, which is up nearly 15 basis points over the prior year. Deposit growth and funding have been challenged this year due to the effects of the inverted yield curve, leading to systemically higher deposit rates, more competition, post pandemic client spend downs, and the expansion of our investment portfolio. As a result, identifying sources for our loan growth has accelerated and we have been more aggressive in raising deposit rates to meet that need. As I mentioned, we've also begun to pivot and emphasize more traditional C&I lending which along with a renewed focused on SBA 7(a) lending should drive more opportunities for treasury management services and growth and lower cost transactional deposits. Third, more scope. We closed the last of our PPP loans rate before year end and we continue to work to expand on the successes we identified from the initiative. Traditional SBA lending made some headway during the year, as we were able to close just over 6 million in balances and deliver over 500,000 in fee income. As we look forward into 2023, we expect SBA loan originations to approach our pre-COVID historical levels of something around 15 million to 20 million. Our pipeline is quite strong and we anticipate a very strong first quarter of this year. Referrals continued to be the center post of our sales initiatives. This year, our staff, our board, our advisory board, delivered over 1300 interdepartmental referrals, produced over $77 million in new business to our company. The corporate sales champion that we hired in the fourth quarter is just starting to identify how and where we can work smarter to expand our number of households, and the products and services in those households to achieve greater market penetration. The incentive and salesforce platforms are now up and running, and integration of these tools into our business development teams is high priority for this new key role in our company. Operational excellence is our fourth theme. We have traditionally been a producer of saleable mortgage product with a small amount of residential construction lending. In fact, in the 10 years prior to this year, we sold over 85% of our originated mortgage volume. This drove non-interest income as a percentage of revenue to roughly 40% every year and built a highly profitable $1.4 billion servicing portfolio. With a rapid increase in rates and inversion of the curve during 2022, residential portfolio pricing became more attractive to home buying clients and this resulted in our total sale percentage for the year to drop to just 59%. This has obviously added some mild duration risk as we've discussed in prior quarters to our balance sheet and has necessitated an emphasis on competitive funding needs at the margin. We intend to return to a more historical level of mortgage sales in 2023 as we anticipate a continuing squeeze on margins from higher funding costs. Operating expenses were down from the prior year quarter by $1.3 million or 11.2% and for the full year operating costs were down $2.5 million or 5.6% The majority of the full year reductions was in salary and benefits segment, reflecting the lower level of commission based payments to our originators. Included in these cost saves would also be the reduction in support staff in this business line. Additionally, we're also in the process of rightsizing retail office hours and select markets to better align with customer trends that will reduce pressure on hiring constraints. Going forward, our quarterly run rate for expenses should allow for a return to positive operating leverage in 2023. Our client driven contact center staff continues to take pressure off our retail office staffing requirements. This initiative allows our community bankers to spend more time on the street, out of the office, engaging with local businesses to garner greater market share. We believe this strategy will ensure an efficient and consistent client experience and one that will aid in our efforts to expand those single service households. Fifth and finally asset quality. While we chose to not take any provision in 2022 despite the significant loan growth I mentioned, the $5.5 million we added to reserve in 2020 and 2021 was certainly an offsetting factor. Our non-performing assets have declined this year by over 21% and as referenced earlier, we had 13,000 in net recoveries in 2022 and 181,000 in net recoveries for all of '21. And finally, before I turn it over to Tony, our seasonal adoption will occur here in the first quarter of '23 and we will add approximately $1.4 million to our reserve levels that Tony will talk about now. Again for the quarter, GAAP net income of $3.5 million and $12.5 million for all of 2022. Highlights for this quarter include, operating revenue up slightly from the linked quarter but down 6.7% from the fourth quarter of '21. Given the $2.6 million negative variance on mortgage gain on sale, a less than 10% decline in revenue was actually quite positive. Margin revenue obviously was up from both the linked quarter and the prior year and our balance sheet efficiency continues to improve. As mark said, our loan to deposit ratio of 89% and total loans to assets at 72%. Outbreaking down the fourth quarter income statement, getting with our margin. We can finally close the book on the PPT initiative as our final loan paid off late in 2022. However, the full year comparison and its impact on our margin was still significant as the year-over-year change was a reduction in revenue of $3.6 million. For the quarter, our net interest margin was 3.61% expanding 73 basis points from the prior year or 90 basis points adjusted for PPP. The improvement in earning asset yields was the main driver as they were up 110 basis points to 4.27%.And partially offsetting this increase was the increase in interest bearing liability costs up 50 basis points in the prior year. In addition to the positive impact of the 7 prime rate increases we experienced in 2022, the mix shift on our balance sheet was key to the $1.8 million improvement in net interest income we reported. Specifically, we had over $415 million in cash and securities on our balance sheet, entering the year yielding 1.01%. By the end of 2022, we had reduced our cash -- our level of cash in securities to $269 million yielding 2.35%. That $146 million reduction was replaced almost dollar for dollar by the increase in our loan portfolio. With total assets remaining flat, this made for a much more efficient balance sheet. As I referenced earlier, funding costs were up from both the prior year and the linked quarter, but trailed the increases realized in earning asset yields in both periods. As our retail and private client teams have been calling on clients to increase their deposit levels, competitive pressures have driven up deposit pricing. Our deposit cost of funds for the fourth quarter came in at 53 basis points up 30 basis points from the prior year and up 22 basis points from the linked quarter. We are pleased however that we were able to maintain deposit levels from the linked quarter with a deposit level of beta of only 14. We understand that further pressure on funding costs are likely given the lower liquidity we are seeing from our clients in a similar position that our competitor banks find themselves for funding. Our strong regulatory relationship and excellent asset quality gives us access to a number of liquidity sources outside of deposits. Fee income as a percentage of average assets has been a strength of ours throughout the last 10 years. We pay special attention to the net year offsetting our noninterest expense to average assets. Getting a number close to 0 would be the ultimate and we feel good about a net number between 1 and 2, which would place us in the upper quartile of our peer group. Absence of $12.9 million variance in mortgage revenue compared to 2021, year-over-year comparisons however are difficult. We certainly look forward to next year when our earnings comparisons will no longer have PPP nor an outside exposure to mortgage gain on sale variance. Mortgage gain on sale yields have stabilized at the low to mid 2% level. While off over 100 and 200 basis points from the levels in '21 and 20, we are returning to our historical level. Late in the quarter, saleable pricing returned to a more normal levels relative to portfolio residential product. This again will bode well for 2023 as we seek a return to an 80% plus level of mortgage loan sales to originations. On servicing rights, the market value of those again improved slightly this quarter with a calculated fair value of 117 basis points. This fair value level was at 3 basis points from the linked quarter and up 24 basis points from the prior year. Our servicing rights balance remained level to the linked quarter of $13.5 million and remaining temporary impairment was down to just $176,000. Expenses of $10.3 million were down from the linked quarter to slightly and compared to the prior year they were down $1.3 million or 11.2%. For the full year, total operating expenses were down from the prior year due to lower volume related costs in mortgage and other incentives. The total operating expense reduction for the year of $2.5 million or 5.6% was critical to close the operating revenue GAAP that we experienced in 2022. While our operating leverage was negative for the year due to declines of mortgage and PPP, operating leverage from the linked quarter was positive. Now we'll return to the balance sheet. Loans outstanding at 12/31/2022 stood at $962 million 72% of the total assets of the company, which compares to 61.8% a year ago. We again saw improvement in the balance sheet mix to the quarter, but we did fall behind on our goal of funding loan growth with deposit balances. That gap required us to expand our use of wholesale funding, which did come in at an elevated marginal cost. Paydowns in the investment portfolio in the quarter provided a small portion of our funding needs and we anticipate the continued decline in the portfolio from principal and interest payments. Our portfolio predominantly contains mortgage backed securities with good cash flow that will provide liquidity. With the long end of the curve already declining, cash flow could accelerate and the negative mark from AOCI will decline. Tangible common equity improved in the quarter as our AOCI exposure declined slightly and we brought $2.7 million to retained earnings from our quarterly net income plus the common dividend. Total equity net of AOCI of $150.5 million was up from the prior year and represented 11.3% of total assets. Regulatory capital continues to be strong with common equity Tier 1 and total risk based capital at 13.4% and 14.7% respectively at the end of 2022. Our loan loss reserve ended the year at 1.44% and we had NPAs down $1.3 million and delinquency were just $2.6 million of total loans. That delinquency rate of 27 basis points is the lowest we have had in some time. As Mark indicated, we'll be adopting CECL in January and we anticipate made an increase to our reserve of roughly 12 to 15 basis points. Relative to our peer group, our reserve level still remains well above the median level. I would like to conclude with acknowledging once again, the dividend announcement we made this week of $0.1250 per share. For 2022, we distributed now $3.4 million to common shareholders, which equates to roughly a 27% payout and a dividend yield of approximately 3.01%. 2022 was certainly a challenging year in many respects in the banking industry as we saw the end of certainly stimulus lending and client liquidity begin to dissipate. Our team worked to stay relevant to all of our constituents during the year and we would expect that our consistent calling efforts and our client attention will pay off and pay dividends in 2023. While we're waiting for additional questions, I'd like to remind you that today's call will be accessible on our website @ir.yourstatebank.com. [Operator Instructions] With no questions, I would like to turn the conference back over to Mark Klein for any closing remarks. Once again, thanks again for joining us. We look forward to speaking with you about our first quarter results in April. And have a great day. Take care.
EarningCall_976	Thank you, operator, and welcome, everyone, to Novozymes Full-Year 2022 Conference Call. My name is Tobias Bjorklund, and I'm the Head of Investor Relations here at Novozymes. At this call, our CEO, Ester Baiget; and our CFO, Lars Green, will go through our performance and key events of 2022, as well as the outlook for 2023. Also present at this call are Tina Fanoe, EVP, Agriculture & Industrial Biosolutions; Amy Byrick, EVP, Strategy & Business Transformation; Anders Lund, EVP, Consumer Biosolutions; and Claus Fuglsang, CSO and EVP of Research and Development. The entire call will take about one hour, including time for questions at the end. Before we begin, I would like to remind you that the information presented during the call is unaudited and that management may make forward-looking statements. These statements are based on current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in any forward-looking statement. Thank you. Thank you, Tobias, and thank you all for calling in. Please turn to slide number two. I am very pleased with our performance in 2022. We delivered a strong sales growth, as well as solid earnings and returns. We also delivered on all, but one of our non-financial targets. We're executing on our strategic agenda and advancing our business, with a stronger emphasis on prioritization, accountability and increased focus on our commercial agenda. This allows us to accelerate growth from our well-diversified businesses. Organic sales grew 9% after being up 6% in 2021, and three of our five business areas delivered double-digit growth. Household Care performed as initially expected when adjusted for the impact of the war in Ukraine. And Agriculture and Animal Health & Nutrition did very well, delivering 8% organic growth. Our investments in commercial activities, especially in emerging markets, are supporting our growth, and we delivered an impressive 9% improvement in both emerging and developed markets. Earnings was solid, and the EBIT margin before special items reached 26.4%, despite the significant impact from higher input costs. We have gradually improving pricing through the year, mitigating part of the input cost pressure. On our free cash flow, we are investing significantly in the business to support an accelerated growth trajectory. The facility in Blair, Nebraska is being built to produce advanced protein solutions, and it's progressing very well. We are fully on track to be ready by the end of the year. As for ROIC, including goodwill, before special items, we came in at a solid 17.9%. Sustainability, it's part of who we are. And I'm very pleased with our newly launched ambitions, non-financial targets, including reducing CO2 emissions for Scope 1, 2 and 3. Novozymes is actually one of the first companies in the world to have its net-zero targets validated by the Science Based Targets initiative, something that we are very proud of. Novozymes biosolutions are already having a positive impact on the world and a healthy planet. In 2022, 76% of our revenue was generated from products that contribute to lowering CO2 emissions. 32% was derived from products enabling healthier foods, and 8% of revenue was generated from products that enable better health. From an innovation perspective, 2022 was one of the strongest years on record. Innovations are key to securing our future performance, and we launched impactful solutions across all our business areas, leading to a total of 26 product launches for the year, including 13 in the fourth quarter alone. Executing on our strategy remain our top priority in 2022. We took important steps in the integration of assets acquired from our BioHealth business. We're very pleased with the progress made, and we're increasingly harvesting the benefits of creating unique insights and approaches to the market based on well-documented benefits. As I've noted before, it's full steam ahead for our investment in the new business area of advanced proteins, and we're also looking at additional opportunities in the protein space. On our ventures, we continue to see strong interest in carbon capture and plastic recycling, and we're pushing interesting collaborations in the field of agriculture, targeting yield enhancements and chemical replacement and enabling a more sustainable footprint for the sector. Thanks to the solid foundation of our strategy, we are set to deliver another good year in 2023. We expect sales to grow by 4% to 7% organically, with growth across all business areas. Price is expected to make up more than half of the increase. And I'm very pleased with the results of the significant efforts already put in our commercial agenda. The EBIT margin before special items is expected at 25% to 26%. And we expect a stronger pricing to offset higher input costs. ROIC, including goodwill and before special items, is expected at 16% to 17%, while the free cash flow before acquisitions is expected at DKK2.1 billion to DKK2.4 billion, with a lower CapEx level than last year. Before we move into the individual business areas, I'd like to highlight the executive announcement we made on December 12, when we communicated the proposed combination with Chr. Hansen and create a leading global bio solutions partner. The next step in this process is the extraordinary general meeting here in the first half of 2023 and the closing of the deal in Q4 or in Q1 2024. And with this introduction, let's now look at each of the five business areas in more detail, starting with Household Care. Could you please turn to slide number three? Thank you. Organic sales in Household Care grew 1% for the full-year. The performance was in line with our expectations from the start of the year when adjusted for the negative impact from the war in Ukraine. Emerging markets grew, driven mainly by Latin America and Asia Pacific, while the developed markets were flat, due to softness in the European laundry volumes. Sales in the fourth quarter grew 4% organically and 7% in Danish kroner. This was in line with our expectations for a solid end to the year. Sales in developed markets performed well in the fourth quarter and despite the underlying softness in European detergent volumes. Novozymes laundry and cleaning solutions are present across a broad range of products and across range of formats. This gives resilience to our business even in volatile environments when consumers are facing high inflationary places. Growing in emerging markets was broad-based in the fourth quarter, despite the negative impact from the war in Ukraine. The indication for 2023 organic sales growth in Household Care is low single-digits with the softest quarter, given that last year included sales to Russia and Ukraine. We expect enzymatic penetration in emerging markets to continue and the Freshness platform will contribute to growth. Our growth indication includes a continuity of the trends observed in 2022, with contracting European and North American laundry detergent volumes as well as a certain degree of downtrading. Finally, rounding off our indication for Household Care, we expect pricing to play a stronger role in 2023 development. Thank you. Could you please turn to slide number four? Thank you. Food, Beverages & Human Health delivered a strong performance this year, reporting 10% organic growth. The performance was broad-based, with all areas performing very well and driven by well-diversified innovation, favorable market conditions and increasing customer needs for healthier and more sustainable food solutions. Growth in Food was well diversified, supported by innovation and penetration in emerging markets with solutions for fresh keeping in bread, sugar reduction and plant-based protein extraction. Beverages also performed very well particularly in emerging markets, benefiting from favorable trends of raw material optimization, increased use of local raw materials in beer production and increased consumption of low-carb beers. Human Health sales performed well, with strong underlying demand driven by cross-selling of our innovative solutions portfolio. In the fourth quarter, Food, Beverages & Human Health grew 16% organically. Growth was broad-based, driven by emerging markets as well as a strong double-digit growth in Human Health. For 2023, organic sales in Food, Beverages & Human Health is indicated to grow in the high single digits, with all sub areas contributing to growth and pricing being a strong component. We assume a modest first quarter due to tough comparator and a timing effect from a large order impacting last year's sales. We expect to see further penetration of our solutions into 2023 supported by favorable underlying trends in Food. Additionally, Human Health is expected to contribute strongly, growing organically in the solid double-digits. Please turn into slide number five. Thank you. Bioenergy sales grew 25% organically in 2022, with double-digit growth in both developed and emerging markets and well above market growth. Growth was led by strong penetration of innovation in North America, supported by a 2% increase in U.S. ethanol production, capacity expansion on corn-based ethanol in Latin America as well as biodiesel. Novozymes' diversified and innovative toolbox of solutions allow our customers to gain market-leading yields, returns and additional value generation in animal feed, corn oil and fiber extraction. The fourth quarter organic sales growth of 22% was better-than-expected and came despite a decline of an estimated 5% in U.S. ethanol production. The growth drivers and a strong momentum from previous quarters continued, demonstrating our ability to respond to a volatile market. Sales of enzymes used for biomass conversion, commonly referred to as second-generation biofuels, did well and contributed also to growth. For 2023, we indicate sales growth in the mid to high single-digits. The positive trajectory of our solutions is expected to continue in 2023. The main drivers being pricing, market penetration enabled by innovation, capacity expansion in Latin America and market penetration in biodiesel. Additionally, we expect growing sales from second-generation biofuels. The outlook assumes a flat to slightly declining U.S. ethanol production. Please turn into slide number six. Thank you. Sales in Grain & Tech Processing grew 10% organically in 2022. The strong performance was led by double-digit growth in grain, with strong growth in both developed and emerging markets, driven by innovation and favorable market conditions. Tech processing was roughly flat as the decline in textile was offset by stronger sales in enzymes used for COVID-19 testing kits. In the fourth quarter, Grain & Tech Processing sales grew 5% organically. Performance in grain was broad-based, growing double-digit in both developed and in emerging markets. Sales in tech processing declined, mainly due to the unfavorable market conditions in textile. Looking at 2023, we indicate organic sales growth in the low to mid-single-digits. Growth is expected to be supported by stronger pricing. Additionally, growth in grain is expected to be driven by increased market penetration in vegetable oil processing and innovation in starch. Tech is expected to decline, driven mainly by the reduced sales of enzymes for COVID-19 testing kits and a weak demand in textile. Please, can you turn to slide number seven? Thank you. Agriculture, Animal Health & Nutrition sales grew 8% organically in 2022, led by strong growth in Animal Health & Nutrition, especially in developed markets. Innovation and favorable market conditions, partially linked to higher prices for soft commodities as well as a pull from more sustainable benefits, drove up demand for yield-enhancing solutions across the sub areas. Fourth quarter sales indicated -- increased by 11% organically year-on-year. Growth was driven by agricultural, which performed strongly and in line with expectations. Animal Health & Nutrition grew moderately in the fourth quarter. For 2023, organic sales is indicated to grow in the mid to high single-digits and to be broad-based with solid growth in both Agriculture and Animal Health & Nutrition. Growth will, primarily driven by pricing, by innovation and market growth and increasing demand for sustainable solutions. Thank you, Ester. Please turn to slide number eight for a review of our financial performance. First, I'd like to recognize the performance of the entire Novozymes organization, which has put us in a position to deliver solid financial results, despite pressure from rising input costs. Sales in 2022 grew 17% in reported Danish kroner and 9% organically. Currencies provided a 7% tailwind with another percent added from the acquisition of Synergia. For the fourth quarter, sales grew by 18% in Danish kroner, including 11% organic growth, 6% from currencies and 1% from Synergia. The gross margin was 54.6% in 2022 and 53.5% in the fourth quarter. As expected, this was below last year's margins for the respective periods, mainly due to the higher input costs, energy and logistics costs, which were partly offset by productivity improvements, operating leverage and pricing. Our pricing efforts have provided an increasingly stronger contribution to the gross margin as the year has progressed and with the strongest impact in the fourth quarter. The fourth quarter gross margin was soft, driven by negative volatility in input costs and some mix effects in Bioenergy as stronger demand led to higher ship volumes between continents, increasing our logistics costs. The reported EBIT margin was 26.0%, which included special items of DKK68 million, split roughly evenly between Q3 and Q4. The special items consist entirely of costs related to the proposed combination with Chr. Hansen. The EBIT margin before special items was 26.4% or 0.4 of a percentage point below last year. The decrease was mainly due to the lower gross margin and included an improved OpEx-to-sales ratio, as well as a slight tailwind from currencies. The EBIT margin also included around DKK200 million contribution, impacting other operating income, which relates to the accounting gain from the 21st.BIO investment recognized in the third quarter. The underlying EBIT margin before special items, when adjusting for non-recurring items in 2022, was roughly 1 percentage point below the reported EBIT margin before special items and roughly 1.5 percentage points below last year's underlying EBIT margin. The fourth quarter EBIT margin before special items was 23.4% for a 2.4 percentage point increase over the fourth quarter of 2021. An improved OpEx-to-sales ratio, driven by lower sales and distribution costs and administrative expenses drove the improvement. This was partly offset by a lower gross margin. There were no non-recurring adjustments in the fourth quarter, meaning the underlying margin is similar to the reported margin before special items. It was approximately 1.5 percentage points above the underlying EBIT margin for the fourth quarter of 2021. Net profit in 2022 was strong at roughly DKK3.7 billion, up 17% over last year, supported by an overall increase in EBIT, positive one-off financial gains, as well as a decrease in the effective tax rate. ROIC, including goodwill before special items, ended at 17.9%, around 1.4 percentage points lower than last year, mainly due to the Synergia acquisition and higher growth investments. Free cash flow, excluding acquisitions was DKK1.1 billion in 2022 and negative DKK314 million in the fourth quarter. As expected, this was a decline from last year due to the increased investments for growth we are undertaking especially related to the state-of-the-art Advanced Protein Solutions production line at our site in Blair, Nebraska, which is progressing very well. The fourth quarter was impacted by a timing-related increase in net working capital and higher taxes paid. Now please turn to slide number nine for an update on the 2023 outlook. Organic sales are expected to grow by 4% to 7% in 2023. And sales in Danish kroner are expected to be around 2 percentage points lower. Full-year growth is expected to be driven by a combination of stronger pricing and volume growth. Positive pricing across business areas is expected to contribute more than half of the organic sales growth whereas innovation and increased market penetration will be the main components of volume growth. Additionally, the outlook assumes no major changes to the current state of the global economic situation. Growth is expected to be slower in the beginning of the year as the comparator from last year was positively impacted from timing of sales, particularly in Food, Beverages & Human Health. Additionally, the Q1 comparator from last year in Household Care includes sales to Russia and Ukraine prior to the start of the war. Turning to the gross margin. We expect a similar level to 2022 as the positive impact from price increases and productivity improvements will be offset by the continued high level of input costs. The increased level from 2022 will carry over and impact the first half of 2023 due to the delayed inventory effects on the P&L. The outlook for the EBIT margin before special items is for 25% to 26%. The margin will benefit from price increases, sales growth and productivity improvements, currencies, continued investments in the business as well as lower other operating income are expected to have a negative year-on-year impact. The outlook for the return on invested capital, including goodwill and before special items, is for 16% to 17%. And as a modeling assumption, the free cash flow before acquisitions is expected at DKK1.8 billion to DKK2.4 billion as the level of investments is expected to be lower than in 2022 and to include around DKK400 million for the final construction year of the Advanced Protein Solutions facility in Blair, Nebraska. Subject to approval at the Annual Shareholders Meeting in March, the Board proposes a dividend payment of DKK6 per share for the 2022 financial year. This is 9% or 50 ore higher per share than the dividend paid for 2021 and corresponds to a payout ratio of 45% of the net profit generated in 2022. Adjusted for the non-recurring items with no cash flow impacts related to 21st.BIO and the Microbiome Labs earnout, the payout ratio is 50.9% and in line with our capital structure policy. On a final note, I'd like to highlight that we continue to invest considerably for growth in order to drive long-term development and returns, and we remain focused on executing on our strategic agenda across the business. Given the current visibility, we feel very comfortable when it comes to delivering on our financial targets as set out in our strategy: Unlocking growth -- powered by biotech. Now please turn to Slide number 10 for a look at our non-financial targets and commitments. Novozymes has always been committed to its non-financial metrics as part of its approach to the triple bottom line reporting. As we have concluded on our 2022 targets, we introduced new milestones for the period to 2025 on the journey towards our 2030 and 2050 commitments. We embrace our responsibility towards the environment, our employees and the society and believe that only by holding ourselves accountable to the highest ambitions we can succeed in reaching our full potential. And with this, I'll now hand back to Ester for a couple of remarks relating to the exciting news on the proposed combination with Chr. Hansen as well as the wrap-up of the call before we open up for questions. Ester, please? Thank you. Thank you, Lars. Please turn to slide number 11. Thank you. On December 12, we announced a very exciting proposal to combine with Chr. Hansen. The proposed combination is a significant step on our journey to become a leading biotech powerhouse, responding to all areas of our strategy. The two companies are both driven by a shared purpose, a purpose to find biological answers to better lives. And the new company will drive a stronger growth while, at the same time, increase the positive impact on the world. The strategic rationale is strong, and the combination offers attractive returns for shareholders. We see two complementary businesses with complementary solutions and complementary markets. The combination will not only be able to accelerate short-term growth by cross-fertilizing solutions across industries, across geographies, but even more so in the longer-term by creating new solutions, derisking innovation and improving our ability to address new market trends. This will increase our likelihood of success and bring even more sustainable bio solutions to existing and to new customers. As you might have seen in the last two days ago, we received the binding tax ruling from the Danish tax authorities that the proposed combination can be completed as a tax-exempt transaction. This is one step towards the expected closing of the transaction. Now please turn to slide number 13. Thank you. We are confident on our ability to generate the communicated synergies. We expect cost synergies of EUR80 million to EUR90 million over the years after close and EUR200 million in revenue synergies over the four years after close, generating an additional EUR80 million to EUR90 million in EBIT synergies over the same time period. The revenue synergies are mainly built around enabling new connections from existing solutions. These are drop-in opportunities from cross-selling complementary solutions to customers or two geographies that are underserved by the other party. This may add to the majority of the revenue synergies. Let me give you -- let me share with you a couple of examples. In dietary supplements, we will be able to sell Chr. Hansen solutions through Novozymes B2C and health care practitionersâ channels and Novozymes solutions through Chr. Hansen network. In the food and beverage industries, we will be able to expand bio protection beyond dairy in segments like baking and meat. We will be able to cross-sell enzymes and cultures across customers, geographies and channels. This includes, for example, plant-based foods, processed meats and fermented beverages. We will cross-sell probiotics, microbes and enzymes as complementary solutions in selected segments such as Animal Health and plant health. As an example, in plant health space is to combine the complementary bio yield and bio protection portfolios of both Novozymes and Chr. Hansen, utilizing existing commercial channels as well as accessing new markets and new customers. These are examples of cross-selling that will lead to the majority of the growth synergies in the short-term. But what we are even more excited about is the growth acceleration will be unlocked as we bring the innovation and biotechnology capabilities of the two companies together. Combining complementary innovation and application strengths after closing the deal will enable additional short-term synergies. We will start to work on these opportunities on day one. And we'll start to see the impact in year three and in year four, but even more importantly, they will build the foundation for stepping up growth beyond the synergy period. Let me share with you a few examples. We will be able to develop food and beverage solutions with enhanced functionality. This includes a broad and differentiation solution offering, including HMO, including enzymes and proteins for high-nutrient contents. We will be better equipped to develop [Indiscernible] solutions with enhanced taste, texture and safety by leveraging the combined innovation pipeline, capabilities and the customer access. And we expect further expansion in the health platform for the combination of enzymes, microbes and proteins in dietary supplements and in the health space. Combining the biotech capabilities of the two companies will uniquely position NewCo to provide the answers to the solutions of the present and the solutions of the future, increasing the likelihood of success, both in the areas where we're currently playing, as well as in the unknown white spaces. The list of opportunities is long, and prioritization will continue to be a key parameter in the NewCo strategy. The combined innovation muscle of Novozymes and Chr. Hansen, its broad market presence and reach, coupled with an even further enhanced capability to bring solutions to scale, would set NewCo as a unique biotech partner for our customers. With this, now please turn to the next slide for a summary of our main messages from today's call. I am very, very pleased with the strong delivery of both financial and non-financial results in 2022. We grew our sales 9% organically with double-digit growth in three of the five business areas. We delivered solid earnings despite high pressure from input costs. We delivered positive pricing, and we continue to invest significantly in our business. We met all, but one of our non-financial targets, and we have set new ambitious milestones for 2025 on our journey towards our 2023 -- 2030 and 2050 ambitions. We expect continued solid performance in 2023, and we are guiding for 4% to 7% organic sales growth, with a solid EBIT margin before special items of 25% to 26%, despite the continued impact from higher input costs, especially from energy and a negative currency impact. ROIC and cash flow are expected to be solid, and both are impacted by increased investments and acquisitions to secure growth of the business. For the business overall, we expect volume growth, and pricing is expected to make up more than half of the organic sales growth. Key priorities here in 2023, of course, delivering on our expectations, including the completion of the Advanced Protein Solutions facility in Blair, Nebraska. We're devoting all the efforts required in preparing for next four and executing on the combination with Chr. Hansen. We're making comforting steps in that direction, such as receiving the binding tax ruling that the proposed margin can become completed as tax-exempt combination. We plan to hold an extraordinary general meeting in the first half of 2023, and we expect to close the deal in Q4 2023 or in Q1 2024. This opportunity opens up a biotechnology play that is second to none, enabling us to provide even more and better biological solutions to a world in significant need of it while, at the same time, creating a strong shareholder value and returns. Novozymes is a unique position to drive change towards a healthier planet. And as a company, we have a responsibility to make this happen. And together with Chr. Hansen, we can do so even more. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question is coming from Alexander Jones from BofA. Please go ahead. Great. Good morning. Thank for taking my questions. Two, if I may. The first on the Bioenergy outlook. This time last year, you guided to low to mid-single-digit organic growth and ended up doing an impressive 25%. So could you give us some color on how much visibility you have for the guidance you've given for 2023 and how much the eventual growth rate in that division this year will depend on the evolution of the external commodity price environment? And then a second question on Microbiome Labs. As you alluded to, you've reduced the earnout by over DKK200 million, compared to a year ago, which you say is due to lower expected sales. Can you give us a bit more color on what's driven the disappointment on sales in MBL versus your expectations a year ago and any quantification, if possible, and how that affects your long-term expectations for both MBL and the Human Health business? Thank you, Alexander. I will let Tina first answer the question on -- building the question on Bioenergy and then on Amy -- Lars and Amy on MBL. Maybe one -- a comment I would like to bring in on the accelerated sales beyond expectations. This is another proof of our capability to respond to a very volatile market and, once more, show the resilience of our offering. Yes. So building on that for 2022, we saw a very strong performance. We have seen new innovations be a key contributor to that. I think it's important to remember in Bioenergy that depending on how you calculate it, but roughly 70% of our sales come from North America. But if you look at an ethanol plant, ethanol is only one element of what it is that -- of the revenue stream you have in an ethanol plant. So therefore, the diversification of our businesses, both in terms of geographies with 70% in the U.S., Latin America being the second biggest area, but also other geographies contributing. And then also that only roughly 70% of the outcome of an ethanol plant is coming from ethanol is leading to diversification. And that is also enabling up new innovation spaces for us. As an example, we have launched a number of both yeast and fiber solutions, which has been very strong contributors of growth. Also, I think that it's important to remember that Bioenergy is more than just ethanol. Bioenergy is also a first-generation ethanol. Bioenergy is also a second-generation ethanol as well as biodiesel. And there as well, that diversification has, I could say, been driving the growth, which we have seen in 2022. We have also taken a bit of share in the U.S. market, but most of it is that diversification we have done across outputs, across geographies and across, you could say, energy sources. And there is more to come. As you remember, we talk about corn cracking, and we expect that area to continue to develop. So in our outlook for next year, we are giving an, you could say, an indication of mid to high-single-digit. And that is including flattish developments in the U.S. ethanol market. It's also including pricing and growth in our volumes. And so for the earnout adjustment, when we closed the deal with Microbiome Labs now more than two years ago, we included very ambitious targets for the earnout in the purchase price agreement. And so now as the earnout period expired at the end of 2022 was the time to then record the difference between the realized results and those very ambitious targets set out in the purchase price agreement. So overall, this is not changing our overall outlook and value of this business. So Amy, maybe you can add a few words on that. Yes, absolutely, Lars. Thanks. Yes. So I think just to echo what Lars said, we're actually very pleased with the underlying performance of the Human Health business and Microbiome Labs as well. And the actual performance is well within our business case ranges, just not to the max upper end of the aggressive accrual. Overall, we're actually really pleased to see that the health care practitioner channel, which is represented by Microbiome Labs, is actually delivering greater than market growth in the channel and continues to be a strong driver as we look forward and one of the key drivers of why we're confident about the strong double-digit growth as we go into 2023. Yes. Hello, congrats with a strong Q4. I have a question around your organic growth outlook of 4% to 7%. So you say, more than half of that is price. So I wonder if more than half of the growth is also price if you reach the high-end of that guidance, because that would imply at least 4% price. And in that respect, I wonder if you can give some color on the magnitude of pricing within the different business areas and maybe also comment on the outlook for underlying volume growth in the different business areas, because it would appear to me that implicitly, you are guiding for volume contraction in Household Care, for example. So if you can comment on that And then a long-term question, Ester. In your introduction, you mentioned biochemicals, biopolymers. I just wonder how many years are we from may be seeing some revenue in that? Are we talking five years plus? Or is it sort of within the next three to five years, we could see some announcement of revenue coming from those areas? Thank you, Lars, for your, first, kind words and then elaborated questions. Let me maybe start taking the -- bringing color and then have Anders, particularly follow-up on the Household Care area. And then the same with the second question, I'll start with this one, but then, Claus, please feel free to chip in on further details. So to your comment on price as a contributor of growth, we're very pleased of the trajectory of -- and the work done by the team and how we see the impact of price as a contributor of growth, as one contributor of growth. You see this is a journey that we have been working for a while. It's -- we move -- coming from a heritage past that price used to be an erosion of revenue of 1% to 2%. Two years ago, it was close to neutral. This year, we have continued to see that [Indiscernible] being pricing strongly contributing as the quarters above and then finishing the year with price as a positive contributor, and that trend continues to stay strong. As the contracts expired, as the conversations of the customers have been completed, we feel very comfortable, with the majority of that pricing already confirmed for the year. But then we are also growing on volume. We are a growing company in a world of needs for our solutions, and the pull and the demand of our solutions continues to be there. It is true that in Household Care, in developed markets, we see some softness, and Anders is going to build there. But we see continued momentum in Household Care in emerging geographies. It is true that we see some softness in textile where the market is growing -- or slowing in a rapid way. And we are very pleased to see that lower demand from our sales for COVID testing. Although it's negatively impacting the revenue, we like the world with lower demand for COVID testing. We continue to see a strong pull and demand from our solutions, leading to a better and more sustainable biofuels in biodiesel, in bioenergy, the broad penetration, also in biomass as Tina alluded. Also the pull from our solutions in Bioenergy bringing also diversified alternatives like feedstocks for animal. You heard Amy talking about the strong pull-on health, strong momentum on cleaner solutions, lower sugar, strong momentum on grain. There is a strong demand from our solutions, and we're going to continue to deliver both price and volume growth. Then... Ester, sorry, but given that and set with all respect, then how do you make up the low end of your guidance range of 4%? Because if for this half of this -- if price is half of the 7%, mathematically, price needs to be 4%. And that means there's no volume growth if you reach the low end of your guidance. But you're telling me you are seeing volume growth. So I just want to understand the dynamics behind the 4%. We -- as you know, last -- the world is not so black and white. And now we also live in a world with uncertainty, with volatility, with inflationary pressures. And that's the way that we read the world is with the guidance that we're putting in place from 4% to 7%. And we read -- and the way we read the world is also with pricing being a strong contributor of that growth with more than the half and then so -- and then also, as mentioned, across the whole portfolio, with some areas that we see softness and declining on volume as the one I indicated. Before I pass it, I'll give it to you, and then I'll build up on the second question, and then we will go ahead, Anders. Thanks, Ester. On Household Care, the makeup of low single-digit guidance we have is that we look at a developed market being in decline on volumes. We see contraction among some of our largest customers that is actually quite substantial. And then we also see some destocking in the segment. At the same time, we see volume growth in emerging markets, and then of course, as we also allude to, we see positive pricing in Household Care. We see positive contribution from innovation, particularly from Freshness and then continued strong market growth in emerging markets. Yes, so we don't look at it like that. We try to segment the two markets in two, and then we give you guidance on how we separate those two. My question is on the net, not on what you say. And if you don't want to comment on it, it's fair. But the question is really, if you net it because we -- you don't disclose numbers by geographyâ¦ So net-net, there will be a small -- there will most likely be a small decline. But I also want to stress quite clearly that we are looking at a world that is fairly volatile. The declines we see right now in developed markets are quite significant. We believe that, that will actually improve over the year. Of course, we need to see that improvement. But please also bear in mind that we are trying to forecast a world that is relatively uncertain. But if you want a very specific number, then small volume decline in Household Care. Thank you, Anders. And then building on your other comment on biocatalysts, we see -- I mean we're very pleased with that question that you're bringing in. And we see at this moment the majority of the efforts and the -- for sales in the aspect of bringing further functionalization and being in biotechnology. I believe you mean from our -- my intro on plastics recycling and with the collaboration here with Carbios and also the carbon capture, where we see enzymatic functionalization as an enabler of bringing even stronger and more sustainable carbon capture. Biocatalysts, it's a space for the future, and we don't have it yet in our sales plan. I'm sure Lars remembers also that we've had previous engagements in the biochemical space. But to elaborate on Ester's comments here on carbon capture and plastic recycling and also bioplastic degradation, so we expect a smaller contribution. We actually had a launch that we have not stipulated as one of the public ones that we hope will contribute on the plastic degradation next year. But it's still small. It's in its infancy. You remember these are ventures for the future. Now is there demand for these types of solution that goes beyond? Yes, we are seeing that. And we're also seeing customers willing to pay the premium for renewable solutions. So for the future, yes, it will be coming, I'm sure. And Claus, just to be clear, if this leads to revenue, that would be incremental revenue, i.e., not cannibalize ascent from any of your current business areas. Is that correct? Yes. Hi, thank you. Just following up on -- clearly, I think the volume growth in Q4 also looks pretty good and pricing is coming through. And I think I heard Lars talking about the contribution from pricing on margin being highest in Q4. But I'm still surprised that there is no leverage on gross margin. Gross margin is still flat versus Q3, and it's down actually year-on-year, more than what probably was the guidance previously. So I'm just curious what is going on, on gross margin? And what are you thinking about in terms of the trajectory into 2023 on gross margin? And the second question was, you referred to soft guidance for Q1. Is there a chance that we might actually see a negative organic sales development in Q1? Or do you think it's more likely to be more low single digit positive and not a negative number? Thanks. Yes. So on the gross margin, you're right that the fourth quarter was slightly lower than what we had indicated in the third quarter release. And the key reason for that is really the increased sales we had in Bioenergy. So while normally we would have leverage from increased sales, then the extra sales had to be fulfilled with production that had to be transported across the big ocean and, therefore, had higher freight costs associated with it. And also, as we pointed out, Bioenergy was also driven by biomass sales. And here in this early low-volume phases, that also has a product mix effect. So those were sort of the key reasons. And therefore, it's not something that sort of makes us cautious or nervous about the outlook for the gross margin in 2023. But what you have to realize is that going into â23, the current spot prices for raw materials and energy costs are actually still higher than the average cost we procured at during 2022. So therefore, the -- we still have a need to continue to make sure that we capture our fair share of the value that our products generate for our customers. And that's also why it's been really important that we have now anchored price increases, which are now contributing to our sales growth, but also to protect the -- both gross margin and EBIT margin in 2023. So the fact that we have now secured the majority of those price increases at this point in time give us the confidence that we can counter the input cost and energy cost levels and, therefore, makes us comfortable we can deliver a gross margin in line with 2022 and an EBIT margin in line with our long-term guidance of 25% to 26%. So -- and on the Q1 question -- sorry, on the Q1 question. So what we are indicating here is that there is a very strong comparator for -- from last year. And therefore, we are sort of indicating a softer start to the year. We are not providing any specific guidance on exactly what that number is, but I would not expect it to be negative. Yes. Good morning. Soren from SEB. A couple of questions. First of all, if you can remind us when you start to book the first sales from the production from the new facility in the U.S. for alternative proteins and also how that -- the phasing of that sales will be over the coming years. As I remember, you were targeting above DKK1 billion in sales over time. And secondly, if you could indicate when the recent drop in energy prices will start to be a tailwind for Novozymes during 2023 on the gross margin. Thank you, Soren. I'll answer on the first question. Then please, Amy, build up and then, Lars, on the contribution on pricing and energy. We will -- we have full on blast, on time, on target to deliver and to have the startup of the plant by the end of the year. That's what we committed to, and that's what we are totally on track, safely, on budget and on time. Of course, starting up, it doesn't mean immediately into meaningful sales. So you should be able to start seeing the sales -- first sales next year and then gradually ramping up until the DKK1 billion. Don't forget also that what we put as a target or the expectation was also, it's broader than this -- only from this plant. It's also a protein platform that we are also exploring and bringing other alternatives that we're moving ahead, and we see very good traction of the broader space beyond plant's functionalization on proteins that we're working on. Yes. So on energy and electricity costs, remember that we are usually hedged for the majority of our electricity consumption when we sort of go into a year. And therefore, we realized the majority of our production in 2022 with the hedging contracts we had in place when we started the year. And so even if electricity costs here in the last few weeks and couple of months have come down versus the peak levels that we saw in late summer and Q3, those costs are still significantly higher than the hedging rates we had secured at the beginning of 2022. So therefore, we have, over the last couple of months, been building our hedging position so that we, at this point in time, have hedged our energy cost more or less to the same level as we would normally do, at lower levels than what we had at the peak rates in Q3, but significantly higher than in 2022. So specifically on electricity costs, we would have higher electricity costs in our production throughout 2023, compared to 2022. And then, of course, it's sort of the future spot rates and forward rates that will determine, when will electricity costs then improve or whatever they -- wherever they will go. But that's the situation we're in. And so we were benefiting from those hedging positions throughout 2022. That's clear. And then just finally, on Household Care. Just wondering if you're starting to see -- I mean some of your big customers has some quite ambitious targets now on being carbon-neutral, et cetera. Are you starting to see them buying enzymes that will sort of, you can say, make them come closer to that target at some point already now? Or is that more sort of in the coming years? Yes. So I think it's fair to say that most of our customers have been quite challenged with the raw material challenge. I think that just occupied them for the most part here last year. But clearly, in conversations with customers, there's a lot of interest in going this way. And when you sort of look at the stack of different raw materials, we are clearly positioned as a very, very superior ingredient when it comes to both biodegradability but also being a renewable raw material. So clearly, we are positioned strongly. Where we do see some movement here and where we also see it in our numbers is in emerging markets, where more customers are dialing down on chemicals and dialing up of -- on enzymes. But in the developed market, we still sort of see -- need to see the development take off. Yes. Thank you for taking my question. And hello, everyone. I have a question regarding free cash flow, where you come out on the full year with DKK1.1 billion. You guided DKK1.3 billion to DKK1.7 billion. I wonder if you can give any comments around why you missed so much on this compared to your Q3 guidance. And the next question is if there was any additional spend on the Blair than what you indicated in Q3, how much have you reduced the spend in your guidance for 2023? Thank you. Yes. So you're absolutely right. We came out a bit below the range that we had indicated in Q3. And a couple of reasons for that: one is we had costs, both special items, but also financing costs for our credit facility we have put in place in relation to the combination with Chr. Hansen. So that all together was roughly DKK100 million in cash flow. We also had a timing in terms of the payment of tax and then also a timing effect on our net working capital. So those were the key reasons. And I don't have any concerns in our sort of underlying ability to generate cash from the business. And so I consider this variance a timing effect between Q4 and Q1. In terms of the facility in Blair, we had the progress of the facility like we expected when we announced Q3 of last year. And so the CapEx that we have recorded in 2022 was in line with that expectation. Can I just come with one follow-up regarding the Blair? Because you did, what, DKK2.86 billion in CapEx for 2022, and you guided DKK3 billion to DKK3.3 billion. So it actually seems that you spent quite a bit lower than what you indicated in Q3. And therefore, these other effects should be much higher if you missed by what midpoint, DKK450 million for the full year. So I'm still struggling to understand why you spent less in CapEx for â22 than what you guided at Q3. So two factors behind that. One is that we also saw a declining U.S. dollar rate. So that was part of the reason that the actual reported CapEx came out lower. And then it was more in the, let's say, the overall portfolio next to Blair -- the Blair facility. That was where we had the variance versus our expectations at Q3 release. Hi, everyone. Thanks for squeezing me in. I wanted to just come back a little bit on pricing. I think from the outside, it's quite hard to understand how much of the pricing initiatives that you've put in place and that you're planning to put in place, how much of that is due to sort of short-term initiatives to sort of recoup input inflation, as Lars referred to, versus some of the longer-term strategic initiatives on pricing. So I was wondering if you could, I guess, help us to understand the split a little bit better and also to understand that if we see input deflation, does that mean -- or would you expect to have to give any pricing back with your customers or renegotiate with your customers? Or do you expect to hold on to this price going forward? And then the second question, if you don't mind, I know we're running out of time, but no one's really asked anything about the deal. And I was wondering if you could just spend a few minutes talking about feedback that you've had both from employees and also from your customers so far since you announced the deal. Thanks. Thank you, Nicola. I'll build on price. Lars, free to chip in and then delighted to comment with you on the feedback we're getting on the announcement that we made on December 12. Price is a component of revenue growth, and it's a component that we have been working on the last years to make it stronger contributor for Novozymes. We started that journey a few years ago in a strong way, training the organization, giving the tools, the capabilities and also the value propositions and the ammunition on how to trigger the conversations with the customers on how to get our fair share of value. We price by value. We don't price by raw materials. We price by the value we bring in. And I hope with that I'm answering your question on the deflation, because the value that our solutions bring in, it is not linked to the cost of the raw materials. We bring value from CO2 emission reduction. We bring value from enabling clean label. We bring value from bringing diversification from the ethanol on other streams on food. We bring value by reducing waste, by reducing energy consumption. That's the value that we bring in to the customers, and that's the way that we're pricing our solutions. Then this is a journey that we've been working strongly. We saw the impact with a marginal flat price in 2021. We've seen the impact in 2022 with a positive contribution. We're going to see a stronger impact in 2023. But price is going to stay as a contributor of growth for the future in Novozymes, as it is productivity, as it is mix for value generation and, for sure, as it is volume growth. We are a biotech company that provides solutions that enable our world a better place. And now as demand from our solutions will continue to stay. Very good. Thank you, Lars. So then regarding the deal. We're getting a very positive feedback from our customers and also very positive feedback from our employees. We feel in a place of extreme comfort, even better comfort, if possible, than when we announced the deal with positive signals across all areas. The conversations with our customers give us even more strength of the assumptions that we put and the synergies. The conversations within our teams, of course, through the help of external legal advisers, while preparing the data for filing gives us very, very high level of comfort on the milestones that we put in place for both -- for the antitrust, but also of the strength again on the synergies. We get -- we got a very good feedback from the employees. There is excitement on the company that we're creating, a company that it's better than any of the two companies individually. We are -- we -- of course, there is the response once the -- after the excitement of wow, this is the place I want to be part. This is the place I want to contribute. That is the personal component on what does this mean for me. And we've gone through that reaction with the organization. But then we take very consciously of the responsibility to communicate, to communicate, to communicate and to bring the post to the organization and to bring the excitement of the company that we're creating together and then communicate on the milestones as we're getting the EGM; the milestone that we just communicated on the feedback from the tax authorities, as we're getting ready for the filing in the countries like U.S., Europe, China, Brazil, South Korea, Turkey, slowly one after the other; the milestones that we bring in, continue to bring in the feedback that gives the comfort to the organization that we're moving and we're getting close to closing. There is a very clear message also passed to the organization on what we need to do is deliver, deliver in 2023, deliver on our targets, deliver on the expectations and then hold the excitement of the company that we're moving in and that we're all going to contribute of -- and that we're going to contribute on bringing better solutions and unleashing the power of biotechnology. And with that, I would like to -- if that answers your questions, Nicola, I would like to close the call. Thank you very much for your questions, and very much looking forward seeing you in the road in these forthcoming days.
EarningCall_977	For first-time viewers, just a reminder of the logistics, we plan to spend around half an hour with the presentation and up to an hour with a Q&A. And of course, if any questions remain unanswered, the IR team is at your disposal after the event. It's been certainly for us a very solid year, and I think we finished it with a very strong operating momentum, not just because of the activity, you see given the relatively low growth in the Eurozone for us to see performing loans up 3.3% and having had also positive net inflows in our long-term savings despite the market volatility is a pretty good achievement. That's how we see it. But beyond that, I think, particularly on the P&L front, momentum is very strong. NII, in particular, this quarter has helped us to post a 5.5% growth in revenues, and that's combined with a 5.6% decrease in costs associated to the bank integration, means that our pre-impairment profit is growing close to 20% this year. Together with that operating momentum and profitability momentum, we made good advances in terms of asset quality. For a year like this, we have reduced our non-performing loan ratio from 3.6% to 2.7%, and we have done that in combination with a very prudent provisioning policy so that coverage for non-performing loans is now at 74%, up 11 percentage points during the year and keeping our cost of risk in line with our guidance at 25 basis points. Capital-wise, a very strong year. We obviously completed the share buyback during 2022, and we end up the year with 12.5% Core Equity Tier 1, excluding IFRS 9 transitional adjustments. It's a buildup of 40 basis points of capital this fourth quarter, very strong one, obviously. Beyond that, MREL ratios with ample margin and liquidity at 194% liquidity coverage ratio, having paid back 80% of our TLTRO speak by itself. That's why we have obviously set up a payout at â¬0.2306 per share for this year at the middle of our 50% to 60% payout range and announced that we will repeat that 50% to 60% range for 2023. I'd like to advance at this point that we feel comfortable with our â¬9 billion target for capital generation or excess capital generation in our plan of 2022 to 2024. And net income, as you know, has grown by close to 30% to [â¬3.145 million] (ph). In terms of our activity, I will go quickly through a number of points. First of all, clients. This is the first year after our integration, the first full year after our integration. It means that in this year, and we tend to forget it very quickly, but this year has been very intense, very busy year for us, where retail branches have come down by 17%, number of employees down by 10%. We've restructured our insurance business, which is so important for us. We have achieved our cost savings target. In fact, bringing it forward again in terms of the synergies -- cost savings that we have achieved already in 2022. And all this is now a chapter, I would say, closed, but it's obviously kept us busy during the year. And at the same time, we have made good progress. You see some of our client-related activity in terms of relational clients, percentage is now above 70%. Digital clients, imagin clients, transformation of our also customer attention model branches through InTouch, growing all very strong. And yet, as you see, we have plenty of potential to continue or to increase the penetration of various products among our client base. We have done so since the merger. You can see that on the right-hand side, but obviously, there's many more -- much more progress than we can do. Our NPS that we measure internally at branch level is up 10 percentage points over the year, indicating a very strong advance after the integration, which is obviously very satisfying for us. Moving on to loan production. New loan production up 23% on the business front, 16% on the consumer front, and doubling on the mortgage front, speak by themselves. I think you have some statistics there. And I think it's very relevant to see that our loan expansion is being done with very prudent levels in terms of the target clients, both in business lending, consumer lending, with 90% of our consumer clients have the source of income paid into CaixaBank, which obviously historically has proved to be very attractive from a risk-reward point of view. And on the mortgage front, keeping mostly the fixed rate mortgage, hence protecting as we have done over the last seven years, protecting our clients and our own asset quality from increases in interest rates. I would say most notably on the mortgage front after the MyHome sort of full year effort, we have now put back our market share of new mortgage lending at 24%, in line with the market share we have on stock, which was the objective even exceeding the objective we have put in our three-year plan. In terms of the stock of loans, as I mentioned earlier, 3.3% of the performing loan book, up, business at 7.6%, consumer 4.1% and even mortgages at 0.7%. The total loan book is going slightly lower. We have had some very, I think, timely and good non-performing loan disposals through the year, which have -- which mostly explained these differences. We'll look at the customer funds. Obviously, the year has been marked by market volatility. So, when we look at performance, we want to look at it ex markets, where we have seen 1.1% growth year-to-date, particularly 1.6% in long-term savings. Obviously, when we include the market impact, which is the reality, then we have a fall of 1.7%. You have all that on the right-hand side here. And I would again highlight the fact that every quarter of this year, we have had positive inflows in our long-term savings, as you know, including long-term life insurance plus mutual and pension funds. And basically, for the whole year, we have that â¬3.7 billion. By the way, January, we have had significant inflows, figures were published yesterday in terms of mutual funds. So, a very good performance for us, which vindicates our strategy on basically advising our clients in terms of their investment horizon, investment needs and asset allocation. No, it's not been an easy year for anyone, and certainly not for our clients, but the fact that we've maintained positive inflows speak by itself. Protection insurance, up 8% with a stronger growth from MyBox, which is now over 77% of total protection sales and yet, I would say, another year of very good activity and success on protection insurance in line with our targets. BPI fantastic year. You can see in terms of activity, up 6% on the asset side; 5% on the liability side. Market share-wise, gaining share across the board, be it total loans, mortgage, business loan, mutual funds, a very good year. And obviously, this is showing, in terms of operating just -- strong growth in core operating income. As you can see, efficiency is now at 50% when you see the graph there from 2017. In fact, the previous year before we acquired the control, it was at 70%. So, we're talking about 20 percentage points of cost income improvement over a six-year period, a structural improvement, which makes us obviously very happy with the performance. Asset quality and capital continue to be pristine, as you can see also on the slide. And with that, the net income for the year is a pretty simple story, a story of 5.5% gross income growth and reduction of cost of 5.6% due to synergies, hence, that pre-impairment income growing at around 20%. And then below that line, while our loan loss provisions have been in line with last year, 25 basis points, we have managed to reduce all the provisions in a significant manner, so that net income actually grows by 29.7% on a comparable basis, so a very good performance coming from integrations in 2021, I would say, and with return on tangible equity just below the double-digit level, which we certainly expect to achieve very soon. In terms of the environment, macro environment, we have slightly improved our expectations for the economy following the positive indicators that we have seen over the last couple of months. We still see a GDP for Spain growing by 1.3% in 2023, slightly more than the 1% we had before. Obviously, 2022 has been stronger with that 5.5%, yet it is a significant slowdown from 5.5% to 1.3%, but certainly staying in positive territory. One of the great news is that employment is behaving very well during this period. And hence, we're not seeing a deterioration on unemployment, which would have obviously an impact on asset quality. Equally on the house prices, we're seeing basically a flat market, slightly below what we were expecting a couple of months ago, but still in nominal terms, flat; obviously, in real terms with -- that means single-digit reduction. But all in all, an environment is consistent with a fairly good asset quality behavior. Inflation coming down, but as you can see, still average inflation for 2023 at 4.2%, which suggests to us that rates are possibly going to outstay at higher levels for a bit longer than the latest that we have seen from market movements. But anyhow, time will tell. What is undoubtedly a big news is the major movement on the right-hand side of rates. And obviously, the very different environment we are facing now than we were facing a year ago and obviously, a much more positive one, no doubt. On that note, just a couple of comments on our financial resilience. The major news is obviously pre-impairment income. And obviously, the gap between pre-impairment income and cost of risk is increasing, widening. And that gives us, obviously, a lot of comfort for absorbing any bad news and also for keeping good remuneration for our shareholders. NPLs, at historical levels. Coverage, at historical highs. Liquidity, as you say, post TLTRO, you can see it would come down to 162%, if at year-end, we had paid all TLTRO. We had paid, in fact, 80%, as Javier will explain in more detail. But it means we have basically liquidity position is already adjusted to a world post TLTRO, which I think is going to be a significant competitive advantage for us vis-a-vis some other players in Europe. And capital-wise, I mentioned at the beginning, a fairly positive development, ample MDA buffer and hence, fairly good prospects on this front. And precisely on that note, again, just reemphasizing our payout and dividend policy, which I mentioned at the beginning. We're very pleased to have seen a year that has been positive for shareholders when we add the dividends and the share buyback. It's basically â¬3.5 billion that we have returned to shareholders this year. We are comfortably on track to achieve our â¬9 billion target, which means, obviously, that there's further good news for shareholders on this front to come. Let me now focus on further details for the fourth quarter, starting with the consolidated income statement. The most remarkable is net income is â¬688 million, that's 2x net income of last quarter of last year. So -- well, this is supported basically by a strong contribution from core revenues, up by 16% year-on-year and with costs negative with cost synergies, obviously, having a contribution on that front. Core operating income up by more than 40%. On revenues, clearly, NII is the main driver, 33% year-on-year, also 23% quarter-on-quarter. Clearly, loan index resets already having a very positive impact. On fees, we are affected by the end of corporate deposit fees and also during this last quarter compared to the last quarter of last year, also market impacts on AUM, obviously, clearly, a much lower average AUM balances. On life insurance, I would say that we continue to have a very positive trajectory with -- you may see on a quarter-on-quarter basis, up by 7%. So, this is as is quarter-on-quarter figure, not being impacted by the consolidation of Bankia Vida. And then, on non-core revenues, just to keep in mind that we have this fourth quarter, the impact from the Deposit Guarantee We have, on costs, nothing much to remark, flat quarter-on-quarter. And as you know, we have reached our targets on that front for the year. And then below the line, loan loss charges, reflecting a broader year-end approach with cost of risk at the end of the day has met also our guidance. All in all, as I say, that net income at â¬688 million. Let's continue with NII, which is a key part of our results today. It's on upper left, you may see the evolution of NII, but also disclosing the impact we have had every single quarter from TLTRO. We have quite a significant contribution from TLTRO this fourth quarter as ECB changed the terms last November. But as you may see, excluding TLTRO also, we have quite a positive organic evolution, up on a quarter-on-quarter basis by close to 18%. Upper right, you may see the NII bridge with this extraordinary contribution of â¬161 million from TLTRO, but then you may see that this client NII, the main driver, â¬325 million and still having some negative impacts from ALCO, basically from the wholesale funding impact, remember, it's at floating rates, and also other foreign exchange money market funding. Bottom left, you may see the evolution of yields. Very remarkable improvement on the back book yield, 50 basis points to 234 basis points. At the same time, the front book loan yield at 315 basis points, up by more than 1 percentage point in one single quarter, basically reflecting the new environment -- the new yield environment in the new yield production. Then, on customer deposits, you may see that the cost is at 16 basis points. But here, let me remark that excluding some structural hedges and also foreign exchange funding that cost is 6 basis points. As a result of all that, margins expanded significantly, up by 36 basis points this fourth quarter and also the net interest margin also increasing by 26 basis points. On the ALCO, we have been on a standby this fourth quarter with relentless increase in yields, but we have ample margin to add to the portfolio. You have the maturity profile, â¬7 billion, this year, but also remember that we have a long-term target for that portfolio to reach up to â¬90 billion. And in due time, I'm sure we will expand the portfolio taking market opportunities -- taking advantage of market opportunities. You may see the average yield of the portfolio 0.8% by the end of December with an average life and duration pretty much unchanged this fourth quarter around five years. Also, we continue with the diversification of the portfolio. Now the weight of Spain in the Spanish government bonds is 67%, down by 11 percentage points year-to-date. In terms of wholesale funding costs, I would remark here that we have a slight increase to 83 basis points. This is the result of, well, the new issuances clearly with a cost spread that is above the historical average. A few words on our balance sheet sensitivity. You know that we are geared towards higher rates. You know well about the percentage of our assets that are at floating. Remember, approximately two-thirds of our loan book at floating. But the main difference in our case probably compared to some of our peers is on the liability side. Here, you may see that on our deposit base that this is a very stable and highly granular one. We have 79% of those deposits from retail deposits. So, those are basically customers with a strong relationship with us, with plenty of operational accounts. So, this is a figure that is well above the figures compared to our peers and also in Spain, but also in the Eurozone. And we have been working on our models for our deposit base. And now we assess that we have approximately 40% of our core deposits that are considered -- core deposits -- our deposits that are considered core deposits, deposits that are actually not -- excuse me, that are not sensitive to interest rates. This is the result of basically â¬10 million payroll and pension deposits that are actually -- sorry, deposit beta is expected to be by the end of the year circa 20% and the terminal deposit beta is expected to be in the high 30%-s by the end of -- by 2025. The sensitivity to NII is expected to be between 5% and 10% for a move of up or down 100 basis points. On fees, we show clear resilience this quarter. You may see here that we are in a situation where -- sorry, but I'm not feeling well. Okay. Well, sorry for this, as Javier is not feeling well now. So, I'm going to try and take on from him. I'm sure he'll be back with us soon. Okay, this is going back to my old job. In terms of fees, as you can see, we have had a quarter where we're slightly up from the third quarter with a difference between this year and last year, which was an exceptionally good year in terms of fee performance, but all in all, when we look at the yearly evolution, very satisfying performance, particularly taking into account that in the fourth quarter, we have obviously removed the cash custody fees which is a significant part of that impact. In terms of AUM, markets have been weaker, and hence, we have had an impact this quarter from the lower value of our AUMs, and this is likely to be reflected, as you can see, into 2023 figures. But it all will depend on market evolution. Obviously, we have had a good -- very good market in January, which provides us some hope, but time will say. Credit cards, very good performance in terms of payments, growing up. So, we expect some positive news on that front within the overall sort of fee environment. And I would say, in the quarter, very good performance both in the quarter and the year from wholesale banking in terms of recurring fees -- non-recurring fees, I apologize, as you can see as well on the slide. Some pressure on recurring banking fees. This is mostly associated to our loyalty program. So, clients had become relational or they exit, and hence, the pool of clients that are non-relational and are hence being subject to these fees are reduced. And this explains why the recurring banking fees mostly are slightly down, as you can see, together with cash custody I mentioned before. Good performance on insurance. This is obviously nothing new to anybody, very solid and consistent. I would say life-risk, in particular this year, also associated to the increase on mortgage production, but a lot due to our MyBox policy, which continues to be very successful. On the fourth quarter versus the third quarter, obviously, there's an impact on the equity accounted part of revenues. This is associated to the seasonality at SegurCaixa Adeslas where the third quarter is always very low in terms of claims. You can see that performance as well last year and some other non-organic impact. On the cost side, nothing new. Basically, we have had, I would say, a very good execution on our integration and cost savings, and that has allowed to offset, obviously, inflation pressure, which is widespread and which explains also our guidance for next year. But we have managed to keep that â¬6 billion round terms, finishing at â¬6.020 billion with this 5.6%. And obviously, we're going to keep making sure that our cost base is under control despite the inflationary pressure. The costing has made a substantial improvement with, as I mentioned, from 58% to 52% cost savings have -- vast majority, 84% of the cost savings have already been booked by year-end 2022. Cost of risk, flat at 25 basis points. Again, a very prudent provisioning exercise at year-end. As you can see, even more prudent than we did at the end of 2021. I think that's the only way to read it. We have seen actually no deterioration on asset quality in the fourth quarter. Quite the opposite, as you see, we have reduced non-performing loans substantially and built-up coverage. So, we feel we enter 2023 extremely well prepared from this point of view. In terms of NPLs, as I mentioned, this very strong reduction. It includes the impact of some portfolio sales, but it also includes basically a non-organic reduction trend. For the whole year, more than half of the improvement in non-performing loans came from actually organic and approximately 40% from asset sales. The ICO portfolio is doing very well. 98% of the portfolio is repaying principal, only 4.2% of the portfolio is as Stage 3, and over one-third, 34% of the ICO portfolio has already been amortized. So, basically, this is another sort of question mark that we had at some point and market had at some point, this is actually behaving extremely well. In terms of the mortgage portfolio, we provided some detailed statistics last quarter in terms of the loan-to-value at 54% on average and the fact that actually, most of the portfolio that is being granted in the last seven years over 70% has been granted at fixed rates, and hence, it's fairly well protected from increases in interest rates and the impact on our clients' ability to pay. Obviously, there is going to be some impact. We still expect some deterioration in terms of non-performing loan during 2023. But given the quality of the portfolio and obviously, the substantial provisioning exercise that we have already made, we actually feel comfortable in meeting our targets that we explained in the Investor Day. Liquidity and capital, not much more to elaborate. You have all the numbers here. They indicate a very strong cash and ample margin. In terms of capital, total capital, MREL and liquidity indicators, it's really, for us, a very good starting position into 2023. I think I would highlight Javier and his team have made a very successful issuances during the year with a significant part of that in sustainable bonds, either green or social bonds, as you can see on the right-hand side. And already in 2023, we have accessed the U.S. market with $125 billion senior non-preferred and the sterling market with a Tier 2 also confirming our ample ability to fund ourselves globally and diversifying sources of funding, which is obviously always good. You have some details here on our ESG issuances. This is the statistics for the last three, four years, where we actually have issued â¬9.6 billion, both in green and social bonds, topping the league table out of Europe consistently, I would say, certainly on a cumulative basis. And on this slide, I also wanted to highlight that we -- even though there are many agencies following different -- slightly different criteria and results are not always too consistent, we are actually ranked very highly by all participants in the sustainability rankings, and obviously, very happy to have stayed in the Dow Jones Sustainability Indices as one of the top players and FTSE4Good at a very high level as well. Capital generation during the quarter, up 40 basis points. You have three components here: the organic generation, 26 bps; dividend and coupons from AT1 of 15 bps, I would say that's the normal; and then markets and other, we include the impact of BPI are moving on to IRB models, which is slightly above 10, 11 basis points positive impact that has already been booked in this year 2022. We still have an extra 30 basis points from the transitional adjustment to 12.8%, but obviously, very comfortable, certainly better -- even better performance than we were expecting some quarters ago in terms of how quickly we are rebuilding capital or how quickly we're generating capital, again post the share buyback, which certainly is something that all of you would be very interested. Good increase in tangible book value per share associated with our profitability and also positive impact from the share buyback. And with that, I'll finish with our guidance for 2023. NII, we expect to finish the year at around â¬9 billion, circa â¬9 billion NII, that is close to 30% growth from the figure in 2022 and obviously even higher if you exclude the TLTRO in 2022, which we should. But you have seen our very strong growth in this fourth quarter. And I think -- and I hope that gives you comfort to see how we can move from the â¬6.9 billion to almost at that 30% and reaching the â¬9 billion number during 2023. In terms of fees and insurance, we're grouping there the two categories together with NII [indiscernible] core revenues. We're expecting to have a flattish-to-slight growth, as you can see, from â¬5.1 billion this year to â¬5.1 billion to â¬5.2 billion in 2023. You have to remind the cash custody fees, which are approximately â¬100 million, which, obviously, we lose in the year-on-year comparison. It's a bit less because already in the fourth quarter, obviously, there's been very limited contribution from custody fees closer to â¬75 million contribution in 2022. And then, it's obviously AUMs that are -- given the market developments that are going to moderate growth in AUM-related fees. And then, as I mentioned before, what's our loyalty program and the fact that our clients are becoming more and more relational or if they are just marginal clients then leaving. Costs, here's where inflation is hitting us, â¬6.3 billion to â¬6.4 billion. That gives you obviously a range of 5% to slightly over 6% growth. And here, we have a number of factors, but I think this is a very exceptional sort of cost growth for 2023 that we certainly should not project going forward. And combination of the inflation pressures that built in 2021 to 2022, together with the fact that 2023 is still a relatively high inflation year in all expectations means that altogether, we have this impact. And there are some others that are worth mentioning, including the effect of our sort of loans to employees that are made at sort of subsidized rates, the subsidy release capture in this cost of statistic, and that is obviously then adding to NII, but it's -- it means that costs are somewhat artificially higher this year because of the increase in interest rates, which is something that we do not expect. And we expect possibly that these levels are maintained, but we certainly don't expect another 300 basis points of increase in rates into 2023. And then finally, cost of risk. We expect to be below 40 basis points. And that's based on a very conservative sort of assumption of how the economy and clients may behave in this environment. And on the other hand, the reality that we have a very good level of provisions, cumulative provisions with â¬1.5 billion of unassigned provision. In our financial statements, if you had the bank PPA and the post-model adjustments, the macro sort of provisions that are not yet reflected in our typical IFRS 9 provisioning system, that gives us a lot of confidence that 74% coverage ratio eventually is another way to look at it, that even if the environment deteriorates strongly, our cost of risk is not going to be above 40 basis points. And certainly, I think any of us can think that if the economic situation is better, we could have some upside on this slide. That's all. Apologies for not being as good as Javier is, but I've been told he is feeling much better now. So, don't worry about Javier. And I think we can now go into Q&A. Yes. We can go straight into Q&A. Just to reassure everyone, Javier is fine. He felt dizzy. So, he's getting a checkup, that's all. So, let's move now, operator, into Q&A. Please ask the name and company of the person that's asking the question. And I believe we have a big queue around 12 people lining up for questions, so please keep the questions brief. Thank you. Hi. Good morning. Thanks for the presentation and taking my questions. I have one question that has a couple of them inside. It's on the NII. I was wondering if you could give more color on your guidance, how much of your loan book has repriced so far? And how much of it do you factor in for 2023 in the guidance? And do you think that following 2023, after the loan book is repriced to current rates and the beta is increasing, there could be a stall or a decrease in NII in the following years? I just wanted to hear your thoughts on this. And then what kind of loan book growth expectations do you have by segment? That would be very helpful. Thanks. Okay. Shape of NII and loan book growth. Thank you, Maks. In the meantime, while Javier recovers, we have been joined by Matthias Bulach who is responsible for -- as a member of the management committee and he's responsible for capital accounting and business planning, and he will help me in some of the questions, so it doesn't become a monologue. Alternatively, you, Eddie, can pick it, [can join up] (ph), because you know the stuff very well. But in any case, I will leave the first question in terms of how much of the loan book has repriced for Matthias to give any clarification. But I would say we do not expect 2024 to be a year where NII falls, because it obviously will depend on the rate environment, which you're seeing that almost every day, changes in the interest rate curve are very significant. So, we need to be prudent on that front. But we still feel that in 2024, pricing of -- asset pricing and activity are going to be more beneficial than further repricing of deposits because beta continues to go up. So, I do not think of 2024 as a year of falls in NII, at least with information we have today. In terms of loan book expectations for 2023, I would say, generally, we expect a slowdown in mortgage in new production and hence fall in the mortgage book, obviously, single digits -- low single digits fall. But clearly, there's going to be an impact from the current interest rate and real estate market. Again, not so much in terms of pricing, but in terms of activity, I would say, it's logical to think that the loan book for the market and for us will shrink during 2023. We're going to try and keep our share of the market in line with what we did this year. So, I would look maybe at slightly a larger decrease for us because we have a slightly sort of more aged book, and hence, higher share of principal repayment. On the consumer side, we have actually seen growth every single quarter of this year. But when you look at the macro slowdown, you'll think that that's likely to mean a small fall in the loan book in 2023, that's how we are at least -- well, that's what we are incorporating into our numbers. I have to say consumer has surprised us positively consistently for the last 12 months. So, I do not discard that the environment eventually is better, but we're having, again, a small decrease in consumer lending books. And we're expecting to still grow, I would say, slightly, maybe it's flattish to slightly positive growth what we see on the business front, continue to be fairly liquid. I think it's also a market that is going to be different and where asset spreads should be more attractive and the asset side should reprice as liquidity is a bit more scarce. And hence, we're not going to be too aggressive in terms of volumes because prices are quite relevant to the business; well, everywhere, but on the business side, certainly are very, very critical. And we expect to actually gain both in terms of asset spreads and slightly increase in volumes. So that's the 2023 outlook. On the question on the repricing of deposits. Recall that around two-third of our mortgage -- sorry, repricing of our mortgage book, recall that about two-third of our mortgage book are referenced to Euribor 12 months and repricing every 12 months and around one-third of the mortgage book is repricing every six months. We've -- that pretty much evenly spread across the year. So, there's even repricing each in any months of the year of these two books. That means, the repricing and positive rates started around April-May this year. So, two-third of the deposit -- of the mortgage book has already started repricing. It's sure obviously that this repricing has been going up. So, it's not up and until now November-December that we see significant repricing. And obviously, a significant repricing will be going on throughout the entire year of 2023, most definitely. And hence, we'll have also a carryover effect on NII in 2024, as repricing that is happening in the later next year, obviously, then we'll have a carry-on effect on NII year-on-year evolution 2024 with respect to 2023. Remember that the repricing typically happens with a lag of two to three months. So, we are typically repricing using Euribor reference of two to three months before. And hence, there's a certain lag when they started to reprice in a positive manner and means that repricing will be going on as well for a little bit longer than Euribor implicit rates would actually suggest. Okay. Thank you, Matthias. Thank you, Gonzalo. Just to add to Matthias' point, remember, TLTRO is an extraordinary in Q4, we will not have that in Q1 of 2023. Next question operator, please. Yes. Thank you for taking my questions. And I'm glad to hear that Javier is recovering. My first question is about the deposit beta. You can share with us your thinking process behind the assumptions for the deposit beta, you expect 20% by the end of '23. Previously, you guided to 30% in '24. You are now pushing out the terminal beta to '25 in the high 30%s. So, what interest rate scenario and what customer behavior do you expect? How big a shift from site to time deposits? What pass-through of the interest rates? So, you can please elaborate on the deposit beta assumptions? And second question is on the cost target for '23. You are projecting 5%, 6% growth is above -- is in line with headline inflation. Would you still be benefiting from some major synergies left because the restructuring was made during the '22. So, you mentioned some costs related to the subsidies for the loans to employees. If you can quantify, just to assess the underlying inflation in the costs? And for that, if you can also detail of how much is investment in business initiatives or wage inflation or catching up in spending? You can please elaborate on the guidance of the growth? Thank you. Thank you, Paco. And yes, we're all pleased Javier is feeling well. Indeed, I would say, let me make a few comments and Matthias can elaborate. On beta, obviously, it's something we've looked at it in a lot of detail. Obviously, beta depends on what's your view of the deposit facility rate, so beta would be different depending on whether we're talking about 3%, 4%, 3.5%, 2.5%. And at this point and based on the rate curve at the end of the year, which was fairly similar to the one just before yesterday's movement, what we see is based on obviously having looked at very different scenarios in different countries, our history of what has been the evolution of rates and then what has been the evolution of deposits, what we see is that the likelihood is that we will get to these high 30%s, but that the repricing or the timing in terms of the number of quarters that are needed to get to that level is slightly larger. That's why we're saying high 30%s by 2025. We obviously have no certainty on this. It does depend a lot on competition. I think then competition is going to depend on overall picture of liquidity in Europe and obviously, particularly on loan to deposits. So, there's a very different behavior of betas -- deposit betas depending on the loan to deposit in the overall system. It's our base case that certainly the loan to deposits remains and the liquidity position of banks remains -- even if obviously not as comfortable as in the past, remains, I would say, balanced rather than comfortable. And hence, we think this is the reasonable assumption to make. Obviously, then one thing is the system and then is our particular case, we're different from the system. And we are convinced we will have a lower beta than the system will have, no question, because we're -- 80% of our deposits are retail. And we have a very large proportion of transactional deposits. When we look at our payrolls market share above 35% or pension market share or even on the business side, what's our market share in point of sale, clearly, the sort of merchant acquiring, we are above 35%. And as Javier mentioned, before he left, actually core deposits that are going to be transactional and not remunerated under earning circumstances are estimated to be 40%. So, this is also a very significant factor. And when we look at what we have already published vis-a-vis our competitors at year-end, we're actually having a 5 basis points. Once you exclude 5 basis points payment of deposits, once you exclude hedges and foreign currency basically, which is certainly below some of our peers, and this is because the mix of our deposits is actually very different. So actually, current beta, if you look at the fourth quarter for us is 4%. And you should expect that this grows during the year to that 20%. In terms of costs, and again, Matthias, if there's anything you want to add, I'll answer the cost question, and then please elaborate as you seem fit. In terms of costs, there's a good combination of factors here, but almost half of the increase comes from, let's say, external and non-organic factors. The one I mentioned is the costs from employee credit facilities. And these are mostly mortgages that we have been -- this is part of the collective agreement -- not the collective agreement, actually we agreements that date back to decades, where they have a significant subsidy versus Euribor on the mortgages. And then, as Euribor goes up, this custody, which -- because it was floored at 0%, it tended to be not very significant. When Euribor increases, this becomes a significant subsidy and it's an accounting reclassification from costs to NII, this is approximately â¬100 million. So, you have that in mind. Another important part is the social security contributions, so [indiscernible] has been revised. This is, again, what we call the stop -- removing the ceiling on social security contributions. And the rest, I think -- well, I'll let Matthias, because he knows this stuff also inside out as Javier does. So please, Matthias, go ahead. Thank you very much, Gonzalo. On the second issue on the social security contribution, as Gonzalo said, this is another â¬40 million or â¬50 million approximately. So actually 45% of what we've been guiding for the increase from the level of â¬6 billion by the end of this year into â¬6.3 billion, â¬6.4 billion as the guidance says next year, 45% actually stemming just from these two factors. So very important as they are, to some extent, inorganic factors or difficult to manage, obviously. Then on the back of this, obviously, and you know we've reached an agreement with the trade unions on remuneration on this 4.5% increase, which obviously is taken into consideration into the cost evolution into next years, as well as we do see, obviously, some inflationary impact on general and on depreciation expenses. And depreciation expenses, this always takes a little bit longer to flow into our cost line as investments around now has been done this year 2022 or will be done throughout 2023, capturing some of the inflationary consequences and hence, we generated a certain upward pressure on depreciation and also on general expenses. So -- and investment in business obviously is continuing. We continue to invest in business. We continue to invest in our digitalization strategy, as we pointed out in the strategic plan, and hence, investments done this year, obviously, generate also more depreciation expense over the next year. On the positive side, obviously, next year, with respect to this year's levels, there is still the tail end of cost synergies and on phasing of cost synergies. We actually had a better year this year 2022 than we expected in terms of realization of those. We realized approximately â¬800 million this year of cumulative synergies in 2022 versus what we had previously estimated and guided, which was â¬755 million of our overall target of â¬940 million. And that means there are pending synergies into 2023 of around â¬140 million, which are the positive side, obviously, of this evolution. Okay. Thanks, Matthias. Paco, I hope that answers all your questions. We need to move on to the next one, operator, please. Yes. Hi. Here's Sofie from J.P. Morgan. And I hope Javier feels fine. Just if you could remind us of your capital tailwinds and headwinds in 2023, and kind of in which quarters those headwinds will come? Is it still 60 basis points or has that changed? And then, my second question would be if you could also remind us of the IFRS 17 impact on P&L? And also, what does the IFRS 17 mean for your guidance, should we just assume about of IFRS 17 adjusted lever NII and fees and costs? Thank you. Thank you, Sofie. In terms of capital, no change, i.e., we still expect impacts -- negative impacts of circa 60 basis points. That includes IFRS 17. We expect the bulk of this impact to be in the first quarter. In any case, we expect to keep Core Equity Tier 1 at or above 12% during the year. And second question on IFRS 17, we've decided to not provide at this stage the guidance or the detailed impact of IFRS 17. We will do so in due course. Obviously, we have to report at least in the first half this semi-annual accounts under IFRS 17. We will see if we have numbers and all clear enough for that to be communicated properly when we present the first quarter results and certainly, it will be by the first half. But in order to make our message simple, not to break trends and not to play with too much complexity, all the guidance we've given to you is pre-IFRS 17. As you know, our expectation is that IFRS 17 is not going to impact the bottom line, but it's going to be a reclassification where we will have some revenue lines, both in NII and in fees, moving into other insurance results, basically and also some of the costs associated to insurance also moving to that line. So, we will have an impact that is neutral in the bottom line, at least non-material in the bottom line, but where both revenues and costs will decrease and that will have a positive impact on cost income. Now that is the direction of the trend that we -- obviously, Javier and the team presented in December in that investor meeting you had, nothing has changed, I would say. But we thought that trying to provide all that detail at this point would be sort of too early and a bit more confusing. So, we've rather today speak about no accounting change. And obviously, at the time when we move from the current system to IFRS 17, we will provide you the full detail, so you can see the impact. But the most important thing are the trends, the trends are as per our guidance and the results today. And having said that, I don't know if there's anything you should know. But those are the big messages, Sofie. Just, Sofie, to be clear, remember that the 60 basis points is as a result of 10 basis points being applied positively this quarter related to the BPI adoption of advanced models. So, net it's 50 basis points, as we said in the last quarter, okay? Hi, good morning. Two questions, one on deposit flows and another one on capital returns. On deposit flows, term deposits were down in the quarter. Maybe you can comment on -- and the total deposits down the last couple of quarters. If you can comment on what the dynamics are there? And also, as we think about next year, what do you think of the -- for example, in the U.S., we've seen the QT has driven shrinkage and deposit balances are actually coming down, Javier mentioned in the past that that's a possibility with QT, I don't know if there's any sort of estimate you can give us of what part of your deposits could be sort of related to QT and you might lose at some point or some color on the general flows? And the second question is on my numbers, your guidance points around 12% ROTE for this year post AT1, it's about â¬3.5 billion. If you're not growing loans or very limited growth in loans and you're already at 12.5%, can we assume the bulk of that 3.5% can be distributed? I'm just conscious you've been quoted in Bloomberg that there could be capital -- sort of further capital returns -- extraordinary capital returns considered. I don't know if that's an interim decision that could be made or we've got to wait until next year, but this â¬3.5 billion, the total distribution we can look forward to on '23? Thank you. Thank you, Alvaro. In terms of term deposits, I would say, nothing out of the ordinary in the quarter. Obviously, within that, you have sort of wholesale deposits that are more volatile and where there's some large movements that are not really generating any trend. They come and go, and we're going to be very disciplined there. So, when they come and go because of rate decisions, they may go more than come. But anyhow, that's something that's part of the business. Quarter-on-quarter, you will see swings on that front. Then, we're going to continue to see, as you know, many of the banks we've been launching funds that are sort of short-term treasury-based funds or sort of treasury bill backed funds, and that is just a shift from deposits to AUMs that has had some impact and may have some impact. Overall, for 2023, we do not see significant movements in deposits, I have to say. I would say we'd probably be stable, slightly up on our deposit base for 2023. In terms of Core Equity Tier 1, obviously, we have â¬9 billion target. We have had a very good year in 2022 from that point of view. We now have this impact of circa 60 basis points, most likely being front-loaded to the first quarter all or the majority of it. So, the 12.5% is going to come down very soon. So, when we look at our capital distribution plans rather than thinking that the starting point is the 12.5% this year or this last year, December '22, I think we need to look at sort of two, three quarters from now to see that excess capital being built back again. And then, yes, we have, obviously, taken no decision. But in order to get to â¬9 billion, clearly, our 50% to 60% dividend payout is not enough. So, you should expect, and that's what I expect that we will undertake another capital distribution that is going to be more likely in the end of this 2023 or even more likely in 2024. So that's the overall environment. We haven't made any decision yet because even if we have 12.5% in a quarter, this is going to be back at close to 12%. But as we see capital generation very strong, I have to say, because we are going to be fairly profitable, and we are not expecting high growth in RWA. You correctly said so. Obviously, there's going to be capital generated. And again, our commitment is absolutely clear, crystal clear, we want that capital to go back to our shareholders. But anyhow, it gives us a few quarters until that sort of plan for the future is actual capital, excess capital on balance sheet. And if I may take the time to say Javier is 100% recovered. He's in pretty good shape. He's maybe come back and kick off Matthias, I don't know. And he said thank you to everybody for taking an interest in how his health was evolving. Thank you. Thanks very much. Glad to hear Javier has recovered. I guess, I have two questions focused on credit quality and the guidance of 40 basis points. If I just look to the fourth quarter gross inflows into NPLs, has been a decline of 17% year-on-year. And in the year, you have reduced around â¬3 billion of NPLs. Why you are guiding for such an increase in cost of risk? I mean, is there any kind of tangible deterioration in credit quality and early indicators that you see? Or is just an effect from the good practice code approved by the government in December? Just trying to get a bit of a color on that. And linked to it, where do you see the coverage going forward? I mean you have a 74% coverage, which looks too high for the credit portfolio that you have? So just to try to square the 40 basis points cost of -- below 40 basis points cost of risk guidance. Thank you. Thank you, Ignacio. And let me be very clear, on the credit quality, we feel extremely pleased where we are. It's been a major achievement to reduce non-performing loans to 2.7% this year. It means we have really the organization, everywhere, very ready and prepared to deal with asset quality issues in the right way and very decisively. So, we feel pretty good. Now we are extremely conservative. And if you look at our guidance, historically, we've always been very prudent in asset quality because something that we do not really control, we look at the year and obviously, there are some reasons to be concerned. I would say three quarters ago, nine months ago, there were even more reasons to be concerned, but actually, non-performing loans have come down and done very well in terms of cost of risk. And hence, if you look at the asset -- sorry, at the glass half full, you can be very upbeat. There is nothing we see today in our numbers that indicate that the problem has already surfaced. Early in non-payments, early defaults, look at the -- between one and 90 days are at historical lows. Even the month of January, which is always a tough month, has gone very well on that front, very well. So, no indication whatsoever today in anything that we see that we have a problem. But you look at the environment, you know that rates have increased, but this is certainly going to mean an extra effort for some clients. Obviously, that inflation is an issue for some companies. They cannot pass on in full sort of cost increases and you have to conclude logically that things are going to deteriorate, and hence, our guidance is prudent. It's prudent, not just because we're not running today at 40 basis points, but because we have â¬1.5 billion of unassigned provisions. And that is why we have a 74% coverage rate. If we didn't have this â¬1.5 billion, obviously, you would have a very significant decrease in that non-performing coverage. Even despite that, they will still be in the 60% area. So, very, very high considering the high proportion of collateral that we have on the real estate portfolio. So, time will tell. I think it's reasonable to be prudent at this point because there will be some deterioration. I think we have no doubt. That's not been prudent, that's been reasonable that there is going to be some deterioration. But because deterioration may not be that tough and particularly because we have all these provisions, I think that less than 40 basis points is safe for us, but we will see. Thank you. Thank you very much, and I hope Javier has a good long rest as he can fully recover. Questions for me. One is if you could give us a quick update on the low-income mortgage renegotiations? How many requests are you getting? And if you still think that it could consume a big part of the COVID overlays in terms of cost of risk, because it seems that it's not going to be that high? So, if you could update on your base case? It'll be good if you could share your front book term deposit yield. So, how much are you paying to the new deposits, terms deposit in Spain? And lastly, about your outlook for mortgages, is this related to the fact that didn't want to pay for deposits that you see some contraction. So, when customers face the decision between getting a yield on the deposits, they didn't get it, they're going to decide to amortize their more expensive mortgages. Is that a trade-off that is included in your forecast? It'll be interesting to know your thoughts. Thank you. In terms of the new code of good practices, it's early days. But as of the end of January, we had approximately 800 requests of approximately â¬100 million from clients. This is the first month where we would have expected significant demand. So, the numbers are, I think, consistent with our view that this is code of good practices. Again, we have 800 requests and round numbers are â¬100 million of principal affected by these requests. It's consistent with what the purpose of this code is. It's a tool for those people that cannot pay their mortgages. And these people, obviously, we want to help them. And certainly, we will do. And it's not a tool for people that do not want to pay their mortgages, but they have the ability to do so. And hence, it's going to be limited because the reality in Spain is that the resilience of our -- of the economy, of businesses, and in this case, of families is very strong, and they are actually being able to muddle through this economic environment. And the first thing they want to do is to pay their house, their home and the mortgage, because obviously, the alternative is not to live in the house and not pay it, but have to pay it at the end of, I don't know, adding an extra three, four, whatever number of years to the mortgage sort of payment period, and that doesn't make sense. So, the take-up is likely to be moderate, but it's likely to be hitting exactly the target audience of people that we want to help. And hence, we feel very good both from the point of view of our -- the impact on our financials and of our ability to help the people that really need it in this moment. In any case, we have had significant increases in rates in -- from November, but particularly December and now January. We're going to still have months where these increases in rates are going to be impacting our clients. And hence, we are expecting certainly some deterioration on -- or some increase in the number of requests and some deterioration on asset quality. Mostly -- this would be mostly unlikely to pay sort of a Stage 3 that in due course, we're helping someone that cannot pay for a year or two or three, it is our expectation that these mortgages in most cases will eventually be repaid. But we should have an impact. I think it's moderate. But it's part of the explanation, which we were giving for, yes, we expect some deterioration, cost of risk below 40 basis points. And this is one of the factors we are obviously expecting to have an impact. The numbers from January are obviously modest at this stage, but we need to be prudent and wait. On mortgages, I want to say, we expect a lower mortgage production because rates have moved. And it's not because we may remunerate on our deposits, but I think the main factor is new production is going to come down because prices are stable, but clearly, the number of transaction is going to be much lower or much lower significantly lower because of, obviously, interest rates reducing the purchasing capacity of people that want to buy a house. Now, there is some impact from, obviously, people that had excess cash that take the opportunity to repay their mortgage. I think that is unlikely to be impacted by the beta on deposits that's natural and we had some impact. And in fact, sure Matthias can also elaborate on that beyond the topic of the term deposits on the front book. Matthias? Thank you very much. In terms of -- to finish up with that question in terms of the impact of increasing rates or not passing on deposit costs on early repayments, we do see a very limited impact as of Q4. Remember that Q4 always is a seasonal quarter in which the early repayments for tax reasons and people are canceling in the last quarter, typically over the year to make sure they reach the maximum amount or the total amount that they can deduct from the tax bill, there's always a seasonable effect on the fourth quarter, and that's why this quarter, actually the mortgage book has been slightly down. But we don't see any significant impact or increase of that of the early repayments in this quarter. There's a little bit of an increase, but it's not to any point significant. On the front book term deposits, on euro deposits, we are not paying. The front book is zero. Recall, actually, we are down â¬2.3 billion Q-on-Q on term deposits, 8% reduction. We are down â¬7.5 billion year-on-year on term deposits. This is 23% reduction. So, what is euro-denominated term deposits, we're not playing at that moment. Obviously, there are some term deposits in foreign currency, which then generates some impact, but this is obviously then against different rate levels and with a very positive margin, including those and if we compare with the sector -- and sectoral data has just been out this week, we compare very, very favorably with the overall deposit rates clearly below those that the sector has seen over the last three months. Yes. Good morning. One question on insurance and one on capital, if I may. On insurance, could you please remind us the level of life traditional reserves at VidaCaixa and the amount of the unrealized capital gains it has today, possibly before and after policyholders' interest? And linked to that, what is the lapse rate in Q4 '22 versus Q4 '21? And on capital, if you could just update your expected impact from Basel IV? Thank you. Thank you, Andrea. I think there's nothing new on Basel IV, but Matthias, do you want to take that and the question on life insurance? Sure. On Basel IV, there's no update to the guidance that we gave. So, there is a very limited -- we expect a very limited impact overall on the different elements of Basel IV once it reaches impact. So, no update on that front. And on the life insurance reserves, we are holding approximately â¬66 billion of life insurance reserves currently on balance sheet. This includes unit-linked reserves, obviously, so part of that being mark-to-market and the part which is not mark-to-market, it's somewhere below â¬50 billion. That currently holds â¬1.8 billion of unrealized losses before policyholders. Okay. Andrea, I hope that asks your -- replies to your technical question. Moving on to the next one, operator, please go ahead. Yes. Hi. Good morning. Thank you for taking my questions. I've got one on overlays. If you can tell us to what extent the release of those overlays is included within the cost of risk guidance for the year? And what happens if you don't use those overlays, how quickly do you have to release them? And the second one is in the banking fee discussion. I mean if you can break down the â¬2 billion ex CIB by segment and give us some color basically about how you expect each of those segments to evolve in '23? Thank you. Thank you. Let me start with the first question. Yes, in the -- in our cost of risk, implicitly, we have use -- we would be using the overlays, that's what they are there for. So, that's why I was mentioning that even if there's a significant deterioration, we still have a â¬1.5 billion of unassigned provisions. This is including over â¬1.1 million of macro provision funds and over â¬300 million from the Bankia PPA. So, this is the â¬1.5 billion, which we expect -- part of which we expect to use. Depending on how the year goes, the expectation of how much of that provision is used or not, obviously, will depend, but it is our view currently, assuming our conservative and prudent scenario that we will be using a large part of this unassigned provision during 2023, even if it's only because we need to update our provisioning models under IFRS 9, which we run twice a year, and we still need to incorporate the current projections versus the last update that we did. So, we will be certainly releasing these overlays. To what extent, at this stage we expect to a large extent. But time will tell depending on how tough the environment becomes. Sure. On fees of the â¬2 billion fees approximately that we have on banking fees ex CIB, you asked for the breakup, half of that approximately is a transaction -- on what we call transactional fees, i.e., including maintenance fees of deposit accounts, including also the corporate custodian fee that we charged last year and which obviously will be reduced and eliminated by -- or has been limited already and hence, we generate a negative impact next year. And including also exchange difference -- exchange rate differences fees deriving from those as well as, obviously, bank transfers. This is most probably the part of banking fees, which is on the most pressure going forward into 2023. As we said, the fees that we charged from -- on corporate deposits obviously, we have abolished them when rates moved into the positive territory and hence, there will have an impact of approximately â¬75 million year-on-year next year with respect to this year. On the other hand, obviously, our loyalty program, as we sometimes commented here, our loyalty program, in the way that people start as they are charged fees if they are not loyal or not customers with a significant amount of products, they might move into being more loyal or having more products and that means that we move and shift away fees from those loyalty program fees into asset under management fees or other fees of other services. So, as a capture, the transactional fees are the ones definitely on the most pressure into 2023. The other half of recurring fees is evenly split up again between fees derived from assets, from credits, whereas there might be from the risk business basically on contingent assets and liabilities and fees charge thereof, where we actually expect into an economic environment that might be getting some more complex into next year, we should be getting some tailwind from that side. And the other quarter of this â¬2 billion then is electronic banking fees, credit card fees, where we expect as there are still year-on-year some positive impact from increases and transactional levels and the levels of credit card payments, we do expect year-on-year still to have some tailwind from that side, even though if you're looking into Q-on-Q evolution, if the economy really gets into lower growth rates and getting into some slowdown, there obviously might be looking -- starting from Q4, some slowdown on that part. So, â¬2 billion split into half of it being transactional fees and the quarter each related to risk are related to credit card business. Yes. Hi, there. Thanks for taking my questions. I was wondering if you could provide a little bit more color on the asset quality outlook with regards to NPL balances and what you expect? What share of unlikely to pay versus NPLs should we be counting on? And how are you forecasting recoveries next year? Are you seeing any changes in, for example, the NPL sales markets, either with regards to demand for volumes or pricing? And then, I've got two clarification questions. Could you tell us what the share of your deposits in FX is? And on the market and other moving capital in this quarter, I know there was the 11 basis points from BPI in there, but could you give us a breakdown of the rest, please? Thank you. I think Matthias, I'm going to leave you -- let you just a comment on asset quality. Obviously, we expect the deterioration of non-performing loan ratio in 2023, a limited deterioration, but rather than having something that is 2.7%, we expect non-performing loans to start with a 3%, maybe around 3.5%, we will see, obviously, again, based on a fairly conservative view of the future. Part of this is our assumption that 2023 is going to be a year where executing portfolio sales will be probably not economical or not attractive enough. And for that reason, we precisely brought down NPL to a very low level to be able to make sure that we have no pressure of having to do portfolio sales when the market is not there. The market for portfolio sales is still open, particularly for non-collateralized non-performing loans. For mortgage loans, collateralized loans, people used to require funding to do these purchases and funding has become much more expensive and hence, prices are likely to be lower. So, part of the reason why we expect some deterioration in NPLs is precisely that even though the market, I think, is going to still be open, we are likely rather than be aggressively pursuing that market to be a bit more selective to make sure that we get appropriate pricing on that front. If the market is even better, then obviously I think we will do even better. Certainly, this is one line where I am being very conservative, and I think that's what we should use for planning purposes. But at the same time, deep in my heart, I think there's quite significant upside, but then, time will tell. Sure. On the capital side, we have this 29 basis points of increase in what we call markets and markets and other, as we said, approximately 11 basis points to 12 basis points stem from the IRB implementation in BPI. There's a small positive impact from the cancellation of the equity swap that we had on the Telefonica shares. As you know, in the beginning of this quarter, this generated a slight positive impact through the RWA reduction of approximately 2 basis points. And the remainder are the sum of little bits and pieces. There's one that by the end of the year, as we had a very positive evolution of profits and of recurring profitability, we are updating in a much finer, in a much more detailed manner, our DTA and DTL and estimations, obviously, into a final year close. And out of that update, actually, we were able to also register a small positive from that side. So, about half of this capture, as I said, IRB from BPI; a small positive on Telefonica; other bits and pieces and a positive also from DTA, DTL update by the end of the year. And then on your question on foreign exchange, it's a very little share in our overall time deposits. It's around 6% and in side deposits around 2% share over the of the portfolio. So, a very small share. Hi, good morning. Thank you for taking my question. One would be on the outlook for Euribor. And the current level of 3.3%, 3.4%, you're seeing that as provoking a slowdown in loan growth, lower house prices, but not necessarily asset quality issues. What level of Euribor would make you more concerned about the outlook for asset quality? Is it 4%, 4.5%, maybe just if you could give some commentary on that? And then, a second question on the outlook for deposits. How much are you expecting a shift within the existing deposit base, i.e., from site to term versus outflows from AUM into term, maybe if you could just make a comment on that as well? Thank you very much. Thank you. On -- well, on the first point, I think it's important not just to look at rates, but why are rates? If the rates are rather than being at 3.5%, are at 5%, this obviously means that it's a very different inflationary environment. And this also means that probably our clients are having a different degree of inflation in their salaries and other income they have. I think it would not be realistic to think of very high rates and all other things being equal. So, to be honest, we are not looking for higher rates than the current ones. I think the current ones are adequate in a zone where obviously they benefit our NII, but they do not severely affect the economy, and they are conducive to some, I think, soft landing. And in the case of Spain, that soft landing, as you have seen, is with growth rate above 1%. So, there's, I think, not much more upside from beyond 4%, because I think increases in rates would obviously be beneficial to NII, but hurts cost of risk, I would say. But I don't see that it becomes sort of a big problem, because when rates are higher than that level, it means that actually we will have inflation, much more serious trends in inflation, and our clients will be obviously being paid at nominal salaries that will be increasing, and the actual increase in nominal salaries and the nominal growth of the economy is going to be higher than the increase in rates. So, for good or bad, our clients paid in nominal euros. And hence, we think we have some protection. But again, beyond the level of 4%, I don't think that's a net benefit from -- for us at all. Yes. On the question on deposit and the shift or some more color on the shift from site to term, we've been guiding for beta, and we are looking at remuneration now on the deposit side actually on a whole picture. It's very difficult to pin that down into concrete levels of movement from site to term deposits. Recalling that when we're looking into corporate clients or into business clients, we are mostly thinking more of a remuneration via site deposits, which is what is typically happening first and which is typically already starting to happen and competition is around some remuneration on that front. And on the households and household clients, there are very many different ways of reaching, obviously, this expectation of getting some more remuneration on the savings. On the one hand, as we said, asset under management as well as fixed income funds might be one way. So, we would be on the strong position of liquidity that we are holding. We are very flexible in the way that we are offering the additional remuneration to our clients. So, it's very difficult to really pin down an exact number. But what we always expect is that we're clearly below historical levels and historical trends. I mean, if you're looking into the last 10 years of history, if you wish, first of all, none of the years over the last 10 years has been an ordinary run. We're looking into, obviously, a liquidity crisis in the last financial crisis at similar rate levels as we have today, and hence, nothing of what we have seen, we do expect to be repeated, especially if we're sitting on a 90% loan-to-deposit currently and back at those times, the sector was around 150% or 160% even. So definitely a very different scenario. So, I need to leave a little bit with the global message, with the global message of overall deposit remuneration that we are seeing based on the models that we commented before and not pin that down to exact numbers of movement between subparts of those deposits, I'm afraid. Good morning. Thank you very much for taking my questions. I have two quick questions. Firstly, is on capital. The EBA published the forecast for the 2023 stress test this week and the GDP assumptions seem to be somewhat more pessimistic. I would like to ask if you could kindly comment on this? And related to capital distribution, I would like to ask regarding your latest discussions with the regulator, if there's any change in the stance with -- regarding bank's capital return? And then my second question, very quickly, on NPL ratio forecast, thank you for giving that guidance. Could you kind of comment in which areas you expect an increase? Is it more in the SMEs or consumer? Thank you. Thank you. On ECB's attitude on capital distribution, I've seen absolutely no change. On EBA stress test, I will ask Matthias to give this simple summary because he's the one who runs the stress test for us, so he's actually very knowledgeable. And NPL, I think you -- well, Matthias, will answer better, but it's going to be across the board. Consumer mortgage and SME, self-employed we'll have -- we expect to have sort of the weakest part of these portfolios being more likely to suffer. Matthias? Thank you very much, Gonzalo. A few to add on the NPL question. I mean SMEs, probably small enterprises being most hit by inflationary pressures and potential difficulties of the cost base. On the other hand, obviously, in the mortgage portfolio, this is where the pass-through of the increase of Euribor is then impacting and consumer loans, obviously, probably been earlier non-repay their mortgages. So, these are the three segments. But across the board, I think this is the message. And on stress test, I do think there are scenarios which are very much in line with what we expected from looking into a history of stress test scenarios. And reminding sometimes now we have the headline that is very, very big dives in GDP, if you compare it to the stress test -- last stress test of the EBA. But you need to recall that the last stress test was doing -- was just coming out of COVID crisis and hence, the central scenario was one of the clear recovery. And the stress with respect to that central scenario is actually higher than the last stress test than is expected to be in this stress test in terms of macroeconomic scenario. So even though the accumulated reduction is clearly higher of GDP, is clearly higher than the one in the last test, the shock with respect with the central scenario actually is not as high. So, we do not see this as a very significant and very relevant downturn scenario, but rather than one that we would expect -- we would have expected in that range. And for internal capital stress test purposes, as you know, that we are running yearly, we are using similar types of scenarios. So, in that sense, I think no concern from that front. [There is some] (ph) weakness. Sorry, let me be clear. We do think it's a tough scenario. The only thing is we do these scenarios internally on very tough and conservative prudent basis. So, I think we are prepared, but it is certainly a tough scenario. Not -- let's not... Hi, there. Thank you for taking my questions, and glad to hear that Javier is okay. Two questions, please. One is on ALCO size on the repricing. I see there are maturities this year coming about â¬7 billion in 2023. What is that you're forecasting for this portfolio including the guidance for this year? And the second question is a question on the -- if you can please provide some comments on the exit of the executive member, Mr. Alcaraz? And if there is any change in any kind of policy -- commercial policy considered behind this? Thank you very much. Thank you, Fernando. On ALCO, this is one that is Javier very much at core. But let me say what we see, and obviously, Javier is leading the thinking on this front together with his team. We are in a bit of a wait-and-see mode in ALCO. And obviously, it's going to be market dependent. What may be very attractive and sort of terming out maturities at some point, maybe less attractive, certainly, at least with today, we do not have a carry when you go long term now versus 12-month Euribor, that's pretty obvious. And hence, I think even though our plan is to reach that â¬9 billion target for the ALCO book and -- the medium term, that is a medium-term target, and it's going to be market-dependent. That's clearly -- we'll continue to diversify the ALCO portfolio. And again, I think if we do more ALCO, it should be upside to our expectations, to be honest, because again, it would mean that sort of longer-term figures are -- for rates are more attractive. That doesn't seem to be the most likely case after how the market has taken the ECB's actions and the fed actions this week. But obviously, the year is very, very long. With respect to the change in the management committee, it represents no change in strategy. What we have done is replace someone who is Juan Alcaraz, who's done a great job for us for the last 15 years. Starting this new cycle, where certainly rates look very different from what we have seen in the last seven years and taking the opportunity to specialize -- or not specialized, I would say, reinforce the strategy in the direction of two parts of the business: advanced analytics with digital transformation; on the other hand, payments and consumer, naming responsible for those areas. Putting them in the management committee, together with obviously replacing Juan in the management of a commercial portfolio with Jaume Masana. The idea is to keep going in the same direction we're going, but hopefully accelerate because we want to be ambitious and certainly try to be better year after year and adapt to the new environment. So, no change, and I have to say, almost a month into the changes, I feel very good about sort of the progress that we have already made by these new responsibilities with their respective responsibilities. They are sort of all-timers, 10 to 20 years in the group, well known by the whole organization and well received, and everybody understands that from time to time, we have to move on to new cycles and management changes are part of sort of the life of every organization. What's important is the strategy actually keeps being exactly the one that we have had for a pretty long time. And obviously, we will adapt it to the different circumstances that we see now in the market and the many opportunities we see associated with higher rates or at least structurally positive rates, which is obviously critical for our liability side of the business. Thank you. Okay. That's all we have time for today. Thank you for watching one more quarter. We will reconvene next quarter. Again, thank you, and goodbye.
EarningCall_978	Good morning, and welcome to the General Motors Company Fourth Quarter 2022 Earnings Conference Call. During the opening remarks, all participants will be in a listen-only mode. After the opening remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded, Tuesday, January 31, 2023. Thanks Michelle and good morning, everyone. We appreciate you joining us as we review GM's financial results for the fourth quarter and calendar year 2022. Our conference call materials were issued this morning and are available on GM's Investor Relations website. We are also broadcasting this call via webcast. Joining us today is Mary Barra, GM's Chair and CEO; Paul Jacobson, GM's Executive Vice President and CFO; as well as Kyle Vogt, CEO of Cruise. Dan Berce, President and CEO of GM Financial, will also be joining us for the Q&A portion of the call. Before we begin, I'd like to direct your attention to the forward-looking statements disclosure on the first page of our presentation. The content of our call will be governed by this language. Thanks, Ashish, and good morning, and thank you all for joining us this morning. I want to begin today's call by recognizing the General Motors team, all of our employees and including our dealers and suppliers. It takes experience, skill land teamwork to adjust to external factors like higher interest rates, commodity price increases and supply chain disruptions and deliver our commitments year in and year out. Our team rose to meet every challenge thrown at them in 2022 and they delivered record EBIT-adjusted and a year of first that really sets us apart from our competition. For exam, GM led the U.S. industry in total sales and delivered the largest year-over-year increase in market share of any OEM alongside record ATPs. This reflects the strength of our product portfolio including our clear leadership in full-size pickups and full-size SUVs, great quality, and improved availability. Chevrolet and GMC delivered more than 1.1 million full-size pickups, full-size SUVs and mid-size pickups in the U.S. which is about 350,000 units more than our closest competitor. Our commercial fleet business is another area where we gain considerable, profitable market share. The team has earned a business of more than 300 major commercial accounts over the last several years which led to our best year for commercial deliveries since 2006. The inflexion point was driven by our investment in mid-size and full-size pickups including our capacity expansions to build more crew cabs and heavy-duty pickups. Our growing portfolio of EVs will enhance our strong sales and share performance across the board because we are targeting the most popular segment at multiple price points. This year we will have nine EVs in the market in North America including the Chevrolet Bolt EV and EUV which saw record sales. In fact they were the bestselling mainstream EVs in the second half of the year and we plan to build more than 70,000 this year for North America and other markets. Quality is another area where our team deserves recognition. In the latest J.D. Power U.S. Initial Quality Study, GM improved while the industry went backwards. Not only did we get better, GM and the Buick brand led the industry. Chevrolet had six top-ranked vehicles and the Corvette was the highest-ranked nameplate in the industry. This commitment to satisfying customers and delivering industry leading quality, helped our eligible U.S. hourly employees earn record profit sharing totaling $500 million, which brings the three-year total to $1.2 billion. Looking ahead, we expect that 2023 will be another strong year for GM. We expect to deliver EBIT-adjusted in the range of $10.5 billion to $12.5 billion which reflects operating performance similar to 2022 when you include the normalization of GM Financial's results and pension accounting. Our guidance includes a total of $2 billion in cost savings in the automotive business over the next two years. The areas we are focusing on include continuing to reduce complexity at all of our products and reducing corporate overhead expenses across the board. I do want to be clear that we're not planning layoffs. We are limiting our hiring to only the most strategically important roles and we will use attrition to help manage overall headcount. On the revenue side of the equation, we expect the new products and key segments will continue to support profitable growth. This includes the Chevrolet Corvette E-Ray, our first electric super car and the quickest production Corvette in history, our new mid-sized Chevrolet Colorado and GMC pickup, our new Chevrolet Silverado and GMC Sierra Heavy-Duty pickups, and the all new Chevrolet Trax which is the best entry-level Chevrolet we ever built. We are especially excited about the Trax and so are our dealers in North America, Korea and other international markets. The Trax really stands out in a segment where customers are often forced to sacrifice for a low price, but the Trax is stylish, roomy, packed with safety technology and it's very affordable. It's combined city highway fuel economy is 30 miles per gallon and it's also more profitable than the model it replaces. The third generation, Chevrolet Montana pickup that we're launching in South America and Mexico starting next month, follows the same formula. The Montana's design is inspired by products like the Blazer and Trailblazer, and it will offer customers more room, the best combination of fuel economy and performance in its segment, and a comprehensive suite of safety features and an innovative reconfigurable bit. So let's talk about our growing EV portfolio. At our November Investor Day, we took you deep into the products and supporting strategies that will help us achieve solid EV profitability in 2025 and this is a breakout year for the Ultium Platform. Production at our Ultium Cells joint venture in Ohio is on track and the plant in Spring Hill will open later this year. Ultium Cells started hiring and training launch team members in October and they began equipment installation in November. These plants will help us meet pent up demand for the Cadillac LYRIQ. The GMC HUMMER EV pickup, and the BrightDrop Zevo 600, and it keeps our other EV launches on track. For example, BrightDrop continues to add new customers, including DHL Canada and they are on track to achieve the goal of $1 billion in revenue for the year. Excuse me. In April, we launched the Silverado EV work truck at Factory Zero for fleets. So we have opened up the order banks to begin converting initial demand for more than 200 customers into firm orders for 2023 production with the first deliveries in the spring. Interest is so strong that we believe demand will exceed supply in 2023 and into 2024. In the fall we will begin building the sold out Silverado RST First Edition, Chevrolet's flagship electric pickup, which will feature trailing capable super crews, four-wheel steering and a multi-flex midgate and up to 400 miles of range. We'll follow with other retail focused models in 2024, including the Silverado EV Trail Boss. This summer will also see the launches of the Chevrolet Blazer EV and Equinox EV. More than 40% of Blazer's reservation holders are new to EVs. Among the 60% who have owned an EV or hybrid, most are either Tesla customers or are our loyal Bolt EV and Bolt customers. What's common to everyone is they want an all-electric SUV that's stylish and roomy with enough range and fast charging capability to make it their daily driver, and they want it from a brand like Chevrolet with a proven record and reputation for quality. The Equinox EV has many of the same attributes and an even more affordable package, which makes it unique and another growth opportunity for GM. More than one third of the customers interested in the Equinox EV say affordability is their key consideration, and the latest data says nearly half live on the east or west coast or in Texas, which are all growth markets for us. This cadence of self-production and product launches combined with strong demand for the Bolt EV and EUV keeps us on track to produce 400,000 EVs in North America from 2022 to mid-2024 with the Ultium platform, volumes increasing significantly in the second half of this year. Our team in China is also scaling Ultium. The Cadillac LYRIQ, which was the first to launch in September, and our dealers are very excited about it. They delivered around 2,400 units through December with about 80% of customers coming from other manufacturers. Excitement is also building at Buick, which is now building pre-production units of the Buick Electra E5 an SUV inspired by the Electra-X concept. It will be the first in an all new portfolio of Buick EVs. All of these launches and initiatives will help us deliver near-term commitments we made at Investor Day, and we continue to make bold moves to drive profitable long-term growth. One example is our planned investment of more than $850 million in four U.S. plants to build the sixth generation of our Small Block V8, which will deliver even better fuel economy, about a 5% improvement and double digit reduction in emissions and more performance for our truck and SUV customers. We're also building an EV supply chain that is long-term competitive advantage for GM and a major source of new jobs, especially in North America. For example, our first three joint venture cell plants are expected to create 11,000 jobs in the U.S. with about 6,000 in construction and 5,100 in operations. In Quebec construction of our joint venture Cathode Active Material plant is moving quickly and the structure should be complete mid-year. In Texas, MP Materials has started construction of its first rare earth metal alloy and magnet manufacturing facility, and they expect to begin delivering product to us late this year. After several months of optimizing engineering and process parameters, Controlled Thermal Resources is now recovering lithium from its geothermal brine resource in California's Imperial County. This is an important step in completing the engineering design to recover lithium from geothermal brine at scale. In Australia, Queensland Pacific Metals has secured all major approvals to begin construction of a new facility that will be an environmentally sustainable center for processing nickel and cobalt. In December, Ultium Cells signed a supply agreement with POSCO Chemical to source artificial graphite from Korea. And today we announced the largest ever investment by an automaker and battery raw materials. Specifically, we are making an equity investment of up to $650 million in Lithium Americas to help them develop the largest known lithium resource in the U.S. and the third largest globally. Lithium Americas estimates that the potential output from this project could support annual production of up to a million EVs and create a thousand new jobs in construction and another 500 in operations. Production is scheduled to start in the second half of 2026, and after our initial investment, GM will have exclusive access to the lithium off-take in the first phase of the project. It's a landmark transaction and it certainly won't be the last major supply chain announcement for GM. We continue to pursue strategic supply agreements and partnerships to further secure our long-term needs and drive investment in the United States and across North America. As I said, all of these launches and initiatives tie back to the roadmap we shared at Investor Day. We're executing a product strategy in ICE and EV that is designed to support strong pricing and grow our share, especially in EVs by competing in multiple segments and price points. We're expanding domestic cell production to drive EV growth, and we are turning our EV supply chain into a powerful competitive advantage, and we're maintaining strong financial results during a period of high investments, which includes taking a very strategic approach to managing our costs. Next, I would like to dedicate a few minutes to Cruise because 2022 was a very significant year for them as well. So Kyle, I'm turning it over to you. Thanks, Mary. Before I share more about the rapid scaling ahead of us for 2023, I'd like to take a minute to highlight what we accomplished in 2022. As you said, last year was the year that fully driverless AVs transitioned from being a moonshot to reality with the Cruise Robotaxi fleet serving thousands of rides to real customers in a major U.S. market and making its first fully driverless deliveries. We started the year with just a handful of cars on the road and a service that was restricted to employees. In January, though, we welcomed our first public riders and a few months later launched our commercial service, the first ever in a major U.S. city. And since then, we're approaching 1 million driverless miles, have completed tens of thousands of driverless rides and run the largest driverless AV operation in the world, currently peaking at 130 driverless AVs at the same time in our RedHill fleet. We've scaled responsibly, safely and transparently, including the release of the most comprehensive safety report in the industry. It outlines the key tenets and processes we put in practice each day that make our products an obvious choice against a backdrop of tragedies on the road caused by human error. We finished the year delivering on our promise, a bold one, to complete our first commercial driverless rides in Austin and Phoenix. In Austin, we went from zero footprint to revenue generating rides in just a few months, and this proves that our technology scales quickly to new regions with minimal modifications to our investment. And I think at this point, it's fair to say that our focus on complex cities like San Francisco doing that first has paid off and we've opened the door to rapid scaling this year and beyond. Looking ahead, this is the year when we really hone in on our key enablers for growth and profitability with our amazing experience, low cost available everywhere. We're going to expand our service in both existing and new markets, and we'll have more to come on this soon and we're working to ensure that our riders have an experience that is not only better than traditional ride hail, but the best transportation experience possible. The Origin will go into volume production later this year with closed course testing underway right now, and I can say after riding in an autonomous Origin myself, I can say that it's going to be hard to go back to conventional vehicle format for an AV. And as part of driving down costs and increasing availability, you'll also see us to continue to improve our operational efficiency and scale. And as an example, the most recent 100,000 driverless miles that we did clocked in eight times faster than the first hundred thousand miles that we did, and we expect our rapid expansion to continue at similar rates this year and next. Our operational efficiency also extends to how we spend our cash. We continually look for creative ways to reduce expenses, including more recently increasing our use of automation, increasing our cloud compute efficiency, and reducing our R&D real estate footprint. Our major investments in lower costs vehicles and hardware, such as the Cruise Origin, better routing and pricing algorithms and operational efficiencies are going to drop costs and improve our unit economics as we scale to more cities, drive up revenue and continue our march toward profitability. We'll be thoughtful and focused with our spending, but we do intend to pursue the massive market opportunity in front of us by significantly increasing our commercial footprint and operating scale. It's abundantly clear that we have a massive opportunity ahead of us and it's fully within our reach. We will continue to go out after it with integrity and with urgency. Well, thanks Kyle, and now let me turn the call over to Paul, who is going to go into a detailed discussion of our results and our outlook. Thank you, Mary, and good morning everyone. Thank you for joining us. I also want to start my remarks by thanking the entire GM team. They remain focused on execution and consistently meeting our commitments no matter the obstacles, and this is exactly what they achieved in 2022. We generated full year revenue of $156.7 billion, representing strong year-over-year growth of 23%. This improvement was driven by the team overcoming numerous logistics challenges and collaborating with the supply chain to increase parts availability. As a result, we grew wholesale volumes 25% within our objective of 25% to 30% for the year. We continue to face some supply chain and logistics issues, but overall things remain trending in the right direction. For the full year, we achieved $14.5 billion in EBIT-adjusted 9.2% EBIT-adjusted margins, and $7.59 in EPS diluted-adjusted. These results were above the record profits we achieved in 2021 and at the high end of our revised EBIT-adjusted guidance range of $13.5 billion to $14.5 billion as December revenue and FX came in better than expected. They also speak to the robust health of our underlying business, which allowed us to offset $5.5 billion of commodity and logistics headwinds, $2 billion of incremental EV and growth spend, and $1 billion lower GM financial results. We generated adjusted free cash flow of $10.5 billion, which allowed us to both reinvest in growth opportunities and return excess cash to shareholders. In the fourth quarter, we repurchase an additional $1 billion of stock, bringing the 2022 total to $2.5 billion and retiring 65 million shares. We also opportunistically early retired $1 billion of senior unsecured notes in the U.S. and $0.5 billion of unsecured term loans in GM International, both maturing in 2023. Our goal remains to be responsible stewards of your capital. Getting into the fourth quarter results, revenue was $43.1 billion, up 28% year-over-year. We achieved $3.8 billion in EBIT-adjusted 8.8% EBIT-adjusted margins, and $2.12 in EPS diluted-adjusted. These results were driven by solid unit volume growth of 30% year-over-year during the quarter and robust pricing. North America delivered Q4 EBIT-adjusted of $3.7 billion, up $1.5 billion year-over-year, and EBIT-adjusted margins of 10.3%, primarily driven by higher volume and pricing, partially offset by mix and higher commodity and logistics costs. Production in the second half of 2022 increased with strengthening supply chain and logistics, allowing us to improve dealer inventory for certain vehicles. We ended the year with total dealer inventory, including in-transit vehicles running around 50 days with the number of vehicles physically on dealer lots improving gradually, but still approximately one third the level we were at in mid-2019, supporting a favorable supply and demand environment. I'd also like to share our perspective on inventory levels going forward. We are committed to actively managing production levels to balance supply with demand, and are targeting to end 2023 with 50 to 60 days of total dealer inventory on a portfolio basis. This is down 20 to 30 days from mid-2019 and is reliant on a continued improvement in logistical challenges the industry has faced. Within this portfolio target, trucks are expected to run at higher levels, reflecting greater customer driven variation requirements, and sedans and SUVs are expected to run at this range or lower. Throughout the year, sales seasonality, production schedules and timing of fleet deliveries may take us out of this range from time to time, but that is the targeted range at which we'll manage. We continue to see strong demand for our EVs with inventory turning on the Bolt EV and EUV in less than 10 days. The GMC HUMMER EV and Chevrolet Silverado EV have generated incredible demand and excitement leading to over 250,000 combined reservations. We've also seen strong demand for the Cadillac LYRIQ, GMC Sierra EVs as well. Order books for the model year 2023 LYRIQ and Denali Edition 1 Sierra EV were quickly filled with a wait list that is growing daily. And when you add in the interest we've seen for the Equinox EV and the Blazer EV over a quarter million hand raisers, our EV momentum will only build as we enter the largest segments in the world. GM International delivered Q4 EBIT-adjusted of $300 million, flat year-over-year, as the team did an impressive job executing in a volatile environment. This included $200 million of equity income in China, down slightly year-over-year due to lower volume and pricing pressure, partially offset by cost actions. EBIT-adjusted in GM International, excluding China equity income was a $100 million, up slightly year-over-year and profitable in all four quarters. These consistent results were driven by favorable pricing and volume, partially offset by mix and commodity costs. I want to take a moment and recognize the transformation this team has executed over the last few years, achieving over $2 billion of EBIT-adjusted improvements since 2018. This was done by exiting unprofitable markets, strengthening the portfolio, leveraging our strong brands to significantly improve pricing and mix, all while simultaneously driving down costs. They've done amazing work as a team and they should be lauded for that. GM Financial delivered strong results with Q4 EBIT-adjusted of $800 million, down $400 million year-over-year, primarily due to lower net lease vehicle income and higher cost of funds, partially offset by growth in the retail and commercial loan portfolios. Used vehicle prices have declined but continue to run above the contract residual value with a Q4 off lease return rate below 10%. Overall portfolio credit metrics continue to be strong in part due to a predominantly prime credit mix with net charge-offs up slightly due to moderation and credit performance, but still running below pre-pandemic levels. GM Financial paid dividends of $1.7 billion in 2022, and we expect similar dividends in 2023. Corporate expenses were $400 million in the quarter, flat year-over-year as we continue to invest in growth initiatives and drive productivity. Cruise expenses were $500 million in the quarter, up $200 million year-over-year, driven mainly by modifications to equity awards resulting in an accounting change in compensation expense. Our optimism continues to grow based on the great progress Cruise made in 2022, and their plans for rapid scaling and operationalizing of the business will result in a modest increase in cost during 2023. Let's now look towards 2023 for GM overall, which I know is a key focal point for everyone. While the environment remains uncertain, at a high level I'm pleased to report that when you exclude the impacts of lower pension income and GM Financial contribution, we expect to drive consistently strong core auto operating performance in 2023. This continues the trend we saw in 2022 and highlights the strong execution throughout the organization. Our plan is to continue to prioritize growth initiatives such as Cruise and BrightDrop, while investing to accelerate our transition to EVs to take advantage of our vertical integration and local sourcing strategies. Assuming a 15 million total industry volume and under current conditions, we expect EBIT-adjusted in the $10.5 billion to $12.5 billion range, EPS diluted-adjusted in the $6 to $7 per share range, and adjusted automotive free cash flow in the $5 billion to $7 billion range. At GM Financial the strong credit performance in historically high used vehicle prices resulted in extraordinary results over the last two years. For 2023, we expect earnings to normalize in the mid $2 billion range. We expect volume and mix combined to be a slight tailwind with volumes up 5% to 10% year-over-year, and mix partially offsetting as we continue to increase production in the sedan, small SUV and crossover segments along with GM International volume growth. Regarding North America pricing, while we anticipate incentives will increase from the record low levels we saw in 2022, we expect this headwind to be partially offset by realizing the full year benefit of MSRP increases on many model year 2023 vehicles, particularly full-sized SUVs and trucks, as well as pricing we expect to achieve on our new launches in 2023. We're also anticipating pricing actions outside North America primarily to help offset FX headwinds. Overall, we see commodities and logistics costs as a slight tailwind. Our longer-term steel and logistics contracts, which help protect us from higher market costs over the last two years, renewed at higher rates in the second half of last year. This combined with the strategic initiatives to locally source battery raw materials is expected to largely offset the tailwind we're seeing from lower raw material prices on our spot and indexed exposures. The $1 billion lower pension income impacts our fixed costs. This non-cash item does not impact our core auto operating results, but will be a headwind when comparing year-over-year in 2023. As Mary mentioned, we are very focused on keeping automotive controllable fixed costs in check despite our growth initiatives, which is why we are announcing a cost reduction program to take out $2 billion of costs over the next two years. Included in our guidance is the expectation to achieve 30% to 50% of that in 2023 and the remainder in 2024. This initiative is the result of several factors and demonstrates our continued commitment to closely manage our operations through this transformation and achieve North American margins in the 8% to 10% range through 2025. We expect capital spend to be in the $11 billion to $13 billion range inclusive of $1 billion invested in our Ultium Cells JV. We continue to shift resources to EVs with around 75% of our product specific capital dedicated to EVs and AVs. Even with the increase in capital spending, we expect our adjusted free cash flow to remain strong in 2023. As we said back in November, we expect that clean energy tax credits will be a material tailwind for GM over time because of the work we've been doing on vertically integrating the supply chain. For 2023, we anticipate at least $300 million in EBIT-adjusted benefit and expect this tailwind to increase significantly over the next few years as our cell production ramps and our North America focused supply chain comes fully into place. We're closely monitoring the dynamic macro environment as well as customer demand to make sure we're appropriately matching supply with demand. We will take quick and decisive actions on both the supply and the cost side to actively manage the business. What gives us confidence in our 2023 and long-term objectives is the work we've already done to position ourselves for success, repeatedly executing on our commitments and our ability to manage through a very challenging and dynamic environment. With a compelling EV and ICE product portfolio, long-term supply chain commitments, extraordinary manufacturing capabilities, a strong balance sheet, and our amazing team, I'm confident we'll continue to enhance the customer experience and deliver compelling growth on both the top and the bottom line. Mary? Thank you. [Operator Instructions] Our first questions come from the line of Dan Ives with Wedbush. You may go ahead, sir. Yes, thanks. A great quarter. Can you just talk about supply in terms of from a battery and lithium perspective? It just seems like you guys have being much more aggressive, making sure you have that supply through 2025. Just talk about some of those efforts and just giving you more and more confidence on the sort of EV targets over the coming years? Thanks. Yes, good morning, Dan. I'm really proud of what the team has done. You know, our collaborative effort across supply chain finance, business development have led to a, what I think is the strongest portfolio of battery raw materials going forward. We've fully secured all of our battery raw materials through 2025 and as you can see from the announcement today with the investment in Lithium Americas and the supply that we'll be able to get from the Thacker Pass, we're making rapid improvements and increases in our battery raw materials for 2026 and beyond. That is core to our strategy. What we've done, we've talked about being creative because what we're really trying to do is to create a portfolio that is in it for the long-term. So whether it's a combination of spot price movements, fixed price contracts across the board, we're looking at ways to creatively manage that and make sure that we're running it as a partnership. We want our partners to be successful too, especially in this space as we're developing new sources of these raw materials and this is such a great example of that partnership mentality coming to fruition. Thanks. And then just a quick follow up. You know, obviously price cuts that we've seen Tesla, Ford, but it doesn't seem like GM is going down that path. Can you just hit on that concept? You know, that's a big focus of investors. Sure. When we look at our strong product portfolio and the interest that we have at the prices that we've already announced, we feel that we're well positioned. Even going into the first month of the year, we've seen a very strong customer interest in our products and so we think right now we're priced where we need to be. Of course we're going to monitor it and we'll make sure we remain competitive, but we really think with the strength of our product portfolio and what we have coming, we're positioned well. Good morning, everybody. I just wanted to maybe just first follow up on Dan's question. Look, I know based on the prices that you've laid out for Equinox, Blazer, LYRIQ, that demand for the near-term is much greater than your ability to supply. But at the same time you're only assuming double or low single digit EBIT margin for EVs by mid-decade. And one of your peers is already at 20% gross and pretty healthy EBIT and their costs are still falling. So my question is whether there are changes that you're contemplating or that you could make to close in on that benchmark and generate similar margins any faster? Hey, Rod, Paul and thanks for the question. Thanks for being on. You know, I think it's important to note that as we look across the competitive landscape, that competitor you referenced wasn't there in the beginning either, right? There's a lot of scaling that we're doing across the board. So as we're running concurrent operations with ICE and EV there's obviously some frictional costs on utilization, et cetera, that we expect to be able to scale as we go through this transformation. The ICE portfolio remains really strong, but we're also building the EV factories for the future. And clearly the production levels that we see now and as we're ramping up aren't there yet. So we expect a tremendous level of operational synergies. We're also going to manage the business aggressively. I think the $2 billion cost reduction program that we're announcing today is a strong testament to that and making sure that we're driving efficiencies as we ramp up those productions. So it's not a, I don't think a direct apples-to-apples comparison, but one that we're obviously aware of. On the pricing front the demand is really, really strong for all of our vehicle programs going forward and we feel good about where we're going in the trajectory that we're on. Okay. Thank you. And just secondly the -- you referenced that $2 billion cost savings, what does that mean for structural cost expansion? And may be related to that, this 5% to 10% volume assumption that you've suggested would seem to imply that you don't see affordability or rates as a major impediment to growth at this point? Am I interpreting that correctly, or are you in fact making more room for pricing with this cost saving assumption? I would characterize it a little bit differently, Rod. So success is going to be driven by, when we look at our fixed cost lines being down $2 billion, that's what we're looking for across the board, and we can get there and I think it comes across all areas of the business. What I would say is we're being prudent about what we see out in the macro environment. Again, we continue to see strength in demand for our vehicles and strength in pricing. But we want to make sure that we're driving efficiency where we can and felt like this was the right time to be able to do that. So we're going to be measuring how we do it. We're still focused on the growth areas of the portfolio, but we recognize that there are ways that we can do things more efficiently and we expect to be able to drive that into margin performance. Weâre not doing anything to prepare for a price war or weâre not doing anything in anticipation of a recession. I would say, itâs prudent cost management and just being aware of whatâs around us. Well, in other words, is there, are your structural costs expected to decline by $2 billion expansion, I guess is a simple way to ask it, or is that, are there other things that are increasing offset that? Great, thanks. Good morning everyone, and congratulations. Just two questions on the outlook. First, can you maybe share kind of what youâre expecting for the companyâs revenue growth in 2023 to just kind of want to calibrate that with the 12% CAGR for 2025? And secondly, I was hoping you could also maybe quantify the drag this year from some of the investments like the Ultium ramp and some of the other investments that youâre making as well. It sounds like, while the guidance certainly looks robust, thereâs certainly a lot of investments still flowing through, so I was hoping maybe you could quantify that as well? And maybe also just provide a quick update on the Lordstown ramp as well? So, Itay you were a little garbled, so let us try, Iâll take the last one. The ramp at Ultium and Lordstown, Ohio is on track going well. The team is really ramping up, really focused on quality and the two between LG Energy Solution and General Motors working really well together. So Iâm very pleased. As I mentioned, Spring Hill is also on track, as is Michigan, and those three plants are really what enables us to achieve the goals that weâve set for getting to 2025 and a million units in North America. So thatâs all going really, really well. From a, I think the middle question you had was about, with the investments that weâre making Ultium to quantify, I think, weâve talked about what those investments are, but theyâre part of our capital program that we announced last year, this year and going into next year, so thatâs part of it. Andâ¦ The first one was on the revenue growth Itay, so Iâll just jump in and say that we obviously experienced pretty significant revenue growth in 2022, driven by 25% increase in wholesale. Weâre not expecting that similar jump in production in 2023. So weâre not giving any specific revenue guidance, but I would say that we would expect the growth rate to be below 2022 levels in line volume. Good morning everybody. Just a first question, Mary on the IRA, I mean, thereâs a lot going on with the interpretation and the final rules being set here. Originally it looked like GM was going to be relatively advantaged just the way that you were set up on production in your supply chain, but some of the interpretations on the commercial vehicle side and the fact that leased vehicles may fit the bill of being commercial vehicles that may open the door to Europeans, Chinese, Japanese, South Koreans, anybody be shipping EVs into the U.S. and still getting a $7,500 credit. So just curious, what your thoughts are on that? How do you think the rules should be interpreted, and could there be the chance if this, loophole or change stays enforced that you might ship EVs in from China? So our strategy all along for a very long time has been to build where we sell. And I think when you look at the work that weâve done with the battery plants in this country and all of the supply investments that weâve made, that helps us have Iâll say supply chain resiliency more certain, it gives us the opportunity with some of the deals weâve made to, I think, have a better cost advantage. And also itâs good for the country and creates jobs, and thatâs what IRA was meant to do. And so weâre waiting to see what the final rules and are going to be from treasury. I think regardless of some of the issues still to be clarified from a lease perspective, General Motors is still going to benefit greatly because if you look at the production tax credits from sales and module perspective, and then where weâll be from a battery component in critical minerals, we think weâre well positioned again. The deal that we announced today, or the partnership, the equity investment, I think continues to reinforce it. So yes, weâre waiting to see what it is going to be, but our focus is on having a strong supply chain here. Obviously, when we get the final rules, weâll look because, we do have a global footprint, but I think weâre focused on supporting North America production primarily from North America and to a certain extent from Korea. So again, weâre waiting to see, but I think you have to go back to what the intent of IRA was. Yes, I agree with you. Just one followup, you mentioned fleet sales as an opportunity, fleet sales have been very low for the past couple years. I mean, fleets have been very under satiated or not satiated at all on their demand function. And now that supply is becoming more normal, how big a part of a recovery do you think they could have in the market just maybe in general where have they been for GM in 2021, 2022, and where do you think they might be in 2023? And how big a part did that play in sort of the development of EVs profitably into fleets in the early stages of the EV ramp? Well, I think itâs an important part, and I think when you look at BrightDrop, itâs a true just all growth opportunity for us. I think when you look at the Silverado EV work truck, I think thatâs going to be very important as well. And so weâre going to make sure that as we grow our fleet commercial rental business, it has an appropriate profitability profile, not from the days 10, 15 years ago when we really stepped back from that. But I think whether itâs what we announced with Hertz and the number of customers that we have interested, every company is working to reduce their carbon footprint. And so the EVs that we have just to help support that I think are going to be very strong, and I think weâre going to have a good portfolio. So I think that allows us to grow, especially in areas where we werenât involved in the past, EVs is a fresh start there. Iâm sorry, if you were to think about at 5% to 10% increase in wholesale volumes, would that be dominated by fleet? Iâm just -- because I mean everybody is obviously very concerned about the retail customer at the moment, but really neglecting that quarter of this market is traditionally fleet, and itâs 10% to 15% in the last couple of years. So I mean, the potential doubling in fleet volume that can come in the market at large and maybe being very supportive of that wholesale increase. So I mean, could you give us some numbers or thoughts on how supportive that could be to that 5% to 10% wholesale increase? I think when we talk about a 5% to 10% increase weâre talking across the board. When you look at the EV launches that we have, the fact that we have brand new Chevrolet Silverado and GMC Sierra heavy-duty pickups, the fact that we have the new midsize, which is just an outstanding midsized truck with the Chevrolet Colorado and the GMC Canyon as well as the Trax. So we think from an ICE perspective, we have an opportunity. We think from clearly the EV ramp-up that weâre going to have this year; itâs a part of it. And some of that -- both of those exciting products will be in the fleet business. So I think itâs a both answer, John, not a single one or the other. Hi, thanks for taking my question. With regard to the $300 million tailwind you are assuming from clean energy tax credits in 2023, I heard you say this could grow substantially over time. I just wanted to check in, try to dimension that potential. Are you assuming a benefit of $35 per kilowatt hour or $45? And are you in a position yet to share or have you resolved internally with your JV partner how these tax benefits are expected to be shared between GM and LG? Iâm just trying to dimension if the opportunity is 1 million vehicles in 2025, times $45 per kilowatt hour, $35, and then to understand whether we need to split that amount 50-50 or if thereâs some other math we need to take into account? Yes. So Ryan, a lot of detail in your question. Iâll take it back to what we said at Investor Day was we expect EV benefits, tax benefits to be $3,500 to $5,500 per vehicle. The $300 million in 2023 is obviously a function of our ramp rate of our cell production. Weâre not going to go into any details on how that works across the board. Itâs our best expectation of where weâre going to land is at least $300 million this year and ramping up rapidly as our production increases across our Ultium plants. Hi, everyone. Just on back to the GM's EV pricing relative to the market in North America, how would you assess GMâs price competitiveness given the latest moves by competitors? It sounds as though demand in your order books are quite full. But just given the more recent competitive responses by others it would be curious to get your take whether your GMC is the opportunity to reposition or we also have the IRA defined MSRP caps as well to consider. Thanks. Sure. Well, I think thatâs the strength of what General Motors is planning to launch this year. Many of the products that we have are going to be below the caps because we have a full portfolio of EVs at multiple price points. When you think about the Equinox EV, the Blazer EV and then the Silverado as well as the LYRIQ, I think weâre really well positioned. And these are brand-new products into the marketplace that we have really strong interest. So thatâs why both Paul and I feel that right now, based on the interest and the fact that the pricing that we put out even before the IRA came out, was very appropriate. Weâre going to -- and because of the strength of the Ultium platform, thatâs what enables us to do that along with the fact that weâre ahead from most of the, Iâll say, the traditional OEMs and getting battery cells produced in this country. So I think if you look at the strategy weâve been executing weâre well positioned, and the strength of our product portfolio, I think is what is giving us the confidence to where we sit right now with feeling that we're priced appropriately. Understood. And then just within the 400,000 cumulative EV production target by the first half of next year, can you just mention what portion of that would be your EV truck platform? We havenât provided that kind of specific analysis, but the fact that the HUMMER to begin with, and that will ramp significantly this year and even more next year as weâre completely sold out. And then the Silverado that we think weâre going to -- the Silverado EV work truck and then the RST [ph] comes at the -- toward the end of the year. I mean I think all of those are very significant products that are going to do very well, but weâre not giving specific numbers. Yes, good morning and thank you very much for taking the question. Is GM considering changes to its longer-term battery plans for North America has there have been media reports recently suggesting both the GM is considering adopting cylindrical cells and also the GM and LG may not partner on a fourth battery plant? So first, one of the strong points of the LCM platform is that itâs chemistry agnostic, and it can take pouch, prismatic or cylindrical cells. And so we can look to what is going to be the right battery for the specific vehicle from a performance perspective. So we have that complete flexibility. We have very important work going on with LG Energy Solution. Theyâre an incredibly important partner to us. And weâre working well together as we mentioned, with the launch of the Orion or excuse me, the Lordstown plant and then Spring Hill and then the plant in Michigan. So weâre working well together, and we are going to need a fourth plant and more plants beyond that. And as we have those details to share, we will share them. But right now, thereâs nothing thatâs really changed in our plan to have battery manufacturing capability here in the U.S. and broadly in North America as well. Thatâs helpful. Thank you. My second question was on Cruise and congratulations on the expansion into the new geographies last year. As you think about 2023 and I know youâre planning to expand, could you elaborate a bit more on your expansion targets for Cruise? And any potential changes in San Fran given the recent feedback from the local government there? Thank you. Yes, sure. I can take that. So we will be expanding in 2023 to several new cities, but our current focus is on expanding our driverless service in San Francisco as well as in Phoenix and Austin following our initial driverless launches there. The initial deployments in Phoenix and Austin were modest, and we want to expand those very quickly. And of course, by doing that, expanding into these new cities using this repeatable playbook weâve developed across safety and operations and some of the technical features, the barriers to launching in new cities can drive growth in existing markets are much smaller because of that upfront work weâve put into all of those really difficult barriers to scale first. And I think your second question was on the SFMTA comments about our California Public Utilities Commission permit to expand. And I just want to say there that our safety record is publicly reported and includes having driven millions of miles in an extremely complex urban environment with zero life-threatening injuries or fatalities and weâre really proud of that record and also that the overwhelming majority of public comments on our permit application, including advocates from the disability community, small businesses and local community groups support expanding our fleet in San Francisco. Hi, thanks everyone. I just want to follow up on Markâs question about the -- about Ultium and the form factor. I appreciate that thereâs room for flexibility. And youâve mentioned in the past, Mary, that the Ultium system was kind of form factor and chemistry agnostic. But if you did change to cylindrical, the 46/80 form factor as reported in some of these sources what kind of thing would drive such a change? Iâm not saying that you have made that decision, but it seems like it is potential -- thereâs potential to do that. What kind of -- would it be driven by safety or cost and kind of how difficult would it be to make that flip? So first of all, Iâm not going to comment on speculation, Adam. And by the way, hello, but we -- weâre looking really at performance. I mean, one of the things when you look at with the way that you configure the packs within Ultium, the difference of the cells is a lot having to do with performance and how do we get the max benefit. Again, our team has been working and looking at all three cell form factors for a while. In fact, today, from a prismatic perspective, thatâs whatâs in the vehicles, the Ultium-based vehicles that weâre launching like the LYRIQ and the Buick in China. So we all along have been looking at all three form factors. Thanks, Mary. And I just have a follow-up for Paul on the pricing. You mentioned higher incentives, but offset by the increase in step-up in the MSRPs. I just want to make sure weâre interpreting that correctly that those are kind of a wash that you think one more or less compensates for the other to leave the pricing element more or less stable from 202s2 to 2023. Is that -- is that the correct way to think about it broadly? I know itâs a volatile environment, but just want to as a starting point, is that the message, a wash? Yes. I would say order of magnitude, yes. The pricing increases, weâre not contemplating big ones this year, rather the annualization of what we did last year across the board. We have some new launches that would kind of come in. We wonât get specific on that. But we are assuming that thereâs going to be some steady increased normalization of incentives. Thatâs where we said weâre trying to plan conservatively. What Iâll tell you is, January month has come in really, really strong, a continuation of what we saw in December and weâre just watching the environment around us, but we still feel good about where demand sits. Thanks so much. I just want to revisit Ryanâs question on the IRA $300 million, and thanks so much for giving that number. Just our math is that, that would be something like 10 to 12 gigawatts from the two facilities in Ohio and Tennessee and without sort of confirming the explicit math, can we just talk about maybe how long it may take to ramp Ohio? And then obviously, Tennessee is only starting at the end of this year, but I think theyâre about 40 gigawatts each. So it seems like there is a material amount to grow at that capacity growth, but just anything you could talk about the time line on Ohio and Tennessee Giga? Yes. So the plan was we started in fourth quarter, and we said a couple of earnings calls ago that Ohio would add 20% more capacity every quarter, so it would be fully up and running by the end of the year. That plan is still on track. I think youâll see us follow with similar, but maybe a little faster in Spring Hill because we already have all the experience. And we actually have people from Spring Hill at the Ohio facility right now to make sure we have a smooth start-up there. So -- and weâve talked about the plan is roughly around 37, 40. So I think youâre in the right ballpark, but thatâs how those plans will ramp up. Perfect. Thatâs super helpful. And just the follow-on, just from a modeling perspective, should we assume the 300 flows through EBIT or is there any benefit that also is going to start to benefit taxes as well? Just it is more weâre going to see the benefit of IRA if itâs only in EBIT or if there is actually some tax component as well? We think that there will be some that kind of flows through both. Our deck has a guide on a lower tax rate of 16% to 18% for 2023. Thatâs largely driven by R&D credits and some IRA. Weâre not getting any specifics into the breakout between them until we see the regs written, and we get more definition around it, but we do expect that there are likely going to be components in both areas. Thank you so much. Two fairly quick ones, first one is back on pricing. I think you said youâre trying to be conservative in your assumptions. So I was just hoping you could be a little bit more specific or explicit around what sort of incentive environment youâre assuming, because I understand the MSRP going up, just not super clear from the outside, what sort of macro and/or industry environment youâre assuming and the impact on the overall industry incentives? Yes, hey Emmanuel, so nothing specific to guide on in terms of our forward incentives beyond. We do expect over time for incentives to increase from the sort of record low levels that weâve seen. Weâve seen slight upticks, but I would say thatâs largely more of a function of interest rates than it is waning demand or inventories. Inventories still remain very tight. We expect that to be the case, especially grounded inventory at dealers through 2023. So while we see some normalizing of incentives, nothing more specific than that, that weâll guide to. Okay. So then just affirming in terms of macro environment, if thatâs okay. Are you assuming some sort of recession in the second half impact on sort of like consumer demand for vehicles or are you assuming sort of current conditions continue? And then I just have a follow-up on free cash flow. Yes. So again, this is a situation weâre watching carefully. But what we see from a new vehicle consumer is a consumer, as Paul said, even in the month of January weâve seen it to be very strong. So weâre going to continue to monitor that and take the necessary steps. But weâre going to watch and learn as we go through the year. We told you at Investor Day, we were going to be conservative as we plan this year, but also position ourselves to take advantage of whatever the market ends up being, and weâre still on that plan executing. But again, from an early read in January, itâs pretty positive. Okay. Thanks for that. And then just quickly on free cash flow. Can you just provide a high-level walk between the 2022 strong performance in 2023? Because obviously, the two sort of elements you would exclude to make them comparable the pension income, this is noncash, right? So yes, walk between 2022 and 2023 would be helpful. Yes, just really high level, $10.5 billion in 2022. At the midpoint, weâve got a couple of billion dollars more of CapEx going forward and probably not as much of a working capital build as we saw in 2022. Thatâs high level how you get to the 5 to 7. Great. Well, thank you, Michelle, and thanks to everyone for your questions. We, at General Motors, are really excited about the opportunities ahead of us in 2023, especially with all the new vehicles that weâre launching. Chevrolet and GMC will build on their leadership in pickup trucks and Chevrolet is giving customers around the world compelling entry-level products too. And this is the breakout year for the Ultium platform. So when you look at the products weâll have by the end of this year, again, theyâre all outstanding. Again, we expect another year of strong financial results and our confidence reflects the determination of the GMT -- of the GM Team, the strength of our vehicles weâre delivering and the valuable relationships weâve developed with our dealers, our suppliers and our other partners. So I hope you see with what we did in 2022 and what weâre indicating weâre going to be able to achieve in 2023 that we continue to have your confidence, and we look forward to continuing to tell you more about this year as we go forward. So I hope everyone has a great rest of the day.
EarningCall_979	Good afternoon. Thank you for attending today's West Bancorporation Fourth Quarter 2022 Earnings Call. My name is Megan [ph], and I'll be your moderator for today's call. All lines will be muted in the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Jane Funk, with West Bancorporation. Jane, please go ahead. Thank you. I'm Jane Funk, I'm the CFO of West Bank and West Bancorporation. Just want to welcome everybody to our fourth quarter and year-end 2022 earnings call. Today, I've got with me Dave Nelson, our CEO and President; Harlee Olafson, Chief Risk Officer; Brad Winterbottom, President of West Bank; and Brad Peters, our Minnesota Group President. I'll start out with our fair disclosure statement. Comments made during this conference call may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements made by us during this call is based only on information currently available to us and speaks only as of today's date. The company undertakes no obligation to revise or update such statements to reflect current events or circumstances after this call or to reflect the occurrence of unanticipated events. Thank you, Jane, and good afternoon, everyone. Thank you very much for joining us, and thank you for your interest in our company. I have just some general comments and then I'll turn it over to others for more details. During 2022, West Bank had the second strongest earnings year in our 130-year history. During 2022, we fell a little short of our '21 earnings, but I'd like to point out that our '22 earnings were about 47% higher than what they were during 2020, and 2020 was also a record year. But during this past year, we experienced growth in all of our markets which resulted in net loan growth of about 11.7% on the year, and our credit quality remains very good at year-end 12/31/22. And also end of the fourth quarter, it represented the sixth consecutive quarter where we did not have a single loan past due 30 days. The Fed rate hikes have put pressure on our margin, and Jane will speak more on that topic. But based upon our fourth quarter performance, our Board of Directors declared a quarterly dividend of $0.25 per common share. The dividend is payable on February 22, 2023, to stockholders of record as of February 8. Thank you, Dave. I am happy to report credit quality continues to be a major strength at West Bank. For -- as Dave said, for a sixth consecutive quarter, we have zero past dues over 30 days. I believe this not only attests to the strong payment ability of our customers, but also attest to the administrative ability of our bankers. We have no OREO and only one loan on nonaccrual. That one loan continues to perform as agreed and is well secured. Our watch list is less than 2% of total loans. Financial information received from our customers would suggest that a majority of what is currently on the watch list will be upgraded after receipt and review of the year-end financial statements. Rising interest rates will and have slowed residential and commercial development, 4% of our total portfolio consists of land for development, land being developed and completed lot sales, or completed lots for sale. The customers holding these assets have significant equity and ability to hold property until economic times are more favorable. Our top five concentrations by type are C&I business, 20%; multifamily, 13%; construction, 13%; and office and medical office, 13%; and warehouses at 10%. Even though current information looks really good, we continue to stress test our portfolio and our individual borrowers. Our practice of doing business with customers that have strong financial positions and good management has served us well. We expect the economy will provide challenges this year, but we feel we are in an enviable position to deal with those challenges. Before I turn it over to our bank President, Brad Winterbottom, I will mention that our Eastern Iowa team has continued to thrive. Loan assets grew substantially this last year, and the group has continued to bring in new relationships. Thanks, Harlee. For the quarter ended December 31, '22, excluding PPP loans, our loans outstanding grew just under 5% or $128 million to $2.7 billion at the end of the year. This growth during the quarter was driven primarily by some significant commercial real estate transactions. Significant and some long-term customers closed on real estate purchase transactions which we assisted along with a few refinance transactions. For the year ended '22, excluding PPP loans, our loans outstanding grew just over $300 million or 12.7%. This is the third consecutive year in a row in four years out of five that loan growth has exceeded double-digits annually. We saw growth in all markets, roughly equal growth from the Iowa and Minnesota markets this year and are pleased with these results. As for the loan pipeline, as we enter 2023, there is some slowness in the activity. With the rising interest rate environment, refinance opportunities are much less. We also hear from our customer base that they are much more cautious going into this year. Our sales team, though, continues to set appointments and see customers and prospects on a daily basis, looking to enhance our relationship. Regarding the deposit gathering side of the bank, our retail customer base produced a 4% increase in total deposits held at the bank. Our commercial customer base, on the other hand, experienced a decrease in total deposits. This decrease was the result of excess funds held by the customers either looking for a better return or using these funds to fund their growth or making acquisitions. We have not lost customers rather just a reduction in deposits maintained. We continue to focus on deposit-gathering activities with our sales team and their calling process, as mentioned previously. I'd also add that in early January, we added another seasoned banker in our Eastern Iowa market that is beginning to make positive marks in terms of moving assets to the bank. Thanks, Brad, and good afternoon, everyone. I'm going to provide a brief update on our expansion into Minnesota. Our team continues to make solid progress in growing each of our Minnesota regional centers. Our bankers are focused on relationship building, and our activities and targeted calling are creating ongoing new business opportunities. We continue to grow our business by adding new relationships focused on C&I. This focus has driven strong core deposit growth and treasury management business. We are also seeing line usage increase, which has benefited our margins. The Mankato market has begun construction of a new facility with plans to open this summer. The Owatonna market is exploring sites for a new building, and we're close to finalizing plans to purchase the land. Thanks, Brad. I'll just make a couple of comments on our financial highlights. For 2022, this was, as Dave mentioned, our second-best financial performance year in the company's history, '21 and '22, both very strong compared to the years prior to that. We recorded no provision for loan losses in the fourth quarter and had a negative provision of $2.5 million for the year. As Harlee mentioned, our credit quality remains extremely strong. We continue to closely manage our expenses during this period of inflation and experienced a very reasonable 3.9% increase in noninterest expense in 2022, and that would have included increase in salary and benefits related to the addition of five bankers during -- through late 2021 and into 2022. As it relates to margin, our net interest margin was 2.49% for the fourth quarter compared to 2.78% for the third quarter. Our loan yields increased to 4.63% for the fourth quarter compared to 4.34% for the third quarter of 2022 and 4.07% for the fourth quarter of 2021. This yield improvement was outpaced by the increasing cost of funding. Our deposit costs increased to 1.99% for the fourth quarter compared to 1.16% for the third quarter and 36 basis points for the fourth quarter of last year. Brokered deposits and short-term funding increased in the second half of the year with the drop in longer-term rates. Since October, we've been evaluating and executing various long-term funding and swap transactions to convert some of our short-term funding into three to five-year fixed rate terms. Our deposit base sensitivity to the rate changes has been magnified by this extreme nature of the rate movements this year and the competitive deposit activities in our markets. Our efficiency ratio has increased to 50% in the fourth quarter from the low 40s earlier in the year, primarily due to the decline in the net interest income. Absolutely. [Operator Instructions]. Our first question comes from the line of Brendan Nosal with Piper Sandler. Your line is now open. Good. Thanks. Maybe just to start off here on the asset side of the balance sheet. Another very strong year for organic loan growth for you folks. No surprise there. I know you mentioned kind of some softening in the pipeline, given where rates are today. Just kind of curious if you have any early thoughts on how you expect loan growth to shape up for 2023? Really -- no, I mean, our pipeline is okay. I've seen it stronger, but I'm aware of transactions that are -- that we'll be funding. But I'm also aware of transactions that will be paid off due to the sale of the assets. So I would not anticipate the kind of growth that we had in the fourth quarter and the first, but our guys are out busy. Understood. That's fair. That's fair. But helpful color, nonetheless. Maybe turning to the securities portfolio. Just kind of curious in the context of trying to fund future loan growth. How much of the secured book cash flows in 2023? There will be about $70 million of principal that will roll off -- that's projected to roll off of the investment portfolio in 2023. Okay. And then I think that probably ties into my next question on just funding future loan growth. Certainly seems like securities roll off and help with part of that. But just kind of curious how do you view the balance of the funding question. Whether it's core deposits or wholesale funding, what are the ambitions for this year? Well, I think that the funding side will come from various sources. There's not a magic bullet or an all-in process here. So we are certainly focused on building core deposits. That is as much of the efforts of the bankers as lending is. So core deposits, we will continue to use brokered deposits and Federal Home Loan Bank advances and really just kind of manage the cost side with those options and evaluating whether short-term versus long-term pricing makes sense depending on our success with the deposit side. But certainly, deposits are a strong effort for the organization this year. Yes, yes. Okay. Maybe on deposit pricing itself, what is your sense for where you folks are in this deposit pricing cycle? Are we partway through? Are we nearing the end here? What's your sense? Well, I would say that probably depends on what the Fed does. Our deposits are a little bit more sensitive, I think, to the Fed rates than some other portfolios, which you can see in our fourth quarter numbers. So the sooner the Fed slows down or stops, the sooner that we can start making gains on -- and improvements on the cost of funding. All right. I would imagine at this point, Fed rate cuts would probably be a benefit to your margin. Is that correct? Yes, we're liability-sensitive. So to the extent that these 425 basis points of Fed rate increases has had a pretty good impact on us. The reversal of that would have some immediate impact benefit. Okay. All right. Maybe on the margin more broadly, there's certainly more pressure than I was expecting, but that's kind of a universal theme out of the bank space this quarter. I mean for the NIM going forward, I would imagine it's pressure until the Fed does pause or hopefully kind of reverse course here. I mean is a quarter like this not out of the question in terms of compression in the first quarter? I think our net interest margin, there are so many variables. It's hard to necessarily provide some future guidance or forecast. But depending on our success with deposit efforts, if the Fed -- we can certainly handle like 25-basis point increments of Fed rate changes as opposed to 75 basis points. So there's just a lot of variables that will go into net interest margin these next few quarters as hopefully, the Fed slows down or pauses on their rate increases. Yes, yes. Of course, I know that it's certainly not an easy thing to conceptualize. Okay. Maybe on the -- moving to the expense side of things. Just kind of wondering what leverage you have, if any, at this point to come at the impact of margin impression? And then any thoughts on kind of the pace of expense growth as you move forward? Yes, I would expect expense growth to be very modest. I mean, certainly, we're very cognizant of our noninterest expenses. We've always been very efficient. Our efficiency ratio has always been one of the best in the industry. So to that extent, there's not a lot of places to necessarily trim expenses. But certainly, we are monitoring closely any additional expenses, looking at the purpose, the benefits, the investments that those relate to. Our biggest -- like I mentioned, our biggest increase in 2022 related to the addition of bankers. And so we will see the benefit of those costs as they have a little bit more time to season with West Bank. Okay. All right. That's helpful color. Maybe turning to credit quality. Obviously, the book remains impeccably clean. No -- not a single number I can look at that suggests that anything could go wrong anytime soon. But just kind of curious what you're hearing anecdotally, whether there's any number or conversation you can look at and say, hey, this indicates we might be heading for a turn? The portfolio that we have has stood a pretty good test of time in regard to what they do. The issues with our C&I customers have then that they have had a lot of liquidity and have had a lot of success the last few years, and that stayed that way from what we can tell in 2022 regarding the information we've received so far. So I don't see an issue there. Multifamily has been strong in regard to strong rents, have increased, and in fact, are probably increasing their NOIs as we go. Office and medical stayed very strong, and warehouses are very strong. So we are vigilant to continue to review quarterly financials, monthly financials, but I don't have anything today that says this is going the wrong direction. Got it. Perfect, perfect. And then on the allowance, so kind of a -- bit of a bleed down in the reserve to loan ratio this quarter. And do you feel like we're nearing a point where you want to kind of hold the line at that 93-basis point level? Well, we -- yes, I mean, that was pre-pandemic, we were in the low 90s. So that was kind of a benchmark, I think for us for normal operating procedures. We will be adopting CECL effective 1/1. So that's going to, I guess throw a whole another layer of complexity into the provision and the allowance for '23. Yes, yes. Of course, of course. Okay. And then maybe one final question from me before I step back. Just hoping you can kind of lay out your capital priorities as you turn the calendar to New Year. Certainly, I can see TCE and tangible book value start to move back up. But just kind of curious how you're thinking about that this year. Well, probably the same way we always do. I mean, we did some capital injection in '22 -- in June '22 with sub debt issuance. So we think our core capital, regulatory capital, our bank level capital is very strong. I mean we're well above the well-capitalized requirements. The investment portfolio, the impact of AOCI has actually improved in the last couple of months of the year. So as the portfolio kind of pays down and rates stabilize a little bit more, that, in and of itself, kind of stabilizes that number. So as Dave mentioned, we declared a dividend this week that's in line with historical dividend payments. And so I don't see us making any wholesale changes in our procedures or processes for that. Thank you. There are currently no additional questions waiting. [Operator Instructions] Our next question comes from the line of David Welch with River Oaks Capital. Your line is now open. Thank you. I don't know who to address this to, so I'll just throw it to the group. And as a kind of background, I grew up in Iowa, and I made a career in Minnesota. I see a lot of banks like yours that have great ability to generate loans, not so great the ability to bring up core deposits. And I'm not advocating the following, but I'd like your thoughts. Minnesota and Iowa are both just littered with the rural trade center banks that have 40%, 50%, 60% loan-to-deposit ratios. Would fit really nicely in this environment for you. I know it's not a short-term fix. But do you see any interest in augmenting your funding base like that over time? David, hi, this is Dave Nelson, and we appreciate you joining the call, and thank you for that question. And what you're suggesting is something that we've certainly always would be open to. But when it comes to having or developing an interest like that, what would be very important to us is to -- what makes West Bank so unique and enviable is really our business model and our efficiency and focus on being a commercial bank. And so if we were to look towards any type of strategic partner, it would be in alignment with our own business model. Okay. Yes. No, again, I'm not advocating. I just -- I'm sure you're familiar with Bridgewater Bank up here. They announced results the same timeline. They're down 10% today because they can't fund their loan growth. And I was just wondering if you were going to possibly modify the strategy over a multiyear period. But thank you for your thoughts. Thank you. There are currently no additional questions waiting at this time. So I will pass the conference back over to the management team for any closing remarks. Well this is Jane again. I just want to thank everyone for joining the call today and listening in. And we look forward to our next call at the end of the first quarter at the end of April, so thanks for joining.
EarningCall_980	I would now like to turn the conference over to Mr. Jud Henry, Senior Vice President and Head of Investor Relations for T-Mobile US. Please go ahead, sir. All right. Welcome to T-Mobile's Fourth Quarter and Full Year 2020 Earnings Call. Joining me on the call today are Mike Sievert, our President and CEO; Peter Osvaldik, our CFO; as well as other members of the senior leadership team. During this call, we will make forward-looking statements, which involve risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. We provide a comprehensive list of risk factors in our SEC filings, which I encourage you to review. Our earnings release, investor fact book and other documents related to our results as well as reconciliations between GAAP and non-GAAP results discussed on this call can be found in the Quarterly Results section of the Investor Relations website. Okay. Thanks, Jud. Hi, everybody. As you can see, we're here in New York City with the whole senior team. And I am very much looking forward to talking about 2022 and a look ahead to what I think is going to be an even more exciting future. 2022 was a record year for our company. It was our best year ever. We welcomed more customers to the un-carrier than ever before in our history, and we translated this customer growth to industry-leading financial growth, finishing with a strong Q4. Our T-Mobile team delivered at or above the high end of our guidance across the board. 2022 was also the biggest investment year in our history. By accelerating these investments, we rewrote the competitive dynamic on network competition for good, and laid the foundation for a highly capital-efficient run rate business beginning this year. When I took responsibility as CEO almost three years ago, I spoke to you about an opportunity we saw that if we could execute well, we can position T-Mobile to be the first company in our space to simultaneously offer the best network and the best value, breaking a decade forced choice on consumers and businesses. While the results are in, with the latest network awards and we've done it. T-Mobile is not only the 5G leader, but now the overall network leader. And this opens big growth pathways for our future. Along the way, we successfully completed the customer migration and network shutdown faster than planned, while also delivering industry-leading growth in both customers and cash flows through our differentiated and profitable growth strategy. And we launched our most ambitious ESG initiatives ever. Our financial outcomes allowed us to accelerate our network deployments and begin share repurchases earlier than planned. And looking ahead to 2023, we're very confident in our differentiated strategy. In fact, we're on track to meet or exceed all of the aspirations for this year that we shared with you way back at our Analyst Day in early 2021. I'm excited to talk more about all of this today, and let's start with our merger integration. Back when we closed the merger, a few people would have thought that we could shut down the Sprint network faster than planned and deliver the lowest churn in our history at the same time, that's exactly what our team did. We moved all Sprint customers off the network and completed the DCOM of Sprint sites, all within 2.5 years. And not only that, we had our best postpaid phone churn year in the Company's history at just 0.88, and we were the only one in the industry to deliver year-over-year improvement for full year 2022. Diving into network, while T-Mobile has been the clear 5G leader for years, we can now say that T-Mobile has the best overall network in the United States. That is a big statement. For the first time ever, T-Mobile won a clean suite across every single overall network category in Ookla's recent report. And recent data from Opensignal and umlaut also show T-Mobile as the clear leader with over 12 billion data points across these network coverage and performance tests, the facts show T-Mobile is the new network leader. And this brings with it an exciting new opportunity, convincing people that this 30-year force choice between network and value is gone when you choose T-Mobile. This is no small task. But other results show that more and more people are beginning to notice and they're choosing T-Mobile. In fact, our results in '22 demonstrated how differentiated and effective our growth strategy really is. Kind of feels like deja vu. When I think back to this time last year, and everyone was worried about what would happen when industry growth began to normalize. And I sense that's top of mind for everyone again as we enter 2023. Well, let's show up immediately last year. The industry did see lower year growth in the second half. And guess what? Our unique ability to offer customers both the best network and the best value across multiple new and underpenetrated segments of the market led to T-Mobile's SaaS growth year ever, with two of our best core system merger coming in the second half, even as market growth began to normalize. We posted a record 1.4 million postpaid account net adds, the highest in company history and the highest reported in the industry once again. We're winning the highest share of switching decisions in the industry through our clear growth strategies. And we delivered our highest-ever postpaid net adds of over $6.4 million, above the high end of our recently raised guidance. This included our highest postpaid fund net adds since the merger with an industry-leading 3.1 million. We explained it before. Our strategy is differentiated and durable because it's driven by taking share in places where we're massively underpenetrated relative to the competition and where we now have the winning hand. Including T-Mobile for Business, where we just delivered one of our highest ever phone net adds quarters in Q4. And we're clearly having an impact on the incumbents. As you can see in Verizon's highest-ever business churn in 2022. In the top 100 markets for consumer, we're winning with prime network seekers who increasingly recognize that T-Mobile offers the best combination of network coverage and capacity for their needs and at a lower cost. We're only beginning to tap into this new opportunity. And in smaller markets in rural areas, where we're bringing a better value proposition and a better network to new geographies, we really didn't play in before. We're capturing a win share of switchers in the high 30s, which says a lot because in many of these places, we're only just getting started. In addition, we added 2 million high-speed Internet customers in our first full year since our commercial launch. In fact, T-Mobile had more broadband net adds in '22 that AT&T, Verizon, Comcast and Charter combined. This is a powerful new phenomenon for our brand in addition to being a good business. And not only did we deliver industry-leading customer growth, but our focus on profitable growth translated into industry best financial performance with core adjusted EBITDA up 12% year-over-year and free cash flow up 36%. The investments we've made in 2022, including in our cybersecurity capabilities showed up in a critical way a few weeks ago. I want to take a moment to address the recent cyber incident. After address identifying a criminal attempt to access our data through an API, we shut it down within 24 hours. And more importantly, our systems and policies protected the most sensitive kinds of customer data from being accessed. We take this issue very seriously. Find disappointed that the crime actor will be able to obtain any customer information, we are confident that our aggressive cybersecurity plan working with the support of some of the world's experts will allow us to achieve our goal of becoming second-to-none in this area. Before I wrap up, I want to touch on some of the ways we're building a more connected and sustainable future. Nearly three years ago, we launched our digital divide initiative called Project 10Million to bring connectivity to underserved students nationwide with free or highly subsidized service. And I am proud to say we're now more than halfway to achieving our goal. To date, we've provided $4.8 billion in services and connected more than 5.3 million students, and we're not slowing down. We're also working hard to create a more sustainable future, recently committing to our most ambitious sustainability goal yet to achieve net-zero emissions across our entire carbon footprint by 2040. This makes T-Mobile one of the only four Fortune 100 companies to do so. Our work in this space is being recognized, including being named in the top 20 of JUST Capital's 2023 rankings, which measures companies against metrics that matter to our communities, including environmental impact, where we ranked number one in our industry. Okay. Let me wrap up with some comments on 2023 and what's ahead. With these record results, we've clearly shown that our differentiated strategy has lots of room to run. And I strongly believe that this will prove to be the case even as industry as a whole is seeing moderating growth and potentially a challenging macroeconomic environment. In fact, it may be especially true in that case as our unique high-quality positioning is proving remarkably well suited to the times. We believe 2023 will also be a year in which we begin to see the payoff. In terms of EBITDA and massive cash flow expansion of years of work on merger integration, synergy attainment and the most ambitious network build in U.S. history, all of which are mostly behind us now. And an ongoing differentiated profitable growth, which is the durable result in front of us. I could not be more proud of this team and our employees, and I am so excited for all that's ahead in 2023 and beyond. Awesome. Thanks, Mike. As you can see, our 2022 results highlighted our strong execution in accelerating the moderation while leveraging our network leadership to deliver industry-leading growth in both traditional postpaid and broadband customers. This translated into industry-leading postpaid service revenue growth of 8% in 2022. We delivered core adjusted EBITDA of $26.4 billion, up 12% and reaching a record high and at the high end of our recently raised guidance. We realized approximately $6 billion of synergies in 2022 or roughly the total run rate synergies expected in our original merger plan in 2018. Our strong margin expansion also unlocked rapid free cash flow growth, which grew at an industry-best 36% year-over-year to $7.7 billion and that's even after funding our peak CapEx year in 2022. This strong financial performance allowed us to commence our share buybacks ahead of our original 2023 time line. We repurchased 16.5 million shares for $2.3 billion in Q4, bringing the cumulative total repurchase to $21.4 million shares for $3 billion in 2022. This is such an exciting start to this opportunity to deliver significant shareholder value. So let's talk about how our great execution and investments in '22 set us up for another strong year of growth in 2023. We expect total postpaid net additions to be between 5 million and 5.5 million, reflecting continued focus on profitable growth as we execute our differentiated growth strategy even while expecting total industry net additions to be down versus 2022. This guidance assumes roughly half of postpaid net adds coming from fans. That profitable growth leads to core adjusted EBITDA that is expected to be between $28.7 billion and $29.2 billion, or up 10% midpoint based on continued growth in service revenues and merger synergies and above our Analyst Day guidance for 2023. This excludes leasing revenues of approximately $300 million as we transition substantially all remaining customers off device leasing by year-end. Our merger synergies are expected to further ramp to between $7.2 billion to $7.5 billion in 2023, approaching a full run rate synergy target from our Analyst Day a year ahead of schedule. And thanks to great execution by the teams. We not only delivered accelerated synergies, but now also expect higher run rate synergies of approximately $8 billion in 2024, of which approximately $2 billion is avoided cost, which is consistent with the amount expected at our Analyst Day. With the major integration work now behind us, we expect merger-related costs, which are not included in adjusted or core adjusted EBITDA, to be approximately $1 billion before taxes, and is expected to be front-end loaded with roughly 40% expected in Q1. This is expected to be the last year of material margin related costs from a P&L perspective. And just as we have highlighted at Analyst Day, cash payments related to merger costs have underwent the P&L recognition to date and are expected to invert and be between $1.5 billion to $2 billion for 2023 with almost half of that total heading in Q1. Net cash provided by operating activities, including these payments for merger-related costs, expected to be in the range of $17.8 billion to $18.3 billion. We expect cash CapEx to be between $9.4 billion and $9.7 billion as we deliver capital efficiency unmatched in our industry on the back of our network integration and 5G leadership. I would expect this to be a bit more weighted towards the first half of the year. Our capital efficiency and data-informed customer-driven coverage approach guides us as we continue to enhance and further expand our network. Together, this results in expected free cash flow, including payments for merger-related costs to be in the range of $13.1 billion to $13.6 billion. This is up approximately 75% over last year, thanks to our large tension and capital efficiency and does not assume any material net cash inflows from securitization. And this also represents a free cash flow service revenue margin multiple percentage points higher than peers. Turning now to taxes, we expect our full year effective tax rate to be between 24% and 26%. And finally, as we continue to execute our strategy of winning and expanding account relationships, we expect full year postpaid ARPA to be up approximately 1% in 2023 and as we continuously win and then deepen our cap relationships. Altogether, we expect 2023 to be another year of profitable growth and even greater free cash flow expansion as we continue to extend our network leadership and further scale our differentiated growth opportunities. Two questions, if I could. One is, you've now had a number of announcements about dabbling in the wireline market. I wonder if you could just talk about your wireline ambitions. And maybe bridge from that into the role that you think WA plays in making bundled offers. Is that something that you need to have nationally? And if so, how do you think you get there on the wireline side? And then second, just a financial question for Peter. I wonder if you could talk about the pacing of share repurchases. I understand that there's some debt paydown that we always expected the first, now that we're sort of well into the repurchase segment. What does the pace of that looks like over the next couple of years? Well, I'll start, Craig. Let me start by telling you a little bit about how we view the convergence space. And obviously, to the premise of your question, we are competing very ambitiously in this space with more new broadband net additions in 2022 than the rest of the industry combined. So we're very happy with our position, and it has lots of room to run for years to come. But on the other hand, the larger question is whether or not we're doing this for offensive reasons or defensive reasons. And our view is that the market has shown that customers will accept bundles. But it's far from certain weather bundles are something that they will require. And so we're some flank is exposed that we have to protect. We're interested in convergence because we have a lot to offer. And we have a great brand, a great capability, a great team, great distribution and the ability to add value to the space as you're seeing in our present success in home broadband through 5G. So we're very interested in the space. But I'll tell you, we haven't decided whether or not that would translate into augmenting that strategy with a wireline approach. But if we did, it would be because it's a good business. Not because we feel like there's some flank that we have exposed that we need to protect. And so while we haven't made a decision about it, I can tell you a few things that we've decided not to do. And I think that's important for people to understand. I personally have no interest in having some kind of major change to our strategy as a company or the financial outcomes that will go from that strategy or the shareholder remuneration that flows from our financial outcomes. We're on a mission to become the best in the world at wireless. And we're pursuing that mission ambitiously and so far, very successfully. That is the place where the future lies and where we want to be. And I'm interested in delivering all of the financial outcomes that we promised you that flow from that business plan. And the shareholder remuneration and share buybacks that flow from that, and we're not interested in something that would cause a material change in any of that. Secondly, because of that, I think we've looked at it and said, if we got involved we would do it most likely with partners. It would make -- it would just be smart to do it with partners versus by ourselves. And that means purely through a partnership or if we have an ownership stake of some type of some kind, it would be off balance sheet and again, would not be at a level that would have a material change in terms of who we are. And then as I said, we'd be interested in it. If it's something that we could add value and make the market better for customers and make some money doing it, directly for the merits of the business, not necessarily for the merits of how it would attribute to wireless. And that's because consumers are sort of voting with their feet. And so far, we haven't seen a benefit to convergence that really translates into consumer value beyond just a discount. And there are plenty of ways to deliver customers' discounts when you have the superior assets in wireless superior balance sheet and wireless, the best overall network and a tradition of a brand that delivers outstanding value. So hopefully, that helps clear that one up. Yes. And then on share buybacks, Craig, I think the important thing is that the strategy hasn't changed, other than, of course, the ability with the financial performance of the Company to initiate those earlier. And so, we couldn't have been more excited to get that first $14 billion through Q3 approved, and you saw we delivered $3 billion of that in 2022. We continue to have line of sight to the up to $60 billion. And so, nothing's changed with regards to the strategy. We're very excited about the cash flow generation of the business, and the flexibility that, that provides. If you think about shaping, of course, I'm not going to talk about day-to-day or week-to-week shaping for natural reasons. But of course, you've got the growth of core EBITDA coming throughout the years, which gives you financial flexibility. As you know, we're very prudent in just the leverage target that we've set overall. But again, nothing has changed with respect to the strategy, very excited about the free cash flow generation and the shareholder remuneration affords. I wonder if you could dig into the business growth a little bit. What type of contracts are you signing? Are we -- what's sort of enterprise versus SMB mix? And where do these customers tend to come in on ARPU? We've heard about some free heavy discounting that you've done to win some big contracts. And as it goes to that, as we think about our POP up 1% this year, should we think of ARPU more like flat? Or does that start to drift a little bit lower year-over-year? Okay. Thanks Mike. So in T-Mobile for Business, as Mike mentioned earlier, we continue to build very strong momentum, which is driven by our 5G network leadership combined with toward winning customer service model. In Q4, we continued to grow our service revenue. We delivered one of our highest ever postpaid so net add performance. We recorded our lowest postpaid phone churn since the merger with Sprint, and we grew our voice ARPU. In fact, we grew strong net adds every quarter in '22 and it's having an impact, as you can see in Verizon's business trend, which was its highest ever levels in '22. And their business to net adds declined sequentially for the last three quarters. We've also achieved five consecutive quarters of business Internet growth. Some of our key wins in strategic verticals, we found in the airline industry, where we've won nine out of 10 major airlines growing our base with these customers by 15% in Q4 alone. In the healthcare industry, we welcome to Ensign here as a using company who's deploying our mobility of a service solution to their 25,000 employees. In banking, large financial institutions are fast adopting on multiline solutions. We won three new logos in Q4 for a total of 24 accounts. In the public sector, we welcome to Chicago PD, Head County, Dallas IST. And even in our Advanced Network Solutions category, we signed on Formula 1, where we're on the last Vegas, be providing powering our operations and ensuring top performance fees. And we also welcomed Bell Resorts, the largest mountain resort operator where we're working together to provide innovative guest experiences, helping meet their sustainability goals and enhance restore operations. And we know why we're laying, it's not a race to the bottom, it's not a bit of the lowest rate of pricing down. We always treat our customers first. And in the modern workplace where CIS, we are focused on productivity digital transformation, even more considered sales. And therefore, it matters that we have a two-year head start in IT network leadership. It matters that we deploy customers drove coverage, and we're differentiated as a superior network an unparalleled service model. Yes. Let me just add to that. I think what you heard Callie say is we're competing on quality, by and large, and ARPUs are rising. They rose in 2022 in the business space. And the premise of your question, they're lower than consumer, but they rose in 2022 because CIOs are picking us because we have the best network and the best solutions, and they're interested in what we can bring in 5G that our competitors are behind on. And so, that's I think, very much to the premise of your question. As we go forward, one of the things to keep in mind is that even though business ARPUs are lower than consumer and always have been, and there's no structural change happening there. They are very good. The cost to sell in that area is lower longevity. So, there's plenty of reasons to like that business that are different for ARPU. That's why you got to be careful about ARPU as a guiding metric for the profitability of the business because it's not. Yes. Absolutely, Mike. And your question, we're definitely not anticipating ARPU to be down on a year-over-year basis. And probably our guide right now would be generally stable. And that's primarily the mix-driven metric as we just had the continued success in T-Mobile for Business, for example, being a mix-driven metric responders or segmentation approach. But there's been just a this amount of tailwind. We continue to see strength in Magenta MAX take rates in Q4. So as you get further into the year, there's potentially opportunity that we could even see some increases over that. But I'd say right now, generally stable with potential upside later in the year, and we'll see how that develops. Great. Two quick ones, if I could. First, I guess, following up on the business market question. Could you give some details on the rural market strategy? In the past, you've talked about where you are from a sort of spectrum deployment and distribution standpoint and sort of how well you're doing in terms of penetrating that market? And then on the CapEx guide, about $9.5 billion, is this sustainable level? And for Neville, maybe could you give us a sense for sort of what you have in store for the network in '23? Maybe update us on sort of the spectrum deployment at 2.5 where you're thinking for C-band and the other spectrum deployments as we look out to 2030 and beyond would be great. Thanks, John. Those are two great ones. First, on smart markets in the rural areas, and I'll hand it to Jon. I am so pleased with what's happening here. We set out to do something we hadn't really done at scale before a couple of years ago. And 2022 was a pivotal year due to all of that at scale. We moved from 30% in to 60% of the marketplaces where we're really competing at -- I think we've explained to you before, what we call internally license to play or better. And in those places, the numbers have been placed. So, maybe, Jon, if you can give a little bit of color on how that's going and maybe even some numbers and back it up, and then we'll switch and talk about what's going on in the network. Yes. Like Mike said, from 30% one year ago to 60% where we'll keep hitting it just reminded about the size of this market. This is 140 million people across the entire country. It's 50 million households. It's 40% in the U.S. in terms of how we define small markets in rural areas, which is everything outside of the top 100 markets. But this overall business, it's been so fun. My heritage is I started out 25 years ago selling into a market are bringing cell phone service into rural markets, and it's in such times to actually bring usable Internet service, whether it be in your home or the mobile service in dual markets. So it's a very, very fun issue so far. And I got to tell you, our switching is up 350 basis points on a year-over-year basis. And when you look at where we're competing, again, 60% of the markets across all small markets areas, we're on in key areas of Verizon peaking over the leadership position in share of portends across the entire market, so a lot a lot of fun. When you look at what's happening to with high-speed Internet, that's a new for opportunity for us in smaller markets and we are in. About 1/3 of our total HSI, high-speed Internet net adds went out of smaller markets or areas, and that's a big catalyst for us in these particular geographies to be that front door in that consideration. But when you look at -- as been talking about this for a while in terms of not having to make a choice between the great value and a great network, that's never been more important, particularly in these areas that have been underserved for the last 25 years and certainly in the last 10 years from mobile perspective. So, we have a lot of fun doing it. And to see shares switching well into the 30s given that a lot of these places, we really does start, I mean, we have the last many years of experience. And that shows that those customers have a resonance with our brands and with our story and they want in. So, we're very pleased without these markets and consumers in the markets are responding. Yes, the CapEx fees where the answer is yes, $9 billion to $10 billion run rate. So that's also we're getting done with that line '23 and beyond. Thanks for the question, John. We're coming off what has been a historic year for network investment in this company. I mean we had an accelerated spend in 2022. And you can see in Mike's opening comments, the results that are coming from that. Our 5G leadership is just not disputed in the marketplace. So that's now translating to overall network leadership, which is just tremendous progress for the business, and I thought a series of great growth opportunities as Jon just outlined in rolling across many other parts of the country too. So, as we look at a sustainable level in '23, we're in a great place because we got the integration effectively complete last year. That was a massive effort, but we're ahead of schedule there. And as we look at the build program on 5G and overall network, we just took great strides. Today, we announced 265 million people now covered with our ultra capacity footprint in the U.S. And that number will be 300 million people covered with our ultra capacity footprint by the end of this year. So we continue to expand that great powerful 5G service across the country. 300 million is a number that neither of our major competitors have even considered announcing a target to reach or to achieve. And in addition to that first part of your question, John, we continue to pain spectrum assets on 5G. I mean, we're a 5G business. We're trying to commit our spectrum, our entire portfolio to 5G as fast as we can. Why, because it's delivering just a tremendous experience to our customers. So that spectrum position today. We have 150 megahertz that are dedicated to 5G, some markets. And that's, I think, currently more than AT&T and Verizon combined having the 5G space. And that number, we've said we're targeting 200 megahertz just on the mid-band spectrum by the end of this year. And so, we've recently talked about how we're not just deploying 2.5 gigahertz. We're also adding powerful PCS spectrum in the space. That's a big part of the program as we move through in 2023. You asked about DoD and C-band spectrum. We have some great assets there. Probably a 2024 deployment plan for us as the opportunity to leverage and deploy that spectrum cleaned up with the FAA, et cetera, but 200 megahertz on mid-band is going to be an industry-leading proposition long before we get to the pentanes. So delighted with the progress, I mean, the 5G network is just unbeatable today across all markets in the U.S. The recent benchmarking clearly demonstrates that. But I think more exciting for the business and especially for the network team is this overall network leadership, something that we've been working way on for, as Mike referenced decades and now is in our hands. So a lot to do, '23 will be a continued busy year for us, but the plan is to extend on that work One of the things you can take away, John, from what Neville just said is that this network leadership story that has emerged has lots of room to run. We said three years ago, that we had jumped out in front on 5G, and we were at least two years ahead of our competitors. And I quoted in two years from now, we'll still be two years ahead of our competitors, and that's exactly what has unfolded if you listen to Neville's statistics, he told you that we're already, as you know, at 265 million people covered by ultra capacity. Neither of our competitors has stated the goal to be there any time in the next two years. In fact, they've stated to go for the end of next year, two years from now, it's less than that. And yet, we're not stopping there. We're on our way to 300 million people this year. But to me, is actually the more exciting part about the future testing you heard from Neville is going from 130 megahertz deployed of mid-band, 150 overall, 130 in mid-band to 200. That's a massive capacity expansion that's happening. Because that's not just factors on the experience you get every day. So far, our medium speeds are 5x faster than just three years ago. Our Magenta MAX customers and you know how Magenta MAX is. They're using 30 gigs a month. These are big advantages versus our competition. In broadband, where we're generating more net adds than the rest of the industry combined, has lots of room to run. And so that's all on the heels of this massive capacity that's not just in the network, that's still coming and within the run rate of the $9 billion to $10 billion in capital per year. Mike, you teed up my question. You said you've got lots of room to run on fixed wireless. Some of the competitors critique the product around limitations on capacity, on speed. So perhaps now you've got a base of customers. You've seen behavior over a couple of years now. We are the learnings? How much market share do you think this product can take? And what's your ability to continue to expand the footprint to continue to expand the capacity of the network? And then maybe just a quick word on macro. You talked about some concerns you've seen, anything on payment patterns or any other cautious behavior yet? Great. Well, first on broadband, it's kind of stating the obvious. When somebody who is a fiber provider. So as you know that product not as good as our product. It's kind of like the people at pointing a finger at the world's best-selling car, Toyota saying, we're faster. We have the faster car. Yes, but Toyota is the world's best-selling car. And that's because -- and if you look in the case of T-Mobile, 5G home broadband because it's perfectly suited to what people want. And although it has less overall potential for capacity than a strain of fiber, which is patently obvious, it's radically simple at low cost. It's transparent. It's portable within tens of millions of households. It has the speed and capacity that allows people to think that they want. And therefore, the net promoter scores are some of the highest in the industry, 10 points higher than fiber, 30 points higher than cable. And most of our customers are coming directly from cable, not just from rural areas or unconnected places or DSO. And so it kind of demonstrates that we've got a product here with the right mix of services to meet people's needs, lots of room to run. When we launched this product, we talked about 7 million to 8 million homes. And as you can see from our numbers, we're tracking beautifully to that. And the question now is where do we go from here? And I gave comments before about whether or not we're looking at ways that could augment that strategy, of course, we are. But that's because we have a winning product and massively expanding capacity to support it. One of the things to keep in mind is that economically, this unlike fiber and cable. This product so far is not burdened by amortization of capital and the cost structure, right? So we're able to take the capital that we deployed through mobile and find places with excess capacity and market broadband there. And those places are rapidly expanding even though we have millions of customers on board now soaking some of it up. We're moving our eligible homes from 40 million to 50 million. And that means that there's 50 million homes out of 140 million nationwide, where tomorrow morning, you applied for service, we'd say, yes. And so that is a big footprint. And we think the product is beautifully suited to the times. I can speak to the question on the macro environment. From a consumer perspective, No, we're not seeing it. Of course, this is an area where we're very cautious. But when we think about just Q3 to Q4, we actually saw a little bit of improvement in voluntary churn. And bad debt was exactly what we laid out in Q2 stable on a percentage of revenue and in fact, actually lower than AT&T or Verizon on those metrics. So, it's something we're looking at and making sure we would closely monitor. As we said, this could also be a moment of opportunity for us because as a consumer set to the extent that you're pressured from a recessionary perspective, from an inflationary perspective, it might make you consider a lot of categories of spend and wireless is being one of those. And at the time you create the consideration moment, you go look around. And again this is the time where not only 5G leadership, but has translated into overall network leadership, coupled with that value proposition just being a fabulous time and it could be a tailwind for us. Again, looking at and making sure we're cautious, but nothing we're seeing right now gives us costs for concern. We're making sure our companies ready for after you know. I mean, but the fact that we saw bad debt moderate from Q2 with inflation for spike surprise consumers last spring. How Q3 and Q4 were lower than Q2. In voluntary involuntary churn was actually lower in Q4 than Q3. Our bad debt rates are lower than AT&T's are for us and showing the quality of our customer base, which has always been a question people had, especially after the Sprint merger. And so, we're signing in the future like everybody else, but we take it as far from a foregone conclusion that very stressful economic times are coming. We're prepared if they are. We're financially prepared. And as importantly, we prepared to serve American consumers that in that situation may be questioning whether they ought to be having a great network at a better value. And we're ready to stand up and serve them if they start questioning whether or not they should be saving money in this category because we are uniquely positioned with our high-quality value positioning for economic times like what might be coming. And so, we're ready in other case, but the emphatic answer to the question is no, we are not seeing it. Yes. So Jud, should we go in between here, should we go up to -- you guys can't see this, but we always have screens pointing at us with Twitter -- Twitter questions, and we'd like to open it up. And I was going to have you call out a couple, but there's one that's from at Magenta. So, they win, they have to have a long -- but it's actually a really good question. It kind of goes to something we've been talking about, which is what's T-Mobile doing to maintain its industry-leading growth, giving cable starting to build momentum in the telco space. And we talked about convergence earlier on. And it's interesting to me that we keep getting this question. We saw cables results coming. I talked about them in Q4. And I would just tell you that it looks to us like cable, who's been in the run rate now for a long time because you had a recent uptick. It looks to us like you're seeing lots of transference in terms of net adds that add to the category, additional adds being printed, et cetera, for customers. New phone numbers being created, people coming over from prepaid as a dynamic. But what's interesting is you see that recent surge in growth from cable, and this is interesting. At a time when every one of the three wireless incumbents experienced better-than-expected churn. So churn was better than expected, for us, it was falling. AT&T was falling in Q4 as well versus a year ago. And at the moment, when cable has for some, well, it didn't surprise us, but for some, a surprise uptick in net adds. And that should kind of tell you a little bit about what's going on. So for me, we look at it as sort of, as you would expect, since this is a contact sport as sort of us against everybody else, right? And so, if I look at the second half of the year, what's interesting is T-Mobile was able to deliver 17% more postpaid net additions in the second half of this year versus last year, while the rest of the industry, Verizon, AT&T, Charter and Comcast combined in wireless, delivered 19% less postpaid phone net additions in the second half of this year versus '21. So in terms of our separation from the market at a time when people ask were doing better and better. Jud, any -- one more on Twitter before we go back? Thanks for taking the question. You gave really great context on sort of what the market size is for rural and small markets and the fact that you've moved from 30% of that market to 60%. I'm wondering if you can give us a little bit more context around the business market in terms of like how your market shares have progressed over the course of this year, and what you see the size of the overall market being? I mean, one of the things you heard from Callie before is that Q4 was one of the best net add quarters ever in our history. So, we're really comfortable with where this is -- how this is shaping up. And one of the reasons for that is there are long sales cycles in this market. And we've been at this 5G story longer than anybody else. CIOs are very interested in more strategic engagements than they were interested in a couple of years ago. And now, we're in those conversations, but we're way down the pike in them. So, we're very comfortable with where we are. We're competing extraordinarily well. And to your market share question, we're very much on track for the Analyst Day aspirations that we shared with you. You mean should I disclose that right now as a new fact. I don't think we did we haven't. I think what we've said is, it continues to be the majority from consumer, but you're seeing continued uptick in the business side as just Callie mentioned in growth there. So we see a lot of room to run on the business side as well. And obviously, continued room in the consumer space. I did see some notes on that that kind of got it wrong is that maybe business is what's surging in that area. It's the business is doing well, but it's the overwhelming majority for us is the consumer in that space. Yes. So, you've been able to sustain very strong post pay net adds throughout the merger integration despite those results being burdened by elevated churn related to those integration activities at certain points in time. And I know it sounds like it seems like a lot of that is behind you, but I'm curious how you think about the levers to drive churn lower from here. I'm wondering, if there's actually any residual benefits from the integration we haven't seen yet. I don't know how important the remaining billing migration may be to churn. And maybe just at a higher level, what type of churn outlook is embedded in your postpaid phone -- your postpaid net add estimates for this year? Yes. First of all, yes, on integration, there's more room to run. But principally, I think most of the room to run comes from value network, service brand. And look, we've been through this journey. We drove the Magenta brand to the best churning brand in this industry. And I certainly won't be satisfied until T-Mobile blended postpaid is the best churning brand in this industry. And that shows you we've got some room to run because while we're the most improved, which is a great price, we're not the best yet. And so that's where we're going. That's the goal. And it is, of course, there's some room to run on integration. But we're not separating it for you anymore because it's very hard to chop up at this point. All the customers are on the destination network. Some of them are on the destination biller. It's not that determinative anymore as to which biller you have because we try to make that biller sort of very opaque to you and not transparent. You're called T-Mobile in many cases. So it's -- it's just hard to chop it up now. But yes, there's still room to run to get people settled into fantastic rate plans, both on their device as well as on their service and to feel very careful with clear transparent services. But I'd say the bigger opportunity is our worst to first game plan that we know how to execute, which is give people a great gives them un-carrier moves that allow them to voice that deal and express in vote for T-Mobile. Give them the best network bar not, give them a fantastic path to great devices. Give them a brand that's famous for caring for them and the best customer service in the industry. That's why our net promoter scores are the highest in the industry, and I expect that to translate to the lowest churn by the time we're done. If you want to mind, if I guess as a churn follow-up question. Where are you in understanding the churn profile of your fixed wireless base, either just as a stand-alone broadband customer or perhaps the impact it has on your mobile churn to the extent of bundle with mobile. We're really happy with it. What we do with any business is we age it into cohorts and look at it sort of based on people that have been with us 1.5 years, people that have just been with us a few weeks. And what you see is what you -- exactly what you would expect, which is the more aged cohorts are settling into a beautiful pattern. We have the youngest broadband base in the industry because we went from nothing to 2.5 million subscribers all in the last few months. And so, we have to really break it down to understand it. And when we do, we're very pleased. And one of the things that happens as a dynamic on this business is that the barriers to trial, therefore, the cost to us of encouraging that trial are totally different than wireline. We're not sending some drug -- some truck to your house to dig ditches or drill holes in the side of your house and all kinds of cost. We're letting you take home a modem and router and give it a shot. And if you love it, you wind up sticking with it. And if not, there's sort of a no harm, no file relationship. This is, let's try it again in a year that wasn't perfect for you right now because we're pouring capacity into this network. And as long as we treat customers really well and they gave this a shot, and we were transparent with them that as to whether or not it would work. The vast majority will keep it, but the small portion of people that don't, doesn't really wind up costing us anything. So, the dynamics of early churn in a business like this are totally different than traditional broadband is one of the things that makes it a better business model. So, I guess the first question would be for Peter. If you could kind of kind of step us through the guidance and the changes from the Analyst Day outlook from $28 billion to $29 billion, what's changed to move your midpoint expectations up? And then from the free cash flow or original guidance of $13 billion to $14 billion, what's moved your midpoint down? And what are moving parts in between those two things? And the second question would be, Mike, what would be your appetite to proactively reach out to SoftBank within the confines of the stock buyback program and clean up this $48.8 million share issue that seems to be keeping for whatever reason, and I understand the lockup and it seems to be keeping T-Mobile stock from going north of $150 million. Is there an appetite to just get rid of that and just make sure that, that's not a headwind for the stock on a go-forward basis? Those are both great questions, Dave. Let's start with EBITDA and cash flow. As you could just eliminate all the headwinds and tailwinds since the early 2021 kind of give us a high level. But we're the only still talking about our 2021 guidance. And we're talking about pulling into the stations and beating it. And that should say a lot about our business plan and the integrity of it. But it is actually quite different than what we were expecting in terms of some of the shaping of it inside. Peter, maybe you can give some color. Absolutely, when I just think, Dave, back to Analyst Day and what's happened since then, you've certainly seen a tremendous amount of incremental profitable growth than what we see. And you saw the ARPA trajectory grow you've seen high-speed Internet and the tremendous growth that we've had there and the ability to accelerate synergies. On the flip side, of course, the world has changed a lot since then, and inflation is one of the elements, that's impacted a lot of companies. For us, we've been a lot more insulated than others, and we've talked before around why that is with our ability early on after the merger to walk down major categories of costs during a time when the negotiation looks a lot different in low interest rate environments and low inflation rate environment. So, there's a lot of the kind of puts and takes and why you see us now being able and confident to express a guy that's actually above Analyst Day. When I think about just the shaping of the core EBITDA throughout the course of the year, what you're going to have, of course, is continued profitable growth and continued synergy unlock. And one of the things that's assumed in the core EBITDA guide is the wireline sale close somewhere around midyear and that's a little bit of a drag on core EBITDA. So as I think about like Q1 probably in the approximately 6.9 range and then continued unlock throughout the course of the year on core EBITDA. And then how I think about from there to free cash flow, really free cash flow in 2023 as a few onetime items that you need to consider. And first and foremost is we're actually now in '23 achieving what we've been talking about for a long time now, which is the highest conversion of service revenue to free cash flow in the industry, despite these kind of few onetime things that I'll highlight. One is merger-related expenses, and I spoke in the prepared remarks around $1.5 billion to $2 billion. And that's a little bit higher than we assumed at Analyst Day in terms of total merger-related expenses by about $400 million, and that gives you now an incremental unlock up to $8 billion of total run rate synergies. So, that's one -- the other is a 21 cyber event. And remember, you saw us take a lot of the expense-related charges in 2022, but we anticipate the cash flow associated with the class action settlement to outflow in '23. And then the last again is related to wireline, where as you recall, we have an IT related take-or-pay agreement. The first year after close is $350 million and then tapers down significantly from there. And so, we're assuming about half of that flowing into '23. So that's how you kind of take core EBITDA down to free cash flow guide. And hopefully, that answered almost all the puts and takes. I just love the question, by the way, Dave, because our guide on cash flow for next year is to have 75% year-on-year growth. And you're like, right. We have just a little low respect. And the answer is I hope so. Let's see what happens. So when you had a second question about SoftBank. Obviously, we know the SoftBank guys very well. We talked a lot, we're in constant communication. But I wouldn't say there's a deal imminent. And there's a reason for that, which is people on both sides of a potential transaction, believe that we're moving past 150 anyway. And so, they don't have a lot of incentive to give us a deal or a discount because they think they're getting this event we've always planned for it. We've always believed the average analyst target is 170 on this business. If you look at our rapidly expanding cash flow profile and the durability of our growth strategy, we think this event is probably coming. So, it doesn't feel like it feels like for us, we would want to discount it, we were going to take that out and they look at it and say, "Yes, but why would I give you a discount and so there's -- that's a little bit of color on it. So I wouldn't say a transaction is imminent, but I wouldn't say it's impossible either. I think the operator cut you off. But yes, we know and thank you for that -- great. And so looking over, if we look at the Twitter, Bill Hull always has some great questions. T-Mobile, John Fryer, Mike Katz, state of prepaid for T-Mobile competitors, including MVNOs. And T-Mobile was the only net positive on prepaid, others had losses. What's going on with prepaid and also what's going on with the MVNO market. Since it includes the MVNO market, I'll actually switch to Mike Katz you can tell us a little bit about what's happening in prepaid. Yes. Like Mike said, we're really excited about what happened in prepaid. We were the only one with positive gains. And I think most importantly, we have and continue to have the number one brand in prepay with Metro. And we see the Metro growth being a big tailwind for us. We also have a really healthy and robust MVNO set of partnerships, including big exclusive partners that also had significant growth over the course of '22 and in Q4. And we've got a diverse set of partners that both focus in unique distribution that we don't always fully reach with the T-Mobile brand and unique segments that also sometimes are underrepresented with the T-Mobile brand. So, we feel really good about the portfolio of products and brands that are reaching the prepaid market. I find it particularly gratifying that in an environment where there's lots of transference from prepaid to postpaid going on and which has lasted longer than most people predicted it would last. Our prepaid brand continues to be the strongest in the market and the only one that grew this quarter. That's fantastic because you have seen lots of momentum across the industry from prepaid to postpaid because of the economic times. People are qualifying for postpaid and continue to do so to the premise of the earlier question about what we're seeing in the macroeconomic environment. And yet our prepaid brand remains this strong. The lowest churn ever in our history on prepaid and the lowest in the industry was in 2022. And so this is a business where -- that has a great bond with its customers. They stick with it for a long time. They love Metro by T-Mobile, and it's a real source of strength. It does. We can probably take one more question and then we got to hop it up. So operator, one more and then we got a call it a day. A question on postpaid phone ARPU. For many years, your ARPU model was flat to down annually and 2022 is a fantastic year for ARPU. Thanks in part to MAX. MAX sell-in still sounds really steady for '23. And so, thinking about your outlook for flattish. I'm just wondering why we might not expect to see more growth in ARPU and maybe even a similar year to 2022 in '23. A part of it is because it's early in the year, and it's not that clear where the dynamics of competition will be. If you look back to our multiyear Analyst Day targets, we actually thought back then, back to all the puts and takes, and Peter just kind of talked about this, that there would be much more going on, on sort of the service revenue ARPU side, And we didn't anticipate as much as what wound up happening on the device side. And so we guided accordingly on service revenues and ARPU where we achieved the '23 service revenues last year and ARPU growth was a big reason for that. But we had unexpected costs on the device side because the factors of competition sort of shifted. So it's a little early to comment on ARPU. We do know that if there's an opportunity for growth versus just generally stable, it would be more in the second half than the first half, and there's reasons for that. But we really like where this is. The underlying dynamics on Magenta MAX are stronger not moderating. They are stronger than they've ever been. But on the other hand, we're finding success with military, with seniors, with business and other things that could be dilutive to ARPU, but are fantastic on a CLV basis. And that's why we have to be careful about not getting people to hooked into ARPU. ARPA, we're guiding for growth because we see lots of opportunity for customers to continue to double down on their relationships with us across the board, including new device types and including home and business broadband. So hopefully, that gives you a little bit of puts and takes on kind of why it unfolded the way it unfolded. Thanks, everybody, for joining us today. Again, I look forward to catching up with you again soon. If you have any other questions, please reach out to the Investor Relations and Media Relations team, and have a great day. Ladies and gentlemen, this concludes the T-Mobile fourth quarter earnings call. Thank you for your participation. You may now disconnect and have a pleasant day.
EarningCall_981	Greetings and welcome to the LSI Industries Fiscal Second Quarter 2023 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jim Galeese, Chief Financial Officer. Thank you, Jim. You may begin. Good morning, everyone and thank you for joining. We issued a press release before the market opened this morning, detailing our fiscal second quarter results. In conjunction with this release, we also posted a conference call presentation in the Investor Relations portion of our corporate website at www.lsicorp.com. Information contained in this presentation will be referenced throughout todayâs conference call included are certain non-GAAP measures for improved transparency of our operating results. A complete reconciliation of second quarter GAAP and non-GAAP results is contained in our press release and 10-Q. Please note that managementâs commentary and responses to questions on todayâs conference call may include forward-looking statements about our business outlook. Such statements involve risks and opportunities and actual results could differ materially. I refer you to our Safe Harbor statement, which appears in this morningâs press release as well as our most recent 10-K and 10-Q. Todayâs call will begin with remarks summarizing our fiscal second quarter results. At the conclusion of these prepared remarks, we will open the line for questions. Thank you, Jim and good morning all. Thank you for joining us on todayâs call. As you have likely seen from our press release, we had another strong quarter in our Q2 fiscal â23. In fact, this is our seventh consecutive quarter of double-digit organic growth. Itâs quite an accomplishment given the ongoing headwinds of the general economy, ongoing supply chain challenges and disruptions in the construction market. My hats off to the entire team at LSI along with our agents and partners. Sales for the quarter were up more than 16% year-over-year, net income up over 107%. We had strong free cash flow performance and I am happy to say our net debt sits around $60 million, which is a 1.3x net leverage ratio. We are in a good spot going into the second half of the year and Jim Galeese will provide a deeper dive of the financials in a few minutes. Our strategy around vertical markets continues to pay dividends and is reflected in our growth. While no market is recession-proof, we do believe that a good swath of our various vertical markets has provided us with some hedge against the current headwinds and have proven to be recession-resistant, creating growth opportunities that outpaced the performance of the general economy. Our refueling market continues to perform well. Although recovery in Mexico continues to lag our expectations, we have developed opportunities in other locations that are offsetting our delayed projects in Mexico. In the second quarter, we substantially completed approximately 200 site re-branding project in Puerto Rico for a major oil retailer. This represents our first major project in Puerto Rico and demonstrates the strength of our systems and processes, which allowed us to substantially complete this major project in a new market without a blip. We will continue to look for those types of opportunities and expand accordingly. As many of you have seen, we issued a press release a few weeks back regarding a solar installation we completed for an oil retailer in Austin, Texas midyear last year. A few months of the system running and operating we were able to provide some interesting numbers in regards to energy savings and the payback period related to the initial investment. We see the Canopy at most petroleum retail locations as an untapped opportunity and this project is a good example of how we can turn this unused space into a real profit center for both us and our customers, let alone the environmental impact of the clean energy production. I want to caution everyone that this is simply a first step but it does go a long way into underlining the opportunities and possibilities of expanding products and services we can offer in our various vertical markets. Our grocery store vertical continues to deliver above expectations. In this last quarter, we were awarded another major project by one of the nationâs largest retail grocery store chains to provide approximately 1,200 to 1,500 units of refrigerated and non-refrigerated display solutions, which we will substantially complete and deliver by the end of this fiscal year. We continue to provide various print and lighting solutions to a wide group of our grocery customers and we are experimenting with some other goods and services we can offer to this market. I hope to have some interesting news to share with you regarding these efforts next quarter. Our automotive market continues to show a number of growing opportunities and engagement of our team in a number of new projects. This week, our automotive sales team will be attending the National Association of Automotive Dealers, NADA Trade Show and continuing to advance our position in this market. Despite several external factors affecting new and used car sales, this market continues to show good solid activity. Lastly, our sports court market has been moving along nicely with a number of larger wins recently. As we have spoken before, our company does have some seasonality built into our normal sales cycle. With our focus on outdoor lighting solutions, it means that a good section of our sales are exposed to the realities of winter, cold weather and construction activities has slowed during winter months. Q2 and Q3 normally represent our slower months. And although I do not expect us to outsmart winter, we have been very fortunate with a record-setting third quarter last year in a very robust Q2 this year. You can be assured we will be looking for every opportunity to keep that momentum going. Next week, we will be hosting our Annual National Sales Meeting in Cincinnati. For these meetings, we bring all our sales, marketing, product development and engineering resources together for a very full agenda. As we have done in the past, we will have a combination of workshops, sales training, product training for our sales and marketing folks. This is a big investment that has historically paid big dividends and we are excited to make this investment and move forward with this meeting. Immediately following our national sales meeting, we will be hosting our third annual partner and agent virtual sales and tech meeting. Sharing lessons learned from our national sales meeting, along with new product introductions and best practices learned over the last year. Going into Q3, our quota activity across all sectors remains strong. We are still facing some significant headwinds, but we believe many more opportunities ahead of us and we are working to improve both our top line and our bottom line. Thank you, Jim. Positive momentum in our business continued throughout Q2, generating double-digit sales growth, expansion in our gross and operating margins, significantly improved earnings and earnings per share and strong cash flow. The period saw continued healthy demand levels across both reportable segments and operational execution continued at a high level. Sales increased 16% year-over-year for the quarter, with both reportable segments attaining double-digit growth, Lighting increasing 17% and Display Solutions 15%. We continue to leverage our position in market verticals where we have a strong position and advance our position in verticals identified with profitable growth potential. Reported operating and net income were double the prior year quarter with reported diluted earnings per share of $0.22 and adjusted earnings per share of $0.26. This compares to $0.11 and $0.15 respectively last year. Adjusted EBITDA increased to $13 million, 54% above prior year and our adjusted EBITDA margin rate was 10.1%, our second consecutive quarter of margin exceeding 10%. The business continued to generate solid free cash flow. Second quarter cash flow of approximately $9 million increased cash flow for the first half of the fiscal year to $19 million. Our strong cash generation reduced net debt, $17 million in the first half of the fiscal year and over $25 million from the prior year period. This served to reduce the ratio of net debt to trailing 12-month adjusted EBITDA to 1.3x. Debt reduction remains a capital allocation priority and provides flexibility to pursue investments in both organic and inorganic growth initiatives. Now, a few comments on segment performance. Momentum continued in the Lighting segment as sales increased 17% and adjusted operating income improved 45%. Demand remains broad-based. Our independent sales network provided significant year-over-year growth and our direct national account sales continued to expand, with orders received from several new customers in the quarter. We noted in the press release the substantial growth in sales for indoor application, reflecting the progress in providing a specific complete solution set for key vertical markets, serving to increase our average order size. Selling prices remained stable in the quarter and commodity costs continued to moderate. This, combined with volume growth, was responsible for the improved earnings and margin expansion for the quarter. We reduced lighting inventory 7% sequentially in the second quarter, reflecting ongoing supply chain stabilization. Lighting DIO remains somewhat above historical levels and opportunities have been identified to further reduce inventory moving forward while ensuring product availability to meet projected customer demand. Project quotation levels in Q2 remained steady at a high level and we exit the quarter with backlog mid single-digits above last year. Moving to Display Solutions, sales increased 15% and adjusted operating income approximately doubled to $8 million. The gross margin rate increased 620 basis points driven by volume leverage, improved program pricing and favorable program mix. Jim mentioned the Puerto Rico branding program for a large oil company. I want to point out our high level of fulfillment and service performance on this and other large, highly customized display projects across the refueling C-store, QSR and grocery verticals as permitting issues and customer installation schedule changes continue. Our teams pivot quickly collaborating with the customer to successfully meet the requested changes. This capability continues to be a differentiator for LSI in the market. Concept design and pilot work for prospective new programs remains very active in the Display segment with over 20 proposals for new and existing customers in progress. To summarize, it was a solid quarter for the business, highlighted by strong financial and operational performance. We continue to effectively manage expenses while investing in programs to identify and support both short and long-term profitable sales growth. Looking forward, quote order activity is expected to remain healthy in Q3 with sales reflecting normal seasonality. Hey, good morning, everyone. Thanks for taking my questions, and congratulations on continued excellent execution. So â maybe if I could start off with a question about just strategy. Youâve now brought down your debt to it seems like reasonable levels. Youâre generating cash, business is going well. So if you just kind of think about the next 12, 24, 36 months, how do you think about the positioning of the company and how you plan to use your balance sheet as to potentially reposition and accelerate growth? Thank you. Hey, George, thanks for joining, and thanks for the question and the complements relative to the performance over the last quarter. Our strategy has not fundamentally changed. We are very committed to our vertical market strategy across the organization. We are looking for businesses that we think are assisting as recession-proof, but recession-resistant did show growth opportunity and have long legs, meaning 3, 5, 10 years out that we believe there is something structural to those businesses that will continue to create growth opportunities for us. So we remain very committed to that in terms of paying down the debt and strengthening our balance sheet and reposition ourselves, there is two ways weâre going to grow, right? The last seven quarters, weâve grown through organic growth. But weâve always said that acquisitions and being able to add to our portfolio of solutions to our customers, particularly aligned with the verticals that weâre in, itâs going to be important for our kind of out of market above-market growth. So weâre going to keep continuing to execute against that. I think as we pay down debt, it just continues to open up the opportunities for us to look to add something else to the portfolio. And we try to keep a very active pipeline. And then itâs just a matter of the opportunity coinciding with us being in the right position and the market is aligning relative to a growth opportunity, and we will be ready to execute. Thanks. And I wasnât necessarily the best student when it came to matrix algebra and advanced mathematics, but it doesnât take a rocket science [Technical Difficulty] youâre well above what youâve outlined for 2025 guidance in terms of $500 million in revenue and $50 million in EBITDA. So I am curious if you can kind of help us understand what your business is capable of, when you look out a few years, what sort of margin structure, what sort of revenue structure should we look to â to understand the company? I think there is â well, let me start with this. First of all, we are looking to revisit that in this quarter and kind of update what our goals are and what our targets are. We hope to share that wildly by the end of the year, if not sooner, by the end of the fiscal year, if not sooner. We definitely see growth opportunity, both top line and bottom line. We do see what we believe is still a lot of runway left for us. This concentration on the vertical markets just allows us to get a greater share of wallet, and weâve always talked about that, that the cost of sales and the cost of confidence in the customer are very high prices we pay any company pays to get in and create a relationship with the customer. We need to make sure weâre executing on the basic commitments we make to the customers, which we do very well. Our say/do ratio still remains very high in our ability to deliver our products and then the services that go along with them. Weâve been executing and firing on all cylinders on that for quite some time, and we remain committed to making sure we can continue to do that. But if we look at what the cost is relative to interfacing and dealing with the customer, it is that initial order, the ongoing orders, the confidence that customer has. And we believe weâre in an environment where if we can continue to execute like that, maintain the confidence and trust of our customers, we can add additional offerings, whether they are products or services or a combination of both into that. So when we look at what our growth opportunities, I know a few years back, we caught a few people off guard with going into refrigeration with the JSI acquisition. But you can see how well that paired up. We do have synergies. We donât expound on the â to great length, but weâre both in there, JSI, LSI were in there as one team, as one company, and we benefit from selling across the product â across our product and solution lines to those customers. As we look forward, we want to make sure we leverage on that some more, both in the growth, we look at it as a three-legged stool growth in our commercial market by picking the right verticals to be in, growth through our organic activities, meaning we become that much better at managing margin and managing profitability. And we think we have a long runway to go with that. Weâre not out of ideas, weâre not out of opportunities in that regard. And then lastly, what can we add from an inorganic or acquisition? Itâs those three kind of things that weâre focused on, and we plan to, like I said, revamp our targets. Iâd also say that there were some pretty lofty goals when we sat down and we penned them out. We actually sat down in December of 2018. We brought it kind of to the market in Q3 of 2019. And there was a lot of skepticism. So we need to make sure that weâre pushing ourselves in a healthy way, but that weâre also able to deliver. So those are the things weâre working on now, and we think we have a lot of runway past the $500 million and double-digit EBITDA. Got it. And maybe just lastly, there was â there is been some M&A in the supermarket channel or the proposed M&A, I should say. And that was the potential for disruption, but it sounds like itâs turned into something thatâs the opposite. Is that an accurate characterization of the activity youâre seeing in the marketplace in that particular channel? But we donât have a crystal ball, but Iâd agree with what you were saying is weâve always looked at it as an opportunity. We certainly had our planning sessions, and we looked at it if it didnât turn the way that we anticipated it turning, but weâve always seen this as an opportunity. It underlines what weâve talked about for some time, which is this space is going to continue to get competitive and little things are going to matter. And thatâs what weâre very good at delivering. And weâre good at delivering that differentiation. Weâre good at helping promote the brand of our customers and helping promote the differentiation of our customers, and we think there is a lot of runway left specific to grocery. Yes. Good morning, Jim and Jim, itâs Aaron Spychalla. Thanks for taking the questions. First for me, good to see your commentary on the second half outlook, can you just talk a little bit more maybe about the increased visibility youâre getting? In the past, youâve talked about some of the multi-site projects and refresh cycles kind of compressing. Just trying to balance that outlook with some of the puts and takes with seasonality as we kind of look to 3Q? Yes. Well, seasonality is always something that weâve talked about quite a bit. We have our focus in a lot of our product is outdoor and they are affected in ways that we just donât â we canât forecast or see. So any time we get into Q2 and Q3, we anticipate, expect some seasonality. Obviously, we backed that trend last year with a very, very strong Q3. And weâre backing it a bit this year with a very strong Q2. The unforeseeable events that happened in the Q, I donât think that they structurally affect our momentum or our growth. But if you have a large snowstorm that affects construction activity for a week or 2 sometimes as they remove snow and things like that. It slows down project and it slows down some of the timing. So Q2 and Q3 have always been a little bit of â had a little bit more variability to them, if you will. And then like I said, you just kind of underline in general, the fact that a big part of our business is outdoor. We do a very robust indoor obviously. But when outdoor weather is affected and that type of thing, we can anticipate some slowing. But again, like I said, last year was an exceptional Q3 and Q2 this year has been â it was obviously very strong as you guys have read. On the large project activity, these kind of things â our large projects tend to work over many month periods, sometimes years. And so the up or down that occurs within any given month of February or March or in August or September. We donât really see that much. They are kind of live events, if you will, but they donât really affect the length or commitment of the projects. And many of the projects weâve been engaged in are these larger projects. And specifically to one of the comments you made, what we see is if we went back 10 years ago, we saw a refresh cycle that was much closer to, we will say, an average of 7 years. If we go back 5 years ago, we saw a refresh cycle that was starting to come under 7 years and bouncing between 5 to 7 years. And now as we look at things today, weâre seeing a refresh cycle thatâs solidly in the 5 in fact, trending lower all the way down to 3 years. And I think it speaks a lot to the fast pace of â we always say the TikTok generation, which is to just keep the image looking fresh and new and attracting customers that create an environment where the customers weâre dealing with are showing to their customers that they are keeping pace, they are continuing to invest in their properties and their offerings, and itâs just to kind of capture that attention of the consumer, which is just those emotions and the buying habits and those type of things are just moving a lot faster. So we obviously see it as a very positive trend for our business. Great. Thanks. Thanks for the color there. And then maybe just can you talk about some of the new products that you have launched over the last couple of years? I know you have refreshed completely some verticals and you kind of called out indoor this quarter. Can you just kind of talk about how thatâs helped and maybe some of the areas that you are kind of focused on going forward? If I go back 4 years ago, I remember us getting on a call and saying we were going to have almost 20 new products launched in the year. And since that time, we have kept that pace plus and those products are not necessarily â they are not game-changing technology products as much as they are tweaking existing product lines. Donât get me wrong. We do have the game changers, by the way. But the core of it is taking our core products and just incrementally making them better to serve our customers better, particularly as we continue to orient ourselves around vertical markets. We have a lot that serve a variety of markets, and that will never go away that these products can be applied to a number of markets. But the learnings we walk away from in our vertical markets, we try to incorporate into our products, whether itâs easier to install or more controls aspects or variations in lighting, forward throw things like that, we continue to at least introduce a minimum of 20 new products each year, and we are on pace to exceed that this year. And in terms of game changers, I will talk about one because it is normally balanced. We introduced a REDiMount. And I think we talked about it last quarter, but the REDiMount is really geared towards being very easy for the installer to install, which makes it where an installer might have a 2-hour install per a fixture, the REDiMount cuts that install time down significantly. And that makes it easier for the installation teams and installers to use our products. It lowers the cost to our customers by reducing the install time. And it has some embedded opportunities in a longer term, quicker refresh cycle, the ability to maintain and service these products through a simple turn and click. If you havenât looked at the REDiMount, I would encourage you to go up to our website, and just look at it. Itâs another way that we are kind of innovating. And that innovation isnât just in the technical aspects of our products, but in how people use them and how they install them and that type of thing. Right. Thatâs good color. Thank you. And then maybe if I could just sneak one more in. Saw the Grocery award and continue to expand wallet share there. Can you just kind of elaborate a little more on some of the cross-selling opportunities that we have been looking at from JSI? Maybe an update on where those stand and anything else on timeline or kind of contribution potentially? Yes, absolutely. And before I hit on that, let me add one other thing. We are just talking about new products. I also want to add because I tend to talk about the lighting aspect of it quite a bit. But in the print materials and in our canopy designs and things like that, we use a variety of different inks and printing materials, some of them are metallic, some of them different composite materials, things like that. And thatâs an ongoing partnership with our suppliers. Itâs our understanding of those materials that help us articulate to our customers. What are you looking for, are you anticipating that you are going to update this in 3 years to 5 years because this ink and this combination will give you good color capture, and we will hold that color and everything for 3 years to 5 years, but we wouldnât want to push it past 6 years. So, those discussions go on all the time. And they affect the decisions that customers make both short-term and long-term because if we are putting in something that we know has a kind of a useful life of 6 years, then that decision has to be made with the understanding that they intend to update it in less than 6 years. If they say, hey, listen, we may want to stay with this image, this look for a longer period of time, then it changes the selection we make on the materials and the conversations we have with our customers and how we apply them. So, those also are in that new product. And the last thing I will say is specifically the JSI. We are in the refrigerated space. We are constantly looking at the refrigerants we use and the impact. They have both operating impact and cost as well as environmental impact and ozone depleting refrigerants versus natural refrigerants and things like that. So, those are all things that are going on simultaneously. Now to flip to your question about how we look at â we call it boundary was selling in here, which is that any time one of our sales folk is in talking to a customer, that we are making sure that regardless of what the entry point is, once we are in and established with that customer that we are talking about the full product portfolio, and thatâs whether you are at JSI or LSI or lighting or graphics or whether you are with our services group, that conversation happens all the time. Itâs hard to articulate exactly that so and so brought us into this opportunity or lighting brought us into that. But I will just underline that itâs constantly â itâs a constant occurrence and itâs a discipline and a process that we are underlining with our folks all the time. You can be assured, it will be one of the things we are covering at our upcoming sales meeting next month. And I donât have any specific numbers to quote. But I will just say that they continue to be promising. These projects tend to take some time to mature because you are talking about maybe taking an incumbent sometimes and making a change. So, there is oftentimes where we are giving a small pilot program, a small test program. And we are also introducing kind of newer technology, if you will, the whole idea of having this continuity in terms of the way we look at graphics and the materials we are using and everything. We have new buyers come into the situation, and we need to earn that trust. And so I am not unhappy with the pace that we have been moving, and I think you will continue to see wins out of that as we move forward. Thank you. Good morning guys. Solid quarter, congratulations. Just to begin with, Jim, maybe if you could provide some granularity on where the operating leverage improvements are coming from? Is it just better pricing or larger auditors or maybe some efforts on the cost side? That would be helpful. Thank you. Yes. Amit thanks for joining and thanks for the comments. Itâs all of those things. And I know it always â everybody always wants to kind of identify one that we are over leveraging or that we are really taking advantage of. But itâs really execution against all of those things. I call it the paper clip effect, which is just small incremental changes across the whole â our whole scope is the things that contribute to these improvements. And I underline often that I think that we have a lot of runway left because I do think that we have a lot of continued improvement that we can offer. We are by no means operating at 100% efficiency. And so every time I look at that as a team â individually and as a team, we recognize that those opportunities still kind of â are in front of us. So, price is an important element. Itâs something that we have been very disciplined about. And along with that price comes reliability to our customers, on-time delivery and that type of thing. And when we have on-time delivery, that means that we need to be operating efficiently and we have less margin for error and waste. And so we work on those things, which creates opportunity. And so itâs really kind of an aggregated look at the business. And itâs us executing against all of the elements you just talked about to gain that. And I canât underline enough, and I think we have been demonstrating it is that we still think we have quite a ways to go. So, those opportunities are still in front of us. Understood. Thank you, Jim. And then from a revenue growth perspective, are you taking market share in both the Lighting and Display segments from other players, or maybe in other words, is this an expansion story that LSI is benefiting from, or are you winning more market share given how you have executed over the last 2 years? I think itâs definitely a market share, right. If you think we have had above-market growth now for seven consecutive quarters, there arenât too many companies, particularly with the broad-based type of solutions we have that are experiencing double-digit quarterly growth. So â and we know that the market is not growing at that rate, although we anticipate that there are opportunities for the market to grow at that rate, particularly when you look at the verticals we are in. So, we think itâs the alignment with the right verticals. Like I said, they may not all be growing at double-digit rates, but they are healthy and they are more resistant to the general pressures, these general economic pressures. Number two is that we are sitting there, we are providing and filling orders, and we are â I talk about it often, our say/do ratio that we have a high say/do ratio, right. We sit in front of our customers, make a commitment and then work exceedingly hard to make sure we deliver to that commitment. And thatâs garnering us a lot of favor, which is turning out to be us taking market share from our competitors. So, thatâs what I think is happening. We are taking market share and thatâs accounting for a lot of our above-market growth, but itâs also underpinned by the fact that we are just in generally healthy markets for the most part. Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments. Well, I just want to say thank you again for everybody thatâs dialed in, called in and follows us and listens. I think that we have a great story in front of us here. As we underlined here through the Q&A today, we believe we still have a lot of opportunity in front of us, and we believe we can continue to grow like this. It is an extraordinary effort by a team of folks here. So, I just want to underline and say thank you to the whole team and to our partners, agents and customers. We will continue to deliver. We will continue to look for those growth opportunities. And I look forward to our next call. Take care.
EarningCall_982	Greetings and welcome to the FinWise Bancorp Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. Good afternoon, and thank you for joining us today for FinWise Bancorp's fourth quarter 2022 conference call. In addition to this call, we issued an earnings press release earlier this afternoon and posted it to the Investor Relations section of our website at investors.finwisebancorp.com. Today's conference call is being recorded and webcast on the company's website investors.finwisebancorp.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ from those discussed today. Forward-looking statements represent management's current estimates and FinWise Bancorp assumes no obligation to update any forward-looking statements in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements contained in the company's earnings press release and filings with the Securities and Exchange Commission. Hosting the call today are Mr. Kent Landvatter, CEO and President of FinWise Bancorp; Mr. Javvis Jacobson, Chief Financial Officer; and Mr. Jim Noone, Chief Strategy and Chief Credit Officer. Good afternoon, everyone, and thank you for joining us on our fourth quarter 2022 earnings conference call. On today's call, we will provide an update on our financial results and share some perspective on the current operating environment and the continued evolution of our business model. During 2022, we executed well in substantially all facets of our business even in its rapidly deteriorating economic environment. Our differentiated and diverse business model coupled with strong execution by our team members allowed us to navigate these macro headwinds and continued to deliver solid loan originations, profitable growth and industry leading returns. Specifically for the full-year 2022, we generated revenue of $89.7 million, net income of $25.1 million and diluted earnings per share of $1.87. We also ended the year with solid Q4 results particularly given the more challenging macro environment. Total revenue was $23.0 million during Q4, led by loan originations of $1.2 billion. Net income for Q4 was $6.5 million, compared $3.7 million in the prior quarter and diluted earnings per share were $0.49 for Q4, compared to $0.27 for the previous quarter. We also maintained robust profitability measures, including a return on average equity of 19.1% during the quarter. We were also good stewards of capital as we continue to buyback our stock below tangible book value, which is accretive to earnings per share and tangible book value per share. Overall during â22, we bought back a total of 120,000 shares for approximately $1.1 million. We plan to continue to be opportunistic with our capital deployment strategy, including our share buyback strategy. Positively in Q4, the company's tangible book value per common share continued to grow to $10.95 per share or 21.1% increase over the prior year period. Although the macro environment is widely expected to remain challenging in 2023, we plan to continue to proactively build on our success and reinvest in the company in order to help to build diversity of income and funding streams, so that we can remain well positioned for continued sustainable and profitable long-term growth, particularly once the environment improves. This includes identifying different ways to utilize our balance sheet, including prudently adding credit risk in a way that gives us more stability in earnings. To that end, I'd like to provide you with some thoughts to help you understand how we are thinking about key objectives, including how we plan to continue to navigate a potentially challenging macro environment in 2023. As we highlighted on prior calls, the environment for loan originations decelerated rapidly throughout 2022 across the industry and FinWise was not immune. This same pattern continued in Q4 2022 and without a significant improvement in the macro environment, we would expect this trend to continue into 2023. Going forward, we plan to remain focused on our strategic programs business where I am pleased to say that our relationships with existing platforms remain strong. This also includes engaging with and working towards launching additional strategic programs, particularly as we continue to see strong interest from potential new platforms. However, it is important to highlight that in addition to the previously mentioned pressure on originations from a tougher macro environment, the revenue benefit of FinWise from potential new strategic programs in any given year is typically delayed give: one, the 90 to 120 days it has generally taken to launch a strategic program; and two, the normal operating period before we start seeing originations come through for the new program. As we also mentioned on last quarter's earnings call, we expect to continue to originate and hold the guaranteed portion of the certain SBA 7(a) loans, which although a headwind to the company's SBA gain on sale, we expect will result in stronger held for investment loan growth and an incremental tailwind to our net interest income over the long-term. We are also looking to further develop our leasing business, which would be an expansion of the line of business we have had in place since 2011. We see this as a great opportunity to expand our traditional product set and further diversify our revenue model. During Q4, we experienced a pickup in expenses driven partly by higher employee headcount and increased business infrastructure spend, which along with a deceleration in originations and revenue caused our efficiency ratio to increase. As we have mentioned on prior calls, our efficiency ratio is likely to increase as we expect to continue to build out infrastructure, including back office. And also expand our FinTech offerings. Our team will continue to assess the natural evolution of our business model, including three components of banking-as-a-service, lending, deposits and payments. We have also made some key hires to support the growing bank. For example, Meg Taylor joined us recently as Senior Vice President and Chief Accounting Officer. We plan to remain opportunistic in terms of hiring best-in-class talent, especially as we evolve towards more banking-as-a-service product. Importantly, we intend to focus on making investments in the company that are carefully designed to deepen relationships with our current customers, while helping us to be well prepared to quickly capitalize on growth opportunities, particularly when the macro environment becomes more supportive. Having said that, we will also focus on managing expenses prudently and making decisions accordingly. Keeping in mind tougher economic conditions. We also plan to maintain our disciplined approach to underwriting and overall strong risk management in order to sustain sound credit quality through varying credit cycles. So far, we remain pleased with the overall credit performance of our portfolios as we have not seen any outsized deterioration aside from the expected gradual industry-wide normalization of credit to pre-pandemic levels. All of you on this call, who has been following our story may recall that we proactively slowed strategic program loan retention in our sub-36% held for investment portfolio early in 2022. Importantly, while reducing these balances has the effect of increasing our ratio of net charge-offs as a percentage of total loans given the denominator effect of lower balances it does not necessarily imply that we are seeing significantly faster-than-expected credit normalization. As I have mentioned before, we do not intend to sacrifice credit quality for the sake of growth. That said, any further deterioration to the U.S. economy from current levels could drive faster-than-expected industry-wide credit quality normalization. Overall, while we acknowledge the risk of further economic deterioration, we believe that we are well positioned to navigate such a scenario. Moreover, we remain focused on maximizing long-term shareholder value. But in order to do that, we plan to proactively build for the long-term, while continuing to work with our strategic programs and serve our clients. By doing this, we believe we will position the company to capitalize on growth opportunities that emerge once the market environment stabilizes. With that, let me turn the call over to Javvis Jacobson our CFO, who will provide you with more detail on our financial results. Thank you, and good afternoon. As Kent mentioned for the full-year 2022, we grew our balance sheet and delivered meaningful net income of $25.1 million or $1.87 per diluted common share. We also posted solid profitability as we generated return on average assets of 6.4% and return on average equity of 19.6% for the year ended December 31, 2022. Let's turn to Q4 results. Loan originations totaled $1.2 billion during Q4, compared to $1.5 billion in Q3 â22 and $2.3 billion in Q4 â21. Average loan balances comprising held for sale and held for investment loans were $261.4 million during Q4, as compared to $263.6 million in Q3 â22 and $286.8 million in Q4 â21. Total average interest earning assets were $354.4 million during Q4, compared to $335.4 million for Q3 â22 and $367.6 million for Q4 â21. As Kent noted earlier, industry-wide deceleration in originations continued in Q4 and FinWise generally follows a similar pattern. And without a significant improvement in the macro environment, we expect this trend to continue as we move into 2023. Average interest-bearing deposits were $126.1 million during Q4, compared to $104.8 million during Q3 â22 and $148 million during Q4 â21. The increase from Q3 â22 was driven mainly by an increase in interest-bearing demand deposits, partially offset by a decline in money market deposits and certificates of deposit. The decrease from the prior year period was driven primarily by a decline in certificates of deposit and money market deposits, partially offset by an increase in interest-bearing demand deposits. As we have noted previously, non-interest-bearing deposit levels generally have a high correlation with origination volume. Let's look at the income statement. Net income was $6.5 million in Q4, compared to $3.7 million in Q3 â22 and $10.1 million in Q4 â21. The sequential quarter increase was primarily driven by higher gain on sale of loans, lower provision for income taxes, and a lower provision for loan losses, partially offset by higher non-interest expense. Net interest income per Q4 was $12.6 million, compared to $12.5 million for the previous quarter and $15.3 million during Q4 â21. The change relative to the prior year period was driven primarily by lower average loans held for sale balances. Net interest margin for Q4 was 14.27%, compared to 14.93% in Q3 â22 and 16.62% in Q4 â21. The sequential quarter decline was primarily driven by lower average balances in the loans held sale portfolio and a shift of the deposit portfolio mix from lower cost deposits to higher cost deposits. The net interest margin decreases from Q4 â21 was driven mainly by lower average loans held for sale balances and an increase in higher rate deposit balances. As we've noted on prior calls, we expect our net interest margin to fluctuate from quarter-to-quarter, due to shifts in our asset mix. Non-interest income was $9.8 million in Q4, compared to $7.5 million during the previous quarter and $9.1 million in Q4 â21. The sequential quarter change was driven primarily by a one-time gain on sale of loans recorded to establish a new loan trailing fee asset of approximately $2.3 million and an increase in the fair value of our business funding group, LLC, BFG investment, partially offset by lower strategic program fees due to a decrease in loan origination volumes. Certainly, this one-time adjustment impacted some of our after-tax metrics during the quarter. This increase compared to Q4 â21 was primarily due to an increase in gain on sale of loans, partially offset by a decline in strategic program fees resulting primarily from lower originations. We expect a fair value of our investment in BFG will continue to experience quarterly fluctuations, partially driven by general market improvements. Loan trailing fees refer to revenue generated from sold strategic program loans that are still performing. Non-interest expenses rose to $10.2 million, compared to $8.5 million in Q3 â22 and $8.4 million during Q4 â21. The pickup compared to the previous quarter was primarily due to an impairment on the company's SBA servicing asset in Q4 and higher employee headcount related to developing and upgrading new and existing technology and business infrastructure. Relative to Q4 â21, the increase was mostly due to increased professional services relating to -- primarily to an increase in consulting fees and increased depreciation from the build out of our corporate office, which was partially offset by a decrease in salaries and employee benefits. The company's efficiency ratio was 45.6% during Q4 versus 42.3% in the prior quarter and 34.3% during Q4 â21. As we've noted in past calls, we expect the company's efficiency ratio to continue to increase gradually as we continue to build out our infrastructure to position the company for sustainable long-term growth. We will strive to be prudent with expenses in light of tougher macro environment. Credit quality remained solid with non-performing loans to total loans of 0.1% at the end of Q4, compared to 0.25 for Q4 â21. The company did not have any non-performing loans as of September 30, 2022. The company's provision for loan losses was $3.2 million for Q4, compared to $4.5 million for Q3 â22 and $2.5 million for Q4 â21. The sequential quarter decline in a provision was primarily driven by a decrease in strategic program loans held for investment. The increase compared to the previous year is primarily driven by higher net charge-offs and growth of unguaranteed loans held for investment. Net charge-offs for Q4 were $30.2 million, compared to $3.1 million in the prior quarter and $2.3 million for Q4 â21. The company's net charge-off rate as a percentage of average loans for Q4 was 4.9%, compared to 4.7% for Q3 â22 and 3.2% for Q4 â21. The change in net charge-offs for Q4, compared the prior quarter was primarily driven by higher net charge-offs related to strategic programs. The change in net charge-offs for Q4, compared to Q4 â21 was primarily driven by some normalization of credit losses to pre-pandemic market conditions and growth in unguaranteed loans held for investment balances. Importantly, while net charge-offs this quarter represent the higher end of our historical range over the past several years, they remain in line with our expectations. As Kent mentioned earlier, the primary reason for the pickup in our ratio of net charge-offs to average loans is due to our proactive effort to lower balances of sub-36% held for investment loans since early 2022 as we deemed the risk reward on these loans to be less favorable, compared to the rest of our portfolio rather than faster-than-expected credit quality normalization. Given our team's experience and the data advantages of our business model, we have been exposed to credit across a wide range of different quality tranches and segments, which has enhanced our ability to price risk appropriately and create value through the underwriting process. Overall, we remain prudent in our underwriting process and we expect to maintain our already tight underwriting standards that impact our reserve levels. As of the end of Q4, the bank's capital levels remained strong and significantly above the 9% well capitalized guidelines. With a 25.1% leverage ratio. The company's effective tax rate was 27.3% for Q4, compared to 48.7% for Q3 â22 and 25.3% for Q4 â21. Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Andrew Liesch with Piper Sandler. Please proceed. Good. Thanks guys. Just want to look at kind of the balance sheet construction here. Recognizing that strategic program production is still probably, the volume is going to trend lower. I guess, are you expecting the held for sale portfolio to continue to decline? And I guess where you think that -- where is a good level for that to plateau? And then similarly on the held for investment portfolio, that continues to put up really good growth. Should that portfolio continue to rise at a double-digit non-annualized pace? Andrew, this is Javvis. I'll take a stab at that question. On the loans held for sale, it's a very highly correlated with our loan originations. We can talk about that later. I'm sure you'll have questions related to that. But we have seen a decline in loan originations quarter-over-quarter, so that's probably your goalpost to use there. And then on held -- loans held for investment, we continue to have very strong originations in areas like SBA lending and our local lending product. So we've seen good growth and as long as conditions don't change, Andrew, it seems like we should expect that to continue. Got you. So if I just look at production here, total originations down 19% sequentially, then the end of period held for sale portfolio is down nearly by half is? I mean, I would have mentioned at some point it's going be at a floor level at some point, right? Or, kind of, continue trending down towards zero, just given where this -- where originations are going? Or do you just intend sell it all. You just don't want to retain any of it as origination decline? Yes, Andrew. I think it's more insightful to look at the average loans than the ending balance as we've talked about before on those held for sale balances that could just have been depend on the day of the week where the quarter ended. But if you look at the loans held for sale average balances quarter-over-quarter, we went from $50.5 million to 43.7 million, not quite has decreased, not a drastic decrease. And then I don't know, you wanted to talk about, Jim? Yes, sure. On originations, Andrew, they continue to be challenged just because of the impact of capital markets on our larger partners. So also many of our partners proactively pulled back on originations. I think we talked about some last quarter, due to the uncertainty around inflation and the rate environment. But I think as Javvis was referencing, there was a quarterly decrease we saw in Q4 that slowed versus the prior quarter. But it's tough to say whether the deceleration in the trend line will continue or whether there will be renewed pressure on originations. But we're keeping an eye on it and proactively work with our partners to support them. Got you. And then just a question on expenses here recognizing the hiring and building for the future. But if I break out -- if I take out the fair value [indiscernible] SBA -- servicing asset mark, about $9.4 million, is that a good number to build off of going into â23? Yes. As we've mentioned in the past, we plan to continue to invest in the company. So we're ready for this spring back when more quickly when the macro becomes more supportive. So yes, I think the way you're thinking about it makes sense. Hey, maybe if I could start with Kent, I think you gave a lot of good color in some of the opening remarks just around, kind of, how you're thinking about the business model into future years. I was hoping just to maybe get a little more color there. I don't know the best way to phrase the question from a timing standpoint, but if we look over the next kind of one, three, five years, I know we talked about you mentioned the three components of that including payments, you mentioned the leasing business, they are obviously incremental kind of partners that you would like to bring onboard? I'm sure, can you just talk about over the next kind of few years how we should be thinking about the growth and the development of your franchise? Yes, sure. First off, let me say that even though the economy has been challenging, of course, this last year. We feel confident that the business model will continue to play out as we've expected. So we're very confident that continuation of execution the way we have in the past will be in the future for us. So when I say investing in the company, this is in line with the evolution of our business model that we've been describing since we went public. We haven't and this is an important point. We haven't pivoted at all because of the macro environment that we're in. It's just the next phase in our evolution. And so when I think about that, when we think about that, we're talking about building an infrastructure that not only further pulls us into the banking-as-a-service ecosystem, but also positions ourselves to springboard when the market returns. And so the one thing I would just add to this is that I've -- in my experience, I've been through many cycles. And I've seen that the banks that are well positioned prior to a down cycle and build within the cycle usually come out very strong when the economy turns and that's what we're looking for. And so specific to your question of what comes out and when, we don't have that type of guidance, but I can tell you that we are looking very closely this year at deposits and payments and expanding the lending aspect of our banking-as-a- service and we'll keep you posted as we make progress there, but it is a major focus once again in natural evolution of the bank. Understood. That's very helpful. I appreciate it. As we think about kind of specifically in the payments arena. Would you be interested in acquisitions or in order to kind of develop the payments type offering? Or are we talking more just kind of incremental partnerships with the bank? So we would actually think of not only incremental partnerships at the bank that allow us to -- and also with existing partners to provide stickier relationships from our services within that. We also definitely would explore something beyond that as well. But right now it's focused on what I've just said. Understood, okay. Can you maybe just speak briefly about appetite for capital return, I saw you were active on the buyback in the fourth quarter. I'm presuming just given where capital levels are at today and the valuation that, that would remain the case moving forward, but I would love to hear just updated capital kind of return thoughts? Yes. So Let me start at and Javvis if you want to add anything, please feel so. But we feel that when you're buying yourself, investing in ourselves basically as especially at the low tangible book value. That was a real good move for the bank and for the shareholders. I think that we will consider that strongly going forward. This is a decision made by the Board, but we've been very active and we -- the one thing as I've mentioned before is we just want to make certain that we have enough capital should some opportunity arise and that we don't find ourselves short on something like that. Okay. Got it. And then last one for me, just on the SBA gain on sale. I think once I make the $2.3 million adjustment this quarter, I get the run rate of call it $1.9 million or so for the fourth quarter. I guess just with incremental SBA loan retention, I presume going forward. Is that a fair way to think about the quarterly cadence of SBA gain on sale income throughout 2023 that kind of $1.9 million level? So Andrew, we're not giving the forward guidance, but I think that you can look at our trend and see that it is declining quarter-over-quarter and has been declining quarter-over-quarter. And as the interest rates continue to increase, we saw another bump in the interest rate for that portfolio on the first of January 2023, it just makes it that much more compelling to retain those loans without selling them. [Operator Instructions] There are no further questions at this time. And this will conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.
EarningCall_983	Good day, ladies and gentlemen, and welcome to the POSaBIT Systems Corporation Conference Call. All participants have been placed on a listen-only mode and the floor will be open for questions and comments after the presentation. Thank you, operator. With me on this call are Ryan Hamlin, Chief Executive Officer. Iâll begin the call by reading the Safe Harbor statement. This statement is made pursuant to the Safe Harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. All statements made on this call with the exception of historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the company believes that expectations and assumptions reflected in these forward-looking statements are reasonable, it makes no assurances that such expectations will prove to have been correct. Actual results may differ materially from those expressed or implied in the forward-looking statements due to various risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those expressed or implied in the forward-looking statements, please see risk factors detailed in the companyâs annual report and subsequently filed reports, as well as in other reports that the company files from time-to-time with SEDAR. Any forward-looking statements included in this call are made only as of the date of this call. We do not undertake any obligation to update or supplement any forward-looking statements to reflect subsequent knowledge, events, or circumstances. The company may also be citing adjusted EBITDA in todayâs discussion. Adjusted EBITDA is a non-IFRS measure used by management that does not have any prescribed meaning by IFRS and that may not be comparable to similar measures presented by other companies. The company defines adjusted EBITDA as net income or loss generated for the period as reported before interest, taxes, depreciation and amortization, itâs further adjusted to remove changes in fair value and expected credit losses, foreign exchange gains and/or losses and impairments. The company believes this is a useful metric to evaluate its core operating performance. Thank you, James, and welcome, everyone. I want to start by saying that itâs great to have you all in the call today. I realize that having a Friday PR announcement is not ideal, so I apologize for last week, but unfortunately a little bit out of our control. But the good news is, that hopefully allowed you some time to read through the PR and investor deck on our website prior to the call this afternoon, so letâs begin. As you all are aware, we announced the signing of a definitive agreement to acquire MJ Freeway, Leaf Data Systems and Ample Organics on Friday. On the call today, Iâll walk you through specifically what these platforms are, our strategic rationale for buying them, and how we believe this transaction positions us to scale and accelerate our growth. For those of you on the webcast, you should have access to the investor deck in front of you, which weâll be referencing today. For others on the phone, you can download this -- download the slides now or later at our homepage at posabit.com. Lastly, before I get too deep into the details of the acquisition, I want to start off by saying we are not providing 2023 guidance on this call today. Weâre in the process of closing our books for 2022, but weâre not ready to speak about our annual results or give any formal guidance for 2023. We do, however, look forward to sharing that information with you soon in the next 30 to 45 days. Now I want to do a quick recap and introduce POSaBIT to anyone who may be new to our story. So if we can all switch to Slide 4. POSaBIT is a leading payments infrastructure provider for the cannabis industry. The company was founded in 2015, and now we provide two main solutions: a best-in-class Point-of-Sale and the only fully compliant PIN debit payment solution, meaning all compliance and regulatory requirements. Today, our solutions are installed in more than 500 merchant locations across 22 states. As of Q3 2022, which is our last publicly stated numbers, we had an annualized run rate of approximately $600 million in payment volume, which translates into approximately $43 million in annualized revenue. This is up more than $25 million in annualized revenue from just a year-ago. Despite this rapid growth, we have been able to run the business at near adjusted EBITDA breakeven and announced in Q3 of 2022 that we would be adjusted EBITDA positive in 2023. Today, POSaBIT is traded both on the CSE in Canada and the OTC here in the U.S. Advance to the next slide. Now letâs talk about our exciting news from Friday. We announced the signing of a definitive agreement to acquire MJ Freeway, Leaf Data Systems and Ample Organics for $4 million in an all-cash transaction. Collectively, these businesses are expected to have generated more than $11 million in annual revenue and $6.8 million in annual gross profit in 2022. At a purchase price of only 0.4x the 2022 expected revenue, we are acquiring hundreds of merchant accounts and a solid software platform for both retail dispensaries and cultivation operators at a very attractive valuation. Specifically, MJ Freeway has a full suite of products that include cultivation, manufacturing, distribution, a retail Point-of-Sale, delivery and analytics capabilities. The Leaf Data Systems platform provides a seed-to-sale track-and-trace software system for states needing to regulate cannabis. Lastly, Ample Organics is Canadaâs leading seed-to-sale tracking and e-commerce platform. MJ Freeway today serves over 350 merchant locations with their retail Point-of-Sale capabilities across 16 states in the U.S. as well as Puerto Rico and Washington, D.C. Importantly, there is minimal overlap with POSaBITâs current POS and payments customers. MJ Freeway processed nearly $2 billion in gross merchandise value, or GMV, in 2022. Iâll get to our rationale for the acquisition in the next couple of slides. But this $2 billion in GMV is a key data point as it represents incremental payments opportunity for POSaBIT and is a key reason we are thrilled to be acquiring this platform. With the addition of MJ Platform and Ample Organics, weâre also adding a very complete and robust cultivation, manufacturing and distribution set of capabilities to our existing product suite. This now positions POSaBIT to fully support all vertically integrated operators and multistate operators that require a full end-to-end solution, from cultivation all the way to the retail store. This is truly a game changer for us as we now can support all marijuana-related businesses, whether youâre an independent grower or a large MSO that is vertically integrated. The Leaf Data Systems solution has contracts currently with Pennsylvania and Utah as the chosen platform to provide the state with a full seed-to-sale track-and-trace system. Weâre excited this will be a new revenue stream for POSaBIT, and it also puts us in a great position to offer our Point-of-Sale and payment solution to all customers in those two states, both of which POSaBIT is not currently doing business in today. All these great solutions say are in the market and supported by more than 50 industry experts and professionals working for MJ Freeway, Leaf Data Systems and Ample Organics, which we are more than excited to work with over the coming months. Go ahead and move to Slide 6, talk a little bit why and what we are acquiring. In the previous slide, I did touch on this. I want to point out a few other items that I think were really important decision criteria for us in acquiring MJ Platform, Leaf Data Systems and Ample Organics. First as part of the MJ Freeway retail Point-of-Sale, weâre acquiring over 200 different Point-of-Sale customers, which make up over 350 actual merchant locations. MJ Freeway and Leaf Data Systems together are expected to generate $8 million in revenue, approximately $4 million in gross profit for the 12 months ending December 31, 2022. Of course, itâs great obviously to acquire this revenue, but equally important is the fact that this acquisition puts POSaBIT combined with MJ Freeway in a position to serve nearly 900 locations. By acquiring these platforms, we are instantly expanding our payments opportunity and adding significant scale to our business. Ample Organics, which is based in Canada, is the leading provider for seed-to-sale compliance tracking and ordering. Today, Ample works with over 80 retailers in Canada to offer their suite of products, focused on providing compliant sales and tracking software for cannabis-related businesses. The primary focus for Ample is on the legal sales of cannabis through pharmacies, including Shoppers Drug Mart, which is the largest pharmacy chain in Canada. Ample has performed very well and is expected to generate $3.2 million in revenue and approximately $2.8 million of gross profit for the year ending December 31, 2022. As a reminder, all the numbers Iâm stating here today are in U.S. dollars. The last thing on this slide before we move on is I want to remind everyone that we publicly stated we would be adjusted EBITDA profitable in 2023, and that remains the case still with adding these new products and solutions. Go on to the next slide. Iâll be very quick on this one. The summary is that these transactions clearly support our long-term strategy for businesses to help us fill in some of the gaps in our current product offerings. First, this acquisition adds major components to our existing product suite and adds full capabilities for cultivation, manufacturing and distribution. It also allows us to upsell to our existing POSaBIT merchants using our POS now to have a fully vertically integrated solution, which we view as a significant opportunity. Merchants are constantly seeking ways to streamline their operations while ensuring compliance with all state and local regulations. We believe that many merchants, particularly vertically integrated dispensaries and multistate operators, will prefer an all-in-one solution that requires a robust enterprise-grade suite of offerings. If we move to the next slide and talk specifically why this acquisition is so important from a payment standpoint. In addition to building out our suite of products, this acquisition presents a very material opportunity to accelerate adoption of our fully compliant PIN debit payment solution with the existing 350-plus MJ Freeway Point-of-Sale locations. As most of you have heard me say over the last several years, payments within the cannabis industry is complex given the high level of compliance and regulation needed. As a result, payment solutions often come and go. In fact, most recently, there was an industry-wide shutdown of non-compliant cashless ATM solutions. In contrast, POSaBITâs PIN debit solution is the most complete, most trusted and longest-running fully compliant solution in the industry. Similar to Toast and Square, we integrated our POS with our payments. This allows us to address key merchant pain points, while improving the in-store customer experience. As one of our first integration work streams with our new teams, we plan to integrate our PIN debit payment solution with MJâs Point-of-Sale. This creates a large pool of merchants available for us to offer PIN debit solution, which will represent incremental revenue and gross profit. Move on to Slide 9. On this -- at this slide, I just want to show a high-level illustration of what the potential synergies between POSaBIT and MJ Platform could be. As mentioned, the MJ Platform currently serves over 350 merchants, representing $2 billion in GMV or if you do the math, thatâs about $5.5 million of volume per location annually. Historically, our share of PIN debit payments is approximately one-third of the total GMV per store, meaning store still has 70% cash, but 30% goes through our PIN debit solution. However, for the analysis on this slide, we elected to be more conservative and assumed only one quarter of the GMV per store will use our PIN debit solution. So by using this formula, we estimate that each store we convert to be a POSaBIT payments customer to contribute approximately $26,000 of annualized gross profit. For example, at 50 merchant locations, which is a little bit less than 15% penetration of the current MJ Freeway base, we believe we can add about $1.3 million in incremental gross profit on an annual basis and so on, as you can see in the chart. So obviously, this is a great opportunity for us at POSaBIT. Go ahead and move to Slide 10. I do get asked about competitions quite a bit, so I want to kind of touch it briefly here on this slide. If you look at the current POSaBIT offering of our Point-of-Sale and our PIN debit payments, and then you combine that now with MJ Freewayâs cultivation growth software and the Leaf Data Systems state traceability system, it clearly moves us ahead of all others in this industry. Weâre very excited to now offer this industry-leading solution to the entire cannabis market. And by the way, this slide doesnât even include the competitive advantages weâll have by adding Ample Organics in Canada. On to our 11th slide, if youâre tracking. As I mentioned at the start of the call, weâre acquiring all of these assets for $4 million in an all-cash transaction, which represents, again, only 0.4x the expected 2022 revenue. This deal, which is subject to customary closing conditions and seller shareholder approval, is expected to close in the second quarter of 2023. However, in the interim, we plan to immediately work with any existing MJ merchants who are interested in PIN debit payments for their dispensary. Additionally, weâll also work on integration of the MJ Platform cultivation modules into the POSaBIT platform. Now on to one very important point I want to address on this slide, our new financing round of $11 million. In conjunction with this acquisition, we are raising $11 million in additional financing, a portion of which will be used to fund this acquisition. The additional proceeds beyond this $4 million are available, if needed, to support our current sales efforts as well as any other potential opportunities in the industry. This $11 million includes up to $8 million of debt financing, which is expected to close at the time when we close this acquisition or earlier at our discretion. The first $3 million of equity financing, which closed with the announcement on Friday, is available for immediate use now. You can read through the specific terms of each of these components of this capital raise. Theyâre posted out on SEDAR or out on our website. Lastly, given the current fundraising climate or lack thereof, if youâre paying attention around lately, you can see that the terms of this raise are very attractive to the company and demonstrates our lenders optimism for our overall vision and our business. All right. Turning now to the last slide before we open up for Q&A. As you can see on this slide, our combined GMV more than doubles to $3.5 billion, as does our current merchant locations at roughly 900 in total. This acquisition also helps us expand our geographic footprint to include new states as well as Canada and also adds a new revenue stream from the Leaf Data Systems state-compliant contracts. On an annualized pro forma basis from 2022 forecast, our combined revenue will exceed $50 million, and our gross profit will be approximately $20 million. You can see that these numbers just represent what both companies have done in 2022. This does not include the potential upside we expect in 2023 by bringing our companies together. I want to end by saying how excited we are to work with the MJ Freeway, Leaf Data Systems and Ample Organics teams. As I hope you can see from this presentation today, our newly combined companies will move us even further ahead as the industryâs leading Point-of-Sale and payments provider. We will now open up the call for questions. However, I will mention again as I did upfront, weâre going to limit our responses to questions that pertain specifically to this acquisition and our financing. Weâre in the process of closing our books, and weâre not ready to speak about our annual results or any formal guidance for 2023. So I will end though by saying we are going to reiterate that once again, we will be adjusted EBITDA positive in 2023. So with that, weâre ready to open the floor for questions. Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions]. The first question comes from Owen Bennett with Jefferies. Please proceed. Yes, good afternoon, Ryan. Congrats on the deal. I had a couple of questions. But first of all, I just wanted to touch on the big revenue synergy opportunity, which appears to be converting new merchants to your payment system. I just wanted to get your view on what makes you confident you can convert a large number of the 350 merchants into your payment system. How do many of these offer payments already or do they? And then what are the risks around delivering on that potential conversion? Thank you. Yes. Thanks, Owen, for the question. Good question. Well, a couple of things. When we look at -- when we looked at this originally, we looked just historically on our ability to close and our close rates for stores and how it relates to either stores that have a POS with existing payments today or stores that just donât have any payments. During the due diligence process, we surveyed the current base of MJ merchants as well and got a good feel for how many of them had payments versus didnât. So weâre very confident in our ability that weâre going to be able to close at a very good rate, consistent or even ahead of what weâve traditionally done in the past. I think you talked about risk. I mean, certainly, as we move forward, this deal has to be approved. So we know that in the next three months, weâre going to be working on getting the same closed in the second quarter. I think the other part of this always and the part that we differentiate ourselves with is that we have the only fully integrated payment solution with our POS. And when I say that, sometimes others will talk about our competition having that as well. The big difference is we started our company in 2015 as a payments company. Weâve been in this business now for over eight years. Our payments is a stand-alone payments engine that has built-in reporting. It has extensive years of experience, something that, frankly, our competition doesnât have. So you combine our history of being in the payment space and our success in the payment space over the last eight years, along with what we did during the due diligence process, it really did give us great comfort in knowing that weâre going to be able to convert a significant number of these over to our payments. Great. Just one over one. You talked about the vertically integrated solution across payments, manufacturing, cultivation and distribution. I just wanted to try and gauge kind of the upside here. I mean, how many MSOs are kind of doing that on a fully integrated basis at the moment, if at all? And do you think thereâs like a real opportunity that this would really like stand out as a big sort of be any internal advantage to them if they did full integration across all those elements? Yes. Good question, Owen. And one of the key reasons this acquisition we looked at and are looking to close is that it filled in some of the product gaps we had. So I think when you and I have talked in the past, cultivation has been an area that we havenât had. We focused all our attention at the dispensary level. So we knew this directionally, this was something that was important for us to have to provide to our customers. Itâs really interesting when you talk about MSOs and how many are vertically integrated. There can be different instances of software, and you may use one suite of software for vertically integrated, the cultivation piece, and then you may use a different POS. The reason we felt itâs very important to have this as an integrated experience is that we saw as we went out to the market that if we were going to maintain our competitive advantage, obviously, on the payment side, but also grow our POS base that this was an important thing to actually link the inventory as it moves from a basic grow cultivation into the retail environment and online environment for sale. So it was identified, and we had been looking at this for a little while. And itâs one of the reasons -- I think Iâve chatted with you in the past about whenever you see product gaps you look at, do you build, do you partner or do you buy. And in this particular case, we felt it was very important for us to actually make an acquisition. Cultivation and grow software is not easy software to just build. It is complex because every single state, as you know, has very different regulations in how you treat cultivation and grow. So this was one for us that we felt like it was very important to acquire. It brought us now to a competitive space that we will compete head-to-head against anybody in the industry to be able to win the MSO deals that, frankly, has been a focus for us. I mean, I think if asked, in the past when weâve chatted about this. MSOs have been a target for us to really focus on, and I think this is a great example of how weâre making a difference to really go after that space. Great, Ryan. And just one more question, if I may, a quick one. Obviously, Akerna listed on Nasdaq, excuse me -- just wondering how this would impact your potential plans for uplisting. Do you think given the Akerna is on Nasdaq, it could make it more likely or easier from your perspective? Yes. I mean, as part of this deal, you probably saw that this was kind of a multi-company deal. And so the company itself Akerna the Shell is not something that we acquired. That was acquired by actually a crypto-based company. And so yes, we are acquiring the three companies. In fact, if you think of Akerna as a holding set of a large several companies over the last couple of years that theyâve had. Weâre just acquiring those three individual companies: MJ Freeway, Leaf Data Systems and Ample. So the Akerna Shell itself is left behind as part of a different deal, a different partner, a crypto partner thatâs actually using that. So of course, we still would love to be on Nasdaq. Thatâs something that we always have been engaged with, and we give updates on each of our earnings call that this is something that we actively pursue. But at this point, unfortunately, thereâs not a clear path to Nasdaq for us today. Hey, good afternoon. Congratulations on this acquisition here. Just wondered if I can dig a little bit on the Leaf Data Systems from a competitive standpoint. How do you look at the Leaf Data Systems compared the seed tracking, seed-to-sale solution versus competitors, BioTrack and Metrc who gaining share in the space. Can you just provide a little bit color on the competitive offering and the emphasis on Leaf Data Systems and the future for us to expand to other states, how are you looking at that? Yes. Thanks, Scott. Certainly. And you hit the competitors, right, obviously, Metrc and BioTrack out there. We have been looking at this space for a little while. And as we -- as itâs publicly known, the Leaf Data Systems is the state system for Pennsylvania and Utah. That in itself is a great opportunity for us. As I mentioned in the call, those are two states that weâre actually not in today. So it gives us a great opportunity to have a very significant presence in both of those states. So there are strategic reasons for the acquisition of Leaf beyond just having a state system. It certainly helps the other parts of our business around payments and Point-of-Sale. But competitively, there are more states that are coming online, obviously. And we will -- we acquired Leaf Data Systems to -- not to just let it be a system that would be for two states. Like we are going to be competitive in that space. We believe, Leaf today, in fact, it just publicly renewed another year for Pennsylvania, which is great. So obviously, the states that do use Leaf today believe in it and believe in that system. And so we felt really strong about the potential here, and we look forward to competing with BioTrack and Metrc in this -- in the state seed-to-sell track-and-trace space. Got it. I appreciate that. And then just following up on Ample Organics, you provided a little bit of color that itâs really primarily into the pharmacy system. Can you provide a little bit more opportunity as you move into Canada deeper here and the legal POS opportunities kind of -- to learn? Or did that experience from that side with credit card came in before the U.S. goes live with that at some point around? Yes. Well, I mean, I think thereâs a couple of key points with Ample. And again, the reason similar to Leaf why we are very interested in that particular company. Today, that -- Iâm proud to say theyâre self-sustaining. I mean theyâre making good revenue, and they have a great positive EBITDA. So number one, from just the business economics of Ample are very strong. And then secondarily, we have been wanting to get into Canada, and this presented itself as a great way for us to learn more about what itâs going to take to move our entire system. So Ample has had tons of success in Canada already. Obviously, if you look at even back when Akerna acquired Ample back in 2019 and you look at some of the public information that is out there, I mean this was a very highly valued company, and it still is. And the fact that Shoppers Drug Mart, which is the largest pharmaceutical chain or pharmacy chain in Canada uses them, I think is a testament of how good their software is. So weâre excited to have the presence. Weâre excited to learn what it takes to bring our entire POSaBIT system to Canada. And we looked at it as kind of, sorry, cliche, but win-win because literally, the revenue, it was self-sustaining and it brought us an instant footprint into a place that weâve been wanting to go to. Got it. And then one last one real quick for me. Obviously, POSaBIT, you run a lean operation. Weâve seen a lot of rightsizing or cost savings here with a lot of the competitors within the cannabis space with a tough environment here. But youâre able to run the staff you have at the current levels and support the next level of growth. But can you provide kind of a little bit of color on the synergies since these acquisitions kind of maintain lean operations? I know youâre rolling out POSaBIT 2.0 kind of integrating a lot. It sounds like similar to what MJ Freeway was looking to enhance reporting inside back end and everything else there. But help us understand how you look at kind of the synergies with the two companies going forward. And Iâll jump back in the queue. Yes. Well, I think you said a couple of key points. One is, clearly, this is an opportunistic time for us. Weâve been in this business for a while. We have a proven track record. Obviously, if you look at our financials and our ability to double our revenue over the last five years and, frankly, we have strong unit economics with a proven payments business. So for us, this was a great opportunity to look out and see, again, where there are some product holes that we could fill by potentially acquiring a company, but also how can we acquire distribution at a much faster pace than just relying, letâs say, on an inside sales team. So thereâs clearly revenue synergies. I mean, if you just look at distribution and what I said with the payments side, so thereâs -- thatâs the beauty of this is that when we look at it as both an opportunity to grow our revenue, but also Iâve done a lot of acquisitions over my career, a lot at Microsoft when I was there. And I understand the importance of when a company comes together, itâs really important to bring them together and not operate them as silos. And I think thatâs an important part as we move forward to make sure that we take the very best of what the three companies that we acquired or acquiring today along with the very best of what POSaBIT has and put those together. Because thatâs really going to be the way that we continue to grow at a fast pace but also maintain what weâve always done, which is being fiscally responsible. I mean, up until this point, weâve only raised a $11 million. So yes, we are raising up to another $11 million, but the reality is thatâs nothing compared to what our competition has done. And so, it was very important for our -- for me on this call to reiterate, and Iâll say it again, which is the acquisition here does not affect our ability to be EBITDA profitable next year. In fact, weâre doubling down and stating it over and over. This is all part of our plan. And itâs really about revenue synergies and anything else. Hi, there. Good afternoon and congrats on this acquisition. Seems to make a lot of sense, so congrats to the team. First question here, just want to go to the financing that was announced. Obviously gross proceeds of $11 million there, quite a bit more than the acquisition amount of $4 million. Could you maybe elaborate if youâre planning to make any significant investments upon closing the acquisition to integrate, the acquired assets, to utilize some of that cash or some of that excess amount more earmarked as just an additional liquidity buffer? Yes. No, thanks for bringing that up. And if you look at it, like I said, we closed on the $3 million, the equity portion thatâs already in our account. This deal being a $4 million in cash, if you just look at our cash in the bank and now up to $3 million, we certainly have the capital to close on this one. The reason that it was important for us to have the debt up to another $8 million, and it really is up to another $8 million and it really is we can choose to close that at closing or even sooner if we need to. Kind of two important points. One is our institutional partner, Fergus, is an excellent believer and has supported us for a long time. And weâve been able to secure -- if you look at the rates of that capital, I would bet a lot of people would be hard-pressed to beat those rates right now given the current market. So the fact that we have access to capital, up to $8 million of capital, at very favorable terms allows us to continue to, like I said earlier, be opportunistic about this market and whatâs out there. And at the end of the day, for us, itâs distribution, distribution, distribution. I mean we have this great ability to monetize our base, and itâs just a matter of how fast can we accelerate the growth of the overall number of merchants that we can serve. So it is not meant to fund a bunch of increased costs. We said already, weâre going to be EBITDA-positive. So this is truly met as a way for us to continue to look at how can we continue to rapidly grow and stay EBITDA-profitable. Great. Thanks for that. My next question would be on the Canadian markets. Obviously, with this acquisition, youâre getting a toehold in Canada with Ample Organics. Iâm just wondering if youâve given any thought to the retail market in Canada. Obviously, it doesnât face the same banking restrictions thus the U.S. does. But have you thought about bringing your POS systems north of the border now that you might have a toehold in the country? Or is it just going to be too difficult to do that without the banking impediments that weâve seen from the last... No, good question, Andrew. And if you look at the numbers, I think the latest number is Canada did about $5 billion in sales in 2022. And in the U.S., I think we were at $30 billion. So they are still a reasonably sized market. We want -- and thatâs another reason why we are excited to bring Ample on. It does create an opportunity for us to bring our POS to Canada. The other thing, and as you -- Iâm not sure how familiar everyone is with Ample, but I mean itâs -- thereâs a lot there. And in fact, thereâs something actually called Ample Payments, which is kind of a referral program already in place to bring payments into Canada. So when you look at it, you overlay it with our overall vision, it fits really nicely into what weâve said all along, which is kind of provide this end-to-end set of products that can cover everything from literally the seed all the way through to, obviously, the sale in the retail environment. So yes, weâre excited for it. And certainly, yes, Canada now is -- we are now in Canada or weâll be soon when this closes, and we are excited to bring the rest of the suite there. Great. And maybe one more quick one, if I may. I havenât seen it and I could have missed this, but I havenât seen it explicitly stated whether the acquired operations were EBITDA-positive or not. Would that be something youâre willing to share just as of the time of announcement, whether those operations are currently EBITDA-positive? Yes. And I think what weâre sharing now is if you just look at the 2022 numbers, I think all up, it was around $11 million and then $6.8 million of that was gross profit. So clearly, if youâve looked at Akerna and some of the press that theyâve had over the last several months, they have done some cost-reduction efforts. So we look at it today as this is a great opportunity. Itâs significant revenue. Theyâre obviously operating, having nice high gross profit levels, in fact, higher than what POSaBIT operates at today. So thatâs great for us. That means itâs helping us overall increase our gross profit margins. But yes, weâre not commenting specifically on how much of that is there. But weâre confident, obviously, in our ability -- and again, I wouldnât state publicly if we werenât going to be EBITDA-positive in â23. So we feel good about weâre coming together both companies. Hey, Ryan. Congratulations on the acquisition. It makes more than enough sense. And somebody asked my question about kind of the last question. But I have one quick question for you, which is, are any of the new states that you guys are getting, are they medical-only? And what is the potential for those to move to recreational legalization? Yes. Yes, definitely. In fact, I think all of them have the additional -- thereâs Pennsylvania â obviously, I said weâre not Pennsylvania, Utah, both of those obviously are medical states. Moving into Ohio, I think the other one thatâs medical-only. So yes, the additions that weâre moving into are just medical. And I mean part of that is because our current strategy today has been all recreational-focused or at least priority recreational-focused. So yes, the net-net is itâs adding a few positive ones plus adding in Puerto Rico and D.C., which we havenât been in before either. So again, all of those being -- well, I guess, D.C., the one exception to being rec-ish, but Iâll leave it at that, I guess. Also, I just wanted to note that, again, itâs really impressive that you guys are able to do so much not only with so little but for so little. I mean the collection of efforts here and the opportunity, I mean if you know nothing else about the company, and this is the first time you ever heard you think about it and took a look at the deck and listened to the call, I mean it sounds to me just like it far exceeds the $4 million that weâre paying. And whatâs amazing is that you guys continue to do these things without wasting money on a bank and doing a marketed deal and so itâs -- so pretty impressive. My question is really over what period of time, Ryan, do you think it is reasonable to measure the success of this deal? Is this something that youâre going to start to integrate and weâll know within three to six months if the strategy is working? Or do we check back in a year and say, this was great? Like how are you looking at it internally? Yes. No, great question. There -- because itâs a public deal, as you know, there is a time between now and closing. So one of the important things and it may have got lost a little bit in the conversation, but is a very important point is that we establish commercial agreements in place already. So what that allows us to do is we donât have to wait until this deal closes in Q2 because we donât know exactly when thatâs going to take or how long itâs going to take to close. But those commercial agreements allow us immediately to begin having MJ use this as a referral partner for payments. And we have other referral partners in the industry, but this is a great opportunity now for them to immediately go out. So right away, I would -- as an investor, I would look at probably two important things between now and when we close this deal, which is a very short period of time, itâs our plan absolutely to make some progress. So I think looking to make some progress in the short-term is important. And then I think itâs not too much to ask that, okay, if this deal closes, letâs call it, April, May-ish, we hope that by the end of the year, there is a model that clearly shows that, yes, this is working. I mean we have -- obviously, before we got to point of signing and closing this deal, we have a very clear path strategically of what we need to do, and we feel very confident in that path. And so yes, I would say probably two points, Joshua: One is what happens between now and close. And then what happens from close to the end of the year. I donât think this is something we have to sit around and wait 12 months. I think itâs going to be pretty clear from the results that we continue to show and the growth we continue to have. We have reached the end of the question-and-answer session. This concludes todayâs conference, and you may disconnect your lines at this time. Thank you for your participation.
EarningCall_984	Good day and thank you for standing by. Welcome to the Q4 2022 Live Oak Bancshares Inc. Earnings Conference Call. [Operator Instructions] And I would now like to hand the conference over your speaker today Mr. Greg Seward, Chief Risk Officer and General Counsel. Sir please go ahead. Thank you, and good morning, everyone. Welcome to Live Oak's fourth quarter 2022 earnings conference call. We are webcasting live over the internet and this call is being recorded. To access the call over the internet and review the presentation materials that we will reference on the call, please visit our website at investor.liveoakbank.com and go to today's call on our event calendar for supporting materials. Our fourth quarter earnings release is also available on our website. Before we get started, I would like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from our expectations are detailed in the materials accompanying this call and in our SEC filings. We do not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of today's call. Information about any non-GAAP financial measures referenced, including reconciliation of those measures to GAAP measures, can also be found in our SEC filings and in the presentation materials. Thanks, Greg, and good morning to those dialing in today. If I had your job, bank analyst extraordinaire, my first question would be tell me about your loan loss provision. Moving to the next slide, Michael, before we unpack the provision, in our last quarterly call, we talked about some very famous folks predicting a recession. So are the last two substantial increases in the provision a proxy for the future? Let's drill down. Next slide. Let's go way back to pre CECL, the provision in 2018 and '19 was between $0 and $7 million, mainly in the $2 million to $5 million range. Then, in Q1 of 2020 we implemented CECL at the beginning of the pandemic. We were predictively conservative providing $10 million per quarter during the COVID peak. We were equally predictable as the government provided PPP funding and our provision came down in 2021 as you can see from the slide. The title of this slide is regression to the norm. We're about back to where we were three years ago as our allowance for credit losses are 2.2% of unguaranteed loans compared to 2.4% in 2019. We do not see the Q4 provision as a proxy for the future at this point in time. Moving to slide 6. In the old days of running banks, we typically added to our loan loss reserves that which we charged off that quarter. Not anymore. As you can see our addition to the reserve has far exceeded actual net charge offs. BJ will be walking you through some calculations on how growth in the loan portfolio has a great deal to do with these differences. Let's move to slide 7 Michael. As always back to credit quality and the underpinning of a building of a healthy allowance for loan losses. Once again soundness, profitability and growth in that order. So here are the facts. [Watch list] is down year-over-year, past dues are flat, non-accruals are down 10 bips. As we discussed last quarter surprisingly, of the total non-accruals at year end of $26 million over half or $15 million were paying as agreed. Charge offs in '21 were $9 million and $10.7 million in 2022. Deminimis on a loan book of $4.1 billion of unguaranteed paper. Slide 8. Now that we have examined the past and reconciled the history of our loan loss reserve and our current credit quality ratios, what does the future look like? What better place to turn than our customers? I have known John Barlow for a long time. John started his data driven consultancy 43 years ago. We asked John and his team to ask our customers a number of questions about the future of their businesses. After a thorough review and list cleaning 4600 loan relationship customers were invited to participate in an online survey between late September and early November. 768 customers are 17% of the total respondents. As you can see from the slide, most were upbeat and over 60% thought they can grow their revenues in 2023. Nearly 25% of our customers planned to borrow money to finance that growth over the next 12 months. Relative to customer challenges, difficulty in hiring and increased material and supply costs top the list. Half of our customers believe they are understaffed. Over the past 12 months most customers have increased their prices over 10%. Over the next five years, 25% of our customers believe they could sell their business. This doesn't feel like a recession, does it? Over to you BJ. Thanks, Jeff. Good morning, everybody. Thanks again for joining us. Let's start on some full year 2022 highlights on slide 10. Earnings per share were $3.92. From a core earnings results perspective, they were driven by healthy production growth, $4 billion of production in the year leading to strong loan growth. This combined with net interest margin resiliency led to excellent net interest income growth. And then of course, we had significant gains from successful exits of two ventures investments, which gave us the flexibility to moderate our guaranteed sales activity due to market dislocation, and continue investing in our people and technology while adding meaningful organic capital. Put some numbers behind the highlights the full year 2022 net interest margin of $3.87 held up incredibly well ahead of expectations. This is a testament to the excellent discipline our lenders demonstrated to balance production and profitability along with the great work by our deposits team to manage the positive pricing in a very highly competitive, rapidly rising rate environment. Our adjusted net interest income growth was up 31% year-over-year on that $4 billion of loan production and 24% loan growth ex-PPP along with 25% deposit growth. This balance sheet growth was made even stronger by the guaranteed loans we did not sell. While gain on sale income was down meaningfully from last year due to secondary market dynamics that income was not last forever. Those loans that we kept will be a strong tailwind to our balance sheet and NII growth in 2023. As Chip said, credit quality remains quite strong, despite the uncertainty of the economic outlook. And of course, our history of successful incubation and investment in FinTech ventures again served us well, generating significant gains in organic capital for future growth. All of this led to significant tangible book value per share growth as well 12% year-over-year. And as we look at slide 11, we also know that our 2022 results had a lot of moving parts that didn't make it easy for investors. A few comments on these as we head into 2023. I'll make five quick points. Number one, PPP loans and associated impacts are immaterial at this point and won't be a factor going forward. Number two, while we will continue to mark our servicing asset each quarter as required, we are working on ways to better forecast and minimize its impact on our quarterly results. Number three, while we will continue to make tax credit investments when attractive, we are modifying our strategy to lessen the earnings volatility associated with those investments. Number four, we plan to keep gain on sale income as a percentage of total revenues more in current ranges, which will afford us additional flexibility and stronger recurring spread income growth. And number five while we continue to find our existing Live Oak and canopy ventures investments attractive, and we'll continue to make further investments we are not currently anticipating any exits in the near term. Turning into slide 13. Let's take a quick look at Q4 '22 performance, where you see our adjusted results and the notable items that make up those adjustments. Adjusted PPNR was down 12% quarter-to-quarter as continued strong net interest income growth of 4% linked quarter was offset by lower gain on sale income and continued investment in people and technology. As Chip discussed earlier, our credit remains quite healthy. We did build our provision proactively in anticipation of a potential recession in '23. I'll get into credit trends a little bit more fully in a few minutes. Turning to slide 14. We generated almost $1.2 billion of loan production in the quarter and $4 billion for the year. You see, our loan originations remain quite diverse across our multiple areas, with particular strength in numerous small business verticals and our middle market sponsor finance vertical. In energy and infrastructure solar remains quite strong, while bio-energy lending was down from last year. Both of those verticals should benefit from the clean energy incentives in the recently passed Inflation Reduction Act. Breaking down the components of revenue on slide 15, we see very strong and encouraging revenue trends particularly in net interest income. While linked quarter revenue was down modestly as continued NII growth was offset by lower gain on sale income, total revenue growth was up 16% year-over-year, even with significantly lower gain on sale income, thanks to 31% year-over-year growth in net interest income. Given the fact we held more loans on the balance sheet and expect to continue to healthy NIM we are optimistic about continued strong NII growth in 2023. Secondary market for SBA and USDA fixed rate sales remain unattractive and pricing for variable rate SBA is recovering but still not quite at normalized levels. So we expect to continue to hold more assets on the balance sheet. Again, it's important to understand that lower gain on sale income is not income that is permanently lost, we simply earn it over time in the form of spread income. And because of the flexibility we have with strong capital and liquidity levels, we are more than happy to hold these high quality assets, and we will remain patient with secondary market sales until further normalization. Digging deeper into net interest margin trends on slide 16. Margin again held strong in Q4 at 3.76% and for the full year at 3.87% versus last year's 3.86%. While we still expect some downward pressure as deposit competition shows no signs of easing we continue to be very encouraged by the resiliency of our margin due the excellent work by our lenders in adjusting loan pricing commensurate with market funding costs. Turning to expenses on slide 17. We have been incredibly pleased with the quality of talent that has joined Live Oak in our various groups across the company. We have now largely worked through our hiring bubble to right size our lenders support to accommodate the significant step up in production and balance sheet growth over the past two years. And in addition, as we have discussed, we accelerated our technology hiring in 2022 thanks to the FinTech gain that is now also largely complete. So going forward, while we will continue to be opportunistic on hiring, particularly for revenue producers, we expect to see our expense growth moderate considerably into 2023 and significantly improve our operating leverage and PPNR growth going forward. Few more points on credit trends on slide 18. As Chip discussed earlier, credit metrics remain quite strong. We continue to actively monitor the existing portfolio and do not currently see any glaring weak spots. Net charge offs and non-accruals remain quite low. 30 day past dues remain low as well. In fact, the Q4 dollar amount of $19 million you see in the upper right is down to only about $3 million as of yesterday. Yet we grew the provision well in excess of the $1.4 million of net charge offs we experienced in Q4 and as you can see in the upper left 40% of that provision was due to strong balance sheet growth. To me that's good provision. 55% of the growth was continued proactivity in building appropriate reserves for a less certain outlook and regressing to the norm. With what we see combined with a conservative outlook we currently feel very well positioned with our current reserve coverage and levels. Slide 19 shows the advantages of the Live Oak business model. Having 42% of year total loan portfolio government guaranteed a stronger net interest margin than most and reserves over twice the industry average is quite new unique and comforting. Add to that our overall capital strength on slide 20, we believe we're credibly well-positioned to thrive in whatever environment lies ahead. With that, I'll turn it over to Huntley for a little more color on our outlook and areas of focus for '23. Huntley. Thanks BJ. I'll try to wrap all this up on page 22. Despite what was admittedly a noisy quarter and the continued sort of macro uncertainty as we head into 2023, with a lot of momentum from day one of Live Oak you've heard Chip articulate our priorities as a company safety and soundness, profitability and growth in that order. And we remain committed to that. Our balance sheet as BJ, went through was really well-positioned with ample capital, significant loan loss reserves and the flexibility that we required to support our growth. Our loan portfolio remains healthy and we're committed to staying close to our existing small business borrowers, and we're optimistic as they navigate a slower growth economy. That said, we still see tremendous opportunity to continue to lend prudently, especially if history repeats itself and lenders pull back from small businesses in choppier times. In 2022, we demonstrated our ability to maintain our net interest margin despite the rapidly rising rate environment, and that coupled with continued loan growth to position us for significant net interest income growth. As BJ mentioned, we've been spending a lot of time focusing on how to reduce the volatility in our earnings to make your jobs as investors easier to see our core fundamentals and expect to demonstrate that in 2023 as well. On the expense side, our team is firmly in place as we start the year, and our headcount growth will dramatically slow versus the last couple years. Our lending franchise is stronger than ever. Our technology teams fully built out with clear roadmap. And we're seeing tangible efficiency gains in both our technology investments and our operational improvements. All that should allow our revenue growth to significantly outpace our expense growth, and result in strong PPNR growth throughout the year. On the technology front, you'll see continued improvements in origination and servicing platforms designed to speed up our lending process and improve our customer experience. You'll also see our embedded banking developer portal that will drive customer acquisition and deeper banking relationships through software providers that serve small businesses. I'll wrap up with a topic that I'm sure you've all been waiting for an update on checking. As you all know, we currently have a checking product in the lower end of the small business market with about 2000 accounts. But it doesn't have all the capabilities that we need to serve our core customers; the veterinarians, the professional services firms and the rest of small business America that require some version of entitlements and money movement. In the next couple of weeks, we're going to onboard our first customer on our fully functional business checking account that's complete with treasury management capabilities and that will allow us to serve all of our existing small business clients and the broader small business market as well. It's been a long wait for everyone. But we're excited to finally prove our ability to drive low cost deposit growth at Live Oak. We remain laser focused on our mission to become America's small business bank, and we look forward to translating that into predictable earnings growth throughout 2023. I want to start so BJ, you guided the NIM several quarters ago to 3.50%, 3.75% for the fourth quarter, you are 3.76%. I think you won both showcases with that forecast. What do you see is the range one year from now 4Q â23? Yes, I think, I would probably still say the 3.50% is 3.75% and hopefully, again under promise and over deliver. As I talked about earlier, I feel really good about how quickly our lenders adjusted loan pricing and still put up record loan production as well. So it's not like we sacrificed quantity for profitability. So very pleased with that. The deposit pricing was very well managed by our team in the first half of 2022. And then it significantly ramped up in the back half and shows no signs of slowing. So I do expect in 2023, particularly in the first half of the year to see downward pressure on the NIM as it relates to deposit pricing. Because we won't see quite as much loan repricing that was helpful to us. But in the back half of the year, I see us continuing to build our margin as potentially the Fed stops raising rates and rates in general are more stable. So still feel really good about the margin and our ability to produce. So happy with what we've seen so far. BJ if the Fed does not cut rates the way the market thinks and they move up a couple more hikes and then pauses you'd still think NIM can hold in that range? Or is it really contingent on seeing rate cuts the back half? Now, it's a good question. We essentially are assuming what the market forward curve looks like. So another two or three Fed moves of 25 basis points, and then a cut either late December '23 or early 2024. So our margin assumptions for '23 really don't have any rate cut that would have a meaningful impact. Okay, that's helpful. And then to follow up on the comments around dialing down the expense growth. Can you help us think about what's a reasonable range for 2023? Good question, Steve. Look I think if you look back in 2021, that's really in that sort of post pandemic or sort of capital flows and our lending volumes, really stair stepped up. And so we hired a bunch of lender support to keep up with of that opportunity. And then into 2022 it was really in the technology side, where we really invested heavily and we talked about that as it relates to some of the gains that we had that allowed us to accelerate that both of those are really in place. And so I think that if you thought about from a headcount perspective, we may still grow a little bit, but it'll be certainly less than 10% across the board. And that's assuming that our production still looks like it'll be at or above where we came in last year with everything we see right now. And that's obviously the driver, the largest driver of our expenses is on the people side. If you look at '21 to '22, so take out kind of some of the noise or the one times that kind of thing we had about 25% expense growth from '21 to '22. I would see that more in the mid teens range this year, as we put more of that investment in people and technology to work. Yes, I think Steve, the other way to think about it is we had a lot of growth throughout last year. So looking at Q4 and that sort of core expense number, I think will be in high single digits or mid single digits of growth over that kind of call it less than 10% growth on that number, but to BJ's point that'll translate year-over-year higher, just given the ramp up over the course of last year. Steve I think the only thing that could upset that right is back to your earlier point, right? If this is a true recession and if the credit guys end up running these banks and if there are opportunities to hire other lending officers, we will be in that hunt. But that is not suitable at this time. Yes. If I could squeeze in one last one, just on credit, did the commentary around a small number of relationships you talked about impacting credit quality, anything to read into there? Any industry one offs? Just give a little bit of color there? Thanks. Steve, this is Steve Smith Chief Credit Officer. No systemic or anything to read into it. I would say that's based on a handful of relationships that are going through some turmoil with their management teams still paying as agreed. However, we opted to reserve against those, because it will be potentially navigating some uncertain times. And so I don't suspect that that is going to turn into losses. But it's kind of a conservative approach. Let's reserve against that. Because and see if these management issues with our borrowers escalate, we'll be prepared and ready for it. So it's kind of a conservative approach, but not anything systemic that jumps out these are unrelated issues. Thanks. And good morning, everyone. First one is on SBA gain on sale margin. So they were at 5% in the quarter well below recent quarters. But you did sell more SBA in the fourth quarter than you did in the third. So I'm just, can you speak a little bit to your strategy there? And why you didn't balance sheet more loans in the fourth quarter similar to what you did in the second quarter? And then just your expectations for selling versus holding on the balance sheet in early 2023? Sure, Crispin. Hey it's BJ. One thing that has been particularly surprising and impressive about what our lenders have been able to accomplish is the beginning of the year, about 30% to 35% of our production was variable rate. So 65% to 70% was fixed rate. And that obviously was as we talked about difficult to sell. By the end of the year, we were over 50% variable rate in terms of the production that we were booking. Variable rate market was still relatively healthy from a gain on sale perspective. And so we had more capacity and more eligible loans for sale that were attractive to investors. So as we looked at where we would want to manage interest rate risk, what kind of balance sheet we wanted, and what kind of gains that we felt we could take in the fourth quarter from SBA sales, we decided to sell a little bit more of the variable knowing that we had quite a bit of it on the balance sheet already. So that was part of the math there. Okay, thanks, BJ. That's helpful. And then do you have any early reads on the first quarter for margins? Have they begun to form a little bit? Or do you expect a little bit more of the same for near term trends? Yes, so I'd say that the variable rate SBA market continues to heal. It's probably still a couple 100 basis points from ânormal levelsâ, but there's -- there's healthy activity and there's buying if we choose to be in the market and sell. USDA and SBA fixed rate product is still virtually nonexistent from a buying perspective. So we'll be holding those. So like I said at the opening, we're just expecting pretty muted activity from a gain on sale perspective in the first half of the year and hoping it opens up in the second half. But one of the thing I did say that I wanted to reiterate now that we've got our gain on sale as a percentage of quarterly revenue somewhere in that 7% to 10% revenue range and gives us a total revenue mix of let's say around 80% spread income 20% fee income versus historically over the last couple years, we've been more 70/30. I think that's actually a pretty good place for us to be. It minimizes our gain on sale and frankly, reliance on gain on sale every quarter, allows us more flexibility to sell more if we see attractive pricing, sell less if we want to hold more. But then importantly, it gives us much more recurring revenue through NII and balance sheet growth, which we think is certainly more predictable and obviously attractive to us and to investors. So this has actually given us an opportunity to kind of reset what our gain on sales strategy is and grow more balance sheet. Thank you, BJ. I appreciate that. And then just one last one for me. Kind of dovetailing off your last point, but I'm just curious what your outlook is on loan and origination growth. In the past several quarters ago, you talked about kind of longer term trends of 15% origination growth. Do you think levels like that is still attainable right now or do you think growth like that needs to come down given the current environment? Yes. So on the origination side we continue to add lenders last year and I think we have the franchise in place to do that. So we did $4 billion of total origination last year to think that we could grow that 15% in sort of a normal environment seems quite reasonable. I think we're obviously being pretty conservative right now looking at the implications of a slowing economy, interest rates, construction costs largely M&A market, things like that. So we feel good right now, kind of, at where we are or up. But certainly the franchise is in place to do that sort of 15%. And as we look at just the overall size of the market, the overall trends in the silver tsunamis and the transition of ownership, as Chip talked about, it still feels like there's just a ton of opportunity for us to continue to expand the lending franchise. We're just going to do it really prudently as we kind of look and see what 2023 looks like. Hey, guys, good morning. Thanks for taking my questions. I wanted to start a kind of two bigger picture questions. One just on how are you guys thinking about, there has been some discussion on this call about expense with moderating positive operating leverage, NIM having some more pressure, but then hopefully stabilizing kind of taking it on to soar here. I mean, what's the updated thoughts you guys have on kind of structurally what the targeted ROE should be for this business. I mean, you guys are now growing the balance sheet a bit more, maybe there's a little less gain on sale. Maybe that weighs on a little near term. But just curious if there's any kind of profitability thoughts you're willing to provide, as you guys kind of look out over the next couple of years with what you know today in terms of what -- what you think is reasonable, or should be targeted for the type of business you're building? Yes. That's a great question Mike. We talked about that a lot here. We've consistently grown our balance sheet north of 20% actually. I think over a sustained period of time, we still think that 15 plus percent balance sheet growth makes sense for us as a franchise as we look at sort of where we're going. The simple math says a 15 plus percent ROE allows you to sell fund that and continue to grow without having to sort of tap into capital markets which is nice. It creates a lot of sort of flexibility for us on that path. As we look at our franchise a 15% ROE, I think is quite reasonable, especially as we start to turn the dial on the deposit side that we've been talking about and start layering and checking accounts which is a pretty capital efficient place to grow earnings by lowering our cost of funds. So we'd love to think that we could turn that dial to be 20% ROE and 20% grower that's sort of I think the optimistic case, but pretty reasonably think that a 15% ROE to support our growth is pretty reasonable. BJ if you have anything on that. No. I think that's right. And kind of our arrow in the quiver so to speak is we were 50 if you normalize some of these onetime costs and the gains and all this we're a 15% to 20% ROE business today with a deposit platform, that is market rate. And as Huntley mentioned this is our year of checking, and really getting focused on that. And so over the next several years, as we continue to grow our business and build out a small business bank we are anticipating that funding cost is going to be a tailwind to us as we continue to improve profitability. Got it, that's helpful, but it's fair to think that on a GAAP basis, there will be a process to build backups that's 50% right. I mean, it over the next year or two, as some of those initiatives take hold and rate stabilize, etc. Is that fair? Okay. And that kind of dovetailing off that you guys kind of brought this up, but I think BJ, you mentioned that at this point you're not expecting any exits in 2023 on the venture side. And kind of from a timing perspective, it feels like 2022 will be a year where the balance sheet growth outpaces the ROE at least as it looks right now. So I'm just curious, all the capital front particularly with the mindset now of holding more your production. Could you also just maybe remind us eternally what you guys are thinking about in terms of the capitalization of the bank and what's kind of the target range? And if you were to go above or below that what would be kind of your priorities to right size that? Yes. I think if you look at where we sit today kind of the common equity tier one ratio of 12.5% is quite solid where we have our binding constraint as we continue to grow is really more of the leverage side. And we are unique in that 40% of our loan book is government guaranteed. And so leverage is a little bit less relevant to us, but obviously, still an important and headline ratio. So that's one that we continue to watch. We're at [9.3%] today from a holding company or bank shares perspective which still remains very healthy. Even if we grow the balance sheet faster than the retained earnings we still have a couple of years of runway before tier one leverage gets down at the bank shears level towards 7.5% or 7% range, in which case, we would probably have to think of something else absent more ventures gains. So we do have some runway as the balance sheet grows. Very helpful. Thank you. Just lastly, for me, I know, it's hard, but any thoughts on a rage on the tax rate for next year BJ just given some of the credit activity you've done already? And is there any guardrails you could give us on that? Yes. Sorry. Yes. I know that's a tough one. Honestly, a tough one for me too. I would say our statutory rate blended is going to be around 23%. I would use 20% as an effective tax rate to model. Now it's going to kind of go up and down quarter-to-quarter but that's probably the best range. If we are, if we do see attractive tax credit investments that we want to make that could certainly shift and be more positive, but right now 20 is probably the best place to land. Thank you. And I'm seeing no further questions in the queue. I will now like to turn the conference back to Chip Mahan for closing remarks.
EarningCall_985	Welcome to today's Covenant Logistics Group Fourth Quarter Earnings Release Conference Call. Our host for today's call is Tripp Grant. [Operator Instructions] I would now like to turn the call over to your host. Tripp, you may begin. As a reminder, this call will contain forward-looking statements under the Private Securities Litigation Reform Act, which are subject to risks and uncertainties that could cause actual results to differ materially. Please review our SEC filings and most recent risk factors. We undertake no obligation to publicly update or revise any forward-looking statements. Copy of the prepared comments and additional financial information is available on our website at www.covenantlogistics.com/investors. I'm joined on the call today by David Parker, Joey Hogan, Paul Bunn. Before jumping into the quarter, I'd like to first take a moment to reflect on 22 as a whole. As it's a remarkable year for us in many ways, it marked the second consecutive year of record earnings, record revenue, capital returns and safety results. We repurchased approximately 20% of the outstanding stock of the company and acquired a small but highly profitable specialized truckload carrier, all while maintaining moderately low debt leverage. We also made progress on our operating model through improved contracts in our Dedicated segment and grew the core business in our Asset-Light segments comprised of managed freight and warehousing. Although the tailwinds of a strong freight cycle may well be behind us, we believe the combination of our improved operating model and our strong balance sheet has us well positioned for the future. Our company today is much improved, and we are grateful to all of our team members whose dedication and commitment made this possible. Focusing now on the fourth quarter. On an adjusted basis, we believe our team performed well during a market of transition. Consolidated revenue was essentially flat compared with the fourth quarter of 2021, while improved revenue per tractor and brokerage margin more than overcame the significant inflationary cost to generate a better adjusted operating ratio and higher adjusted net income. Through acquiring and successfully growing AAT, working with long-term customers to improve the stability of contracted capacity in our expedited fleet and selectively downsizing our least efficient dedicated operations, we did more with less. On an adjusted EPS basis, the impact of our capital allocation towards share repurchase was considerable, with adjusted EPS growing 28%. These results were earned in a difficult environment. Freight rates were up year-over-year but are under sequential pressure. Freight volumes turned negative prior to the fourth quarter and are continuing to feel soft. In addition, cost inflation and availability of equipment and parts continue to provide headwinds. And -- looking ahead, we expect difficult year-over-year revenue and income comparisons for the first time in many quarters. In this environment, our playbook remains consistent and our urgency is high. The primary adjustments to our reported results resolve around our tractor fleet, particularly a group of underperforming leased units that needed to be removed from operations due to negative driver, customer and cost considerations. Several factors transpired in the quarter, including receiving over half of our 2022 new tractor order in the period. delaying lease turn-ins due to parts availability for trade prep on used tractors, whose lease terms have expired and parking additional lease tractors with future lease maturity dates, which have been the source of significant operational cost headwinds throughout the year. The abandonment of these units in the period before the expiration of the leases caused us to write down the right-of-use asset in the period and accrue any estimated future disposal costs on these units, resulting in a lease impairment charge. Although costly in the quarter, we believe this is our best opportunity to start the new year in the most cost-efficient manner possible. Key highlights for the quarter include adjusted net income increasing 8% to $19.5 million and adjusted earnings per share increasing 28% to $1.37 per share compared to the year ago quarter. As a percentage, earnings per share growth outpaced net income growth due to the shares acquired throughout the year under our share repurchase program. During the quarter, we repurchased approximately 450,000 shares, bringing the total to $3.4 million for the year. Total freight revenue declined by 4.4% to $255 million compared to the 2021 quarter. Our asset-based truckload freight revenue grew 11% with 76 fewer trucks -- our asset-light Managed Freight and warehousing segment's combined freight revenue declined by 22%, primarily because of the combination of a muted peak season and reduced volumes of overflow brokerage rate compared to the prior year. Truckload related cost headwinds continue to play a major role in our results for the quarter, increasing $0.20 per total mile on an adjusted basis compared to the prior quarter. Salaries and wages, maintenance and insurance all contributed to this increase. Gain on sale of equipment was $1 million in the quarter compared to $0.1 million in the prior year. On the safety side, we are proud to report that our DOT accident rate per million miles for the year was a new company record, beating last year's previous record by approximately 6%. The -- despite 2 consecutive years of favorable safety results, unfavorable development from a small number of prior period claims contributed to almost a $0.06 per total mile increase in insurance expense compared to the prior year quarter. The average age of our fleet at December 31 was 26 months, a 3-month reduction from September 30. For 2023, we have been able to increase our original tractor order, and we anticipate sequential improvement to the average age of our equipment throughout the year. Our Tel leasing company investment produced $0.21 per diluted share compared to $0.23 per diluted share versus a year ago period. Our net indebtedness at December 31 was $46.4 million yielding a leverage ratio of 0.34x and debt-to-equity ratio of 10.9%. Return on invested capital for 2022 was 15.3% versus 12.8% in the prior year. Thanks, Tripp. Taking a moment to dive deeper into what drove the consolidated results for the quarter, our expedited operating our expedited segments freight revenue grew 26% compared to the prior year quarter as a result of the combination of a 16% rate improvement and operating 67 additional tractors. The increases are related to the AAT acquisition we had in the first quarter and the loosening driver market, allowing us to seek more tractors. We are pleased with expedited rate and utilization in the quarter, which was improved by FEMA freight in October that resulted from Hurricane Ian. Cost headwinds from increased sores and wages, maintenance and insurance continue to play a major impact in the quarter and condensed our margins. We believe the combination of our work to resolve a significant number of prior period claims and the impact of the equipment replacement plan will help improve costs in this segment going forward. Driver pay remains stable at the present time. Our Dedicated segment had a 5% reduction in freight revenue compared to the '21 quarter as a result of 143 or 10% reduction in the average number of total trucks in the period, offset by a 5% increase in revenue per truck. Although we are pleased with both the year-over-year and sequential improvement to the margin, we fell short of our profitability target, primarily because of the same cost increases, which were impacting our expedited segment. The fleet reduction we've experienced in this segment is a product of 2 factors: intentionally exiting unprofitable business and reducing fleet counts with existing customers based on reduced volumes. We continue to work diligently to improve margins in this segment by improving our customer mix, contractual terms and operating a younger, more efficient fleet. Managed Freight experienced a 30% reduction of total freight revenue and a 20% reduction in operating profit. The significant reduction in revenue was the product of less overflow freight from our asset-based truckload segments, a reduction in peak revenue, offset by them of freight in the quarter compared to the prior year. We are pleased with the fact that Managed Freight was able to hold margins for the quarter, but we are now experiencing a much more aggressive environment with competitors aggressively competing for volumes at the expense of margin. We anticipate significant margin compression in this softening environment. Our warehouse segment, although the smallest of all of our business segments saw a 31% increase in revenue compared to the prior year, resulting from the start-up of 4 new customers in the year, the largest of which became operational in December. We are pleased with the top line revenue growth we've achieved in this segment, and the team has done a phenomenal job in executing these start-ups, which are both intense and time-consuming. However, despite the top line growth in this segment, we've seen sequential deterioration in margins throughout the year. Our focus in 2023 will be to continue to grow this segment and restore profitability to the mid- to high single digits through improved labor utilization and rate increases with existing customers. Our minority investment in TEL produced pretax net income of $3.9 million for the quarter compared to $5.2 million in the prior year period. Although the fourth quarter is typically soft for tail, it was especially soft due to an adjustment to accelerate depreciation on a specific group of equipment that is expected to be sold in the near term. The adjustment negatively impacted the quarter's results by approximately $1.5 million. TEL has a strong track record of producing gains on sale of equipment throughout good and bad cycles, and we believe this adjustment is isolated to a specific quantity of similar make and model equipment. TEL's revenue in the quarter grew 47% and pretax operating profit decreased by 22% versus the fourth quarter of '21. TEL increased its truck fleet in the quarter versus a year ago by 243 trucks to 2,237 and grew its trailer fleet by 654 to 7,149. After receiving more than a $7 million distribution during the quarter, our investment in tail, which is included in other assets in our consolidated balance sheet was approximately $55 million. As a reminder, TEL focus is on managing lease purchase programs for clients, leasing trucks and trailers to small fleets and shippers and in clients in the procurement and disposition of their equipment through a robust equipment by sale program. Due to the business model, gains and losses on the sale of equipment are a normal part of the business and can cause earnings to fluctuate from quarter-to-quarter. Regarding our outlook for the future; there is no doubt that 2023 will be a challenging year, but it's also a year our team has been anticipating and working hard to prepare for. We view it as a test of the resiliency of our operating model and opportunity to identify areas where we can continue to improve. As such, our primary focus remains a continued progress on our long-term strategic plan. We are also focused on aggressively improving our operating cost profile. With our equipment replacement plan and strong safety results, we see opportunities to improve cost in the short term to improve fuel economy, reduced operations, maintenance and insurance costs in an environment that will be pressured from both at a rate and margin perspective. We expect market headwinds from a softer market during the contract renewals as well as continued inflationary pressures. However, based on company-specific factors, including investments we have made in our sales team, the AAT acquisition, share repurchase program and the equipment upgrade plan and reduced insurance casualty costs resulting from our improved safety results, we expect less earnings volatility than in prior periods of economic weakness. Over the past 5 years, our customer base has been strategically shifted to less cyclical industries through our full-service logistics focus. Even with a heavy equipment investment year, we expect our cash generation, low leverage and available liquidity to provide a full range of capital allocation opportunities to benefit our shareholders. Paul, I wanted to kick things off and talk a little bit about managed freight first and then jump in the truckload. On the managed freight side, you said that basically prepare for significant margin compression. I guess maybe can you give us a range of what you consider significant? And then maybe walk us through maybe some of the puts and takes to just how bad it is out there? Because it seems like all of this is coming from competitive pressures out in the marketplace. Yes, Jason. Here's what I'd say on the managed freight side. The market is crazy competitive out there right now. As far as -- I would say it's going to return to historical truckload brokerage margins. I think not just us, but a number of our competitors have been running margins in these brokerage businesses that are multiple times more than the historic margins that truckload brokerages operate. And I've seen several others out there. Everybody is kind of returning back to pre-pandemic pre-supply chain issue, brokerage margins levels. And those are mid-single-digit kind of numbers. And so we're seeing it just like our peers return to those numbers. there's no doubt there are folks out there trying to buy volume in this space right now. And a lot of logistics departments, traffic departments are trying to go back and recoup costs from the last few years. That said, a lot of these rates we're seeing are just unsustainable where they're 10%, 20%, 30% below what a small carrier can run at. And it's just kind of a purge. I think the whole industry on the brokerage and the truckload side is going to have to go through. But some of these small carriers stacked up some money running the spot market the last couple of years, and they're making it. But you can't run 10% or 20% below what your cost start forever. Yes. And contract rates to the brokers -- those are folks keep doing many it, get a number and then they do another bid and that kind of stuff. Okay, that's good color. I want to jump over to the asset-based side now and maybe talk a little bit about some of the deterioration you're seeing. We held a call a bunch of private companies earlier this month, and they basically said that the market has deteriorated a lot in the last 60 days. What are your expectations for sort of the pricing gains that you're going to get out of the contracts that you signed here during this bid season? Here's what I would say. A lot of ours just right now, quite frankly, is coming from volume reductions because a lot of our customers just don't have the freight they had, and our reduced margins are coming from having to take more broker freight to fill the trucks as opposed to straight up customer price reductions. I mean I will tell you, on the expedited -- I mean we're somewhere between low single digits to flat to up a little on customers. I mean it's -- on the expedited side, there's not a lot of margin pressure. But when customer XYZ is giving you 10% less loads than they were giving you 5 months ago. You're either -- your replacement or broker freight right now and the freights you're going and getting to refill the bucket is not as profitable as what you got out of. And so that's what's pushing on truckload margins. Okay. Fair enough on that. I wanted to talk a little bit about the changes in the fleet, obviously, a far newer fleet than you had before, probably newer than you thought it was going to be. Talk a little bit about the savings that can maybe help offset some of the market pressures we're seeing. Yes, I may be able to help with that. There's no doubt about it that new equipment is more costly than from a price perspective than some of the older equipment that we're taking out of the fleet. And we've been pretty vocal on the last couple of calls on really looking at our ops and maintenance spend, the cost of running that older equipment. Just to frame this up for you, if you look just on a cents per mile basis, our ops and maintenance costs in our Truckload division ran $0.21 a mile. -- in 2021. When we look at 2022, it ran up $0.29 a mile. And sequentially, it got worse and worse and worse. And so it was pretty early in the year where we decided we've got to get in front of this. And we got in front of it through being more aggressive on new acquisition or acquiring incremental tractors beyond our 2022 trade plan. And those incremental tractors, which were about 250 units landed in the quarter in the fourth quarter on top of what we were scheduled to already received. We've also bumped up our trade plan for 2023. I think our original order was somewhere in the neighborhood of 600 tractors and anticipating to get closer to 900 now. And so what this did in the short term and the compounded with the fact we went out and identified the most expensive tractors in the fleet, which were these leased units that we talked about in the earnings release, just call them 600 units. We went ahead and proactively park those units. And so all of that being said and done, it created a little bit of a logjam of excess equipment. We had newer equipment we had received and deployed that we're setting out that were being operated and then we had all of these leased assets that were generating costs, and we weren't able to turn them in. So, I don't want to get into specific numbers but I do think that you're going to see meaningful improvement in both ops and maintenance costs. And I think you'll also see even though the cost of equipment is going up -- if you think about the little gain on sale that we had this year, which was just over $2.2 million or about $3 million adjusted when you exclude out the terminal sale, you're going to see, I think, meaningful improvement because what we're going to be selling next year, we're not going to be trading in leased vehicles. We're going to be selling used vehicles that we own. And so you'll see some meaningful improvement in gain on sale next year. So we think the fixed cost of equipment could be flattish, even though the price for that equipment is going up, but we believe meaningful improvement in ops and maintenance and also meaningful improvement in fuel economy with that newer equipment. So the other thing I wanted to say, so you went for $0.21 a mile to $0.29 a mile worsening as you went throughout the year. What is the maintenance cost on these new trucks that you're bringing in, so you can put it into perspective for us? Exponentially, better. I think that there have been cost and I don't know if it's realistic to get back to what we consider all in ops and maintenance costs of 2021 number of $0.21 per mile, the parts of the cost of tires, the parts of labor, the cost of parts all have had significant cost inflation. But I think that I think you could see that number lands somewhere between the $0.21 and $0.29 per mile. It's a little bit hard to say because the other key component to this is uptime and utilization. We had to keep -- throughout 2022, we had EPA considerable number of excess units, particularly in our dedicated fleet in the fleet just because we would have a customer that would require 15 trucks and we were putting 20 trucks in there because 5 of them were down. And it will help us with uptime and utilization, too. So it gets a little bit muddy when trying to do some sort of cost reconciliation by just looking at ops and maintenance. But I think you're going to see an overall improvement and efficiency of that -- in the truckload -- larger truckload segment, which both includes expedited and dedicated. That's a great explanation. And last, and I'll turn it over to somebody else. Expectations for share repurchases. Obviously, you guys were very aggressive last year, repurchasing your own shares and supporting them. This year is going to be a down year by anybody's estimates in terms of just your overall financials. Are we going to see you still be the same aggressive way as you did in '21? I don't want to comment on what we're going to do in the future, but it is public information on what we have out there and what we've repurchased today. And we still have about $20 million of availability on what we -- on the plans that have been approved and are in the market today. We'll evaluate that. Obviously, we have the strength in our balance sheet to do that if we so choose, but there's a number of different options that we may choose not to do that. So it's certainly in the arsenal of things that we could act on, but there's been no decision or no public disclosure of us committing to something additional beyond what's out there today. Okay, great. So, I guess maybe I'd like to ask you about sort of the trends into the first quarter here, but maybe we could take a step back and kind of think about, Paul, going back to the last couple of quarters, you guys have sort of commented on the cyclicality in the business and sort of how you think you've been able to mute that a bit, given all the work you've done in the last few years, but you do sound a bit more bearish about the trends in the business that you're seeing over the last few months. So I guess, as you sort of think about the run rate for the business today based on sort of your outlook for the managed transportation managed freight business in mid-single-digit margins. Do you think down 25% to 30% peak to trough earnings is still how to think about it? Or has that changed any over the last few months? Jack, I would say it's probably -- that's still our goal. That's still what we're shooting for each and every day is down in that 25% to 30% range. We haven't given up on that goal internally for 2023. And so we had a big meeting on that yesterday, and we talk about it frequently. To your point, you're taking a step back. I'll take a long step back. I mean historically, peak to trough, we might have been down 50% or 60%, 70% some years. If you go back to the years we've made 2.86 and the next year made 61 or something. And so 75% type reductions. Is it going to be 25%? Is it going to be 30%? Is it going to be 35%? I don't know. A lot of that's just going to be what is the market deal up for us, but it's not going to be anywhere like you saw in the 10 years ago. So we're still very confident in the changes in the model, reducing volatility compared to, I'm going to call it, the last 10 or 15 years. We're still shooting every day for that 25% to 30% reduction. And I think it's -- how achievable that is, probably is a function of how much further the market in general falls? And does it bounce off the bottom? Or does it stay on the bottom for a little while. But we're still in that whole kind of big vein of becoming less volatile, there's no doubt compared to the prior years were materially less volatile. Yes. about that -- no doubt about that. And I think that's helpful and I appreciate the way you've kind of framed that up. I guess as you think about the first quarter, I know that a lot of people are kind of looking at this 4Q to 1Q trend and should we see better or worse to normal seasonality given all the factors that are at play out there. You guys -- it sounds like you guys had a really strong October, which may have been kind of boosting the fourth quarter, but you didn't have much peak season in November and December. So as you think about the way the business is trending into the first quarter, consensus is about $0.90 or so. Do you feel like that -- I mean do you feel like that's in the right ballpark based on the trends that you're seeing in the business today, the run rate there? I know January is a tough one too. Yes, it's tough to peg it off January but that's in the range of reasonableness. I mean here's what we did. You said October was a stout month, no peak, November, December, definitely pulled back. But I mean, Chip talked about the interest we had $0.23 a mile insurance. We're hopeful we don't run $0.23 a mile insurance. And so I would tell you that, again, no doubt things are soft out there, but we are -- our cost structure for the first quarter is going to look better than our cost structure in the fourth quarter. So revenue won't be as robust, but our cost structure will be better. Okay. Okay, that's helpful. And I guess maybe kind of I'd be curious to get your take on what your customers are telling you about maybe the -- the trends within their business and sort of how they're thinking about their inventory levels. I mean, do you think that we can get back to maybe normal levels of replenishment, normal ordering levels in the second quarter? Or do you think that's maybe something that we'll need to see in the second half of the year? Just sort of what are your customers telling you about the direction of their business? Jack, this is David. Yes, there are 4 bullet points that I would say is that I really believe that first second quarter from an economic standpoint are going to be negative GDP. That's what I believe. I believe that as it relates to transportation, I think that we hit the bottom around Thanksgiving, and I think that we have just been there. That's where it's been. We've not seen a second downward trough going down below kind of Thanksgiving. And we have since that all in the month of January as well. So I'm optimistic that the industry and us are down on the bottom level there. And as I think look at it in the second quarter, even the first and second quarter or negative GDP -- when they start buying more Coca-Colas and it gets warm in May and it gets warm in the end of April and hot dogs and all those kind of things, freight is going to pick up even if it's a negative GDP growth. And so I believe that that will be a tailwind for the industry. I also believe that it will be about a second quarter event when the inventory levels are corrected. And as soon as that happens, that in itself will be a tailwind for the industry because right now, that's what a lot of our customers are doing and are correcting their inventory levels. And so we're just having to muddle through it. And -- but I'm optimistic that the pipeline is good. I mean better than you would think it would be in the month of January, I'm optimistic about that. I think that we've got -- I'm optimistic about what I've seen from the rate levels thus far, the pressure of reduction that it's only been 3 or 4 accounts. We're not talking about across the board. Everybody has brother beaten us up. If we were to eliminate what's happened on the "broker" side of us having to go to the outside brokerage and get it. I would be very happy if where our pricing is at the present time. I take -- I look at this and brokerage has gone from 1s the 5% kind of usage. And the rates on that for are 1990 rates. I mean it's the most horrible thing I've ever seen. The rates are pathetic, especially coming off the West Coast. I think a lot of that because of everything that's happening in China and the boats aren't coming in and Chinese New Year's lasted longer and -- but the West Coast has been very difficult. And so the rates out of there are just horrific rates. That said, take that out of the picture, and I'm very pleased with the rates. And again, we probably got 2 or 3 more accounts that we got to hold our nose to hold our breath and hope and pray that we're able to get there because as Paul started off some -- a little bit down, some flat, a little up. That's what we're seeing. It's not -- everything is down because it's not down. Yet if we can replace and I really believe in the next 30 days, I hope I'm right because of the pipeline, I really believe in the next 30 days that we're going to have a bunch of the brokerage freight that's going to be replaced and their rates are almost double what we're holding. So if I get 6% of that double on rates, it's going to help what I'm seeing so far in January with the market being down, but just floating on that downward just -- it's there. I haven't seen it go down again. So, hopefully that helps. I'm going to add one thing to what David said is that -- you asked early in your questions about the changes and volatility and peak the trough and all that. Here's what I would say. I used the word niche on last quarter's call. And I would tell you, everywhere we're we are niche and people really need our teams or they really need hazmat heavy haul dedicated? Or they really need -- where we're providing value, things are holding in there just incredibly well in this market. We do have -- there's still a little bit of business that's commoditized here and there. But every day, we're trying to find where we can be more value-add and itchy -- and the commoditized people are going to do what the commoditized people are going to do. I feel like we're probably down that path, but we're going to keep working on that path every day. Good market or a bad market. And eventually, that saves going to become 80 or 90. And that niche stuff where we add value for our customer, and they add value to us, we want to get that to 100%. And so that's part of what to David's point is protecting us thus far in this market. And it's really -- it's the pressure points are in 2 places where we still have a little bit of commoditized business. And then where we don't have enough freight in certain geographies, and we're having to haul broker freight. So we keep working on those 2 things, it will be good. Okay. No, all that makes sense, and I really appreciate all the commentary, David, thank you for that, too. I guess maybe just last question, David, and I'll hand it over. I'd love to get your take on this. because you've seen a lot of cycles over your career for such a young man. But I guess you sort of think about just capacity attrition in the market. You talked about rates being at 1990 levels in certain markets. But it doesn't really feel like we've really seen a lot of capacity come out yet, at least from what we can tell. I guess how do you see the capacity situation playing out over the next 6 months or so? What do you think needs to happen to really trigger that sort of attrition that we would normally expect to see with rates at these levels? Yes. I think going forward, that we will see the reduction in capacity because I think that what has happened thus far, I mean if you look at new DOT numbers, it's negative. And so there is not new trucking entries coming into the marketplace. That's number one. But I do think what's happened, Jack, is that the folks that just grew -- I mean, not good, but came into the market in the spot and Holland $450 a mile, those were onesie, Tuesday trucks. Those are -- somebody has got 3 trucks and not many. Those trucks have left that you and I have not felt it yet because they've been to drivers for me or truck drivers for Warner drug drivers for you, they just started driving company trucks. And so we still got the same amount of capacity. And so I think that's where the market is today. but 2 plus 2 does equal 4, you can't haul 1990 rates with cost in 2022, 2023 cost and think you're going to stay in business. So I think in the next couple of months, we will see a rush of capacity that is going because all of us truckload guys, our trucks are full virtually. They're virtually full. And so that's what I think you'll start seeing capacity leaving in the next couple of quarters. Yes, Jack. It's going to -- the ones that made a lot of money had some capital to hold on for a little while. But again, you can't run at some of these rates forever, and I won't mention the vendors, but I've talked to a couple of vendors in the last few weeks that deal with big truckers and small truckers. And they're small trucker delinquency rates or people hitting their credit limits is it's getting there to a spot where eventually -- I don't think we're going to wake up one day and say, well, capacity left yesterday. But over a 6- to 9-month period, you're going to see it trend down. And again, that's some of that's just talking from vendors that deal with big truckers and little truckers and their credit departments are pretty worried right now. Thank you for the time. David, maybe just a follow-up to some of the comments there. I think if I go back a few quarters, you've been communicating a more bearish position toward future freight market fundamentals. So your comments, I think there maybe indicate you're starting to become more optimistic at least about where things are trending even if we go through a little bit of a dip here in the first half. Does that make you from the covenant perspective, want to be more aggressive during the downturn? And in terms of trying to put your finger to the wind in terms of when the market is starting to turn, is it as simple as you as what your customers are saying or looking at the spot market? When do you think it really becomes more risk on in the trucking side? Yes. Number one, I am more bullish than reporting some of the freight management being down and TEL the equipment and those kind of things from a business, from a freight standpoint, during a time that we hit the bottom, so things are not great, but I am becoming more and more bullish. There are more opportunities that are presenting their sales. And I do think it's -- some of that is because of what Paul talked about is that we've worked hard since 2018 and then 2020, we have worked hard on 2 things. getting deep in the supply chain, whatever that means, getting deeper in the supply chain; and number two, bringing value to our customer for that customer bringing value to us. And we have those kind of conversations with our customer because I don't care if it's 2 20 or 21 or 23 when you need some freight. If I'm not bringing value to that customer and if they're not bringing value to me, one or the other is going to leave because we are going to get to the point where when we started down the road of being you call, we're not going to be a UCO-hall carrier and just hope we get enough phone calls. We're going to have commitments from our customers, not that dedicated is running 20 trucks and they need to go to 15 because they have no freight. I understand that. That's just business. But not, okay, we're going to do a ban because at the end of the day, we used in abuse '21, and we don't like your pricing. Let them go do that. I don't care. We will go do other things. It means reduce our trucks, whether it means go do acquisitions, whether it means repurchase stock, whatever that means, we will do whatever the market tells us to do. So I am bullish there in a very bleak time out there that there's going to be a lot of opportunities going forward. Now, how do I watch that? It is to the things you're talking about. It is through looking at certain things that we're involved in. I mean high security loads right now are popping up a lot for us. And that's good because we're one of the few that do high security. I would say in the last couple of weeks, we got 4 or 5 accounts and some good volume accounts that could replace all the brokers anyway, some good volume accounts on high security. And so that's a great opportunity for us. Another one would be that as the brokerage number goes down, it's telling me a little bit about where the market is going to be for us. So, I do think that there's opportunities out there that can overcome what we're seeing in industrial production and what we're seeing in housing, I think there are some things that are happening. But I also burn again, we've been working for years to be that carrier that's bringing value. One of the reasons why our rates have not been slammed so far, minus the brokerage and you can do the math on what I told you that will get you to a number that's negative, it's not positive. But as I look at that, I go Brandan. I'm 65, Bert, I forgot what I was going to say. It will come back in a bit. Thank you. This is Joey Hogan. We're a different company that's worked very hard the last 4 or 5 years to bring value. And the reason why our rates have not dropped like the market has dropped is because our customers recognize it. And I mean this is -- they're verbalizing this to us, and that is our business is down, but you do such a great job, and you've given us the teams when we needed it, you give it the dedicated trucks when we needed it. And we're not asking for a rate reduction. We were really fair for the last 24â¦ We have been -- we have I think, Bert, that's another piece of it. We didn't -- we were pretty far with a lot of these folks over the last 24 months when we could have taken advantage of some situations and we didn't. And in turn, what we're finding is our customers are being really fair to us back right now -- and the 30% that aren't -- well, as Dave said, we'll figure that out. Yes, that's obviously great color. Maybe just all the things you guys talked about on the reduction of volatility. I think a lot of that has been some things you've done on the expedited side, and then obviously, improvement in dedicated. If we think about the 2 things that likely going to determine whether you end up at 25% down or plus 35% down in '23, it's going to be, I think, your ability to maintain that 92% or better or/and expedited. And I think it's going to be your ability to keep managed freight at least the sales side of that in a reasonable range, not going back to where it was pre-pandemic. Can you just provide some color on those 2 items and maybe why you have confidence that both of those segments are going to hold up better because expedited historically a lot more cyclical and managed freight obviously very cyclical in a backdrop like this? Yes. I would say managed freight from a confidence standpoint, remember, other cycles Bart, we didn't have a lot of these long-term agreements. And we're 60%-ish of expedited freights tied up in long-term agreements. And so plus the addition of AAT, which rolls up into expedited, I mean that's just not our -- it's not your average expedited carrier and what they do and just the structure. And so we have a lot of confidence in how expedited is going to hold up in 2023. On the Managed Freight side, I mean, we said it, margins are going to be compressed but we're still feeling really good about top line revenue. Our team there has got -- as David said, they've still got a really robust pipeline, and expedite has a robust pipeline. And I think on the dedicated side, you're going to continue to see -- over the last 24 months, you've seen incremental improvement in dedicated, and I think you're going to see incremental improvement in Dedicated this next year. Not going to be -- it's going to be a little harder, but dedicated is going to continue to incrementally improve. You've got long-term agreements in AAT and expedited. Managed Trans margins are going to go way down, but they've been way high. But I think the revenue base will be there. And then on the warehousing side, I think we'll -- I think margins will start to rightsize as we continue to grow that business. And that pipeline is the best we've had since we entered that business in 2018. So Paul, maybe as a follow-up to that, you only saw a modest quarter-over-quarter impact on the sales side in managed freight. Are we getting closer to the bottom? Do you think you can remain that elevated? Or does that step down in the first quarter and also sort of increase off of the new base? Yes. I think managed freight will step down in the first quarter, and that will kind of be your new base going forward versus Q4 margin same [ph].
EarningCall_986	Good day, everyone, and welcome to the Fourth Quarter and Full Year 2022 Eastman Chemical Conference Call. Today's conference is being recorded. This call is being broadcast live on the Eastman website, www.eastman.com. We will now turn the call over to Mr. Greg Riddle of Eastman Chemical Company, Investor Relations. Please go ahead, sir. Thank you, Emily, and good morning, everyone, and thank you for joining us. On the call with me today are Mark Costa, Board Chair and CEO; Willie McLain, Senior Vice President and CFO; and Jake LaRoe, Manager, Investor Relations. Yesterday after market closed, we posted our fourth quarter and full year 2022 financial results news release and SEC 8-K filing, our slides and our related prepared remarks in the Investors section of our website, eastman.com. Before we begin, I'll cover two items. First, during this presentation, you will hear certain forward-looking statements concerning our plans and expectations. Actual events or results could differ materially. Certain factors related to future expectations are or will be detailed in our fourth quarter and full year 2022 financial results news release during this call, in the preceding slides and prepared remarks, and in our filings with the Securities and Exchange Commission, including the Form 10-Q filed for third quarter 2022 and the Form 10-K to be filed for full year 2022. Second, earnings referenced in this presentation exclude certain noncore and unusual items. Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures including a description of the excluded and adjusted items, are available in the fourth quarter and full year 2022 financial results news release. As we posted the slides and accompanying prepared remarks on our website last night, we'll go straight into Q&A. Emily, please let's start with our first question. I guess first one to ask, can you walk through your step-up in your implied guidance from first quarter through the rest of the year? I guess mostly interested to hear how much you see this within your control versus subject to macro conditions changing? Sure, Josh, and welcome. The -- we expected that question. I think it's an extremely important one we spent a lot of time on. First, let's just recognize we're in an extremely dynamic time in this world where it is difficult to predict some of the macro. You've got China in a weak situation but likely recover, seen one article saying there's $2.2 trillion of cash out there with Chinese consumers to be deployed and how that impacts both demand and energy. Ukrainian War, you've got inflation at four-year highs and what the Fed is going to do with it. So there is a lot of uncertainty, and the fourth quarter was a little bit challenging. As we look at Q1, many of those challenges continue, whether it's the destocking in durables and B&C that still needs to work itself out, auto not yet recovering and the stable market is virtually getting past destocking, but not growing yet. We will certainly see some raw material benefits in the first quarter, but not much in the way flow-through works and seasonally energy is high. So the first quarter has a number of challenges, not to mention pension and variable comp. So as we look at the step up into the second quarter and through the rest of the year, there's really three key elements. To your point, the one that's most directly in our control is taking out $200 million of cost net of inflation. And not much of that is really helping us in the first quarter. There are some of the unmet manufacturing activities that we're executing on, but even that is being implemented through this quarter and the operational improvements flowing the inventory, and those benefits won't flow out until they start moving into the second quarter. So the vast majority of that $200 million gets spread across the three quarters. So that's a big step up Q1 to Q2. The second one is how will spreads improve. Now we've had tremendous success in being disciplined and successful in managing our pricing with just great commercial excellence across all parts of the company. It's pretty extraordinary when you think about the amount of inflation that we faced. Last year was about $1.3 billion of inflation where at the beginning of the year, we didn't really expect that much inflation if you go back to our January call of last year. And if you look at it on a two-year basis, it's $2.4 billion of inflation, if you even go back to 2019 to '22 $2 billion of inflation. So a significant amount of inflation, and we've caught up with most of that and across that multiyear timeframe. We certainly kept up with it through last year. So as you go to each segment, the story is a little bit different. So Advanced Materials is probably the most important one to start with because it has a pretty significant tail when in spread. When you think about it, they had one of the most challenging raw material and energy environments across our segments with VAM and PVOH up 45% relative to '21 PX, up 40%; energy up 70%. Now they kept up with that inflation with 13% increases in price, but they did improve spreads. And if you go back to where we were at the beginning of last year, we had the intention of recovering spread compression in '21 of about $100 million. Now we didn't get that, but we did keep up with inflation. And we're starting now into this year at a much higher altitude with the prices that we've achieved in keeping up with this inflation. So as we look at this year, we see that this segment is going to have a pretty substantial tailwind in raw material and energy. And we're not trying to be too optimistic about this. If we just use the -- where raw materials have already come down in VAM, PVOH and PX for the first quarter of this year and think about the energy off of the natural gas forward curve for the year, that's actually quite a bit more spread tailwind than what we would have thought last year of that $100 million because of the higher altitude. So that's part of it. And again, that shows up as a step up as you move into the second quarter. There's a bit of it that flows through in the first quarter, but most of that is in the second quarter through the fourth. With Fibers, much shorter cleaner story, which is you had a lot of challenges in inflation here as well, both especially in energy and the market, the customers have moved to being worried about security and supply. So you've been very successful in increasing prices last year as well as contractually securing much higher prices this year to make sure that margins are back to sustainable levels to support our customers. And that's $275 million outlook to earnings this year, which is a significant step-up in fact, enough to offset the spread normalization in chemical intermediates that we expect this year. And then A&P will have modest spread improvement as well, but not as much because they managed spread quite well last year, so they have less upside this year. So you put it all together, that's a lot of spread improvement and a lot of it flows in sequentially into the second quarter. So that's a big step up. The third segment is volume and mix, and this is more of a mix of what happens with the economy versus what's in our control. Destocking at some point is going to end. We're assuming right now that it predominantly ends by the end of this quarter for durables and B&C. And so you get a step up of demand going from destocking levels, which are pretty severe to something less than that. In the stable markets, we can see moving past that some amount of growth from those markets. Importantly, innovation is something in our control, and we've had a lot of success last year despite our challenges in the economy and securing a lot of new business wins that are going to help this year. And again, that doesn't really happen during destocking. So you got to wait to get that past you to start seeing some of that benefit. And then, of course, there's China recovery. But we're being very conservative in not assuming much of that in our sort of outlook that we've provided until we see more proof of it. So the bottom line is there's a lot of step-up across these three factors. Many of it is in our control. But as you look at the guidance we gave you for the year, given the outlook for the first quarter, I think it's appropriate to sort of look at the lower half of that guidance for how we're going to perform until we get past this quarter and have more insight on all these factors. Hi, David. Thank you for the question. It's one of the bright spots of the year and one we're excited to talk about. Fibers has obviously been on a tough journey since 2014 when the market structure loosened up for a variety of factors. But the situation has evolved and changed over time. First is on the demand side. We historically thought about demand declining in the 2% to 3% range. But what we've seen over the last few years is it's only declining around 1%. And partly, that's driven by the strength of the heat-not-burn segment of the marketplace that is growing at 15% a year, offsetting some of the other decline on the cigarette side. China has also stabilized to being pretty much flat to slightly up in demand over the last several years. So you've got stabilization of demand, the heat-not-burn market growing. And the heat-not-burn devices require quite a bit more tow per smoking experience than a cigarette. So that's also helping. If you look at in the last decade, we've only been down about 10% of demand as you sort of put all these factors together. And we uniquely at Eastman also have the benefit of the textile growth, providing stability and margins to our business. On the supply side, there's also a lot that's changed in the last decade. So you can see about 15% of capacity has been shut down or repurposed. That's assets that have been retired, the impacts that Russia has had on capacity in their country as well as us repurposing some of our assets towards the textiles growth. And the move to like the slim cigarettes, especially in China, as well as two free cigarettes has actually had a significant impact on the effective capacity. It's much more difficult to make those products, so you lose a lot of capacity, at least 10%, maybe 15% of capacity is lost with that. So the industry has gone when you put those factors together to being pretty high in capacity utilization, where the conversations and then the focus with our customers is how we are reliable, secure supplier for their needs. You have to remember the value of tow and the final price of the cigarette is a very small percent. So making sure they have it to sell their product at very high margins is incredibly important to them. And that's not the focus. So that's allowed us to get quite a bit of price up last year, so already good momentum, seeing some of that benefit already in the fourth quarter of last year that indicated the trajectory we're on for this year. So we give you factors as sustainable and improving the earnings quite a bit. So I would say this year is going to be at least $275 million when we put all those factors together. The other thing that it does is it gives us a much more solid base for our overall cellulose extreme and very strong cash flow to support the investments we're making in the circular economy, not just the polyester side, but we have a huge number of opportunities on the cellulosic side, with our recycling capabilities to take plastic waste into that product also being biodegradable is allowing us to realize why growth in our Naia textiles, we told you a lot about. So you're going to hear a lot more this year around Aventa food service that has a huge market opportunity to replace polystyrene and the microbe. So the cellulose extreme is shifting to being pretty attractive and sort of when we put it all together, growth business. And just on cash flow. You mentioned increased to $1.4 billion this year due to a number of actions you're taking. Can you just sort of on patty taking and specifically working capital release this year? Yes, David, this is Willie. I would highlight to your point, basically, in 2022, I'll call it, the inflationary pressures consumed another roughly $300 million in working capital. As we look at 2023, we see, call it, an absence of that inflationary pressure as well as we optimize the inventory for the new demand levels. We think there's at least $300 million on that front that we'll benefit from on a year-over-year basis. Also, as you think about cash earnings, I would say you need to look at higher cash earnings year-over-year as we normalize for the pension and also as you normalize for the variable comp coming back to normal. Those two items should put us at $1.4 billion or above, and higher taxes will bring us back down to the $1.4 billion level. So that's a high-level bridge for you. The price of version plastics has been very volatile lately. So has the interest in recycled content that you're negotiating changed at all given lower version plastic prices and perhaps weaker demand? So a good question. We haven't seen any real change in people's interest when it comes to recycled content. If you think about it, the brands have set out very aggressive goals in '25 and 2030. And the pressure out there for why they set those goals is just increasing, not decreasing when it comes to plastic waste. So consumers are very sensitive to this topic. There's obviously a lot of environmental NGOs putting a lot of pressure on this and politicians, both in Europe and in the U.S. are doubling down on sustainability, climate impact, plastic waste and the policies that they're putting forward. In Europe, you've got extensive policy around plastic waste reduction and recycling that was passed a couple of years ago and the rules are being implemented now that requires you to have 30% recycled content in your packages, if you want to put them on the shelf in '25 in taxes for whatever it does in every cycle content in it. So there are significant economic drivers in Europe that are driving brands to be committed to that. In the U.S., the NGO pressure, the social media pressure on brands is pretty high. And you now have at least five states already passing some version of legislation that's driving change like what's going on in Europe and some of those are quite big states like California. So the policy pressure and almost requirements to do it are there versus pay a tax and from a brand that's easier to be sustainable than pay a tax from a choice point of view. So the brands have these commitments. The other challenge I've got is the mechanical industry is not remotely capable of supplying the recycled content that's needed by this 2025 timeframe back into food grade, while material gets recycled down into other applications like textiles and park ventures, et cetera. But they -- but to get it back to food grade that quality mechanical recycling just can't meet these goals. So the need for our capability is very much there. The brand engagement is very strong. And we've seen tremendous success already on the specialty front, as we've shared with you with the 1,000 opportunities that we're pursuing with customers around our first plant here in Kingsport. But on the PET side, like the Pepsi contract that we just accomplished, we see that the central part of actually solving this crisis. The other thing I would note that a drop in demand in short term. Yes. I just forgot to mention one thing on the rPET, if you're looking at short-term demand and it's dropping, that's actually not about packaging. It's the carpet people and the textile people having such low demand. They were also buying clear bottles, and they're not buying those clear bottles anymore for their feedstock. And so that's why short-term demand is coming off is purely what's going on in the durables and building construction sector has nothing to do with packaging. And just a follow-up on Advanced Materials, Mark. Do you need raw materials to come down from where they are today to get to your targets of be meaningfully up versus 2021? Or are you assuming sort of current spot raw material prices pretty well for the rest of the year? Yes. On the spread assumption that we've got and how Advanced Materials improves, we're assuming that we don't have another inflation crisis like we did last year, right? So VAM and PVOH prices were extraordinarily high because the VAM producers, half of them in the U.S. were unable to operate for five months. So we had prices for some periods of the spring and the summer were double because of that extreme market tightness. And we had to buy a lot of very high-priced material from the spot market out of Asia to continue to supply our customers. So getting rid of all that market tightness, which is where sort of VAM and PVOH prices have now gone to some degree, I think there's still more coming down, but we're just using where we are today for this quarter and how we project spread improvement versus last year. Same with PX. We're not assuming a dramatic improvement relative to where PX is now. You could look at 6 million tons of PX capacity coming online this quarter in China, and PX prices could get lower, but that would be upside. We're not banking on that in our outlook. We are assuming energy costs get lower, as I said, we're using the forward curve on natural gas for that. But that's what's in the sort of outlook we're giving you for this base case. Could things be higher? Sure. But that would require a pretty significant move up in oil from the sort of $80, $90 range we're in. And I think we feel good about this base case given sort of the world that we're in and the macroeconomic challenges that we face right now. First question, just on the circular plastic build-out, a bit of inflation so far, and you still need to break ground on the second and third facility. So can you just talk about what you're doing today to help make sure we don't get further CapEx creep year over, say, the next year or so? Sure. So there's a lot that we've been doing to manage a difficult capital construction environment last year for the Kingsport plant and have done a great job in keeping those costs under control. A little frustrated by the challenges in getting craft labor to get the plant sort of completed here, but the cost control is working well. And we're confident we'll get this plant up and running early summer. When it comes to the next two projects, there are a couple of things we're doing. One is some of the commentary we provided in our prepared remarks about how we're building these plants. So we had a design for building these plants where we were always going to start out with 100 KMT of capacity, but designing them upfront to expand to be 50% bigger when you add it on the second phase. We've switched to taking a more standardized approach to sort of say, look, we're going to build identically what we're building here in Kingsport in France and in the second U.S. project with Pepsi. So a very standardized approach to leverage all the engineering, procurement, construction approach to sort of build a replica of what we're doing here in a very efficient manner. So that's one way we're going to help to keep the capital cost down. Now to be clear, we're still spending capital at the site to make sure the infrastructure is in place for what we will do is double the capacity at each of these sites over time after we get the first site, first modules up, if you will. So we're actually sort of expanding what we think we can deliver between now and 2030, doubling it versus go 50%, but we're taking a more standardized approach. And this also allows us to take a lot of insights we have around how to improve the technology on energy efficiency and feedstock robustness into that second phase in this more modular approach. So there's a variety of benefits. The other thing we have really factored into our capital estimates yet is a slowing macroeconomic environment should create some deflation in the construction industry. We're already seeing it in the price of steel and pipes and things like that. So materials are going to get cheaper. I don't think the cost per labor hour is going to go down. But I do think we're going to have more availability of resources, higher quality resources. So productivity will improve in materials and equipment will probably come off in price. So that will help also keep control on the CapEx numbers. Great. And then second, just on Fibers and the new contract there. If I remember, most of your tow business was moved to long-term contracts a few years ago. So is this new pricing just reflective of a portion of your current business that we'll see further resets over the next two years? Or is this a big reset for almost all of your business here today into '23? It's a big reset for most of our business. So about 2/3 of our business is on contract. A lot of that is multiyear. Some of it is annual. And even with what is not on contract, it's pretty firm agreements when it comes to volume on an annual basis. So we -- just the nature of when all these contracts started to turn over happen to be last year into this year that gave us the opportunity to have these negotiations and increase these prices. That's why you're seeing this all happen now as opposed to a year ago when the market was already started getting tight, but we didn't have the contractual flexibility to make these changes until now. Mark, could you talk a little bit more about, I guess, two things. One, I was struck by the consumer durables comment in Advanced Materials where your volume was down 40%. That just seems like an enormous number. So could you just talk a little bit more about how that's actually impacting Advanced Materials business and what the sort of cadence of improvement is it's going to be? And then also, could you just sort of detail a little bit your assumptions about the auto business for '23? I think I read that you've got expectations for sequential decline from 4Q to 1Q and some modest growth overall in '23. But is there anything changing about the customer mix of your products for the in terms of the cars they're building and the tech that's in them or anything like that, just given it seems like the automakers are starting to focus on different things in a more recessionary environment. Sure. So both very relevant important questions for us. The consumer durable business is incredibly important markets where we sell our Tritan at very high margins and have had tremendous growth over the last decade. What I can tell you, and we've been doing a very deep dive on what's going on in the fourth quarter, as you would expect, it's entirely market-driven. When you look at some of what's going on in the specific parts of the market we're in, which is small appliances, housewares, electronics, that part of the durables world, it's just been declining really for quite a long time, right? So the underlying market started declining in the second quarter of last year modestly. And then as people started switching to travel, leisure versus buying a lot of durable goods, you saw that in the announcements from Walmart and Target, if you go back to May. And what we didn't really fully appreciate is just how much overstocking the retail sector was doing in ordering from everyone who could supply them because they were so short of material and then suddenly it all showed up and they had a lot more inventory to get to get out. And with inflation being so high, the consumer durable sector is the first thing people stop buying. And you can see that in the semiconductor data, you can see that in the electronics where they're dramatically down. So when we look at what's going on in the end market, you can see a lot of evidence at the primary demand level of demand being off, but not nearly as much as us, right? So the retail sales data will show our direct end markets might be off 10%, 15%. And we're off 40%. So the rest of that is, by definition, destocking. And that's because of these retail inventory channels that are so overstuffed, and it just took a while to get that momentum to try and pull down production through the entire chain. So it's challenged. And it's continuing into the first quarter, and we expect it to be equally challenging this quarter as the fourth. But at some point, it's going to end. And from what we can see so far, we think they will get this under control mostly by the end of this first quarter, and then you've got a big step up in demand when the destocking is over to sort of lower demand than what is normal but still a lot better than 40% down, and that's part of the step-up in earnings for Advanced Materials as you move into the second quarter. On the auto side, demand, we're being, I think, conservative probably a little bit more conservative than what the consultants would say about demand being slightly down in the fourth quarter -- in the first quarter and not improving much for the year. So if we're wrong about that and production improves more, that's a lot of upside because those are very high-value markets that we serve in our earnings. But the shift in the market, to get at your question, Vince, is really important. That shift is very favorable to us. So we now got about 10% of our sales going into at very high margins. You have to remember that EV is about 3.5x more value for us than an ICE car. There's a lot more glass in an EV car and a lot more functionality. They're putting in it from acoustics to solar rejection, to heads-up display, et cetera. So the value capture there is tremendous on a mix lift basis. So the EV trend, and we are aligned with the top players on this with our products is a significant opportunity. I'd also say head-up display in general, not just in EVs, but all cars have a lot of growth momentum. It was a big mix uplift last year and even though down market, and we think that trend is going to continue and accelerate into this year as a result of the semiconductors, there's a lot in the HUD. There's a lot of times if you were trying to buy a car last year, they would let you order the HUD because of semiconductor limitations, that's going to resolve. And so we see the HUD market picking up. I'd also note that, that's in large. The paint protection business and the performance films business is doing fantastic, very strong growth, very high margins. So we got a lot of mix uplift relative to the underlying market in auto that helped us offset some of the challenges last year and certainly will be a significant lever versus last year into this year. Jeff, thanks for the question. I would highlight we have two major pillars within this. We've highlighted roughly $125 million of this we'll be taking from our operations, which would include manufacturing and supply chain and then $75 million, I'll call it, more in the non-operations which would be SG&A and -- primarily. So I'll break it down a little bit for you. So on the $125 million, what gives us confidence is we expect more efficient operations as we run at lower rates due to moderating demand. As you think about the supply chains as well as our planned and unplanned schedule last year, we expect a significant improvement. I also think we've demonstrated even back to the COVID environment that we also leverage a pretty variable cost structure when it comes to leveraging overtime contractors, and we're already taking the actions at the end of the year, starting in Q1 to change that cost structure to the current demand levels. And we're very focused on operating at the most efficient level from an operations standpoint as we assess the demand environment that Mark has highlighted here. On the supply chain and the network optimization, we see $30 million to $50 million in that space as you think about us having to air freight, use inefficient modes on a year-over-year basis. So a substantial increase on that front. Also, as you saw in the prepared materials, we expect to have roughly $25 million lower maintenance year-over-year. And we're also looking at our asset footprint and as you saw, some restructuring charges there as we look on a go-forward basis. So that's on the manufacturing front. On the non-operations I would highlight, we've already, I'll call, reduced discretionary, and we're starting that here in Q1. So as you think about external spend versus our workforce reduction, that's about 50-50 from a cost impact on a year-over-year basis. Okay. And so these are net reductions. So does it mean that SG&A should go down $75 million all-in in 2023, exclusive of the $110 million lift in pension expense? And can you explain what the event was that caused the $110 million lift in pension expense? Okay. So let me break that into a couple of parts for you, Jeff. So on the pension, I'll hit that first. That will not impact SG&A or manufacturing. It's set forth on our income statement within the [EBIT]. There are two drivers as you think about pension, and they're equal. So the pension and interest to costs, we had lower discount rates. You can think about 200 basis points on the interest cost in 2022. That increased over 500 basis points, so a 300 basis point change on the interest cost. Our assets are lower year-over-year as you think about the market basically being down about 20% versus our assumed return of about 6%. That's about $50 million each is what I would roughly say there. On the SG&A question, our variable comp will be normalizing. So that will be a headwind on a year-over-year basis that we expect that to be substantially offset by the $75 million. So Jeff, one way to think about sort of the waterfall across the businesses and the cost actions is, the cost reduction actions are sort of equal to offsetting both the pension costs and the return to variable comp and inflation, right? We put all that sort of together. So sort of the fixed cost structure, if you will, is flat. The Fibers improvement offsets the normalization in CI. So you have to have a point of view that the two specialty businesses are able to deliver earnings growth over the annualized FX headwind for this year. That's another way to sort of think about how we get to sort of flat EPS, including pension is those specialty businesses have to offset basically inflation this year and growth relative to last year. We've given you a waterfall on sort of where that growth comes from. Willie, I'll give you a shout later on and talk about how Fermium can help on your pension plan asset returns. Mark, you mentioned in the prepared remarks that you're going to keep the cracker down through the first quarter. Can you talk about some of the factors in the outlook that you're seeing on the CI side of things and when should -- should we expect that the cracker will come back up in 2Q? Yes, our expectation is the cracker starts to come back up in Q2. Any way you can do the math on sort of cracking spreads right now last year. Remember, our crackers are a bit different where they're highly oriented towards propane versus ethane. And we're trying to make as much propylene as we can and as little ethylene as we can with the investments we've made in switching into RGP, which we're doing as much as we can because the ethylene market is very economically challenged for basically at cash costs on bulk ethylene. But as the propylene markets are starting to improve, you can sort of see that through January. The spreads, the crackers are recovering as we go through this quarter and that feeds into our expectation that, that is likely to continue or hold and we bring the cracker back up. Demand right now continues to be challenged. So we don't really need as much of the output which is why it's easy to sort of make this decision in the moment for both the demand and the cracker by point of view. But we expect demand to get better in the second quarter as well as the spreads to continue to sort of stabilize at these better margins. So that's sort of how we're looking at it at this stage. You have to remember that propylene prices are well below any sort of historical norm to oil. They're very depressed. If you go run that analysis, it's pretty extraordinary. So we're really just trying to get back to a more normal relationship to the price of oil on propylene. Terrific. And then if I can ask about the second methanolysis unit in the U.S. You'd indicated in the remarks that you've made progress on permitting, but you haven't selected a location as of yet. Can you just talk about how that process plays out? I mean I don't doubt that communities would welcome a methanolysis unit in our locations, but can you talk about a little more color there? Sure. So we -- first of all, we're really excited to have this relationship with Pepsi that baseloads this facility and gives us the confidence to move quickly on this project. We are looking at multiple sites. As you might imagine, we're looking at existing sites we own and whether we can leverage all that brownfield and existing infrastructure costs down in Texas. But we're also looking at some other brownfield sites in some other states that could be attractive and evaluating the capital efficiency of each of these sites, the feedstock, benefits of each site as well as the incentives that different states are willing to provide to promote investing in the circular economy and playing a role in solving this environmental challenge. And the engagement, frankly, across the states has been really high. And as you said, I think they're all quite interested and excited to sort of participate in this kind of a green project. But we haven't finalized that. I'm hoping within the first half of this year, we'll have that finalized and then start moving very quickly on the -- on this -- so not just incentives, but the permitting and the site development and everything else. The advantage of our new sort of standardized approach in building these plants so allows us to start the engineering now without knowing what the site is going to be. So we're already spooling up engineering for this site and designing it. And then we'll do from what is what we call inside the battery limits, the actual operating units of this plant, the sort of infrastructure will obviously be dependent on which side we finally select. A couple of questions on your capital deployment. So in the prepared remarks last night, Mark, I think you mentioned your methanolysis investments in the aggregate would cost $2.25 billion, which is up about 10% relative to your prior projections. Can you talk about how that flows through? Is it going to be ratable over the next five years or some other shape? And then related to that, are your returns still the same? In other words, are you able to perhaps extract a larger premium to offset the higher project costs? And I guess more broadly for Willie, do you think CapEx will run $700 million to $800 million over the next several years? Or again, is there a different shape to that as you execute on these investments? Kevin, thanks for the question. Yes, I would highlight here in 2022, we already invested approximately $300 million as we think about our circular investments that we highlighted in the prepared comments. So as you think about approaching $2 billion over the next three to four years. In 2022, '23, we're increasing our CapEx budget to $700 million to $800 million. That includes a step-up on a year-over-year basis. And yes, as you think about a normal, I'll call it, a large capital curve, it will definitely be over $800 million through that time horizon and probably will peak around $1 billion to $1.2 billion. Yes. So on the return front, to be clear, what we announced in the prepared remarks today around the design of the facilities is the same as what we had in our economics back in 2021 innovation phase. So the first phase was always going to be the -- around this 110,000 tons of waste being processed. And so the $450 million EBITDA has not changed, and we feel more confident in as we're actually securing prices with contracts and securing feedstock, both attainability as well as what it's going to cost supporting those economics. The capital costs being a little bit higher than what we had talked about that sort of 10% increase that we discussed in our prepared remarks don't affect the returns. We said where our returns are above 12% for the second, third project, above 15% for the first project. We said greater than -- or we have room to absorb some of these challenges you always expect them to happen, frankly, when you're doing these kinds of capital construction projects, and we always want to make sure we have robust plans for the economics to deliver returns. One, I have missed this, but if we're looking at the Kingsport methanolysis unit, can we just walk through the progression from cost to profit how much commissioning costs in 2023 numbers? What do we think for how that moves to profit in 2024 and getting that full run rate earnings on that facility? Yes. So I would highlight as you think about the start-up, we're talking about roughly $35 million, including, I'll call it, the depreciation as it starts up in the back half of the year. So as we think about the first project, you should be getting to a more normalized run rate of growth in 2024. And by the end of '25, we would expect to be close to the full run rate of the plants, which we've highlighted could approach roughly $150 million per project. All right. On that end, would that mean that 2024 is just neutral? Or would you see EBITDA? And then I guess just a question, you don't really talk much about buyback for next year. And I know CapEx is going up, but it still seems like maybe you have $200 million, $250 million of after dividend cash flow. Do we assume that goes to buyback or I mean your leverage is fine. Can you do in excess of that? Yes. So definitely, we expect 2024 to be accretive from our Kingsport circular methanolysis projects. So we're confident in the progress. You'll see revenue here in the back half of '23. That turns into earnings and growth in '24 and approaching those run rates as we expect these plants given, I'll call it, the market excitement that's around that in the 1,000 leads that we're already working on. As you think about... On the capital front, versus share buybacks. So yes, we're -- on the capital allocation, our priorities remain the same. We increased the dividend here in the fourth quarter for 2023. Also, as we think about $700 million to $800 million of CapEx, and we're looking at prioritization of bolt-ons versus share repurchases. We're going to always fully leverage our cash flow to give shareholders return. So there is that capacity and we will put the cash to use. We always have this debate around best uses of cash in there on a principal basis. When we look at the circular platform, the capital we're deploying there has substantially better returns and valuation potential for the company than buying back stock today, and we think that's the appropriate way to deploy the capital versus buybacks on that front. Sure. Well, just to highlight, obviously, we executed $1 billion of share buybacks in 2022, both from our operating cash flow and the divestiture proceeds. So we will have, Iâll call it, EPS accretion as a result of the full year benefit from that. Right now, that's primarily offset by higher interest expense. Mark, just one question. You spent a lot of time over the us last several years transforming the portfolio to more specialty assets. And when you think about the performance in the second half, kind of the start of the first quarter, what can you point out to folks that demonstrate that maybe the performance has the special characteristics or maybe it's more the bounce back in the second half? And clearly, your multiple is where it should be, if it's the case. So just curious what your thoughts on that. Sure. So first of all, we think we've made tremendous progress in improving our portfolio over the years. We've obviously divested a lot of commodity businesses, acquired some great specialty businesses. In the past, if you go back to that sort of 2011, '12 time frame as well through the acquisitions to '14 and the divestitures more recently and optimize the portfolio. So I think we have a very good track record and portfolio discipline. I think last year, as you look at it, it was a uniquely challenging year for two reasons that you have to sort of consider in judging a history and a future of this portfolio. Obviously, the fourth quarter turns out was the entirety of the earnings decline from a volume mix point of view. So we were actually flat in volume and mix leading up to the fourth quarter and the entirety of the volume/mix decline was driven there. And because of some of the very unique operational challenges we had last year, those limited our ability to deliver growth, especially in Advanced Materials. So those two factors sort of constrained what was on track at the beginning of January before the Ukrainian were rapid inflation, everything else was going to be a really impressive year of earnings growth. So I wouldn't sort of overwork on trying to interpret too much into the 2022. Our challenge and our proof point will be if we deliver this performance that we've just sort of suggested in our outlook discussion today, in this kind of challenging economic environment. That's a really strong endorsement about the quality and strength of the portfolio to manage through these challenges. There's no question, we create a lot of value in markets that have economic sensitivity, whether it's B&C or durables or auto. Auto, all last year was at recession levels. 80% below 2019 is not a good year for auto demand. And we managed to actually still do reasonably well in that business on the volume mix side. So I think we feel really good about the quality of the portfolio from a volume/mix point of view and its ability to deliver innovation and growth through all kinds of platforms, not just big circular platform we've been talking about, but cellulosics has probably $200 million upside when we go forward. over the next three, four years. And then the interlayers business, as I discussed earlier, has a tremendous amount of growth. PPF is great. Coating, adhesives has a lot of sustainable introductions to the marketplace, semiconductor leverage we have in high-purity solvency. So growth innovation is very much there as the specialty business should have to deliver good results. Margin stability actually is on the spread side quite good. When you look at the portfolio, how it combines together to deliver steady spreads at the favorable margin level. And we've demonstrated very good commercial discipline. So what you really got last year is a manufacturing recession in one quarter and a huge currency headwind for the year. And then some limitations on how much growth we're going to have with some one-off operational issues. So I don't think there's any lack of differentiation in this portfolio or quality of that. And I think as we get through this year and start delivering pretty significant growth next year, assuming we put this recession behind us, is going to be very attractive for owners. You had an ethylene/propylene flex project for Longview. Has that been delayed? And if you had that in place, would you have still shut down the cracker? So we're not yet constructing that project. We are completing the licensing and the early engineering work around being able to pull the trigger on that project as soon as we feel it's appropriate. We have a lot of requests for capital across our portfolio back to valuation discussion that I just commented on. It's not just circular that has a lot of capital opportunities for very attractive returns on investment. Our whole specialty portfolio has those opportunities as well. And while certainly, the current economic challenges are there, we don't see a lack of growth opportunities across our portfolio on the specialty side. So those get priority call on capital relative to the ethylene and propylene investment. It's one that we will for sure do when it's at the right time, but we're going to have to be thoughtful about how we manage our overall CapEx budget. And to answer your question, if E to P was in place, we would not be -- we would not have left as cracker down. Remember, we had it down for maintenance. We just didn't bring it back up after we completed the planned maintenance. And we would certainly pin down for the maintenance in Q4, but would have been switching to E to P right now. Two quick ones. First, on the renewables capacity, will that inventory build show up on your P&L? Or will it be separate? And can you give us a sense for the magnitude? And secondly, on the end market comments that you're hearing from customers, I guess it looks from your presentation is if the overall theme is the industrial recession driven by destocking to recalibrate, but underlying demand is pretty solid -- is pretty stable outside the construction markets. How confident are your customers on that? Or -- and when do you think they need to -- or -- and how much warning do you think you would have if they need to recalibrate? Sure. On the Kingsport methanolysis project, obviously, we've built out the supply chain. We already have the key raw materials and lease cycle materials as part of our inventory here at year-end as we're preparing for a startup next year. So you can think about there's no significant impact of transitioning from fossil fuel feedstocks to recycled content as we go from '22 to '23 as we think about our projects, second U.S. project and the project in France. Again, we could have different operating models in the regions that those are not significant working capital builds. When it comes to your end market question, when you think about end market exposure in three buckets, right? The one that's most impacted by this sort of manufacturing recession is durables and building construction. The 40% down in durables, as we talked about earlier, down in building construction in the fourth quarter in AFP. So those markets are being very heavily impacted. And that destocking relative to the retail data is pretty significant relative to end market demand, which is still quite weak. So there's that. We do think destocking by definition as in at some point. It's hard to say exactly when, but we've told you what we're assuming, and you can factor what you want to believe into the models. When it comes to auto, auto demands are already at recession levels all last year, right? So that second bucket, which is a huge driver of profit for the industry as well as for Eastman, probably has limited downside and more upside as we go through this year, even though we are going into an economically or already in an economically challenged area where consumers have discretionary choices on where they want to spend money. So we do think that's going to sort of be stable and sort of modestly improve. And within that mix, I should have also said earlier, we are levered to the luxury market with all of our products because they're very high-value products that we're selling. And that part of the market is likely -- has held up better last year and certainly going to, I think, hold up better this year in sort of these economically sort of expensive times when it comes to interest rates. And then the third bucket, which is about half of our revenue is what we call our stable markets. This is medical, consumables, ag, food, feed, all these sort of end markets are water treatment that are very stable. Now we saw quite a bit of destocking even in the stable markets in the fourth quarter across the entire company as people were trying to get rid of high-cost inventory, generate cash for themselves. So that was a big part of the headwind too less than a percent basis, but happening everywhere as part of the challenge. There, we see that destocking playing out because their markets are stable. So there's not a lot of destocking they can actually do. So that starts to really help stabilize as we go through this quarter into second, the overall revenue base across the company. So Mark, on methanolysis, you mentioned your CapEx is up 10%, but you don't expect a huge change in the returns you expect. Are you passing on the increased cost to your customers? And also, the plastics are cyclical. And so you -- if you want to get steady returns there, are your customers willing to take the cyclicality of the plastics and volatility so that you can cap steady margins? Yes. So I think from a spread point of view, the way we're sort of contracting into the PET market is with our -- what we call our circular contracting model, going to provide steady spreads between the cost of feedstock and energy and the price of material. So from a spread point of view, we expect to have quite good stability, I think Airgas company kind of model. Demand, of course, is still subject to end market demand. So when it comes to sort of the volume, there's always going to be some variability, but we're going into packaging and the consumables. So the variability in that volume on an annual basis year-over-year is pretty stable, right? So I don't have a lot of volume concerns there. When it comes to the specialty side of this circular platform, we're not changing the end market sort of structure in both demand or how we do pricing. We're just adding recycled content as another dimension of differentiation to Tritan and all the other copolyesters in the cosmetics everything elsewhere selling. So we'll still be sensitive to demand changes when it comes to the circular platform that we'll be capturing higher margins relative to what we currently realize in these products and growing total volume quite fast, right? One of the reasons we win in the marketplace is high-value growth, driving mix upgrade against such cost leverage, right? That is very true in good times, and this will lead to much more accelerated growth from these kind of products to fixed cost leverage. But unfortunately, face downtimes like the last fourth quarter and the first quarter of this year where that mix is a headwind. But when you look at the upside in our stock, as you get through this, not just for circular, but for just market recovery, there's a huge mix upside for our company as you go into the back half of this year in '24 when you think recovery is coming, which we demonstrated coming out of 2020. Mark, the Airgas or the industrial gas model hasn't really worked in plastics. What gives you confidence that this would work this time? Is it because this is such a specialty product and the consumers want it or the customers want it that you can have that kind of contract structure? Yes. So as I said, in specialty, it's just our current model. But when it comes to the PET, that's where the industrial gas model concept applies. And yes, it's a unique offering, right? We're the only large-scale company on the planet, especially in North America and Europe, who's offering recycled content from hard recycled plastics. And when you get to the food grade industry, mechanical can't remotely meet their needs. And someone has to plug that gap if they're going to hit their targets, and we are way ahead of our competition in being able to provide that service. And that's exactly what an Airgas company does to provide a service to convert a product into a highly needed input. And that's sort of where we're at today, and that's our confidence as we go forward into these three projects. And that's why we continue to maintain a discipline of not building these kind of facilities unless we get these kind of contracts because I'm not getting back into as you said, P.J., the traditional plastics business with high yield margin volatility, we just won't do that.
EarningCall_987	My name is Julianne, and I will be your conference facilitator this afternoon. At this time, I'd like to welcome everyone to the Fortive Corporation's Fourth Quarter 2022 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Ms. Elena Rosman, Vice President of Investor Relations. Ms. Rosman, you may begin your conference. Thank you, Julian, and thank you, everyone, for joining us on today's call. With us today are Jim Lico, our President and Chief Executive Officer; and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. We present certain non-GAAP financial measures on today's call. Information required by Regulation G are available on the Investors section of our website at fortive.com. Our statements on period-to-period increases or decreases refer to year-over-year comparisons on a continuing operations basis. During the call, we will make forward-looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and actual results might differ materially from any forward-looking statements that we make today. Information regarding these risk factors is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2021. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements. Thanks, Elena. Hello, everyone, and thank you for joining us. I'll begin on slide 3. Fortive had another quarter of outstanding operating performance in Q4, delivering 14% core revenue growth, 50 and 110 basis points of adjusted gross and operating margin expansion, respectively, 11% adjusted earnings per share growth, 62% free cash flow growth, all ahead of the guidance we gave in October. Our strong purpose-driven culture is supported by our relentless focus on executing for customers and shareholders in 2022. The continued evolution of our portfolio within the markets we play is characterized by strong secular drivers, which powered 9% ARR growth in our software businesses and backlog expansion in our hard products businesses, contributing to record core revenue growth for the year. Our performance would not have been possible without the dedication of our 18,000 team members around the world. Team overcame continued supply chain and inflationary challenges, which will likely linger into 2023. We believe the power of the Fortive Business System is a key differentiator, contributing to more profitable growth, record gross margins and free cash flow generation. As we look forward, we're excited to update you on the progress we've made on our multiyear targets and strategies that are driving outperformance at our upcoming Investor Day in May. Turning to slide 4. Even against the backdrop of a difficult macro in 2022, Fortive continue to validate the investment thesis that we have pursued since 2016, delivering core growth of 10% and 20% on a two-year stack basis, accelerating over the last few years. Our portfolio transformation has also driven approximately 1,000 basis points of gross margin expansion since 2016, which has translated into higher operating margins and provides further opportunity to improve margins in the years to come. We also delivered free cash flow growth of $1.2 billion, with margins approaching 21%, underscoring our ability to compound cash flow off a higher base, a key Fortive differentiator and value creation driver. In summary, we had said that 2022 would be a show-me year and we delivered strong results across all of our segments, which I will highlight in more detail on the next few slides, starting with Intelligent Operating Solutions on Slide 5. IOS grew core revenue by 13%, representing its third consecutive quarter of double-digit core revenue growth. We had good growth in all regions, with low double-digit growth in North America, mid-teens growth in Western Europe and high 20s growth in China. Double-digit core growth in every workflow, combined with our rigorous application of FBS, drove 330 basis points of core operating margin expansion, more than offsetting inflation and FX headwinds. Looking at our performance drivers by workflow and connected reliability, look at low teens growth, supported by a strong backlog position and continued success with their new solar and calibration products serving the energy, renewables and electric vehicle markets. POS remains strong in every region. However, we expect to see some slowing as supply chains continue to normalize. Strong end market demand drove double-digit EMEA SaaS revenue growth in the quarter, with record net dollar retention of approximately 106%. In EHS, revenue grew by high teens with strong contributions from both Industrial Scientific and Intelex. Industrial Scientific revenue grew approximately 20%, as strong demand was supplemented by record iNet expansion and higher instrument shipments following the resolution of key supply chain issues at the end of the third quarter. Meanwhile, Intelex posted another quarter of low double-digit SaaS growth. They have successfully deployed FBS initiatives to accelerate software implementations and create upsell opportunities to customers. Moving to facilities and asset life cycle. We had low double-digit growth in Q4. Vontier revenues once again increased double-digits as customer labor shortages and deferred facility maintenance continued to drive higher volume through the company's job order contracting platform. Accruent SaaS revenue grew by mid-single digits, despite a sizable headwind from end-of-life products. Accruent continues to see good success from its recent go-to-market focus in asset management and workplace solutions to enable mid-single-digit revenue growth in 2023. And ServiceChannel saw another quarter of double-digit revenue growth taking their full year growth rate to just under 50%. As a reminder, we are transitioning from a largely pass-through revenue base to a better long-term business model that includes more recurring SaaS revenue. This change will create a short-term revenue headwind in the first quarter. However, we expect service channel to remain a strong double-digit growth business in 2023 with above 20% adjusted operating margin. Turning now to Slide 6. Precision Technologies delivered another strong quarter of double-digit revenue growth in every business. Core revenues increased 20%, driven by high teens growth in North America and greater than 20% growth in both Western Europe and China. PT also delivered 240 basis points of adjusted operating margin expansion with higher volume, price realization and productivity more than offsetting inflation in FX. Some highlights for the quarter include: record quarterly revenues and operating profit at Tektronix, which continue to benefit robust backlog, driven by new product launches, share gains and new entry in mainstream as sold scopes. We saw orders slow in Q4 as expected as demand normalizes following the 40% growth we've seen over the last two years. Sensing Technologies had another quarter of mid-teens growth, driven by strong price realization across all businesses and continued demand in Qualitrol's utility and power business, offsetting industrial and semiconductor demand softening. Combination of Gems and Setra in 2022 also drove approximately 200 basis points of margin expansion and four working capital turns improvement. Pacific Scientific EMC saw high 20s growth in the quarter, facilitated by capacity expansion and improved materials availability. Moving now to slide seven in Advanced Healthcare Solutions. As expected, revenues increased 5% in the quarter, driven by broad improvement across all health care operating companies. By major region, mid-single-digit growth in North America reflected the benefit of our higher installed base and some improvement in hospitals, partially offset by a low single-digit decline in Western Europe and a high single-digit decline in China. The exit rate on China elective procedures was the lowest we have seen post-COVID and roughly 30% of normalized levels. January 2023 volumes were roughly half of prior year levels, which was reflected in our Q1 outlook for the segment. In the fourth quarter, AHS segment margins were down 260 basis points, driven primarily by higher inflation, partially offset by favorable M&A. Notably, margins were up approximately 400 basis points versus Q3. Versus our fourth quarter guidance, margins were unfavorably impacted by additional transactional effects and lower margins at Fluke Health Solutions. As we look ahead, the team is starting to see traction on their pricing and productivity initiatives, which we expect will deliver margin recovery in 2023. Some other highlights of the quarter include; ASP finished the year with core revenue growth of 5% as capital share gains and consumable volumes more than offset COVID headwinds in China. Even with inflationary pressures, ASP ended Q4 with the strongest margins of the year and continued to deliver strong working capital improvements. While hospital profitability remains pressured, due to labor and inflationary challenges, Censis continues to drive robust growth and in Setra SaaS offering in Q4 and for the year with mid-teens net new ACV and record cross-sell opportunities. Lastly, Provation is ahead on its return expectations, having contributed $0.10 to earnings in 2022. As customers continue to standardize our probation across their health systems, we are seeing accelerated SaaS growth, setting them up for a strong 2023. Turning to slide eight, the Fortive Business System is a powerful mindset that makes continuous improvement a way of life at Fortive. We drive deep engagement across our teams and hold them accountable for delivering on high expectations. As a reminder, in October, we brought together over 400 team members and our CEO Kaizen Innovent. Our most senior Fortive leaders, including our segment leaders and a number of our operating company presidents, collaborated to drive significant improvements in growth, margin, free cash flow, and breakthrough innovations across four operating companies, Fluke, ISC, Tektronix, and Censis. We're proud of the success our teams are having sustaining results to directly attribute it to this event, including, at Fluke, we reduced bold change over time by over 50%, eliminating stock-outs on critical plastic components and reducing past due backlog. At ISC, we applied lean conversion in the Fortive material system to improve quality output and turnaround time for iNet and rental customers, dramatically reducing the cost of repairs and product redesign. At Tektronix, we applied lean conversion to circuit board repair, increasing on-time delivery to 98% by altering material flow, installing 5S part management, and building standard work and documentation of our procedures. In Censis, we applied value stream mapping and transactional process improvement to identify the inefficiencies and waste, resulting in a 50% reduction in time to onboard new customers. With Kaizen activity accelerating in 2023, we expect significant results across in the year ahead. I'm incredibly proud of the work we have done in 2022 to deliver powerful results and continue our progress towards building a more sustainable future, as you can see on slide nine. We believe in taking a holistic approach to creating value that includes setting aspirational and actionable targets across each of our sustainability pillars as shown on the page. Leading Fortive today is a diverse Board and leadership team, with recent hires and promotions advancing our commitment to top talent and diversity. Strong and inclusive culture is core to Fortiveâs mission, with inclusion and diversity, a critical component of FBS. Last year, we published clear goals to increase our diverse supplier spend, gender representation, by pack representation and senior leader diversity by 2025. We believe this has resulted in part to an increase in our employee engagement scores, up five points from pre-pandemic levels. Our progress also extends to how we protect the planet. It includes the early achievement of our 2025 greenhouse gas goal in the adoption of our new ambitious goal of 50% emissions reduction by 2029. It's our shared purpose that also pushes us to create innovative and sustainable products and services. Today, approximately 60% of our revenue is derived from products and services that enable more sustainable outcomes, aligned to the United Nations' sustainable development goals. And we have award-winning products that promote sustainability for our customers. Lastly, the commitment to drive meaningful and sustainable outcomes that matter most to our stakeholders is reflected in our recognition by Newsweek for the fourth consecutive year as America's most responsible company. With that, I'll pass it over to Chuck, who will provide more color on our fourth quarter financials and our 2023 outlook. Thanks, Jim, and hello, everyone. I will begin on slide 10, with a quick recap of our fourth quarter performance. We generated year-over-year core revenue growth of 14%. Acquisitions net of divestitures contributed 1.5 points of growth. FX headwinds were approximately four points. Turning to the geographies. We saw another quarter of double-digit core revenue growth in each of our major regions. North America revenue was up low double-digits with broad-based strength across our businesses, Western Europe revenue grew mid-teens, with volume contributions in hardware products and favorable pricing, partially offset by a decline in healthcare. In the fourth quarter, bookings growth slowed in North America and Western Europe as expected. Asia revenue increased high-teens, with low 20% in China, driven by robust growth in Intelligent Operating Solutions and Precision Technologies, more than offsetting a dramatic drop in elective procedures in China impacting Advanced HealthCare Solutions. Lastly, we saw a broad-based performance in our high-growth markets with mid-teens core growth. Turning to slide 11, we show operating performance highlights for the fourth quarter. Adjusted gross margins increased by 50 basis points to 58.3% as volume and strong price realization continued to demonstrate the value proposition of our products and solutions more than offsetting higher inflation. Adjusted operating profit margins expanded 110 basis points to 25.5%, up 230 basis points on a two-year stack basis. Adjusted earnings per share increased 11% to $0.88, reflecting a strong fall-through on higher volumes and productivity, partially offset by higher interest and tax expense. Normalized for tax earnings in the quarter were up 16%. Free cash flow was another standard. Strong year-end cash collections and the benefits of our FBS-driven working capital initiatives yielded $428 million of free cash flow in the quarter, taking the full year to $1.2 billion. Before turning to the guide, I wanted to provide some context on our 2023 outlook on Slide 12. We expect that 2023 will be another year of growth and margin expansion in each of our strategic segments supported by secular tailwinds, driving market expansion and new customer innovations. Our recurring revenue businesses at roughly 40% of sales are expected to benefit from the work we did in 2022 to increase demand generation and strengthen our go-to-market efforts, driving double-digit SaaS and license revenue growth. Elevated backlog in our hardware products businesses, particularly at Tektronix, is expected to derisk moderating demand as order rates normalize in 2023. Further, the benefit of 2022 pricing actions is expected to carry over into 2023, driving another year of above-trend pricing realization along with increased sourcing and value engineering savings contributing to gross margin expansion. We also expect our productivity initiatives to yield strong incremental operating margins, including actions in the first half of the year to countermeasure the slowing macro environment. Project paybacks related to these initiatives are expected to average one year. We have included these benefits in our margins and earnings outlook for the second half, with carryover benefits into 2024. In summary, we believe our 2023 outlook reflects a more resilient revenue and earnings profile, as we expect to weather the evolving macro environment. Turning now to the guide on Slide 13. We are introducing 2023 guidance. Starting with the full year, we expect core revenue growth in the range of 3% to 5.5%. Our outlook reflects a year-over-year foreign exchange headwind of just under 1% on revenue. Adjusted operating profit is expected to increase 5% to 10%, with margins in the range of 25% to 25.5%. Adjusted diluted net EPS guidance of $3.25 to $3.40, up 3% to 8%, which includes higher interest and tax expense. And free cash flow is expected to be approximately $1.25 billion, representing conversion in the range of 100% to 105% of adjusted net income and a 21% free cash flow margin. For the first quarter, we anticipate core revenue growth of 5% to 6.5% with an FX headwind of 2.5%. Adjusted operating profit is expected to increase 4% to 9%, with margins in the range of 23.5% to 24%. Adjusted diluted net EPS guidance of $0.71 to $0.74, up 1% to 5%, which includes higher year-over-year interest and tax and free cash flow of approximately $170 million, reflecting the stronger cash collections that pulled forward into Q4 as well as our normal seasonal variations. Turning now to Slide 14. We are expecting a 48-52 split of revenue first half to second half, which reflects a step-up of approximately $120 million of core revenue growth, which when you compare to last year, it's less than half of the increase we saw in the second half of 2022. The step-up in 2023 is largely driven by acceleration in new products, a ramp in the growth rate of advanced healthcare as we lap China COVID lockdowns and an increase in software and other recurring revenue streams. FX and interest account for abnormal earnings seasonality as FX becomes a tailwind in the second half of the year and interest expense is expected to decline as we pay down debt with available free cash flow as the year progresses, giving us a bigger than usual step-up in EPS first half to second half. In summary, our revenue outlook reflects a similar linearity profile to 2022 and while core growth decelerates first half to second half, it accelerates on a two-year stack basis. Thanks, Chuck. I'll now wrap up on slide 16. In summary, I'm incredibly proud of the contributions of our 18,000 team members to make 2022 a record year for Fortive and further differentiate our more resilient financial profile. As we turn the page on 2022, that resiliency will be on display again in 2023 as our outlook reflects an expectation for slowing growth as customer demand normalizes after two years of robust double-digit hardware product orders, but it also reflects the benefits of the investments we have made to accelerate strategy, strengthen our market position, scale our software revenues and develop new innovations that are solving our customers' toughest safety, quality and productivity challenges. As you've also heard today, we are seeing the benefits of our continuous improvement culture, unleashing the power of the Fortive Business System to deliver more profitable growth and strong free cash flow, again in 2023, allowing us to compound returns through disciplined capital deployment. When taken together, this creates a powerful formula for value creation with a high-quality portfolio of desirable brands favorably leveraged to sustainable secular trends, industry-leading margins and free cash flow generation and best-in-class execution, enabling Fortive to outperform in almost any environment. Can you just talk about -- for iOS, the margin expansion kind of sequentially from the first quarter for the -- through the full year, the kind of key building blocks for that? Yes. Hey, Steve, it's Jim. A couple of things. One, obviously, we play a role in that. And -- so as we continue to progress, we'll see that. As we noted, some of the asset life cycle, a little bit lower growth in the first quarter. We can talk about that, but that -- those margins will expand. So, the revenue coming back certainly in the software businesses there as well as just continued progression of -- a lot of the actions that we've got price will continue to be a helpful piece of this driving gross margin expansion along with our productivity initiatives. So, I don't think we've got anything dramatic from the first half to second half in terms of anything that you wouldn't normally see seasonally in terms of growth, price realization, productivity initiatives get more traction as you go through the year. Those are probably the big drivers outside of just normal revenue. And then should we assume this excess $350 million backlog that that all obviously gets washed out this year? And then what's the pace of that being washed through? Steve, this is Chuck. Actually, in our modeling, no, we wouldn't expect that all gets washed out based -- but of course, it depends on the order rate. It's one of the reasons why we think that we've got a pretty resilient forecast here. If the order rates moderate beyond where we think they're going to be, we could still do it. It's really still -- we've got -- supply chain is getting better. It's just -- it's not resolved. So it sounds like we can just flip the switch and get it all out. But we would -- we'd probably cut it in half. Hi. Good afternoon. I just wanted to start with some more detail on the product hardware orders. So I think those were up mid-single digit Q3. It sounds like they're up maybe low single Q4. And then you've got this slowdown commentary. And then also on slide 14, you talked about orders improving through the year. So is the way to think about that, you're trying to say that orders, I don't know, ended last year up low single, maybe they're down in the first half, grow in the second half? And then that's what informs the PT organic sales guide, because if I look at that on slide 17, you're starting the year up double digit. The year as a whole is up low to mid. So you're implying the organic sales in the year flat or down. Is that just, kind of, the orders flowing through with a six-month lag? Is that how we're thinking about it? Well, I think, first, we would think of the second half of 2022 is basically flattish for orders for those businesses. So a little bit down in the fourth relative to -- and right along where we thought. If you remember from the third quarter call, we said, yes, we also saw some orders that came in, in the first half for the second half. So that's kind of the backdrop of what we just described, backlog in and around where we thought it would be from an ending year. So the backlog, obviously, as Chuck just described, that obviously helps in the -- with some of the order down slowing that we saw. We expect orders to be around the same in the first half relative to those product businesses, Julian. So you think about probably the second quarter -- first quarter and second quarter being probably negative in those businesses. But backlog obviously mitigates a number of those things. And then it starts to pick up a little bit. Some of that pickup is an easier comp, obviously, because of what I just described in the second half of 2022. And there's a little bit sensing probably stays flat through the year is probably not a big improvement through the year in sensing, but a little bit of improvement in Tek. And we think Fluke will come back as well, typically comes back a little faster. And Julian, the only thing I'd just remind you is we have an easier comp in PT in Q1. So when you start -- when you look at $1 standpoint, it's not as dramatic as you move through the year. In fact, I think from $1 standpoint, we'd expect that it would -- there would be an upward trajectory in PT each quarter sequentially. Thanks. And when we look maybe within PT at Tektronix, maybe flesh out a little bit more what you're expecting. You've got that high-teens growth first quarter. The year is up mid-single. But I guess if I look at a lot of what's happened in, say, electronics, it feels like people are in kind of the teeth of the destocking right now and have been for three or even six months. So, I understand maybe you're protected a bit by the backlog in Tektronix. That means you have a sort of gradual descent through the year. Maybe just help us understand kind of where you see channel inventories in that business? And again, on Tektronix, it looks like the guide implies down revenue in the back half. Just wanted to kind of confirm a couple of things there. Yes. Well, number one, I think, on the back stuff, as we said in the prepared remarks, 40% order growth over the last couple of years. It's obviously a little bit higher growth rate than what we'd normally expect for Tek. So, what you start to see in the full year, itâs a moderation or a normalization back to that mid-single-digit growth. I would say when you think about customers, very much playing out the way we anticipated in terms of moving the business. The business just doesn't have as much of influence from consumer electronics anymore, where you're seeing a lot of that distortion with the things we've talked about in terms of power, data centers, industrial IoT, all of those drivers are really driving the business much more today than ever before, making it more resilient. So, I think those are all the things we've described that I think really continue to have the business. It does dissolve a little bit, but it moderates off of really, really large numbers. So I think mid-single-digit growth for the year is what we're calling out here. It could be a little bit better. We'll still end the year with a decent backlog, as Chuck was just describing a couple of questions ago. So, I think when we look at the business for the year, very healthy channels have almost no inventory. So we continue to see good point-of-sale strength. And some of that is just fulfilling past due to some extent, but there really isn't a channel inventory situation whatsoever. And so I think we're in a good place. Orders will slow a little bit, but some of that is just the big heavy comps that we've sort of had over the last couple of years. So we think we're in a good place, and we think we'll exit 2023 in a good place as well. Hey, Jim and Chuck and Elena. I hope you guys are well. If I look back at my notes, I think you said, the service channel probation would be like $0.12 accretive in 2022. It sounds like maybe that came in a couple of pennies better. Is that accretion step-up meaningfully in 2023? We think just given the growth rates of those businesses that would be a nice tailwind for you. But I know you did make some comments on the SaaS adjustment on service channel, though as an offset. Yes. Scott, you got right. We came in at, I think, $0.14 in 2022. And I would expect that, that would grow as you expected. We build on that $0.14 in 2023. Faster growth rates there, also more profitability in the first half in service channel and things. All that are going to give us a nice tailwind. And Scott, just to maybe add on to the first quarter service channel thing, as we talked about in the prepared remarks. This is really -- the SaaS revenues continue to be incredibly strong in the business. But we did have a little bit more pass-through revenue in the year than we anticipated. That's why we grew the business almost 50% on a full year basis. So really strong growth this past year. But we'll move to a better business model, which is a little bit less pass-through revenue and a much -- but the strength of the SaaS business has been there all along. We've now got a data analytics platform that we're offering as well. So we're really going to, kind of, get through that in the first quarter and a little bit in the first half, but the profitability really does raise considerably as well. We got what we needed in 2022 in that regard. We'll be an even better place in 2023, simply because the business model transformation that we intended to do is really start going to hit the -- full hit of the P&L through the year. All right. That's helpful. And I think it was Jim. You mentioned in your remarks that the discretionary procedures in China finished the year at like a 30% number, which 30% of normal, I think I'm reading it as, which just sounds crazy. But -- is that -- are you still seeing that in January? I would imagine that the reopening -- just the timing of the reopening, that stuff would pick back up here in 1Q pretty aggressively, but I don't know. But are you still seeing that kind of... Yes, I mean you got it exactly right. December, in particular, was really low. I think that speaks to the strength of AHF, quite frankly, on the revenue line is we were able to weather that storm because of the strength of other regions of the world. We talked about the 5% growth that we had in the segment. So we think, we're about probably 50% in January, so about half of where we were a year ago. But you're right, it's going to ramp. We're seeing some of that improvement. A couple of weeks ago, we think was the low point. But it's now picking up to 70 in a week, but we should see continued improvement. Again, on the other side of the Chinese New Year holiday, we'll get a better view of things, as we always do. But we anticipate that this will continue to improve throughout the year, as China just kind of gets back to normal, and we certainly started to see that. Hey. Thanks. Good day, everybody. Hello. Hey, Jim, as you're well aware, right, there's a process going on out there for national instruments and a lot of speculation out there about your interest. I'm sure you're fairly limited on what you might want to say, but any color you could give us on your appetite for any deal at large or you've expressed interest in the past and hardware-related deals? Anything there make any sense for you? Yes. So, I think, number one, we obviously, know the company and have read the news. So you're exactly right. We wouldn't comment on any process that we'll be involved in or not involved in, particularly a public one. But I would say this. I mean we've known NI for a long time. I can remember meeting Dr. T 15 years ago or so. So we know them well. We partnered with them at Tektronix and have for a long time. So I think what we've said strategically about all of our funnel was there was a balance of large, small deals, hardware and software. So we can -- the balance sheet is an incredible place right now, as you know. So we're in a great place to do things. But we're going to be disciplined. We're going to make sure that every situation we approach, we approach it strategically, how well that accelerates, what we want to do, and I'll leave it at that. But I think more broadly around M&A, we're in a very good place relative to our opportunities ahead of us. And we'll -- we certainly are playing offense in that regard. Great. Thanks for that. And then just totally shifting gears. Just back to kind of the inflationary pressures in AHS. At this point, do you have the cost and other actions in place to be neutral or better as we move through 2023? Maybe just put a little finer point on how you see kind of price cost and kind of the margin impact playing out over the balance of the year? Yes. So I think, more specifically around AHS, we called out a couple of kind of onetime headwinds in the quarter. We -- I think there's a number of things that are working in our favor relative to the 2023 year. Number one is North America. We had good growth in North America and anticipate that will continue -- we're not necessarily calling everything getting perfect in North America, but we do believe it will get better. And we saw that in the fourth quarter, and that's a good thing for our margin structure. And then number two, to your point, we're seeing a little bit more price realization in the fourth and into this year. Things are starting to get a little traction. We've talked about that on the call that it just takes longer, and we're starting to see that. And then finally, productivity. The team has -- that leadership team has really adopted FBS, and they've really embraced a number of things to really drive productivity. So, we don't see the additional inflation either as well. So the combination of we don't see incremental inflation at this point and we have those actions getting deeper and deeper into the margin structure, if you will, through the year. So, we feel like we're in a much better place starting here in 2023, both from a market and obviously, the kind of actions that we need to continue to make the business better. And I would just kind of ask, but we have grown gross margins in AHS -- operating margins about 130 basis points over the last two years. So, despite those challenges, we're in a good place. I call that the launch path from where we are today. Thanks, good morning everyone. Hey guys, how are you? By the way, [indiscernible] is going to be very happy, you put them in that competitive basket. So, just want to follow-up on Jeff's question, obviously, the National Instrument news is out there. Where do you stand philosophically on issuing equity for a deal? Because based on the math of we're doing -- your leverage will get to very high levels. So, just wondering, what is the leverage ceiling you prepare to go to for the right opportunity? And philosophically, would you issue equity for the biopsy? Nigel, it's Chuck. We've always felt we want to maintain an investment-grade rating. And so we wouldn't do anything that -- on any type of deal that would jeopardize that. I've pointed out in the past, we've done equity instruments, like the mandatory convert. And we've always said that in situations where we want to do something, equity has never been off the table. It just hasn't been needed at this point. Okay, that's helpful. And then just going back to the FY 2023 plan. How much of that $350 million surplus backlog are you sort of planning to eat into underpinning your plan? And then maybe just touch on the service channel SaaS transition. It seems like it's a very sort of discrete sort of intra-quarter, maybe 1Q first half event. These SaaS transitions tend to be kind of drawn out when we look at other companies. So, just curious why that would be so short-term? Nigel, I'll take the first part. We would expect to take of the excess backlog that we're talking about probably up to half of it is included in the assumptions for this year in this guide. But to be clear, this is what we consider excess. And that's still -- we get more out if supply chains get better. So there's a little more there, but it's still constrained by supply chain throughout this year. But getting back Nigel on the service channel question, I wouldn't think of it as a SaaS transition. The SaaS revenue has continued to be good. It's just -- we grew the business well over 70% in Q1 of 2022 and so with a large amount of this just pass-through revenue. And so if you think about it, we have a customer. Some of our contracts have. We're passing through a number of amounts of the facility maintenance costs that they have pain plumbers or electricians. We're just doing less of that. And so it's really not a SaaS transition in the traditional sense. That we're replacing that solution, though with some other added benefits. And so we -- that's why it's a short-term transition. It's really kind of going from losing some of this one-time pass-through revenue and quite frankly, we didn't make any money on. So I would see it as that, and that's why it's short-term as opposed to sort of a conversion of what you'd see traditional license revenue to SaaS revenue. We're not going to see that. This is -- service channel is 100% SaaS revenue company. Jim, you and Chuck mentioned increased productivity initiatives planned in all segments that primarily benefits the second half of 2023. I think you already mentioned FBS in AHS, but could you give us a little more color around what the bigger initiatives are and maybe size these initiatives for us? And then if there's any sort of cost to undertake these initiatives? Yes, Andy, the first half, we'd expect to put up $20 in $25 million to $30 million of cost. See cost to get after some of these structural things. Some of them are looked up, a few of those, but there'll likely be some outside of the U.S. Maybe there are some regions that we want to convert to a dealer approach rather than a direct approach, and I'm thinking here in our health margins. We've always thought that there was cost that we needed to improve our go-to-market there. And we're just getting after that. Got it. And then Jim, can you give us more color into what you're seeing by region? It looks like Western Europe has continued to be strong for you. We've talked about China and AHS, but outside of AHS is strong. So what are you thinking for 2023? You talked about orders slowing in Western Europe and North America, but are that more a function of supply chain normalizing? Or are more of your customers are little cautious to start in 2023? Yes, it's interesting. I think we've always thought for the last several months that customers would inevitably start 2023 out a little more conservative just given we've seen some of the Tek layoffs and some of those things, the PMI and where it is. And so that's number one. That's number one. That's kind of a planning assumption from an order perspective. Now we also knowing that we had -- we're starting here with a good backlog situation. I would say, if you think about it regionally, Andy, obviously, North America is going to be pretty good and pretty resilient, given the fact that we have most of our software businesses have the predominance of their revenue streams in North America. And I mentioned the health care, particularly ASP North American story. So, North America is going to be pretty resilient I would say that Western Europe and Europe more broadly, probably a weaker area for the year, just given a number of things. Some of that is supply chains normalizing a little bit back to normal. Some of it is just a little bit of weakness as well. China is going to be good all Healthcare will be weak in China in the first quarter because of the actives but should continue to get better through the year. So that's kind of the regional play, and that's sort of our planning assumptions going forward. I think it's still early days. Obviously, a lot of the year to play out here. But that was -- that's sort of fundamental to our planning assumption. Hi. We do this every quarter. Morning, afternoon, sort of depends. I hope everybody is well. Not to beat a dead horse on this hardware backlog conversion and sort of what's in the guide but not, but I just want to be clear here, Chuck, on that comment that you only have about half of the excess backlog getting worked down. I don't know how fungible that backlog is even within something like Tek where it's a little bit more weighted. But am I to understand then that like orders on a volume basis could be down close to double digits. And you guys are basically still hitting the guide if you can work down that backlog fully this year, providing there's no like other governor in the way? Is that sort of a fair way to think about how that's calibrated? Yes. I mean, that's not what we're seeing here in there. But what we are seeing is reason we can't get the backlog down more, it's more supply chain constrained we've got so much material is the way I'm thinking of it. So if orders go down $10 million more, that doesn't necessarily change our revenue guidance. That's what you say. I would agree with that. And that's where going -- yes, I was just going to add that it's -- as you said, it depends on the business as you pointed out, a little bit more backlog intact. So it does matter where the orders go down relative to how we can make it off. So that certainly is part of it. But we ought to think of that extra -- the half that isn't planned to go out as an insurance policy, again some additional decline. Got it. That's helpful. And then I guess sort of related to -- I think it was Jeff Spragueâs question on price cost. Maybe taking a step back and just thinking about kind of total bullet effect on supply chain. I would imagine there were some frictional costs last year that probably get better, but maybe you're also kind of working down some inventories. So, is there some sort of like offsetting absorption hit to the absence of those frictional costs? Or how would you sort of balance those two as a net headwind versus tailwind for this year? Well, I would take it this way. There are some spot buy costs that probably go away from 2022, for sure. But there are some embedded costs in the standards that are going to be with us here for a while. I think the real thought is we're going to have price cost like we have been, we grow gross margins more in 2023 than we did in 2022. So in that sense, I think we're going to be as we've shown over the last several quarters, the media had -- we're not too worried from a factory absorption perspective. If that's -- if you're going in that direction, we won't worry about that. We'll really be focused on is making sure a number of commodities are down or will be lower, things like metals, plastics, but the majority of our buy is electronic components. And that will take a little bit longer to sort of wean ourselves from some of that inflation that we saw this year. So, we plan to -- I think we're super aggressive in that regard. We'll get after everything. We have great supply chain teams, but it will take a little while. But I think you're going to see that throughout the year as the gross margins continue to look good. Thank you. Good day, everybody. Can we put the spotlight on free cash flow by here? It looks like Fortive is the only company we've seen that is over delivered in the fourth quarter significantly above your 4Q average. And Chuck, you mentioned some working capital initiatives you could take us through that? But also there was a reference about collections pulled into the fourth quarter from the first quarter. So what was the dynamic there? Yes, a couple of things we have always have a lot of work as you know, working at our working capital across all of our operating companies is the focus that we've had all year long and it's been -- it's been a challenge. It is -- it always is, but we've really done a great, ASP actually was a stand up there. So I think that's really what we were talking about there. But they weren't building ones. We had a couple of really good place. I wouldn't say pulling so much is really thinking about it as just some time. We thought we had a really, we did have a really strong guide, and we came in a little stronger that. There could be -- sometimes you just get your on receipts, sometimes they come in a little late and show up in Q1, this time, I'm probably think maybe $20 million came in a little early. You really can't do much about that. It's just whether sometimes when they cut the check before New Year's or after -- that's -- but we were very pleased with our free cash flow performance all year along. Yes, it looks -- it came in at $107 million. So that's right in the sweet spot for you all. And then a follow-up question on cross-selling. Jim, you mentioned sensing having some success in cross-selling. Just kind of take us through what's going on there? How much is that encouraged, how do you track cross-selling? And what are the opportunities? Yes. Dean, I think number one is, as you -- I know you know when we've seen a little -- in a couple of places, we've seen new loan book. When things get a little slow, particularly starting the year out. New logos maybe a little bit harder to grab on to as people maybe take a month or so to maybe an extra 30 days to close the business. But cross-selling and up-selling is something you can do every day. And so our Presidents are very much tuned in times like this where maybe things are a little bit more -- there's a little bit more ambiguity out there as to how the year is going to play out. The teams are really conditioned to really move the sales motion to more cross-selling and that really drives our net dollar retention. We talked about it in a couple of individual places we've got over -- we've got a number of businesses that are well over 105 now, we're about 102. So the metric we really used to drive that is cross -- is net dollar retention. And so what we're really pushed on early in the year is get those renewals, drive gross retention up and then drive the cross-selling and up-selling as well. So, I think we're well -- from a process perspective, FBS has a number of tools that support those efforts, with customer success organizations. That's a big focus for us here at the start of the year. Thanks for taking my questions. Hi. I wanted to start just more macro and I think you know what you're talking about on the orders front is more just kind of backlog normalization as supply chain corrects. But as you go through that mean, how do you think about coming out on the other side? And how do you think that it's sort of soft-landing type of environment when we see sort of industrial production and we see PMI, so just in general, what you're seeing on kind of structural growth or outgrowth and kind of confidence that backlogs normalize and then the growth is there on the other side? Yes. Joe, I think it really goes back. It will have an opportunity to really give a lot of this detail on our Investor Day in May. But I think what we really think about this is really how we move the growth rate on long-term through the cycle growth rate to mid-single-digits. So we got two really strong years of growth 10% average in the last two years. That's on the backs of a number of things we've done from a portfolio perspective and just demand has been better than historically. But as we get into 2024, and we normalize around the kind of things that we would see. We certainly would continue to see that mid-single digit as a number on the backs of continued stabilization of the macro for some of our product businesses obviously continued improvement in our healthcare businesses and just the strength of success that we've had in software. And those sort of combination pillars are really are going to be what really drives that mid-single-digit growth rate. As we said, as things normalize here, hopefully sooner rather than later. Got it. And then I think in the prepared comments, you mentioned some actions to counter some of the slowing. You're not sure what might be happening on the cost front, but anything that you could expand on there? Well, yes, I think as Chuck described, it's really kind of across the segments. And it really deals with a number of things. Certainly, looking at certain product lines that maybe are a little slower than over the next few years, we closed a couple of rooftops, continue to do some things on the lease front as we continue to consolidate our real estate footprint. So a number of those things are really what we're talking about. It's an accelerated rate, given kind of after a couple of years of 10% growth, we've may be more focused on the growth, maybe a little bit more focused on supply chain. But now as things start to normalize here, we're back to getting after some things, and in the traditional sense, we want to be ahead of those things, and that's really what we're talking about. Hey, guys. Hey, how are you doing? I just want to follow-up a couple of things on the orders here. Particularly, let's strip out like the AHS and look more on the hardware stuff in PT and Fluke and Tek. What gives you confidence that orders in the second half of the year start to get better? I guess like just the revenue guide suggest that you exited kind of the lowest point of the year. And you said, Fluke -- Tek orders were up like 40% over a period of time here. So, like is it just going from plus 40 to normal levels? Is that like reasonable or like could you see declines in orders because of the magnitude at which they expanded over felt relatively short time? Well, as we said, I think in the first half, we're going to see some of those declines as we described. And I might note, point-of-sale is still really strong. So at Fluke and Tek, we normally get that scenario in a coal mine question around Fluke. And quite frankly, Fluke's point-of-sale has stayed strong. So, we think that will moderate as some of the macro impact certainly moves that number down. But you're working on such high comps relative to the last few years is that any moderation whatsoever could make it look negative, but really, quite frankly, is not a significant issue relative to both the backlog and kind of where we're at relative to the historical perspective. So, yes, we'll -- some of that improvement in the second half is comps for sure, but some of it -- we think Sensing probably as an example, probably stayed a little rough through the year. And we get -- we know what the OEMs are doing right now. So, we mentioned in the prepared remarks some places in industrial, like industrial automation and some parts of the world like China. But on balance, when we look at the sum total of Sensing, Fluke, and Tek, we still think there'll be a little bit of improvement in the second half. But we don't need a big improvement necessarily to really deliver what we described. It is as we talked on a couple of the questions, we've got some backlog as an insurance policy against those things may be declining a little bit more than we anticipated. Okay. So, you're saying it's more of a dollar thing. I mean more of a comp mask think than dollars, I guess? That's right. That's right. I mean we're really looking at some pretty significant growth rates over the last couple of years in orders that were much bigger than our revenue numbers because of the supply chain issues and the creation of a bigger backlog. And quite frankly, a bigger pass-through backlog, which we started to burn down as we've talked about throughout the day. Okay. And then just last for me. You talked about, I guess, theoretical M&A on the call so far. But if you were -- in a theoretical situation where equity was a component of a purchase, like how do you think about what your return hurdles would be in scenarios like that where equity is part of it? Well, first of all, I think it's clear we're trying to convey here is discipline will continue to be the word of the day relative to M&A. And I think we -- our return hurdles are going to be what our return hurdles are. We've talked about 10% ROIC for the various kinds of deals, and we'll continue to think about that. I think what we've been trying to describe is situations in which we'll be disciplined. I think what you've seen in 2022 is the strong returns of that, certainly the most recent M&A that we've done for patient and service channel, beating their first-year numbers as an example of that. But also the deals that we did five, six years ago. that are just performing outstanding like Gordian and eMaint and Landauer. So, I think we're in a great place from a balance sheet perspective to deploy capital. And I would be much more focused on our discipline around returns and our discipline around accelerating strategy in places where we can really do that. We are all out of time for questions today. I would like to turn the call back over to Jim Lico for closing remarks. Thank you, Leanne and thanks everyone for spending the time with us today. We really appreciate -- we know you're busy this week with a number of things. I think what you heard from us today is a real sense of pride of what we did in 2022. We said 2022 is going to be a showing year and I think what you saw through the quarters and certainly in the full year numbers, the real power of the Fortive Business System and the building for us -- use the FBS tool to accelerate. We try to convey the fact that getting back into in-person Kaizen is something that's really important to us from a cultural perspective and from an ability to deliver in any sort of economic time. And that acceleration of in-person events we tried to demonstrate and show you some examples of that. We're back to work in that regard as we get into 2023. We look forward to continuing to share our strategies in May with you, and I think, what you'll see this year and what you're seeing in our guidance is the continued improvement in our portfolio and the strength of our culture in our business system. Special thanks to our 18,000 teammates around the world who made that happen and make it happen every day. Thanks, everybody. Have a great day. We look forward to the follow-up calls, and we'll see you soon. Take care.
EarningCall_988	Greetings, and thank you for standing by. Welcome to the Fair Isaac Corporation Quarterly Earnings Call. During the presentation, all participants will be in a listen-only mode. [Operator Instructions] This conference is being recorded Thursday, January 26, 2023. Good afternoon, and thank you for joining FICO's first quarter earnings call. I'm Steve Weber, Interim CFO, and I'm joined today by our CEO, Will Lansing. Today, we issued a press release that describes financial results compared to the prior year. On this call, management will also discuss results in comparison to the prior quarter in order to facilitate understanding of the run rate of our business. Certain statements made in this presentation may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements involve many uncertainties that could cause actual results to differ materially. Information concerning these uncertainties is contained in the Company's filings with the SEC, in particular, in the risk factors and forward-looking statements portions of such filings. Copies are available from the SEC, from the FICO website or from our Investor Relations team. This call will also include statements regarding certain non-GAAP financial measures. Please refer to the Company's earnings release and Regulation G schedule issued today for a reconciliation of each of these non-GAAP financial measures to the most comparable GAAP measure. The earnings release and Regulation G schedule are available on the Investor Relations page of the Company's website at fico.com or on the SEC's website at sec.gov. A replay of this webcast will be available through January 26, 2024. Thanks, Steve, and thank you, everyone, for joining us for our first quarter earnings call. In the Investor Relations section of our website, we've posted some slides that we will be referencing through our presentation today. I'm pleased with the results we delivered in our first fiscal quarter. Even in these uncertain economic times, the resilience of our assets and the execution of our team allow us to deliver steady growth in both revenues and earnings and value to our shareholders. Page 2 shows financial highlights from our first quarter. We reported revenues of $345 million in Q1, up 7% from the prior year. Our GAAP net income of $98 million was up 15% over the prior year and GAAP EPS of $3.84, up 24%. On a non-GAAP basis, Q1 net income was $108 million, up 6% from the prior year, and earnings per share of $4.26 were up 15% from the prior year quarter. Overall, we are off to a very good start in our fiscal 2023. In Scores, revenues were up 5% over the same period last year, as you can see on Page 6 of the presentation. B2B revenues were up 11% in the quarter versus the prior year, driven by unit price increases, increased volumes in card and personal loan originations, and also by a license renewal in Latin America. In the U.S., auto originations revenues were up 24% and card and personal loan originations revenues were up 19%. We continue to see reduced mortgage origination volumes for the U.S. market, where revenues were down about 40% year-over-year. The fiscal 2023 price increases we talked about last quarter take effect primarily in January. So we expect to see much of the impact in our second fiscal quarter. As always, it's difficult to estimate the timing and magnitude of the impact. Our B2C revenues were down 6% versus the prior year quarter as we continue to see difficult comps in our myFICO business due to the economic climate and especially because of the higher interest rates and lower number of consumers preparing for mortgages. In our software business, we continue our focus on the decisioning platform that enables businesses to optimize consumer interactions across their enterprise. Overall software numbers look strong, and platform numbers continue to be exceptional. As you can see on Page 7, we delivered overall ARR growth of 11% and platform ARR growth of 46%. Our ARR, our DBNRR and our ACV numbers are adjusted for the Siron divestiture. And again, our customers continue to find new use cases, as you can see from our net retention rates shown on Page 8. Overall, net retention rate was 110%, and platform net retention is 130%, continuing to demonstrate the success of our land-and-expand strategy, and we continue to see strong demand for our software. As you can see on Page 9, our ACV bookings were up 31% over the same period last year, and we continue to see a strong pipeline of opportunities as customers look to FICO to deliver strategic mission-critical decisioning. Earlier this week, I had the opportunity to attend our annual sales meeting, where I met with colleagues from around the world to discuss best practices, current trends and especially how our customers view our offerings. I heard firsthand how customers were looking at FICO to help solve their most difficult decisions and how those customers were increasingly finding new ways to use the FICO platform throughout their businesses. I don't think there's ever been a time at FICO where the team has been so excited about the opportunities ahead of us. And I share that excitement. I came away with a renewed appreciation for our unique technological capabilities and the incredible team that we have taking it to the market. Finally, as I've often said, we are committed to becoming the preeminent platform player in decisioning analytics. The strategic focus has allowed us to exit some non-strategic products and services over the last few years. In November, we announced we had reached an agreement to transition our Siron compliance business to our partner, IMTF. We closed that transaction in December. While we are proud of the work and the innovation at the FICO team put into Siron to make it an industry-leading solution, we believe we are better positioned if we dedicate our focus and our resources to expanding the capabilities and market penetration of FICO platform. I'll have some final comments in a few minutes, but first, let me turn the call back to Steve for more financial detail. Thanks. As Will said, we delivered another solid quarter in both our Scores and Software segments. Total revenues for the first quarter were $345 million, an increase of 7% over the prior year and slightly ahead of our internal plan. In our Scores segment, revenues were $178 million, up 5% from the same period last year. B2B Scores revenues were up 11% over the prior year. As has been the case for several quarters, mortgage originations revenues were down from the previous year. This quarter, those revenues were down 40% from the same quarter last year and 29% from Q4. But again, that was offset by growth in other areas. Credit card and personal loan originations revenues were up 19% over last year, and auto originations revenues were up 24%. We also renewed a multi-year license, which had a positive impact on the quarter. B2C Scores revenues were down 6% from the same period last year, and we expect B2C revenues to be down modestly from current levels throughout the rest of the fiscal year. Software segment revenues in the first quarter were $167 million, up 9% versus the same period last year. Software revenues recognized over time were $133 million or 80% of total software revenues. License revenues recognized upfront or at any point in time, were $12 million this quarter and represented 7% of software revenues. Our professional services revenues were $22 million, representing 13% of total software revenues. This quarter, 85% of total company revenues were derived from our Americas region. Our EMEA region generated 9%, and the remaining 6% were from Asia Pacific. Our software ARR in the first fiscal quarter of 2023 was $583 million, an 11% increase over the prior year quarter. Our platform ARR was $133 million, up 46% last year and represented 23% of our total first quarter ARR compared with 17% last year. Our non-platform ARR was $450 million in the first quarter, up 4% when adjusted for divestitures. Our dollar-based net retention rate in the quarter was 110% overall versus 109% last year. Our platform customers continue to show very strong net expansion from land-and-expand follow-on sales and increased usage. The net retention per platform was 130% in the fourth quarter. Our non-platform customer software usage has matured and relatively stable with retention this quarter at 103%. Software sales were again strong this quarter with annual contract value bookings at $21.5 million versus $16.4 million in the prior year, an increase of 31%. And as a reminder, ACV bookings include only the annual value of software sales, excluding professional services. Turning now to our expenses for the quarter. Total operating expenses were $205 million this quarter versus $207 million in the prior year and $215 million in Q4. While we continue to focus on expense efficiency, we do expect our total expenses to trend up in FY 2023 from salary increases and modest headcount increases. Our non-GAAP operating margin, as shown on our Reg G schedule, was 49% for the quarter, representing a 400 basis point non-GAAP margin expansion versus the same period last year. GAAP net income this quarter was $98 million, up 15% from the prior year quarter. Our non-GAAP net income was $108 million for the quarter, up 6% from the same quarter last year. The effective tax rate for the quarter was 17% and included $10 million of reduced tax expense from excess tax benefits recognized upon the settlement or exercise of employee stock awards. We expect our full-year fiscal 2023 recurring tax rate to be approximately 25% to 26%. That expected recurring tax rate is before any excess tax benefits or other discrete items. The resulting net effective tax rate is estimated to be about 24%. Free cash flow for the quarter was $92 million. For the trailing 12 months, free cash flow was $471 million. At the end of the quarter, we had $166 million in cash and marketable investments. Our total debt at quarter end was $1.92 billion with a weighted average interest rate of 4.9%. Currently, about 67% of our total debt is fixed rate. Our floating rate debt is prepayable at any time, giving us the flexibility to use free cash flow to reduce outstanding floating rate debt balances in future periods. Turning to return of capital. We bought back 180,000 shares in the first quarter at an average price of $418 per share. We have $451 million remaining on the current Board authorization, and we continue to view share repurchases as an attractive use of cash. Thanks, Steve. I'm really pleased with our Q1 results. I'm pleased with the progress we're making on strategic initiatives, and I'm pleased with our positioning for the balance of fiscal 2023. Our Scores business continues to deliver growth even in a turbulent market. As I said in the past, our diversification across different credit verticals means that we are not dependent on one specific type of lending. On the software side, our platform strategy continued to drive strong results. The strategic mission-critical nature of our decisioning FICO platform means that customers are not delaying purchases and implementations. This is evident in the 13 straight quarters of 40-plus percent of platform ARR growth and the continued strong net retention rate of current customers. We are confident we have the best-in-class capabilities in an emerging marketplace that's poised for sustained growth. I'm confident we have the correct strategy and a strong team in place to deliver on the remarkable opportunities ahead. As always, we remain focused on execution, and we are committed to delivering outstanding value for our shareholders. As a reminder, when we announced our CFO transition, we also reiterated our guidance with an adjustment for the transition of the Siron Compliance Solution to our partner. So we are guiding revenues of $1.463 billion, GAAP net income of $401 million, GAAP EPS of $16, non-GAAP net income of $487 million, and non-GAAP EPS of $19.42. Thanks, Will. This concludes our prepared remarks, and we are now ready to take your questions. Operator, please open the line. [Operator Instructions] And we have a question from the line of George Tong with Goldman Sachs. Please go ahead. Your line is open. Hi. Thanks. Good afternoon. When you presented your fiscal 2023 guidance last quarter, you had assumed Scores revenue growth of 7% composed entirely of pricing increases and flat origination volumes. One quarter into fiscal 2023, does that assumption still hold on your end? Or are you seeing anything that could challenge those trends? I think the assumption still holds. The future remains uncertain, but right now, the assumption holds. We think we're right on track. Great. Switching to the software side. ARR year-over-year growth accelerated in fiscal 4Q from fiscal 3Q, and you mentioned in your prepared remarks that customer demand remains strong. Can you, overall, just elaborate on the overall spending environment for enterprise software? And if you're seeing any second derivative slowdown in spend? So as I mentioned, I think that because the platform software is so mission-critical, it's a little bit less subject to our customers pulling in their budgets and pulling in their spend. So there's no question that there is budget pressure out there. I mean everyone is under budget pressure. But the kinds of solutions we provide with the platform are such a perfect fit for the strategic needs of some of these customers that it's something that just can't wait. And so when the customers adopt a platform, it's a transformation of their business really, and it's not the kind of thing that's easy to put off. The other thing I would say is we're demonstrating incredibly rapid return on investment. And we have testimonials from customers with amazing returns, within year returns. And that word is getting around. Our customers are finding out that this stuff pays for itself within a year. And as a result, we have not seen any slowdown in the spend on our platform business. Thank you. I'd like to start with a question on the Scores business. Can you provide any other additional color on kind of the licensing deals or the magnitude of that? When I kind of think about what volumes were, the B2B revenues came in a bit higher than I was anticipating. So any color on how licensing deals compare this year to last year in terms of the revenue impact? I would say that the license deal that we referenced is kind of par for the course. We get these deals from time to time, renewal deals, sometimes they're bigger renewal deals. They happen every year. We can't really predict what quarter they happen in, and so we get a little bit of lumpiness there, and that's what we've got here. Got it. And then in terms of the B2C business. I think you mentioned that maybe you're expecting some modestly lower revenues on a go-forward basis. Is the expectation just of sequential declines on a quarter-over-quarter basis throughout the year at this point? Or any color that you can help us provide on how to think about the amount of drag that perhaps there might be on a go-forward basis? Yes. Surinder, this is Steve. It's relatively modest that we see right now. I mean, a piece of that business is, as you know, there is a partner side and then the myFICO side. The myFICO side has been challenged by the economic environment, right. In fact that people and I getting pay mortgages, if mortgages increase in the spring and breaking them down and that increase that our business will probably pick back up again. But it looks right now, we're projecting it to be a little bit less than it is today, but we're not expecting to be [indiscernible]. Got it. And just a clarification on that, Steve. So is the partner side holding steady at this point? Or â and it's â the drag is mostly from the myFICO side? Yes, it's mostly on the myFICO side because the myFICO side is more â the partners have a lot of different business models they can cycle off to, right? There's a premium [indiscernible] MyFICO side, we don't set what market it is. It's a lot more tied to each market. Got it. And then one quick question on just capital allocation. The stock has obviously performed really well over the past year and especially over the previous quarter. So does this still kind of make sense to be fully allocating all of your free cash flow towards share repurchases? Or should we start to think about maybe paying down some of the floating rate debt at this point? We're still in love with our stock, and the plan is to continue to return capital to shareholders through stock repurchase. That said, we'll keep an eye on rates. And we're at a weighted 4.9% on the interest expense right now. And I just â when I look at FICO stock, when you look at FICO stock, I think you believe that's a better â that's a good balance. So for now, still on stock buyback. Great. Thanks, guys. So I just wanted to get your, like, sense of appetite. I guess, like you guys just mentioned FICO stock is really attractive. But how are you guys feeling about the buyback and capital allocation in this environment? And kind of if you could rank order, Steve, your like use of capital, that would be really helpful? Yes. Okay, Kyle, thatâs a good question. So one of the things we're really working on hard, frankly, is we're bringing back as much cash as we can from around the world. Even if there's a slight expense to that when the rates are higher, it just makes more sense to do that as much as possible. So that we're bringing as much cash into the U.S. as we can. And then we look at the trade-offs between the rates and to put what kind of stock we can buy back. So as Will said, we're concentrating on buybacks, but that can change as the markets change. So we look at that, we model it out. And we're still comfortable that buying as many shares back as we can conceivably. We're not going to do like we did last year where we went all in, and we ratcheted up our debt when we said we had the opportunity. But I think you'll see us spending the free cash flow this year on buybacks. Yes. I mean, that makes sense. And I mean I think you guys went hog-wild on it last year, but like, yes, we're all about that. But I guess like just as we're thinking into the next year, is there anything different? Or should we expect more or less cash flow? I guess that the messaging from you guys historically has been, cash flow is â it's your money and shareholders' and not ours, and we want to return that if we can't find a better use of that. But is there any different messaging? Or is it more of the same with you at helm, at least for now? Look, I think Steve said it well. I mean, we try to return free cash flow every year. And then periodically, we do more than that. So for the last two years, we've done considerably more than that. And it's because the stock price was depressed, like really, in our minds, quite depressed relative to its value, and also it was a lower interest rate environment. Now we have higher interest rate environment. The stock is a little bit price here. I still think it's a bargain, but it's more expensive than it was. And so we're back to thinking about stock repurchase in terms of our free cash flow, our annual free cash flow. So I would say that things have changed. I mean we were really piling up the debt to buy in the shares over the last two years, and we will not be quite as aggressive in the future, at least right now under these circumstances. And again, two-thirds of our debt is fixed. So we have no rate risk there at all, so even with the rates increasing. So we're just talking about the variable rate, and we're happy with where it is right now, but we continue to monitor it. And if rates were to go up significantly, then we'd probably pair back the buybacks. But it's always just the calculus we have to do. Thank you. On the Auto and Card side, you gave us â you showed some healthy revenue increases. But I was hoping you could just help us parse down what volumes are doing in those two categories? And the flat volume assumption for overall volumes in Scores, I guess what are you assuming for Auto and Card to get to that flat number? Yes. So right now, Auto is relatively flat. It's up some months and down some months, but it's relatively flat. Card is still up. It's been probably decelerating, but it's still up. So most of the increase year-over-year on revenues on the Auto side came from pricing. Most of the increase on the Card side came from volumes. Not 100%, but most of it was. So as we go forward now, next quarter, we'll have the benefit of the new price increases. So it â there's a lot of different variables in there. So it's hard to really say what we're expecting in terms of overall volumes because there's a lot of different tiers involved, and there's different pricing tiers. So you have to really dig under the covers to see all of that. But we're not seeing anything in the market that's really changing the way we looked at it when we issued guidance three months ago. Mortgage is probably a little bit weaker than it was then, but we knew it was going to be weak. So none of that really surprises us. We'll see how things progress in the next couple of quarters. If housing pricing comes down and the rates are down a little bit and that market picks up, then we'll get some more acceleration there. But right now, we're pretty much tracking to what we thought we would see three months ago. Got it. Helpful. And then, Will, just on the Software side, the platform business always had a five handle. Next is, in terms of growth, I know it's probably just nitpicking. This time, it's 46%, but even in your prepared remarks, you said 40% plus type growth. Is it just the law of large numbers? Is there something timing-wise? Just talk to us a little bit around that, please? It's a little bit of both. So we knew we were never going to be able to keep the 70% number, right? So now we've been 50%, now we're a little less than 50%. Looking at the rest of the year, we think we'll probably be in that high 40s to low 50s percent. So there is some timing around some of these things. But we don't see it really decline. I mean, it's declined for the last few quarters, but we think we're pretty comfortable operating in this range, give or take a few points. Thanks for taking my question. Just a question on the special pricing. Our understanding is that tends to be in the $40 million to $60 million range usually. Is that the expectation this time as well based on initial feedback as you have ruled out these special pricing increases? We never confirmed that number. It's â and so I won't be doing it today. There is still some special pricing, but I can't confirm a number for you today. It's easier to do in hindsight. There's a lot of volatility, right, in the marketplace. So if you can tell us what the interest rates are going to be in six months, we can probably give you a better number. Okay. That's fair. Maybe just a follow-up question on portfolio rationalization. Is it fair to assume that the Siron divestiture could also potentially help on the growth profile? And are there other opportunities for portfolio rationalization within the software portfolio? I would say yes and no. So yes, our platform growth rate is substantially higher than the Siron business that we divested. And so divesting it does contribute to a higher growth rate for FICO. And are there other opportunities in our portfolio? Not really. I mean never say never. We're always looking to be as streamlined and efficient as we possibly can be. But we're pretty happy with the set of assets and the set of solutions that we have today. Even our older application solutions are still quite popular with our customers. We continue to invest in them and make sure that they have the features and functionality that the market needs. And as you know, the renewals on these typically have a cycle of kind of three years, and they get renewed multiple times. It could be a nine-year or 12-year kind of arrangement. And so I think we'll be probably hanging on to the vast majority of our portfolio. There are no obvious candidates for divestiture at this time. That's very helpful color. And maybe if I can sneak in one last question on the B2C side. As you mentioned, some of it is tied to the mortgage weakness. But I was wondering if there's anything that you can do from a product perspective or a marketing perspective in order to improve or moderate the headwinds that are causing from the weak mortgage market on the B2C side? Well, I can share you that our talented management team is doing everything they can on the marketing side and the customer acquisition side to keep the business growing as much as possible. But you do have a macro environment that just results in the kind of performance that you're seeing right now. That business is completely data-driven science-based kind of a business where we spend on customer acquisition up to where it ceased to be economically smart to do so. And so there's â that is always optimized. That business is optimized at whatever levels we have in the marketplace. And so the short answer to your question is we're doing just the right amount. I really think it's optimized. I don't know that more would make things better. You might be able to get the growth rate up, but it wouldn't be better from an economic standpoint. Yes. Hi, thank you. So first, I just wanted to pick on a comment that you made saying that you thought revenues were ahead of plan. Maybe you could talk about what areas in particular were better than your expectations in the quarter? Yes. I mean it was modest, but it was on the software side. I mean, the Scores number is pretty much dead on plan, and software came in a little bit ahead of plan. So it's encouraging to see that, that happen. Okay. Great. And then on the software side, I'm curious how we should think about the non-platform revenues. I think previously, you had talked about those revenues being roughly flat. And they are. They were down just a little bit on a year-over-year basis. I'm talking about the recurring revenue. Like is that â like â so that $450 million, is that sort of the right way to think about it going forward? Or do you expect sort of more â some declines from here in that business? I think someday we will have declines, but I think for the time being, flat is the right way to think about it. Now obviously, we can manage that number. We choose to end of life some products, and that contributes to shrinkage. And it's a balancing. And it's really a balancing act that we are in. I think that we're in a good place right now at flat. That's just about the right balance where we can close down, end of life the products that would result in us having a lot of technical debt where we did continue them without really shrinking that business. The day will come, no doubt, when we will shrink that business somewhat. But that day is still a ways away. Got it. And then just on expenses. I think you mentioned that expenses are going to go up a little bit as we go through the year, mostly driven by personnel expenses. And I'm curious, is that something that's â something that's already put in motion? Or maybe want to talk about the magnitude of that increase, if you can? And secondly, like how much flexibility you have on that, should the planned revenues don't come in line. Is that something you can pull back on? It's not â it's not a lot of money. But I mean, we put â we have salary increases that take place in December. So we'll have three full quarters of that. There'll probably be some additions to headcount, but we expect to have more revenues, too. So I mean, we can delay the headcount hires if the revenues don't come in. So we do have control over it to some degree, but it's not a step function in expenses. It is [indiscernible] on for Jeff. I was just hoping to get a little color on some of the nonorigination B2B scores, and particularly, the marketing and prescreen side of things. How is that trending... Yes. Prescreen is down slightly from last quarter. Some of that is seasonal. But we still see pretty strong pre-stream numbers, but they're not what they were in the fall. So we'll see what happens after the first of the year. Typically, that's a lower marketing quarter, but we monitor that, and we'll see. It's still strong, but it's not as strong as it was in the fall. In terms of the account management scores, the account review scores, those were actually stronger. So for â there's a lot of different factors looked on that, but it's a little bit stronger than it was in the prior quarters. Appreciate that. And then on the software side of things, is there a usage component that benefited in the quarter? Or is it just strong growth? There's some usage. I mean, it's a combination. Most of the platform, especially, it's all based off the usage. So it can either be increased usage of the same functionality or additional use cases that are brought on board. But is there like, I guess, a transactional or is there a revenue benefit to, like I said, the increased usage that's specifically... And that concludes our Q&A session for today. It also concludes the call. We thank you for your participation and ask that you please disconnect your line.
EarningCall_989	Good evening. I'm delighted to be with you again. I think, it's two years now, Mr. Guiony, that we were not present, were perhaps on Zoom. Perhaps that meant that I didn't have to work. That was all well and good. But at least I'm very pleased to be with you this evening to announce, I want to say once again, at the risk of tiring you, record results for the group LVMH. You saw the chart that was published. We achieved just over â¬79 billion in revenue, just over â¬21 billion for profit from recurring operations and increased 23%, net income above â¬14 billion, free cash flow just over â¬10 billion. So, financial performance thatâs quite remarkable. Really the consequence of the great work put in by the teams in the various Maisons in terms of the quality, the desirability of our products and our presence throughout the world that is both dynamic and outstanding and has allowed us during these difficult years marked by the economic crisis, in part, and above all by the health crisis to increase our market share. As I say on several occasions, in difficult times in terms of the macro economy or political difficulties, LVMH is gaining market share and making progress and this has been the case since 2019. Organic growth is very significant. The reported growth at most of our brands is -- also in each of our divisions. We have creativity and innovation that allows us to be in the situation where we are with these earnings. And I'd like first of all to discuss the most important activity of the group, Fashion & Leather Goods, notably Louis Vuitton. In the release, when we go through a major milestone, we never go the figures of Louis Vuitton. Itâs a major milestone, so, we give it. It's a case this time for the first time. We said this when we crossed the â¬10 billion mark, Louis Vuitton has exceeded â¬20 billion in terms of revenue. And in this regard, I'd like to salute the outstanding performance of his -- Chief Executive, who will now take other functions. Michael Burke and for 10 years has been heading up Louis Vuitton and carrying it to this level, exceptional level whilst preserving its desirability with innovations and wonderful boutiques, and stores and creations that surprise worldwide. The most recent, I'm sure you've seen it because we can see it in Paris on the Champs-ÃlysÃ©es, the Kusama, the range of products that we produced with Kusama. And she in fact visited the Tokyo store. One of the greatest current artists came to visit the works and to face her robotized image that you can find in the displays of our store in the Place VendÃ´me. So, it's a creativity that enhances the brand's desirability. And that's what guides our teams above all, it's the desirability, be it for our Fashion & Leather Goods activities or for all the other activities of the group. Let's also mention in Fashion & Leather Goods a great milestone. And I think at the last meeting where we were physically present, we mentioned this because Hedi Slimane had just joined the Maison with Celine. And we sat as a goal midterm to top the â¬2 billion revenue mark. And as it's an important milestone, I could confirm that we have crossed that milestone, which is very interesting and bodes well for the future for this iconic brand whose desirability, attraction to young people, to young women in particular, is now spreading to perfumes and fashion goods with the tremendous success. Before going into greater detail of all this, and Jean-Jacques Guiony will go into the details of the figures. I would like to stress what I view as most important, extremely important for the group that is now leading group in Europe, and its various markets that it's economic and social footprint. Because I very often note with surprise but in France you can be readily surprised. People aren't always familiar with the economy, and we can be criticized and we are criticized by people who don't really know the subject that they're discussing. I would like to demonstrate here that this magnificent group that has spectacular results is also a group that has a great economic and social footprint for France. In 2022, we recruited worldwide close to 40,000 young people in France. In France alone, we recruited over 15,000 people, makes the group the leading recruiter in France in 2022. LVMH invested over 200 million for the training of its employees. In France, a job created by LVMH generates four in -- with our partners or suppliers. So, we carry some 160,000 people in France who work directly or indirectly for LVMH. The group has worked on its building new workshops and it stores over 5 million -- in over 500 stores and 100 craftsmanship manufacturing sites are in France. LVMH opens every year many manufacturing facilities, notably for Louis Vuitton in France and we need, the group -- because we generate profits, we pay a lot of tax. We pay â¬5 billion in corporate tax in -- throughout the world, half in France, whereas 80%, close on 90% of our products are sold abroad. Over â¬1 billion invested in France every year on average over the past years, the total tax footprint, well -- when we -- the total corporation, tax, taxes and social benefits of LVMH is of over â¬4.5 billion a year. Let me add that, because our head of Human Resources informed me that was an important point. And I would agree with that that the salaries of the group's employees are amongst the most competitive in the various sectors of activity. Most of our employees furthermore benefit from profit sharing with a total, for the group of â¬400 million a year. A word on the -- our commitment as regards the environment. LVMH has been recognized for its leadership in terms of transparency and performance regarding the protection of the climate, forests and water by the Carbon Disclosure Project, the CDP, which is a not for profit global organization LVMH, one of the two companies to be ranked AAA, 15,000 companies, and I believe weâre the only one to have achieved that in our business sector. I wanted to say that because this is even equally important, perhaps even more important than the figures that we're discussing today. Moving now across the various business groups, say excellent performance for Wines & Spirits. Champagne delivered an excellent year with a considerable increase in its sales, facing a supply problem. It's very difficult in certain countries, notably in the U.S. to find Dom PÃ©rignon for this year. We've fully integrated Armand de Brignac that we own together with Jay-Z, the famous U.S. star and it works very well. We're -- doubled our forecasts when we made the investment. The acquisition of the Joseph Phelps Vineyards in the Napa Valley, that augurs well for the future. Cognacs, Hennessy is up with a strategy aimed at increasing its price, very dynamic strategy, the U.S. were somewhat impacted earlier in the year through logistic constraints, but the partnership of Hennessy has been strengthened with the NBA and strong progress of our whiskies, Glenmorangie and Ardbeg. Ardbeg viewed today as possibly the finest whiskey in the world. And we sold a cask of Ardbeg that -- actually the equivalent of 144 -- this cask was sold at a world record of â¬19 million and quality was vintage dating back to 1975. Moving to Perfumes and Cosmetics, great success of perfume. The Dior perfume in particular with Sauvage is a leader in perfume sales. Sauvage, great perfume, the world's leading men's or women's fragrance, we launched lesson than 10 years ago, achieving remarkable success, driven -- buoyed by the image of Johnny Depp, you've probably seen the ads that's working very well. At Dior perfume, we now have a nose that joined us recently, because when we recovered the house, Francis Kurkdjian. We asked Francis to also become the perfume creator and he accepted that and with great talent, we have many plans for the future. Of course, the other, the Rouge Dior, Prestige, CrÃ¨me, LâOr de Vie is growing very well, ditto for the other brands. What can I -- yes, we've acquired a small brand that is really quite interesting that I urge you to take a look at because we have several stores in Paris, one of the [indiscernible] Buly. It's a very small brand, not a lot of revenue, but set for a great future. It's already growing quite remarkably, notably in Japan. Fashion & Leather Goods, I've discussed that. Everything is growing very dynamically. We have a team of excellent creators, be it at Dior, Louis Vuitton, with Nicolas Ghesquiere; Dior with Maria Grazia Chiuri, Celine, I've mentioned; Loewe, Jonathan Anderson. Our overriding objective is to make these brands increasingly desirable. And the desirability of the brands when we compare it to that of our peers is improving steadily. And therein lies the success. The results that will be presented in the moment and I'm sure you'll have questions is a consequence of all that. It's not at all an objective. That's not where I spend most of my time, because the desirability, its improvement leads, of course, with the quality of the products, the creativity in stores, leads to a certain consequence, which is increased sales and better profitability. But it's a consequence. On Selective Retailing now, which is -- we have the watches too. On the Watches and Jewelry also a very good year. Tiffany for the first time will exceed the â¬1 billion in profit, profit from recurring op. We were barely at half that when we acquired the business. Everyone said to me, why are you buying this business at that price? It's far too much. Well, if today the business were to be listed, well, you never know. But I mean, it wasn't perhaps managed in the most dynamic way, I won't dwell on that at the time. But if it were listed today, probably worth twice as much. Donât know what Alexandre thinks about that. But the group, the shareholders, I hope there are shareholders here, not just commentators. It's a very good investment, continues to work very successfully. I'm not going to plug for Bulgari. The Patek Philippe that everyone's clamoring for, I get requests every week, for -- to agree to sell Patek Philippe watches. The problem is that they sold -- I mean, the market price was about $40,000 when it was sold. When a model was sold at an auction, it generated almost 10 times as much. So, very strong demand, a whole string of products arrive, products that are currently being launched. And we also have High Jewelry collections that are doing very well with the leaders in high jewelry worldwide. We've just bought a collection of a pink diamonds in an Australian mine that is shutting down, a fantastic collection, worth a certain price, but I think it's almost pre-sold, et cetera. And of course, the high point of this year for Bvlgari will be the opening of the flagship on 5th Avenue on the corner of 57th. But as we're already doing over â¬200 million in the provisional store, and I think we're going to double even more the annual sales in this new store, which will be wonderful. I've seen it -- I donât know if it's going to be open on time. You never know. The United States are less precise than the Japanese are when it comes to construction. So, Bvlgari is going very well. It's a companyâs brand that we've owned for longer that's expanding very well. TAG Heuer watch brand also developing. While all these brands are profitable, very profitable, some -- Hublot just had a great ad boots with the soccer World Cup. Every time, a new player came on the pitch, Hublot was up on screen. Chaumet great success. Fred, for the first time, wonderful exhibition in Paris. And I hope, it will be able to continue it and travel throughout the world. And Zenith developing fine new products. I don't think. I've forgotten anything. Selective Retailing. Well, here Sephora is really firing on all cylinders. Record profits and sales, very well managed company, very present in the United States. The year '23 is off to a great start in the U.S., fantastic scores. I think, theyâre now ahead of the market. It's far and away, the lead is distribution brand of Perfumes and Cosmetics. And well, DFS slightly more challenging, airport, sales airports have been deserted up till now. So, of course, it's difficult to remain out in front with an uptick in sales. But there are green shoots there in China. Macau has started again. I mean, we're not invested in casinos, let me reassure you. But in our stores in Macau, business is back, the Chinese are buying. Le Bon MarchÃ© is small but good sales, good level of sales very well managed, very creative. Mr. Wagner is there, but well done, bravo for the latest creative with hit pans. I mean, it's amazing. It's absolutely wonderful. So, the word about the outlook, the goal for 2023, which is to continue at the risk of tiring you, continue to improve the group's leadership, and we plan to increase our lead across market segments and to continue with the same strategy with teams that are changing. You see that we made a few changing changes in the group teams. So, as to advance things I mentioned earlier, the head of Louis Vuitton, who, after a wonderful success, will work with me directly. On other issues, Pietro Beccari, who's moving from Dior to Vuitton, where he was previously, after a great success with Dior, will move to Louis Vuitton. Delphine was at Dior for 10 years and then 10 years at Vuitton, is now back at Dior with a great creative team, an extraordinary creative director. So for 2023, I'm quite confident. I think that 2023, if the early part of the year is confirmed, if the opening up of China is confirmed, it's a bit short, but -- January, but a very strong start. We'll see. We can't guarantee it's going to continue like that. We can't guarantee that something might not happen. We hadn't expected the Ukraine problem two years ago. If it continues as it is, it'll be an excellent year. We'll be able to continue to develop our investments, gain market share, because even when the situation is somewhat more challenging, is going to happen, from one month to next, we continue to invest, whereas some of our peers may have tighter financial constraints, they stop investing or they invest less. And so, things are more difficult afterwards. We continue to invest and for the time it's been quite successful for us during the difficult times when we weathered the health crisis. That's all I wish to say at this stage and then will come back later to take your questions, if I haven't forgotten anything. Very good. Thank you. Good evening, everyone. It is my pleasure to introduce the figures for the year 2022. As Mr. Arnault just said, revenue was close to â¬80 billion, profit from recurring operations â¬21 billion, cash flow â¬10 billion and net income about â¬14 billion and market value about up 14%. Well, that's not the purpose of tonight that these are all record high numbers and this was an outstanding year. Let's get into the details starting with revenue. Revenue in euro was up 23%, 17% in organic growth, I'll give you the details by territory. No scope effect this year, unlike last year and the currency effect was positive to the tune of 6%, essentially, because of the U.S. dollar and the Chinese renminbi, weâre up to about â¬80 billion in revenue, â¬80 billion. If you look at the geographical areas, there's been something of an upset. The main country remains the United States with the 27% of the total revenue. Asia is a runner up. Asia last year was 35% but now it's down to 30%. You might ask why? I'll tell you. Europe is doing well, about 24%. So, you have a balance between the U.S., Europe and -- and Europe. Japan remains stable at 17%. Let's look at the various regions. Starting with the U.S. The United States was up 15% and year-on-year we've been on double digit growth and for the past 10 years. 2022 is no exception. Looking at the numbers, we get the feeling that growth was slowed down over the year because the growth rates were down. However, there are two aspects. One, overall general aspect is the basis of comparison for 2022 in H1 was an easy one because there was so many shops closed in Europe and the U.S. So, growth rates were easy to achieve -- easier in H2 than in H1. But, the second aspect is that in the U.S., you also found that the U.S. dollar had been high in the second half of the year and that generated tourism towards the Europe because they were -- the tourists took advantage of the high dollar to make purchases in Europe. So, while there was less growth in the U.S., you will find this on the right hand side and Europe. In Europe, of course, you have this basis of comparison in H2 which was exacerbated but you may remember that everything was closed down till April in 2021. And the growth rates remained sustained in the last two quarters including in Q4. Regarding Japan, Japan had a slow recovery from COVID but it sort of woke up and now dramatic growth, constant growth to the tune of about 30% in Q1. And then, Asia, Asia as a whole is a complicated region. Itâs both volatile and a contrasted picture. Q2 and Q4 reflected the situations of lockdown in China, lockdown in Q2, and the specific situation in December and Q4, and we've -- as Mr. Arnault referred to. And then Q1 and Q3 were more regular quarters, but there was pressure because of the lockdown overall. So Asia was stable, but the overall growth being 20%, that's why Asia's share came down from 35% to 30%. If you look at the various business lines, it's pretty easy to tell. All business lines are enjoying double digit growth. That's not -- that -- it doesn't happen that often. A special mention for Fashion & Leather Goods, not -- well, still double digit, 20%. And itâs mostly Dior and Vuitton, but all the other brands did well. And I'm not going to go through the whole list. And then, special mention for Selective Retailing up 17%, organically, which after a number of challenging years is now generating high growth and in absolute numbers, also very high in numbers. Looking at the business lines on a quarterly basis. So, this is a bit more complicated. But, let's look at the bottom line. You can see overall growth on a quarterly basis for the group as a whole. We find that it looks like growth over the year slowed down, well still. So, Q4 at 9%, it's still 14% in euro term, so it's not bad at all. This is an apparent slowdown and without looking in -- well going back to ancient times. But if you look at the numbers compared with 2019, and that's the last year that didn't have too many upsets because of COVID. We find that on all quarters consistently, we are looking at 33% growth in Q1, Q2, Q3, Q4, maybe 1 is 32% of 33%, but still growing about 30%, 33% compared to 2019 in spite of the huge drop in 2021. And for some businesses like Fashion & Leather Goods, we're talking 70% growth driven mostly by Dior, Louis Vuitton and the other brands. But the striking thing is that quarter-on-quarter, there's stable and sustained growth. So, if you look -- if you think it's a slowdown, closer look would -- reveals that -- reveal that it's a bit more subtle than that. Looking at the income state, income state, and I won't -- go through the first line, sales -- revenue up 23%. We already mentioned this. Gross margin, similar grow at 68.4%. That's pretty good. Charges overall were up 18%, 24% including the currency effects. And, of course, our profit from recurring operations were up 23%. So, the profit margin is stable at 26.6%. So last year, during the -- well, when we saw this margin, 26.6%, up 5% compared to 2019 last year prior to COVID, we were asked whether we could keep these levels for the year 2022. Well, now you have it. We were able to keep these levels in 2022. Now, I know you're going to ask this. So I will answer this already. This profit margin, 26.6%, there was some increase in H1 and a slight decline in H2, compared to last year. But all in all, weâre still stable at 26.6%. We did not commit to keeping the same profit levels in all quarters, in all -- all over the world. But overall, yes, we were able to do this because with the decision was made in H2 to keep our marketing budget up 30% to the previous year, even though we knew we would not enjoy the same growth in revenue because of this comparison basis I mentioned earlier on. But also, we did not fully expect that sharp decline in China in December. But in spite of this strategic decision -- I mean, of course, we're not going to do this every quarter. But in spite of the decision to keep an ambitious marketing budgets, overall, we were able to keep these margin levels. Other operating income and expenses, â¬54 million, it's not very significant. The financial line, I will give you more details later. Net profit is stable. We stand at about 26% corporate income tax, about the same as last year talking about â¬5.4 billion in taxes even though they say that big companies don't pay taxes. And all in all the group share of net profit is â¬14.1 billion, up 17%, a record level. So, above the profit from recruiting operations, there was significant growth in Wines & Spirits ever since we've commented these results. I don't think this is an outstanding year in Wines & Spirits. Fashion & Leather Goods, another good year, up 22%. In Perfumes and Cosmetics, it's more challenging situations because we deliberately decided to contain or indeed delete all parallel channels and travel retail around the world, so as to preserve the brand capital. This is a costly decision. This is offset by local, dynamic local markets in Europe and the U.S., but overall this drove down profitability. Even though it comes at a cost, it was the right decision. Over time that will keep our brands attractive. Another mention -- special mention for Selective Retailing, you can see that profit is up almost 50%. This is not just because of DFS, because DFS in spite of its efforts met major challenges last year. So, this is mostly due to Sephora. And Sephoraâs year was truly outstanding and that was well noted. So, we're looking up 23% in profit from recurring operations. And last slide about that variation highlights the currency effect. The scope didn't make much difference. Currency effect brought in almost â¬1 billion, which is significant, but nonetheless most of the growth is attributable to organic growth, which accounts for almost 25. [Ph] So, let's look at the cost. Well, if you look at the cost of net financial debt, the interest mostly. Until '21, well, we had financial income. And now we have financial expenses when we have debt. Weâre paying â¬17 million compared to the overall debt. We're looking at a reasonable rate of 0.2%. Interest on lease liabilities, as you know, this is the way the debt was converted in IFRS 16, meaning that part of the rents, they're lumped in a line which way it has nothing to do. Fortunately, it's stable from one year to the next. The cost of hedging has increased, well, because individual hedge strategies have increased, but also the budgets that need to be hedged are higher. But of course, when the group has -- enjoys growth, well, then the budgets also that need to be hedged grow as well. And then, if you look at our investment of financial -- portfolio of financial investment, we had in 2021 a â¬500 million increase in value and now we had a decline of â¬200 million, so it looks like a lot of money. But in economic terms, it is not that significant. And overall the portfolio has enjoyed capital gains, even though the capital gains are down â¬200 million compared to the previous year. If you look at the balance sheet, there's no major changes because there were no acquisitions. We have a bit more inventory and the variation of that is also contained. But a few words about cash flow. Cash flow is always a complicated topic. You may remember that back in 2021 we had high cash flow levels, but that was to do with nonrecurring effects, especially as we emerged from the crisis, we paid relatively little tax because in cash flow statements you have the tax installments, which were based on the previous year, where the previous year, the numbers were rather low. And this year, we have more in tax installments. You have variation in inventory. Last year, we were running out of inventory, so we -- the stocks came down. But this year, it was the other way around. We had large inventory, but December was challenging in China, and so we had a surplus of inventory. So, last year's levels -- last year, we had a favorable effect; this year, it's unfavorable. Regarding the operating profit, you have to remember that we sold some property in the U.S. and that -- we had this exceptional increase in cash. And this year we have acquired more property, including this building. And so, we have a nonrecurring -- about â¬1 billion in nonrecurring capital expenditures. So you can't really compare 2022 and 2021. Nonetheless, we have more than â¬10 billion in cash flow -- in free cash flow. Debt itself remains stable. We have about â¬10 billion in cash flow, â¬6.7 billion in dividends. It's not just dividends, there's also taxes plus dividends paid out to minority interests, in particular MoÃ«t Hennessy, â¬1 billion in property acquisition, Joseph Phelps being the main one, but also, we bought back â¬1.6 billion worth of shares, and that's a way of regulating the debt level. In view of the high level of interest rates, we don't propose to have -- well, we don't -- we want to keep the debt under control. And right now, it remains at an acceptable level. Dividends, up 20% and net income was up 17%. So, we decided to keep it simple. We rounded it up to â¬12. We've already had an interim dividend of â¬7, and so -- a â¬5 interim dividend and the balance will be paid and decided at the next AGM. Well, ladies and gentlemen, if you have any questions, weâre available to take those, if you'd be so kind as to state your affiliation when you ask your question. Yes. Antoine Belge from BNP Paribas Exane. Three questions. First of all, could you say a word about the outlook, the prospects, reopening of China? Do you think that the prevailing enthusiasm is indeed justified, you see challenges -- I mean, in our stores in 2022, the revenue levels are higher than without Chinese tourists. How are you going to maintain the customer experience Europeans with a lot more traffic? My second question is the Vuitton brand, you were so kind as to give us its revenue, perhaps even little more '21, '22 over three years. It represented an increase of some â¬8 billion to â¬9 billion. So a question perhaps on the law of great numbers to grow â¬5 billion, that's â¬1 billion. That's more than a lot of brands in the sector. How to maintain the exclusivity of the brand? I'm sure the same question was put to you, no doubt, 15 years ago when you talked the â¬5 billion mark. Third question, last year, you set up a company that the management company with a family control that was at risk. Could you perhaps tell us a bit more about this management partnership company? Well, China, it's actually difficult to predict what's going to happen. What we can say about China is China needs economic growth. It's no secret. I think everyone would agree on that. China for its people, for the success of the country needs economic growth. The growth had slowed. I'm quite confident that the Chinese leadership being very astute. They will no doubt and almost certainly use the time to reboot Chinese growth. That's the case. In fact, it started in January. We have every reason to confident indeed optimistic on the Chinese market. In Macau, where Chinese can now travel to, the change is quite spectacular. The stores are full. It's really come back very strong pace. So, are they going to travel? I mean, you're afraid of they coming to France, when will they travel? I mean, estimates would be as of the summer, if they resume their travels and they'll head for the countries that attract them and probably come to France. We have for that the possibility of receiving them. We have various stores, different size stores and increasingly, we have stores that are reserved for the customers who require greater individuality of high quality and we've managed -- although the brand does indeed attract hugely, we've managed to improve the desirability. Thatâs our key criterion, the brand desirability every quarter, and that desirability in a way suffers from the size of the company. Will it become exclusive? Is it not too big? I mean, I've heard since I was appointed CEO of LVMH. It was back in 1989, 13th of January. And one of my close friends, who was a leading Belgian financier said, but are you really sure that you want to start this business to buy? Because I was offered Vuitton products. And they're so -- spread so widely that I didn't want it. Are you sure? And Vuitton in euros less -- generated less than â¬500 in revenue. So don't be overly impressed by size. What counts above all is quality today, products selling incredibly well. While it's been difficult to find, if today, if you want a yellow Kusama bag in the -- on the Champs-ÃlysÃ©es, well, it's quite simply out of stock, and I'm not at all worried about that. And what was the other? And the limited partnership, well, that's for the lawyers. I am not a lawyer. They recommended that I set up this limited partner. It's strong. It's very much in fashion. Hermes did that this limited partnership? Why don't you do one? It doesn't really -- it's really nothing at all. I wanted to talk to you about the organization because we changed the organization of the group quite a bit earlier. I didn't mention Selective Retailing with Chris de Lapuente, who's running that in a masterly fashion with the success of Sephora, which is really quite extraordinary. They get -- we bought that at, how much, Tony? I think, we acquired it for 100 million, right, give or -- I don't know how much it would be worth. Today generates significant -- very significant profits. I won't give you the number, but let's say, very highly significant. So it's a great company. We've just reorganized. I mentioned Tiffany earlier. We've just reorganized the Watches and Jewelry with StÃ©phane Bianchi, who is with us this evening, who runs all these businesses. They're all profitable today. All our watch businesses, jewelry business was already profitable. And FrÃ©dÃ©ric, who is constantly producing new watches, I've got a TAG Heuer watch, Iâm worrying one. It's quite wonderful. It's a diversity and at the same time, we learn a lot on the -- about the technology of the product at Vuitton. I mean, they produce extraordinary watches, watches that are quite spectacular and that enhance the desirability of the brand. Hello. My name is Edouard Aubin from Morgan Stanley. You mentioned recent changes. One significant one is change of management in Vuitton of your flagship brands. Can you tell us what we can expect to come out of these changes in Selective Retailing? Sephora had a very, very good year. Can you expect a digital pure player emerging in the western world, like Tim Hall [ph] selling Prestige brands franchises, and that contain the growth of Sephora in China. Is that something that could be a challenge for Sephora? And a question for Mr. Guiony about the profit margin in H2. You gave us clear explanations on Fashion & Leather Goods and the impact on Selective Retailing margin was down in H2 compared to H2 of last year, whereas according to your explanation -- well, your explanations don't apply to Selective Retailing. So, can you is more about the decline in profit margin from one year to the next whereas growth was rather sustained in Selective Retailing? Well, in a large company, as in any human organization one needs to evolve. It's not a good thing to keep a form of organization that leads to a routine mindset. And in the group, apart from I, who've been here for quite a long time, but we follow the business from afar. But I think we need to push innovation that the executives after a certain while give them time to prove their quality to succeed, but they must use their management skills by changing. Mustn't get used to things. But of course, we need duration. I mean, it's not like in a government where change every two years or even more. Here, it's the opposite. It's really just that they're just flitting from one job to another. But to wait that a number of new ideas injected brought to the table that they're supported by individual experience. You'll have noted that the heads that we've appointed to the two major businesses are very experienced to wait for strategic continuity with a possibly a different managerial approach, a focus placed on quality, creativity of products, emphasis placed more on communication, store, design, et cetera, but fundamentally the same strategy. Sephora U.S., well, I was already -- someone said to me five years ago, be careful, be very prudent, Sephora in the U.S. is on the threat from Amazon. That's what we were told. Okay? But it's never worked so well. I think that there's a return to physical stores and the experience in a physical store will always be extraordinary as to compared to an online purchase. So to sell products, be it luxury products or cosmetics, solely on internet, I don't really believe in the potential for direct head-to-head competition of that sort of thing. What's interesting in selling by internet, I mean lipsticks, perfumes, creams, et cetera, is a service when you try the cream when you come to Sephora to test the product after you want to renew it, you go on the separate site and you buy it. But discover the product on Amazon in the midst of a whole other utilitarian products, I mean, it doesn't really make you fantasize, I'm not saying it doesn't work, but most of the selected brands are not represented. So I'm not really worried. Regarding the last question, profit margins was slightly down in Selective Retailing, 0.9% in H2. The explanation is DFS, because DFS had 2 very different half years. The first H1 was not outstanding but it was all right. But H2 was a challenging half year because, of course, the local circumstances and the fact that Macau was knocked down starting in July, no Chinese visitors and so no sales in Macau from July to December. And as Mr. Arnault pointed out, now things back in business. Macau is one of the few places where the COVID test is not compulsory for Chinese nationals. But, H2 was challenging compared to 2021 where Macau was open. Hong Kong, no big difference with Macau. Of course, when it's closed down suddenly, well, that of course, made things difficult. Good evening. Luca Solca from Bernstein. I have -- there are a number of significant factors in a sudden recovery in Chinese demand, but American demand seemed to be slowing down. I mean, are there signs in the U.S. that there's a slowdown there? I mean, there's talk about that, recession and whatnot. But looking at a 7% growth in Q4, it seems pretty good. So is there a slowdown or not? Question number two, about steps that you might consider to address the return of Chinese tourists in Europe. We've thought about this. But, could a price increase in Europe be a way to maintain the high-quality experience in the stores for local customers? In other words, not to have too many Chinese visitors. And the last point I saw representatives of the Arnault family sitting in the front row. Mr. Arnault, are you already thinking of your succession? And then, what would be the criteria considered to who would follow in your first steps? Okay. The last question I will not take. That will be for Mr. Arnault himself to answer. In America, 7% is less than the average growth rate of the Europe, which is 15%. So Q4 was not quite as dramatic. And part of the explanation, it was that American tourists decided to buy in Europe rather than in America. And in fact, when you look at purchases from the American customers, we are enjoying double-digit growth, and that's the case in -- as well. But in the U.S. itself, it's true that the numbers are not quite as high because a lot of business is done in Europe instead. And that was true already in Q3 and of course, in Q4 as well. Regarding the situation in the U.S., if you look at Sephora, the best quarter of the year was Q4. And Sephora is a good indicator of the rest of the luxury industry. And the comment about American demand is that -- well, Sephora is sort of the budget line and they are enjoying a very high growth. So, we're not concerned or not particularly concerned, even if the numbers are slightly down in Q4 compared to the beginning of the year. Well, I've already answered about the return of the Chinese. No worries about the quality of the relationship with our customers. If you take, for example, the Vuitton store on the Champs-ÃlysÃ©es, what will happen is that the line outside will probably lengthen. But inside, there will still be the number of people who still get the same level of service. And if the line is too long outside, maybe they won't. You may have noticed that since the winter, we serve hot chocolate -- delicious hot chocolate prepared by Yannick AllÃ©no, all those standing in line to get into the Vuitton store. Last question, see that I was -- friend with Roger Federer and a great fan of tennis. He probably wants me to play a bit more tennis. And the last time I played with Roger Federer, I think I won one point in a single set, and maybe I could do a bit better than that. And that would indeed delight me. But as to succession, you may also have noticed that the retirement age is very much in vogue, has been extended. From Goldman Sachs. Thank you for taking my questions. And I apologize, it's in English, first up. If I could just ask two questions, if I may. Mr. Arnault, you kindly shared the revenue number as we head earlier for Vuitton. I wonder, is there anything that you can help us understand or the observations about the customer base? Given the sheer size of the brand, obviously, there's a huge number of new customers coming through the doors every year. But, can you help us think about that dynamic with the loyal and the existing customer? Is there a shift over the last few years towards a bigger slice of the revenue pool coming from that existing customer base? And then, my second question, Jean-Jacques, if I may. Given obviously, presumably, you have your budget discussions with the entire teams at the end of the year, presumably, there's been quite a change in mood since the beginning of the year and the reopening of China. But, I wondered if you can help us think about that process and whether you're enabling maybe a little bit more investment on new projects. I'm sure you get plenty that come across your desk. Thank you. All right. Well, I'll give you the answer. It's a bit early to -- early days to decide on the budget outlook. The past few weeks gave us reason to believe that what we had in China at the end of the year was a sudden drop, but now we are back to normal. Well, it's a bit early days again because this -- we are right in the midst of the Chinese New Year, so it's difficult to see any trends during that holiday season. So, we don't know for sure, but we're not changing our short-term plans. We'll wait and see to see how things develop. Of course, it will be difficult for Chinese nationals to go out of the country. There is not much by way of air travel, complicated situations with Korea and Japan. Air travel is an issue in Europe and in other countries. Well, Macau is opening up again. But -- well, the 40-hour COVID test does mean that there are some limits to travel. But still, things are changing on the right track, but a bit early days to change our position for the year as a whole. You were asking about the customer base at Vuitton. First of all, I don't think we'll have that many tourists from China before the second half of the year. It's going to take some time, as Jean-Jacques is saying, to return to a more dynamic level. And Vuitton customers are, for the most part, loyal customers who come back. And so, we have -- we're used to in order to serve our loyal and our usual customers and also new customers to treat them well, but it's very separate. And I'm not at all worried. And if there are lots of people, and we're used to receiving a great many people, well, we favor service to the customer. And if customers don't wait, well, long enough, well, too bad, they may -- they'll come back later. But we really favor customer service. Iâm not at all worried. One final question perhaps. It's Natasha Brilliant from Credit Suisse also in English, I'm afraid. Three questions on China. I accept we're not going to get for January. But could you just give us a bit more color? Are you seeing sort of normalized levels of footfall come back in the key cities, or is it still much lower, but you're seeing decent spend per customer? Just a bit more color on some of the trends that you're seeing there. And second question is just on margins in China, if there's any big differences versus Europe and the U.S.? And so, how we should think about profitability as China reopens? And then last question is how you expect the balance of spend from Chinese consumers to fall? Do you expect a greater proportion to stay domestically kind of in the longer term? And what your thinking is around Hainan? Whether you're still sort of reluctant to operate there? And could that hamper growth if more spend stays within China? Those are my two questions. On the first question regarding traffic in China per structure, well, of course, we are not to the levels of 2019. We're still a long way from that. But in January, we were, what, minus 85% in December. But even in January, where things are better, we're still -- far cry, what is it? What we've done to -- maybe 40% below the 2019 levels. On profit margins in China, well, you have -- it depends on the year. Last year was not a very good year of profit margins in China because, as you know, there was some disruption, especially in Q3 and Q4. So of course, that drove margins down. So we don't have the revenue, but we have the cost, the profit margins are down compared to 2021, which was an outstanding year for profit margins because suddenly, there was a recovered -- well, demand in China, went back to Mainland China. Then, of course, in '21, things were very positive. And now, it's the other way around. So margins are down. Regarding the breakdown between tourists buying and local domestic buying, it's difficult to work out exactly. But in absolute numbers before -- well, it used to be that tourist represented a certain share of business abroad. It would take a long time to get back to the levels of before. I mean, now 90% of the demand is in China itself. So now part of that demand will move out offshore when the markets reopen, but it will be a long time before the percentages change. And also, the Chinese market is bigger now than in 2019. There are more customers now than they were in 2019. All the numbers are up. So, for the proportions to change significantly to have much more offshore proportionally will take a while. All the more so that we're refusing and we're fighting against so-called parallel exports. A number of our peers need to generate revenue and don't hesitate sell through resellers who buy abroad products and then sell them on at discounted prices in China, but we avoid that. Absolutely ditto for cosmetics, the sale, products that we see offered by certain competitor through -- I mean it's quite fascinating to see the duty-free stores, where there's nobody because their airports are empty or at least were empty, were generating huge sales, huge revenues. Why? Because the products never arrive on the stand. They went straight from the inventory, the reserve of the seller to the professional seller who sold them on a discount in China. I mean, for your image, there is nothing better. It's dreadful. One last question. Not a financial question, but there is one of the major developments in the luxury industry is secondhand products. What's your take Mr. Arnault on this development, the fact that people are taking an interest in secondhand items is -- does -- is LVMH at all interested in taking part in this? We're focusing on firsthand. We haven't reached -- yet reached the second or indeed the third. So, we haven't really given any thoughts. I mean, I think the potential is such for our brands that the secondhand -- well, that might be of interest, it can perhaps be a kind of a derivative for certain brands, but for the time being, we don't really need it -- we don't really need to intervene or indeed consider. What we're, of course, trying to do is to avoid. And here, we have a major effort with our product tracking to avoid these secondhand items because that's the problem we're facing, sell products of our brands that are fakes. And that happens more than you think and then we see the people who bought these products, secondhand products, but they're not at all secondhand, they're fakes. They come and that -- you have to be very diplomatic to solve that with the people who come to do Dior, to Vuitton, Celine and to explain we're very sorry, madam, but we canât repair your bag because it's a fake. But we don't go as far to do what Rolex is doing. Because Rolex, in that case, you know what they do. A customer arrives, says, my watch is no longer working, needs to be repaired, very good, madam, sir, we'll take your watch. And if it's a fake watch, they never return it. We could try that. That might be a solution, they keep the watch.
EarningCall_990	Good afternoon, ladies and gentlemen, and welcome to the South Plains Financial Inc. Fourth Quarter 2022 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Steve Crockett, Chief Financial Officer and Treasurer of South Plains Financial. Please go ahead, sir. Thank you, operator, and good afternoon everyone. We appreciate your participation in our fourth quarter 2022 earnings conference call. With me here today are Curtis Griffith, our Chairman and Chief Executive Officer; and Cory Newsom, our President. A replay of this call will be available on our website within two hours of the conclusion of the call until February 2nd, 2023. Additionally, a slide deck presentation to complement today's discussion is available on the News and Events section of our website. Before we begin, let me remind everyone that this call may contain forward-looking statements and are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those anticipated future results. Please see our safe harbor statement in our earnings press release that was issued this afternoon and on Slide 2 of the slide deck presentation available on our website. All comments made during todayâs call are subject to those safe harbor statements. Any forward-looking statements presented herein are made only as of todayâs date, and we do not undertake any duty to update such forward-looking statements, except as required by law. Additionally, during todayâs call, we may discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. A reconciliation of these non-GAAP measures to the most comparable GAAP measures can also be found in our earnings release and on Slide 22 of the slide deck presentation. Thank you, Steve, and good afternoon. On today's call, I will briefly review the highlights of our fourth quarter and full year 2022 results, as well as our outlook for the year ahead. Cory will discuss our loan growth and the credit profile of our loan portfolio in more detail as well as review our strategic initiatives for 2023. Steve will then conclude with a more detailed review of our Q4 results. To start I am very proud of our execution over the last year as we successfully navigated a challenging economic environment and while the economic outlook remains uncertain, we believe we have positioned South Plains for continued success in the future. Central to our success has been the expansion of our commercial lending platform, which has driven the acceleration in our organic loan growth and contributed to an improvement to our run rate net interest income. As our net interest income improved through the year, it began to offset the expected decline in our mortgage banking revenues as the Federal Reserve aggressively raised their benchmark interest rate to combat inflation. Looking forward, we believe we are well positioned to continue to deliver returns in line with or better than our peers. Given that backdrop, there are five key points that I hope you will take away from our results and today's call. First, we delivered 8.6% annualized loan growth in our seasonally slower fourth quarter driven by strength in both our community markets as well as our major metropolitan markets of Dallas, Houston and El Paso. Second, our major metropolitan markets experienced 13.9% annualized loan growth to $879 million, which now represents 32% of our total loan portfolio at year end as our new lenders continued to successfully grow their portfolios. Third, the credit quality of our portfolio remains stable through the fourth quarter and we believe we are well positioned for the uncertain economic outlook. Fourth, we have diligently managed our expenses to drive profitability as our mortgage banking revenues have declined and wage pressure has increased across the bank. Lastly, we remain focused on returning capital to our shareholders. During 2022 we repurchased 4.8% of the company's shares of common stock that were outstanding as of December 31, 2021. We also distributed $0.46 per share in quarterly cash dividends in 2022, representing a 53% increase as compared to 2021. Turning to our results in more detail on Slide 4 of our earnings presentation, we delivered net income of $12.6 million, or $0.71 per diluted common share for the fourth quarter of 2022. This compares to net income of $15.5 million, or $0.86 per diluted common share, in the third quarter of 2022, and $14.6 million, or $0.79 per diluted common share, in the year ago fourth quarter. As we discussed on last quarter's earnings call, our third quarter 2022 results benefited from $0.10 per share of legal settlements, net of increased legal expense, and a negative provision for loan loss net of tax. As a result, our fourth quarter earnings per share experienced there more typical seasonal decline like we have experienced in prior years. We recorded a provision for loan losses of $248,000 in the fourth quarter of 2022 as compared to a negative provision of $782,000 in the third quarter of 2022 and no provision in the year ago fourth quarter. The provision was mainly due to our loan growth in the fourth quarter. Looking forward, we believe we are well reserved for an uncertain economic environment given that our allowance for loan loss ratio is 30 basis points higher than our pre-pandemic levels. Our base case outlook is for the national economy to experience a mild recession in 2023 with the Texas economy seeing a slowdown but avoiding recession given the continued strong in-migration and low unemployment that we have been experiencing. As a result, provisions for loan losses may be necessary in future periods. While we expect economic growth to slow in Texas as the Federal Reserve continues to raise their target benchmark interest rate, loan demand remains strong through our seasonally slower fourth quarter as we grew our loan portfolio 8.6% annualized from the third quarter of 2022. Our loan growth was driven by gains in both our community markets as well as our major metropolitan markets. For the full year 2022, we grew our loan portfolio 12.7% to $2.75 billion, which exceeded our expected mid to high single digit loan growth. This strong loan growth contributed to net interest income growth of 13.7% to $138.5 million as compared to 2021, and which help to offset the 47.5% decline in mortgage banking income that we experienced through 2022. As a result, we were able to modestly grow diluted earnings per share to $3.23 in 2022 as compared to $3.17 per share in 2021, which is quite an achievement. Overall, I am very proud of our accomplishments in 2022 as we've grown our lending team taken share across our markets and delivered results above our expectations. That said, our share price has not fully reflected this improvement as we believe our shares have continued to trade below intrinsic value. As a result, we utilized the remaining capacity on our share repurchase authorization to buy back 130,000 shares during the fourth quarter. For the full year 2022, we repurchased 860,000 shares, representing approximately 4.8% of our shares outstanding at December 31, 2021. Our Board of Directors is currently analyzing our prior buybacks and evaluating the merits of another share repurchase program. We also understand that liquidity in our shares is important and we need to balance our liquidity with the benefits of our share repurchase programs. Additionally, as was disclosed earlier this month, our Board of Directors adopted resolutions to terminate our employee stock ownership plan on December 30, 2022. This plan was created in 1994 and no longer served its intended purpose. The plan will be distributing the shares to the plan's participants, which may improve our stock liquidity over time and will also reduce the expense required to maintain the plan. We believe this will benefit the company, our employees, and our shareholders. Returning a steady stream of capital to our shareholders through our share repurchases and quarterly dividends remains a priority for our management team. Along those lines, our Board of Directors authorized $0.13 per share quarterly dividend as announced last week. This will be our 16th consecutive quarterly dividend to be paid on February 13, 2023 for shareholders of record on January 30, 2023. For the full year 2022, we distributed $0.46 per share to quarterly cash dividends representing a 53% increase as compared to 2021. To conclude, we remain cautiously optimistic that the Texas economy can deliver moderate growth in 2023 and avoid a recession, but we do expect a mild recession in the national economy. That said, we will remain vigilant and will not sacrifice credit quality for growth. We have been underwriting the more conservative assumptions and remain confident in the credit quality of our portfolio. Looking forward, we also believe that more challenging economic environments can lead to opportunities for those with strong balance sheets and sound loan portfolios. While we expect M&A to remain subdued through 2023, we look to further expand the bank and remain in contact with potential sellers as we believe there could be a resurgence in 2024. Thank you, Curtis, and good afternoon, everyone. As Curtis touched on, long held for investment increased during the fourth quarter of 2022 by $57.7 million or 8.6% annualized compared to the third quarter of 2022 is outlined on Slide 5. Our loan demand remained primarily in commercial real estate, residential mortgage, and consumer auto. Overall loan demand remains strong despite the fourth quarter being a seasonally slower quarter for the bank combined with principle payments in a hotel segment, which is not a growth sector for us. Our loan yield in the fourth quarter of 2022 was 5.59%, which compares to 5.12% in a third quarter of 2022. The rise in our loan yields in the fourth quarter reflects our efforts to proactively price new loans to account for a higher market interest rate environment. Our funding costs did accelerate in the fourth quarter as the Fed Reserve continued their aggressive interest rate increases and quantitative tightening policy. As we will discuss managing our funding costs and deposit growth is a focus for our team in 2023. As we have discussed on prior calls, we are a community retail bank in our smaller markets and primarily a commercial bank in our major metropolitan markets of Dallas, Houston and El Paso as outlined on Slide 6. Our strategy has been to redeploy our excess liquidity consisting of lower cost deposits from our community-oriented markets into major metro markets. To accomplish this, we have added experienced commercial lenders who share our culture and values and who focus on developing long-term customer relationships done the right way. Our expansion and growing scale in our metropolitan markets is a key factor to the accelerating loan growth that we delivered in 2022 combined with a market share gain that our community bankers continue to deliver. As outlined on Slide 7, we grew loans in our metropolitan markets by $29.5 million in the fourth quarter of 2022, representing 13.9% annualized growth as compared to the third quarter of 2022. Year-to-date, weâve grown our loan portfolio by 19.2% to $879 million in our major metro markets, which have strongly contributed to the banks 12.7% total loan growth for the full year of 2022. As Curtis touched on, we expect the national economy to experience a mild recession during 2023 with Texas seeing a slowdown but avoiding a recession as our economy digests the impact of higher market interest rates. Weâre fortunate to operate in Texas given the favorable environment for businesses, continued strong in migration and solid demand for housing. Currently demand for commercial real estate and residential properties remains healthy, though moderating with inventory constraint. If market interest rates begin to stabilize at current levels, we believe this supports our low-single digit loan growth outlook for 2023. We will remain cautious with a focus on maintaining the credit profile of our loan portfolio while keeping tight control of our expenses. Importantly, we have the ability to add space and bankers in our major metropolitan markets as growth opportunities present themselves. As the economy continues to transition to a higher market interest rate environment, we are proactively underwriting to more conservative levels and asking for more money down on new loans as we focus on discipline growth. Likewise, we continue underwriting to lower energy prices in the Permian Basin to ensure we avoid potential problems if an economic downturn occurs. We are continually stress testing our loan portfolio and remain pleased with the improvement credit quality that we have experienced. Overall, we believe we are entering 2023 in an advantageous position and remain pleased with our asset quality and strong capital position, which will serve us well as both the Texas and national economies begin to pick back up in 2024. Skipping ahead to Slide 9. Our indirect auto loan portfolio increased by $10 million to $296 million in the fourth quarter of 2022 as compared to the third quarter of 2022. While there is a modest growth in this sector, we are maintaining a discipline approach to underwriting a 78% of the indirect auto loan portfolio originated with a credit score of 690 or better. This strong credit profile positions the portfolio for resilience across varying economic cycles. Additionally, less than 3% of this portfolio is comprised of recreational vehicles, an area where we believe challenges could occur the economy were to experience a more severe recession. Turning to our mortgage business on Slide 10. Mortgage loan origination has decreased 17.7% to $125 million in the fourth quarter of 2022 as compared to the third quarter of 2022, as a result of rising market interest rates combined with normal seasonality. As we discussed last quarter, we have been aggressively managing this business for profitability as volumes declined. While focusing on growing our commercial lending platform across both our community and metro markets, we believe that we have reached an inflection point where our growing loan portfolio will generate improving interest income and position the bank for growth. Our mortgage business is now at a level which will likely no longer have a material impact on our results positive or negative. Looking forward, we will remain in the mortgage business as long as it is profitable and drives incremental business through cross-selling. Turning to Slide 11. Weâve generated $12.7 million of non-interest income in the fourth quarter of 2022 compared to $20.9 million in the third quarter of 2022. This decrease was primarily due to the seasonal decline of $2 million in income from insurance activities and a decline of $3.5 million in mortgage banking revenues. Additionally, third quarter non-interest income benefited from $2.1 million in legal settlements, which skews the comparison. For the fourth quarter of 2022, non-interest income was 26% of the bankâs revenue as compared to 37% in the third quarter of 2022. Looking to the year ahead, we have several strategic priorities in 2023, including first, continue to selectively add experienced lenders with a focus on our major markets given the significant opportunity for commercial loan growth as well as other services. Second, work to enhance and expand our deposit gathering capabilities with a focus on adding treasury and wealth management professionals. Third, continue to pursue opportunities in the Permian Basin to drive loan and deposit growth as well as fee income. Fourth, we are proud of our customer service and the state of our technology given the investments that we have made over the years. In 2023, we will largely complete our migration to the cloud while also enhancing our cybersecurity as we focus on having industry-leading technology and tools. And lastly, continue to tightly manage expenses as we strive to maintain the bankâs profitability in the current inflationary environment. To conclude, Iâm very proud of our results this past year as we have successfully executed our organic loan growth strategy, which has delivered strong net interest income growth and offset the decline in our mortgage banking business, which positions the bank for a continued growth. Thank you, Cory. Starting on Slide 13, net interest income was $36.3 million for the fourth quarter of 2022 as compared to $35.1 million for the third quarter of 2022. The increase was primarily a result of an additional $74.4 million in average loans outstanding combined with higher interest income received on other interest earning assets in our portfolio as a result of the continued rising interest rate environment. We also benefited from $900,000 in a purchase loan recovery in Q4. Looking forward, we continue to believe that we are positioned for our net interest income to benefit as we grow our loan portfolio and benefit from the anticipated rise in interest rates through the first quarter of 2023. Our net interest margin calculated on a tax equivalent basis was 3.88% in the fourth quarter of 2022 as compared to 3.70% in the third quarter of 2022. This improvement in our net interest margin was driven by our organic loan growth combined with the corresponding increase in loan yields due to the rising interest rate environment, which outpaced increases in our funding cost. Our average cost of deposits was 97 basis points in the fourth quarter of 2022, an increase from 52 basis points in the third quarter of 2022. As we discussed on last quarterâs call, competition for deposits started to increase through the third quarter and we made the decision to proactively raise our deposit interest rates to maintain relationships. Through the fourth quarter, we have seen a further increase in the competitive landscape, which has necessitated a more aggressive response to keep our deposits in-house. As Cory discussed, this is a focus of the bank in 2023 as we strive to manage our cost of funds as well as grow the bankâs deposits in a more competitive environment. Turning to Slide 14, total deposits decreased $54.1 million in the fourth quarter to $3.41 billion as compared to the third quarter of 2022. A majority of the decline was due to the elevated competitive environment, though, we also experienced outflows due to mortgage escrow relationships, which declined approximately $32 million in which we expect to build back through the year. Our deposit base during the quarter reflected the impacts from a shift in the competitive landscape as non-interest bearing deposits decreased to 33.8% of total deposits in the fourth quarter of 2022 as compared to 36.5% of total deposits in the third quarter of 2022. Turning Slide 15, we continue to believe that our loan portfolio remains appropriately reserved as our allowance to total loans was 1.43% at December 31, 2022 as compared to 1.47% at September 30, 2022. As Curtis touched on, we recorded provision for loan losses of $248,000 in the fourth quarter, which compares to a negative provision for loan losses of $782,000 in the third quarter of 2022. Overall, we continue to experience stable credit metrics in our loan portfolio led by continued improvement in the hotel segment, which had a net reduction in principal outstanding of $16.8 million in the fourth quarter. This can be seen in our non-performing assets to total assets ratio, which was unchanged at 20 basis points in the fourth quarter of 2022 from the third quarter of 2022. Importantly, we believe we are well reserved for the uncertain rising rate economic environment given that our allowance for loan losses ratio is 30 basis points higher than pre-pandemic levels. Nevertheless, future economic conditions remain uncertain due to the rising rate environment and persistent inflation levels and are impacting customers and businesses in the United States, which may make additional provisions for loan losses necessary in future periods. Skipping ahead to Slide 17, our non-interest expense was $32.7 million in the fourth quarter of 2022 as compared to $37.4 million in the third quarter of 2022. The decrease was primarily due to a decline of $4.2 million in personnel expense and a decline of $587,000 in legal expenses. The significant decrease in personnel expense during the fourth quarter of 2022 was largely the result of a decline of $1.8 million in insurance commissions and a decrease of $1.2 million in mortgage commission and related personnel cost as compared to the third quarter of 2022 as a result of the decline in insurance and mortgage revenues. Importantly, we have carefully managed our personnel expense through driving efficiencies, not replacing some of our personnel who have retired in managing mortgage overhead lower, which taken together has allowed us to manage wage inflation across the bank through 2022. Looking to the first quarter of 2023 and the year ahead, we expect non-interest expense to be flat to modestly rise from the fourth quarterâs level as wage pressure and cost inflation continue. That said, we believe we can continue to find offsets to manage inflation while also remaining competitive in the market as we work to keep our employees as well as attract talented individuals from across the industry. Moving ahead to Slide 19, we remain well capitalized with tangible common equity to tangible assets of 8.50% at the end of the fourth quarter of 2022, an increase from 8% at the end of the third quarter of 2022. The increase was driven by an $8.4 million increase in the fair value of our available for sale securities and related fair value hedges net of tax, and by net income after dividends paid of $10.6 million. The increase in fair value of our securities was a result of the reduced volatility in the markets as valuations stabilized and increased in the fourth quarter. Tangible book value per share increased by $0.96 to $19.57 per share during the fourth quarter of 2022. Thank you, Steve. To conclude, Iâm very proud of our results this year as we successfully expanded our lending platform in our major metropolitan markets. While our bankers in West Texas continued to take advantage of the bank ownership changes in our local community markets. This led to better than expected loan growth and a sizable increase to our net interest income, which effectively offset the decline in our mortgage banking revenues. As I look to the year ahead, we believe that weâre an excellent position. We believe our markets will slow, but remain resilient in the face of what will likely be a national recession, positioning our team to deliver moderate loan growth. Additionally, we will maintain our expense discipline and our conservative underwriting standards and risk management as we strive to deliver on our long-term goal of achieving superior returns for our shareholders. I would like to thank our employees for their hard work and commitment to our customers and our communities over the last year. And at this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Brad Milsaps with Piper Sandler. Please proceed with your question. Appreciate you guys taking my questions. Steve, maybe Iâll start with expenses. I appreciate the color around kind of what you think is going to happen in the first quarter, obviously, some great expense control on the fourth quarter, but as you think about the entire year, I think maybe last quarter you said maybe flat to down slightly. Is that still possible from where you sit today given how great the fourth quarter was? Just kind of curious how to think about the full year. Yes. I mean, we will definitely have some fluctuations. I mean, again, insurance and mortgage those do have a little bit of cycles. So I mean, weâll be down Q1 may be a little bit lower, and then some of that will increase over Q2, Q3, and then come back down. We do still feel good about the overall projection, yes, that weâll be able to keep expenses fairly in that flat to slightly in an increase range. Brad, this is Cory. Iâll just add color to that. I mean, obviously, weâve got expense save [ph] on the mortgage side. But hereâs the thing that Iâm really proud of. We have expense save outside the mortgage. And if you look at everything people are facing on â I mean on a salary expense and everything else. We were able to really handle on those and keep it pretty flat and find a way to take care of our team to do some other savings. Yes, no, great. It was really impressive work this year. Maybe just shifting gears a bit to the net interest margin. Steve, it sounds like, you saw additional pressure late in the quarter and in year-to-date on deposits. Do you think kind of with everything you have going, the NIM may have likely peaked and it probably starts to contract from here? Just kind of curious, kind of what your thoughts are sort of around a NIM trajectory as you move through 2023? Yes, thatâs a great question. I mean, weâve looked at it a lot of different ways. We really think weâre â I wonât say itâs peaked, but itâs probably a pretty close to that. I mean, weâre â would say, we would continue to see increase on the interest cost, but we should see increases still on the income side. So again, would be hopeful. We would see NIM while itâs not going to, may not grow like we did in Q4 either maybe strive to keep it flat, maybe slightly grow. But itâs going to be right around, we believe itâll be right around that area. I mean, you â I guess you could see a slight downward. But I mean, we donât think at this point that itâs going to contract. And then just to follow up on that, can you remind me, is there a certain percentage of your taxable securities portfolio thatâs floating or variable? The yield there has improved really nicely for kind of several quarters in a row, just kind of wanted to get a handle on kind of what kind of the key drivers are there? Yes, so on the taxable side, weâve got, I think itâs around 80 million or so thatâs in some CMOs that do reprice every month. And so those have helped that yield. They obviously didnât look very good at the beginning of the year, but as the rates have gone up, those do reprice. So thatâs whatâs helping us out there. Okay. I guess thatâd only be about a little over 10% â 15% of it or something, and then the rest of itâs just kind of regular repricing, I guess. So I want to make sure I heard something correctly. Steve, I think you mentioned a $900,000 benefit from a purchase loan recovery. Did that happen in the fourth quarter and did that flow through spread income and the margin? Yes, it did. That was â I think it was about eight basis points or nine basis points that it improved NIM. Okay. So that could be a modest, at least from a percentage point of view, that could be a modest headwind into 1Q on the margin? Okay. All right. And then, so I mean, you guys were pretty active in the buyback in 2022. I understand you want to increase the liquidity of the stock, I know canceling the ESOP will help with that. But do you think you will be active, as you said, the stock is still inexpensive? So do you think you will be active with the buyback potentially in 2023? This is Curtis. Weâre really looking at it. Weâre in a good position. Weâve got plenty of cash available at the holding company level. But our Board is going to really analyze things over probably the next month or two and make a decision on that, on â whether we do get back in. And if so, really at kind of what level we want to go after it. I think thereâs still some value to be had right there. But itâs going to be a Board decision on that as we look at everything. Weâve got several moving parts kind of happening right now and as we look at all of those we just didnât feel like itâs a good time to make a decision right here in January. Oh, yes. CECL, yes sir. Yes, we adopted in January. Yes, Steve can give you more color on that if you â he can give you a whole lot of color on that if you [indiscernible] too, but yes sir, we were supportingâ¦ Yes. Maybe just a thought on, do you think itâll have a material impact on the reserve ratio, just given adoption? Yes, so at this point and as Curtis said, we are adopting it. Weâre still finishing up some validation in a few other things before weâll have to disclose that number in the 10-K. But as of now, thereâs not a material impact to where we are in our current model. I think a lot of that goes back. If you look how conservative weâve been at this point. I think itâs been our numbers have been pretty high anyway. Okay. And then finally for me, I know historically you guys have guided to mid to high single digit loan growth. I think I heard you say, but whatâs the expectation for 2023 loan growth? Well, Iâd like to still think we could achieve high single, but Iâm a little cautious in this environment. Of course, we canât â we keep working with a bigger number there as well. So that affects it. But I think if we can hit and hit, itâs going to be doing pretty good. And we will have some payoffs. And a lot of projects are kind of on pause, but we are still seeing some customers come in, including some new customers coming that are interested. So weâre getting to look at some really great deals. So I think we can still achieve some growth during 2023. But I do think weâll probably be more in low to mid single digit range, just my opinion. Yes, I agree with. I think low singleâs not unrealistic for us. I mean, look, you canât base it all on January, but January has been a good month. But if you look at what some of the projections for the economy, we think Texas is a great place to be. Weâre really glad thatâs where we are, but reasonably and conservatively low single digits. And we have reached the end of the answer session, and Iâll now turn the call back over to Mr. Curtis Griffith for closing remarks. Thank you, operator. As you heard, weâve had a good quarter. Weâve had a good year. Very proud of what we did achieve in 2022. This economic outlook is very uncertain. We donât expect significant credit problems in our markets, and we are dealing with many of the same funding and deposit cost issues as most other banks. Weâre going to handle that just as we do our other issues, and thatâs through strong relationships. We will be incentivizing our people to have good growth in deposits, and weâre going to focus on controlling expenses while achieving, we believe good, reasonable organic growth in both deposits and loans. We have an incredible team. Weâre confident that they will keep delivering excellent results for our customers and for our shareholders. Thank all of you for being on the call today, and please reach out to us if you have any questions. And ladies and gentlemen, this concludes todayâs conference. And you may disconnect your line at this time. Thank you for your participation.
EarningCall_991	Thank you for standing by. This is the conference operator. Welcome to the NOVAGOLD 2022 Year End Financial Results Conference Call and Webcast. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] Thank you, Ariel. Good morning, everyone. We are pleased that you have joined us for the 2022 year-end financial results and also for an update on the Donlin Gold project. On today's call, we have Dr. Thomas Kaplan, NOVAGOLD's Chairman; Greg Lang, NOVAGOLD's President and CEO; and David Ottewell, NOVAGOLD's Vice President and CFO. At the end of the webcast, we will take questions by phone. Additionally, we will respond to questions received by e-mail. I would like to remind our webcast and call participants that, as stated on Slide 3, any statements made today may contain forward-looking information such as projections and goals, which are likely to involve risks detailed in our various EDGAR and SEDAR filings and forward-looking disclaimers included in this presentation. On Slide 4, we have included a drill hole map for the '22 program that shows the ACMA and Lewis areas, the three areas where we did tight-spaced grid drilling, and the top five intervals from the latest results we jointly released with Barrick a week ago. The 2022 program was completed under budget and ahead of schedule in September, with 141 holes drilled for a total of over 42,000 meters, making it the largest drill program at Donlin in over 15 years. During the field season, 150 employees worked at the Donlin site, representing 24 of the villages in the Yukon-Kuskokwim region. Keeping our workforce healthy and safe has always been a top priority for NOVAGOLD and Donlin Gold. The safety protocols and meetings at the project site played a central role in ensuring the continued success of Donlin and its drill program. We are immensely proud that Donlin Gold achieved zero lost time incidents again in 2022. This is a remarkable achievement that we do not take for granted, as we continue to work and improve practices to the insurance of the health and safety of our people. The key focus areas for the drill program such as the tight-spaced drilling in the deposit confirmed recent geological modeling concepts at the wider-spaced drill intervals in the immediate areas around the grid. It also identified short-scale controls that will be incorporated into an update to refine the geologic domains used for resource estimation, which will then be utilized for the strategic mine planning work. The addition of 14 geotechnical drill holes also provided information to advance the application for the Alaska Dam Safety certifications. We could not be happier with the outcome of the 2022 program. The assay labs returned some of the best intercepts since the project's inception and among the best open pit gold intercepts industry-wide. Just to highlight how encouraging the results were, the table on Slide 5 includes the top 20 intervals from the program. For example, drill hole 22-68 in the Divide grid encountered over 40 meters at about 1 ounce per ton, and a sub-interval at 23 meters of almost 2 ounces per ton, excellent results. What's particularly intriguing about the results in the Divide grid is the tighter we drill this, the more we expose ourselves to encountering these high-grade structures. Three or four of the top holes from this program were in the Divide grid and encountered unexpected high-grade structure that we'll be following up on. With this highly successful drill program behind us and once we have completed the updated resource model and trade-off studies, the owners look forward to supporting the project team and its partners Calista and TKC in positioning the project for the next steps and taking it up the value chain with an updated feasibility study. Developing one of the world's largest gold mines represents a substantial undertaking that requires the necessary time and energy to ensure a diligent, thorough, transparent and inclusive process for all of our stakeholders in the region. But from my experiences with multiple Tier 1 assets, when I was President of Barrick North America for many years, I realized how spectacular the Donlin Gold project really is. I believe that the intensive work that we're doing on the front end, the better will be the long-term outcome. Richard Williams, our Vice President of Engineering and Development, shares that philosophy. He brought the Pueblo Viejo mine into production for Barrick, and he too joined NOVAGOLD to align himself with the best-in-class for the gold industry's future. Turning to Slide 6. Calista and Donlin Gold continued their bipartisan outreach in Alaska with the administration and Congress in Washington D.C. to highlight the thoroughness of the project's environmental review and permitting processes in addition to the considerable benefits that this project will deliver to all Native Alaskans. Alaska's U.S. senators, Murkowski, pictured with our External Manager of Affairs Kristina Woolston, and Dan Sullivan, as well as Governor Michael Dunleavy, have long been supporters of the Donlin Gold project. We also recognize the historic re-election to the House of Representatives of Mary Peltola for a full term as the first Alaska Native to join Congress, and look forward to our continued outreach to her regarding Donlin Gold in the coming year. Donlin Gold is a federally-permitted project located on private Alaska Native Corporation land designated by law for mining activities as part of the 1971 Alaska Native Claims Settlement Act. This is a differentiating factor for many other mining projects in Alaska. Permitting in Alaska has represented a substantial undertaking and a tremendous achievement to ensure a diligent process for everyone involved. Ongoing Donlin Gold permit activities are included on Slide 8. In September, 13 tribes joined Earthjustice, requesting that the Corps of Engineers to a supplemental EIS and revoke the permit. Responses have been submitted by Donlin and Calista stating why none of these actions are appropriate, so there is very little precedents for 404 vetos and the EPA always differs to the court's regular permitting process. The agencies have been very receptive in dialog and welcome the responses that we have provided. We continue to support Alaska in its efforts on the state's Clean Water Act 401 Certification. The Commissioner granted the request for an adjudicatory hearing related to potential water temperature [effects] (ph) in Crooked Creek. The briefing process is underway and should be completed in the next six months. The right-away lease for portions of the natural gas pipeline on state land was separately appealed in Alaska's Superior Court by two parties. Legal briefings are being prepared by the parties and we anticipate a decision this year. The state of Alaska's issuance of water rights for the mine and facilities was also appealed. The administrative record with the court and all parties are preparing their initial briefs. A decision is expected also this year. The Alaska Department of Natural Resources finalized the re-location plan for public easements in the mine and transportation facilities. Should be noted that all appeals and challenges to Donlin Gold permits to date have been unsuccessful often multiple times, and we have confidence in the process. Nevertheless, as with all mining projects in the developed world, we're always prepared and organized for challenges. The project leadership and litigation teams are intimately familiar with the permits and the procedures that need to be followed. Donlin Gold alongside the steadfast advocacy of Calista and TKC continue to support the state in defense at what constitutes an exceptionally thorough permitting process. One of the key areas which we spend a considerable amount of time and energy at Donlin project is participating, funding and supporting the local communities in initiatives associated with health and safety, environmental management, and training and education. For example, as shown on Slide 9, Donlin Gold has conducted many fishery studies, reclamation work and other environmental activities. The project team has also supported various search and rescue teams in the region, fostered education by supporting the local school districts and youth activities. This has represented a fundamental undertaking by Donlin over the years for the benefit of all stakeholders. From a community engagement standpoint, Crooked Creek, the closest community to the project site, recently formally expressed their support for the Donlin Gold project, and four additional Shared Value Statements were also signed in the region in the last few months, bringing the total to over 12 with five new community relations positions filled by regional Donlin Gold employees. Slide 11 highlights our operating performance. We reported a net loss of $53.3 million in 2022, an increase of $12.8 million from the prior year, primarily due to the expanded Donlin Gold drilling and work program and lower accretion income due to the maturity of the $75 million Newmont note in the prior year. Our interest expense on the Barrick promissory note was offset by increased interest income earned on cash and term deposits and favorable foreign exchange movements. Cash flows are highlighted on Slide 12. For the year, we spent $42.2 million, $15.4 million higher than the prior year, primarily due to the expanded drilling and work program at Donlin and the timing of corporate liability insurance payments, partially offset by higher interest received on cash and term deposits. Looking ahead to 2023 on Slide 13, we began the year with a financial position that includes cash and cash equivalents of $64 million, term deposits of $62 million, and $25 million due from Newmont in July 2023. We expect to spend $31 million in 2023, including $17 million at Donlin, $13 million for corporate G&A, and $1 million for working capital and other items. As the premier gold deposit in the industry located in Alaska, Donlin Gold represents a potential source of responsible economic development for the benefit of all the stakeholders in the second largest gold-producing state in the U.S., with its well-established tradition of responsible mining and an opportunity to provide long-term sustainable economic growth for many decades to come. Donlin Gold is truly in a league of its own within the gold industry. With approximately 39 million ounces, grading 2.2 grams per tonne, it hosts one of the largest and highest grade undeveloped open pit endowments in the world. And we believe it has exceptional capacity to grow. The most recent drill program results clearly demonstrate the remarkable upside that remains at Donlin. The ACMA and Lewis deposits, which host the existing resources, occupy only three kilometers of an eight-kilometer mineralized belt, which is on less than 5% of Donlin's land position. This project is on private land designated for mining with our partners Calista and TKC, who are dedicated to responsibly advancing the project. As currently envisioned, the Donlin Gold project would average over 1 million ounces a year over 27 years of production. When looking at the select group of gold development projects in North and South America on Slide 15, Donlin is by far the largest. And with global gold production continuing to decrease for most of the producers, it is clear the industry needs projects with scale, grade and longevity to ride out multiple gold cycles. With a grade of twice the industry average for an open pit project at 2.25 grams, as shown on Slide 16, this gives Donlin an advantage to make it one of the lowest cost producers in the gold space. The great exploration potential is another attractive attribute of the Donlin Gold projects. The ACMA and Lewis deposits occupy just a small part of the land position, as highlighted on Slide 17, an incredible upside exists to increase the ounces and extend the life well beyond 30 years. Location is key. Having great leverage in a place where you can keep the fruits of your leverage is worth the investment in time and resources. On the map on Slide 18, we feature the top three gold-producing operations in the world and the five largest gold development projects. As private landowners, both Calista and TKC, are dedicated to developing Donlin Gold in a way that remains consistent with the Elders' vision for responsible economic development while creating jobs and benefits for the surrounding communities, as well as protecting the local culture. A few quotes are provided from the leaders of both Alaska Native Corporations on Slide 19. Calista and TKC's knowledge and guidance have been critical over the years through the permitting, sustainability and community initiatives we conduct. We immensely appreciate their input regarding their land and the significant economic needs required to sustain healthy living for their communities. Our partners continued and time-tested collaboration and full engagement are extremely valuable in ensuring responsible and sustainable economic development through all phases of the Donlin Gold project. Turning to Slide 20, the focus of our activities in 2023 will be updating the geologic and resource models incorporating the data from last year's drill program, continuing field work on collecting geotechnical and hydrologic information for completing design documentation required for the Alaska Dam Safety certificates. We will be reviewing key project assumptions, inputs and design components for optimization in the future mining engineering, metallurgy, hydrology, and infrastructure. We will also continue to guide our permits through the regulatory process and support the state in defending existing permits. And lastly, we will continue to engage, maintain and grow support for the project in the region and with government entities. It's always a pleasure to be able to hear the highlights of what has become my favorite investment and my favorite gold story, particularly as I am now embarking on my 30th year in this industry. I've been very, very lucky from the outset to have been able to work with fantastic people, who could help guide me to the right places and to the right assets. But mining is more than that. And in fact, I think investing is more than that. And I'd like to reiterate with some first principles, which I've enunciated on multiple occasions, but can now use to distill once again the reasons why I do believe that NOVAGOLD represents the very best way to gain maximum leverage to my thesis on gold. As its written, but let me repeat it again, as an investor, I find that the ability to make money is very much a function of developing a thesis, scrubbing that thesis to the point where one enjoys massive conviction, finding the right assets that will allow one to benefit from the underlying theme, increasingly so in a jurisdiction that secures the fruits of that benefit, and then having the patience and riding it out for as long as it takes. And I have came to that conviction with NOVAGOLD. Let me take this in two parts. Over the last 30 years, I've been blessed to have experienced what it's like to make anywhere between 10 times and 200 times my money as a consequence of being able to harness the value of great assets. And I have had the pleasure and the luck to be able to control some of the greatest assets in silver, platinum, hydrocarbons, and now, once again, in gold as well as silver. As good in fact as great as some of these assets were category killers in their space, I do not believe that any of them in their combined attributes would be able to be called unique. Unique is a big word. And so, I tried to use it in an educational way. When I meet an investor who is looking for a way to be able to play the gold development space, I will put forward the attributes of Donlin. And when I say this, I'm saying this as, obviously, the Chairman and largest shareholder of -- a 50% owner of Donlin through NOVAGOLD. And I also say this as somebody who very happily can point people in the direction of Barrick and say that I do believe that this is undervalued within Barrick's portfolio as well. We tried to be as ecumenical and as partnerly as we possibly can. The reality is that if you look at the combined attributes of Donlin, it is unique in the gold space. And so, if we are to look at Slide 22, let me reiterate some of the factors that I look at when I'm sitting on the side of the table of many of you out there as those who analyze the story or are investors in the story. First of all, size matters. And the truth is that there has never been to my knowledge a gold mine that began with 40-ish million ounces and has the potential to host so much more. The drill results which Donlin Gold LLC posted over the last year are not just the best drill results in the history of the project, but also the best drill results in many ways in the gold industry, certainly for a large open pit story. And I'm not even including in that the fact that it's not located in a difficult jurisdiction. It's located in a place where mining, a responsible sustainable mining is welcome. So, you have the size, you have the exploration potential. We have often said that we believe that there could be a multiple of the gold at Donlin. What we're seeing is that not only is there more gold, but that we're finding structures, which are so high grade that they very well could assist us in being able to find what could very possibly be the feeder zone for this very, very large system. We've come to call it the new Nevada or the new Carlin, simply because it's so big and the potential to make it bigger is so obvious. Think about this, the entirety of the eight-kilometer trend that is mineralized represents only 5% of the land package. That means 95% of it is relatively unexplored. The reason for that, for those of you who are relatively new to the story, is really a function of a quirk of history. Barrick Gold, long before we were shareholders, but indeed while Greg Lang was the CEO of Barrick North America, Barrick Gold made a hostile takeover attempt on NOVAGOLD. Had they succeeded -- by the way at a multiple of where the stock price is today and that's in 2006, had they succeeded, I have no doubt that they would have had 10 drill rigs on the property. And this is the wild forward-looking statement, but I've been in this movie before in a number of countries and with a number of deposits. I believe that we would be talking about a multiple of the 40 million ounces and very possibly on other deposits within the district. Again 95% of the district has been unexplored without drill holes. There is an adage in the mining industry, if you're going out in search of elephants, go to elephant country. This is probably the greatest elephant country now in North America. And I believe and my Chief Geologist who has seen me through 30 years of discoveries also believes that there is a very reasonable chance that the next Donlin is at Donlin. Had Barrick won that takeover bid and then not done everything that it could to try to suppress the value of NOVAGOLD so that it could buy the rest over the years, and Barrick's CEOs would admit that at the time, I have no doubt that they would have absolutely drilled this thing completely out. Having made my money primarily through the drill bit, there is no drill budget that Barrick could propose that I wouldn't ask to double. So, you know, I have massive conviction about this deposit, and everything about the drill results has absolutely confirmed what we've been saying for years that Donlin is a gift that keeps on giving. It is the ultimate category killer. But it's not just that it has the size, it has the grade. In the last decade, the grade of the average gold mine has gone down as much as 50%. Properties that are being put into development are often the lower gram and the grades are falling. There are two aspects to that. First of all, it's harder to mine lower grades. Secondly, it gives a tremendous relative advantage to Donlin, because Ceteris Paribus, all things being equal, if you have a mine that's producing a 2 grams, a mine that's producing at 1 gram, and the cost structure is similar, your cost of production is going to be half for the higher grade mine. This gives us an advantage. So, you have size. You have quality, as well as quantity. You have exploration potential that we've already shown in the last year is as good as anyone has shown for any gold deposit anywhere, period. But, very importantly, to my mind most importantly, and I say this as somebody who is not squeamish about the developing world or jurisdictions, I say this as somebody who as they say, made their bones in Bolivia, Zimbabwe, South Africa. I sold Kibali to Mark Bristow at Randgold. And as he will often say, I was one of the only two people with him who believed that, that was going to be a great mine. I know where if I speak in the developing world, I was the largest holder of mineral rights from Mauritania through to Pakistan itself. Having said that, while this was so good to me, the frontier spirit, the go where the gold is mentality, I believe that the world has changed, and I believe that events over the last year have only reinforced that conviction. And so, I believe that when you have an asset that has the fundamental attributes of Donlin in terms of size, grade, mine life, cost structure, exploration potential, production profile to be producing upwards of 1 million ounces or more a year, these are all fantastic. But then you superimpose on to that that they are located in the Tier-1 jurisdiction. They're not just Tier-1, they are Tier-1 jurisdictions. Those are places where you get all the leverage to the underlying theme that you're looking for, and we are unreconstructed, unabashed gold bulls. I believe that gold is going to multiply from here. You want to be able to have overleverage to that theme in a mining equity and in a place that you feel very comfortable will allow you to keep the fruits of that leverage, that way you wake up in the morning what you thought that you own is still what you own. And there are reasons why this is a competitive advantage when you're talking about a development story. First of all, perhaps I'm talking about this because I tend to try to project onto other people the feelings that I have as an investor, but I'm very convinced that when brokerage firms are taking companies around to see investors in the next leg of the bull market and people are scrambling to find great stories, great assets with great management teams, the first question that they're going to get from the investor is, this sounds wonderful, just tell me where in the world is it? Is it someplace I am willing to take my kids? Is it a place where I can go gambling, like Nevada, or whale watching, like Alaska, or swimming in the Great Barrier Reef, like Australia? Because if it's not why am I adding on to the complexity of mining investments? The fact that I can be surprised. Lots of things are going on in the world. It can range from insurgencies to social dislocations. You want to be in a place that welcomes you and where the rule of law is not a novelty, but where private property is enshrined. Places like a Donlin where the land on which the deposit is located has been set aside by law designated for mining, and where the native corporations could not be stronger supporters as shown by the signing on-board of Crooked Creek, the nearest community to the mine, and of course TKC and Calista, who have been time-honored partners for us and an incredible blessing. We've seen it, Barrick has seen it, Donlin is very, very blessed to have this kind of support at the local level as well as the state level, the senators and as well as being in a position where we have our federal permits, not just from the Bureau of Land Management, but the US Army Corps of Engineers. Something so special that this combination when it was done, they asked to be able to have a party to celebrate this unique joint venture. We're in a great place. Donlin figuratively, metaphorically, physically in every respect is a gift that keeps on giving. And I can tell you as someone who doesn't have to be Chairman. I'm Chairman, because I enjoy it, because I love telling the story, and probably able to gather that. I've been in this now for 12 years and rather than experiencing deal fatigue, I'm more excited about this than ever before. And the reasons are several folds. First of all, you know when Greg came onboard as CEO, I came onboard as Chairman, we came onboard simultaneously, we went out. We've raised $330 million within the first few months. We've raised that money at $9.5 in 2012. We haven't had to raise outside capital since then. We've kept faith with the investors who bought us. We said there is no reason to be raising money below where we've raised money. We've raised enough money between that and the sale of our stake in Galore to Newmont to be able to take us to the next milestone. We are keeping faith with all of our investors. And I'll get back to that in a moment, because that has definitely been a differentiating factor for us and the industry. So, we have the leverage. We have the partnerships. The balance sheet takes us to where we need to go and a production decision. We're blessed with a management team that could run any large mining company, they have the credibility, so too does the Board. And we have a shareholder base that knows us extremely well. We are perhaps the most transparent company in the industry in terms of expressing its long-term strategy as well as our tactics in how we intend to fulfill that strategy. We're almost too transparent. But the product with the end result of that is that we have perhaps the most educated consumer base in this space. One of the easiest ways that new investors have found to be able to get up to speed on checking the box as to whether this is the kind of investment that they want to be in is they will look at our shareholder base and they go, "Oh wait, I know him, or I know him or I know them. What's going to happen if I call them?" And I say please do, because they are our best reference. They've known us for years and they've seen that the management team, the Board has kept every single promise that it's made since we came on board in 2011 and that -- more than that the deposit itself has always delivered. So, now, let's get to what really is the gating factor on where we go from here. If you look on Slide 23, I'm just going to repeat what I've been saying, because I believe that we are -- perhaps I hate to talk about timing, it's not my strong suit, but perhaps on the cusp of seeing this happen this year or next year at the latest. Gold is marching to a different beat. When people least expect it, gold will go back to $2,000. People will say, "It's been here before." It will go to $2,050. People will say, "It's been here before." Then it will go to $2,100 and $2,150. And people will say, "I'm going to buy it on a pullback." Then the pullback to $1,950 comes, and then all the people who've said they were going to buy it on a pullback, pull their buy orders and they don't buy it on the pullback, because they get scared. And then, it will go back to $2,300, $2,400, and then those who could have bought it at $1,950 or $2,050 or $2,150 get paralyzed until gold goes to what I expect to be the next equilibrium range between $3,000 and $5,000. Now, remember, my background is as a historian. I surround myself with an A team of people both within the family holding company, Electrum, which is our family and employee capital and several sovereign wealth funds and family offices, but also in the management team of NOVAGOLD itself. When we look at the price chart of gold going back to $1,970 on Slide 24, I just want to point out to you, and this is someone who speaks to it as a fundamentalist, as a historian, and who believes that stock charts are simply human brain waves seen through a different lens. This is a really bullish chart. This is a chart that shows you why I genuinely believe we will see an entirely new equilibrium level, and it's not going to be $2,200, $2,300, $2,400 or $2,500. It's the reason why we're so relaxed about when NOVAGOLD goes into production, because we're going to be achieving much, much higher realized prices than what we see today. I've long advocated that there's no reason to build something at $1,100 or $1,200 if you're genuinely bullish. Well, let's look at that long wave from the turn of the century to nearly $2,000 in January or in 2009-'10. That was 12 years. 12 years, gold went up every single year, for 12 years. Now, during that time you had inflation fears/deflation fears, strong oil/weak oil, political instability/political stability, strong dollar/weak dollar, and yet gold went up every year for 12 years. That is a bull market. If it looks like a duck, and if it quacks like a duck, and if it tastes like a duck, it's a duck. That's a bull market. What you saw is basically a stock go from $2.5 to $19, long wave. Then you've had a second wave, which took it down to what is actually a very, very beautiful chart transformation, but I won't go into that. Suffice to say that, that second wave, I believe, is coming to an end, or actually came to an end and we are now at the point where the third wave, higher, is going to take us to the equilibrium level that I have suggested. I'm saying this not because I believe in playing charts, but I do believe that if you really are a fundamentalist and you ignore charts, you're ignoring basically a representation of human history and the human thought process. It's a very, very bullish chart, and it's gotten even more bullish in terms of the fundamentals. So, I get the question, what does Ukraine done to make people more bullish on gold? Well, I may get this question from you, but I'm going to answer in any event. And I say, I don't hear very many people saying that they're buying gold because of Ukraine, although I could make a case for it. I mean, after all, war in the heart of Europe is certainly a reason to want to protect your assets and gold is amongst those that have proven themselves to be great stores of value. The reason why Ukraine is particularly valuable is because it has accelerated and I think this will be an enduring acceleration, the competition between the public sector and the private sector to be able to own physical gold. Central banks have been buyers, net buyers, of gold for a number of years now. They're not dumb money. In fact, they are quite the opposite. They are smart money. They are insider money. Nobody knows better the quality of their treasuries and their reserves than the central banks themselves and they're buying more gold. They want to be able to have diversification away from paper assets that they are very, very cognizant of the facts because they've been doing it, can be printed at will. They want to be diversified away from dependence on the dollar, particularly in the aftermath of what happened in the opening days of the Ukraine war, where Russia basically had half of their attainable or touchable foreign reserves quarantined by Western governments and central banks. That came as a surprise to them, but it did also reinforce the fact that the gold, particularly the gold that they had in Russia, wasn't touched and could still be used for those friends and neighbors who might want some collateral for the support that they're being given. This is only accelerated on the part of central banks they need to own more gold. And for those that already have it, there is no way they're going to sell it. Eurocrats are not paid enough. They're not paid 2 and 20 to take a risk of standing in the face of a bull market and selling off the family silver or gold. So, I think we can expect central banks who own it are going to hold it, and those that don't own it are going to want more of it and are going to want to repatriate it particularly back to their own countries. There are also a lot of reasons why the Chinese, the Russians and some of their fellow travelers are looking for ways to be able to use gold as a means of being outside the dollar system to the extent that they can. The bigger issue in terms of the gold narrative that I want to point out is crypto. I no longer get very many questions from investors about the reason to own gold. For 20 years, I would hear from people, "Well, you know, you can't eat it, you know." And I would respond with something believe like you can't eat yen or aussie or swissy or dollars or euros for that matter with your cheerios. So, no, you can't eat it. Okay. Then it was well, "You know, it doesn't have earnings, et cetera." Okay, fine. It's just a currency. You have to see it through that prism. Then crypto came along, and crypto build itself as gold 2.0. And that was, first of all, I wrote about this a couple of years ago. I said this is going to be a game changer, because it's going to make an entire generation compare what they're buying with such wild abandon to gold. And some of them are going to look at that and say, 'Well, why would it be called gold 2.0? You know, we thought gold was a barbarous relic for troglodytes." No, no, no, there is a reason indeed to be able to own a currency that can't be printed at will or by fiat. Now, in truth, it turned out that most of those new currencies proliferated as if they were being printed at will or by fiat. But what happened was that in making the case that they were gold 2.0, it got people to once again look at gold 1.0, such that when the crypto universe collapsed, and I'm not talking about all the particular vehicles that we use, so I'm not going into that, but when that universe collapsed and as Warren Buffet would say, the tide went out, therefore, revealing who was swimming naked, gold all of a sudden started to look pretty good. And a lot of those family offices were saying, "Huh, well, central banks are buying it. What did they know that we don't know?" And after all, gold has been something that's held its value for thousands of years. And with all due respect to the self-referential solipsistic attitude of Western audiences, pretty much every Indian or Chinese who has owned gold since they bought it, since the dawn of mankind, has now seen that that gold has held its value against paper. That is what we call positive reinforcement. They're not looking at gold and saying, "Gold is too high." They're looking at gold was saying, "Thank you gold, in gold we trust." So, you have that at a time when Western countries are reassessing cryptocurrencies, but cryptos now made the argument for me. I can't remember the last time someone said to me why should I own a currency that cannot be [de-based] (ph). In other words, why should I own gold? That argument has done. All that remains is for gold to push convincingly through $2,000, $2,000-ish, and I think we're off to the races. I don't like to engage in market timing. It could happen tomorrow. It could happen six months from now. It doesn't really matter. What counts though is that I've always found that the best leverage comes through those equities which are related to the underlying commodity or in the case of gold, currency. And if I'm right, the go-to stock in this space for all of those myriad reasons that I mentioned will make NOVAGOLD the go-to stock in the development space. It will be for those brokers, whether they cover it, if they don't, some are, and I think more will as Donlin goes up the value chain. This is going to be something where an investor is able to look at it and say, you know what, it checks all my boxes, great asset, great management, and in a jurisdiction that when I talk to my IC, their eyes aren't going to roll. They may actually -- some of them may actually say can I join you on the mine tour. That's a differentiator and that's one of the reasons -- many of the reasons why I believe that NOVAGOLD as a pure play on the greatest gold development story in this space is for me, as an investor, the Holy Grail. Going to Slide 25, the leverage is absolutely enormous and so you know, as a historian of these things, I believe that Donlin for the benefit of Barrick as well as NOVAGOLD will be valued using very likely a 0% discount rate at -- as U.S. assets were back in the '80s and '90s before the Frontier Spirits took people like Newmont, the Yanacocha, and Uzbekistan and Freeport's to Indonesia and indeed Barrick to all kinds of far-flung places. I think that if you're in a safe jurisdiction and you have the kind of exploration potential that in a bull market would make your stock double or triple. In a bull market, if we were there already, the kind of results that NOVAGOLD has put out with Barrick over the last year, I believe, would have put us already in the teens. But that's the investor psychology. When it happens, people will catch up. They'll do their work. They will look at it, they'll say, this is exactly the kind of story that we want and it's got exploration, it could be much bigger, it's in North America, we're going to give it a premium valuation. That's a lot of leverage in a place where you can keep it. Now, on the last slide, I'd like to say this, I mentioned this before, we take it really seriously that we have an extraordinarily educated shareholder base. I've said this many times. We don't just benefit from having the shareholders on the roster. When I have questions, when the company has questions where it seeks investor advice, we know who to call. The door is open to us at Fidelity, at Paulson, First Eagle, Saudi PIF, the Agnelli Family at Exor, I can go on and on and on, and we take advantage of that. Through my career, which started when I became a partner with Soros in a silver mining venture, next year will be 30 years, I have always taken advantage of the intelligence of my partners. I believe in the Solomonic proverb, as iron sharpens iron, so a friend sharpens a friend. I'm not interested in people telling me what I wanted to hear. Lot of people would benefit from the old Russian proverb, it is better to be slapped with the truth than kissed with a lie. We are very, very fortunate. We have shareholders who have been up to speed on everything that we do. Before we make major decisions, we seek advice, we seek counsel. And, as I said, the best reference that we can make when we talk to new investors is to say if you know any of the people who are involved with us, by all means, give them a call. They know Greg, they know me, they know we've kept all of our promises, and they also know Donlin to be the very, very best in breed. There is a reason why we call it the Holy Grail. And the fact that our shareholders have stayed with us with this kind of solidarity, and pardon the pun, fidelity is one of the reasons why we have been able to shine and why I expect that we will be the premier rated story in the gold development space when the next leg of the bull market kicks in and people want the right assets in the right place. And so, with that, I pass back to Melanie, and she can continue being master of ceremonies from there. Thank you. Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Lucas Pipes of B. Riley Securities. Please go ahead. Thank you very much, operator. Good morning, everyone. Thank you very much for the very detailed overview. And Tom, always great to hear your update on the gold market. Really appreciated all of that perspective. My first question is on Slide 20 where you list three upcoming catalysts. And I wondered if you could maybe elaborate on the potential timing of each of those? And then, I have a follow-up question from there. Thank you very much. All right, Lucas. Well, thank you for joining the call today. The upcoming catalysts, they are actually all very much interrelated, and then the natural outcome from the drilling and the other work we've been doing with our partner. So, to give you a sense of timing, the resource model is well advanced and we're updating it with the great results from last year. And the various trade-off studies is same, they are work-in-progress, but we anticipate all of the work that we set out to do to really fine-tune the project, make sure that we've approached the infrastructure and all other aspects in the most effective manner, we expect to wrap those up end of March, early April and review them with our partner. And I think, got to lay the foundation for us to make the next decisions on the timing of updating the feasibility study. That's very helpful, Greg. And ,then the follow-up question from there is, one, do you have a sense for the budget for the updated feasibility study? And to what extent -- and I know you're still completing the trade-off studies, but to what extent can you maybe provide some color as to whether the drill results allow for a staged approach that could then allow for a different fuel source to get the mine started, for example? I would appreciate your color on those two points. Thank you. Sure, Lucas. So, looking at the trade-off studies, certainly a staged development approach is -- that's been something we've been exploring in a great deal of detail. I think it makes a lot of sense to us. I don't want to get ahead of the studies, but I think that's certainly a sensible way to approach the project. Some of the other studies that relate to that is what bench size should we use, optimizing the fleet to maximize the grade, what stockpiling strategies do we want to employ to enhance the grade in the early years? So, I think these are all related to really charting the most economic path forward for the project. And I look forward to updating everyone as this work progresses, and we're -- and the owners are positioned to describe the project that we plan to take forward in greater detail. Excuse me, Lucas. The feasibility study for an asset, the scale of Donlin, it's $60 million to $80 million undertaking, and a lot of that will depend on how much engineering that you want to do on the tail end to prepare the project for construction. So, in rough numbers, somewhere $40 million -- $30 million, $40 million to NOVAGOLD. And I think as Dave pointed out, our treasury can certainly easily accommodate the expenditures that we see coming forward in the next couple of years. And as we've said, we see no reason to raise equity until we are ready to make a construction decision. In closing, the gold industry in general and large-scale assets such as Donlin Gold, in particular, require patience. This is an attribute that we have demonstrated extensively over the last decade, which has proven beneficial in allowing us to de-risk the project and move it up the value chain. Donlin Gold is brilliantly positioned for this next leg in the gold market. I wish to thank all of you and all of our shareholders for your backing and your choice to invest in NOVAGOLD, as well as your encouragement, patience and insight over the years. We look forward to continuing to deliver on our promises and keeping an open line of communication between us while we reach even more milestones and achievements together in 2023. Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
EarningCall_992	Good day, and thank you for standing by. Welcome to the Lynas Rare Earths' Quarterly Results Briefing Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. Thank you, and good morning. And welcome to the Lynas Rare Earths' quarterly briefing for the December 2022 quarter. Today's briefing will be presented by Amanda Lacaze. And joining Amanda are Gaudenz Sturzenegger, Chief Financial Officer; Pol Le Roux, Chief Operating Officer; Daniel Havas, VP, Strategy and Investor Relations; and Sarah Leonard, General Counsel and Company Secretary. Good morning, everybody. I hope to -- I guess I should start with Happy New Year. For those who celebrate Lunar or Chinese New Year, Gong Xi Fa Chai. I hope everybody had a really lovely festive season and have come back with enthusiasm and excitement for a great 2023.So, I'm pleased to have launch today's quarterly results. There were -- relatively -- it was a relatively uneventful quarter, which was a delight after some of the challenges of the prior quarter, which, of course, we talked about in a lot of detail, including the catastrophic failure of water in Malaysia. We did have a few sort of hangover challenges from that at the beginning of the quarter, but we finished the quarter back as Lynas makes strides and look forward to being able to continue. Both of our operational sites performed really well. Just as an interesting site, we had a record quarter at Mt Weld and we are making some very good progress on ensuring that we really are optimizing performance right through the value chain from mine to big bags at the edge of the land facility. We also made really excellent progress on all of our major projects. Just as a refresher, that includes our big project at Mt Weld, where we're expanding throughput by actually 4x, which expands our output over time by double. We've got already bulk earthworks. Contractor has been mobilized. We've started the procurement of the long lead time items. That project is prioritized in a way that we're making the investments that are creating bottlenecks for our production today first. So, we will release those bottlenecks with our objective being that we will be able to sort of progressively sort of move production up rather than just jumping from today to the 1,000 tonnes a month, which is the target by the end of next year. In addition to that, we are building our stockpile for the Kalgoorlie facility. It will initially be set with what we're describing as direct shipping ore, which is very high-grade material which we've segregated from the rest of the materials. So, this is not a constraint from the concentrator on our ability to actually build that inventory to feed the Kalgoorlie plant. Kalgoorlie itself, really, our project manager, she was telling me on Friday, it just is a fabulous time to be on site. I'm looking forward to being there next Monday when we will be in Kalgoorlie, importantly, signing a cultural agreement with traditional owners associated with our Mt Weld facility. But Grant tells me that every day, there is something new to look at and it is very exciting indeed to be operating at this time and seeing the huge progress, bearing in mind that it's still less than 12 months from receiving full approvals for that site. And we continue to work on our US processing facility making good progress on deliverables associated with that project. And then, of course, in Malaysia, we had some significant development occurring to ensure that we can receive the mixed rare earth carbonate, which will arrive from -- which will -- sorry, I'm looking at the chat here which is saying that some one can't get a question in. So, I shouldn't look at those, should I? So in Malaysia, we've got a significant project to receive the mixed rare earth carbonate from the Kalgoorlie facility. But as with all of our projects, we will take the opportunity to improve a number of other elements of our processing facility, including in this instance, things like soda ash loading and unloading, because if we're going to be making an investment in the new building and new capability, then it makes sense for us to use that opportunity to continue to improve efficiencies in our operations. So in terms of the business, the market continues to be very buoyant. Whilst the price was very stable through the quarter, it started to pick up in December and we continue to look into a market with strong demand and really very good pricing prospects for our business. And one of the other things, which I think we sometimes sort of underestimate is we're not just an NdPr business, the value which comes from selling our other materials is important within our business. And you can see this when you look at the average price received over the quarter that whilst the NdPr price was relatively flat, our average price actually lifted up and that was a consequence of both the SEG pricing, heavies pricing remains very strong, but also increasing in sales of higher value-added lanthanum and cerium materials. So, a good quarter. We're doing everything we can to make sure that the quarter that we're in is going to be an even better quarter. My colleague, Pol, has a very popular saying within the business that we are much better than yesterday but much worse than tomorrow. And certainly, that's our objective is to ensure that we continue to improve. But a good quarter, pleased with the settings in the market, pleased with what we've been able to deliver in terms of production and sales and certainly very pleased with the progress on sort of really very significant projects. So, with those just sort of general opening comments, I'm very happy to take any questions that people might have. Happy New Year as well, and hope you're all going okay. First question is on the realized pricing. So good kick up in the realized pricing for the other products, Amanda, as you mentioned. Just on the SEG pricing, the heavy pricing and the lanthanum, cerium, the improvement in product mix and pricing, do you expect that to continue over the next couple of quarters and into the medium term? I think that we think that the Heavy Rare Earths price remains very positive, and we would expect that, that will continue. And we would hope that we will continue to improve the contribution from our lanthanum and cerium materials as we increase the amount of high value-added materials that we sell. Okay. All right. So, we should assume, for modeling purposes, a bit of a continuation on that dollar per kilo on the other -- the other products in that case. Next question, Amanda, is on projects and some good progress on the Kalgoorlie cracking and leaching in the quarter. Just observing, I guess, again the pictures on some of the key items there and just sort of trying to match that with the 1st of July deadline, just wondering if you could just step through internally, or when you expect first carbonate production from Kalgoorlie? And just talk through maybe the ramp-up and just how that sort of matches again with discussions with the Malaysian Government? And just on that, if you can just maybe just talk through the new Malaysian Government, how they've been, how recent discussions, if you had some, have gone with respect to potentially extending the permit on the cracking and leaching uptime or operations, I should say, in Malaysia, beyond 1st of July sort of just to match with that, that ramp-up requirements from Kalgoorlie? Yes. So, Paul, that was a question of very many parts. And it would not surprise you to know that we have a huge amount of effort in the business focused on sort of this transitional period. If we take the situation in Malaysia, as I think we've indicated previously, it is a matter of public record disclosed by a previous minister that we have appealed for the removal of the 4 conditions that were applied 3 years ago to our operating items. Our position is very strongly that we have -- we run a low-risk operation. We are a lawful company, which is compliant with all regulations and we have never been involved in any sort of health or environmental incidents. The most compelling data that we have is now our 10 years of safe operation in Malaysia. So of course, governments change, our advocacy has always been that decision should be made to ensure that we're treated fairly and equitably and that our performance is recognized. So, when the AELB that's does audits with our operations in Malaysia, we have consistently been rated as very satisfactory, which is the highest level which is available. And all that we seek from the government is the decisions that are fact-based, not actually made on the basis of some of the alarm statements from some activist groups, which even the IAEA has said, has no basis and scientific fact. So, we continue to engage with both the regulators and also with the government. As recently as last month, we had a delegation from Malaysia come to visit our site in Kalgoorlie. So, we have never pretended that we can forecast timelines the governments may choose, but we are actively engaged with, as I said, both the government and the regulators. In terms of sort of feed on and ramp-up in Kalgoorlie, we had our own targets, which of course, are all about ensuring that we will be able to bring that facility online. But we are also looking to opportunities where we can ensure that we have sort of safety stock as required as we manage potentially a transition period. Okay. Can I just clarify 1 thing? Is one of the options that you're planning for a transition period, it sounds like it is as far as having to run LAMP below capacity as Kalgoorlie ramps-up? Look, we've got a number of scenarios and we're preparing ourselves for all of them, right? The best possible scenario, if I may, we're running two facilities, which gives us a straight uplift in the ability in throughput right through to one where we are required to close down one facility and operate the other. So, we're managing a number of different scenarios. And it will be clear, long before the 1st of July, which of those we will be required to execute. The plant clearly exited December at a very strong run rate, and I think you said earlier that you're looking for Lynas next grade to be achieved, which is about 1,800 tonnes a quarter of NdPr. Is that what you anticipate for the next few months or next couple of quarters for your field throughput? Or is there any major maintenance or anything else that might impact being able to run at that rate? Not every month will be the same because, of course, some months have 31 days and some months have 28 days. But running at a roundabout 7,000 tonnes a year is always our objective and we're just pleased that we're at that full run-rate at present, but we are always sort of cautious about making strong predictions on this, given some of the impacts that external factors can have on the business. And just on Kalgoorlie, the plant which, obviously, I can see progress there. Just wondering your expectations once everything is in place when the plant is complete, how long do you think it takes to ramp up and commission the plant to full capacity? I think that, that will not be absolutely clear until we commence operations in that plant. Suffice to say that we have had a really strong commissioning team. We have our operational team, all in place already in Kalgoorlie. It's a residential team, running processes. We will have all of the equipment properly tested before we commence and we have our significant sort of experience of operating a plant of this type in Malaysia. So, we expect the ramp-up time will be assisted by that level of experience that we have. But at this stage, we won't be disclosing any specific timeline on that. Just following up on licensing in Malaysia, I'm just trying to -- just want to confirm, which works are actually underway. So, my understanding is if there is a renewal for the entire facility due sometime around March 2023, and then the negotiations or your appeal on the restrictions put on cracking and leaching for July is occurring in parallel. Just kind of trying to get a sense of whether or not you think that those 2 could come concurrently and if we're still expecting that before March this year? Al, I've learned not to predict how either regulators or governments may choose to proceed, but you are right on that. We operate under an operating license in Malaysia. The AELB, we've had 5 of those issued over the period of time that we've been operating in Malaysia. And the AELB issues those licenses with -- well, we had a single set of conditions for the first, sort of, 7 years, 8 years of operation, and then we had sort of these additional conditions placed upon the operating license in March 2020.So, our objective is to -- and our appeal is to have those conditions removed. However, those conditions are not effective until the beginning of July. So, one scenario may see us with our operating license renewed with the conditions in place. Another one may see us with the operating license renewed with the conditions removed. And as I said, we continue to engage both with the regulators and government and to prosecute our case very strongly for the fact that we have operated safely for 10 years under a set of operating conditions and there is no scientific basis for making a change to those. All right. Secondly, just a bit more detail on the water reliability issues. Just wondering if the improvement is a reflection of a better performance of the pipeline? Is it seasonality? Or is it some of the backup measures you put in place over the last couple of months or a combination? I just want to try and get a sense of, if and when we might see a return of water issues down the track. Yes. Well, the issue that we had in September was a catastrophic equipment failure. And so we haven't had sort of an equipment -- we haven't experienced an equipment failure of that magnitude in the time that we have been in Malaysia. It was a big pipeline that burst, and it was 10 -- I think it was 10 meters underground and it affected everybody, residential, industrial, everyone. So, it would be our hope and I'm sitting in a wooden table, so I am touching wood, but this will not occur again. In terms of some of the other issues associated with our supplier pipe, there have been a variety of different issues over time, which we had generally been able to mitigate, which may be associated with the pumping station or another time we had an issue with the bund wall which failed. But generally, we've been able to mitigate those issues. But we continue to work on projects, which will see us not have to use as much water. I mean, this is consistent with best practice -- sustainability practices. So, we certainly want to be doing that. And so that includes opportunities to recycle water and some rather exciting sort of further developments on that, but they are not short-term fixes. So, we do continue to have our pipeline to the local sort of pits, which fills up with water when it rains and it's rained a lot in the last 3 months. But pipe water supply has been consistent now across the quarter, and we really haven't had to rely on some of those other initiatives. Right. Maybe just a final one before I pass on. Just wanted to understand if there's any potential for you guys to provide a reserve update sometime this year on Mount Weld. I guess just really pretty keen on getting the split of contained rare earths and deposit and how that changes with depth. I guess we haven't seen a split out in a reserve or resource statement for a while. Yes. Well, we will do -- at a minimum, we'll do a reserve update as part of our Annual Report because, of course, we are required to do that. We have a whole team working on -- sort of on defining the carbonatite on reserve or resource in the first instance. So that work continues. I don't expect that we will be finalizing that within the next 6 months. But in addition to that, we are doing a lot more drilling as part of preparation for our next mining cutback and to more accurately define the reserve. So when Lynas just started a decade ago, more than that, say, 14 years ago in Mt Weld, we had really good drilling in quite a small area of the ore body in, what we call, in the Central Lanthanide deposit. And we had a lot of other drill areas where it was relatively sparsely drilled. Now, we are progressively drilling through different areas to properly flesh out our understanding of the ore body. The other thing which we are working on is, we have a 4% cut-off grade which, of course, is sort of pretty amazing compared to some of the other deposits which are being developed. And so we're doing some further work to really understand whether that -- which was set once again very early on in the process of development at the Mt Weld ore body, whether it is -- whether it remains the economic -- economically optimized to be -- have a cut-off grade at that number, or whether we should be looking at a different cutoff grade. So, we do have a lot of work going on in terms of both geology and mining. And yes, we will be providing both resource or reserve updates, but we don't expect that we will have completed the carbonatite work by the time we do the next substantive update. But we believe that we will have substantive information related to the reserve as it is currently conceived. Does that make sense? Well, I'd be happy, Al, to sort of facilitate a discussion with our Mt Weld team to provide some more detail. I guess, suffice to say that as a business, we seek to always have a long-life reserve. And so the work that we're doing, drilling both within the current deposit and also at depth is all part of ensuring that we have that, that we maintain sort of that long life. Right. Yes, definitely love to be able to pick up brains [Technical Difficulty]. Just while I've got you, I might just throw in 1 last question. Just thinking about markets and Chinese production quotas. So, I assume we're probably going to get another -- a 6-monthly update pretty soon. Have you or the team got any views on whether they'll likely increase those, the output there, knowing that we increased that up by about 20% to 25% over the last couple of years. Yes. Well, first, on the production quotas, you remember that last year combining first and second half, the production quotas led to around 20%, a bit more than 20% increase. And that was balanced with the demand increase. So that reflects a fairly stable price. Next production quotas are expected to be released after the lunar new year, but it's a bit like with any regulators, there is no -- no one knows what will be. I believe it will still be in line with the variation of demand, but that's all I can say on this. Congratulations on the strong quarter result. 2 questions from me, please. The first one is on the price realization. Just wondering if you could provide bit more color on that new lanthanum and cerium specialty products you developed. Like how much of the price premium can you get for this product. I'll come back with the second one. Okay. Once again, I'd like to pass over to Pol for that because this is an area of passion for Pol. Yes. It's a very complex question to answer. I would say that we focus on adding value to basically cerium product mostly and lanthanum as well, but cerium #1. And so it's -- you can check -- when you run the numbers, you can analyze the premium. As far as the substantive, we have a lot of work and a plan of development for lot more added value. But as usual, the more complex targets, you target the more time it takes. So, this will continue over the next, I would say, years. But definitely, it's a very important KPI for us. And that's why we reinforced our R&D pool to develop a new product application in the cerium, basically, cerium area, which will continue to be in oversupply for quite a while. But for numbers, sorry, I can't give you numbers precisely. It's substantial. All right. The second one is on the cost inflation. Just wondering, Amanda, how are you managing the cost inflation pressures at Mount Weld and the Kalgoorlie project? I mean, in this reporting season, we see many companies reporting higher costs. So seems like this inflation pressure is kind of staying with us. Yes. So, we did provide an update last time on the fact that a combination of growth in scope and also cost escalations at Kalgoorlie or an update from 500 to -- I think it was 575 mill, but basically a 15% uplift, bearing in mind that, that was combination of both costs and scope changes in the facility. Yes, we see pressures across all of the business, but we're paid to manage those. So, we focus on ensuring that we continue to deliver efficiencies. So if unit costs go up and they are unavoidable, well, our task is to implement projects, which will see us improve the efficiency of operations. Whenever we think about costs, we think about how do we do things better because if we do things better and we reduce waste, then costs will inevitably come down as a result. So, we do have escalation of costs, but we also have improvements in efficiency and we've not had to take any sort of significant actions to drive cost out of the business, in fact, quite the opposite. We continue to grow our investment in the business because we're facing into such a strong growth market. So when we look at our costs, we certainly see 2 or 3 big contributors to cost escalation and at Mt Weld, of course, a huge one, those with energy and increase in diesel costs. We are working on alternate energy solutions for our Mt Weld facility, which over time will drive sort of costs out of the business we believe. And in Malaysia, so for example, we've seen really significant increase in sulfuric acid prices, which had been stable for a very long period of time. Once again, it's not something which is avoidable in the short term, but continuing to enhance efficiency, continuing to improve recoveries will mitigate to some effect -- to some extent, the effect of those price increases on the business performance. I will start with Malaysia if I can. I presume you guys would have seen the press last week relating to a decision on the extension of the license conditions in Malaysia. That press referred to a change of decision by the government early next month. I'm not sure whether if you would be willing to comment on that, but can I have a tip of the ore asking you to comment on that? Oh, look, don't believe everything you read in the press. But in this instance, as we've disclosed previously, our operating license is due for renewal on the 2nd of March. So, we do expect that we will have some indications from the regulator with respect to that operating license renewals certainly no later than the 2nd of March. Okay. Sticking with Malaysia again. In terms of [indiscernible], your overall concentrate in import, is that risk or benefit over the years, such that regardless of the [Technical Difficulty]? Sorry, stuff there regardless [Technical Difficulty]? The outcome of the operating condition -- operating license conditions would provide you with enough concentrate to get you through the ramp up of Kalgoorlie. So, you're working now to build-up that concentrate over the next 6 months or [indiscernible]? No, we have a series of conditions associated, standard conditions associated with the license, which includes the amount that we can import, the quantity which can be stored on site at any given time. At various times, we have been able to get variations to that, particularly through the pandemic where we had sort of variability in the amount, which was delivered and when it was delivered. And we also have conditions associated with the amount that can be processed. We managed within all of those conditions. And so without trying to sort of make it too complex, as I said, Reg, there is a series of conditions. We managed to those conditions. And, yes, one of them is associated with the amount that we can import. And yes, it does reset on the 1st of January each year. Look, just a quick one from me. I was just hoping you can reconcile -- help me reconcile some of the numbers. So CapEx for this year, you've guided previously towards AUD600 mill, and then there was a CapEx creep for Kal that you reported on last quarter. So that takes to AUD675 million. I'm just trying to reconcile that with the cash spend of AUD240 million for the half, do you expect the second half to be more heavily back weighted? Yes. Sure. And I'm happy to let Gaudenz add a bit more on to this as well, but yes, this is cash. We're now committed almost fully in terms of purchase orders associated with the Kalgoorlie project. And so this is just a timing issue as to when it actually goes up. But notwithstanding guidance, if we don't have to pay something, we don't pay it just to stick with the timeline. But, Gaudenz, maybe you'd like to say something more to the capital profile. I think on the CapEx, what you can really see is on the -- particularly on the cash side an increase in spend level, which obviously follows the commitment, [the POs] which are out in the markets. I think the last quarter was above AUD140 million and the quarter before AUD100 million. So you see a clear trend. And I'm very sure we see the trend to continue. So, particularly, the next 2 quarters will be quite high, specifically in regards to the Kalgoorlie project, which logically makes sense. On the Mt Weld expansion program, we will see a ramp up as well, but on a much lower level at this point in time. Right. Okay. Cool. And just when can we expect to get up to Kal and do more than -- drive by some of the works? Frankly, we have a huge number of contractors on site. We wouldn't even take you on to the site right now because it's just managing the traffic with the contractors on site is a challenge in and of itself. So, yes, I'll try and answer that, but I'll have Daniel come back to you with some estimates on timing. But it certainly won't be whilst we've got sort of hundreds of people actually building stuff. So it's going to be some months before we would be able to have visitors on site. A few follow-ups from me. Just on your ex-Malaysian and actually downstream strategy. Just wondering if you could expand on the comments on the US refinery. I know you said that you made good progress on deliverables. Just wondering what that is, has construction actually started, have you selected the -- i.e., the site? Yes. We've identified a site. It's on the Gulf Coast. We're working with at various levels of government on finalizing that position. We think that it's a very good site for the plant because it's within an already industrialized area, has good services, has access to very good and skilled labor. With respect to engineering -- detailed engineering and design, that's been completed, but now we are working with the outsourced engineering team.I mean we think we've had some fairly challenging inflation of costs in Australia, as well in the US, in Spain, at Australian levels plus some. So, we have populated more of the teams with both internal and external resources. It's that stage where there is nothing much exciting to see, but all of the heavy-lifting in terms of sort of planning and design, development, all of those sorts of things, that's where we are right now. So it's not exciting for everybody outside, but quite exciting for the project team. Yes. Okay. Understood. And just your comments around engagement or incoming inquiries some OEMs and non-China magnet facilities for offtake. That's really interesting. And I guess the question I have is around, of the 12,000 tonnes of NdPr you want to produce, how much actually is -- is actually not contracted? So, I guess outside of the Chinese and Japanese contracts. Well, I can make a very simple question -- answer. Since our production capacity currently is 600 tonnes a month, we don't contract over our capacity. So the day we are at 1,200 tonnes, that would be 600 tonnes a month additional to contract, because people want to sign a contract on the promise that you will some day produce. They want to see evidence. Sometime they sign MoU with a company saying they will produce rare earths sometime in the future, but it won't go to a contract level. So the answer is very simple. And we just have a queue of OEMs and lots of discussion ongoing with them for securing the supply of rare earths. In addition to that, anyone who has a project for magnet making outside China, today comes to Lynas. So that's why -- because we are the only one supplying outside China. And so all-in all, we are not short of demand. I would have to say that we are short of supply, but that's my problem as well. Yes, no, I understand that. Yes. Just from a volume perspective on percentage terms versus Lynas 2025, the upsized plant. What Pol just said is very helpful. Last question I have, Amanda, is just on -- I mean this industry, everything is developing so quickly. Every quarter from a downstream perspective, the magnet industry is changing very quickly and will change very quickly over the next couple of years from a perspective of government funding, but also involvement of OEMs, you see what MP Materials has done, but also new entrants across the value chain. Are you interested in -- is one of your things you're looking at potentially getting funding from OEMs or even actually getting involved in magnet making? At this stage, we don't have tech and funding. So, we're not specifically looking for additional funding sources. In terms of do we [Technical Difficulty] advance downstream activities, we have a continuing watching brief on that and have done quite a lot of work really on what are the opportunities, what that might look like, how could they be executed right now. And the last time we did sort of a full review on this, we can get a bigger bang for our buck for our shareholders by increasing output than we can buy diverting attention into some of the downstream activities. And we are -- one of the hallmarks of our success is that we focus on doing things, completing them and then moving to the next one. So right now, we have a very, very full agenda with the Mt Weld expansion, with Kalgoorlie, with the further development of the Malaysian facility and the US. But yes, we have our work ongoing with respect to downstream development, which we will brief at an appropriate time. Maybe following up with Paul, just you mentioned Chinese quotas could come in line with demand growth. Just wanted to get a sense of where you guys are seeing your forecasts for demand growth in 2023 and then maybe out on a 5-year view, if you've had any substantial changes since you've last mentioned those things? Okay. So short-term growth 2023 for us, we are more than fully booked with our existing contracts. And the growth especially in electric cars continue to be very strong, with a better -- slightly improved situation on the semiconductors supply, which has been cutting a bit of the growth last year. On the long run, definitely, this will continue. So, we're talking about the double-digit growth for the next 5 years at least, unless there is something like a global financial crisis that we experienced few years back. The question being where will this demand come from, is it from China or is it from outside China? And that's the game that is being played at the moment. Who will be the leading country for electric cars? And there is a lot to do in the west to not lose this fight against China yet. And that is yet to be seen. We don't see -- we see a lot of announcements of magnet -- new magnet projects. So far, outside China, I have seen only one new factory in Vietnam, Shin-Etsu, but that's -- that's an existing magnet maker and that's a very excellent customer of Lynas. But that's the only one who did actually increase production outside China so far. So, we'll see. Okay. It sounds to me like we might have had all of the questions. So, we're about 5 minutes from the end. So if anybody else has a question now is a good time. Otherwise, I would once again thank you all for your interest and look forward to seeing you in person as we move through the year.
EarningCall_993	Greetings, and welcome to the Thermon Earnings Conference Call for Third Quarter Fiscal Year 2023. [Operator Instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce to you, Ivonne Salem, Vice President of FP&A and Investor Relations. Thank you, Ivonne, you may begin. Thank you, John. Good morning, and thank you for joining today's fiscal 2023 third quarter conference call. Earlier this morning, we issued an earnings press release, which has been filed with the SEC on Form 8-K and is also available on the Investor Relations section of our website. Additionally, the slides for this conference call can be found in our IR website under News and Events IR calendar Earnings Conference Call Q3 2023. During the call, we will discuss some items that do not conform to generally accepted accounting principles. We have reconciled those items to the most comparable GAAP measures in the tables at the end of the earnings press release. These non-GAAP measures should be considered in addition to and not as a substitute for measures of financial performance reported in accordance with GAAP. I'd like to remind you that during this call, we might make certain forward-looking statements regarding our company. Please refer to our annual report and most recent quarterly report filed with the SEC for more information regarding our forward-looking statements, including the risks and uncertainties that could impact our future results. Our actual results might differ materially from those contemplated by these forward-look statements, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. Now I would like to introduce you to Bruce Thames, our President and Chief Executive Officer, for the - for his opening remarks. Thank you, Ivonne, and good morning, everyone, and thank you for joining us today. I wanted to begin by setting the stage with a quick overview of Thermon. For those of you who might be new to the story. As a 68-year-old company, we've been tested and proven resilient across many economic cycles. We're a world leader in providing safe, reliable and innovative mission-critical industrial process heating solutions to customers in 85 countries from facilities on four continents. Our over 1,300 employees have an industry leading safety record, and are dedicated to creating value for our customers and by executing our long-term strategic plan, and I will provide a few examples of our strategy and action during this morning's update. I'd like to thank all of our employees for contributing to our very strong performance this quarter and for your ongoing commitment to Thermon [ph] I would like to note that in the lower left of the page where you see revenue by type for clarity and simplicity, beginning this quarter, we've changed how we are showing this data. We previously presented this data as point in time versus over time. Kevin Fox, our CFO, will provide more detail on this revised sort of our sales and the rationale for doing so later in the presentation. On slide four, you can see our strategic. In order to create value for our shareholders over the long term is on three key areas. First, profitably [ph] in our installed base, second, diversification and decarbonization and third, capital allocation [Technical Difficulty] but from a very large global installed base, which provides significant opportunity to capture recurring revenue while driving growth across our traditional end market verticals. We're driving additional growth through diversification into attractive adjacencies, such as commercial, rail and transit, food and beverage, renewables and other end markets. Our solutions also help enable the transition towards sustainable energy sources. We are expanding our digital solutions with products that utilize the industrial Internet of Things and support customer demand for productivity, reliability, efficiency and safety enhancements. I will discuss digitization further on today's call while providing an update on our recent new product introductions, specifically looking at the launch [Technical Difficulty] Because we are seeing an opportunity in decarbonization, our strategic priorities is developing markets to capitalize on this larger opportunity with our existing [Technical Difficulty] We see significant growth over the next few decades, [Technical Difficulty] some more detail in a few moments. Finally, we're committed to disciplined capital allocation. Our current priorities include inorganic growth through acquisitions with returns â on weighted average cost of capital by year three and maintaining balance sheet strength through the cycle. [Technical Difficulty] We're seeing a large emerging mark for global decarbonization. Energy use generates over 80 [Technical Difficulty] gas emissions. As you can see here, heating represents roughly 50 [Technical Difficulty] consumption of the energy used for heat [Technical Difficulty] is from industrial sources. Today, 95% of the heating used in the industry is from hydrocarbon-based heating sources with only 5% of [Technical Difficulty] as well as thermal energy storage is roughly $1.3 billion which we believe is addressable with our existing technology. By 2030, we expect this market to more than double to $2.8 billion growing at an anticipated 9.3% compounded annual growth rate. By 2050, this market is anticipated to grow to more than $15 billion globally. Today, we believe that Thermon has the electric resistance heating products and technology to address 80% of this global market. Going forward, we believe Thermon has the products, technology and is well poised to capitalize on this rapidly growing market opportunity. Moving to slide six on enabling the energy transition and decarbonization. Here, we have a couple of examples of many of the types of opportunities we are seeing in this space. In both examples, we're providing the heating technology for [indiscernible] as part of carbon capture and storage systems to reduce scope [indiscernible] and an aggregate cultural project, which includes ethanol and other processing plants across the U.S. Midwest. While these represent just a couple of examples through three quarters, we have booked over $22 million in energy transition and decarbonization opportunities this year, up roughly 50% from the full year in FY '22 with another quarter to go. Moving on to slide seven with our new product development. I'm very pleased to announce the latest addition of the Genesis Duo to our market-leading digital platform shown here on the right side of this slide. This new two channel controller has features that have never before been seen in the industry in a controller of this size. It offers advanced control features with the ability to track historical trends, is IIoT enable with self-healing mesh communications, has an intuitive touchscreen interface and a multifunction light ring that provides visual feedback to operators. These units can be pipe mounting, decentralizing control and lowering total installed costs for operators. On the left side of the slide, you can see examples of new products launched over the last 5 years. Our new product development efforts have resulted in a robust vitality index representing 28% of year-to-date revenues. This pipeline of new products has created a real competitive advantage for Thermon with our controls and communications in combination with the most advanced heating technologies for demanding applications. Turning now to slide eight for an update on diversification. You can see here examples of recent wins illustrating our continued momentum across three of our targeted markets for diversification, including commercial, food and beverage and rail and transit. In commercial, we see city ordinances driving the conversion of hydrocarbon-fired boilers to electric. In rail and transit, we're on pace to achieve 50% year-over-year growth with the introduction of the new Hovey Hellfire Blizzard Duty. The recently passed U.S. Inflation Reduction Act is driving investments in the rail and transit sector that we believe will benefit our business going forward. Finally, in the food and beverage market, we won a $2.4 million opportunity in a seed oil plant in North Carolina, and we expect revenues in our food and beverage end market to more than double in fiscal 2023 versus the prior year. On slide nine, looking at the external environment, I would like to again emphasize the progress that we've made against our end market diversification strategy. Here, we see an updated chart with end market mix for the trailing 12-month period ending December 31, of 2022. Approximately 57% of our revenue came from non-oil and gas end markets compared to roughly 45% in our fiscal year '17. In fiscal year '23, we are seeing a strong recovery in the oil and gas sector that is largely focused on maintenance, combined with efforts to increase throughput and reliability on the installed base. In fact, 91% of sales to the upstream oil market are recurring product sales to support and maintain the installed base. We're also seeing continued progress in growing our diverse end markets and are working diligently towards our long-term goal of achieving 65% to 70% non-oil and gas revenue by the end of our fiscal year 2026. We continue to see strength across the majority of our end markets. We believe the strong maintenance environment in chemicals and petrochemicals, combined with customer demand for end-use plastics, enables those markets to grow over the longer term. The headwinds from margin pressures and increased European energy prices are partially offset by the cheaper and branded feedstock in the U.S. In the power sector, we've seen growth moderate after revenues doubled in fiscal year '22 following the winter storm Uri. However, we believe the mid to long-term drivers remain intact, which include electrification, renewable energy and the rise in middle class in Asia. Several of the verticals that make up the strategic adjacencies category continue to experience growth including renewables, such as hydrogen, biofuels and nuclear power. As mentioned earlier, we have secured over $22 million in orders this fiscal year to date, up 50% compared to the full year in fiscal year '22. Overall, while we're not immune to impact from ongoing macroeconomic turbulence, we believe the breadth of our solutions, combined with our diversification across a wide variety of geographic and end markets continues to serve us well. Turning now to our results for the third quarter of fiscal year 2023 on slide 10. Thermon had another quarter of outperformance driven by our team's outstanding execution despite ongoing macroeconomic challenges and continuing geopolitical uncertainty in Europe. We achieved record third quarter adjusted earnings per share due to strong performance in North America, which benefited from the ongoing recovery in the oil and gas industry, combined with an improving supply chain. We have also been able to offset increased material and transportation costs with strong price realizations while diligently managing controllable costs and continuing to make strategic investments to grow our business over the longer term. For example, the integration of our Powerblanket acquisition announced during the first quarter of this fiscal year remains on track and produced $8 million of revenue at attractive margins during the quarter. Revenue of $122.1 million was up 21% year-over-year. Adjusted EBITDA increased over 45% year-over-year to $29.8 million with a margin of 24.4%, an increase of 390 basis points. Free cash flow of $17.6 million for the quarter was driven by strong earnings and customer collections. Adjusted EPS was a record $0.52 a share, an increase of more than 40% from the prior year period. Given the strength in our backlog and incoming orders, we're raising revenue and adjusted EPS guidance for the full fiscal year. On slide 11, you can see that our orders and backlog continue to remain strong. We're very pleased with the momentum in the business. This quarter, we achieved record incoming orders of $126 million, up 40% year-over-year, while bookings grew 22% on a trailing 12-month basis. Our book-to-bill was 1.03 times. This represents the ninth quarter of the last 12 where we have achieved a positive book-to-bill. Our backlog of $160.7 million is at record levels and was up 16% year-over-year, excluding FX impacts. With that, I'd like to turn the call over to Kevin our CFO, for a more in-depth review of our financial results. Kevin? Thanks, Bruce. Before we get into the detailed results, I would like to highlight that we have announced our decision to withdraw from our operations in Russia. We have a dedicated slide later in the deck to walk through the impact to our financial performance, and we will present the financials in the upcoming slides on an adjusted basis. Additional information will be available in our 10-Q filed later today. Next, I would like to describe the change in revenue reporting that Bruce touched on briefly at the beginning of the call. As you recall, we previously reported revenue broken into two categories, point-in-time and over time. We found that these categories could be even more valuable to the investment community. And in our view, it is important to understand whether our sales are derived from our customers CapEx budgets or instead from ongoing maintenance and repair spending which is typically operating expense dollars. The value of our installed base is more closely tied to spending in less volatile operating budgets that sustain and optimize customer production whereas customer capital spending is what builds that installed base over time, but can be more volatile as macroeconomic conditions cycle. So for this reason, we will now show over time large projects defined as over time revenues greater than $500,000, which we believe are typically funded through CapEx budgets. A second category will now be presented as over time small projects which are over time revenues less than $500,000 and we believe are typically funded through OpEx budgets. There is no change to point-in-time revenue reporting. For a point of reference, the average size of an over time order capturing both the small and large categories in our fiscal 2023 year-to-date is approximately $70,000, well below the $500,000 threshold we've established. We hope this clarification will be helpful to all of you. Turning to revenue on page 13. We are pleased with our overall performance this quarter as the global Thermon team continued to drive profitable growth while meeting strong customer demand. Revenue in the third quarter was $122 million, up 21% versus prior year and exceeding internal expectations. Sales growth in the Western Hemisphere was a result of continued deferred maintenance activity in upstream and downstream oil and gas and chemical end markets and investments driven by sustained commodity prices and global demand. While maintenance spending in the oil and gas market is growing considerably, we are still focused on executing against our long-term goal of market diversification. By the end of fiscal 2026, we expect that at least 65% of total revenues will come from diversified markets other than oil and gas. We continue to see progress in our diversified end markets with rail and transit up 39% and food and beverage up 145% on a year-to-date basis. Renewables revenues are up almost 2x versus prior year. While smaller today than other legacy end markets, these segments represent opportunities with long-term tailwinds, and we expect them to be a key component of Thermon's growth trajectory in the years ahead. FX negatively impacted revenue by $5 million due to the stronger US dollar, which we expect to continue to impact our business in the quarters ahead. Reported results also include a full quarter of Powerblanket financials worth $8 million in revenue. We are pleased that our integration of the Powerblanket acquisition remains on schedule. Thermon's revenue growth, excluding acquisitions and on a constant currency basis was 19% year-over-year. Large project revenues declined 4% in the quarter due to the non-recurrence of the large onetime contract from the previous fiscal year. As a reminder, we believe large overtime project revenues are aligned with customer capital spending budgets and more volatile in nature, while small projects and point-in-time product revenues, which were up 12% and 36% in the quarter, respectively, and 15% and 32% on a TTM basis, a representative of maintenance, repair and small upgrades on our installed base that help our customers maximize production, up time and efficiency. Small projects and product revenue growth was driven by increased activity in smaller design and supply projects, particularly in downstream oil and chemical end markets. Small projects and products revenue represented 78% of revenue in the current quarter. Now for gross margins and SG&A on page 14. Adjusted gross margins in the quarter are 45.3% versus a reported 40.5% last year, with a few items we'll call out to provide context on the improved performance. In the third quarter of fiscal 2023, volume contributed an increase of 460 basis points driven by the mix in small projects and product sales. We continue to be able to manage the price, cost equation with favorable pricing impact this quarter, up 260 basis points, slightly offset by global supply chain headwinds of 180 basis points. While we have seen supply chains generally improving in the last two quarters, there are still some pockets of challenges we continue to navigate. Operational efficiencies contributed an additional 40 basis points. Please note that the trailing 12 months and prior year quarter data includes the impact of the large onetime labor contract we discussed on our previous calls and for which on-site work was completed in May of 2022. SG&A. As a quick reminder, we deduct depreciation from the SEC reported selling, general and administrative expenses to arrive at the SG&A on the slide. In the quarter, SG&A was $28.6 million or 23% of revenues versus the prior year of $19.3 million or 19% of revenue. On a trailing 12-month basis, SG&A was $99 million or 23.6% of revenue, up from $79 million and compared to 24% of revenue in the prior year. Powerblanket contributed an additional $2 million of expense in the quarter. We remain diligently focused on driving profitable growth over the longer term, and our aggregate SG&A expense will continue to increase during the fourth quarter of fiscal 2023 as we invest in resources to execute our long-term strategic plan. The team has done an excellent job managing the balance between growth and profitability, and we will continue to focus on maximizing the value of each dollar we invest in the business. Moving on to page 15 for adjusted EBITDA and earnings per share. The combination of higher volumes, positive pricing contributions in a volatile environment and continuing our pursuit of operational excellence has again yielded a strong quarter of profitable growth. This is the strength of the Thermon business model and representative of the execution we expect to deliver for shareholders. Adjusted EBITDA was $29.8 million or 24.4% of sales in the quarter. Adjusted EBITDA increased over 45%, up over $9 million from the prior year, along with margin expansion of 390 basis points. On a trailing 12-month basis, adjusted EBITDA is now up to $86.6 million, along with margins of 20.6%, an expansion of 650 basis points, a really great result for the team. Given the strong performance in the first three quarters of the year, we are now projecting adjusted EBITDA margins of 21% to 22% for the full fiscal year. GAAP EPS in the second quarter was $0.25 per share compared to $0.33 per share in the prior year. Adjusted EPS was a record $0.52 per share versus last year's $0.37 per share. For the trailing 12-month period, GAAP EPS was $1.03 and a record adjusted EPS of $1.46 per share. On Page 16, we'll cover the updated balance sheet. We ended the quarter with cash of $35 million that was unchanged year-over-year after accounting for the Powerblanket acquisition and adjusted EBITDA growth resulted in a net debt to adjusted EBITDA ratio of 1.1 times, an improvement versus 2.2 times in the prior year. Working capital results were mixed with seasonally strong collections, offset by elevated inventory associated with meeting demand for the heating season and strategically building inventory to buffer potential supply chain disruptions. We continue to navigate an improving but not yet fully reliable supply chain environment successfully, and we have observed sequential improvements in many areas. Free cash flow of $17.6 million reflects 14% of revenue and 209% of net income and enabled us to pay down $11 million of debt in the quarter. As a reminder, our capital allocation strategy revolves around three main tenets. One, we will pursue accretive strategic M&A to build our industrial process heating platform while expanding and diversifying our addressable markets. Two, when we execute M&A, we target return on invested capital to exceed WAAC by year three. And finally, we evaluate all of our capital allocation options, including returning capital to shareholders with our Board's Finance Committee on a recurring basis. In the absence of value-enhancing inorganic growth, our current priority will be to continue to pay down debt while investing in our strategic initiatives of decarbonization, digitization and diversification. A quick update on Russia on page 17. Today, we announced the decision to withdraw our operations in Russia, and I wanted to highlight some of the items related to that event. We booked an impairment in our third quarter impacting pretax profit by $8.3 million, net income by $7.3 million and reducing GAAP EPS by $0.22 per share. By the time the exit is complete, we expect to take an additional charge of $0.11 to $0.20 in GAAP earnings per share. We've included the income statement highlights for your reference with revenue of $7.6 million, net income of negative $8.9 million and adjusted EBITDA of negative $1.4 million. As you observed, the Russian entity was slightly below breakeven profitability on a year-to-date basis and we believe this decision provides clarity to our investors while improving financial results and the risk profile of the business. Additional disclosures will be available in our 10-Q that will be filed later today. This quarter built on last quarter's positive performance with significant volume growth, margin expansion and excellent free cash flow. While the outlook in Europe continues to be soft, supply chain cost and lead times are improving, the Thermon team continues to execute against its short and long-term plans, and we see opportunity ahead to continue to drive strong results and create value for shareholders. Many thanks to the global Thermon team for the great work and commitment that enables us to deliver for our customers, shareholders and our communities. All right. Thank you, Kevin. I'd like to turn now to slide 18 and our long-term revenue goals. Our goals for fiscal 2026 remain unchanged, and we're very pleased with our performance through the first 2 years of our 5 year plan is on the upper range of our initial expectations. The sheer size and scale of the decarbonization opportunity that we believe will be a secular tailwind for next two or more decades creates real opportunities for long-term growth. The progress on diversification is also encouraging with meaningful growth across a number of diverse end markets. And finally, our advancements in new product development and the digital platform give us a competitive advantage in the marketplace. The momentum across all three of these strategic initiatives underpinned by solid installed base of customers in our traditional end markets, gives us confidence that our fiscal year '26 financial goals are well within reach. We continue to place a high priority on diversifying our end market exposure, specifically targeting industrial markets outside of the oil and gas sector to represent 65% to 70% of revenues by the end of fiscal year '26. Last but not least, our operational excellence, combined with leverage on our fixed cost will yield EBITDA margins in the low to mid-20% range over that same period. Turning now to slide 19 and our updated guidance for the fiscal year 2023. We are pleased with Thermon's strong performance through the third quarter of this fiscal year. In spite of the number of areas of uncertainty in the macro environment, the positive momentum we are seeing in quotations, bookings and backlog give us confidence to raise our fiscal year '23 full year revenue and adjusted EPS guidance. We are raising fiscal '23 revenue to a range of $429 million to $437 million, which represents a 22% growth over the prior year at the midpoint of the range. We're confirming GAAP EPS guidance for the full year of $1.11 to $1.15 a share. We are also raising adjusted EPS guidance to $1.55 to $1.59 a share for the full year, an increase of 89% over our fiscal year '22 in addition to the 150% growth delivered in fiscal year '21. Finally, wrapping up on slide 20. As we detailed today, Thermon is a world leader in providing safe, reliable an innovation - an innovative mission-critical industrial process heating solutions. This is a high-value niche market with high barriers to entry, which creates a significant competitive advantage. Our outstanding global team, our diversification across a variety of end markets, our large installed base, our aftermarket business that generates recurring revenue and our low capital intensity combined to create a business that is resilient across economic cycles. We believe that Thermon is truly well positioned to deliver profitable growth through the remainder of fiscal year '23 and beyond and to create long-term value for our shareholders. With that, I'd like to turn the call back over to our moderator, John, for the Q&A portion of this call. John? Thank you, sir. [Operator Instructions] And our first question comes from the line of Brian Drab with William Blair. Please proceed with your question. Could you go back to slide 17, just to spend another minute on this in clarifying because there wasn't -- you didn't talk about Russia, you didn't talk about Russian this way in the second quarter. I'm just wondering if you can just clarify what the adjusted numbers are here. So is the - and how would it compare with the third quarter, for example, a gross profit margin? And what's apples-to-apples with - between third quarter and second quarter? So are we looking at the 41.3 and then in Russia, was a 400 basis point headwind in the third quarter. Is that what you're saying? Yes, Brian, this is Kevin. So I think when we look at the second quarter on a gross margin basis, you were at about 45.7, I believe. And so on an adjusted basis, third quarter was 45.3 on a like-for-like. So margin sequentially was slightly down once you back out the impact to COGS that we had to take related to the Russia exit. I think that's the question you're asking, but just numbers... Yes. No, I'm just a little confused by it, as you can tell. So the 41 â the 45.3 is comparable to that adjusted number. And did you make an adjustment for low-margin business in Russia, I guess, in the second quarter as well when you talked about adjusted gross margin? No. There's no impact in our fiscal '23 second quarter given the Russia exit. This was approved by the Board this week. So there was no impact to our second quarter fiscal results. So - but you did business in Russia in the second quarter. So I'm just wondering, if you take Russia out of the picture completely for all of â you know, any quarter in fiscal '23, how was gross margin in this most recent quarter relative to the second quarter? Was it about consistent sequentially? Or did it go down? Yes. I think the question you're asking is if we would back out Russia from the second quarter, what would the results look like? Yes. We can get you that walk off line in - you would see given the business on an EBITDA basis, Brian, has been slightly negative year-to-date. So if you would take Russia out of any of the previous quarters in the fiscal year, you would see a slight improvement to profitability, I believe on both the gross and EBITDA lines. I think that - I think that's the question. Yes, I'm just trying to get a sense for what - I think everyone would be interested what - a real sense for what direction gross margin is going, because this looks obviously like an outstanding quarter. There's so many - every headline number is positive, the stocks up 2%. I'm just curious, I'm trying to - I'm just curious why the stock will have 2%? I'm thinking maybe - the only issue I see is that it looks like gross margin, maybe some of the business that you had in the third quarter was a lower margin business than you had in the second quarter? And then how do we think about the trajectory of gross margin from here? That's all. I'm just trying to get a sense for second quarter gross margin in the third quarter and where we're going from here. Yes. Brian, I think that's fair. I think we can look at gross profit or EBITDA, as you mentioned, any of those metrics are increasing pretty substantially on a year-over-year basis. If you want to look at things sequentially Q1, Q2, Q3, I think we certainly feel like the business is getting better. That mix in the business is still very much oriented towards those smaller projects and the point in time or product or materials revenues. That certainly has a positive impact as well. Pricing 260 basis points in the quarter. So difficult for us to see with how the business is performing. A lot of positive momentum in the business today really from a gross margin basis and a lot of that's falling through down to EBITDA and the profitability line as well. So I certainly won't speak to what the investment communities do. But internally, I think we feel very good about where the business is positioned, not this today, but for the future as well, raising the revenue and profit guidance I think for the third quarter in a row here, I can't imagine that would be perceived negatively by the Street. Yes. Got it. Okay. And then can you - I don't know if you can give any more detail on the wins that you've had in renewables. There's obviously a lot of momentum there. And two specific questions. So what types of projects, if you can give any sort of breakdown or granularity, what types of projects are in that $20 million in orders? And secondly, what can you tell us about the margins for those renewables projects, given that's going to be a growing part of the business? Yes, Brian, this is Bruce. So the project wins, I gave a couple of examples here of some carbon capture and storage projects. Those kind of size of those were - the project in the Midwest was about a $900,000 order in process heaters with about another $900,000 opportunity this quarter and about a $3 million opportunity for heat tracing. The project was a pilot project in a Canadian refinery for CO2 capture. It was a little smaller because it was a pilot project, but it was a few hundred thousand dollars. As we kind of look at the types of opportunities, we're a leader in biofuels and there's quite a bit of that bookings in our backlog for biofuel plants, particularly, there's a lot of growth we're seeing in biodiesel. For example, there is also some hydrogen projects. Most of those are where there's a mix of blue and green hydrogen and a lot of the ones, particularly for green hydrogen, are pilot projects, certainly, as they prove out those technologies begin to scale those, the order size will go up pretty dramatically. The other area we've seen some wins is in the nuclear space. We've had some nice wins with some nuclear refurbishments in Canada. We're one of only six companies in our space globally that have the instant. So we see that as a significant opportunity. And again, those are just illustrative. As far as the margin profile, they're consistent with kind of what we've seen with our historical business in this space. So certainly, we think it's supportive of our current margin profile going forward. And certainly, we will have some opportunities on some of our operational excellence programs and continuous improvement to drive margin expansion over time. Okay. Thanks. And then last one, and this is, I guess, maybe not something you're prepared to comment on today. But I mean, you're only - you're less than 30 days away from the beginning of fiscal '24, have you gone through the budgeting process and forecasting process, give us any sense for what you're expecting in terms of growth, revenue growth in the next year? Even like a range? Yes. Yes. So we're in the middle of that budgeting process right now. It's - we are seeing growth in the coming year. We're not at a point yet where we're prepared to set a range for that. We typically do that as normal course during our May kind of year-end earnings call. And certainly, we'll be prepared to share that with you at that time. However, we are seeing - you can see the momentum in bookings, I mean, 40% growth year-over-year, positive book-to-bill, we are seeing momentum in the business, and we foresee continued growth in our fiscal year '24. Along the sort of lines of Brian's question. In your press release, you talked about - and you're benefiting this year from deferred maintenance spending. And I guess, by definition, it's deferred. So when - after they make those expenditures this year, is there a fall through next year? Or does that sort of become sort of a headwind when you look at maybe 2024 versus 2023. What - how important has deferred maintenance spending been for you this year? And how do you think about that next year? Yes. So Jon, great question. I mean we certainly saw a really a significant contraction in maintenance spending during COVID. So we've seen that really begin to rebound. And we've seen that during the course of this year. Now as we look at this, I mean, we're seeing a lot of small projects and we believe that there's been a significant underinvestment in infrastructure over the last 7 or 8 years. And based upon that and kind of the change in the capital allocation strategy going forward, what we're seeing is reinvestment in existing assets rather than really building a new greenfield. So we don't expect to see a big surge of CapEx spending that maybe we would have seen in prior economic cycles. However, if you look at our global footprint and the installed base, it's actually very favorable for our business. One, is we're entitled to the recurring revenues where we have the installed base. Second, they tend to be higher margin profile and what we believe is these levels of spending going forward are more sustainable than what we may have seen in previous cycles where you had some very large peaks in CapEx spending. And I would kind of go back to our fiscal year '19 and fiscal year 2015. So going forward, we actually see a lot of the maintenance spending being stable to slightly increasing in the coming fiscal year. Okay. Thank you. Kevin, two questions. Maybe you mentioned this, is the Russian charge all non-cash? And secondly, supply chain challenges have sort of a headwind, I think you mentioned 180 basis points. You were hearing a little bit of improvement on the supply chain challenges that we've seen over the past year. As you look into next year, do you see that begin to ease and the improvement on the - improvement on the gross margin front because of that? Yes, Jon, maybe I'll take them in order. On Russia, there was about $3 million of cash on the balance sheet that we just reclassified. The rest of it from a P&L, it's a non-cash entry. We will see some additional impact to GAAP EPS once the exit is complete. Again, that was about $0.11 to $0.20 in GAAP, but a lot of technical accounting from the team there, but essentially, it's all a non-cash entry in Q3. With respect to supply chain, I think you're right. I think we see things getting better sequentially. I don't think we're prepared to say it's fixed and everything is back like what it was in 2019. But I think us like many others have built those buffers and the inventory at this point. And I think when we look at our inventory turns and that sequential improvement, I think we expect that trend line continue to go upwards in the quarters ahead. So yes, I don't think I'm quite ready to say we're out of the blue. There are certainly pockets that are still challenging, but it's much better today than where it was six months ago. And I think we expect those trends to continue going forward. And at this time, we have reached the end of the question-and-answer session. And I would like to turn the floor back over to Bruce Thames for any closing comments. John, thank you, and thank you all for joining here today. I appreciate your interest in Thermon. Enjoy the rest of your day. Thank you, everyone. That does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
EarningCall_994	Good day and welcome to Tata Motors Q3 FY '23 Earnings Conference Call. I'm joined today by Mr. P.B. Balaji, Group CFO, Tata Motors; Mr. Girish Wagh, Executive Director, Tata Motors; Mr. Shailesh Chandra, MD, Tata Motors Passenger Vehicles Limited and Tata Passenger Electric Mobility Limited; Mr. Adrian Mardell, Interim CEO, Jaguar Land Rover; Mr. Richard Molyneux, Acting CFO, Jaguar Land Rover, and my colleagues from the Investor Relations team. Today we plan to walk you through the earnings presentation followed by Q&A. As a reminder, all participant lines will be in listen-only mode and we will be taking questions via the team's platform, which is already open for you to submit your questions. You are requested to mention your name and the name of your organization while submitting the questions. Thank you. Once again, thanks, everybody for taking the time to join the call. As is customary, let's run through the deck at reasonable clip and thereafter spend as much time as possible on Q&A. So customary Safe Harbor statement. Nothing to report here other than the normal one that is the segments. Again, draw your attention to the changes that we have done over the last one year. So that's up there. Next slide, please. The quarter as such was a pretty intense quarter and I draw your attention to the Auto Expo, which I'm sure Shailesh and Girish will quickly touch upon their slides as well. A pretty intense affair and an exciting presentation from Tata Motors across the whole team of moving India and something that have been very well received in the market as well. We also completed the acquisition of the Ford facility in Sanand, and this is now completely -- we're now getting into the integration of employees there. We also issued a drawdown notice for the tranche two of the 3,750 crores, $500 million to TPG Rise and the funds are expected to be received by end of January. And JLR order book, which I'm sure, and the semiconductor situation is something that Adrian is going to talk about. Next slide, please. Overall on the quarter, a very satisfying performance with a revenue of 88,500 crores, EBITDA of 11.1% and the profit before tax of exceptional items of 3,200 crores. Growth of 22.5% and an EBITDA improvement of 90 bps and an EBITDA improvement of 270 bps. The key call out here is that after long time, all the three auto verticals are actually profitable and improving their performance and therefore that's driving the margin and HCF improvement that you see and we hope to sustain that in the coming quarters as well. Next slide please. The source of growth, a lot of it coming from volume and mix and of course pricing starting to come through as well as we start taking pricing above and the inflation starts stabilizing. Profitability improvement coming across JLR, CV, PV, which is what I referred to earlier. And the only fly in the ointment is the losses we've taken in Tata Motors Finance something which I'll talk about towards the end. Automotive debt down to 57,500 crores. And the point that I'm sure there's a question that's going to come in the case of JLR, we do see a stretch in meeting the net debt zero targets. So we will update where we are on this in the end of March. Again confident in TML India as far as that number is concerned, we should be able to get it to net zero there. So intention is to work on all other areas as well. Next slide please. So with this, let me hand you over to Adrian to take us through the presentation on JLR. Adrian over to you. Okay, so these are our KPIs for the quarter standard format you see versus last quarter and then the same quarter last year. Retails were slightly lower than last quarter. We'll get into the details of that a little bit later. We did improve significantly our deliveries of MLA units Range Rover, Range Rover Sport. They principally get targeted to North America and to China. North America was actually up 34% quarter-over-quarter and China was lower because of the COVID shutdowns, just a punch-line. But you'll see that more detail later. Revenue because of that strengthening mix and the overall increase in wholesales. wholesales sales did actually increase by 5.7% versus last quarter. Significant increase. Significant improvement. You can see that above the 6 billion level and we anticipate being above 6 billion revenue for the foreseeable future. Of course, PBT was very strong, breakeven points are still below 300,000 units annually, 75,000 units per quarter. In fact, they were down to 70,000 units in Q3. Half of that PBT number is actually a revaluation game on conversion of our dollar denominated debts mostly, and we'll get into that in later slides. EBITDA out of 11.9%, EBIT was particularly encouraging at 3.7%, significantly higher than the comparative periods. And cash, once we break to that breakeven point with their average transacting values and average GVR being above Â£70,000 per unit now. It really does escalate into a considerable cash positive 490, the best cash quarter for seven quarters. Next slide, please. Okay. So these are the key highlights. We'll get into some more of the details around these later. The order banks did grow or explain our expectations on that going forward. Refocus did deliver again up to 850 million, which again, we will repeat our confidence in more than Â£1 billion on that as well. And very importantly, our cash liquidity continues to be strong, 3.9 billion. And we actually secured the extension of our revolving credit facility at the end of December and then into early January, that got extended to 1.52 billion through to April 2026. Next slide, if you would, please. So these are the quarter three highlights on retail and wholesale volumes. You see the big call out at the top there up marginally on wholesales 5.7% or 6%, 15% year-over-year. My focus on retailers, first of all, as I've mentioned, the actual retailers did fall a little bit. This is by nameplate. Basically we've improved the deliveries on defender and you will see increasingly going forward. And now we've moved to three shift on defender. A lot of our orders on the defender nameplate will start to fall in the retailers increase Range Rover hold up. But within that we're starting to improve our MLA deliveries, Range Rover and Range Rover Sport, which is a fundamental improvement in this quarter's delivery. From a wholesale perspective, there are steady improvement 5% or 6% this quarter. Just a little bit more the quarter before. That's a progression we're starting to see now. The progression I think we can start to anticipate going forward. Again, you can see that defender delivery increasing in quarter three to almost 24,000 units and the Range Rovers and Range Rover Sports coming through also as well. Next slide, if you would, please. And this is by region really important. Say those bigger units are Range Rovers and Range Rover Sports. Now, we've doubled the volume of deliveries. They're starting to impact North America heavily. You can see that both on the retail and the wholesale piece. And even though those units were made available within China, of course, the lockdowns in December, within the retailer facilities in China that they weren't in a position to take those deliveries. And so the reduction in both the China retail and wholesale inventory we hold ourselves pending pass over to China. The actual uplift in China in the first three weeks of January is very strong. As those dealer outlets have opened, of course, the dealers who have an appetite to take those units, they're moving very, very quickly. And that will be our anticipation post new year also. The electrified number of units have grown to 67%, but you can see we're in a frame of 65% to 70% now and that's likely to continue for the foreseeable future. Next slide, please. Okay. So the bridge, the bridge versus the same profitability last year about a small loss last year, EBIT 1.4%. So volume mix is starting to influence this considerably. And that would be a shape we would expect to continue going forward. The pricing and VME is still very low and obviously it's corroboratory data around those units actually being passed over very low levels, 0.6% VME and their targeted levels on targeted nameplates within targeted regions. Most of our larger units have zero VME at this point in time. We do, however, as we've talked before, some considerable headwinds on material cost inflation, commodity inflation, utility prices also, but they are starting to peter away. And also we've had to go into the marketplace to buy premium chips to keep supply going. So that's all a part of our material cost. Again, we're starting to see that taper down. And my expectation going forward is that pricing in VME will begin to offset the material cost increases in quarter four and beyond. We are investing more. We're absolutely spending more within our commercial areas, our commercial function. Both our marketing now, our marketing is still only two-thirds of the level it was pre-semiconductors, of course. So coming from a low base, but we will be actually starting to spend more fixed marketing as confidence on supply comes through over the next weeks and months. And particularly our engineering spend to move towards our Reimagine electrified future is starting to increase pace. And we'll show you that in more detail when we get to the capital slide. And the operational exchange is the big news is the revaluation. I've mentioned of our dollar denominated debt, you know, sterling appreciated from 112 to 120 in the quarter. You see mostly that within the reveal line, but our operational position is still ahead of our hedges that crystallized within the quarter. And therefore, there's a net gain on operational FX and that's up to the 3.7% EBIT, Â£265 million PBT encouraging quarter for us. Next slide, please. So this is the cash that flows from that. You can see the Â£265 million I have just referenced Â£800 million cash profit after tax. Look, you know, our model works really well when that number moves up towards Â£1 billion. That's where we were at the end of FY '21. That's where we expect to get back to over the next few quarters. And that's why the underlying cash flow is still strong, even though investment spending is starting to increase. Working capital was a nice rewind this quarter Â£306 million but it's only a small fraction of the adverse as we've had on working capital since March 21, Â£1.77 billion negative from that point. Most of that will rewind as we move through the several next quarters. And what you're looking for here is production and wholesale volumes to grow through 30,000 units a month, then 35,000. And when we get to 40,000 units a month, which is where we were at March 21, most of that will actually rewind. So a lot of cash is going to come through from working capital as we build back our production volumes and our wholesale volumes. Of course, free cash flow Â£490 million best result for seven quarters, very pleasing on just 79,600. Next slide, please. So this is the break-even slide. I won't dwell on it just to say we're still at the 280,000 level in Q3. It will average eight to around 300,000 full year. We are starting to invest more, including our fixed marketing and our commercial digital strategy, so our costs will increase, but with the mix strengthening on MLA and Defender units, we do expect a containment of breakeven over the next two to three quarters also. Next slide, please. This is the investment number I mentioned. It is worth referencing last year. Last year I had - I think so Â£622 million in total, up just over Â£100 million. Pretty much all of that, but more than all of that is in the engineering spends. We are bringing more engineers, of course, into the organization to deliver a Reimagine strategy, our electrified future. And that's starting to impact on our cost base as it needs to do so. More of that is being capitalized now, 48%, which demonstrates the maturity of those architectures starting to grow and improve. We were down at 26% only earlier in the year. So this is actually a good sign. And I do expect investment to continue to increase beyond Â£650 million towards Â£700 million over the next quarter or two. Next slide, please, business update, okay the next one. So Reimagine electrified strategy. Look, there's no change to our electrified strategy. I know I'm on record in saying that. I thought I'd dwell here on the key highlights, which is exactly the same as previous highlights you would have seen from our electrified journey. MLA architecture is out there, the beautiful car you see there and it's Range Rover Sport. The order banks have been filled by those two-product it is the epitome, we believe, of modern luxury, beautiful proportions to that vehicle and the Range Rover Sport, the minimalist luxury view inside the vehicle. That's a great signature to vehicles and quality and view of vehicles we will put forward going forward. Within two years, we will have a full electrified BEV Range Rover. It's just two years away now, recognizing our order bank support for that product for the next 12 months or so, the gap between orders and new electrified vehicle is closing and will continue to close as we go through 2023. Well then in 2025 come forward with our first all new electrified Jaguar products. And then beyond that, our other Range Rover and our other Defender products will come along in the next two years. So within two years, most of our vehicles will have full electrified - offerings and that will be complete in all models before the end of the decade. We're estimating 60% of sales by then will be BEV. But the important point, we will have offerings across the range over that period of time. We still maintain zero tailpipe emissions by 2036 net zero carbon emissions by the end of that decade. So our electrified future continues at pace and the investments we're now making are going to grow towards it over the next 12 to 18 months at least. Next slide, please. Okay, so these are our wholesale volumes. You know, I think the important thing here, you can see the gradual improvement, but I like to look at quarter versus last year so Q2 '23 versus Q2 '22. You can see there about a 15% increase. We know Q3, there's a 15% increase and that starts to give you an indication of what we should begin to expect in quarter four. So we are expecting that number to grow in Q4 - and obviously to continue to grow going forward. So we do think we've made a lot of progress on supply, particularly on semiconductors, particularly for this calendar year. But there are still challenges. Of course, COVID in China is a challenge and we'll talk about that in a few moments. But we are improving, break even points are stabilizing, and therefore our profitability, EBIT, revenue and cash will be growing as we go forward. Next slide please. Okay Range Rover and Range Rover Sport, the MLA architecture, are fundamental to the delivery of our business model and our business success. And we explained in great detail over the early quarters of last year how it was difficult for us to gain the parts to grow the volumes. We've broke through that in September, you can see the average weekly has grown quarter-over-quarter. We will deliver more production units in Q4. It won't be that same size of scale of increase, but it will be a sizable 10%, 15% improvement in Q4 over Q3. Also we can maintain our 33% to 35% worth of deliveries on these products and that will maintain our average selling price at the levels you've just seen as well as a strong variable profit mix portfolio going forward. It's really is now starting to show through our business results, particularly in Q3 and going forward. Next slide, please. Okay so, what's going to happen to order banks? Well first point is, they did continue to grow in quarter three and we've helpfully broke out the amount of deliveries we passed over to customers 85,000 versus the amount of new orders 95,000. So at this level of marketing spend and we are only spending two-thirds of the level on marketing we were before semiconductor shortages, but at this level, you can expect new orders to grow by 30,000 or thereabouts a month. But our fulfilled orders, our retails will start to grow now, we're already seeing that in Q4 in part because of the opening up of China, but I do anticipate in quarter four fulfilled orders to be above new orders and therefore, our order banks to start to taper down towards a level which is more natural maybe towards the 200,000 level over the next three to four months, most of them as we've said before in those three nameplates Range Rover, Range Rover Sport and Defender. We have gone to third shift on Defender and therefore, as we come out of quarter four, our deliveries in particular and our fulfilled orders on Defender will grow. And then, we've also mentioned, we expect to build another 10% or 15% more the other two also. So very confident at retail levels or at fulfilled orders are going to move towards a 100,000 level over the course of the next months and quarters. Next slide, please. This is a super important slide. We dwelled on it several times, let me remind you, the top piece is a range of retail inventory targets and that dark blue line is now creeping towards the bottom of that band, which means the vehicles in the right place and that will trigger incremental retailers in Q4, as I've mentioned a couple of times, I run wholesale stock, inventory we own. The band there you see below between 30,000 and 45,000 units. We're still within that band towards the bottom of it, but if you add those two numbers together, 82,000, inventory end-to-end vehicles at the end of December, that was the highest number we had in inventory for several quarters back to around May 2021. So that's a good, healthy sign that we're starting slowly to fill the pipeline, which will trigger more retailers et cetera, et cetera. So this really is starting to improve for us, although there are still issues we can get on a daily basis in terms of supply. Next slide, please. Inflation has been a theme all year. What did we say at the start of the year? We said refocus would offset inflationary claims. Nine months through this period, inflationary claims have been 660 million, refocus has been 850 million, half of which is in the commercial space. So we're doing what we said we would do, the investment number because we mentioned earlier, we are accelerating and bringing more engineers in by future won't be the savings going forward and our expectation is the commercial performance, the market performance will actually then begin to offset inflation in Q4 and beyond together with our efficiencies through our agile transformation activities, which we've referenced previously also. So we are doing and we will do this year exactly what we said we could do in terms of offsetting those high inflationary claims. Next slide, please. You need to mention COVID and China we've all seen the reports and the extent of the contagion within the Chinese population. Q3, it was impacted, of course by lockdowns particularly at the dealers and also some disturbance in terms of the units we could build. Employee absence for a short period was high. I'm really pleased to say that more than 90% of our employees at the production facilities and 99% of our employees within our national sales company have now returned to work. And the retailers definitely opened up for the three weeks in January. Obviously, with Chinese New Year, there's a care point around what happens to the population following that, but we do anticipate, given the scale of contagion in the December period that we will get back to business very quickly in China at the back end of Q4. There is a care point around production facilities in China, supplier production facilities that we are monitoring. We're bring information back around that as we close out the results, but it is possible for us to be scoped within the U.K. production and within need for production and within China production. As a result of those supply facilities, they won't be the scale and the size of the stoppages we've seen previously. We don't believe. Next slide please. Outlook year-to-date I'm throughout on Q3 here, but this is the summary so far year-to-date. I won't read it have to part from, say, we are now EBIT margin positive across the first nine months investment is lower, but growing free cash flow, it's just under $300 million I've shown there. Hopefully, what our expectation is for Q4 above 80,000 units on wholesale maybe closer to 85,000 plus we continue as we have in the first month, revenue will exceed $5 billion, close to $6 billion again. We will be positive on EBIT with that, our investment will grow probably around $700 million, 600 something and our free cash flow. We believe those physicals will be more than $400 million positive, which will make us positive free cash for the full year and the rest of the day, you see there, what are our priorities obviously continue to secure chip suppliers moving through the strategic tie-ups. But to the excellence of the work of the teams now, we really do have excellent teams in place now, ensure we keep our supply and airlines going continue Range Rover, Range Rover Sport ramp up. I've mentioned our expectation that will grow by 10% to 15% in Q4 over Q3 improve on the 80,000 units. We have done in quarter three within quarter four now we focus complete including more of those price increases coming through as we deliver more cost to customers And obviously you know our jobs to deliver positive data. So EBIT margin, and free cash flow in quarter four and also for the full year. Let's quickly move on to the Tata Commercial Vehicle space. Girish and I will take the session. As if you recollect, we had signaled us earlier saying that we will be focusing squarely on market share, registration market shares and shifting to a demand full business model that did cost a bit of grief in the month of October, but since then we've been sequentially improving our market shares as a propositions are starting to land and we're starting to see this in across the rest of all the portfolio as well. Next slide, please. From the point I would like to call out, you know just take a look at the CNG, the light green bar there, substantial drop in CNG composition as the prices of CNG started inching closer towards the diesel and we should expect to see this trend reverse once the CNG prices start stabilizing and going down. So we are very much invested in CNG, but this is a current ways it's played out. And the other thing that we'll call out here is the whole international business where you would notice that the wholesales have been pretty anemic as a challenge in the international business continues. Next slide please. From a financial performance standpoint, the demand pull model is translating into improved profitability of almost 580 bps. Revenue growth, of course, at 22.5%, pretty strong and EBIT now at 5.9%, up 650 bp. Next slide, please. Drivers of this particular profitability, you would see draw your attention to the realizations adjusted against variable cost. You'll notice this number used to be negative in the past. Now sitting at almost 480 bps as the strategy starts playing out. And what you do see as the software cost disadvantages that have come through this quarter, some of it, most of it related to the investment that we are making in the new technology is translating into higher employee costs. And then of course, investing in the business as they are moving more and more money into SMEs, that's showing the number there. So the industry grew by around 16% over Q3 of FY '22. When I see the growth rates have been dropping now, but this is also due to the base effect. And that's what we will see in Q4 also, the growth rate will go down further. For Tata Motors, since we have been focusing on retail, setting our retails were ahead of wholesales by 6% in the quarter gone by. And this is also in line with our preparation to unwind as we gear up for the RDE transition in in the month of April. I think good thing for industry. The commodity prices did soften in Q3 and that's how it is remaining in Q4 also as of now. And we are keeping a track of how the steel prices especially moves, steel prices and precious metals move in Q1 of next year. Balaji spoke about the CNG. So I think with the CNG benefit going down and more so it is the concern in the minds of the customers about variability in CNG price. I think the volumes have come down and in SCV they've come down to around 12% of the portfolio ILCV we've come down to around 14% of the portfolio and you would recollect in ILCV it used to be almost around 40%. Within the segments, I think medium and heavy commercial vehicles have seen a very good growth, almost 50% growth over Q3 of last year, again due to the base effect and even higher growth in the passenger, the passenger segment is back. I think it was the worst suffering one during the COVID period and during the COVID recovery. For us the non-vehicle business is spare parts I think continues to do pretty well, spare parts and consumables, and in fact in the nine months in this financial year. We have grown by around 38% over last year. And the penetration, also keeps on increasing. So, the share of the overall market is continuing improve quarter-over-quarter. On the product front, we continue to launch new products and for the year, we've launched more than 40 new products as well as 150 plus variants and this includes - is electric vehicle for which we have already started the deliveries in the beginning of this month. The new range of pickups, the both intra and Yodha I think has a very, very good traction in the market. And also good premium that we are able to charge this is a question. And we also brought the CNG trucks, which have started seeing some traction. Coming to Auto Expo, I mean did introduce a comprehensive range and I'm going to speak about that a little later. Going ahead, we will continue to have the focus on these three things, which is retail pull, improving the VAHAN share which is the registration. And of course, while doing all this I think realization improvement agenda will continue. To push this agenda, we continue to engage with all the key stakeholders in the ecosystem, meet customers and financials more so trying to get them on board. I think we see a very good commitment from all the stakeholders to the revised. We were working on the revised operating model that we have put in place. RDE transition is what we are preparing towards migration will happen from April 2023 and of course as we did in BS6 in April 2020 even now I think we will come up with a lot of value enhancement for the customers. So it won't be a plain simple price increase. With the COVID situation globally, we did bring semiconductor supply situation back on our radar. Well it was a bit worrisome 15 days back I think fortnight things have improved, but we will continue to keep this as well as the electric vehicle aggregates on our radar. In international markets, I think in most of the markets, the volumes have dipped significantly more than 50%. And in this kind of an environment, we are focusing on maintaining our market shares in all the markets. Margins - setting margins have also been doing well. And also the channels health, we are ensuring the channel health even at the lower volume, which is extremely important when the volumes start picking up. Next slide, talking about electric mobility, so as I said, I think we completed very successful trials of the ES electric vehicle in our customers' operations, both we started with e-commerce players, but we also had FMCG players joining the bandwagon as also parcel and courier companies. And I think the product has done very, very well which is leading to even more inquiries for the product. I think we started these deliveries and as you can see in the third bullet, we have also now started pulling material from the supply chain although we had a COVID scare, I think we will start ramping up the production of this vehicle. We did showcased almost eight zero emission concepts in Auto Expo, which I'll speak about. On our Smart City Mobility Solutions business that we are put in place, we signed a definitive agreement now with the Delhi Transport Corporation, as well as Bangalore for 1,500 and 921 buses respectively, so that's around 2,421. In addition, we also got an order of 200 buses from Jammu and Srinagar. Our E-Bus fleet now has cumulatively crossed more than 6 crore, 60 million kilometers with more than 95% uptime till December. The revenue generated by this business in the nine months has been INR 260 crores and at this level of revenue, I think the business is giving good profits. On the digital businesses, I think we continue to grow the fleet edge penetration, our connected truck platform with the total vehicles crossing 337,000, which is around 135,000 customers. And the usage also has been growing consistently with - we have now almost 80% being active usage on fleet edge. Our E-dukaan which is our online marketplace, we used to sell spare parts for this. Now, we have also added consumables like diesel exhaust fluid and lubricants. And in addition to that, I think we've also started adding some of our retailers as well as mechanics as customers. So they can also order on this platform and we see a very healthy growth around almost 165% growth over the previous year. I spoke about digital lead generation during the last quarter. And we continue to push this agenda in the entire portfolio. We had almost 16% of our sales coming from leads generated through digital means. We still have a good headroom because the convergence can improve further from the level that we have reached. Next so talking about Auto Expo, I think the whole Auto Expo was making a statement of our journey towards net zero greenhouse gas emissions. So we committed by 2045, we will be the net zero greenhouse gas emissions. And as our commitment towards that, we demonstrated 14 concepts. We had hydrogen propulsion in terms of Hydrogen ICE powered tractor, Hydrogen fuel cell tractor and also Hydrogen fuel cell bus actually will see commercial application from the next quarter. So this is to meet the IOCL order that we had received last year. We also unveiled five electric vehicle concept yes of course the deliveries have started the Starbus EV which is already on the road, Ultra E.9 which is the next vehicle we see having good customer interest Magic EV which is for the last-mile intercity passenger transportation and Prima 28 ton Tipper which is a good option to decarbonize the closed-loop usage of tippers, especially in mining. We also introduced two new fuel agnostic architectures which addresses our entire range from seven to 55 tons and these two architectures can take any powertrain so ICE as well as electric in electric battery electric and then hydrogen fuel cell electric as well as H2X. We of course reviled Yodha CNG and Intra Bi-Fuel which are available for sale now commercial sale. Prima LNG Tipper which is also ready for commercial sale. And we are working with a few customers and of course premium version of our vendor. In addition to this, we also had good interactive exhibits to explain our fleet edge the connected truck platform, the Sampoorna Seva, which is a bouquet of services as also E-dukaan which also attracted good attention. I think this was a very holistic display of - not just our commitment towards net zero greenhouse gas emissions, but also hope we are driving some of the cutting edge products and services. Next slide please moving on to passenger vehicles. Next slide, here the call out is the consistent improvement in market shares and a strong growth market beating growth that continues here. And the third call out is, CNG plus EV is now almost 17% of the portfolio. And next slide is - likely to improve further once the new CNG launch is coming as well as Tiago EV launches as well. EV continues to be on a roll, we have surpassed the milestone offsetting 50,000 EV vehicles from the start and for the calendar we - have sold almost 37,000 making almost 1% of our market shares in EVs now. Next slide, from a performance perspective, 37% revenue growth, INR 300 crores almost of profits, EBITDA of 6.9%, albeit the one-offs of about 80 odd bps that you see in the EBITDA there, but EBITDA of about 1.5%. So strong performance continues in the profitability side, we should continue to see a steady improvement on this call. Next slide, in terms of drivers here again, you'll see the realizations and variable cost is now starting to improve further. So the underline contribution margin of the business is starting to improve. And investments fundamentally in the EV business with employees of building up the team that is what you see out there as well as investments in products is what you see on the D&A side. Those are the two things that brought down the fixed cost line. Let me start with the key highlights of the industry. Quarter three was a retail heavy quarter, I would say, and the industry reached its highest ever quarter in its -- highest ever retails in its history of more than 10.58 lakhs. And wholesale also grew by 23% as compared to the quarter three of last financial year. EV industry has continued to show strong growth year-on-year versus last quarter 130% growth primarily led by Tata Motors. It is notable to see in the last calendar year which was 2022, the industry pull sale was at its highest level at INR3.8 million as compared to somewhere around 2019 where it was at 3.3 million, 3.4 million level. So steep jump, I would say, nearly 25% growth as compared to where we were in 2021. As far as Tata Motors is concerned, we have been around 14% market share consistently throughout the financial year. PV, EV business has delivered an industry beating growth of 33% of PV and a very high growth for the EV also. Like the industry, we also had the highest ever quarterly retail at 139,000. For the calendar year 2022, we were the third OEM to cross the 5 lac mark. And we also, as Balaji mentioned that during the last quarter, we crossed the 50,000 milestone for EVs since its inception and in the last calendar year this create Balaji will work given it was actually 44,000, nearly 44,000 sales that we did for EVs in the last calendar year. We maintained our number one SUV position as of year-to-date, and Nexon and Punch are among the top three in the 40 plus odd SUVs that we have in the market. As far as EV sales year-to-date is concerned, for the financial year, it is at 32.4 units with a market share of 85%. Going forward, the bright spots, given that the inventory in the channel is green, there are new product launches that we have seen recently in the industry and improved supplies quarter four should be strong as far as wholesale is concerned and as compared to quarter three. And as far as EV growth is concerned, there are a lot of states who have announced progressive EV policies and that should support the EV growth in quarter four. As far as Tata Motors is concerned, the Tiago EV deliveries have commenced in this month. We have a strong order book. We had extended the introductory pricing for the first 20,000 customers, which we have already crossed in terms of bookings. We in the Auto Expo have showcased the Harrier & Safari Red # Dark, and this is going to be launched in this quarter itself. As far as BSVI Phase 2 transition is concerned, it is on track and ahead of the deadline. We on 10th January completed the acquisition of Ford plant in Sanand and we saw very strong response to the product unveils inside the Auto Expo and talk about in the next slide. Going forward as far as challenges are concerned, I think after a long duration of supply driven industry, now we are in a situation where supply has completely normalized. It is meeting the demand for all the regular models except for some popular models which are still high on waiting list. Overall inquiry to the retail time has increased for the industry. You see, this is a signal of lack of urgency among the customer that improve supplies and price increase post BSVI Phase 2. We don't see if there is any impact on the demand, something to be watched out for. In terms of actions, we are willing to go for very focused demand generation initiatives specifically in certain segments as well as hyper markets. And as far as margin is concerned, we are taking structural material cost reduction actions and we'll continue to drive other levers of margin improvement. Next slide. Giving a quick overview of what did we showcase in the Auto Expo. The theme for this Auto Expo was moving India forward to safer, smarter and greener vehicles. And we had about 12 showcases both on EV as well as ICE side. We showcase the Tiago EV, which we already launched. Harrier EV was also showcased. This is a generation two product for us. Sierra EV is slated to be launch in 2025 was also showcased. And Avinya, which is the generation three pure EV also slated to be launched by the end of 2025. These are the four products that we showcased. On the ICE portfolio side, I've already talked about the Harrier & Safari #Dark, which will come with ADAS as well as the bigger infotainment screen. This gets launched in this quarter as I said, it was a big disruption that we have showcased in the Auto Expo, which is CNG twin cylinder technology. I think this segment has always suffered with the handicap of having no boot space because it is occupied by the cylinder and it came with this very innovative idea of having this twin cylinder which releases in the space and retains in a way the boot space, which was otherwise being sacrificed in CNG. This would come in the first half of next financial year. Then we also showcase the ICE version of Curvv. If you remember in April 2022, we had showcase the EV version and along with this product we have also showcased the two TGDi engines in gasoline 1.2 and 1.5 liter, which will help us in coming with products which will be greater than 4 liter in the ICE space. So this was received very well. This is what I wanted to share. Next slide, please. Overall CV, PV cash flows draw attention to cash profit after tax strong from and therefore more than adequately funding the CapEx that we have and we gradually clawback the working capital that we lost in the first quarter, so that's what is happening. Next slide please. Investments, you can read for yourself skipping this slide, but just to guide that for the full year, the investment spending will likely to be around INR1,000 crores number no change on that one. Next slide please. Tata Motors spend and I want to take a few minutes on this because this is a disappointment for us this quarter where the GNPA increase that we saw in this portfolio is two reasons. Number one, the restructured book that is actually starting to perform pretty poorly and it's continuing to do bad and going from bad to worse, and as well as a onetime upgradation one time hit because of the RBI upgradation norms that we had. So therefore we have started to get further provisions put through in the restructured book. This is now almost 9% of the AUM of INR41,000 crores that we have and there are lot of efforts underway as you would expect to normalize the static restructured book and therefore this work is going to be pretty intense in this quarter as well. The early results are encouraging and the GNPA starting to reduce November, December and January so far has been trending where the maturity efficiencies improving to 102%. The normal book is quite comfortable. We don't see stress there and capital adequacy also is quite comfortable there. But clearly this is an area where we need to drive a lot of efforts to ensure that we get our collection efforts particularly on the restructured book. Next slide please. Overall therefore our priorities you can read for yourself, but maybe the only thing I would like to highlight is the view on demand which I'm sure a lot of you are asking as well. We remain cautiously optimistic both in JLRs as well as India and there are enough global uncertainty that we are all aware of, but we still remain optimistic and we can't be complacent and hence the work both in JLR and in India on the innovation intensity as well as activating the market and ensuring that we win our rightful place here. And of course, chip supplies are likely to improve further and therefore volumes will continue to ramp up steadily, particularly in JLR and commodity prices, we do expect stability and therefore the focus on profitable growth should deliver a strong EBIT and free cash flows in Q4 as well. So that's what I have to say. The individual priorities by businesses we have already covered. So let me not go through that. Let me start covering the questions that have come through already. We move to the question section. Okay. So maybe let's start with -- I think Ben this is coming your way, Ben or Adrian, either of you can take it. Could you let us know the terms of the extension of the revolver? How much was undrawn and drawn? Interest rates increased by and additionally given the cash cushion the company enjoys, is there a scope for optimizing the revolver debt balance further? And there's another question in terms of also about how much of a repayment are you planning given the cash position there? But you want to just wrap this all up with one response Ben. Yes, I can cover that, Balaji. So broadly the terms of the revolver are in terms of covenants and things like that. The documentation is pretty much identical to the prior revolver, the pricing margin did go up 50 basis points to 3.35%, but that's on a drawn basis and undrawn basis all we do is we pay 35% of the margin. So the annualized cost of Â£1.5 billion revolver is about Â£18 million. So it's from our perspective, it's the cheapest fire insurance you can possibly have. In terms of -- is there scope for optimizing the revolver debt balance? Well just because I think it is low cost liquidity insurance and we actually used to have a higher revolver than that, I don't really think we're considering taking down the revolver. We obviously have the net debt target that we're still working towards. But I don't really see changing the size of the revolver at this point. Thank you, Ben. Next question I think is from Chandramouli, Goldman Sachs. I think, Adrian, this is coming your way. On JLR how are we thinking about the demand outlook once we clear out our strong order backlog. Is the current hawkish interest rate environment were to continue into the next year. What is your view on the market and the next I think the same question coming into Girish later on. You take the first one, Adrian. Yes. Thanks, Balaji. So from our perspective, look our order banks historical highest to pre-supply challenges that double the level and you've seen the size of the increases that reduction. So we believe our order banks are going to stay naturally high particularly on the Range Rover but we've sold out for more than 12 months now we're not taking new orders until 24 model year and on the Range Rover Sport. Although we're rectifying Defender. So we will see a marginal reduction quarter-on-quarter, but I still believe will be this time next year talking about order banks, which are higher than ideal. So at today's level of known uncertainty in the marketplace on recession and interest rates at the levels we see in front of us going forward today I believe the challenge here continues through '23 to be supply rather than demand. We have plenty of opportunity to increase demand and stimulate that given we're only spending two-thirds of the level on fixed marketing we were 12 months, 18 months ago or so. Thank you. Thanks Adrian. Girish, just coming your way, same from Chandramouli itself on India's CVs, however we are thinking about price hikes heading into the stricter emission standards beginning '24 FY '24, is it going to be all at once or more phased in nature? So the cost increases for RD are going to be lesser as compared to what we had seen in BSVI phase-1. But even in this BSVI phase-1, I think we had taken all the increases or the price increase in, one go. I think there is only one another factor that we have to keep a watch on which is the commodity increases, which may happen again in Q1 of next financial year. And this is both these things put together we'll see what is the kind of price increase which has to be passed on. But from the point of your RD, I think it will also vary model-to-model, but mostly it will be passed out in one go. Just sticking to you, it is from Sonal Gupta, HSBC MF. LCVs, while MHCV is showing strong growth, LCV segment is showing a decline. Can you highlight the reasons? Yes, so I think it is more of ILCV which is showing a decline, which in our parlance is seven to 15 tons, but now it has gone up to seven to 18 tons. So as you rightly pointed out, MHCV is growing because of higher freight availability. I think this year, we'll see that the freight supply is actually more than the trucks, which are being put into the market and therefore fleet utilization is going up. As far as ILCV is concerned, one of the thing, which is playing out is the base effect, right. So the decline, which had happened in ILCV, was much lower than that of MHCV, number one. And number two, we also see that in ILCV one had seen a significant penetration of CNG where to some extent the diesel vehicles were also underutilized and the last portion of CNG got pushed in or bought in more so. And I think those are coming back for usage now. So it is more of a base effect. And we do expect that this year while the MHCVs may grow about 45% on a year-on-year basis for the entire year, ILCV may end up growing only 14% to 15%. I don't know whether in LCV you were also referring to the small vehicles. So let me talk about that also. As far as small vehicles are concerned, even here, I think it is the base effect which is coming in, but this continues to grow. The growth rate is tapering quarter-over-quarter, but still I think it appears that for the entire fiscal we should see a growth rate of more than 20%. Yes, thank you. Adrian, this is coming your way this is from Jinesh Gandhi yes in terms of JLR, you've talked about higher inflation and supplier claims largely related to constrained volumes. Can you talk about the quantum of these two, till what production level would you have to compensate vendors and the still - related question also chip related cost inflation is expected to start moderating in CY 2023 as supplies improve? Is that a fair assessment? And you also talked about increased SG&A spend. What are the targeted levels to which you want to increase SG&A spend so maybe three distinct questions there? Yes okay, so let me talk them in order of they were asked, so look the inflation claims and the reason for supply claims. There is, multiple reasons below that and in terms of the level that we expect to be normal. If you go back to FY '21 and - on previous calls, I've referred to FY '21 a lot before supply constraint. A normal level for us, we still believe will be the 120,000 units, plus a quarter 40,000 plus a month 500,000 a year. And once we get towards that level will be clear how much more we can push it beyond that. So for a normal environment and our suppliers set up for normal environment. We would need to build wholesale 40,000 plus units a month, and we're just above 26,000, 27,000 at the moment. So there's a long way from today to normal, but we do believe that increasingly quarter-over-quarter. We will in calendar year 2023 move towards that normal level until we get 40,000 to that level. A number of the reasons for the claims in particular, the utilization of supplier factories which are within this number will still be there. Once we get to that level, if we have no unnatural requirement to go buy parts outside of normal channels that's eliminated then again we will eliminate another course scored in our premium parts or chip supply from - the vendors, the brokers that will be eliminated as well. However, we will still be left with commodity prices at the moment, they are looking to be heading more aggressive against us and they will still be there and a lot of our contracts with suppliers have a pass-through on commodity costs. So there will be some level, that's the only problem we have. We'll probably, won't be talking about it by the way, but it's wrapped up within that 200 plus million a month, including some more on utilities lower than it was and including the wage the wage demands that, which hopefully will come down with the interest rate pressures that going to be pull out.0 From an SG&A perspective, we will increase spend, but revenue will increase as well. So think about SG&A increasing commensurate with improvements in revenue. It's just about 9% of revenue today, maybe a - shade, over think about that being a broad guideline going forward on SG&A. So we won't be spending above our entitlement to spend, but as revenue grows, we'll need to stimulate some of that demand both of those datasets would increase. Thank you. I understand some of my questions are - it's a bit muffled I'll try - my level best to increase my volume. Next question comes from Rakesh Kumar, Adrian, back to you again with PHEV incentives coming down in Europe, do you see risk to JLR compliance with CAFE targets and given the JLR's FCF generation in third quarter and seasonally strong fourth quarter is there FCF breakeven outlook for FY '23 conservatives and I'll separately, pick up the - Tata's battery manufacturing plants in Europe? Yes, okay so if I take the PHEV one before. Look, we've been very consistent on PHEV volumes over the last several quarters around 11%. We obviously monitor this really carefully, when I look at the order bank that we've referenced the PHEV orders now - order bank actually slightly richer than that at the moment, so up to 14%. So there is no indication at this point in time that any customer incentive changes on PHEV as having a sizable impact on the orders that we actually receive nothing at this point in time. So I'd say what we see today no, to the first one. There is no impact on PHEVs. We don't expect to be non-compliant in Europe over this next phase either. The strong JLR cash flow in the third quarter. I think if we go back to the page that we talked to earlier, we are expecting a strong cash flow in quarter four. The underlying cash should be broadly at the level that we saw in Q3 maybe around the Â£200 million. I'm hopeful cash from operations will increase a bit with the increased volume. Our investments are going to increase as well as we've said. So maybe those two will balance out. We're only three weeks through the quarter. There's 10 weeks to go on the supply obviously still be in fragile things can change. But that's what I see today broadly speaking, underlying cash been similar if not a shade higher in Q4 over Q3. So working capital was a big build back this quarter Â£300 million that probably is going to fall a little. It really depends on how many units we actually built in the March, the mid-February through end of March period, but it's likely to be less than the Â£306 million. So we see - in total of the total cash to be slightly lower in Q4 even though the volumes are higher because that working capital point. But we do believe that's going to drive us through breakeven maybe up to Â£100 million in total for the full year. Thanks, Adrian. On the battery plants for Tata's in Europe, I think as we had mentioned earlier as well, this will be a Tata Sons entity that we're investing where you have JLR and Tata Motors as two anchor customers and locations, India, and Europe. Obviously at this point in time - this is all that I can share. And as and when we are ready to announce more, we will talk about that? Okay, this question is actually coming on popular demand and therefore, Shailesh is coming your way. Considering the strong EV order book, what is the rationale for the price cut in Nexon variant that we saw two, three days back? And what's your take on the brand impact for the price cut? And is it supported by cost reductions? Multiple people have asked it in different ways, but this question is non-stop. Over to you. So the call on price cut has been taken after â holistic, consideration taken into account multiple factors. One is that we have a future growth aspiration as far as Nexon EV is concerned and with the improving capacity and supply, I think this was one be consideration. Also the visibility of underlying structural costs and in which we have been able to reduce over the last two to three years effort of the deeper localization that we have been working on. There is also an added factor of - depending PLI benefits also that we look relative price positioning of our entire EV portfolio and mostly importantly, keeping the value proposition fiercely strong in the changing competitive landscape. So these were the four, five factors I would say that has really gone behind this. As far as brand is concerned, I think Nexon brand enjoys a very strong referral from its large customer base of 40,000 plus now. And in terms of its value proposition, it is the best in terms of compelling mix of our best tech features, premium and cable experience, multiple range options. I think the revised pricing action with improved range only makes it higher on consideration and more desirable for our customers, so I think this is the thought which is gone behind this. Yes thanks, Shailesh. There is question on ADRs, which I thought we expect, but if I just pick it up, why did Tata Motor decide to delist ADRs, is the cost of complying versus pressure on shares on account of shareholders who don't want to invest directly in India, management thoughts. We had explained that the original purpose with which ADRs were listed, I think is probably now not relevant anymore. And with the Indian market getting deeper and wider, there is no constraint on fund, raise and also all our bond issuances anyway we don't need the ADRs to be listed there to do that. And at the same time compliances are getting more complicated and therefore, we just decide - the risk reward equation one looked at it then make sense for us to continue as part of simplification, we have not all that's the background to it. They stand delisted as of yesterday. What is now the net auto debt deleveraging timeline for Tata Motors? I thought I already covered it. Maybe I'll just talk about the second line. How does the listing of Tata Technologies help towards that, we have announced our intention. It's now our Tata Technologies Board position and therefore we will be working with them closely. Question from Gunjan. Could you talk about the impact of RD for both CV and PV, I think what Girish have already covered that piece. Also an update on the discounting trends in CV industry, update on the Tiago EV order book Shailesh and we already talked about the price cut in Nexon. Why don't you finish that and then I'll go to JLR on the VME trend? Yes, so I think on the discounting as we have been speaking about it for the medium and heavies and intermediate and light commercial vehicles. We have started pulling back the discounts from the month of September and we see a good impact of that flowing into our results for Q3. And we will continue to be on this path even in Q4 to bring down the discount and also bring more transparency in the systems. As far as small commercial vehicles are concerned I think this discount reduction in Germany - we have started even earlier right from Q1 of this year. So we will continue that as well, and ensure that finally it - helps us build margins in each of the product mix. Shailesh? As far as Tiago EV order book is concerned, I already mentioned that we crossed 20,000 which was the size which we had kept for the introductory price so that is the status as of now. As far as delivery is concerned, we started the deliveries - sorry we started the supplies I would say last month itself. And this month, we are ramping up and I think we have kept a target that we should always keep the waiting period within six months and that will be the intention. We have kept some level of fungibility between the electric vehicle models that we have. So we will be able to temporary ramp up to ensure that the waiting period is kept within a period which is acceptable to the customers. Thanks Shailesh. Adrian, the third point is coming your way - in JLR how do we see the VME trending given the macro and aggressive pricing from EV OEMs. I think Morgan Stanley also had a question on this one? Yes, thanks Balaji look we're not seeing any signs point in time of lifts in VME even though I can understand the sentiment behind the question. I think in the environment we're in. While we still have had demand and orders increasing above supply that will to continue to be the place and VME is mixed by region and by nameplates, of course. And with the bias that we have, and the customer orders we have on Range Rover, Range Rover Sport, Defender North America and China they are the big buyers as within the data today. You know the Armstrong VME is 0%, 0%, 0%, 0% and 0% so with this level of order intake and the buyers to those products and - instability within the production and supply pipelines. We will continue to be very, very low. There will be a point in time where that stuff will start to lift. And so another question you asked about what normal is? If normal 40,000 units a month plus for us, which likely is I think it's reasonable to assume at this point will be passing more, but there non-big three units to the other regions. And then VME will start to gradually lift to 2%, 2.5% level at some point we're not seeing any sign of that within the data we have today. Thank you. Next question I move to Raghunathan from Emkay. The other questions have been answered, but the one that is new, which is on the EV/PV subsidiary from when would you get PLI scheme benefits. And are you currently accounting, how are, you accounting these incentive as part of the PLI benefits itself is concerned the key is to ensure that the domestic value addition norms are met and we are getting our vehicles accordingly certified. And at this point and we will have to file when the financial year is over, then you file for the PLI benefits and you'll get it subsequently. Given the fluidity of the situation at this point in time and we are going through the process and the first time that we will be filing this year currently no accrual is being done on these incentives and once we get one round of things coming through then we'll be in a position to review it on that one. Okay. We already explained that one - just capacity, I think Hitesh Goel, CLSA. What is the domestic passenger vehicle capacity currently and when is the Ford capacity coming on stream? Yes, so as far as our capacity is concerned, we have been now at around 50,000 per month. We have further the ability to debottleneck the capacities in our two plants which is in Pune and Sanand which is the existing facility not the Ford one, by an additional 10% to 15%. And we are targeting to operationalize the Ford plant in 12 to 18 months timing. Yes, thank you. I think there is a question from Jinesh on passenger vehicle, a sharp drop in other expenses on a quarter-on-quarter basis, was there any one-offs? I think most of it is linked to just cost facing across quarters nothing to read in it beyond routine stuff there. Then other one is in terms of when can you expect to see these exciting products that we were displayed in Auto Expo? Yes, so none of these products were concepts, these are products all going to come into two, three years' timeline. We already mentioned about that Harrier EV is going to come in 2024. Sierra and Avinya will come in 2025. These were the three electric vehicle products that we had shown, Tiago is already launched that was the fourth one. As far as ICE products are concerned, Curvv is also going to come in 2024. Then the CNG models which were being similar model of Punch and Altroz already mentioned earlier that it's going to come in the first half of the next financial year, those are [indiscernible]. Thank you, Ben. The next question is from [Jemma]. This is on -- can you confirm if you still be looking to use cash to repay the 2023 maturities versus refinancing through the markets and the breakeven guidance implies 300 million HCF for the last quarter, which I think Adrian has already addressed that. So Ben, can to take the first piece? Yes, on the refinancing, so I think the default or base plan is that we had an expectation of circa Â£750 million, Â£800 million of cash flow in the second half which Adrian already talked about and that would be sufficient to cover on the two bonds we have maturing in February and March for Â£800 million equivalent and it's probably also worth mentioning that in June of this year, we had a Â£600 million equivalent on China bank loan due to mature. And actually we signed an agreement in January to extend that for three years from January of this year. Some maturing the facility will end in January 2026 through our annual reviews. So we've at least pushed out the maturity until January of 2024. Thanks Ben. The next set of questions coming in from Kapil Singh. First one to you Shailesh Tiago EV, what's the percentage of first-time buyers that you're seeing in the order book? You know first time buyers roughly 25% to 30% is what we are seeing who are buying a car, for the first time that's substantial in electric, but we are not never see this mostly the people had worked buying this as a second or the third car. Although a high percentage was using this as the only car and also the primary car. It's first time buyers we have seen significant size of buyers. And related question is this gross margin dilutive for the PV business and the initial stages. Yes. But after that it will start trending towards the margins of the main medical will be making. But that's over a period of time. But that's part of the planning that we have for the overall portfolio. I think in M&HCV Cargo we have seen some softening but I can probably attribute that to post festive season drop in fret, so future expectations still remains strong. In tippers the Sentiment Index has improved marginally. That is also expected because the previous one was during monsoons were the tipper usage is low. In ILCV it has dipped a bit again because of post season post festive season impact and for small commercial vehicles it remains quite stable. Yes. And linked to that question from [Rajesh Iyannar]. In the medium term how is fuel mix change happening as far as your opinion between CNG, EV adoption bus, ICVM, how does it -- how should one think about it. So I think as we go ahead the pathway is going to be through CNG or LNG. As far as CNG penetration is concerned, currently I think the bigger anxiety is the volatility in CNG prices with the CNG prices actually went up very fast. So that is a bigger anxiety in the minds of the customers with actions that the government has taken, and once the CNG prices do stabilize at this level or a bit lower level CNG vehicles do have an inherent TCO advantage. So one will see a fair bit of penetration happening again in ILCV and SCV segments. As far as long range is concerned, yes, I think two customers will start coming in because I think the OEMs have addressed the range issue. So we have some trucks which we launched which can run for 1,000 kilometers on CNG. As far as LNG is concerned, I think this depends on availability of filling infrastructure, otherwise I think we are ready with the product. In terms of EV, I think one we clearly see higher penetration in buses first because of the government push. And one will also see a good penetration happening in the last mile distribution due to the pull from companies who are having their own net zero greenhouse gas emission commitments. My view is that, see if we have to take a view by the end of this decade, the mix will be around 25% to 30% for CNG, 25% to 30% for EV and rest would be gasoline, but the timing of ex-fuel, because that is the direction investing are going. Diesel will significantly come down below 5%. So, that's probably the outlook. Thank you. The question from Binay Singh, Morgan Stanley. We seeing price cuts in EVs in China and other regions, do you see that as a risk to ICE pricing for the entry level cars? As well as -- as JRR launches in EVs as well, that's another angle as well? No, I'm saying, with the price cuts that we're seeing in China, do you see that as a risk to the ICE pricing for Jaguar entry in mid and large, and EV profitability as JLR launches it's EVs in 2024? Yes. No, we don't at this point actually recognized another a lot of our smaller units, smaller value transacting price units in China are generated within China within the joint venture. We don't see any risk at this point in time or any evidence of this until weakened prices for any of our imported, was in fact, the VME reference back to the previous question, the average VME last quarter, which will be the first sign of that of course, the average VME last quarter was as low as 0.8% across all units imported into China. So we've seen very, very low levels and strong demand at this point. Thanks. And on the PV side we already answered the question on the EV price cuts that have happened, but another angle to it, with the raw material cost index not coming down, how do you see the EV profitability going forward. I think we need to keep in mind that one, there is a relative premium that a customer is ready to pay for EV versus ICE and that is about 25% to 30%. ICE prices are going to go up, so therefore it will support the higher price for EVs, while the secular trend of the competence for EVs will keep on coming down, there has been a temporary volatility that we have seen in the battery prices, which was very steep last calendar year. But also already has started moderating. This year we have more long-term view of the battery prices, rest of the companies are coming down also as the scale is increasing. So there will be short-term pressure on the cost because of these temporary volatilities but we have to focus on driving the scale because that is what is going to bring down the cost further as we are driving the deeper localization. You also need to remember that the next three, four years will be the benefit of PLI also which we indicated. And so I think keeping all these in mind, it is going to be in mid-term very beneficial from a mix perspective. Thanks Shailesh. I think with that we are done with all the questions that I've been asked in terms of just the team rather than the names. So there is anything else that you want us to answer, I would suggest reach out with the Investor Relations team and will be more than happy to respond to you. So thanks a lot for taking the time to attend the session. We hope you found it informative and look forward to catching up with you soon. Thank you.
EarningCall_995	Good day, and welcome to Match Group Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. Thank you, operator, and good morning, everyone. Today's call will be led by CEO, Bernard Kim; and President and CFO, Gary Swidler. They'll make a few brief remarks, and then we'll open it up for questions. Before we start, I need to remind everyone that during this call, we may discuss our outlook and future performance. These forward-looking statements may be preceded by words such as we expect, we believe, we anticipate or similar statements. These statements are subject to risks and uncertainties, and our actual results could differ materially from the views expressed today. Some of these risks have been set forth in our earnings release and our periodic reports filed with the SEC. Thanks, Tanny. Good morning, everyone, and thank you for joining today's call. As we look back on 2022 and our Q4 results, it's clear that the year was challenging and our performance fell short of our expectations. But this is an organization that is not okay with missing our goals. And while the business continues to exhibit strong fundamentals and financial discipline, we have taken decisive steps, including restructuring for increased accountability and collaboration and recruiting key talent to set us up for long-term growth and maximize profitability. As I've previously shared during my first few months on the job, I went on an intense listening tour across Match Group. I've spoken to leaders and employees from all layers across the organization as well as users across our portfolio to identify opportunities and pain points. One thing that was very obvious is that this organization welcomes change and embraces the cultural shift that is required to drive shareholder value, while serving our mission to create real and meaningful connections every day. The changes we made at Tinder have allowed it to quickly regain footing and prioritize product momentum. The results are evident in Tinder's 2023 roadmap and improved execution. No other brand in the category has the virality, the reach and the scale that Tinder has. While it might take a few quarters, I'm confident by shoring up the talent there and judiciously investing in the team and the brand that we're going to accelerate Tinder's momentum and get us back to the financial performance that we all expect. I remain the Interim CEO of Tinder and key senior leaders continue to report directly to me. I'm encouraged by the progress that Tinder has made both culturally and in terms of execution. In fact, in the second half of the year, Tinder saw a significant increase in the number of product features it delivered compared to the first half of 2022. I'm also very excited for the new marketing campaign which launches later in Q1. This will allow us to begin shifting and establishing Tinder's brand story. After Tinder, we looked at the rest of the organization. From every conversation I had with our brand leaders, it became evident that Match Group had historically operated in a very siloed way. I'm a big believer that by increasing transparency across the organization, you increase accountability, while at the same time adding a healthy dose of friendly competition to the company's culture. That's why we announced last week that we revamped our leadership structure to create a more streamlined organization. With a focus on setting up the right team for the future, we restructured the management team around leaders with extensive knowledge and experience supplemented with new talent that brings a renewed focus on innovation and growth. Hinge remains a standout in our portfolio, guided by Justin McLeod's founder-led mentality and mission-focused vision for the brand. Hinge continued its highly successful international expansion efforts becoming one of the top 3 most downloaded dating apps across English speaking DACH and Nordic countries in December. It will also launch its new premium subscription tier HingeX to all users by the end of February. I've been impressed with Hinge's ability to create a differentiated, powerful dating app that resonates with so many singles across generations, and now expand their monetization by offering two subscription tiers that give users more control over how they date. Hinge is still very early in its international expansion and monetization efforts, but I believe there is a lot of upside as we continue to invest in the brand. I'm excited about our opportunities within Asia and the strong focus we have now in the region. We needed a product focused leader on the ground in the market, who knows how to engage and inspire teams. So I promoted Malgosia Green from Plenty of Fish to a newly created role as CEO of Match Group Asia. Malgosia will be moving to Asia to work directly with Pairs and Hyperconnect to recapture growth and enhance profitability, as well as drive the go-to-market strategies for Hinge and Tinder across the region. Finally, Evergreen & Emerging Brands which consist of Match, Meetic, Plenty of Fish, OkCupid and our emerging brands like BLK, Chispa, and The League will be managed together for the first time. Hesam Hosseini will be taking on a newly created role as CEO of Evergreen & Emerging Brands. Formerly, the CEO of Match and Affinity brands, Hesam brings an unmatched level of experience to this combined global team. Combining our evergreen brands under a shared direction will enable us to streamline operations and reduce duplicative work. It will also allow us to leverage our institutional knowledge to drive growth with attractive margins across our emerging brands, where we see significant untapped potential. Lastly, we're excited to welcome Will Wu as our new CTO, who will work directly with all our brands to build upon Match Group's history of transformative innovation by continuing to incubate, launch and grow entirely new experiences for our users. Will and I have known each other for a long time, and he has had a highly influential impact on social media products, as we know them today. He has been able to build some of the most engaging user experiences for Millennials and Gen Z. And his passion and dedication will be a great fit for the culture at Match Group. I know the team here is going to welcome his expertise, creativity, work ethic and humility. And finally, through all of this, I would be remiss if I didn't take a moment to thank Gary. He has been instrumental in not only my onboarding, but has helped to lead with strength and clarity even amid a very challenging operating backdrop. As such, I'm pleased to appoint Gary as President and CFO of Match Group, a clear demonstration in the trust I have in him and the value we put in his ability to drive our shared vision forward. As we begin a new year, I'm energized and ready to take on this next chapter in Match Group's history. We are navigating the current macroeconomic challenges, and we have a strong team and clear vision to execute upon. I look forward to sharing more on our efforts in future calls. Thanks, BK. I feel great about my role and the other org changes we've made and think the hiring of Will Wu will be terrific. I'm very much looking forward to working with him and to continuing to see the company build its momentum. Now let me get into the numbers. As BK said, while not at the standards we hold ourselves to, our Q4 2022 total revenue was in line, and our adjusted operating income exceeded the expectations that we set forth in our last earnings call. Total revenue was $786 million, down 2% year-over-year. FX was a notable headwind once again. Our total revenue would have been $846 million, up 5% year-over-year on an FX-neutral basis. The FX headwind was less than we expected when we provided our outlook on our November earnings call, but that was offset by slightly more business weakness than we had forecasted primarily in Europe. Our direct revenue was down 2% year-over-year. It grew 2% year-over-year in the Americas with growth at Tinder, Hinge, BLK and Chispa but declines at the Evergreen Brands, which include Match, Plenty of Fish and OkCupid. Direct revenue declined 4% year-over-year in Europe but was up 8% on an FX-neutral basis driven by Tinder and Hinge with weakness at Meetic. Direct revenue declined 9% year-over-year in APAC and Other, but was up 9% on an FX-neutral basis driven by Tinder. Total payers were 16.1 million, a decrease of 1% year-over-year. Payers were down 2% year-over-year in the Americas, down 4% in Europe and up 6% in APAC and Other. Tinder payers globally were up 3% year-over-year, while All Other Brands were down 8% in aggregate. Q4 RPP was down 1% year-over-year at $16. RPP was up 4% in the Americas driven primarily by higher average prices paid for subscriptions at Tinder and Hinge. RPP was up 1% year-over-year in Europe, where contributions from Tinder and Hinge were offset by the strength of the U.S. dollar compared to the euro and the British pound. RPP was down 14% year-over-year in APAC and Other due to the strength of the dollar relative to the yen and the Turkish lira. On an FX-neutral basis, Q4 RPP was up 7% year-over-year company-wide, up 14% in Europe and up 3% in APAC and Other. Tinder overall performed in line with our expectations in the quarter, delivering direct revenue of $444 million, flat year-over-year, up 8% on an FX-neutral basis. Tinder added just under 300,000 payers to just over 10.8 million. Tinder saw a 3% RPP decline year-over-year in the quarter, which again highlights the impact of FX. Tinder RPP was up 5% year-over-year on an FX-neutral basis. All Other Brands' direct revenue was down 5% year-over-year in Q4 driven by an 8% payer decline, partially offset by 3% RPP growth. Hinge, BLK and Chispa continue to drive growth with Hinge up nearly 30% year-over-year. Our Evergreen & Emerging Brands declined 9% year-over-year in terms of direct revenue, and our Asian brands saw direct revenue declined 16% year-over-year, in large part due to FX. We saw stability in Pairs and Hyperconnect direct revenue on a local currency basis, but we have yet to see a rebound in the Japanese market despite improvement in the COVID situation there. Indirect revenue was $15 million in the quarter, down 18% year-over-year, but similar in dollar terms to the other quarters of 2022. Q4 2021 was particularly strong for indirect revenue. Operating income was $107 million in Q4, a 54% year-over-year decrease for a margin of 14%. Operating income was impacted by $102 million in impairment charges on intangibles primarily related to our Meetic and Hyperconnect businesses. The charges stem from declining financial performance at Meetic as well as the use of higher discount rates on Hyperconnect's long-range forecasts due to the higher interest rate environment and higher market volatility overall. Our Hyperconnect business outlook did not change meaningfully during the quarter. Adjusted operating income was $286 million, down 2% year-over-year, representing a margin of 36%. Q4 AOI and margin strength reflected our nimbleness on costs, as we reduced marketing spend and rationalized some bonus and overhead costs. Excluding the impact of the $102 million of impairment charges, overall expenses, including SBC expense, were essentially flat year-over-year in Q4. Cost of revenue grew 1% year-over-year and represented 30% of total revenue, up 1 point year-over-year driven by App Store fees and hosting costs. Selling and marketing spend decreased $12 million or 9% year-over-year, the third consecutive quarter where we've seen a year-over-year reduction as we continue to reduce marketing spend at our lower-growth brands and to exercise ROI discipline overall. Selling and marketing spend was down 1 point year-over-year as a percentage of total revenue to 16%. G&A expense was flat year-over-year and steady at 14% of revenue, reflecting lower legal fees but higher compensation expense. Product development costs grew 21% year-over-year and were 10% of revenue primarily reflecting increased engineering headcount at Tinder and Hinge. Our gross leverage was 3.4x trailing adjusted operating income, and net leverage was 2.9x at the end of Q4. We ended the quarter with $581 million of cash, cash equivalents and short-term investments on hand. We did not repurchase any shares in the quarter as we decide to allow our cash balance to build slightly. And we are concerned by the high volatility and weakness in the equity markets generally in Q4, which drove ours and many other stock prices down throughout the quarter. With our cash balance now strong, we will reconsider repurchases once the window reopens. We currently have 5.3 million shares remaining under our buyback authorization. When we look at our history as a public company, 2022 stands out as a year we did not hit our growth targets, delivering 7% top line and 6% AOI growth, respectively. Some of the miss was due to macro factors, including consumer weakness and particularly FX. On an FX-neutral basis, our top line growth was 14% in 2022. But our business overall and Tinder, in particular, decelerated as the year went on. And product execution was not where we expected to be, especially in the first half of the year. For the full year 2022, Tinder direct revenue was approximately $1.8 billion. Hinge delivered $284 million in direct revenue, slightly below our $300 million expectation due primarily to our decision to delay the rollout of HingeX. Evergreen & Emerging had $730 million in direct revenue, and our Asia brands delivered $322 million in direct revenue. Fortunately, we made critical corrective changes in the middle of the year, which have begun delivering results. It's still very early, and it will require some patience through 2023 to see the momentum build, but we're increasingly confident we're on course to deliver results consistent with our standards. For Q1 '23, we expect total revenue for Match Group of $790 million to $800 million, roughly flat year-over-year. For Tinder, we expect direct revenue to increase slightly year-over-year. We expect Hinge to deliver Q1 year-over-year direct revenue growth of over 25% driven by continued strong performance in its core English-speaking markets, the introduction of the two new pricing tiers and continued European expansion. The early testing of the new Hinge tiers is going well with take rate consistent with our expectations, higher conversion impact than we expected and no notable cannibalization of Ã la carte revenue. We expect the tiers to be globally rolled out by the end of February. We expect our Evergreen & Emerging Brands' direct revenue to be down under 10% year-over-year in aggregate, and our Asian brands to decline just under 15% driven in large part by FX. We expect Q1 indirect revenue to be down close to 10% year-over-year, given ad budgets broadly are being slashed due to macroeconomic concerns. We expect adjusted operating income of $250 million to $255 million in Q1, representing margin of about 32% at the midpoint of the ranges. IAP fees continue to be a headwind and will also now include an $8 million payment into the Google litigation escrow, which was a cost we didn't incur last Q1. We expect marketing spend to be up year-over-year at Tinder and Hinge with reductions elsewhere in the portfolio. We expect to incur $3 million to $5 million of severance and similar costs in Q1 related to our personnel reductions and cost savings initiatives. Macroeconomic factors are impacting our business, consistent with our expectations thus far in early 2023. That, coupled with improved product execution at our Tinder brand, gives us increasing confidence that Match Group can deliver 5% to 10% year-over-year revenue growth in 2023. We believe Tinder is positioned to deliver a similar range of growth. We also remain confident that Hinge's momentum will lead it to delivering nearly $400 million of direct revenue in 2023, approximately $100 million more than in 2022. We expect the company overall as well as Tinder to have accelerating year-over-year revenue growth as we move through 2023 driven by improved product execution leading to improved revenue momentum at Tinder. In terms of AOI, we expect improving year-over-year margins in the back half of the year as the benefits of our cost savings initiatives take hold and Tinder top line growth accelerates. Our cost savings initiatives are focused on rightsizing headcount and reducing overhead costs, including office expenses and professional fees. We expect to reduce our global workforce by approximately 8% in aggregate. We've already reduced roles in the U.S. In other countries, this process is ongoing. We expect to incur $6 million of severance and similar costs related to our cost savings initiatives in 2023. We're also reallocating marketing spend from lower-growth businesses to higher-growth ones in 2023 to keep overall spend close to flat. Our financial outlook reflects no change to current App Store policies, though we believe that the stores are moving to comply with aspects of the Digital Markets Act that is now in effect in Europe. The stores are also facing continued legal setbacks and restrictions in other markets globally such as India. We continue to expect changes in the App Store ecosystem, but the timing and shape of the changes is challenging to predict. We expect to be a U.S. Federal cash taxpayer in 2023. The precise amount we will pay depends in part on our stock price, which affects the compensation expense deductions we can take. We currently expect to convert low 70s percent of our AOI into free cash flow in 2023. We expect 2023 SBC expense of $230 million to $250 million, with the year-over-year increase driven by previous hiring as well as our desire to remain competitive on compensation. We've made a lot of critical changes since BK arrived mid last year, including revamping the Tinder team, streamlining our organizational structure, implementing cost savings initiatives and hiring critical new talent. These changes are just beginning to pay dividends. We expect it to take a little time in the first half of 2023 to build momentum but are confident that improved product momentum and our financial discipline position us for much stronger growth and profitability in the back half of the year as well as longer term. I want to ask about Tinder, and you spent a good amount of time in the investor letter talking about the Tinder product roadmap. And maybe you could just dig in a little bit deeper on that. And you mentioned you're starting to execute on that roadmap, maybe some kind of practical examples of that and highlight where we are and how much there is left to get through this year? And then second question on Tinder. And you talked about the three components of expanding the core experience of deeper engagement, broadening monetization and then optimization. You highlighted that optimization is going to drive 2/3 of Tinder's revenue growth in 2023. Just can you expand on that a little bit, why that's happening? And how we can expect the other two components to contribute to revenue growth over time? Thanks, Ygal. I can take that one. It's been pretty clear when I joined last May that I wasn't happy with the state of the Tinder roadmap. So we moved quickly, and we made changes to the team. And we pushed really hard over the next six months thinking about our product roadmap and where we want to take the business. It was important to lock a roadmap that everyone was aligned on. We focused on two key areas: experience for our daters on our platform and future areas for monetization. As we are laying out the product roadmap, we actually found some problems in the foundation that we had to prioritize and fix. So the team rallied quickly on focusing on that. Our emphasis has always been on the health of our ecosystem, given that these foundational improvements will lead to better user experience, enable further monetization. Unfortunately, we head into 2023 with less momentum than what we would like. But as we build momentum in the first half of the year, it sets us up for a second half of the year for accelerated growth. The chart that we included in the letter actually shows a challenging environment that Tinder was facing. Ã la carte revenue was under significant pressure, given the macro environment. But I'm really proud of the way that the team moved really quickly and coming together with solutions to offset this weakness. In fact, they did it in three ways. Number one, they changed the merchandising approach around ALC, which was no longer working in this macro environment. Number two, they rolled out Primetime Boost. And number three, they rolled out a new optimization called Compound Boost, which collectively helped offset a good amount of the ALC weakness. I've been impressed with how quickly the team has worked together to produce results. This wouldn't have been possible with the team six months ago. The other big priority that I've been making sure the team is focused on is a clear and detailed product roadmap for 2023. For the first time ever, we've published that in the letter alongside delivery dates. I'm holding myself and the Tinder team accountable for delivery of that product roadmap. By its nature, when we have a roadmap like this, we have to test and iterate all these features. Some will be optimized over time, and some will be more successful than we expect. In general, once we roll them out, it will take some time to translate into visible payer and revenue metrics. I'm confident that it's a strong roadmap and that this Tinder team is going to execute on it. This will lead to wins that will be visible in financial results and metrics in the back half of the year. A big initiative for Tinder is to cater to Gen Z through a series of initiatives around authentic content and self-expression. We have some really creative and interesting features that we're currently concepting and we plan to integrate into Tinder. We'll be talking more about that as the year goes on. Another place that we think Tinder can really change the game is by leveraging machine learning to enhance recommendations. We're already using machine learning for safety and moderation. And that technology is really improving, and I think it will be very beneficial when applied to [rest]. We have resources inside the group that we can leverage to build this technology out, and it's something that we're working on in 2023. Not only do we have these resources at Tinder, but Hyperconnect also has a significant team of machine learning talent that we think we can utilize to move faster in this area. You asked about pricing optimization, and I believe there's a lot of low-hanging fruit around optimizing pricing. We haven't been focused in this area for a long time, and we recently put our best talent from Match Group against these initiatives. We have a lot of confidence that we can achieve significant revenue improvements by tackling this area. This actually reduces the risk and improves our chances of delivering our financial targets. So I feel really good about the fact that 2/3 of Tinder's 2023 revenue growth is delivered by just product pricing and product optimizations. Lastly, we plan on broadening monetization to meaningfully unlock power users at Tinder. This is an area that we see a lot of opportunity. Last year, we acquired The League, which has a $1,000 weekly subscription. And we think there could be a demand for a high-price tier at Tinder, which is the largest pool of daters on the planet. We're in the very early stages of testing the appetite for an ultra-premium subscription tier at Tinder. It's too early to say when and if we're actually going to launch this, but the possibilities are super intriguing. Great. You mentioned in the letter that the year is off to a solid start performance-wise. Just wondering if you could expand on those comments and what you're seeing specifically? And is the improvement broad-based or specific to some brands or regions? And then just maybe following up on the last question, what are some of the KPIs or trends that you're seeing internally that give you confidence in Tinder reaccelerating to mid-teens revenue growth by the end of the year? Thanks, Lauren. Why don't I try to take that one? So when we met on our last earnings call, we told you that we are seeing significant pressure on our ALC revenue, which was really driven by macro factors, particularly younger consumers that were feeling pressure from the economic environment. And that was especially acute at our Tinder brand where we have a lot of younger consumers. That impacted our Q4 performance, and it was also really a potential overhang on our 2023 performance as well. But since we met last time, a couple of things have happened. The first one, which BK mentioned, was that Tinder put out a lot of initiatives to reverse the trends in ALC. And you can see from the chart that's in the letter, they did succeed in reversing a lot of the decline we are seeing in ALC, not all of it, but a significant portion. And the other thing, and this is very important over the last few months is that we've really seen stability in our ALC trends. And so we have not seen further degradation, which was a risk when we spoke last time. I'd also want to add that we haven't seen any impact on our subscription revenue trends. That's Tinder and business-wide. I think our subscription trends remain extremely resilient to any economic pressure. But it's ALC where we've been impacted by some of the macro things going on. And I would also say that, as you know, dating has a bit of a peak season that starts at the end of December and runs through Valentine's Day. And so we watch the peak season, which tends to be a good harbinger of what's coming in Q1 and for the rest of the year. And what we've seen is really stability in those trends, kind of the typical pop that we see in trends in the peak season, we did see that this year as well, which tells us that the macro trends have not led to worsening consumer demand. They've not put incremental pressure on the consumer demand in the ALC. So that's been particularly encouraging and gives us more confidence in our 2023 outlook than we had last time. So just to summarize, while we see pressure on ALC and in fact, we see ALC revenue down year-over-year at Tinder, in particular, we don't think those trends are worsening. And so with stable ALC trends and with subscription revenue being resilient, that gives us that confidence in the outlook for 2023 and the fact that we think as the year progresses, we'll start to see improved momentum as well. And I would tell you that the peak season trends that we're seeing are not just a Tinder phenomenon, but we're seeing good stability of peak season trends across all of our businesses. I would also tell you that we think that the Americas business is pretty strong. It's a little bit weaker in Europe and certainly was in the fourth quarter, but in general, we think Europe is a little bit weaker than the Americas. In terms of the Tinder reacceleration as the year goes on, as we've talked about a few times now, we're very clear that the problem was largely a product execution one. And we're really pleased with the strides the team has made over the last six months in improving on product execution. And BK mentioned the Tinder team has a clear and strong product roadmap for 2023, and we see them executing on it. We see them shipping product and moving forward. The other thing, which BK also alluded to, is that we have more confidence in Tinder achieving its goals in 2023 from a financial perspective and accelerating its momentum to achieve that double-digit growth by Q4 because the roadmap is not dependent on one or two big swing initiative that we have to achieve. Rather, it's a series and a large number of smaller initiatives that really contribute to the growth. So that really does reduce the risk that we see in achieving the financial objectives for the year. And BK specifically pointed out that 2/3 of the revenue growth for the year for Tinder are coming from optimizations, which we have a high confidence in, strong line of sight to what we've done before. And we think they're highly achievable now that we've got the right team focused on those optimizations. So while there's a lot of work still left to be done and it's really early in the year, we don't want to get ahead of ourselves. I feel like we have a strong line of sight to getting back to that mid-teens growth by Q4. Great. A couple on Tinder. In terms of the fourth quarter payer number decline of 300,000 quarter-on-quarter, just curious if you could talk a bit more about the drivers there. And then given the payer definition, just curious if those payers were the ones that only bought Ã la carte previously and stopped for a large reason for the decline? Sure. Let me take that one as well. So the fourth quarter Tinder's payer number was really affected by a couple of things, which I kind of just alluded to. The first is the overall macro weakness and the pressure on the consumer, the younger consumer, consumers with less discretionary income, which is definitely impacting Tinder and the Tinder payer numbers generally as well as the product weakness and lack of product momentum that Tinder did not achieve in Q -- in 2022. And so that manifests itself throughout the year and led to a weaker Q3 and Q4 from a Tinder payer perspective as well as a Tinder revenue growth perspective. And so those are really the two key factors that are affecting what you see in the Tinder payer number in Q4. The thing that maybe we didn't talk about as much on the last call, which we did end up doing starting in Q4 and we're going to continue to do in Q1 and probably through most, if not all, of 2023 is we are doing a bigger focus on product -- sorry, on pricing optimizations. And that's a big initiative for us. We're basically at Tinder eliminating more of the intro pricing and discount pricing than we had been planning to previously. That's having an adverse effect on the Tinder payer numbers, and that's what happened in Q4. But it's relatively neutral to revenue. And so our goal is to get Tinder to much more optimal price points, which, again, will impact the payer numbers there. But longer term, it's a revenue positive. We'll essentially have fewer payers but at higher price points. So that's an ongoing project through the year, which is going to have some effect on Tinder payer numbers. As you know, we tend to target overall revenue goals, not specifically RPP or payer numbers at Tinder. And there's going to be volatility in both those depending on the level of optimizations we do through the year, depending on our roadmap, depending on whether we do higher-priced tiers or not at Tinder. There's a lot of variables that could be traded off by us in terms of RPP versus payers, but we're somewhat indifferent to those two metrics. We are focused much more on revenue and revenue generation. The other part of your question I just wanted to quickly address is you asked about whether there was any impact from people who are just buying ALC products but are not subscribers at Tinder and did that have any effect on the Tinder subscriber numbers or payer numbers. And I would tell you that they're a relatively small, really pretty tiny component of overall Tinder payers. We don't see that many Tinder payers who are only taking ALC but not a subscription. So that's not really -- that trend hasn't changed, and that's not really a meaningful impact on the payer numbers that you see in Q4 or in any other quarter. So the price optimizations are probably the one additional factor that I would highlight that affected those numbers. Great. And then in terms of Tinder growth for this year, I know you're planning towards total revenue. But in terms of the 5% to 10% expected growth for this year and a slight growth in 1Q, is there any additional color you can provide just in terms of the drivers of growth between the payer users and then RPP? Yes. I mean, because there's a lot of swing factors in that, I don't really want to get locked in specifically to kind of an outlook for RPP specifically or payers growth specifically. I would tell you that sitting here today, our forecast kind of calls for relatively balanced growth between payers and RPP for the year, but it could shift depending on what initiatives succeed more than others, what we prioritize as the year goes on, what succeeds in testing. So that's our best guess sitting here right now, but we don't have religion around that, and it really could shift. But I would tell you it's relatively balanced. The other thing that I would just point out to you is that I do expect softer Tinder payers growth in the first half of the year and stronger Tinder payer growth in the back half of the year because the momentum is building, the initiatives will be rolled out as the year goes on. And so opposite of what we saw in 2022 where you had strong payers growth in the beginning of the year and then not enough initiatives that led to weaker payers growth in the back half of last year. You're going to have a bit of the opposite effect this year where you've got this product momentum building, payers momentum building, momentum in the business generally. And that should carry through to stronger revenue growth, obviously, which is in our outlook as well as stronger payers growth year-over-year in the back half of the year. So those are the trends that we're expecting for the year. Hopefully, that's helpful. Shifting gears to Hinge. First, could you please maybe share some feedback and early learnings from the recently launched HingeX in plus tiers? And then second, how should we think about the revenue growth opportunity beyond '23 and the $400 million revenue guide you provided through the lens of payer net adds and then also ARPU growth? Thanks, Alexandra, for the question. We spent the last few months refining the HingeX value proposition, and we've been testing it on a small percentage of the Hinge user base. We're really pleased with where it stands, and we're confident that it will deliver the expected contribution to our $400 million plan this year. The global rollout is planned for the end of February. And after it goes live, we'll continue to optimize it. It's important to understand that when you launch a new premium tier, you unlock a new kind of buyer. And the price points will pay dividends over multiple years. While we will benefit in 2023 from some incremental revenue from the higher price tier, the long-term value will be realized over time in terms of higher RPP and conversion. HingeX is a unique feature that directly leans into Hinge's designed to be deleted motto. And if it works, we believe it will lead to even more success for Hinge and create even more relationships around the world. Bernard, could you talk about just in broader detail why you found this to be the right organizational structure and how the different teams start to incentivize? And then perhaps related to that, could you talk about some of the top priorities for Will and where we can see his imprints and product lead as product lead over the next year? Thanks, Justin, for the question. I've spent the last eight months digging in and learning about the organization and have been really impressed with what I've seen. Following the positive impacts from the changes at Tinder, it became clear to me that we could do more by being more efficient and making some structural changes to the organization that could help us grow and continue to innovate. We believe by reorganizing the company into four pillars, Tinder, Hinge, Asia and Evergreen & Emerging, we're better aligned to focus on key areas of growth and double down on our strategy. At Tinder and Hinge, there's significant upside. So we want to continue to invest in the teams there. And now I have a direct line of sight into each of those businesses. In Asia, I thought it was important to have a product-focused leader on the ground working with those businesses to recapture growth and drive profitability. With Evergreen & Emerging, we have similar businesses that we've now combined into one global organization. With this, there should be many opportunities to share learnings and be more nimble and more efficient. And then with the Emerging Brands and our new bets, this team has built and launched new businesses before. And there's been a lot of experience bringing these products to market, serving unique demographics. We think there will be really exciting opportunities coming out of this group as well. As I've said in the letter, ultimately, I believe that this new org structure will improve transparency and accountability across the entire company. We're also really excited that we're adding Will Wu to the team as CTO. I've personally known Will for a long time, and I know how passionate he is about product and innovation. He has an incredible track record on innovation and has changed the way that Gen Z has interacted on social media platforms. He's a really low ego guy, and he just wants to win. He'll be based with me and the Tinder team in Los Angeles. And I think he'll work really well with our teams all across Match Group. And I think in response to your question is that on the incentives, we tend to be pretty creative on our incentive structures. For example, the Hinge team is incentivized around its own performance. The performance of the business is a significant part of their incentives. And we've done that in other situation as well. And we are working on some other incentive programs around achieving specific goals in specific areas of the company. So we are trying to tailor incentives to drive more of the results that we're seeking, and that's something that we're actively working on. So you left the '23 outlook unchanged. But given the weaker dollar, this does imply a bit of a downgrade on an FX-neutral basis. Just hoping you could talk about what's driving your more cautious view on an FX-neutral basis and your decision to keep the reported guide unchanged versus going through the FX? And maybe perhaps specifically any changes to your outlook at certain brands that were driving this? Yes. I mean, I wouldn't quite characterize it that way. I don't think just -- we have a 5% to 10% range. It's a pretty broad range for the year, and just because we're not adjusting it right now, it doesn't mean it's implicitly a decreased outlook. Cory, as you know, FX has been really volatile for the last 12 or 13 months and it's been particularly volatile in just the last few weeks as well as since our last earnings call. I think at our last earnings call, it was like a 3-point headwind for the full year '23. Now it's basically neutral. And I think it's down to about a 3-point headwind in Q1. So based on that level of volatility plus there's still a lot of uncertainty out there around macro, so we feel like our trends are stable. And we've been really happy with peak season, but it's hard to deny there's a lot of uncertainty on the macro front for full year '23. And certainly, for the first half of the year, I think pretty much every company is calling that out in their earnings call. So given all that, we just didn't think it was prudent to start adjusting our guidance ranges at this very early stage in the year. It's February 1 after all. So we left that unchanged. But obviously, as you rightly point out, to the extent there are FX tailwinds, that would be a swing factor either to a higher level within our range or potentially above the top end of our range depending on what kind of tailwind we get from FX as the year goes on. So I would rather kind of wait and see how some of that plays out, whether we see some level of stability around FX. And then, of course, we'll revisit it. I'm sure we'll revisit it next quarter as well. But -- and overall, in terms of your question, I don't think there's really significant changes to our business outlook really at any of our businesses. As I said in the answer to the question that Lauren asked, we've actually seen a good start to the year across most of the businesses. And so we feel like things have firmed up, but we're also cognizant of the fact there's a lot of risk and uncertainty and things to battle through. And so we feel good about kind of where we are from an outlook perspective at this point in time. But there's still a lot of innings to play in the game. So we're going to see how it plays out. Just want to ask about the Tinder CEO search process. Can you provide an update there? What has been the challenge? And how important is it for a new leader to buy in with the product roadmap that you currently have for 2023 since you're putting a lot of efforts into these? Thanks, Deepak, for the question. We're continuing to look for a candidate, but we want to make sure that we're finding the right person that will work well with the Tinder team. In the meantime, the current leadership team is working really well together. The team has now been in place for six months, and they've gone through the kind of gelling well together stage to fully execution mode. We're making really good progress, and we feel actually really good with where we are. So there's no rush to add a CEO. We're only going to do it if the person really brings a lot to the table. Gary, you mentioned that AOI margin should be at least flat in 2023. Beyond sort of App Store fee changes, what are the swing factors that could potentially drive upside or downside here? And also how should we be thinking about the quarterly margin cadence throughout the year? And then finally, when should we expect to see the impact from the 8% reduction in force? So on your question, Ben, first of all, I want to say we're very focused on making sure we deliver at least flat, if not improved margins year-over-year this year. That is a goal for us. It's one of the drivers behind implementing the cost savings plan. So we're very committed to making sure that, that happens. In terms of the swing factors aside from App Store relief -- and by the way, I think App Store relief is likely to be a 2024 event but we're waiting to see how the regulatory processes continue to play out, but that could be a significant event for us as soon as 2024. I think there's a few swing factors. The first really would be around Tinder executing on its product roadmap better than what we're expecting. So getting some improved revenue growth on the Tinder side would be very margin beneficial. Same thing would be true on the new Hinge tiers. That would be upside to the extent they perform better. And right now, they're performing as we expect, but it's still a very small test. And so we'll see how that continues to play out. And then a recovery in Japan would be very helpful for us as well, which you'd like to think is going to happen at some point this year but is not currently baked into our forecast. Just generally, any macro improvement, macro tailwinds, which is not what we're expecting as the year goes on, but any of that would be very helpful. But because we can't rely on those things, in this environment, we implemented this cost savings plan. And it's going to generate meaningful savings for us in terms of marketing spend, headcount, overhead, et cetera. When I look at kind of the trends for the year, which you asked about, we are expecting some margin degradation in the first half of the year, which we're expecting to be lower growth for us. And we won't have the effects yet of significant cost savings implemented. But as the year progresses and we deliver enhanced revenue growth, which is what we're expecting and we've talked about throughout this call, and we also get the compounding benefits of the cost savings initiatives in the back half of the year, we're expecting there to be year-over-year margin improvement. And so when you put that together, less strong margin in the first half of the year, improvement in the second half of the year, that's how we get to flat or better margin target for the full year, and we have confidence that we can deliver that. I'd also note that we're including the severance and other costs. But if you were to exclude those, then the margin in the first half would actually be better than what we're providing in terms of our outlook. The other thing I just want to highlight, you raised IAP fees. In the first quarter of '23, we have about $5 million of incremental headwinds from IAP fees just as more Hinge revenue and continued mix shift towards app. And then we've got the $8 million of headwinds from having the Google litigation escrow this year, which we didn't have last year. So that's $13 million of incremental costs that are essentially out of our control, plus you layer on top of that the severance and other cost savings initiative costs. So you have pretty significant year-over-year headwinds from those kinds of items. The other thing in terms of margins, I just would draw out for your awareness, is that we like many tech companies hired a lot of people late in 2021, early 2022, particularly in product development, engineering heads at Tinder and Hinge, which has created incremental product development costs for us, which have been visible for the last few quarters and continue to be. But that's going to moderate because we really slowed hiring, and we're reducing head in some places. We're constricting our hiring really to Hinge and a couple of other strong growth business at this point. So you're going to see moderating product development year-over-year cost increases as 2023 goes on. And we're confident of that, given the hiring trends. So that's a margin tailwind for us as well. So those are some factors to think about as you model out kind of our margin trajectory and cadence for the year. Thanks, John, for the question. When I started working with the Tinder team, I saw a real opportunity for marketing. Frankly, this is an area we need to make more investment to drive a brand story that better reflects all the positive outcomes that Tinder is responsible for. There has actually never been a Tinder global brand campaign before, and it's been years since we've actually had a defined marketing campaign in general. I think that the perception has taken a hold about Tinder is too limited. We want people to come into the platform feeling comfortable whatever their relationship intent is. The team had some really provocative and creative ideas. And this campaign will celebrate all of the relationship possibilities that Tinder creates every single day. We think that this will drive top-of-funnel growth over time. We intentionally moved Melissa into the Tinder CMO role because she has a track record of big, bold, attention-grabbing campaigns at OkCupid. And I know she and the team will do great things together at Tinder. We're really excited to roll out our first campaign and see the reaction. Stay tuned. Most of my questions have been addressed. But if you could please talk about Japan. You mentioned that you're not seeing much progress there, but that could drive upside. Any sense on when you think that could happen? Or what your -- or commentary on what you're seeing right now? And then the follow-up I have is, how do you -- it sounds like you're very confident now with the guidance, reiterating the reported guidance for the full year. Could you please talk about, Gary, the level of conservatism and/or the confidence you have in delivering to this for both top line and margins? Well, I think on the margin outlook, obviously, that's much more in our control, and we've taken steps that we know are going to lead to more cost discipline. Obviously, we can go further if the conditions dictate. So I feel very confident in the flat or better margins. That is something that we are extremely committed to. I think you rightfully pointed out that based on what we've seen so far this year, we feel incremental confidence in our outlook for the year. But as I said in response to Cory's question, I think it's really just a little too early, really one month into the year to start further adjusting our outlook. And we tend to try to be conservative and thoughtful when we provide the guidance. So especially in an environment where there's a lot of uncertainty and a lot of things that remain unknown, I think that's the right course and the prudent course to take. So we're sticking by it. But I think it's fair to say that what we've tried to get across this morning is that the start to the year has been very solid for us. And that is giving us confidence that what we're seeing is going to come to fruition as the year goes on. Japan is a wildcard. I think that the government there is really trying to take steps to fully get COVID behind it, trying to discourage real from wearing masks and things like that. But as we've talked about previously, there's been a reasonable amount of less socialization in that market because of all the restrictions that came from COVID. And so when kind of society there is going to really rebound back to much more normal levels of socialization is really hard to say. All I can tell you is we haven't seen it so far. It's been a number of quarters now. And as a result of that, we're not assuming that it happens in 2023. At some point, it's likely we're going to come to you and say we've seen a rebound in that market. I cannot tell you precisely when that's going to be. So again, from a conservatism standpoint, we're not assuming that rebound in the Japanese market this year. But we're hoping we're wrong, and it will come sooner. And we're looking for catalyst to try to spur activity in that market, which would be meaningful upside to us because Japan is such an important market for both our Pairs brand and our Tinder brand. So we'll have to wait and see. But again, right now, based on what we're seeing in conservatism, it dictates not assuming anything kind of from a rebound standpoint in the Japanese market. All right. With that, I know we're out of time. So we're going to sign off, but thank you, everybody, for joining us. We appreciate the continued support, and we will talk to you in the next quarter.
EarningCall_996	Good morning, and thank you for joining us for Marine Products Corporation's Fourth Quarter and Year End 2022 Financial Earnings Conference Call. Today's call will be hosted by Ben Palmer, President and CEO; and Mike Schmit, Chief Financial Officer. Also hosting is Jim Landers, Vice President of Corporate Services. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would like to advise everyone that today's conference call is being recorded. Before we get started today, I'd like to remind everyone that some of the statements that we will make on this call may be forward looking in nature and reflect a number of known and unknown risks. I'd like to refer you to our press release issued today, our 2021 Form 10-K and other SEC filings that outline those risks, all of which are available on our website at marineproductscorp.com. If you've not received our press release, please visit our website. In today's earnings release and conference call, we refer to EBITDA, which is a non-GAAP measure of operating performance. We use this non-GAAP measure because it allows us to compare performance consistently over various periods without regard to changes in our capital structure. Our press release issued this morning and our website contain a reconciliation of this non-GAAP financial measure to net income, which is the nearest GAAP financial measure. Please review this disclosure if you're interested in seeing how it's calculated. Jim, thanks, and thank you for everyone for joining the call this morning. Let me begin with a few highlights regarding our fourth quarter 2022 earnings press release that was issued this morning. Marine Products Corporation generated record quarterly net sales during the fourth quarter as we experienced improvement in our supply chain issues and transportation availability. This allowed us to finish a larger number of substantially completed boats that were in our inventory and deliver them to our dealers. This also led to more efficient production in our manufacturing plants, which should benefit us in future quarters. Average selling prices increased due to a favorable model mix and price increases implemented to cover increased costs, including labor, materials and components. Our fourth quarter unit sales were the highest of any quarter in 2022, despite the impact of two holidays. In addition, the increased unit shipments during the quarter allowed our dealers to begin building their inventory to accommodate the winter boat shows and prepare for the upcoming 2023 spring retail selling season. We also announced this morning that yesterday our Board of Directors declared a regular quarterly cash dividend of $0.14 per share. Net sales for the fourth quarter were a record $108.5 million, a 42% increase compared to the fourth quarter last year. Unit sales increased by 29% and average selling prices of our boats increased by 12%. Gross profit in the fourth quarter was $27.3 million, a 43% increase compared to the fourth quarter of 2021. Gross margin during the fourth quarters of both 2022 and 2021 was 25%. Selling, general and administrative expenses were $12.5 million, an increase of 47% compared to $8.5 million in the fourth quarter of last year. This increase is due to costs that typically increase with higher sales and profitability, such as incentive compensation, sales commissions and warranty expenses. We also recorded a $1.2 million defined benefit pension plan charge related to a lump sum settlement offered to plan participants during the quarter. During Q1 2023, we expect to record a settlement charge of approximately $2.6 million associated with the final termination of this plan. We do not expect to make any cash contributions in connection with the transfer of the plan liability to a third-party because of the plan's fully funded status. EBITDA in the fourth quarter was $15.3 million, an increase of $4.2 million or 38% compared to the fourth quarter of last year. We reported a quarterly net income of $11.9 million, a 40% increase compared to $8.4 million in the fourth quarter of 2021. Diluted earnings per share were $0.35, also a quarterly record, compared to $0.25 in the fourth quarter of last year. Our full year financial results were also records, with net sales of $381 million, net income of $40.3 million and diluted earnings per share of $1.18. Our international sales, which account for approximately 8% of our total sales, increased by 71% compared to the fourth quarter of last year. Our cash balance at the end of the year was $43.2 million, a $29.1 million increase compared to the cash balance at the end of last year. Our cash balance increased significantly during the year because of profitable operations and diligent working capital management, with a particular emphasis on the completion and shipment of substantially completed boats in our inventory towards the end of the year. Dealer inventories continue to be lower than normalized levels, but have increased compared to the third quarter of 2022. As the 2023 retail season approaches, demand remains strong and our dealers continue to restock inventory. We, therefore, have fully allocated our scheduled production for the first quarter of 2023 to our dealers to meet this demand. Our market share remains strong. Chaparral's sterndrive market share remains Number Two in its size category and the combination of Chaparral and Robalo's outboards held the third highest market share in their size category as well. Indications from the early winter boat shows, together with feedback from our dealers, remain positive. We're not seeing any reason to modify our current level of production. However, we will continue to monitor market indications for any change in retail demand, which could occur as a result of higher interest rates or increases in economic uncertainty or softness in dealer demand for higher levels of inventory. A second successive quarter of record financial performance are the result of the hard work of the Chaparral and Robalo management team, and other dedicated employees who are continuing to confront and successfully navigate a challenging operating environment. [Operator Instructions] And there are no questions at this time. Mr. Jim -- I apologize. A line just came in from the line of Craig Kennison from Baird. Your line is open. Yes, thank you so much. I'm just curious if you're seeing any variance on the demand side at the high end versus the low end? Craig, this is Ben. I would say, up to this point, we really haven't seen anything significant. I think we do hear anecdotes actually that on the lower end, which are [more] (ph) the probability or usually those are more often financed by the consumer, that there's probably a little bit of hesitation there. But the larger boats, there seems to be less pushback. Those continue to stay quite strong. So, at this point, we ourselves have not seen much change, which is good to see in here. Yes, that's great. And just on the inventory front, it sounds like you've made a lot of progress with your supply chain and are catching up. How would you say the current level of inventory compares to, let's say, 2019 or whatever the most normal environment was with respect to inventory? Oh, dealer inventory. It is only recently begun to build. So, there's -- it's still well below '19 levels, well, well below '19 levels. So, it's only begun, as I said, to increase just a little bit. But clearly that's something we'll watch it. We think that's healthy, right? We think that's normal. Things are beginning to become a little more normalized. So that's to be expected and not troublesome. But again, we'll continue to monitor that. Thanks for that. And then, I had a question on your input costs. I'm just curious, I'm sure some input costs have lowered and some still remain high. But when you look at the total bill of materials on your typical boat, what is the trend in your inflationary pressure? Craig, this is Jim. We probably agree with what you just characterized. In other words, cost of materials has been -- has increased a lot, but it is starting to moderate a little bit. A lot of our materials have hydrocarbon feedstocks. So that's moderated some. And just supply chain easing has helped cost moderate a little bit. That does not count labor. Labor continues to be high. But cost of materials is moderating some. And more -- probably more on the material side, the commodities, as Jim referred to, those have come down a bit. I think it's still with components, key components that have labor associated with them and there's a lot of -- still there's more supply chain -- tends to be more supply chain issues there. That's probably more along the lines that it's stabilized, not necessarily declined at this point. Yes. And to be clear, we still have surprises -- negative surprises. There still may be things that are -- that we have to wait on or price increases happen. But in general, it is moderating a bit better. It's a great question, and we talk about it often, and it really varies. It's kind of maybe not day to day, but it's week to week. Sometimes it can be day to day, but it's the same old things, sometimes it's engines, wiring harnesses and controls, gauges... Windshields. It's a lot of the same sort of things, but it's just not constant, which is what makes it really challenging. And I'm sure you've heard stories from other people as well. There's not really anything new that's come along and all the things that have been a problem from time to time continue to creep up. I think, toilets has been an issue. Unpredictable. Yes. Well, it seems like you're making progress there, which is great. I guess, one more question, if I could. Since dealers have struggled to get inventory of your boats and, frankly, every other brand out there, I imagine you've not been pursuing the addition of additional distribution. And so, I'm wondering like as your production starts to normalize, as dealers start to rebuild inventories, those core dealers become happy and they're set. Is there an opportunity for you to expand your dealer network? Is that something that may be a dormant strategy that could reignite as production normalizes? Well, let me answer or provide the following. We've been very straightforward with our dealers and our strategy has been -- our team has adopted the strategy, which I think is very, very smart that we have not tried -- we have not catered to particular dealers. We said we like our dealer network. It's key to us. It's important to us. They're all important to us in the geographic regions where they are. So, we have allocated our production, right? We have the amount of production we're able to generate and we're working with the dealers to allocate that production out, and it's very, very similar to what historical deliveries have been from a percentage basis to those dealers. So, we have not taken away from our smaller dealers and tried to direct significantly more production to the larger dealers. We think that's fair and appropriate. I think that has served us well and I think that will serve us well into the future. Your question is a good one, and you're right. We have -- we are always, where necessary, where we have a dealer that bows out or whatever, we are normally prepared to with another dealer to insert into an open spot from a geographic perspective. So -- but our dealers are loyal to us and we try to be loyal to them. And allocating out our production is just one example of that loyalty that I think has and will serve as well. And, I guess, I'd just add, our main focus right now is to take care of our existing dealer network. So, we don't really have a focus on expanding that at this time. So right now, just getting through the remaining supply chain issues, making sure their inventories are up. So that's really our main focus right now, taking care of our existing dealer network. Yes, until there's -- until -- if and until there's any pushback from dealers saying, I have enough, right, and if we can't redirect those to other existing dealers, so until existing dealers says, no more, then we have to decide, is there additional geographic areas, and there's not significant ones, but there may be very selected opportunities to direct some available production. But at this point in time, our dealers are saying, send me as many as you can. Thank you. In terms of dealer -- I'm sorry, in terms of your consumer demand, is there any backlog with consumers? Any pre-orders that have yet to be satisfied? Or has any of that demand -- has all of that demand been fulfilled at this point? No, I would say -- there still are -- we still have unfulfilled orders, but certainly that's moderated, obviously. And an indication of that is dealer inventories building, right? And that varies some by region or by dealer. But no, there still are orders to be fulfilled. And like I indicated, almost virtually every dealer is saying, send me as many as you can. Yes. A lot of our production is still retail sold, which you know the industry pre-COVID that was usually not the case. To this point, not a significant amount of cancellation. Certainly, the orders -- retail orders on hand certainly are less than they were six to 12 months ago. But it's still -- the demand is still quite strong. We've not yet seen -- we've not yet ourselves seen any softness there. Now, we are certainly mindful. As we indicated in our comments, we're always watching and monitoring and are prepared to adjust production as necessary if demand were to weaken. But dealer field inventory continues to remain low by historical standards. So, even if things softened a bit, I don't expect there's going to be any hard stop or significant decline in demand. But if demand were to weaken, we'll step back and reassess and decide if and when we need to adjust production and we're prepared to do that. We've always done that to try to obviously align our production to what reasonable demand and reasonable and appropriate dealer inventory levels would be. And there are no further questions at this time. Mr. Jim Landers, I'll turn the call back over to you for some closing remarks. Okay, Rob, thank you. Thanks for everybody who called in to listen, and we appreciate it, and hope everybody has a good day. We'll talk to you soon. Thank you. This concludes today's conference call. Today's conference call will be replayed on marineproductscorp.com within two hours following the completion of the call. You may now disconnect.
EarningCall_997	Good morning, everyone, and welcome to the National Bank Holdings Corporation 2022 Fourth Quarter Earnings Call. My name is Jen, and I will be your conference operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session following the prepared remarks. As a reminder, this conference is being recorded for replay purposes. I would like to remind you that this conference call will contain forward-looking statements, including, but not limited to, statements regarding the companyâs strategy, loans, deposits, capital, net interest income, non-interest income, margins, allowance, taxes, and non-interest expense. Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks, uncertainties and other factors which are disclosed in more detail in the companyâs most recent filings with the U.S. Securities and Exchange Commission. These statements speak only as of the date of this call and National Bank Holdings Corporation undertakes no obligation to update or revise these statements. In addition, the call today will reference certain non-GAAP measures which National Bank Holdings Corporation believes provides useful information for investors. Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on the Investor Relations section of www.nationalbankholdings.com. It is now my pleasure to turn the call over and introduce National Bank Holdings Corporations Chairman, President and CEO, Mr. Tim Laney. Thank you, Jen. Good morning and welcome to National Bank Holdings fourth quarter and full year 2022 earnings call. Iâm joined by Aldis Birkans, our Chief Financial Officer. Adjusting for one-time acquisition expenses, we delivered pre-provision net revenue of $50 million with adjusted net income totaling 34.5 million or $0.91 per share for the fourth quarter. Further, our adjusted return on tangible common equity was 18.37% for the quarter. Solid loan growth and a very low beta on deposits set us up well to deliver a net interest margin of 4.39%. Our team simultaneously closed and integrated two strategically important banking acquisitions that we believe will meaningfully contribute in 2023 and beyond. Finally, the quality of our loan portfolio remains very strong with excellent performance metrics across the board. I'll thank you. And I'll turn the call over to Aldis to cover the quarter and full year in greater detail, as well as share guidance for 2023. Aldis? All right. Well, thank you, Tim. Good morning. As Tim mentioned, during my comments, I will cover the financial highlights for both the fourth quarter and the full year, as well as share our guidance for 2023. Consistent with our past practice, our guidance does not include any future interest rate policy changes by the Fed, nor does it include any large yield curve changes in general. As we reported in last night's release, we delivered another strong quarter of financial performance, while also completing the acquisition of Bank of Jackson Hole and fully converting systems for both recent bank acquisitions. For the fourth quarter, we reported net income of $16.7 million or $0.44 of earnings per diluted share. During the quarter, we realized $6.8 million of transaction-related expenses, as well as recorded a Day 1 CECL loan loss provision expense of $16.3 million for the Bank of Jackson Holeâs loan portfolio. As Tim shared, excluding these transaction-related items, our adjusted core net income was $34.5 million or $0.91 per diluted share, which is a 14% increase over the prior quarterâs adjusted results. Our pre-tax pre-provision net revenue, excluding the transaction expenses, grew $8.9 million or 22% on a linked quarter basis. Weâre very pleased with the strong organic loan growth during 2022, and our teammates continue to focus on building robust new client relationships. During the fourth quarter, our loan balances grew $1.5 billion. $1.2 billion was driven by the acquired Bank of Jackson Hole loans. In the quarter, [indiscernible] balances grew another $310 million or 21.5% annualized. On a full year basis, including the two acquisitions, our loan book increased an impressive $2.7 billion or 60%. We continue to operate in markets that are outperforming the broad national economic indicators on many fronts. However, our outlook for 2023 cannot ignore the prospects for slowing growth. For this year, we look to grow loan balances in mid-to-high single digits. Net interest margin was 4.39% and expanded another 38 basis points this past quarter and fully taxable net interest income increased $26 million on a linked quarter basis. The margin expansion was led by a 54 basis point increase in our originated loan portfolio yields. As noted, our variable rate loans, annually originated loans reflect the higher rate environment. The resulting earning asset yield widening was slightly offset by a 37 basis point widening in our total interest-bearing liabilities. Our cost of deposits increased just 15 basis points for the full year 2022. Our total deposit beta this rate cycle to date has been less than 5%. However, we are starting to see an increased rate competition for deposit balances and looking ahead for 2023, we expect that our cost of funds will close out some of the margin widening we experienced in 2022. As such, we estimate that the margin will return to around 4% by the fourth quarter of 2023. In terms of our asset quality, if it remains strong, our non-accrual ratio improved 3 basis points to 0.23%. Our non-performing asset ratio improved another 4 basis points to 0.28%. The fourth quarterâs net charge-offs were just 4 basis points annualized and we finished the full year with net charge-offs of just 3 basis points. Both criticized and classified loan ratios also improved quarter-over-quarter. During the quarter, we recorded a provision expense of $21.9 million. And as I mentioned earlier, $16.3 million was driven by the establishment of a Day 1 allowance for credit losses for the Bank of Jackson Hole loan portfolio. Approximately $5.6 million of the provision expense was to support quarter's strong organic loan growth and to increase the allowance to total loan coverage, which reflects the increased economic uncertainty as indicated by the Moody's forecast scenarios. As a result, our ACL ratio to total loans ended the quarter at 1.24%, up from 1.15% at prior quarter end. Total non-interest income for the fourth quarter was $14.1 million or a $3.2 million decrease from the prior quarter. Billing quarter decrease was primarily driven by the slowdown in residential banking which seems to have settled into a lower run rate as of right now. Looking at the core banking service charge and bank card combined revenues, they increased $312,000 on a linked quarter basis and grew $2.1 million or 6.3% on a full year basis over 2021. For 2023, we project our total non-interest income to be in the range of $70 million to $75 million. The projections include our new non-interest income revenue streams, including the trust business income, as well as projected gains on sale of SBA loans. Non-interest expense for the fourth quarter totaled $67.7 million and included approximately $6.8 million of acquisition-related costs. On a year-to-date basis, we have realized approximately $15.1 million of acquisition-related expenses, which was nearly 20% better than our initial estimates. Excluding the acquisition-related expenses, the fourth quarter's core operating expense was $60.9 million compared to $46.9 million of core expense in the third quarter. The linked quarter increase was primarily driven by the addition of a full quarter of both Rock Canyon and Bank of Jackson Hole operating expenses, as well as investments to unify build out. Most M&A transaction-related items are recognized in 2022, and we do not expect additional costs to materially impact the 2023 expense. Looking ahead for 2023, we do project approximately $10 million to $12 million of expense related to unify ecosystem build out. Inclusive of this strategically important investment, the total non-interest expense is projected to be in the range of $243 million to $247 million. When projecting the 2023 effective tax rate, we expect it to increase to the 20% to 21% range. The increase is entirely due to the projected higher taxable income in 2023. The past quarter's and last year's effective tax rates benefited from increased deductions due to the M&A-related expenses. As always, this projected rate excludes the FTE adjustment on interest income. In terms of capital management, we ended the quarter with a strong 8.38% TCE ratio and a 9.29% Tier 1 leverage ratio. The tangible book value per share ended the year at $20.63 and fully reflects now the two M&A transactions. In terms of the share count, we project diluted shares outstanding to remain around 38 million shares. Well, thank you, Aldis. We've shared a lot of detail with you. So let me ask the operator to open up the call for any questions that you might have. On margin, Aldis, just want to make sure I get the -- I guess the guideâs at 4% at year end. Does that exclude any accretion in there? It's all in, so it includes all of the acquired loan accretion increase and expected increase in our cost of funds given the rate environment. So that's -- but it does exclude any rate changes that Fed may still do here in February or later this year. Got you. Okay. But is the -- I got your message that cost of funds kind of closing out sort of the advantage. Does that still mean -- on a core basis, do you think you could scratch out maybe an incremental increase in the first quarter too? I guess absent the Fed moves, is there still hope for maybe incremental increase and then again as that drifts down towards the end of the year? Yes, I think another way of looking at that is what net interest income will do, right, in terms of dollars more importantly than whether we're going to grow that. And I think our earning asset yield growth has a good chance of overcoming whatever the margin calculated squeeze there is and we can at minimum I think hold it flat if not adding each quarter. This is Tim. I would add that, as a reminder, we targeted or expected that margin to drift down closer to 4 or even over the course of the fourth quarter. So we will admit is that we believe we're taking a conservative view on that glide path. But what we're not doing is giving up on our loan price discipline. I think the fact that over 80% of our deposit base is represented by core relationship accounts, much of that core operating accounts we think the area where we're going to need to flex on deposit pricing is on that other 20%. So if you think about areas like CDs that we haven't really leaned into, our inclination would be to lean in to call it that nine-month plus CD as an area to pick up what we believe are reasonably cost fundings. And again, I guess the main point here is we're targeting to have margin compressed by year end as low as 4%. Thatâs at year end. Obviously, we're going to be doing everything we can just as we did in the fourth quarter to mitigate that and produce a strong return in that front as we can. Yes, I hear you, Tim. And I'd say -- I guess the upside a pretty big number, so I think relative to expectations that popped on the short end. So maybe just one more on the margin though. Further out, if we can even be that far, but you're putting anything on in terms of hedges or anything to kind of mitigate asset sensitivity sort of, again, looking at the end of the year? If it does come back to 4, are we thinking about things in '24 that you want to protect it even further as in try to hold that level? Are you putting anything on balance sheet to try to protect it further out if we do get a shift in rates? We selectively are actually adding some derivatives and rate floors to ensure that we can lock in as much as possible the margin that weâve enjoyed here. And it is market dependent, rate dependent and price dependent, obviously, but we've throughout 2022 had a few 100 million of rate hedges. Clearly they are, call it, out of money right now. Don't have any value. But if rates were to reverse, we have some protection and looking to do some more of that in 2023 as well. Okay. Thanks, Aldis. My other question kind of relates to the credit quality. The net move from NPAs was not significant quarter-to-quarter. Just want to double check that adds and deletes within that if there were any additions that were brought on from the acquisition, and maybe you had net payoffs on the legacy portfolio, just trying to see if there was anything under the hood what looks like a pretty modest increase in NPAs? Really nothing material. And clearly, if you adjust -- clearly the NPA ratio came down. So we will look at on an overall portfolio basis. So clearly there's some stuff that came across from the acquisitions. But weâre all portfolio improved on kind of a core basis. And really across a broad set of credit metrics. We do feel like the portfolio is positioned to perform very well. Got it. And then just kind of as a jump off from that then, Aldis, I think you've mentioned, that's absent the CECL deal-related provision I think something approaching 6 million to support growth. If we read into, growth could pull back into the mid-to-high single digit, we could expect barring other changes macro wise that that core provision could come in if growth were to slow? Yes, I think the way I will look at it is our sort of total losses is 1.24%. And that's the -- with the information that we have, that's the level that we would maintain all else equal. So if the loan growth were to slow down as weâre projecting here into mid-to-high single digits, then the provision expense would slow down as well accordingly. But we would still look to maintain the same loan loss coverage. On the ACL going up, again, the credit book can be in a better shape. It really is driven by the CECL and the Moodyâs outlook. It is deteriorating throughout the quarter the forecast scenarios to be using and that's driving some of this increase. Now having said that, what we said and starting this year with the uncertainty that exists around the economy, we certainly didn't fight or would mind that type of increase. So we like that increased provision allowance. Yes, I would echo that I don't have an issue carrying 124 on an allowance for credit losses in an uncertain environment. At the end of the day, obviously, the two drivers that are really going to dictate that level will be the CECL process and to be more granular, the economic forecast that that are submitted and to your question, loan growth. So I think it will moderate on the CECL front if we start to see different economic projections, and it will moderate on the loan growth front if in fact we see the kind of levels of growth that we've projected for '23. Okay, and it sort of drew out another question, sorry about that. 124 is a pretty big number, but Aldis do you have like a trued up reserve if you were to include credit marks on deals, is there a figure that inclusive of that would be a higher coverage level? There would be. We have about $34 million of loan loss reserves that goes up and beyond that that protects us from future losses as well. So that's another number which is equal about 45 basis points of total loans or 1.83% on the acquired loans. Hi. Good morning. I apologize if you covered this in your prepared remarks if I missed it. How much -- you had such strong NII and your margin came in well ahead of what I had. How much of the margin right now is accretable to yields? And what does your guidance imply for that contribution this upcoming year? Yes. So accretable yield is -- it's that $33 million mark amortizing. I'd say it's about 1.5 million per quarter is included in there approximately. I do want to point out though is it's kind of good and bad acquiring a loan book in the rate environment that had moved quite substantially from the time those loans are booked. So a good chunk of that accretion is actually rate mark. And we effectively bought a 4% loan in a 5% world and therefore got to markets a discount. So it's a good accretion practice from both credit perspective, but it's a true loan yield rate the way we look at it, because had we originated that loan, it would have been originated in my example 5%, not 4%. Got it. That's helpful. And then turning to your fee income guidance, that's a pretty big -- a pretty decent step up from where you were in 4Q. I'm just wondering if 4Q included any SBA gains from Rock Canyon or if you're working to build the pipeline, and kind of the outlook for that business as we look to 2023, given I think secondary market premiums have compressed a bit? Right. It's a great question and a good patch there. Our guidance is a bit higher than where if you were to analyze fourth quarter really. So breaking it down kind of and call it three buckets, our service charges, bank cards, kind of core banking service fees that were looking to grow, we look to grow that along with the rest of the balance sheet, call it mid single digits. We grew that 6.3% in 2022. So I think that's nice and achievable. Then there is mortgage, which I'll come back to and then there's other, right, and we did pick up trust business through the Bank of Jackson Hole so that is expected to grow and is embedded in the other income. There's SBA gains, which we did not have any SBA gains in the fourth quarter. Rock Canyon Bank in the prior several years had generated about, call it, $6 million to $9 million of SBA gain fee income. We are not counting on that type of levels. As you mentioned, the SBA margins have come in quite a bit. So call it -- approximately half of that is what is embedded in our guidance. And then just the rest of the kind of the other non-interest income that we typically have had isn't that line item. And then coming back to mortgage, clearly the fourth quarter was -- seasonally is and first quarter seasonally are slow months in a way for purchase market. We are projecting that to recover in the coming -- a little bit in the summer months and summer quarters. But our projections embedded there are in line with what MBA is projecting, which still if you were looking to year-over-year volumes still being down 15%, 20% in 2023 over 2022 in purchase market. But nevertheless, clearly the fourth quarter was -- it feels like as I mentioned in the prepared remarks a bit of a trough. Got it. Thank you. Also as we look to this year, I know you guys have had your ongoing tech initiatives and to unify initiatives. Just wondering how you prioritize that given -- I'm sure you're busy having just finished the acquisition of two banks, how that fits into kind of your strategic plan in this year and beyond? That would be helpful as well as a two-parter to that question on expenses and kind of the run rate there, how the cadence of cost saves flows through from the deals? Yes. Thanks, Kelly. We are on track with the build out to unify. We are benefiting interestingly enough from a lot of the reductions we've seen in the kind of core FinTech tech arena. So the availability of talent at better pricing is something that we're benefiting from. I'm increasingly -- and I think Kelly you happen to know some of these people, but I'm increasingly comforted by some of our key partners working with us to build to unify, including Mobiquity [ph], and we believe we're going to be in a position to be doing some testing with businesses at the end of this year on certain elements to unify. I'll turn it to Aldis to speak to expense detail. And we say expense detail, obviously I view this as an investment. But Aldis, why don't you take Kelly through the numbers? Yes. So really stripping out the one-time expense of $6.8 million this last quarter, what we call core operating expense was approximately $60.9 million. Certainly, a lot of noise still this quarter, right, given that we just closed Bank of Jackson Hole, integrated two systems. The Bank of Jackson Hole system integration took place in December. So certainly, there's still some overlap and synergy is still to become and realized. But at the same time, we did step up to unify investment in fourth quarter and just it's in our press release yesterday or earnings release yesterday, but for full year that added up to be about $4.3 million investment. Now looking ahead for 2023, if you were to take the $60.9 million and analyze it, it come out right in the middle of the range what I gave for this year, which means that not only we will have to figure out how to cover the unify investment of $10 million to $12 million, the FDIC insurance increase which all of our industry is increasing by 2 basis points of FDIC, as well as any inflationary pressures that are still coming through. We're going to have to figure out that and we've always managed expense as well and it's been a strong culture here. But in terms of run rate, basically, we kind of feel like we are at the run rate for next year, including all those investments. Maybe just to follow up on expenses, I hear that kind of color and guidance for I think itâs 243, 247 for 2023. If they're kind of 10 million to 12 million of two unify expenses coming through in the coming year, I guess should we think about those as more transitory implying that the 2024 expense run rate kind of moderates, or would you build off of this 243, 247 into '24? I think you should look at that possibility for '25 and beyond. And what we haven't talked about that I'll add given your question is where we're increasingly optimistic is around taking some of the low cost new technology that we're putting in place to unify and applying it to our core bank and the ability to lower that operating cost over the next few years. So we're not in a position at this point to provide guidance on that front. But if you're asking about '24 and thinking about '25, I will tell you our optimism around leveraging, for example, the challenger core that we are leveraging to unify gets really interesting. We will remain as hyper focused on our operating efficiency as we've ever been. And I think we're going to end up being able to make some real interesting tradeoffs in terms of historical cost versus a future way of operating the business. Okay. I appreciate the added color there. If I could just clarify on the loan growth guidance, mid to high single digits, is that referring specifically to the originating loans, so not excluding what you would expect from the acquired runoff? Got it. Okay. And then for Aldis, just going back to the 4% NIM expectation by the end of the year, I was hoping to just get maybe some incremental color on moving pieces there specifically as it related to kind of deposit costs increases you're expecting? And then does that guidance reflect any change in deposit composition, so any incremental kind of non-interest bearing deposit mix change for here? In terms of deposit composition, I think Tim hit on it, because I think -- and it does feel like as we're reading through some other bank releases that at least the consumer is gravitating to highest earning asset for them, liability for banks, which is time deposit. So I do expect that we probably will increase some of the CD balances here. We are down to 10% of total balances and time deposits historically weâve been closer to 20%. So weâre building some of that forward balance sheet, again, is probably in the cards slowly of course. In terms of non-interest bearing deposit mix, I don't see that changing much. Again, our go-to-market strategy is always a relationship. We always start with a checking account. And I do not see that changing. So we expect that balance to be core there. Now having said that, if you look at the flows, we haven't seen anything specific or one large or specific kind of movement that would be unique. We've seen rate movements, we've seen still people spending down there stimulus checks, so how much that yet to go, who knows? So give or take a couple of percentage points around that. But the mix otherwise I think will stay unchanged. Okay, very good. And then just to maybe clarify. I think I heard this right in the discussion, but outside of just the NIM fluctuations we should expect, you think you can grow net interest income every quarter off of this base of, call it, 96 million in 4Q? Did I get that right? Just sticking with the balance sheet and the margin here, do you think the balance sheet reached the point where any incremental rate hikes aren't going to have any benefit to the margin or funding costs could increase that quickly in the near term assuming we get some rate hikes this quarter? Or do you think there's still some upward bias from the rate hikes? I think there might be still upward bias. The way we calculate it in terms of again our model language clearly is modeling and a lot of times, we'll hit far away from reality. But we still reflect small asset sensitivity in our position. So I do expect that the rate hikes might still be beneficial on net-net basis. Again, in my mind, any marginal rate hike just creates that catch up, so to say, the cost of funding at some point. And why we say 4% return is really that's how, and I think I mentioned that in prior calls is, when we look at our balance sheet composition, the type of lending that we do, the type of core deposit balance sheet that we have, the liquidity that we have through the investment portfolio, in the long run I think we can maintain in a normalized yield curve or normalized rate environment 4% or thereabouts margin. And therefore for us today it feels elevated and it'd be projecting it to normalize it over time. I would add is if you take this down to the banker level, our bankers understand that as the cost of their inventory, which is deposit increases, it's incumbent that they increase spreads on loans that they're making. We take it one step further in terms of our relationship to review with a client. If a client is providing low cost funding, theyâre going to see one level of pricing as compared to a client or a prospective client coming in, looking to borrow money but not having the core operating accounts and core deposits available. And that's a discipline that we adhere to that we're not going to let up on. And that's why I may be a little more optimistic than even Aldis in terms of our ability to continue to see progress on loan margin. And one more data point I'll add is that for fourth quarter, which included October originations that were before the latest rate hike, our new loan origination rate was just under 7%. So newly originated loans away from rate increases and from variable rate loans are accretive to our margin. We're not going to give business away. And we are not into doing business to lose money in relationships. And I think our clients understand that. Got it. That makes sense. Thanks for that color there. And then just a little detail on the loan growth. Have you seen the pipeline or demand temper at all, or is it still pretty strong, you just expect growth maybe to slow in the latter part of the year? We are, frankly, surprised at how strong demand has continued to be. I think where we'll temper that is with what I was talking about earlier, in terms of being more selective if a new relationship is prospectively coming in to the bank and they don't have enough to offer on the treasury or depository management front, they may not be a right fit for us. I'm not worried about demand. We're fortunate we're in incredibly strong markets that continue to perform well. But number one, as we've discussed in prior quarterly calls, we have certainly raised our credit underwriting criteria. And number two, the relationship pricing has got to work for us. And our very simple message to clients is it's got to be a win-win. You want us to be here over the long run. We can't do that by participating in relationships where we're not generating adequate returns. Yes, thatâs okay. Itâs Hovde Group. I wanted to go back to the deposit question and just on the margin, what do you -- so I want to make sure I'm clear. What are you guys assuming for the beta as we get into later this year? And then obviously the 5% beta presently, that's pretty low. There's a little bug in the back of my head that says you can be a little bit worried about losing maybe some deposits as people âwake upâ to the rate environment. Any color on those two topics? Yes. And before Aldis jumps in with specifics, I'll say where we're going to focus is on that, call it, 20% that we've addressed that are really not operating accounts. If you think of it, your core operating account, whether you're an individual or a business, those accounts tend to be much less sensitive, right? That's where you're transacting your business. That's where in the case -- if it's a personal account where your paychecks being deposited to, that's not really the intra [ph] sensitive dollars that we're talking about. We're talking about that 20%, of which 10% have been in CDs historically up to 20%. We do, as Aldis mentioned, we could see flexing that CD book up meaningfully in order to provide a competitive return on time and money. I'll turn it to Aldis. He was hoping I would skip him. Iâll turn it to Aldis to try to answer your question. Get out your crystal ball and try to answer the question on the beta. I was hoping not to because I don't have a crystal ball. And having been reading the beta calculations, it can be certainly on total deposits, interest-bearing deposits, interest-bearing liabilities, and all of that. So I like to stay away from projecting beta here really and just stand by the guidance that we gave in the margin. I think we look at that as a whole. And embedded there are certain obviously assumptions on assets pricing as well as deposits. But getting to that 4% over a period of time I think is where our goal is, or how to play out. And we expect -- and I will say this at a macro level, we certainly expect, given our history, we expect our beta to perform better than the national averages that we've been saying. There's nothing we're seeing that would suggest that that trend would change. Okay. And then I know it's not a huge concern in terms of the fee income with the whole $10 billion question, there's several things you can unwrap there with the regulators want you to have more staff for a lot of different things. Maybe there's an advantage for staying under. And just wanted to get your thoughts, Tim, on how youâre thinking about the $10 billion question. Yes. I'll just remind everyone that when we started this company, we had to agree to operate as though we were over a $10 billion institution from day one. So we've put in a lot of that infrastructure and been operating with that cost for some time now. Frankly, it turned out to be a benefit. I'll give the regulators a lot of credit because it put an infrastructure in place that we've really been able to leverage and lean into. Will there be some incremental cost? I'm sure there will be. Our discussions with our regulators to date have not suggested anything dramatic at all or frankly not even anything noteworthy beyond what we're doing today. But then all this can speak to the timing of this, because it's not as though the moment you crossed the $10 billion threshold, you're held to any changes in the first place. Yes. And certainly given our guidance on the loan growth, which you could certainly apply to how total assets will grow as well and back into that there is a good chance that we do cross 10 billion by the end of this year. And therefore, again, this year's guidance doesn't include any of that, because they wouldn't impact this year. It really starts, if it does, in 2024 on the expense side, on the [indiscernible] side, again, for us right now on the run rate basis, call it, it would be about $10 million-ish hit to the interchange, which would for 2024 is only half a year. So I'm estimating 2%, maybe 3% of total net income for 2024, so very manageable impact. Okay, and itâs a little bigger number than I was recalling. All right, great. And then maybe just one last one just thinking about, Tim, the franchise you have now and you've done two acquisitions here in the past quarter. So besides the two unify initiative, would there be other things that you want to accomplish in '23, would additional M&A kind of make sense if that could happen? Obviously, the current environment doesn't suggest that's very unlikely, but just want to make sure I was aware of whatever else you were looking to try and accomplish this year. I'm very proud of the team and the fact that we were able to announce a close and fully integrate two institutions in short order in 2022. We certainly continue to have a pipeline of discussions with banks that reside in our core markets. We do like the idea of growing and expanding in attractive markets where we operate. So when you think about certainly Colorado, but Utah, even Idaho at this point, which may be lost on some folks that we've got an interesting presence in Boise now, and we really liked what we're seeing in that market, think we can do a lot organically there. And I think it's just an interesting market to pay more attention to, at least for us. And as we've always been, we're just going to be prudent stewards of capital. So if there's a seller interested in doing something with us, they're going to have to be cognizant of the fact that we've, again, got to create a win-win. And we're very sincere about that. So we'll be patient and we'll be thoughtful. We feel really good about our organic growth prospects. But we certainly have not closed the door on looking at new potential partners to help move NBH ahead. Where we have closed the door, and I've mentioned this in prior meetings, is frankly we are not spending time talking to community banks in low growth markets. We are not going to fall into that trap of simply acquiring with the idea of taking out 20% or 30%, riding that accretion for a few years and putting ourselves on that treadmill. That's just not something of interest to us. Thank you. And I am showing we have no further questions at this time. I will now turn the call back to Mr. Laney for his closing remarks. Thank you, Jen. I'll simply say thank you for joining us today. We appreciate your confidence in NBH. And we'll be working hard to deliver more along the way. Take care. Thank you. And this concludes today's conference call. If you'd like to listen to the telephone replay of this call, it will be available in approximately 24 hours, and the link will be on the company's Web site on the Investor Relations page. Thank you very much and have a great day. You may now disconnect.
EarningCall_998	Thank you for standing by and welcome to the Symboticâs First Quarter 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I will now turn the conference over to your host, Mr. Jeff Evanson, Vice President of Investor Relations. Please go ahead. Thank you, Valerie. Good afternoon, everyone. Welcome to Symboticâs first quarter 2023 results webcast. As Valerie mentioned, I am Jeff Evanson, Symboticâs VP of Investor Relations. Our press release and discussion today will include forward-looking statements, based on assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements, including as a result of factors described in the cautionary statements and risk factors in Symboticâs financial release and regulatory filings with the SEC, by which any forward-looking statements made during this call are qualified in their entirety. In addition, during this call, we will discuss certain financial measures that are not recognized under U.S. Generally Accepted Accounting Principles, which the SEC refers to as non-GAAP measures. We believe these non-GAAP measures assist management in planning, forecasting and evaluating our business and financial performance, including allocating resources. Reconciliations of these non-GAAP measures to their most comparable reported GAAP measures are included in our financial press release, which is available in the Investor Relations section of our website and is on file with the SEC. These non-GAAP measures may not be comparable to measures used by other issuers. Today, we will provide guidance for the second quarter, including revenue and adjusted EBITDA. These are not â we are not providing guidance for net loss today, which is the most comparable GAAP financial measure to adjusted EBITDA. We are not able to provide reconciliations of adjusted EBITDA to GAAP financial measures, because certain items required for such reconciliations are outside of our control and/or cannot be reasonably predicted, such as the provision for stock-based compensation. On todayâs call, we are joined by Rick Cohen, Symboticâs Founder, Chairman and Chief Executive Officer; and Tom Ernst, Symboticâs Chief Financial Officer. These executives will discuss our first quarter 2023 results, our outlook, and then we will follow up with Q&A. Thanks, Jeff. 2023 is off to a great start and we are excited about our outlook. Again, our results reflect strong execution of our growth opportunity. In our first quarter, the Symbotic team delivered triple-digit revenue growth and improved both gross profit and adjusted operating margins. I thank our entire team for their hard work and excellent execution. Last quarter, we highlighted our plans to build on our existing base of outsourcing partners. During this quarter, we added additional Tier 1 suppliers to build capacity to meet our growing demand as well as to ensure supply chain and redundancy. These outsourcing partners now span our full deployment process for manufacturing of bots, cells and lifts to construction and installation. We are excited about our partners growing contributions as they help us accelerate delivery of systems while maintaining our extraordinary rate of growth. These partnerships will also help us to reduce system costs and streamline deployments and reduced deployment time creates the capacity to satisfy the high demand of our solutions. In summary, our supply chain continues to improve, also moderating, and we continue to attract top talent. Demand for our solutions continues to grow and our contracted backlog now stands at $12 billion. Thank you, Rick. Our first quarter revenue of $206 million grew 168% over the prior year period. We initiated 6 new system deployments during the quarter and as planned, advanced one system to fully-functional production operations. We now have 22 active system deployments with multiple customers, up from 17 systems last quarter and 9 systems in the first quarter of last year. Our extraordinary revenue growth was driven by both progress on deployments already underway and the 6 deployments started during the quarter. We are gaining efficiency in our deployments by standardizing our systems, streamlining our deployment processes and realizing the benefits of outsourcing. Our cash and equivalents, including marketable securities, grew $94 million sequentially to $448 million due to favorable working capital performance. Looking forward, we believe last quarterâs balance of $353 million will be a low watermark. We believe we have more than adequate resources on hand to achieve our strong growth plans and remain very well capitalized to execute our strategy. Recurring revenue grew 25% sequentially as deployments have begun to move to production operations. We now have 8 systems operating at customer sites. In the near to mid-term, we expect recurring revenue to be small relative to our rapidly growing systems revenue. Over time, as system completions waterfall, recurring revenue should grow to have a much higher gross margin than systems revenue as well as become an increasing share of our revenue mix to provide powerful operating leverage to our business. Our first quarter gross margin increased 230 basis points sequentially. These results still reflect significant costs associated with rapidly scaling our operations and the burden of elevated pass-through steel costs. In the first quarter, operating expenses, excluding stock-based comp, declined sequentially, demonstrating the cresting of expenses that we had anticipated. Despite this, we still have ongoing redundant costs associated with ramping partners and ongoing investments in our innovation initiatives, such as SymBot and BreakPack. Operating leverage improved as we achieved a record 7.9% adjusted EBITDA loss rate compared to 27.6% in the first quarter a year ago driven by our revenue growth and moderating operating expenses. Our backlog increased this quarter to $12 billion. Cost-adjusted pricing, the addition of UNFI as a customer and an additional non-Walmart existing customer deployments start contributed to the 8% sequential increase. Turning to our outlook for the second quarter of fiscal 2023, we expect revenue of $205 million to $230 million and an adjusted EBITDA loss of between $13 million and $17 million. This represents 126% revenue growth year-over-year at the midpoint of our revenue guidance range. In closing, 2023 is off to a great start and our team is energized. We are excited about the year ahead and our opportunity to transform the supply chain. We will continue to scale our business and innovate rapidly to deliver against our $12 billion revenue backlog. We look forward to speaking with you again next quarter to provide an update on our progress. Thanks. Couple of questions. First, on gross margin and OpEx, how should we be thinking about those items kind of scaling from here? You mentioned OpEx kind of cresting last quarter, so things seemingly moving in the right direction with more efficiencies to be gained? And then maybe put a finer point on gross margin, how we should think about that rolling forward from here and how much steel is still maybe diluting that margin? And then I have a follow-up. Yes. Thank you for the question, Matt. So first on the OpEx side, we reported an adjusted OpEx of $52 million. That was lower in both of the prior quarters as we had fewer third-party expenses. So, I think a way to think about that is some of that is structural as we are shifting to outsourcing partners and some of it is just the quarterly variability of our engineering projects. Looking through to that, our headcount is up about 9% quarter-on-quarter. So you can see we are still investing and hiring heads as we are able to make a benefit of less dependency on third-party resources to grow and scale our business. Perhaps shifting over to the gross margin side, quarter-on-quarter system gross margin, which drives our overall gross margin improved sequentially by 250 basis points. This really is an attenuation of some of the effects that we saw last quarter in terms of some of those scaling and project costs that have made their way into gross margin. We began to see some of those recede. And so generally, we expect that trend to continue as we look forward over the coming quarters, although quarterly progress on that can be stair-step. So I wonât predict and give you guidance for exactly how we make progress against that. But the general trend over the coming quarters, you should expect us to see some of those effects of â some of those costs that are in gross margin associated with scale in the business begin to attenuate, along with steel costs begin to flow through as less of a headwind. A way to think about that steel as well, donât forget that we do lock in much of our steel pricing 12 months prior to the start of an installation. So if you look at the steel price indexes, the steel prices have really been lower for about 5 to 6 months. So we expect kind of the benefit of lower steel prices to wash and over the coming few quarters rather than right away. Does that answer the question, Matt? That makes sense. Thank you. Yes, that does. And then just as a follow-up, from here forward, what are the key incremental steps Symbotic needs to take from an outsourcing standpoint to further accelerate system implementations? And when do you think the company will reach an optimal sort of implementation rate? Thank you. Yes. So we spent this last quarter a lot of face-to-face time with suppliers. So we have pretty much locked in our suppliers. We have a couple of very good suppliers that are going to be ramping up in the second and third quarter. So we are pretty well set with our outsourcing supplier mix. And we are seeing as they learn to make the systems better and a little competition, we are seeing the pricing come down. We are also seeing efficiencies of rollout. And as we work with the suppliers and redesign small components of it, we are finding that the installs will happen faster. So I think the next 3 to 6 months, you should see a full benefit of the outsourcing of the suppliers. And I will add to that, Matt, as we just think about the long-term, we see this as a continuous opportunity for us to where the system can be engineered for faster deployments. Our partners are going to gain efficiency, we are going to gain speed with it. So we think that, in addition to Rick highlighting these 3 to â next 3 to 6 months are huge for us. There is gains that we can have over the coming years to continue to speed deployments and get more efficient. Can you give us a little more color into the revenue ramp that you are seeing? I am sure you want to be conservative, but at the bottom of your revenue guidance for Q2, you are predicting flat sequential revenue despite your system deployments and Symbotic rapidly scaling its business. So is there something that could hold you back or are you just being conservative given you never know if supply chain constraints come back or is there any risk of customers slowing down deployments given macro concerns? Yes. Thanks for the question, Andrew. So you are right, we are growing rapidly. Our number of systems under deployment, as you highlighted here, now at 22%, so thatâs up 5% net of the one that went into full production from last quarter. That translates into 126% year-on-year revenue growth, which we think is quite rapid. So we are planning to deliver and scale against that rapid growth. I think something â one of the things we talked about in our last earnings call was these first few systems â first wave of the few systems we delivered did see somewhat of kind of a stacking of the key concentration of revenue, deliver those systems over the â really the prior quarter, a little bit into Q3 as well. As we begin to deliver more and more waves of systems, they are going to be more uniformly spaced and we will begin to see some of that quarterly variations and revenues smooth out a bit. But really, what you are seeing is a function of our sequential growth is more just to do with the concentration of the stacking of some of the smaller number of systems actually in the meat of their deployment. Got it. And thatâs helpful. And then you mentioned backlog of $12 billion. Obviously, it continues to go up. I think you talked about greater than $11 billion last quarter. So is this just more addendums to sort of existing contracts that you have? Or do you continue to win work with new customers? Obviously, we know, eventually, revenue will begin to eat into that backlog, given itâs so big. But how are you thinking about backlog at this point? Should it begin to go down now as revenue ramps up? Or still more new awards to be had? Yes. Thanks for the question, Andrew. So youâre right, backlog did increase net of the revenue out in the quarter by about $900 million in the quarter. So that really reflects a couple of things. It reflects the new UNFI relationship that we announced on last quarterâs earnings call that was signed during this quarter. It also reflects an additional existing customer, new deployment we started in the quarter. And then finally, it reflects cost-adjusted pricing for the existing backlog in the quarter that we expect that youâll see once a year when we start each calendar year. So a little bit different average cost per system in the backlog, how you should think about the backlog? Our strategy hasnât shifted. Weâre thrilled with the $12 billion backlog. Our goal is really not to drive backlog growth so much, but really to drive our customers to being ragingly happy and having â and the scale against the opportunity we have. Weâre looking to add new customers more by the one or two per year rather than add to the backlog as our primary strategy here in the near-term, given that we do have such a strong demand for our systems that we can control as the backlog as we want them. Thank you. [Operator Instructions] Our next question comes from the line of Mark Delaney of Goldman Sachs. Your line is open. Yes. Good afternoon, thank you very much for taking the questions. Rick, I think your decision to retake the CEO role on, as I understood it, was to streamline the touch points that your customers have and hopefully create some more efficiencies in that sort of relationships. Could you elaborate if thatâs materializing as you expected? Yes. Itâs â I mean Iâve been the CEO for most of the time, except for really a short period of time. The interaction â so yes, itâs playing out the way I thought. Customers want to talk to me. They have been talking to me for a long time. Iâm really the Chief Product Development Officer. And so when I just talk to customers, one of the things they are asking is, because of my deep distribution background, is they think some of the products that they are thinking about are viable. And so it just makes the logical, the sales cycle, the proof-of-concept piece of selling these big pieces of equipment and then the follow-through logical. So itâs playing out pretty much exactly the way I thought it would. Thatâs very helpful. Thanks. And then my second question was around how to think about the cadence of systems going forward. And maybe help us better understand whatâs contemplated in the guidance, perhaps in terms of number of new installations that may be started and if you think youâll move any other systems into full completion this coming quarter baked into guidance. Thanks. Yes. Thanks for the question, Mark. So we do anticipate adding more systems each quarter. Itâs a little bit less predictable on a given quarterly basis exactly how many we will add. But you should expect that as you look forward over coming quarters, we continue to add systems and potentially in growing numbers as we look forward. Those systems that get added in the quarter donât add as much revenue as the systems that have already been on the books for a couple or a few quarters. I think you know that our value that we deliver and thus the revenue that we carry from those systems is recognized and reported on a percentage completion basis, but itâs not linear. The revenue actually has a bit of a concentration to the middle part of the middle of the second half part of the contract when weâre doing the meat of the installation and testing of the system. So those early systems do benefit quarterly revenue production, but not as strong as the systems that are well into the meat of installation. Yes. Thanks. Good afternoon. Maybe just on the outsourcing initiative. It sounds like from the opening remarks that you guys have made really good progress on that. So if we were to talk about it in baseball terms, I guess, what inning are you in with all of your projects on outsourcing? Yes. So in baseball terms, I would say, we have â I would say weâre probably in the fifth, sixth inning on outsourcing. We will â we â the partners are doing a good job, and â but we havenât finished the process yet. So I think weâre bringing on some new â we havenât announced them yet. Weâve announced some of it internally. Weâre bringing on some new, very experienced manufacturing partners to help us work the outsourcing part of the business. So we feel really good about it, where the game plan is probably gone a little bit better than we thought, which is a nice thing to say. And no showstoppers. The world out there of our particular partners is interested in warehouse automation and in making EVs. And we right now have a lot of interest because of our big backlog and warehouse automation. So we are very happy with the attention weâre getting from suppliers, quite frankly, all over the world. So that was not the case a year ago. So I guess, fifth inning, sixth inning, maybe even seventh inning. Weâre pretty happy with where we are. Got it. Thanks, Rick. Thatâs helpful. And then one more question for you guys is just â I know you talked about OpEx cresting. Is that also the case for the subcomponent of R&D.? Is that also expected to crest, just trying to think about all of the innovation initiatives that you guys also have underway? Thanks for the question, Nicole. So I would expect modest growth in our OpEx, particularly near-term. Our OpEx we reported in this quarter was relatively light in terms of third-party expenses and kind of special projects. But if you take the last three quarters overall, that general comment about crested is generally right maybe with moderate growth, looking forward. In terms specifically with R&D, yes, it applies to R&D as well. Thank you. [Operator Instructions] Our next question comes from the line of James Ricchiuti of Needham & Company. Your line is open. Hi, thank you. Good afternoon. I think you referenced an order from an existing customer. Was this one of your legacy customers? Yes. Thanks for the question, James. It was. And in fact, we disclosed in our proxy filing that, that customer is C&S Wholesale Grocers. Got it. And Iâm wondering, as you talk about the supply chain and the contract manufacturing capability that youâre bringing on and you expect to see ramp, can you talk about the interest youâre getting from new customers and your ability, your capacity to maybe take on newer business? And specifically, Iâm wondering, most of your business has been in the U.S., North America. And is there the potential over the next couple of quarters for you to potentially take on some business in Europe, for instance? Yes. We â itâs a fairly long sales cycle, but weâve had interest from Mexico. Weâve had interest from Europe. So we â and the numbers are pretty promising. I made a trip to Japan to visit SoftBank. Thatâs a very promising â these high-cost labor markets are interesting. So nothing to announce, nothing probably to announce for a while, but a lot of interest. And what weâre doing with the supply chain partners, actually, some of the partners are in Europe, places like Italy, Germany. And so they are actually out there kind of help them sell for us, legitimizing our product. We do have a number of international customers coming to visit in the next 3 to 6 months to go visit sites. And one of the things that weâre doing with the outsourcing partners is as we ramp them up, it allows us to complete sites faster. And if we can complete sites faster, we can do more sites. And also, one of the things that weâre looking at is outsourcing partners, in particular from Europe, that would be good partners and doing European installs. Iâll just reiterate, James, that while weâre working to create that additional capacity, our operating strategy is to add new customers slowly, kind of 1 to 2 per year. Okay. And final question for me, when would you anticipate completing the next fully-functional system from your backlog, if you can say? Sure. Thanks for the question, James. Itâs hard to predict on a given quarterly basis. But as we look forward over the coming quarters, we do anticipate that youâll begin to see us get into a pattern of moving systems from deployment to fully-functionally complete â hit the customer with increasing regularity. Thank you. [Operator Instructions] Our next question comes from the line of Michael Latimore of Northland Capital Markets. Your line is open. Okay, thank you. Yes. Great results here. Just in terms of the deployment time frames, what are you seeing now? How long do you anticipate deployments to take, given some of the added outsourcing capacity here? Yes. Thanks for the question, Michael. So we continue to make progress on this front. We are definitely beginning to feel the benefits of having done it many times now, along with beginning to get support from our outsourcing partners that are helping this trend in the right direction. And as you would expect, Michael, our first wave of systems take longer than what we expect that those next couple of waves to take, particularly in the light of having an extended supply chain where we got out in the front and made sure that we started those systems early with an extended supply chain. So we are making progress. I think weâre generally on track with our plans and where we thought it would be a year ago. And to the points of Rickâs comments just a minute or two ago, working with these outsourcing partners in the next few months really help us unlock the ability to move faster here over just the coming four, five, six quarters. Got it. Right. And then as you think about backlog addition opportunities, would they be bigger in terms of new customers or would it be kind of expansions of current customers? So as you think you grow backlog longer term, is there one that clearly is a bigger contributor there? I think youâll see a mix of both. Again, our strategy here is less to grow backlog and more to scale our operations against the existing backlog. But we do anticipate that over the coming handful of quarters, youâll see us add both new customers and new projects with existing customers. Got it. And just last one, gross margin. I think you gave some color; I just want to be clear. So would â is it fair to say gross margin in the first quarter would be the trough for the year or low point for the year? How should we think about gross margin? Yes. I think we said pretty clearly, last quarter, we expected, when we reported a 15% gross margin, that, that was a low watermark. So we emphatically feel that thatâs still very much a low watermark. Progress against the 18.7%, we reported this quarter, we expect to see that happen, but the progress can be stair-step. So we will talk about the progress as we make it each quarter. Thank you. I understand the outsourcing push is helping to accelerate the rate of system deployments. But is there any negative offset on the gross margin line, because I believe in the past, the company has spoken to or talked to a high 20% gross margin target versus kind of high teens today within systems. Is that target still achievable with a higher level of outsourcing? Yes. Thanks for the question, Chris. In fact, we think that our gross margins are higher long-term under our outsourcing initiative. Now we did talk last quarter about the aggressive ramp to bring on some of these outsourcing partners, was definitely coming along with some increased short-term expenses to ramp these partners. As you can imagine, we have redundant resources, right, as we are ramping partners and redundant supply chains and kind of a whole host of costs that not only flow through COGS, but also flow through OpEx. So, we are still seeing some of those transitory costs associated with the outsourcing program that is a negative near-term impact to gross margin. But we think that, that very quickly flips to a positive and over the long-term leads to not only higher gross margins, but just the ability to deliver these systems with less risk and the ability to do many, many more systems concurrently than we could do on our own. Thank you. If I could just maybe follow-up quickly on that. Rick, if I look from fiscal Q1 to fiscal Q2, the company is guiding revenue up mid-single digit, high-single digit percent at the midpoint, but a roughly unchanged EBITDA loss. Is that just due to the ramping of the outsource partners? And is that like effective margin down on the gross margin side or the OpEx side? I think one of my comments I made in the prepared remarks was that we saw a relatively low amount of third-party special projects in fiscal Q1. So, those costs are â can be variable, a little bit less easy to predict on kind of a quarter-in, quarter-out basis. I think the implicit of my Q2 guidance is a little bit more of an average type of quarter in terms of third-party and one-time costs relative to what we expect looking forward for the year. Does that help? Thanks. Absolutely. Thanks. And if I could just follow-up on something maybe more thematic, if you guys look at the backlog of projects or you are engaging with customers, is it more on the brownfield side, essentially upgrading or modernizing an existing facility, or is it more greenfield, so I am just kind of new warehouse capacity coming to the market? Thank you. Yes. Our existing backlog, Chris, is heavily concentrated to retrofits to brownfield. That being said, as we think about the market over the long-term, we see a very, very large market opportunity with greenfield as well. I think as you know one of our key â one of the key benefits that we have as a business is there is no other end-to-end automation technology that can really work effectively and efficiently in a brownfield environment. But shifting to the greenfield market, we are incredibly more economically efficient. We just bring a much, much stronger ROI versus legacy generation end-to-end automation systems. So, we do anticipate that you will hear us over the coming years talk more and more about greenfield opportunities as well. Today, backlog is highly brownfield. Thank you. One moment please. Our next question comes from the line of Rob Mason of Baird. Your line is open. Yes. Good afternoon. I just had a quick question, Tom. I think you mentioned that you expect cash to be at the low watermark. Obviously, you build â inferring, you build cash through the year. Just was curious if you could speak to how the cash flow profile should play out this year. I am just curious how lumpy the payments from your customers could be on a quarter-to-quarter basis. Just how we should think about free cash flow generation through the year or cash generation through the year? And then secondarily, with the push on outsourcing that you have had, has there been any change in how you view CapEx or the capital intensity from maybe the plan when you first came public? Yes. Thanks for the question, Rob. So, you are correct, our cash flow from the customer payment side is actually quite a bit lumpy. We tend to have large milestone payments from our customers that are far fewer, therefore lumpier than our vendor payments, which are much smoother, as well as our revenue is quite a bit smoother. So, the quarterly performance on the cash, you definitely could potentially see up and down sequential type of quarters. That being said, we feel confident enough to say that our starting cash position, which was of $353 million to start Q1, is our low watermark for the year. Shifting to your CapEx question, we anticipate that our CapEx will be relatively light. Our operating plans for this year, our CapEx is essentially associated with office equipment and a little bit of engineering test tools. That being said, as we think about kind of the mid, long-term, there is definitely the potential that we could have projects where we do use more CapEx. But in the near-term, we expect to be pretty CapEx light. Do the contracts for newer customers, maybe like the ones you just brought, the one that you just brought on, does the cash flow â the upfront cash flow, upfront payments, does that continue with new contracts as well? Yes. Rob, thank you. We donât like to speak to specific new customers. But if I generalize across our near-term pipeline, in general, yes. We anticipate that we have a strong working capital positive relationship across the life cycle of our projects with our customers. That doesnât mean in the future that we wonât support a customer that wants to pay more perhaps and have a more even or even slightly negative cash flow. So, we will reserve that opportunity for later. But for now, our business is constructed with strong positive working capital. Thank you. One moment please. Our next question comes from the line of Joe Giordano of Cowen. Your line is open. Hey guys. Thanks for taking my questions. So Tom, when I think about this quarter versus last quarter and your actual results versus what you guided, like can you maybe contrast us how you formulated the guides? And last quarter, obviously, it was like a substantial massive beat over the top end. This is still very strong over the top end, but the magnitude is very different. So, like how â when you formulated those initial estimates versus what came out, like talk us through how those were different. Yes. Maybe just one observation to give you a little context as to how we think about it, we are beginning to benefit from having more systems add up. Therefore, the variability and volatility and what we predict is lessening, right, so less variability. We are able to get a little bit tighter range. I think you can see that implicit in the guidance still is, our guidance ranges are narrowing a little bit as times move forward. So, thinking back to Q3 and Q4, where you saw some pretty significant top line beats, I will point back to the words we used at the time. As we are compressing schedules and we are kind of hitting key milestones a little bit more rapidly, that led to some pretty strong outperformance. Well, now we are getting a little bit more spread across these systems. Itâs just a bit more predictable. Yes. That makes sense. As you guys have been adding at an accelerating rate here, you added three a couple of quarters ago, then four and then five and six. Like is there like a target that you are trying to get up to? Is it 10? Like how many can you guys theoretically even put into production in a quarter? And how many do you even like want to? Right. So, we are not looking to add an additional system each quarter, if that makes sense. But our goal is to enable the right ecosystem of outsourcing partners that manufacture everything we do, right. SymBotâs cells, partners that install and run the projects for construction and installation, and then to be a fantastic manufacturer and designer of these systems that enable those partners to have this business scale so that we can do multiples of what we are doing today. Our focus is on scaling this business to really address the massive TAM that exists. So, I wonât predict how many that gets to, but we do believe itâs many multiples of what we are doing today. And then maybe last. Rick, when I speak to clients after having the initial discussion about the technology itself and the markets you serve, it always comes back to the share structure and liquidity. And just curious for your comments on how you see that now and where you would ideally like to see that potentially in the future, if itâs different than it is today? Like liquidity is always â the liquidity of the shares is always like the first question I get asked from clients. I am just curious if you have any comments on where that is now. And is it optimal? Is it how â do you plan on â are there things you can do to address that? Yes. No, I think itâs fine where it is today. Itâs not optimal. I think at some point â the reason I said itâs fine where it is today because we are just ramping. As we think to respond â to reflect to what Tom said, if we are going to grow at multiple times our sales and do multiple applications, we probably are going to want more shares out there. And so we donât have to do that. We are generating â we are in a very strong cash position, and our contracts are structured to do that. But it is something that I think about. So, I am not hung up on owning between me and SoftBank and Walmart having just three people on such a large percentage of the shares. We would like, when the time is right, to have large investors own more of the shares, and we think we will have very good uses with that liquidity. One thing that we have seen a little bit of a benefit from, Joe, recently that you may have seen is we have seen lockup triggers be released. So, we now have 22% of the 555 million shares are now unlocked. To Rickâs point, a significant portion of that is held by affiliated partners of ours, SoftBank and Walmart, but we are beginning to see the benefit of increased employee shares and all those shares being unlocked as well that might begin to alleviate a relatively less liquid stock out there. Thank you. One moment please. Our next question comes from the line of Derek Soderberg of Cantor. Your line is open. Yes. Hi guys. Thanks for taking my questions. I wanted to start with software revenue. Tom, I guess I would have expected that software license revenue would have been a bit higher. Can you just help me understand how many of the eight live production modules are generating software license revenue today? And is that software fee sort of in the mid-single digits percentage annually? Is that correct? Yes. Thank you for the question, Derek. So, we have eight systems that are up and running and in fully-functional production mode, and all of those are receiving software and operations revenue. Now, donât forget that six of those were pre â or generally available launch of new product. So, those six generational technologies were sold effectively as prototypes, proof of concepts and carry generally not only less software revenue than our go-forward business model, but much less profitable software revenue. The other thing to remember, too, is that these two systems that have come live since, one of them was late in the last quarter, the other one was late in the quarter prior to that, so those waterfall streams are just starting to trickle in. You should expect to see it build from here, but it will build slowly. And I think importantly as well, while we are growing our systems revenue rapidly, continue to be â continue to represent a small portion of our overall revenue, so, operations revenue and software revenue taken together for those systems in our backlog, the $12 billion backlog, represent a mid-single digit percentage of revenue, not individually each component, but taken together. Got it. Thatâs very helpful. And then my follow-up is on the backlog. Curious if part of the backlog growth with existing customers included BreakPack. I am just curious if thatâs the case. And then within the $12 billion backlog, are there any agreements in there for non-ambient food or cold storage applications, or is it all ambient food and generalized merchandise? Yes. Thanks Derek. So, no, you should read the backlog increase besides the two new systems, the UNFI system and the C&S system I referred to. Thatâs â the bulk of that is associated with cost-adjusted pricing across the existing backlog rather than a change in the mix of the systems. We havenât addressed that, and thatâs something that might be hard to address as we look forward. Our customersâ strategies are often something they want to keep to themselves. So, no, we havenât addressed the mix of the specific technologies in our backlog. Thank you. Iâm showing no further questions at this time. I would like to turn the call back over to Jeff Evanson for any closing remarks. Thank you, Valerie. And thank you everyone for joining our call tonight. We appreciate your interest in Symbotic, and we look forward to seeing you at conferences, on our warehouse tours or virtually when we talk over the next quarter. Have a great night. Bye-bye. Thank you. Ladies and gentlemen, this does conclude todayâs conference. Thank you all for participating. You may now disconnect. Have a great day.
EarningCall_999	Greetings. Welcome to BOK Financial Corporation Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Steven Nell, Chief Financial Officer for BOK Financial Corporation. Thank you. You may begin. Good morning and thanks for joining us. Today, our CEO, Stacy Kymes, will provide opening comments. Marc Maun, Executive Vice President for Regional Banking, will cover our loan portfolio and related credit metrics; and Scott Grauer, Executive Vice President of Wealth Management, will cover our fee-based results. I will provide details regarding the key financial performance metrics. And Marty Grunst, our recently named incoming CFO, will provide our forward guidance. PDF of the slide presentation and fourth quarter press release are available on our website at bokf.com. We refer you to the disclaimers on Slide 2 regarding our forward-looking statements we make during the call. Starting on Slide 4, fourth quarter net income was $168 million or $2.51 per diluted share. The strong results of the fourth quarter continued to build on the earnings momentum we have been developing throughout 2022. This quarter was the highest pre-provision net revenue in our history. Through the fourth quarter, we've now put together 5 straight quarters with solid core loan growth, with annualized core loan growth of 13%. Our fee business has remained strong for the quarter and for the year, despite the worst combined equity and fixed income markets since the late 1960s. As short-term interest rates continued to rise during the quarter, the combination of our asset-sensitive balance sheet and growth in earning assets drove a $36 million increase in net interest revenue and a 30 basis point linked-quarter increase in the net interest margin. Credit also goes to our diverse fee base, with linked quarter fees stable despite the full-quarter impact of implementation of previously announced changes to our customer overdraft program, as well as the continued effects of the mortgage origination market downturn. We did experience an increase in linked quarter net charge-offs. However, our asset quality trends remain unsustainably good. In recognition of the strong growth in loans and unfunded commitments during the quarter, we did add to our credit loss reserve. The uncertainty in the economic outlook remained high, with slightly less favorable key economic factors this quarter. Turning to Slide 5. Period-end core loan balances increased $773 million or 3.5% linked quarter, with growth spread across C&I and commercial real estate. Unfunded loan commitments grew $839 million linked quarter and have increased $2.9 billion [ph] over the last 12 months. Utilization rates remained slightly below historical norms, so capacity exists for continued growth in outstanding balances. Average deposit volumes continue to remain high compared to pre-pandemic levels. We did experience a decrease of $1.6 billion or 4% this quarter, with attrition in both interest-bearing and noninterest-bearing balances. These declines were consistent with industry trends in response to the continued efforts of the Federal Reserve to move short-term rates higher to slow inflation trends. Assets under management or administration grew $4.3 billion or 4.5% linked quarter and were down $5.2 billion or 4.9% compared to last year. The market impact on equity this year which comprise approximately 1/3 of the total, was partially offset with new sales driving the performance. I'll provide additional perspective on the results before starting the Q&A session but now Marc Maun will review the loan portfolio and our credit metrics in more detail. Thanks, Stacy. Turning to Slide 7. Period-end loans in our core loan portfolio were $22.5 billion, up 3.5% linked quarter. Total C&I loans increased $591 million or 4.3% linked quarter and have increased $1.7 billion or 13.5% for the year, with growth across all sectors. Unfunded C&I commitments increased 7.4% linked quarter. Commercial real estate loans increased $133 million or 3% linked quarter and have increased $775 million or 20% for the year. This effectively returns those balances to our 2020 level after experiencing significant paydown activity in 2021. The annual increase was primarily driven from loans secured by multifamily residential properties and industrial facilities. Unfunded commercial real estate commitments increased 4.9% linked quarter. We take a disciplined approach to our CRE lending by allocating 185% of Tier 1 capital and reserves to total CRE commitments. We are presently at the upper limit of that commitment range but do expect outstanding CRE balances to grow in 2023 as construction loans fund up. Health care balances increased slightly this quarter, up $18 million or 0.5% but have increased $430 million or 12.6% for the year, primarily driven by our senior housing sector. Health care unfunded commitments increased 16% linked quarter which we expect will produce additional balance growth. Energy balances increased $53 million or 1.6% linked quarter and have increased $418 million [ph] or 13.9% year-over-year. Unfunded commitments increased 9.6% linked quarter, resulting in an average utilization rate of approximately 49%, creating more capacity for continued balance sheet growth. General business loans recorded a strong quarter, with balances increasing $368 million or 11.8% linked quarter. Loans in the general business category are mainly from our wholesale and retail sectors. Loans in our services sector also increased, with balances up $151 million or 4.6% linked quarter. Service sector loans consist of a large number of loans to a variety of businesses, including Native American, tribal and state and local governments as well as tribal casino operations, foundations, not-for-profit organizations, educational services and specialty trade contractors. Combined services and general business loans have increased $844 million or 13.9% year-over-year. Unfunded commitments in the combined services and general business categories increased 4.4% linked quarter, slightly lowering utilization rate. Utilization rates continue to run below pre-COVID levels, so we remain well positioned to increase outstanding loan balances without it being predicated on any new customer acquisition. Over the last 12 months, core loans have grown $2.6 billion or 13%, the largest annual dollar increase in our history, excluding acquisitions and PPP loans. Although we don't expect loan growth to continue at this pace, we believe that the momentum we've experienced over the past 5 quarters will continue as we enter 2023 and customers increase their line utilizations. Turning to Slide 8, you can see that credit quality continues to be exceptionally good across the loan portfolio. Nonperforming assets, excluding those guaranteed by U.S. government agencies, decreased $22 million this quarter. Nonaccrual loans decreased $9 million and repossessed assets fell $15 million [ph]. In consideration of strong growth in outstanding loan balances and unfunded commitments this quarter, we added $15 million to our provision for expected credit losses. The level of uncertainty and the economic outlook of our reasonable and supportable forecast remained high and key economic factors were slightly less favorable to economic growth across all scenarios, with our downside forecast probability weighting unchanged linked quarter at 40%. Given our solid credit position today, a ratio of capital allocated to commercial real estate that's substantially less than our peers and a history of outperformance during past credit cycles, we believe we are well positioned, should an economic slowdown materialize in the quarters ahead. We realized net charge-offs of $15.5 million during the fourth quarter, essentially all related to a single credit. For the full year, net charge-offs averaged 10 basis points which is far below our historic loss range of 30 to 40 basis points. Looking forward, we expect net charge-offs to continue to be low. The combined allowance for credit losses was $297 million or 1.31% of outstanding loans at quarter end. We expect to maintain this ratio or to migrate slightly upward as we expect strong loan growth to continue as we -- as well as continued economic uncertainty due to market conditions as the Fed pursues their goal of reducing inflation. Both of these conditions support credit provisions going forward. Thanks, Marc. Turning to Slide 10. Total fees and commissions were $194 million for the fourth quarter, relatively unchanged from last quarter. However, the third quarter included record-high results for our commodity and hedging activities as well as our bank-wide investment banking activities. Trading fees increased $9 million linked quarter as we took advantage of favorable market conditions and increased market volatility. Our commodity and hedging activities declined $4.7 million from last quarter's record high, with linked quarter declines in both energy and interest rate derivatives. Bank-wide investment banking activities fell $2.4 million from last quarter's record high. Commercial loan syndication fees increased $2.3 million linked quarter, offset by a $4.7 million decrease in other investment banking fees, primarily fees from our municipal investment banking segment. The combination of our investment banking and customer hedging activities from our wealth and commercial segments generated $91 million in fee income for the year, an increase of $36 million or 67% compared to 2021. Fiduciary and asset management fees were $50 million for the fourth quarter, relatively flat linked quarter. For the year, these fees increased $18 million or 10%, primarily due to reduced fund fee waivers driven by the increase in short-term interest rates as well as market-driven increases to our oil and gas fees. Our assets under management or administration finished the year at $99.7 billion, an increase of $4.3 billion or 4.5% linked quarter, with growth across all categories. Our asset mix for assets under management or administration was relatively unchanged this quarter, with 45% fixed income, 32% equities, 14% cash and 9% alternatives. Deposit service charges decreased $2.3 million this quarter, primarily related to the changes we implemented during the quarter to our overdraft program. Commercial service charges also decreased slightly as we increased the earnings credit rate for our customers. Mortgage banking revenue was $10 million for the quarter, down slightly linked quarter, with production revenues down $1.6 million due to a $119 million decline in production volumes combined with narrowing margins. Mortgage servicing fees increased slightly this quarter and are 25% higher than fourth quarter last year. Over the past 18 months, we strategically acquired servicing of approximately $6 billion of unpaid principal balances that will add $15 million of annual servicing revenue. I'll now turn over the call to Steven to highlight our net interest margin dynamics and the important balance sheet items for the quarter. Steven? The rapid increase in interest rates, combined with our strong loan growth and our asset-sensitive position, resulted in linked quarter net interest margin expansion from 3.24% to 3.54%. This was partially offset by the expansion of our securities portfolio which slightly dilutes the margin but increases net interest revenue. The average effective rate on interest-bearing deposits increased 59 basis points this quarter, bringing our total deposit beta to 32% for the year. Average earning assets increased $757 million compared to the last quarter. The average available-for-sale securities portfolio increased $648 million this quarter as we increased that portfolio $1.5 billion linked quarter to pivot back towards a more neutral interest rate position. Average loans increased $377 million, while cash and cash equivalents fell $180 million. On Slide 13, you can see that our liquidity position remains very strong. Our loan-to-deposit ratio increased to 65.4% this quarter from 59.8% at September 30. Total deposits decreased $1.9 billion and loan balances increased $767 million this quarter, although increasing our current loan-to-deposit ratio remains well below the pre-pandemic level of 78.7% at year-end 2019, providing sufficient on-balance sheet liquidity to meet future customer loan demand. Our capital position remains strong as well, with a common equity Tier 1 ratio of 11.7%, well above regulatory thresholds. It is notable that even with our strong loan growth and material unrealized losses in our available-for-sale securities portfolio, our tangible common equity ratio remains strong at 7.63%. Both the holding company and the bank hold investment-grade ratings from all 3 major rating agencies. With such strong capital levels, we once again were active with share repurchase, opportunistically repurchasing 314,000 shares at an average price of $103.14 per share in the open market. We expect to be active in repurchasing shares over the next 4 quarters. Turning to Slide 14. Linked quarter total expenses increased $24 million, $16 million from personnel and $8 million from non-personnel expense. $10 million of the personnel expenses from cash-based compensation due to increased sales activity combined with a onetime employee incentive. Deferred compensation expense which is directly influenced by market valuations, increased $5 million. The linked quarter increase in non-personnel expense was primarily driven by increased professional fees and business promotion spend as well as a contribution to the BOKF Charitable Foundation. Thanks, Steven. Turning to Slide 16, I'll cover our expectations for 2023. We expect mid- to upper single-digit annualized loan growth. The economy and our geographic footprint remains very strong and may outperform in this cycle, given the high level of business in migration from other markets. Sizable increases in unfunded commitments during 2022 and low levels of line utilization should be an additional tailwind for loan growth. During the fourth quarter of 2022, we added $1.5 billion to our available-for-sale securities portfolio to move us closer to an interest rate-neutral position. We expect to hold the portfolio at this higher level in '23. With a strong base of core deposits and expect modest attrition in interest-bearing and demand deposits to move our loan-to-deposit ratio somewhat higher while still remaining below historical levels. Currently, we are assuming 25 basis point increases in February and March before the Federal Reserve pauses. We believe the margin will migrate modestly lower in the first half of 2023 as interest-bearing deposit betas increase, demand deposit balance attrition runs its course and our interest rate position is more balanced. The December net interest margin was 3.57%. Net interest income is expected to approach $1.4 billion, in total, for 2023. In aggregate, we expect total fees and commissions revenue to approach $750 million for 2023. We expect expenses to be below Q4 2022 levels in the short term, migrating back towards this level throughout 2023. We continue to expect revenue growth to outpace expense growth, resulting in an efficiency ratio which remains below 60%, nearing 57% by year-end '23. Our allowance level is slightly above the median of our peers and we expect to maintain a strong credit reserve. Given our expectations for loan growth and the strength of our credit quality, we expect quarterly provisions similar to the second half of 2022. Current asset quality is very strong and does not foreshadow material deterioration. Changes in the economic outlook will, of course, impact our provision expense. And we expect to continue our quarterly share repurchases as closing commentary. Thank you, Marty. The strong fourth quarter results, in fact, earnings for the year demonstrate how the bank was positioned for earnings growth in this rising rate environment. We leaned in to becoming more asset sensitive, given the unique nature of the events causing rates to drop precipitously. We chose this approach and have now moderated back to our more neutral interest rate risk profile. We materially benefited from our asset-sensitive balance sheet position in 2022 as well as our focus on top line revenue growth. We recorded the strongest annual loan growth in our history, with loan growth across the geographic footprint and across business line sectors. As a result of our diverse fee base, we came very close to covering the 53% year-over-year decline in mortgage banking fees, establishing new records in our commodities and investment banking businesses. Last year included loan loss reserve releases of $100 million compared to actual provision of $30 million in 2022. Our broad selection of products to our client base produced the top line revenue growth we set our focus on at the beginning of the year and has us well positioned as we start the new year. Credit quality continues to be very stable and better than pre-pandemic levels, though it is likely unsustainable. We continue to maintain a combined allowance above the median of our peers. We are in a stage where investing in strong banks versus trading the sector are expected to matter. Banks with thoughtful growth, a diverse business mix, meaningful core deposits and proven credit discipline should outperform. We are well positioned for however the economy should shift, favorable or negatively, as we move through the incoming year. I am proud of my teammates here at BOK Financial, who work very hard to deliver these strong results. As we conclude, I'd be remiss not to acknowledge my friend and our long-time CFO, Steven Nell, as this will be his last earnings call. Steven has been an asset to our company and served with great character. We will miss his contributions. We are fortunate to have such strong talent with Marty Grunst stepping in to fill the CFO role. Many of you know Marty from his time as our Treasurer before he became our Chief Risk Officer. First, I'd like to just echo Stacy's comments and Steve, congratulations on your pending retirement. And Marty, congratulations on the new role and looking forward to working with you in that role, going forward. Maybe just looking at the asset sensitivity and the steps you took this quarter, are you where you want to be in terms of now being more fully neutral? Or should we expect to see some additional moves to the securities portfolio to get there? And then on the funding for that, was that match funded or what's the duration on funding on that positioning? Yes. So Jared, we're pretty happy with the neutral position that we got out of that increase and we'll continue to look at that position as the year progresses. I mean, that's something that we look at on a continuous basis. But that's all funded with variable rate funding. It has to be to generate the impact of the rate risk position. So that's how that played out. Okay. So on that trade, we can expect to see maybe spread expansion as rates start to move back down later on. What's the duration on the securities purchases? Yes. So those are our typical mortgage-backed securities and so that's kind of in that 3-year, a little longer than that, duration territory. Okay. And then on the loan growth, it seems like there's, like you said, good momentum going into the year. Are you seeing better spreads on loans now? And then also, what would have to happen, I guess, for customers to come back in and reengage and see that utilization rate move higher as we go forward? Yes. Jared, this is Marc Maun. The spread really hasn't, I wouldn't say, expanded but it hasn't contracted either. It's really just tracked along all year long, I'd say, fairly consistent. So we haven't really seen any significant change in that. As far as utilization rates go, I mean, focusing on the C&I side because CRE will go up naturally just from construction loans. But the C&I side, it's more just, I think, a reflection of our customers have been expanding commitments at a faster rate than they've been borrowing. And I think from their cash positions and liquidity positions, that they're going to expend some of that first before we start to see utilization rise. But we would expect that to continue as you progress through time. It's still some of that, that just has to be used up in the business. Okay. And then just finally on capital, where would you like -- are you focusing primarily on the TCE ratio here in terms of looking at how you want to control excess capital? Is that the right thing for us to be focusing on? And where do you think ultimately that should flow out or stabilize? We've ranged -- this is Steven. We've ranged somewhere in between 11.5% to 12% of tangible common equity and that's a range that we like. That's what we look at primarily. Sometimes we are constrained by total capital. But we've got a nice level of buybacks that you've seen over the last several quarters. We continue to -- we think we'll continue to do that, opportunistically use capital in that fashion, pay a good dividend. We raised that just a little bit in the quarter. And then the rest, we'll allocate towards loan growth and balance sheet growth to support our businesses. So that's generally how we think about it. I just wanted to ask the buyback question a little different. I mean, if you look at 2022, you repurchased around 2.5% of the company. It was about $155 million of stock. Should we expect something similar for 2023? Or -- I mean, you guys clearly have excess capital so it feels like you could do more than that potentially. I would say, probably similar. I think that kind of range that you've seen quarterly which has been anywhere from $30 million to $50 million, fits kind of the capital profile. We feel like we've got that level of dollars to buy back stock and it depends on the quarter. Scott executes that for us and we opportunistically find a good price and we'll be a little more active. If the price runs up, we'll slow down a bit. So that's why you see it variable across those various quarters. But I would anticipate a similar level of buybacks in 2023 than 2022. But again, it's all contingent on what the market looks like. Okay. And BOKF has, for a long time, been a very experienced energy and health care lender and it's a meaningful amount of your loan book. I know energy is doing great, just given the pricing backdrop. But yes, you start to hear of some weakness within health care. We're not seeing it in y'all's numbers at all but maybe just an update on how you're thinking about your credit quality for the next couple of years out of your health care borrowers. Yes. Brady, this is Marc. We certainly are keeping our eye on the health care portfolio significantly because probably the headwinds there are around the labor costs associated with the senior housing industry which is the primary area we focus on. And the catch-up that has to happen with Medicare and Medicaid reimbursement rates and which hasn't completely got there. So we're seeing a little bit of issues with that but it's something we want to keep our eye on. But over time -- we've been in this business a long time. We've been very selective about who we're focused on. Demographics favor the industry. We've focused on regional operators, not major chains and large operators, people that have an understanding of the industry. And so we've been through cycles before and we think we're comfortable with our customer selection. But certainly, that's the one we're going to keep probably our strongest attention to in 2023. I might just add, if you think about that sector, from my perspective, over the last 20 years, it's probably our lowest net charge-off segment in our entire loan portfolio. We do have criticized classified risk, where because of the timing of cash flows between when operating expenses are incurred versus when they may be reimbursed from private or public payers, there can be some mismatches that create some short-term [ph] or classified levels. But if you think about it over a longer period of time, the loss rates in this portfolio are exceptionally low. It's actually probably our best-performing asset quality segment in our entire portfolio over the last 20 years. All right. That's helpful. And then finally for me, BOKF has done a great job of growing fiduciary and asset management fees. I mean, if I look at it over multiple years, it's just been a great source of revenue growth for you guys. How should -- I mean, not necessarily next quarter or even next year but as we look out for the next couple of years, should we continue to expect BOKF to see this nice revenue growth in that segment? Sure. So this is Scott. We feel good about really the fact that not just our asset mix which is very well diversified between fixed income, equity alternatives but a healthy mid-teen percentage of cash which now is obviously serving us well in terms of fee generation off money market funds, both our proprietary and others that we utilize. So that's been nice to get that momentum and revenue generation back. But we're really seeing significant progress in growing assets across all the various business lines inside of Wealth Management as well as in the various customer segments that we serve. So we're -- we continue to be optimistic and feel good about how we're positioned to continue to see that segment grow, given our account, new account attraction of assets with probably less market exposure and decline than many others do that have a more skewed asset mix than us. So we're very optimistic about it, yes. One of the other things that differentiates us there a little bit is, if you think about both the pandemic and the decline in asset value during that period of time and then last year where both fixed income and equity markets declined really for the first time since 1969, the way we deliver into that segment through a very personalized approach, people value that. So as some in the market are moving more toward automated approaches or things like that, the ability to have a touch point, to talk to an adviser, to talk about strategy and to reassure folks in difficult market circumstances that -- the value of that is much higher today than perhaps in previous periods because of the volatility that's been experienced. And we think that's a differentiator for us in the long term to help us grow this asset base. Yes. Back to the Midwest, I guess. But can you guys help us a little bit on the cadence of the margin? You kind of alluded to it a little bit in your guidance. And I know you're focused more on NII but you're saying modestly lower until maybe some of the deposit rate and flow pressures ease. But does it feel -- what kind of erosion are you talking about earlier in the year? And do you think it can maybe stabilize and float higher later in the year? Yes. Jon, this is Marty, I'll take that. So our rate risk position is now pretty neutral to a rate increase. And we do think we'll get a rate increase or 2 early in the year and that might be modestly beneficial, just at least initially. The securities portfolio will continue to reprice higher. So those are kind of positives there. Deposit mix shift is, of course, going to be the counterbalance as that kind of plays out. And loan growth, that will be supportive for net interest revenue but just ever so slightly dilutive to margins. So it's not at all clear exactly how that shakes out timing-wise but that should result in some modest decline in margin and nothing that's really significant one way or the other. Okay, okay. Got it. That's helpful. So not material changes. Maybe Marc or Stacy, I wrote down a couple of quotes, Marc. You said should an economic slowdown materialize and Stacy, you said credit is unsustainably good. So help us understand where your heads are at in terms of what you're seeing on credit. And it doesn't feel like you're signifying any kind of material slowdown in loan growth, or am I wrong on that? This is Stacy. I think it's interesting to listen to the market pundits over the last 6 months from there's a deep recession coming to a soft recession to now a soft landing. I don't think any of us know with any level of precision what the future holds. We've got a deeply inverted yield curve but we're also coming off of pandemic that's unprecedented. And so all of the economic metrics that people are accustomed to trying to use to predict those types of economic outcomes are probably not as reliable. Our viewpoint is, if you think that we're going to have a soft landing and we're going to grow, we've demonstrated our ability to grow. We grew loans organically 13% this year, $2.6 billion. We're in a great footprint and we're well positioned for growth if the economy does achieve a soft landing. Our footprint is much better than most. But if your view is that there will be a recession and there will be more likely credit deterioration, then we're one of the best-performing credit banks in the regional bank space. Largest bank in the United States that didn't participate in TARP. Our credit performance through the last meaningful downturn materially outperformed our peers. Credit is hard to forecast. We typically will say, the next 6 months are pretty easy to see. After about 6 months, the lens gets really foggy. But as we look forward from here, our classified loans are down, our potential problem loans are down. Our nonaccrual loans are down. We're starting from an incredibly low point. And so even some migration up wouldn't necessarily even indicate a deterioration really in long-term credit trends, really just a movement from abnormally low levels. And so I don't know that any of us want to forecast exactly what we think is going to happen because nobody really knows. But if it's a growth scenario, we're going to perform well. If it's a credit event that people are worried about, then I think our credit history and our discipline around that will serve us very well if that is the scenario that has people concerned. Not in the least. I mean, I think our view, even when people were forecasting a recession, was that it's entirely likely that our footprint -- think about Dallas, Houston, Denver, Phoenix, what's happening in those markets, that there may be a level of material outperformance in our core markets than there maybe in the rest of the country if there is a recession because the level of in-migration into these markets is significant. And the economic growth that's happening is far outpacing the national economy. So even when the general consensus was there's going to be a recession, we thought that we would be in a much better position just because of that footprint. But we're not seeing anything today in discussions with our borrowers and our own data that would indicate that we think there's a recession that's imminent. On the brokerage and trading line, I think the slide deck attributed higher levels of trading from elevated margins. Any more color on the drivers of that higher margin? And how sustainable is that into 2023? Well, this is Scott. So we saw in all of the fixed income markets with the market volatility that Stacy alluded to, we saw unprecedented volatility in the fourth quarter. But we continue to see, with the level of rate uncertainty that's out there in the marketplace, good spread capability. We're nimble and have a reasonably well-diversified product mix inside of the fixed income arena. So we think that until there's an abatement of the uncertainty on the market volatility, we'll continue to enjoy better margins there. Okay, appreciate that. And then going back to deposits and funding, pretty big material outflow of demand deposits in fourth quarter and we're seeing this across the industry. And it sounds like the guidance you put out there assumes continued pressure here. I'm curious what your expectations are. And within that guidance, when do you expect that to stabilize? Yes, this is Marty. Let me give you a little color there. So yes, our guidance does presume our loan-to-deposit ratio comes up some over '23. And it presumes that our cumulative beta on deposits continues to increase somewhat over '23 to accommodate the retention of our interest-bearing deposits. The DDA attrition, we see that more in the first part of the year. Any of these attrition factors, they either burn out or conditions change and it's no longer relevant. That's kind of how we think about the outlook there. Matt, this is Stacy. I think that we've seen a commentary in the markets around the deposit attrition in the industry broadly. I think a couple of things that are unique about us that I think need to be brought out. Number one is we're starting from a much lower loan-to-deposit ratio than most of our peers in this space. We end the fourth quarter at low 60% loan-to-deposit ratio. Steven and I were talking, we've run this bank at upper 70s, low 80s for a long time. That's typically much more normal. And so that starting point gave us the ability to manage this liquidity and margin and we are actively doing that. We also have a lot of stored liquidity that's effectively off-balance sheet through our broker-dealer and our wealth group, where funds that have left our balance sheet have gone to other sources that are controlled through our broker-dealer or our wealth group, that in the event that we need liquidity in a future period, can be brought back at the right price. So it's not something that we see is necessarily problematic. It's something that we're actually actively managing and watching to optimize for our shareholders. Yes. Okay. I appreciate that, Stacy. And I guess just kind of staying on this topic here. In the fourth quarter, I mean, the funding plan was obviously some borrowings to kind of plug the hole. And Stacy, you mentioned some of the store liquidity that you could use at some time but it didn't sound like that's a near-term event. So what is the plan, I guess, for funding at least for the first half of the year? Yes. So we would see both a stabilization in the overall deposit trends and some usage of wholesale really throughout the year on the wholesale side. As you know, the vast majority of our securities portfolio is U.S. government agencies which are ideal for pledging to FHLB. And it's really normal for us to have FHLB funding as a core part of our overall funding base. I mean, that goes back 25, 30 years. So it's really the recent couple of years that are the anomaly. And eventually, we're all going to get to normal balance sheet profile at some point. Remember, Matt, I mean, pre-pandemic, we always view deposits funded the loan book. And the securities book was self-funding through other mechanisms, whether it be FHLB or repo or other activities. That's the way we ran the bank for 25 years and so we're just kind of coming back to that. Deposits didn't fund loans and securities historically. It's only been in the last really couple of 3 years where that's happened. We're still $6 billion higher in deposits today than we were December of 2019. So we've got to put some of this in perspective, based upon the long-term perspective, not just based on a pandemic viewpoint. We have reached the end of our question-and-answer session. I would like to turn the conference back over to Steven for closing comments. Well, thanks again, everyone, for joining us today. If you have any additional questions, please call us at 918-595-3030 or you can e-mail us at ir@bokf.com. Have a great day. Thank you.

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