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EarningCall_300

Thank you for standing by ladies and gentlemen and welcome to the Costamare Inc. Conference Call on the Fourth Quarter 2022 Financial Results. We have with us Mr. Gregory Zikos, Chief Financial Officer of the company. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today Wednesday, February 8th, 2023. We would like to remind you that this conference call contains forward-looking statements. Please take a moment to read slide number two of the presentation which contains the forward-looking statements. Thank you and good morning ladies and gentlemen. 2022 has been a record year for Costamare. With a fleet of 117 vessels including 45 dry bulk ships, the company generated net income of about $520 million. As of the end of the year, liquidity stood at around $970 million. On the containership side, 2022 was a unique year with the first half drawing upon favorable market conditions with strong demand and logistical disruptions continue to impact the sector, while during the second half, charter rates and asset values normalized as a result of reduced cargo demand and the return of capacity previously tied up by congestion. We chartered the total of 16 secondhand containerships during the year, which added incremental contracted revenues of more than $550 million. Total contracted revenues amount to $3.2 billion with a weighted average remaining time charter duration of about 4.2 years. We are above 95% covered for 2023 and we have proactively arranged long-term employment on a forward basis for a number of containerships coming off charter between 2023 and 2025. At the same time, we are in the process of disposing of some older tonnage at prices fixed during a tight market environment. On the dry bulk side, the new dry bulk operated platform previously announced commenced operations during the quarter. With a negative commitment of up to $200 million, our goal is to grow the business on a prudent basis, realizing healthy returns for our shareholders. On the back of our increased liquidity and containing charter coverage, we are actively pursuing new investment opportunities in the shipping sector that have the potential to provide advanced returns at acceptable risk levels. Moving now to the slide presentation. On slide three, you can see our annual results. 2022 was the best year since our listing. For the year ended, net income was above $520 million or $4.3 per share, while adjusted net income was around $400 million or $3.3 per share. Our year-end liquidity is up by almost $420 million year-over-year to around $970 million. Slide four, during the previous quarter, we announced the setup of a new venture called Costamare Bulkers Inc. CBI will charter in and out dry bulk vessels enter into COAs and trade FFAs and bunker swaps. Until now, we have already invested $100 million with a commitment for another $100 million. Over the last months, we fixed 23 vessels and enter into numerous COAs and FFAs. On slide 5, you can see an update on our refinancing arrangements, which amounted roughly to $560 million without any material increase in leverage. Most of them were coupled with significant improvement of the funding cost and extension of maturities. Our corporate leverage remains below 35% and we continue to maintain a strong balance sheet. Slide 6. We continue to charter all our dry bulk vessels in the spot market chartering 37 ships since our last earnings release. On the container side, our revenue stays at 96% fixed for 2023 and 85% for 2024 while our contracted revenues are up to $3.2 billion with the TEU-weighted remaining time charter duration of above four years. Lastly, we fixed 16 containerships with incremental contracted revenues of more than $0.5 billion. Slide 7. The containership charter market has normalized in the second half of the year mostly due to reduced cargo demand and the return of capacity previously tied up by congestion. The dry bulk market has also weakened and the FFA market indicates significant strategy signs, especially from Q2 2023 onwards. Finally, we continue to have a long and interactive dividend track record boosted by strong sponsor support. On slide 8, our liquidity has increased significantly year-over-year starting at around $970 million. This liquidity gives us the ability to look for opportunities to grow the company on a healthy basis. Moving to the next slide. Here you can see a snapshot of our fourth quarter 2022 results. We had an average of 115 vessels and our adjusted ending about $75 million or $0.61 per share. Our adjusted figures take into consideration the following items the good charter revenues, accounting gains or losses for passive disposals impairments and other non-recurring or non-cash items. On the last slide we're discussing the market. Moving to slide 10. Box rates have normalized from historically high levels. The latest conferencing pictures that have been concluded have been consulted periods at a lower rate. The idle capacity has reached 2.6%. On slide 11, you can see the recent dry bulk market trends where rates have been under pressure. The order book is at 7.5% of the total fleet and new ordering continues to be subdued. With that, we can conclude our presentation and we can now take questions. Thank you. Operator, we can take questions now. Yes, hi. Thanks for taking the question. Maybe we could start on the container shipping side. I was curious about your take on discussions with charterers. So I know you have a degree -- a strong degree of coverage as we move through 2023. But in the instances where you've been having conversations with some of your customers, can you give us a sense of sort of what that dynamic feels like? Obviously we heard from Maersk earlier this morning and I think broadly speaking overall box rates have fallen precipitously. So I want to get a sense of how we should be thinking about sort of charter development over the course of the next couple of quarters or maybe as we think about the next couple of years? Okay. Thanks. Thank you for that and good morning, Chris. So a couple of things. Look, the softening in the charter market, both in charter rates and box rates, it is something that was expected. At some point the congestion is then we have also seen reduced cargo demand for a lot of reasons, but it's got to be inflation-related or it may have to be with the financial targeting, et cetera. Now, as you said, we are pretty much close to 100% fixed for this year, and 85% for the year after. We don't have a lot of ships opening and the trend we see is that apart from the fact that charter rates have been falling, at the same time the period of the picture has been shorter and shorter, and there are extension options that we see back again for two to three months charters option. Now, I cannot predict how the market will go. All I say that, for the time being, we have not seen asset values being softening at the same level, although there is definitely some correlation, but like we haven't seen it yet. So regarding charter rates, first of all, we feel more than comfortable with the quality and the credit standing of our charterers. Also, considering the fact that, they have been extremely profitable over the last couple of years. And secondly, from our side, you saw our liquidity. So in case of like, when we feel that asset values in the containership market are going to be at levels, which we find interesting. I can tell you that, we might be there as a buyer. But for the time being, we pause, we sit and wait. Okay. Okay. That's helpful. And then I guess, I just wanted to come back, and ask a little bit about what your thoughts are in terms of deploying capital in the market, what maybe is the most attractive area in your opinion currently? Obviously, you have ample liquidity as you highlighted on slide 8. So kind of curious where you think the best use of that capital will be, or does it make sense to kind of sit back a little bit and kind of see how the broader macro plays out? Yeah. Look, part of the answer is what I just mentioned is that, when we see asset values on the containership side being correlated to charter rates today, and we would look at it again. But this sort of may take some time, both for second half and also for new building. So this is one area that, I guess, we're going to be active, again, should the market prices justify that. The second applies also for the dry bulk fleet. So still, we don't think that asset values have reached a level where they have become of interest again. But should this be the case, we will deploy capital buying ships at prices, which we feel makes sense, and it's going to position ourselves in a quite opportunistic timing. So it's ship acquisitions both dry bulk and containers. As you've seen we have started the dry bulk trading platform that, we have allocated up to now $100 million that's going to go up to $200 million. This is another area we have been investing. And finally, we are looking at some other initiatives, which have not materialized yet. So, I cannot disclose them for two reasons, both for legal reasons and also because they're not material yet so they're not concluded yet. But we are working on some other initiatives, where we feel that part of our liquidity could be deployed as well. However, if we don't see asset values coming at levels that make sense both on the containership side, and also in the dry bulk side, simply we will sit back and we're not going to be buying any ships. I have to remind you that, we didn't put any new building orders at the high prices we saw in the containership market over the last couple of years, simply because we felt that asset prices were prohibitive, even if the charter rates offered were at high levels as well. So we will take our time. We are patient when like we feel we should be and we will wait. Okay. That's helpful. I guess, maybe one final for me before I turn it over. Just in terms of the trading platform, are you going to need to maintain a higher degree of liquidity in the business in terms of capital reserves to be able to manage the risk potentially associated with that? I guess, kind of, curious about how that might influence how you think about liquidity and cash balances? Yeah. The way we see it now, our equity there it's going to be up to $200 million. And that's it. Of course, if the business grows and if you see more potential, I don't think you would be surprised that we can go higher. But what we have today in mind and let's see how it goes. But what we have today in mind is that those $200 million are going to be more than enough in order to cover our liquidity needs in this business and manage our exposure and our market risk. But as I said, if this thing is something that we feel make sense and we feel more comfortable with the whole setup. And we see potential in that market. The $200 million is not a limit. It is just what we feel we should allocate today. We could easily go north of that if it is justified. Hi. I just wanted to follow-up maybe on the last discussion about the dry bulk fleet and the trading operation. You've obviously moved very quickly here over the past 18 months building up the owned asset base and now you've chartered in those 14 capes and the nine Kamsarmax, which you referred to in the release. And I guess from the -- maybe the perspective of risk or maybe just duration, how should we think about those vessels? Are these short-term charters? Are they longer term? How should we be thinking about those? How they sit in your portfolio today and for how long? Yeah, the ships target in the trading platform, which is asset light. First of all, not all of them have been delivered most of them will be delivered over the next couple of quarters. But the charter period could be between two to three years. However, most of them are on index. So strictly speaking when you have a ship charter on index, there is no real exposure, because it is an index you pay what the market is paying. And you get the COA based on market terms. However, having said that in the future we may have ships with a fixed rate, again for period. And it's going to be a combination of both I guess. But most of those vessels today to answer your question, they are for the period rating up to three years. And most of them are on -- or in index based charter rate. Okay. That's helpful. So good to know that they're index based. And then you do have -- you were saying you have the COAs basically covering them on the other side where you can capture effectively spread? Correct. We have two ways. And at the same time, we have started employing FFAs as well both in order to hedge and also in order to position ourselves. So we've done FFAs. We've done COAs, especially for the vessels that are going to be delivered now. We have 23 vessels chartered in, most of them on index. And for the bank exposure, we will also be doing bunker hedging. Okay. Thank you. And then just on the 23 ships that you are about to have in the fleet is that kind of, a -- is that the right size it needs to be or is that maybe a starting point? Is there a certain number given the liquidity or the capital you're putting forth into that operation? What could be the size of that trading fleet? Yes. No this is a starting point and those ships that were committed over the next couple of months, I would say. I think sooner rather than later, we could easily reach the threshold of the 50 ships being operated. And of course subject to market conditions, we could go to 100 or 250 easily. This is why I said earlier that, if we feel it makes sense the $200 million of total equity commitment, could go higher because at some stage you need to have a meaningful size in this business as well. So it will definitely be 50 higher against sooner rather than later. And in the future it could also -- it could also go to 100 150 or even north of that. Okay. That's very helpful. And maybe just one quick follow-up just on the reference you made to the -- a couple of initiatives you were looking at that you can't comment on. Can we assume that those were maybe outside of dry bulk and containers? Well, it's going to be in shipping. I cannot comment whatever I say -- if I say, it's going to be within dry bulk and the containers I'm giving you partly an idea if I say that it will not the same thing. So I'm afraid I cannot comment at all it's going to be shipping related. Of course, it's not going to be aviation. But this is something both for legal reasons and for the simple reason that is not concluded yet. I cannot comment more on that. You've been clear you want to pursue additional acquisitions if attractive opportunities arise. And given your solid financial position I was wondering how do you plan to balance this additional spending with potential shareholder returns, especially, considering the significant discount to NAV shares are trading at? Yes. It's a question about capital allocation, which comes quite often. And this is the fair question. I cannot rule out share buybacks and we did in the past. And we also increased the dividend in the past and we also had a one-off extra dividend payment. At the same time now for the time being, however, if we feel that the asset values make sense and as I mentioned earlier justify further acquisitions either in the containership segment second part of buildings or sort of, dry bulk vessels, this is something we would look very, very carefully without excluding share buybacks for example, but we follow the market for timely acquisitions should circumstances change. Thank you very much for your interest in Costamare and for dialing in today. We look forward to speaking with you again during our next quarterly results call. Thank you.

EarningCall_301

Good day and thank you for standing by. Welcome to the PAA and PAGP 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] Please be advised that today's conference is being recorded. Thank you, Andrew. Good afternoon and welcome to Plains All American’s fourth quarter 2022 earnings call. My name is Blake Fernandez. I have recently joined Plains as Vice President of Investor Relations. The Company's attractive asset base including its premier Permian operating system, coupled with a long-term capital allocation framework, focused on increasing returns to equity holders makes it an exciting time for the Company. I look forward to engaging with all of you throughout the year. In today's material, we are providing forward guidance for 2023. In an effort to improve communication and forecasting, we have made a few updates including an adjusted EBITDA range, which reflects potential volatility and the underlying commodity market along with the volumetric outlook for each segment. The slide presentation is posted on the Investor Relations website under the News and Events section at plains.com, where an audio replay will also be available following today's call. Important disclosures regarding forward-looking statements and non-GAAP financial measures are provided on Slide 2. An overview of today's call is provided on Slide 3. A condensed consolidating balance sheet for PAGP and other reference materials are located in the appendix. Today’s call will be hosted by Willie Chiang, Chairman; and Al Swanson, Executive Vice President and Chief Financial Officer. Other members of our team will be available for Q&A, including Harry Pefanis, President; Chris Chandler, Executive Vice President and COO; Jeremy Goebel, Executive Vice President and CCO; and Chris Herbold, Senior Vice President, Finance and CAO. Thanks, Blake. We are very pleased to have you join the Plains team. To all on the call, good afternoon everyone and thank you for joining us. Today, we announced strong fourth quarter and full year results, exceeding our expectations in both our Crude Oil and NGL segments. '22 represented a positive inflection point for Plains. We executed on our goals and initiatives for the year. We captured meaningful Permian production growth on both our gathering and long haul systems and our team was able to capture market based opportunities via our integrated business model, flexible asset base as well as commodity price upside. In summary, fourth quarter and full year adjusted EBITDA attributable to PAA was $659 million and $2.51 billion respectively with full year results exceeding our February guidance by $310 million or approximately 14%. As a result, we achieved the low end of our targeted leverage range earlier than expected, which enabled us to announce our multi-year capital allocation and financial framework in November. Consistent with that framework, we subsequently announced a $0.2 dollars per unit or approximately 23% annualized distribution increased in January to be paid later this month, bringing our yield to approximately 8.5% based on current trading levels. Additionally, we completed in or announced several win-win strategic transactions in both our Crude Oil and NGL segments including our Cactus II pipeline, Advantage pipeline, Empress facilities and our Keyera Fort Sask minority JV interest sale, which all further optimize our asset base and streamline our operations. We also achieved record health safety environmental performance by achieving or exceeding our 20% reduction targets in employee recordable injury rate and federally reportable release metrics. While we have made great progress in both of these areas and have achieved top quartile performance, we remain focused on continuous improvement with zero as our ultimate goal from both of these metrics. Looking to 2023 and as highlighted on Slide 4, we provide an adjusted EBITDA attributable PAA guidance in a range of 2.45 billion to 2.55 billion. This reflects year-over-year growth in our crude oil segment underpinned by continued Permian production in tariff volume growth on our gathering and long haul systems. Our guidance also factors in a reduction in our NGL segments primarily driven by lower weighted average frac spreads, and C3+ spec product sales volumes as well as the Keyera Fort Sask which is expected to close this quarter. Al will provide additional color on our guidance in this portion of the call. As shown on Slide 5, we anticipate 2023 Permian crude oil production to grow plus or minus 500,000 barrels a day exit to exit based on an assumed 2022 exit production level of approximately 5.65 million barrels a day. Our updated forecast assumes an average horizontal oil count rig count of 340 consistent with current levels, as part of our routine fundamentals forecasting process will continue to monitor our assumptions regarding natural gas takeaway capacity and commodity prices as the year progresses. Our Permian JV system is well positioned with more than 4 million long-term dedicated acres and operating leverage. As shown on Slide 6, we expect to capture approximately 350,000 barrels a day of incremental gathering tariff volume for the full year 2023 versus 2022. For our long haul systems, we're seeing higher utilization year-over-year, particularly on our Cactus I and Cactus II systems. On Cactus I, we have contracted or hedged a substantial portion of our open capacity for 2023 at levels generally consistent with our prior expectations. We also expect to see similar year-over-year throughput from the Permian to Cushing on our basin pipeline. Furthermore, we anticipate additional volume on Wink-to-Webster, due to an increase in MVCs. In our NGL segment, we continue to focus on optimizing the business as well as improving the predictability of our earnings. During 2022, we completed a transaction to obtain full ownership of our Empress facility and announced the 270 million sale of our interest in Keyera Fort Sask at an attractive multiple in long-term and on terms that will improve our connectivity to the Plains Fort Sask complex. Additionally, we're advancing capital efficient in bottlenecking and expansion projects around our Fort Saskatchewan facility, and we hope to be able to share additional detail with you over the coming quarters. Thanks, Willie. We reported fourth quarter adjusted EBITDA of $659 million, which includes crude oil segments benefits of Canadian market based opportunities and increased volumes across our systems, primarily within the Permian and along with NGL segments benefits from stronger seasonal sales. For the full year, we reported adjusted EBITDA of $2.51 billion, which was $310 million above our initial February guidance. Full year outperformance was primarily driven by market based opportunities captured by our assets throughout the year, higher commodity price benefits and increased tariffs volumes primarily in the Permian systems. Slide 17 through 19 in today's appendix contains walks, which provide more detail on the fourth quarter and full year performance. A summary of 2023 guidance as well as key guidance assumptions are located on Slide 7 and 8. Looking at 2023 compared to 2022 and as illustrated by the EBITDA walk on Slide 7, we expect adjusted EBITDA $2.45 billion to $2.55 billion with year-over-year growth in our crude oil segment and a reduction in the NGL segment. Growth in our crude oil segment is primarily driven by anticipated tariff volume increases in our Permian gathering long haul businesses, due in part to our increased ownership in Cactus II, which is now consolidated into PAA's financials with volumes reported on a consolidated basis and earnings on a proportional basis. This is partially offset by an assumption of fewer market based opportunities as well as lower assumed oil prices in 2023 for our pipeline loss allowance barrels. We expect lower year-on-year NGL segments adjusted EBITDA as a result of lower weighted average frac spreads and C3+ spec product sales volumes due to a planned third-party facility turnaround as well as our sales to KFS interest. I would note that our C3+ spec product sales volumes are approximately 80% hedged for the year. Regarding capital allocation, as illustrated on Slide 9, we remain committed to one significant returns of capital, two continued capital discipline, and three maintaining financial flexibility. For 2023, we expect to generate $2.3 billion in cash flow from operations, which assumes approximately $200 million of working capital outflows and excludes approximately $225 million of anticipated insurance proceeds related to the settlement of a Line 901 class action lawsuit, which we now expect to collect in 2024. Furthermore, we expect $1.6 billion of free cash flow, inclusive of $270 million of assets sales. Intended uses of cash flow are as follows. One, allocate approximately $1 billion to common and preferred distributions, inclusive of the respective increases. Two, self-fund $325 million and $195 million of approved investment and maintenance capital net to PAA, which includes the POP JV well connect and intra-basin debottlenecking is making capital to support future growth across our Delaware system. I would note that this does not include amounts related to potential Fort Sask debottlenecks and expansions. And three retire $1.1 billion of senior notes through a combination of cash flow, asset sale, cash on hand, and available capacity on our credit facilities, bringing expected year-end leverage to approximately 3.5 times. As of today, we have repaid $400 million of the $1.1 billion target, additional detail in our capital program in the balance sheet are included on Slides 10 and 11. Before I turn the call back to Willie, I wanted to provide a few detail on a few housekeeping items. In regards to our Series A preferred equity security, the owners exercise their one-time option to re-price the security at a fixed rate of 9.375%, which will increase annual payments by approximately $26 million. This is in addition to the Series B preferred equity securities shifting to a floating rate in November 2022, increasing expected annual payments by approximately $20 million. As a result of the Series A election, we have the right to redeem the security at 110% on par which is the par is $26.25 per unit. We will continue to evaluate our longer-term capital structure, but near-term we intend to maintain our financial flexibility and do not foresee any changes with respect to the preferred securities at this time. Second, during the quarter, we purchased an additional 5% interest in the Cactus II pipeline, which resulted in a consolidation of the entity and a non-cash gain on investments in unconsolidated entities of $370 million. Furthermore, 2022 results also include a $330 million non-cash impairment related to our California assets. Thanks, Al. Today's results a critical inflection point for the business, and a very strong year of performance and execution. I'd like to acknowledge and thank our Plains team members of dedication and progress in all areas. We continue to believe that the world needs North American energy supply long-term and that our business will perform well in the current and longer-term environment. As such and as illustrated on Slide 12, Plains is well-positioned to improve returns of capital to unitholders, through a capital allocation framework that targets multiyear distribution growth, an 8.5% current yield, significant free cash flow generation and balance sheet flexibility built on the strength of our strategically located Crude and NGL footprint across North America. We appreciate your continued interest and support and we look forward to providing further updates on our earnings conference in May. A summary of our key takeaways from today's call and our goals for '23 are provided on slides 13 and 14. Thanks Willie. As we enter the Q&A session, please limit yourself to one question and one follow-up. For those with additional questions, please feel free to return to the queue. This will allow us to address questions for as many participants as practical in our available time this afternoon. Additionally, the IR team will be available throughout the week to address any additional questions you may have. Good afternoon, everyone. I wondered if I could just start just one item I guess related to the quarter. Can you quantify if you benefited from the fact that, Keystone was down in December? And then I understand it's running at reduced pressures today. So does that benefit you at all in 2023? Michael, hi. This is Jeremy Goebel. It happened in December, so it wasn't really impacting the trade month and in December. It was more impactful to forward periods. The impact was modest, but you will see some from our Canadian group and some throughput impacts at our facility. But by and large, that's corporate into our guidance. It didn't really impact 2022 as much as it will be the first quarter of 2023. Okay, great. And then just wanted to ask about the capital budget. Maybe just, are there any major projects to flag in that number? And then it looks like maintenance is down year over year, so maybe can you talk to that as well? Thank you. Yes, Michael, these are pretty consistent with kind of previous levels with a slight step up in the expansion capital piece. Chris Chandler, would you cover the key ones? Sure, Michael. It's Chris Chandler. We are wrapping up the Wink-to-Webster project this year and that's a little higher year-on-year. We do have some additional well connects that are driving higher cost based on volume assumptions and producer forecasts. We are funding some incremental Permian debottlenecking costs primarily for station work. And that's driven by supporting, of course, low assurance, reliability and flexibility. There aren't any major projects included. And as Al mentioned, we're not currently including any costs related to the Fort Sask debottleneck projects. Maybe to start off on just the Permian growth expectations, it seems like there was a slight shift in cadence lower for up to 500,000 barrels per day from prior expectations. But it also seems like Plains is capturing the larger share of the gathering and long haul volumes compared to prior year. So I'm curious if you could just discuss the drivers around one the Permian growth guidance? And the second Plain does assumptions around market share and margin opportunities in the '23? Hello, this is Jeremy Goebel. First on the production forecast. Last February, we got into roughly approximately 600,000 barrels a day of growth in '22 and '23. You're going to exit '22 at roughly 5.7 million barrels a day, exit '23 at roughly 6.1 million to 6.2 million barrels a day. That puts you in a range of on target with where we were at last year. So we think the cadence is consistent. The 340-ish rigs that are working today is roughly 75 more than we're working in the prior periods contributing to growth today. So, we look at that plus a roughly 10% increase in the wealth connects across our systems throughout the year, gives us pretty much good confidence on a top down level as well as a bottoms up build from producer forecasts in the 500,000 barrels a day outlook that we have, some of the offset as to potentially slowing down as well, we can foresee as incremental basin decline just from higher production. You've got a rebuilding of a modest level of depth across the system, because you had some depletion last year. And then, the continued conversion of development programs to maximizing the value of the inventory of the units as opposed to unbounded well, so that combination gives us a view as to because if you just ran out based on historical looks and every well gets completed, you get higher than 500,000 barrels a day of growth. So that's kind of some of the factors we considered and coming out with our view of production for this year. As for the capture rate, we look at our individual producer contributions. And we look at the bottoms up forecast as well as a top down view. That gives us confidence as to where this our cash flow rate will look. And also highlight that roughly 50,000 barrels a day is coming from another gathering system moving on to our long haul pipe. So, it's really an intra-basin capture. So some of that's really being gathered by a third-party, we capture it intra-basin movement to our long haul pipe. So the 350 number, you can really look at that 300 relative to 500 as opposed to 350 relative to 500. And then quickly, just on margin into '23. Is it basically the same as '22 or should we assume any changes upward or down? So, that the incremental margins for spa capacity are more this year than they were last year if that's directly answering it. Contract roll offs and step ups can change it, but if you're looking at what the marginal capacities were this year versus next year, it's higher this year. And based on the way we're able to contract that space for this year, we've locked in largely all of our spot capacity to the Gulf Coast. And then going forward, we sold additional capacity in '24 and '25 at successively higher levels. And then just for a quick follow-up on the NGL segment, it just seems like the fee for service components seems to be trending higher. I'm just curious if you can talk about is that it's primarily driven from the asset sale? And looking forward, are there more opportunities to turn out this side of the business? Thanks. I would think some of that would come from just a decline in commodity prices. So that contribution being lower, but as Chris talked about, we're advancing opportunities for potential adding fee for service. So I think you may see that longer term trend that way, but this year, specifically is an erosion of some of the commodity based margins, which is baked into the forecast. So first, just on the guidance for the year, so one of the drivers in the waterfall is fewer market based opportunities 2023 versus 2022. Can you talk just high level on what you're assuming in the '23 guidance for marketing and logistics opportunities? Are you baking some in, are you staying pretty conservative? And if you are baking in some opportunities, where they may be beyond the Keystone outage that you already referenced? Yes, Keith. This is Willie. On the guidance for kind of mark-to-market based, what we've done is, as you know, we've got a pretty complex system that's got a lot of flexibility to be able to capture volumes when the arbitrage opportunities are there. We're not going to get into detailed assessment of where things are. What I would tell you is we put a, what we thought was probable that we could capture, and then there's a lot of variations, I think that was mentioned in the prepared scripts. We went with the range and it was actually as a response to some of our conversations with analysts on not trying to be too precise on that. So, it's a longwinded answer telling, we've got some baked in, that we think we're going to capture and there's some upsides and downsides and the typical buckets that we capture these in whether it'd be distressed crude into storage. We've got some time spreads, it's sometimes we're able to capture if the market is conducive from that. And then we've got some unhedged portions of our PLA as well as our frac spreads, not a lot. We've got the predominant amount of that hedge. That would give us some upside if oil prices are higher or lower. Second question just on the NGL guidance for the year, so down 100 million year-over-year. Last quarter, you pointed to that 100 million impact, but you beat pretty good in the fourth quarter, so '22 actually came in higher. You also have the carousel. So is it fair to say the NGL business is improving on some ways? It just feels like the outlooks actually gotten a little bit better than your last update? I think it's a fair assessment. And remember, we expect to close Keyera Fort Sask, later this quarter. So you'll see that number wasn't included in anything past tense. It'll be prospective, but I think it's a fair assessment. Maybe just a follow-up on the Permian production growth outlook. Is there any sensitivity you can provide from the Plains perspective to that 500,000 barrel a day number in terms of '23 EBITDA guidance or any context around the embedded assumptions within your guidance range? The way we look at it is roughly, it's different for the gathering of long haul business. But a simple approach would be 100,000 barrels a day would have roughly $10 million to $15 million of EBITDA impact to net to Plains. So if you think about that just on the gathering side and the long haul will be a function of which market it goes to. And so since we have hedged a substantial portion, if that barrel wanted to go to Cushing or our shippers on Cactus II decide to ship that at higher rates. It would add additional margin. So that's a rough view on the gathering side and then your view of -- and that's assuming no market related opportunities. It's just the gathering fees associated with that. Great. That's helpful. And then on Slide 9, you referenced a net debt reduction in the context of the $600 million of free cash after dividend. And you also have the $400 million of cash from the balance sheet as of yearend. So just wondering if there's a particular target you have for net debt repayments this year in the context of the $1.1 billion you have maturing? Yes. This is Al. The leverage we talked about going down basically 2.10 from 3.7 to 3.5 that's roughly about $600 million is what we are assuming. So, it'll be partly a reduction using cash to reduce the gross debt, but the net debt we have modeled about $600 million. Again, there is the things that can happen throughout the year that will change that but that's what's embedded in our assumptions at this time. Hey, everyone. Thank you for the time. Appreciate it. Maybe looking again at the Permian, just thinking about kind of barrels out of the Houston versus Corpus, starting to see the Corpus bound lines start to fill up on a relative basis given export levels. Curious if you can kind of share our view of what you think is going to happen in terms of the need potentially for actually more capacity or expansions on any of the lines going to Corpus and whether or not that could be '24 or '25 or later conversations? Hi. This is Jeremy Goebel. I'd say what you're seeing is the Corpus line filling up because international demand is waking up for crude oil. I'd say, the Wink-to-Webster step-up having a larger impact on the market centers at Houston, moving from market centers there to Webster and Midland. And then the fourth quarter of this year, you will see a step-up in additional movements into the Beaumont from that same market. So, you will see more of an impact there. Corpus is continuing to draw barrels, but there is a lot of spot capacity moving into Corpus today, and those margins will move out over time just to get from the lower levels they are today to closer to new build economics. I don't think you are looking at an expansion in the near-term. The markets have to move off incentive tariffs closer to where you could build or support additional construction. But Houston and -- both have strong markets and will pull barrels and Cushing will continue to pull barrels based on the excellent crack spreads we're seeing in the market today. So, we see the Permian needs all of the above to clear, but at this point, the most efficient dock from a quality and a logistics standpoint is Corpus. Net yields are premium to the other markets. So if it's an export barrel, it's going to look to price into that market. But there's low overflow capacity into the others and you'll see pull into those other markets. But for purely logistics and quality reasons and pricing you will see Corpus pull that export barrel. And John, you know this, but the markets change in different locations as Jeremy outlined, you can say will be the leader lag, but there are times when we've got access to all those markets. So there's times where Corpus will be attractive and sometimes we end up with a pole on Cushing up to on our basin pipeline from Permian to Cushing, and we're able to move volumes there. So, when I think about it, if market is generally dynamic and we have a system that is able to capitalize on really any of that to move barrels for our customers. Maybe just on the gathering pickup, the 50 a day that's now going to be flowing onto your long haul lines, are there more of these opportunities out there? Is this kind of a one off, maybe anything you can share on again, any others we could see what that maybe means for rates overall? Anything else would be helpful? I think some of that is just a preference for producers to shift barrels. We just offer flexibility of our customers to go to specific markets. As we said earlier on the call, we continue to contract additional space opportunistically when it makes sense. And so, we've layered in contracts over time to Corpus to Cushing, to other markets and we'll continue to do that. There's step ups in our contracts on Cactus II and Wink-to-Webster this year, which can impact that. There's additional movements to Corpus as contracts roll off when we contract new pieces. It just changes the dynamics in the system. So for, we're not going to disclose who shippers are or how they move barrels, but that's something you'd continue to see. We have an attractive gathering system and people like to deal with one operator from wellhead to market, and we'll continue to capture opportunities that work for us and the customers. Just wanted to come back to the assumptions in the Permian here, the 500 assume year over year, as well as kind of on Slide 6, the market share of those gains across gathering intra-basin long haul. Is there any high level thoughts you're able to provide as far as sensitivities, if we want to kind of overlay our own assumptions on those? How that might impact EBITDA in the year? Well, I think Jeremy Goebel's earlier comment on the rough sensitivity is probably about as close as we can probably get. I mean, that was that roughly 10 million to 15 million in the gathering system. If you -- for every a hundred thousand barrels a day of growth in the Permian, it it's hard to put a detailed number more on that because it really depends on what system it's going on. And as you might understand, the sometimes if it's an NBC that's empty and the volume wants to go differently, it will be a benefit. And so, there's a lot of variables that play into it, but I'd probably just go with that 10 to 15 per a hundred thousand. And Jeremy just recognize on the long haul side, we feel very confident in the volumes that we put in here through the additional hedging and contracting of additional capacity. So, I'd say that the long haul system, look, some of this is flex and based on market demand, but we have a very good view of that. And I don't know that within a hundred thousand barrels a day of basin growth, you're going to see a lot of movement and what we think will capture on the long haul side this year. One thing that's notably different this year than past years that you may have picked up is, we've -- we're coming into this year with a substantial amount of our long haul volumes in the Permian and 80% of our frac spreads kind of locked in. So that gives us a little more confidence as we think about 2023. But that's different than what we've done in the past. And Al, this is kind of a question maybe, maybe from Matt a little bit here, just as far as what's the right leverage level for the business going forward. We've seen larger peers move to a lower leverage level. So just curious, I guess, how you think what do you think is the right leverage for this business longer term? Good question. Yes, we've seen that same disclosure. Our current leverage targets we established in 2019, we lowered them than pandemic hit. We've now got into them and have now migrated below. And what we're communicating versus establishing a new target is that we intend to migrate further below the low end and kind of operate there. And I think what our view is we'll assess that. We do believe that probably broader energy industry leverage probably needs to be lower than it's been historically. But we'll take a little time and assess that in the future, but for now, just kind of look at it and pass along the math that we just intend to kind of operate below the low end. First question, the frac spread, I know you've talked about that improving for ‘23 on the outlook. Could you maybe talk about what the moving parts were from the last outlook to this outlook since your 80% hedged when you look at the NGL basket versus AECO? Sure. Neel, this is Jeremy. Just think of it as the -- in the fourth quarter in November, natural gas prices were substantially higher than they are now. We were not hedging through that period in the fourth quarter. And as natural gas price Henry Hub and subsequently AECO defined, we were able to hedge into so propane and butane and condense prices didn't have to move materially for relative to the spread of buying AECO and selling NGLs. And so, we took advantage of that move and hedge additional volume that gave us a stronger outlook for pricing. But that's all priced into the forecast we've given today. So, we have an outlook that's consistent with the hedging we have and then the Ford market that's there today. Second question, Jeremy, probably for you also. We had a lot of crude kind of flooding the Houston area with the SPR release last year. Now that that's gone, it seemed to have affected a lot of exports and improved the outlook. Is the same push there for exports and subsequently movement to Corpus versus Houston this year? I would say those are somewhat independent because last year light crude exports increased by just a bit more than light crude production growth from the per -- from the light basins including the Permian. The FPR was 70% heavy and that more impacted imports from Canada and imports from other locations. So, the real need for replacement from those refineries roughly the average of 450,000 barrels a day of FPR releases over the calendar year is going to be on the heavy side. They're going to need to find replacements for that distillate yield. So it's really not a replacement in yield here. We look at that more of an impact to the heavy markets than it is to the light markets. So, we still think the best logistics and the best quality will draw the additional barrels for export. So, we kind of look at those as independent because the domestic refiners increased last year exports of product and exports of lights. And so, we just look at those as independent. Got it. And if I could just ask one clarification. So when you talk about hedging the spread, let's say, between the Permian and Corpus Christi market or Permian MEH. Is that for your equity volumes that you are doing that now? It's also a price for -- it's just [indiscernible] from a Midland Basin or it's a price for -- it contracts based on pipelines. So, if you think about it on a prompt basis in the given month, the spread to the water could be $0.50 from MEH. It's different than Houston and Corpus, but just from a Corpus standpoint, it could be in excess of $0.50. On a longer term basis, if you are looking at the MEH market, it could be easily in the $0.30 to $0.40. So if you are looking at that as the marker the relationship has changed a bit since Wink-to-Webster started and there is less liquidity in MEH. But it's still a proxy, but there is a premium for Corpus for sure. I'm not sure if your question was, we capture the margin on barrels that we buy and move. Was that your question? Good afternoon guys. Thanks for the time. It's kind of been asked, I just want to ask maybe a different way. I'm trying to get a sense of, if you see any different win now strategy now when I look at sort of simply growth versus distribution? And then maybe as part of that how you think about sort of minimum distribution growth coverage that you are comfortable with on either side of that if those things have changed? Hi, Neal, this is Willie. The strategy hasn't changed. Capital discipline and discipline in everything we do continue. Our goal is to continue to generate lots of free cash flow, continue to pay debt down. We have got preps that we want to deal with at some point in time when it's optimal. And as we go forward, we want to have that extra financial flexibility. We have got some very exciting opportunities of potential debottlenecks on some of our NGL assets. So if you do see us take on some more projects, we are going to be strong return and we are going to be very, very measured as we go forward, whether it'd be capital investments, or even bolt-on acquisitions or anything else. So that's why we think about it. Very good. And then one last one, just you have mentioned, I know previously you had a little bit of downtime or off line in the Canadian facilities. I'm just wondering the uptrend how that's trending down? Thank you. Yes. This is Chris Chandler. I can take that. We did have a turnaround at our Empress facility late 2022. We completed that successfully and we are back at full strength across our Canadian assets, both on the Empress extraction plant and at the fractionation facilities at both Fort Sask and in the East [indiscernible]. Hi. Good afternoon, everybody. So my first question was on the CapEx. So it seems like you have guided to CapEx a little bit higher than what you did last year. I was just curious since there are no specific big item projects, is this the kind of run rate we can assume going forward, especially if the Permian growth going forward remains in the same similar kind of range? Yes, Neel, I understood your question, you're asking kind of trajectory of growth and run rate? Is that what you're asking? Yes. So, we do have operating leverage. So, we've got capacity in the Permian gathering intra-basin, long haul multiple markets. So there'll always be some opportunities there. And then as I shared earlier on the NGL assets, there's definitely some opportunities there as well. Okay. And then, one question for Al. So when I look at the Slide 8 where new layout financial assumptions for 2023, could you walk us from -- cash flow from operations of 2.3 billion to your free cash flow of 1.6 billion? Well from cash flow, the ‘23, it would be -- we're assuming 270 million of asset sales, which would increase it. The CapEx both the 325 and the maintenance capital would reduce it. And I think in our calculation we have distributions to non-con controlling interests embedded in there as well. So, it's the same formula as we use all the pieces and parts are, if you look at our definition of free cash flow, you'll be able to take the sum of these parts and get there. Does that make sense? Yes. Got it. And then one follow-up from the previous question on leverage, I think, you've also guided to mid BBB kind of credit ratings. So does your previous range of 3.75 to 4.25 on the leverage metrics helps you get there or considering the overall environment that we are in and what we are hearing from other mainstream producers, also, you need to kind of lower that number 3.75 to 4.25 to get to mid BBB? I would say probably not, other than we'd probably have to operate in the lower band of it and operate in the lower band of it on kind of a through the cycle kind of basis. But again, as we've communicated on this call and the call in November, we intend to operate kind of at the lower band or below, and we've had the same dialogue and communication with the rating agencies as well. We believe the path that we plan to manage our financial capital structure at is commensurate with mid triple BBB ratings, and it'll just take time and us executing against what we've laid out to get there. So, we're pleased with the progress so far. We did get one positive outlook recently and we're hopeful. Again, we just got to continue to execute and deliver like we think we will. Thanks. I did want to add one thing. When we talked about things that we look at with intense financial discipline, we talked about capital investments. We looked at some -- talked about some of the NGL expansions. The one other thing on there of course is acquisitions. And you would expect us to take the same level of financial disciplines. We think about acquisitions. When you think about our system and what we're ultimately playing for, we've got great assets. We're probably able to capture more synergies out of some of these, but we're going to be very disciplined and think about the valuation on these when they do come up. But again, anything you'll see us do is going to be go through that threshold of financial discipline. Thanks everyone for your attention joining us this afternoon, and we'll look forward to keeping you updated as we go forward through the year. Thank you very much.

EarningCall_302

Hello. And welcome to today’s webcast. My name is Sarah, and I will be your event specialist. Please note that today’s webcast is being recorded. During the presentation, we will have a question-and-answer session. You can ask text questions at any time by locating the Q&A box on the left side of your screen, type your question and click new questions to submit. If you are experiencing any technical issues as a best practice, we suggest you first refresh a browser. Thank you, Operator. Good afternoon, everyone, and thank you for joining us today. We would like to welcome you to FPA Queens Road Small Cap Value Fund Second Half 2022 Webcast. Again, my name is Courtney Reardon, and I am the Relationship Manager for the Fund. In just a moment, you will hear from Steve Scruggs, the Portfolio Manager of the Strategy. Steve has managed the Fund since its inception in 2002. Over those 20 years, the Fund has delivered benchmark beating returns with less risk over the long-term and protected capital during every large drawdown. Steve’s disciplined value approach is predicated on investing in attractively priced small-cap companies that are in sound financial condition led by strong management teams and operating in growing industries. As of December 31st, the AUM of the strategy was about $500 million. In terms of our agenda today, there are a few things we will cover. First, we often get questions regarding availability of our Small Cap Value Fund on various platforms and we want to update you on our progress. The Fund is currently available on most major platforms, including Fidelity, Schwab, LPL, TD Ameritrade, Ameriprise, Commonwealth, Wells Fargo, RBC, Raymond James and Vanguard. If you have any trouble transacting in the Fund, please feel free to reach out to [email protected] and we will be happy to assist. And finally, Steve and I have collected questions from investors and turned it into a little Q&A, which will allow Steve to provide his views on the small-cap market, review the strategy and walk through an investment example. We will then open it up to additional Q&A. If at any time during this webcast, you have questions, please submit those through the device on your screen and we will get to them at the end of the presentation. The audio, transcript, slides and a visual replay of today’s webcast will be made available on our website, fpa.com and that typically takes about a week to two weeks. All right. Let’s get to it. Steve, let’s talk about the objective of the Fund. I’d also love to hear how you think the Fund results -- how you think about Fund results lately with the current drawdown over the current cycle and since inception? Steve, I think, you are still on mute. Thank you. Thank you, Courtney, and thank you all for joining us today. Our objective is straightforward. It’s to outperform the Russell 2000 Value over full market cycles. We expect to do so with less risk. And we define a full market cycle as either from a peak to a peak or a trough to a trough. And what we are trying to do is to compound money steadily over long periods. The recent period shows that making a lot of money in a frothy speculative market, it doesn’t really matter if you are going to give it all back when stock prices fall. So everything we do, we do with a bottom-up view. It’s based on classic Benjamin Graham principles, we always focus on fundamentals is regardless of what the market happens to be focused on. We are confident that in the long run, it always gets back to fundamentals. This causes us to miss out on some of the speculative excesses that frequently happen in the market. But we tend to make up -- more than make up for that in down markets when the markets come back to the fundamentals. Because we participate enough in the up markets and we hold up better in down markets, our investments compound better over time. And since inception and over the most recent cycle, we have met our objective and we have done it with considerably less risk, measured either by standard deviation or market drawdown. Over the last year is a good example. We outperformed in 2022 and we held up really strong during the worst of the COVID panic in the first quarter of 2020. You might be on mute. Thanks, Steve. Can you please speak to how your specific investment process has been reflected in the overall portfolio return recently and especially over time? Sure. Our process doesn’t change in different types of markets. We are very consistent. And we talk about the investment process having four pillars is versus balance sheet and we see companies with strong balance sheets. And by that we want companies that have staying power, ones that aren’t reliant on capital markets. These are ones that are going to get through any unforeseen crisis that would happen, whether it’s an economic or financial crisis or pandemic, ones that aren’t going to get an unpatched and ones that are going to have staying power. So balance sheet strength is a foundation of our process. The next thing we look at is valuation and we are -- we demand a margin of safety. We are -- primarily we are using free cash flow discount valuation models with a long-term view that normalizes economic earnings over the company’s cycle. We discount those back at a rate that we think compensates us for the amount of the risk that we see in the company and then we demand a margin of safety. We look at management, just management that can lay out a strategy and execute to that. If they do that, it’s going to show up in the financials. We would love to see management take calculated risks, try new things as long as they are open and honest about it, and we don’t like to see what to see management take -- make wholesale bets on changing the direction of the company. And then the last thing is sector and industry analysis. We want to make sure that we are investing in companies that are in growing industries that have stable competitive dynamics. We will typically are going to avoid commodity industries, overly competitive industries and make sure that the companies are competing in industries that have attractive long-term growth expectations. And so as we go through this process, it leads us to a portfolio of high-quality companies. And most are mature companies, they are consistently profitable and they show a slow but steady growth and this process is what helps us with downside protection. These higher quality companies with strong balance sheets tend to hold up better in down markets. When you look at the four pillars, is there one that’s dominant across the portfolio and is there one that you are more lenient on? No. I wouldn’t say that one pillar is any more important than another. They are all equally important. But it’s not as though we just go through the four-pillar process and check the box for each pillar. There’s a trade-off and it’s more of an art than a science. Each pillar has a baseline hurdle that must be achieved. But some of the pillars will be stronger than others in any individual company. It’s really rare to find a company. It’s going to have a rock solid balance sheet, a great management in an attractive industry that’s trading at a 12% free cash flow yield. So when we go through the pillars, balance sheet, that’s one of the things that helps us provide us with downside protection. These are companies that we don’t think are going to get in a pinch. And it also allows us to take a long-term view, because we have confidence that these companies can make it through any type of short-term disruption. The valuation is very key to what we do, demanding a margin of safety. That helps on the down side. But we also -- we model every -- when we are coming up with an estimate of intrinsic value, they are all modeled with expected rate of return that we think we need to get based on the riskiness of the company. And then when we look at management, we are not just looking at the management of the company, but also the culture of the company, what their business model looks like and what are the things that they are focused on. And management, that certainly can’t be minimized. And lastly, the industry analysis, over the last 20 years, the mistakes that we have learned from, the most common one was buying a really cheap company in an industry that was in secular decline. So this, on one hand, helps us avoid value traps, but it also leads us to companies that have the wind at their back with regard to the industries they are competing in. Let’s talk about investor expectations. You and I both really like this chart, because it shows how the Fund has performed during various market types and the Fund is again very consistent. Please walk us through how you read this and what investors should expect during different markets? Yeah. This is a great chart. During times of market weakness, we protected capital better than our benchmark and our peer group. And our outperformance during this -- the most recent downturn, it’s in line with what our expectations are. As I say, we are going to outperform -- we tend to outperform in down markets and we are going to trail somewhat in robust markets. But what this chart really shows is, when you look at it on a rolling five-year return basis, since the Fund’s inception, this correlation is very strong. When the benchmark is down, the Fund has outperformed in 23 out of the 23 instances when there was a five-year rolling return period that the Russell 2000 Value was down. And also point out that the average return for the Russell 2000 Value during those periods was negative just under 2% and we actually had a positive -- average positive return of over 2%. I think that speaks to our downside protection. When markets return between zero and 10% on a five-year period, the Fund outperformed roughly 70% of the time. So we are in a -- what we would call a normal market, not that there is anything such as a normal market. But in a market like that, we outperformed 70% of the time. But when the market average return is greater than 10%, we have only outperformed 7% of the time. But if you do -- if you see, our performance during those periods was about 12% versus roughly 14% for the index. So we are participating, but just not as much. So when we look at that on a full market cycle basis, by taking this long-term view, we have achieved our objective and it’s our long-term view that allows us to do this. Yeah. A brief recap of last year. In 2022, the Russell 2000 broad small-cap, it fell over 20%. Russell 2000 Value fell about 15% and our Fund fell 9%. So we held up better. We were down but not nearly as much. In performance, our performance, it was negatively impacted a couple of things. One, by not holding energy stocks. Small-cap energy stocks, if you look at measured by a broad-based small-cap energy ETF, they were up about 50% last year and that was after being up almost 60% the previous year. And as I said earlier, we typically are going to avoid energy in the portfolio, because the long-term track record is not an impressive one. It is -- I mean, if you think you can predict the price of oil, you can trade in and out of those companies and be profitable, but we are not going to try to predict short-term movements in oil prices. It’s just -- it’s not something that we do. And incidentally, the ETF that I just mentioned, the one that was up 60% last year -- 50% last year and 60% the year before, over the last decade, that Fund is down over 80% and that is a broad-based small-cap energy ETF. But our lack of energy for 2022, that’s one of the things that hurt our relative performance and we are okay with that. We also had a couple of individual holdings that did poorly, one in particular is Synaptics. It’s a long-term core holding and it was down 67% and it had been on quite a run over the previous several years. We think it got a little ahead of itself. We sold a good portion of our holdings due to valuation during 2021 and then we sold a little bit more in early 2022, but we still had it as an equal weight. And in spite of the recent price decline, when we look at the fundamentals, they look great. We feel good about the company, and in fact, late last year, we started adding back to our position. And I think that’s a good example of our discipline. Selling on valuation as we did in 2021 and then buying back when the opportunity presents itself. And as far as portfolio positioning, there were no fundamental changes to the portfolio during the year. We trimmed some companies. We added to some others. We initiated six new positions, companies that were really beaten up and we also had four portfolio holdings were bought out during the year. I would say it’s our technology holdings is currently 23% of our portfolio and that’s compared to roughly 7% in the Russell 2000 Value and 14% in the Russell 2000. And we get asked about this a lot, because tech stocks aren’t what you really think of when you think of small-cap value stocks. But the companies we are invested in aren’t the speculative type of companies that grab the headlines. They are process companies, distributors, component manufacturers, and all of them are consistently profitable with very strong balance sheets, and right now, a lot of them are trading at really attractive valuations. Another out-of-consensus is, we have no direct energy exposure. We think that small-cap energy companies are generally poor asset allocators. It’s entirely cyclical. When they make money, they make a lot of money when they lose money, they lose a lot of money. And unless you are going to be able to predict short-term movements in oil prices, you are not going to be able to know when to buy or sell, and we think that’s for gamblers and it’s not what we do. Let’s transition to the current setup for small-caps. Is small-cap value still extremely attractive in aggregate in your view from a quality and valuation perspective? This chart shows the relative historical valuations comparing small-cap to large-cap. And you can see, broadly speaking, small-cap companies are cheap. They have only been this cheap four times in the last 40 years. But as often is the case, a broad measure like this can be deceiving. When we look within small-caps, what we are seeing is that, the lower quality companies were clearly hit the hardest last year, and many of those look statistically cheap. But when we look at the higher quality companies within small-cap, the ones that we are seeking to buy, they held up better last year. They are cheaper than they were. The valuations are more attractive. But we don’t see them as screaming bargains kind of like the ones we saw in early 2009. But, overall, I will say the opportunity set, it’s much more attractive. We started last year with over 15% cash in the portfolio, and today, we are just under 10%. So things look more attractive, but we are not seeing broad-based screaming bargains like we have during some softs [ph]. Yeah. I will talk about -- I see and there are a lot of moving parts to this one. It’s a very unique company. Control by Barry Diller, who has a very long successful track record going back decades. And he started out buying QVC in the early ‘90s, did really well with that. He has an interesting -- a unique way that he runs businesses. He doesn’t run the companies to be profitable. And that may sound like something that Kathy Wood would say, but there’s a difference. He runs in a breakeven or slightly cash flow positive, so that he’s not reliant on capital markets or outside funding. But what he’s focusing on is building long-term businesses and he doesn’t care about hitting a quarterly profit target. It’s really rare and we really like it and it fits in with our philosophy and we wish more managers would operate like this. But we started buying IAC after the stock was -- had fallen over 65% and there are several reasons for the price decline. One is that they own a significant stakes in two different public companies and those stock prices fell dramatically. Another they bought a company called Meredith, which they merged into their Dotdash unit and it was a large merger or a large acquisition and integration did not go to smoothes plan. It was more expensive and it took longer than they had hoped. But the company did announce last quarter that the integration was complete and they have all of their media properties on a unified platform now. The two companies that they own significant stakes in one is Angi, which used to be known as Angi’s List and it matches home repair contractors with homeowners. And the other company is MGM Resorts International. And between the two of those, they own about $1.2 billion worth of Angi and they own about $2.5 billion worth of MGM and this is for a company who has got a market cap of $5 billion. If you net out the stakes in those companies and the net debt, the remaining company is trading for about $1.7 billion. And we think that the Dotdash Meredith unit is worth considerably more than that. They are expected to do about $250 million in pro forma or not pro forma, in EBITDA this year. And so when you look at the two major holdings and publicly traded companies, you look at what we think Dotdash Meredith is worth, the company looks undervalued, somewhat undervalue. But then they have a collection of other companies that they are working on doing similar to what they have done in the past and that’s running them not for quarterly profits, but building the business. And again, I’d say not for quarterly profits. They run them profitably. They want to make sure that the companies are self-funding, but they put profits back into R&D and marketing, et cetera. And these companies is kind of across the Board they are all Internet related. One is Care.com, which matches family care providers with individuals, it could be either a babysitter or someone for eldercare, does $350 million a year in business, revenue growing rapidly. Turo, which is kind of an Uber for rental cars. They own about a third of that company is growing quickly. And then the on something called the Mosaic Group, which is a mobile app platform that has over 3.5 million paying subscribers. So when you -- when we look at the core holdings of the business, we can get to a market valuation that’s greater than $5 billion and then when we look at these other companies that aren’t as profitable but are growing quickly, we see a lot of optionality there. So this is -- IAC is a company that we think highly and I think it’s a very attractive investment right now. So if we go through the four pillars, if brief -- you briefly go to the four pillars and the way we would look at that, balance sheet strength with regard to their marketable securities and cash on the balance sheet. We don’t have any concerns there. Valuation as a sum of the parts, we have ready valuations for their public equity holdings. And when we model out what we think the Dotdash Meredith is worth, again, we get to something above the $5 billion market cap of the entire company. And then the remaining companies, we view as options. Companies like that are not our specialty to come up with levels of intrinsic value, because they aren’t throwing off lots of free cash flow, which is one of the key things we like to see in our core investments. But as I say, they are profitable and they are growing, and it’s because of Diller’s track record over many decades of running companies this way and doing so to the benefit of shareholders, we have confidence in that. And then lastly, if we look at the industry, the industries these companies in are all growing. One, the Dotdash Meredith online advertising had a rough year last year and it looks like it’s going to be another rough year this year, broadly speaking. But as the company has gotten this integration finished, they have made some changes in some things. They quite publishing six of their print brand, finished publishing five or six of their print brands. We think we are going to see some margin improvement there, even though it took a little bit of revenue out. So we like to see a company that’s willing to do that, sacrifice revenue for profitability when it makes sense and it clearly makes sense here to us. So, again, it’s an equal weight holding right now, but we are slowly adding to it and expect to continue to do that. Thanks, Steve. Let’s shift a little bit to talk about the outlook. You often talk about looking three years to five years out when making an investment decision. How do you incorporate the near-term economic environment? What if there’s a recession? Yeah. When we say we take a long-term view and long until, say, we are looking three year to five years out and it’s not as though we think we know what the world will look like in five years. We don’t even know what it’s going to look like next quarter. But what it does, it helps us approach investing with a long-term view and it helps us overlook some of the noise today and I will give some examples that may be helpful. For instance, right now, in Property Casualty business. We have some investments in property and casualty insurers. Inflation has eaten into underwriting profits. The rates companies sold insurance for was not enough to pay the claims because of inflation. We know this and companies are saying out loud. And we have property casualty, underwriting profits are going to be under pressure in the near-term. And our companies are pushing through rate increases and they will get them. But there’s going to be some hits in the near-term. And so what should we do? Should we sell because of this and then buy back later when things look rosy. Most investors try to do that and it’s impossible to execute. When we look at a situation with a long-term view, we accept that we factored into our estimates of intrinsic value. We make sure the companies that we are invested in have the balance sheet strength that’s going to get them through it and then we are confident that our experienced management will manage through it. And that’s an example at the company level, but the same holds true at a macro level. Right now, everyone is predicting a recession and it does seem kind of inevitable. But if we are going to trade on that prediction, we would have to predict how deep the recession is? What type of recession is it? How long will it last? What areas of the economy will be most affected? And then we would have to position the portfolio in light of that prediction. And so then in six months, our prediction will be tested and we can see what we got right, what we got wrong, and then we would have to make another prediction and position the portfolio accordingly to that prediction. And it’s a common way money is managed and we think it’s based on a false precision. So having that long-term three-year to five-year view outlook, it keeps us from engaging in that fatal [ph] task. At all times, we are bottom up with a long-term focus. Should we still own Queens Road Small Value today and has the reason for owning it changed at all over the last two decades. How should we think about future expectations for the Fund? We have seen a lot of change over the last 20 years. And in some ways, markets have become more efficient with regulation fair disclosure, kind of evening the playing field with regard to what management can say and win in. And also technology -- the technology available to analyze companies efficiently, I think, has made more markets more efficient. But I also think in other ways, it’s gotten much less efficient. And most notably, it’s from shortsightedness and I think that’s from both investment managers and management. You just -- you can see what happens if a company hits or misses a quarterly number and what the price action in the stock does. And while we think there is some value in that information that came out with that number, very often, the market overreacts to it and it provides us with an attractive opportunity a lot of the times. And back to shortsightedness, as an aside, within the last year, I have spoken with two friends and they are both C-level employees. And I had -- these are two completely separate conversations. And they got -- these are two guys that went from private companies to public companies and then had recently gone back to private companies and they are in two completely different industries. And they both said independently and they were adamant about it that they would never work for a public company again, because of the shortsightedness. Everything was focused primarily on this quarter or maybe this year and they weren’t allowed to take a long-term view and really work on growing the business over long-term. And this is something that I think it seems to be getting worse and it’s one of the main lenses we use to look at management and a company’s culture and we try to seek out management that are really playing the long game and so that will get paid off in the long run. And while we have learned a lot over 20 years, our framework remains the same, and we think a consistent process will lead to consistent outcomes. And as we showed the correlation of our performance in different market types is consistently strong and we don’t see any reason why that would change. We focus on the diligence, discipline in patients and taking a long-term view is core to what we do and we are sure that that’s not no change. And as I started this, our goal remains the same and has to outperform the Russell 2000 Value over full market cycles and we think we can continue to do that. Thank you, Steve. And with that, we are happy to answer any questions you all may have. I will pause for a moment to see if there are any live questions from the audience. I will also add that we had a few pre-submitted questions that Steve and I tried to address in the prepared Q&A. But if we didn’t answer your questions thoroughly enough, please do reach out to me. And we had one question come through towards the end that we did not address. So I will ask that now while we are gathering listener questions. Steve, what has happened for small -- what, sorry, what has to happen for small-cap to outperform large-cap companies over a sustained period of time? One thing we are starting with better valuations and that always helps performance. The valuations that you are starting at, look, 10 years ahead, you are going to have better returns if you are starting from a lower valuation than a higher valuation. That’s pretty well documented. So the fact that small-caps on a relative basis are price cheaper than large-caps is one of the things that we think plays to small-caps advantage. Historically, rising rates have helped small-cap stocks versus large-cap stocks. And then also a recession -- coming out of recession, small-caps and small-cap value in particular, have led the way out of eight of the last 10 recessions. So we are starting with better valuations than large-cap. We don’t know what interest rates are going to do, but higher interest rates have historically helped small-caps, again, that’s just relative to large. And if we should go into a recession, which we think is very possible, although, we have no idea what the depth of it, we think that a lot of the worries of a recession are priced in. Coming out of that, small-caps 80% of the time over the last 40 years have led the way out. So I think those are three pretty solid reasons why you should feel good about small-caps. Great. I will pause for one more second to see if there are any other live questions. That appears to be our final question for today. Thank you to those for listening to the FPA Queens Road Small Cap Value Fund second half 2022 webcast. I will turn it over to the system moderator for closing comments and disclosure. Over to you, operator. Thank you for your participation in today’s webcast. We invite you, your colleagues and shareholders to listen to the playback of this recording and view the presentation slides that will be available on our website within a few weeks at fpa.com. We urge you to visit the website for additional information about the Funds, such as complete portfolio holdings, historical returns and after-tax returns. Following today’s webcast, you will have the opportunity to provide your feedback and submit any comments or suggestions. We encourage you to complete this portion of the webcast. We know your time is valuable and we do appreciate and review all of your comments. Please visit fpa.com for future webcast information, including replays. We post the date and time of upcoming webcast towards the end of each current quarter and webcasts are typically held three weeks to four weeks following each quarter end. If you did not receive an invitation via e-mail for today’s webcast and would like to receive them, please e-mail us at [email protected]. We hope that our quarterly commentaries, webcasts and special commentaries will continue to keep you appropriately informed on the strategies discussed today. We do want to make sure you understand that the views expressed on this call are as of today and are subject to change without notice based on market and other conditions. These views may differ from other portfolio managers and analysts at the firm as a whole and are not intended to be a forecast of future events, a guarantee of future results or investment advice. Past performance is no guarantee nor is it indicative of future results. Any mention of individual securities or sectors should not be construed as a recommendation to purchase or sell such securities or invest in such sectors and any information provided is not a sufficient basis upon which to make an investment decision. It should not be assumed that future investments will be profitable or will equal the performance of the security or sector examples discussed. Any statistics or market data mentioned during this webcast have been obtained from sources believed to be reliable, but the accuracy and completeness cannot be guaranteed. You should consider the Fund’s investment objectives, risks and charges and expenses carefully before you invest. The prospectus details the Fund’s investment objective and policies, risks, charges and other matters of interest to a prospective investor. Please read the prospectus carefully before investing. The prospectus may be obtained by visiting the website at fpa.com, by e-mail at [email protected], toll-free by calling 1-800-982-4372 or by contacting the funded writing. FPA Funds are distributed by UMB Distribution Services, LLC.

EarningCall_303

Good day, and thank you for standing by. Welcome to the Smurfit Kappa 2022 Full Year Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. Thank you, operator, and good morning, everyone. It is good to be with you all. And I'm joined, as you know, by Ken Bowles, our CFO who I think most of you know well at this stage. As usual, I refer to the disclaimer concerning future expectations with your permission I will take as read. So you all know Smurfit Kappa's vision which we put in place some seven years ago, and I as I say is no doubt familiar to all of you by now. The vision which has evolved guides our total approach to business, ensuring that we are able to deliver for all of our stakeholders, dynamically and sustainably delivering is central to that vision. And in the next few slides, we'll take you through what we have delivered, but more importantly, how we have delivered. Turning to the next slide, in your world of finance, you have a tendency to say that past performance is no guarantee of future success. It is no different in our business. However, as in your world, it is a good indicator. Over the past number of years, you can see that our stable management team has delivered for all stakeholders and against all the key performance indicators outlined in this slide. I'm naturally proud of what this team has delivered as we continue to embrace and live our core values. As a management team, our objective is always to manage for continuous improvement. Our past delivery and our future potential is demonstrated by the success shown in the numbers on this slide. More importantly, we are both excited and ambitious for our future, which is best reflected by the capital plans and actions we have taken both internally through investment and externally through acquisition. Our performance has been and will continue to be driven by a number of factors, one of which is our capital plan. On this slide, you will see that in the past 24 months, in the group, we have approved €2.3 billion. This includes mail efficiency projects, corrugated projects and converting equipment projects, together with our contribution to the environment and the pursuit of our own sustainability goals. These investments that have been made and are going to be made are a platform for continued future success in growth and efficiency of the group. As we say on the next slide, simply put, Smurfit Kappa will continue to deliver going forward. Quality people are and always will be at the heart of our performance. As owner operators, we treat capital as a scarce resource, ensuring it is deployed in a measured way to deliver today and tomorrow. Our leading market positions and integrated model ensure security of supply both internally and externally. Innovation is also a key driver, partnering with our customers to define and in many instances to anticipate their packaging needs. Our market position as the number one or number two operator in most of the markets in which we operate, allow us to, together with our innovation to service our customers with the most advanced applications in our business, allowing us to capitalize on all market trends. Our product's own positioning for today's world as the most sustainable, biodegradable, renewable and environmentally friendly packaging medium will continue to drive medium to long-term demand growth. Together with our geographic balance, our leading integrated business model, as illustrated on the next slide, will drive future performance. The integrated system provides us with two consistent profit streams and it optimizes operating efficiency. Importantly, an integrated system reduces costs in areas such as transportation forever and continually optimizes our stock levels. A key component of the integrated model is also security of supply, and this helps drive capital allocation decisions. A good example of this is that we expanded - as we expanded our corrugated business, we became short in paper. So in addition to internal investment in existing paper mills, we identified and acquired 2 world-class paper mills in Reparenco and Verzuolo, adding nearly 900,000 tonnes to our systems. That was delivering in action. Turning the page, I've always said that the commitment of our people to our core values of safety, loyalty, integrity and respect is what truly differentiates our company from all others in the sector. The average tenure amongst our management team is 22 years, which demonstrates the experience and commitment of them to SKG. But it is a two-way commitment. We continue to put in place the most advanced bespoke programs for training and development to ensure our people become part of the culture that so differentiates us. As a company, we are passionate about maintaining our culture through openness and meritocracy. Turning to the next slide, innovation is, of course, at the heart of everything we do. We have a growing network of 29 experience centers across our business. These innovation centers are fed with new ideas by our over 1,000 connected designers, giving our 4,000 sales professionals across the world and across our 36 countries, unique access to irreplaceable ideas and applications that have been developed. Just one such idea more recently is illustrated here on the Click-To-Lock detergent pods, which demonstrates there is a world of plastic ready to be replaced by our sustainable corrugated packaging. To show you how we're intertwining our investment plans, innovations and sustainability and cost reductions, there are three examples I'm going to show you that demonstrate how far this company has progressed. And of course, how far we are going to continue to progress as we affect our future plans. First example on the next page is one of our mills, which demonstrates continuous improvements through investment and innovation. This mills productivity for manhour has improved enormously as we've expanded capacity on the existing footprint and attacked our costs. We've also made this mill fit-for-purpose, producing ever lighter weight paper and reducing our carbon footprints. This example also illustrates how the Smurfit Kappa across our recycling system has improved its output. When Smurfit and Kappa came together, we produced 3.2 million tonnes at 22 mills, whereas today, throughout our investment and acquisition, we produced 4 million tonnes at 15 mills. Another important statistic is that we are completely self-sufficient in lightweight containerboard, whereas at the beginning, we had practically zero. Turning to our corrugated system, on the following slide, this example of one of our - just one of our 243 corrugated plants demonstrates how we're investing to improve security of supply for our customers, capacity in our corrugators and efficiency and quality within our converting machines. This specific example illustrates the kind of improvement we're seeing and we'll continue to see going forward in the corrugated system in general. Within Smurfit Kappa, we have a number of specialty businesses that are allied with our core business. One such business is our Bag-in-Box operation, which I'm immensely proud of and which has grown from practically nothing to number two in the world. This business is replete with potential, and it is a highly sustainable product to replace both glass bottles and heavy plastic containers. We continue to have ambitious growth plans for this operation. As Tony mentioned, 2022 has been another fantastic year of continued delivery for the group, both operationally and financially, which I'll speak to in a bit more detail shortly, but also in terms of delivering on our sustainability agenda. We don't see ESG as separate from our financial performance. They are clearly linked as a circular economy business, with an ever-improving environmental footprint, our leadership and sustainability is clear. On this slide, you'll see the progress we have made as outlined in our 15th Annual Sustainable Development Report. These achievements in the areas of climate, water, waste, Chain of Custody certification and people are a key pillar of Smurfit Kappa's strategy for the future and a testament to the work we've done over many years. These results can only be achieved by investing time, effort and financial resources to foster the change required to become the leader in sustainability in our industry. We began the year strongly with SBTi validation of the group's emissions reduction targets and reached a number of other important milestones, including the completion of a large-scale sustainability project at our Zulpich paper mill in Germany, which significantly reduces the mills CO2 emissions by over 55,000 tonnes, that's a 2% reduction for the group. At our Nettingsdorf paper mill in Austria, we launched a district heating project, which will save approximately 21,000 tonnes of CO2, while also providing heat to local businesses and schools and 20,000 homes. This project followed on from the recent installation of the heat recovery border at the mill, which eliminated 40,000 tonnes of CO2 per year. The group also announced a €100 million investment to sustainable biomass boiler at our paper mill in Cali, Colombia, which will reduce our global Scope 1 and Scope 2 CO2 emissions by approximately 6%. This ambitious project is the latest example of the circularity of our business as we find another use for our organic waste and transition away from fossil fuels. Out of time, when many others talk about their sustainability ambitions for the future, Smurfit Kappa is delivering today. We are pleased to be both listed on so many ESG indices and score strongly across the leading third-party certification bodies. Furthermore, we were especially pleased with the recent recognition of our work by Sustainalytics. We awarded SKG, the Industry Top Rated badge, ranking it in the top percentile out of over 100 companies. In addition to again achieving the Regional Top Rated honor. Through our leadership in innovation and backed up by the group's better planet packing portfolio of sustainable products, SKG continues to help our customers deliver on their own sustainability goals. One of the many examples of the work we do with our customers can be seen here on this slide. This project use the new design to market factory, which provides customers with a tangible packaging prototype that can be tested with consumers and subsequently refined before moving into large scale production. In this example, the request came from Danone, a company with clear ambitions around sustainability itself, who wanted a sustainable packaging solution for its popular outflow drinks range. The brief was eliminate the plastic, safeguard the supply chain and enhance the product to appeal on shelves. The results, over 730 tonnes of plastic eliminated and over 1,800 tonnes of CO2 reduced. Turning the page, in 2022, in addition to the group's established programs in education, well-being and the environment, the Smurfit Capital Foundation invested at over 40 projects across 18 countries to improve basic care, education and health facilities to positively impact the lives of underprivileged people in the communities in which the group operates. Some examples include; in Germany, where over 60 employees volunteered their time to supplement the financial donation by the foundation to construct the therapy writing project for children. In Brazil, €250,000 was donated to upgrade the infrastructure of a childcare facility. In Argentina, the foundation contributed to the construction of a new mother and child ward at the Dr. Raul Caccavo Hospital. And in Ukraine, a basement was refurbished to facilitate the safe schooling of young children in Kiev. So turning now to our financial performance and the group's full year 2022 results, Tony talked a little bit about our performance earlier on, and let's, look at that in more detail on that. Our overall performance in 2022 against every metric is a result of many factors, not least the dedication and commitment of the 48,000 employees who work relentlessly to achieve that performance. It is also a result of our multiyear investment programs and the returns that we are evidently achieving through them. Group revenue was over €12.8 billion for the year, up 27% on 2021, or 23% on an underlying basis, with the rise reflecting success with box price recovery initiatives. Group EBITDA for the year was up 38% to €2.355 billion. The group EBITDA margin improved from 16.8% in 2021 to 18.4%. The results reflect the resilience of the group's integrated model, box price recovery and the benefits of our capital spend program, partly offset by higher year-on-year energy, labor, distribution and other raw material costs. Pre-exceptional EPS was up 62% in the year to €4.441 per share. And the group's return on capital employed increased from 16% in 2021 to 21.8% in 2022. As always, the group is focused not only on the here and now, but also what to come. And so this year, we've taken an exceptional charge of €223 million. Over half of that is related to the planned disposal of our business in Russia, but we've also taken a restructuring charge in our Americas segment to take out labor costs in addition to rightsizing goodwill in Argentina due to hyperinflation and in Peru, given the current economic backdrop there. Our free cash flow in 2022 amounted to €545 million, an increase of €90 million compared to the prior year. EBITDA growth of €653 million, combined with a lower outflow for changes in employee benefits and other provisions was partly offset by a higher working capital outflow, higher capital expenditure, higher cash interest and higher tax payments. While we saw OCC paper and energy reduced towards the end of the year, box prices did not. And as a result, as a percentage of sales, our working capital, as a percentage of sales 8.3% at the end of 2022, slightly outside our normal guidance range of 7% to 8%. It goes as saying though that the management of working capital has ever remains the key focus for us. Finally, reflecting the confidence that we and the Board have in the group and indeed the strength and resilience of our cash flows and our future prospects, we are pleased to announce a 12% increase in the final dividend to €1.076 per share. Turning now to our European operations and their performance in 2022, EBITDA increased by 42% to €1.846 billion, primarily as a result of the progress on box pricing as mentioned earlier, and the benefits of our customer-led capital spend program, offsetting significantly higher inflow costs. The EBITDA margin in Europe was 18.6% in 2022, up from 16.6% in 2021, while corrugated box volume is down 2%, when compared to the exceptionally strong volume growth in 2021. The slowdown in our Germany and U.K. markets, in particular being partly offset by a more robust performance in countries such as France and Spain. 2022 also saw our European operations record their best-ever safety scores and the lowest ever parts per million quality scores, two significant milestones. Our European business continued to build on its strong operating platform during the year with a number of projects across our paper and corrugated divisions. And Tony mentioned a number of these initiatives earlier. And during the year, the group also announced an investment in its first Moroccan facility, along with the acquisition of a corrugated business in the U.K. and a Bag-in-Box plant in Spain. And now turning to the Americas, in the Americas, EBITDA increased by 25% on 2021 to €553 million, the EBITDA margin was marginally lower at 19% in 2022 compared to 19.5% in 2021. Colombia, Mexico and the U.S. accounting for over 80% of the region's earnings with strong performances in all three countries, box volumes in the Americas, excluding acquisitions were broadly flat year-on-year compared with a very strong prior year comparative. Our Americas operations also recorded their best ever safety score in 2022, and the group continued to invest across the business with significant efficiency, capacity and sustainability-related investments into corrugated, containerboard and specialty business in Central America, Argentina, Colombia, Mexico and the U.S. In our corrugated box, we are expanding capacity and investing in state-of-the-art converting equipment across the region. In our specialties business, we are expanding our portfolio in paper sacks and Bag-in-Box. And during the year, we also acquired corrugated packaging plants in Argentina and Brazil, expanding both our footprint and customer offerings in these attractive growth markets. And finally, turning to the next slide, an important reminder of how we think about capital allocation, a very dynamic allocation at its heart. As you know, our aim is to ensure that allocation of capital takes into account all stakeholder groups. It is very much a returns-focused allocation, which as you can see, continues to be a key underpin to our success. At Smurfit Kappa, we believe that capital allocated to internal projects is central to the success. We are investing in our asset base to improve our environmental footprint to take out cost, to improve efficiency and to capture the long-term growth opportunities presented by the end consumers push for the most sustainable packaging solutions. The acquisitions we made in 2022 are clear indicators of how we see M&A. As always, we have a number of projects in the pipeline focused on building out our strong geographic network or further enhancing our product portfolio. We remain, of course, disciplined around M&A, and as always, benchmark them against all other capital allocation alternatives. Given the high levels of capital, the group has deployed over recent years, we are especially pleased to have recorded our highest ever return on capital employed at 21.8% at the end of December. The dividend is another cornerstone of our capital allocation strategy. Our policy is progressive and aim to ensure that the allocation of cash flow to the dividend is proportioned to other forms of allocated capital over the long-term. The increase in the final dividend of 12% is yet another illustration of our confidence in the future prospects and the cash generation ability of our business. With net debt to EBITDA of 1.3 times, the lowest in the group's history, the strength of the group's balance sheet continues to secure long-term strategic and financial flexibility. With no near-term maturities, an average interest rate of less than 2.9% and over 95% of our gross borrowings at fixed interest rates, the group's balance sheet has never been stronger. Finally, the expansion of our capital allocation framework to now include buybacks underscores the flexibility and agility of this framework and ensures that all avenues to create and return value to our shareholders are considered and benchmarked against all options. Well, as you would have seen, we have again delivered against all key performance measures. In Smurfit Kappa, our performance-led culture has delivered. Our multiyear capital program, have delivered and will continue to deliver. Our acquisitions have delivered and will continue to deliver. I hope you realized from today's presentation, we are delivering for our customers due to our innovation, our service-led and sustainable packaging solutions that we offer. This is happening as a result of our dedicated and loyal 48,000 employees who strive to deliver successfully to our customers' day in, day out. Together with Smurfit Kappa's geographically balanced and integrated business model, we are providing security supply across all market conditions. And this has never been more evidenced by the difficult 2022, which we have very successfully navigated through. By way of conclusion, as we say in the release, there will always be challenges along the way. I've always said that success is never a straight line, but our record year in 2022, even with the effect of the global pandemic and the massive inflation we experienced demonstrates the company's agility and resolve to continuously improve. As we've said, we've never been in better shape financially, strategically and operationally. And while it is early in the year in 2023, the year has started well. Our past performance demonstrates our future potential. We remain very confident for the future of our business and our prospects and opportunities that will present themselves in the years ahead. And that confidence is best reflected by the 12% increase in our dividend that was announced today. And with that, everybody, I will turn it over to the Q&A. And thank you for the attention you've given Ken and myself. Thank you. [Operator Instructions] We will now take the first question. It comes from the line of Lars Kjellberg from Credit Suisse. Please go ahead. Your line is open. Good morning and thanks for taking my questions and congratulations to you and your team for this delivery. I just want to start with a couple of questions. Your call started well in 2023. Clearly, judging from incoming calls this morning, investments are generally concerned about volumes and it did seem as if there was a meaningful volume contraction in Q4. How that started well? What should we read into that in terms of volume? And then of course, the next focus is how prices are performing versus costs. If you can share any color on what happened in the final quarter of the year and of course what you think in the beginning of this year? And then also the - you called out, Tony, the great success of your specialties business, the back in the box, good growth, et cetera. And we've seen a number of transactions in that business putting big multiples on that sort of specialty high growth, good sustainable product business? But we don't really know how big that is in the context of you and how that is progressing so if you can share any color or not, that'd be extremely helpful. But if you can start with what you would read and started well in terms of volume price cost, et cetera and what's your outlook for the current year in broader terms? Okay. Well, I'll take the first question then and Ken, if you take the price versus cost. Basically, what we say with a year started well, it has. I mean the overall trend of volumes, we would say, with the exception of one or two major countries has improved in January, we saw a very sharp drop off in certain markets in the - really specifically in December. And that's, we believe, a result of destocking. We haven't lost any customers. So we see that as a more of a destocking issue, the only country that really hasn't improved thus far in the year is Germany. And yes, it's probably the country that I feel the most confident will improve. But obviously, that's caveated by the whole issue on the Ukrainian war. I think the Germans really went into their shell during the month - the last quarter, and the consumption was very low and the savings was very high. What we've seen is - and that comes from the worry that they were having on what energy was going to do. Governments have in Germany, for example, have allowed for a certain portion of any inflationary wage increases to be tax-free, and that's going to put money in people's pockets. We see savings still very high, but consumption is starting to improve, and that will ease up the supply chain, I think, as the stock in the supply chain. And so, we feel pretty good when we look forward into Germany about how it's going to look, obviously, again, with the caveat of Ukrainian war in the background and what that might do. And other markets, as I say, improved like the U.K. improved in January, the Italian market improved in January. So, we have seen improvements, and we really put down a lot of the falloff in Europe to destocking during Q4 and continuing in Q1 mainly in Germany and the Benelux actually. When I take the Latin American markets, they haven't improved yet. And they seem to be - there seems to be a large destocking going on over there. There are some nascent signs with one or two customers just as recently as two weeks ago that their orders are starting to pick up very significantly in the durable area, but that one swallow doesn't make a summer, so to speak. So we'll have to see a little bit more before we see that in - in the Americas. Because inflation really does affect the average person there much more than those in Europe even. So we have to see how that transpires over the next couple of months. But again, a bit more optimism than there was, let's say two or three weeks ago in that area. With regard to pricing, we obviously had a good fourth quarter performance, and that has continued into January. Costs are down, and we consider that we've had a very good start in relation to our earnings, and we'll just see how that pans out as we go through the year. As we say, it's early doors, but we're very comfortable that we've got our efficiency programs, our capital investment programs are paying off. And obviously, we feel that we're very well positioned to take advantage of any growth that will happen. Ken, do you want to take the second question, and then I'll talk about BIB. Good morning Lars, as soon as track, back a bit to the guidance we gave in November, where we said we do about €2.3 billion, clearly come in ahead of that. I suppose the backdrop to that was costs are still rising. Yes, we've done most of our work, not all, nearly all of our work around energy and energy heading for the year. So we had a good line of sight on the open position. I think at that point, we guided probably somewhere around €700 million of the headwinds. Clearly, we end up with €600 million, but it's important to remember that while energy kind of came off a little bit in the fourth quarter, where the costs didn't. We still saw some labor inflation, distribution other raw materials are still kind of climbing it's like 8 inches some of that kind of small tailwind as we got towards the back end of the year. But as Tony just said, if we start this year, that picture is kind of plateauing in certain cost categories. So the outlook is largely different than what it would have been in the back half of last year. On the price side, we guided at the November call that we get about 1%, so we felt 1% was coming through on boxes and primarily with some of the inflation pieces that came through. So the box prices, as I kind of noted there has been kind of solid through the year-end and as we start off ahead, despite what's happened to-date in paper prices. But suppose it's early in the year to be calling full cost categories - I suppose the fourth quarter, as you saw the year got very complex in terms of lots of very large moving parts are in cost categories, but I suppose the net-net is to Tony's point earlier, we gathered them. I managed to kind of get ahead of where we thought would be at the end of October, start November. And then, Lars, just on Bag-in-Box, Bag-in-Box has been a phenomenally good success story for us over, as I said, starting with nothing back in 1994 to be the number two player in the world. We're not breaking out what the turnover and suffice to say that it is above our average. Yes, there's a lot of embedded value there for shareholders, and we would see that multiple being one day taken for the shareholders. But we see very significant growth still in the business. We see very significant opportunity across the world. And we intend to take that opportunity within Smurfit Kappa to continue to enhance this business for the future. I think it's - we are the best of what we do. We make a huge number of taps. We make the plastic. It's a sustainable product vis-a-vis things like glass bottles or big plastic drums and it uses a hell of a lot of corrugated to protect it, which we use - we do plenty of, for example, the box in water in Spain. So both from the box side, from the sustainability side, from the expansion side, from the people side, we've got the best team in the world in this particular business that have grown up with the business. Our CEO of that is obviously a personal friend, but he's been in the business 35 years. It's a great business, and we intend to grow it and develop it within the system for the foreseeable future. But obviously, that one day may change based on the multiples, but that's not for now. One quick follow-up, if I may. Could you just help us to guide us for the capital you put through in 2022, what sort of benefits you expect to accrue from that in '23? All right I think, Lars, in reality, capital you put in, in '22 probably takes about 12 to 18 months to get the kind of full run rate of ramp-up given some of the smaller as you've seen. But I suppose, if you go back to the IRRs on those projects as a kind of broad mix is going to be above 20%. And they clearly clear the rocky hurdle. So you won't get the full benefit in '23. You get, one-third, two-third in terms of '23, '24. But remember, then you're going to get the benefit of '21 capital coming through in '23. So it's a bit of a kind of a momentum build in terms of incremental capital across all, that piece. And again, for '23, we're expecting to put in another build in the capital, which again goes back to building for the future, both through sustainability, through efficiency and through growth. Thank you. We will now take the next question, one moment please. It comes from the line of Justin Jordan from Davy. Please go ahead. Your line is open. Thank you and good morning. I've got two quick questions. Firstly, on containerboard, we've seen clearly European and North American containerboard prices easing slightly in recent months. How should we think about that feeding through to box prices? I know you - can you describe it on those, solid year-to-date, but realistically, should we expect some easing in box prices as we go through the year? And secondly, just on OCC. I think from memory, Smurfit, as a group purchased something like 6.5 million tonnes of OCC in both Europe and Americas. Again, OCC prices have eased significantly in the last three to six months. Can you give us some idea of what that might mean in terms of an annualized cost saving in addition to the energy cost saving you've already described? Thank you. No, just I'll save Tony, and then I'll take both of those directly he can jump in if he feels that he's saving, correcting or embellishing. On the box price side, look, I think you know the natural trajectory in terms of where paper prices go. I think what we've seen over the last number of years is a better embedded resilience in the box price. I mean, the reality, tradition would tell you, paper price goes up in a three to six month kind of our box prices start to come off nine-plus that clearly lengthens in the last cycle. And I think it sort of goes back to a number of factors, which is, I don't think that particular trajectory works anymore. I think we're much more to the partners that we supply. I think we're more embedded there is more value there, more innovation. It's part of an integrated model and a total supply chain kind of approach. I think if you look back to the last couple of years around what we did during COVID heading with stress. I think that was much appreciated. And look, I think equally, those contracts that traditionally would have been built on a simple model of paper or paper sacks now infused all this for inflation, energy and things there's natural protections around while paper price might move, it's not going to move for other factors. So logically and naturally, you would expect some kind of smaller version box prices and paper continues to fall, but is that going to be in the next three, four months. No, probably more predominantly towards the back half of this year, which reason a natural cycle. But I sort of remind you all of our success in previous call and cycles, if you want, around holding on to that box price and how we built the margin over time. On OCC, again look, you can see the PIX index, like we see the PIX index you can see the kind of difference in change. I think it sort of goes back to the overall team here, which is it's still on the early part of February, still a lot to play for. And China is reopening, Tony's comments are in Germany and kind of demand picking up could have a material impact on the direction travel of OCC over the coming months in terms of how it's pulled. But clearly, the China reopening and 1.4 billion Chinese people back in open economies, back exporting will naturally pull the containerboard back into the country, which will provide a decent underpin to the OCC price. So I wouldn't - you're right, your quantum is right around the OCC consumed, but I'd say, look, you could do like we do, we look at the fixed price, but I think I'd also think about the general economic backdrop, how Europe is going to come through the next few months, particularly Tony's comments around BIB and confidence in Germany, but also don't forget China is reopened. Thank you. We will now take the next question. It comes from the line of Charlie Muir-Sands from BNP Paribas. Please go ahead. Your line is open. Good morning, thank you for taking my questions. Mainly a follow-up on what's already been covered. But with respect to your outlook on box prices, can you just remind us now what proportion of your business is typically on the index prices versus open negotiation? And how that should play into our thinking about how the phasing of box prices will evolve over this coming year? Secondly, related to that, do you sort of think about this on a kind of unit profitability basis depending on where volumes go in this business or will this spreads narrow or widen based upon how you think you can manage those contracts? And then finally, just on the acquisition side of things. I just wonder what your view is with respect to asset prices at the, moment? Are you seeing it as being a more or less favorable market for securing expansion through M&A? Thank you. Hi Charlie, I'll save Ken, the breath here, and I'll take those. Basically, about half of our business is indexed in some way, shape or form. I think it's important to remember, as Ken has just said that the - and they will be generally three to six-month contracts, sometimes yearly contracts, but broadly speaking, most of them are six-month contracts. So at the start of - and you average the quarter and there's caps and colors depending on the particular customer. So there's, all sorts of different formula with every different customer that's different. Some have waste paper built in, some have energy clauses built in. And most of our contracts now have inflation clauses built in as we have come out of the last 18 months of higher inflation, we have been negotiating with customers to have energy contract - I'm sorry, inflation contracts built into their contracts. So overall, I would say we're very well positioned. As Ken mentioned, there is a natural up and down. But I think one thing that everybody should remember is that we are putting a lot of capital into the business. We are spending a lot of money in innovation. -- and we are giving our customers a different kind of service than what would have been, say, five, six, seven years ago with regard to the whole sustainability agenda. And that takes a lot of effort and takes a lot of money on our side, and that's why we have these innovation centers. That's why we have the cost there. And frankly speaking, if we're not getting a return for that, we shouldn't be doing it. And you can see from the results that we are getting a return from it. So we're spending a lot of time. So it's just not as Ken mentioned earlier to an earlier question, it's just not up and down like it used to be. It's a very different scenario. Packaging is continually being redesigned, and packaging has continually been modified so that both our customer, and ourselves get the best benefit from the supply chain, and that's what's making the difference and we'll continue to make the difference. I suppose it's more that what you can do with the asset Charlie, to be honest with you. I mean if it's -- we've been traditionally very good at finding businesses that we can bring some value to on polished diamonds, if you like so and particularly a success in the U.K. this year and in Mexico and in Brazil and in Spain. I think in the greenfield of Morocco, it's kind of we -- these companies tend to be very around managed, and we can learn something from them as well, which we've also done in those assets. So I think we kind of try and see the value in it. I don't think our philosophy would have changed around how we see that. If you look back over history, we tend to be very disciplined in this space. At times, it would have been a challenge around not doing M&A when valuations were kind of heavy multiples, but we stayed away from that. And I think you can see the success of that as we sit here today with a rocky of 21%, 22% and a strong balance sheet, which gives us tons of firepower for whatever you might want to do. So I think it's less of where asset values are. I think it's more about what you can bring to them in terms of the wider context of bringing it to market, bringing our innovation, bringing our capital, bringing our customer base, bring our tools, technology and our expertise. I think that's where we drive the value from. Thank you. We will now take the next question - it comes from the line of David O'Brien from Goodbody. Please go ahead. Your line is open. Good morning guys, thanks for taking my questions. Three, please, if I could. Firstly, I know you didn't want to talk to Lars' point on what the capital investment plan is going to deliver in '23, but could you give us an idea of what it delivered in '22 and '21 and just how that is gathering momentum. Secondly, you talked about a culture of continuous improvement. This year, you've delivered a return on capital to 21.8%, which is fairly stunning? I'm not going to ask you how you improve from there. But I guess the question is fairly obviously either 17% through the cycle target rate for returns. Is there upward pressure on that at this stage or how should we think about it now given the strength of your performance? And then finally, again, a record balance sheet strength. Where should we think about the capital deployment opportunities over the next five years? I guess you've got €1 billion of organic investment again this year. But is there further opportunity internally within the group that you can continue to deploy towards - you've kind of given your view on acquisitions to Charlie. And what kind of - you've talked about opening, I think, for the first time net buybacks. Is there trigger levels of leverage we need to think about before that you won't go on there to think about when you start to execute larger buyback programs or how should we think about those kind of milestones? Well there's, more than three questions, okay. But thanks for those questions. They are very thought provoking - but obviously, I'll let the last question go to the last number of questions go to Ken. Just on the - how should you feel about capital? I mean, basically, if you imagine our depreciation is roughly 500, and there is always some pickup in -- when you're investing in, let's say, repairs and renewals, there's always some pickup in efficiency or something - some minor returns out of that. So I would say anything above that, you should be looking for at least a 25% return. So if we're looking at €500 million above €500 million or €600 million, whatever the number of depreciation, is and add a bit, I think it's a good number to look at. And that will be the overall general improvement in the business. Obviously, it's always masked by so many different moving parts, whether it's cost on one side of the ledger or whether it's savings on the other side of the ledger, it's very difficult to point to an actual number. You sometimes win more customers than - you because of your equipment or you get more efficiency or you get less inefficiency because of your investment in energy. So it's very difficult to point to a number. But the way we broadly think about it, if we're investing, let's say, €0.5 billion above depreciation, and we're not getting a 25% return or so, on that additional investment, then we're not doing our job. Ken? Good morning Dave, it's clearly coming from the Barry Dixon school, the mathematics there of the question. I suppose, how do we think about Rocky, right? So you know the way we think about investment in this business, which is we take a three to five-year view on where we need to put that capital either at the paper end as we did in the last cycle where we purchased Verzuolo than offset a couple of paper projects or in this cycle, where we're pushing it more towards the consumer end and building at the box business and everything around that. So we think about the Rocky in the context that - the Rocky is less the target is more of a kind of a floor about where we think as Tony just mentioned, where we think projects should come in at. So I think it's the case of around our current investment cycle, which comes out of the 2020 equity raise, we end with that. Clearly, we have strong ambitions around sustainability projects and everything else. And then it said, look, wait till this finishes, then we sit down and review where we think the next level of capital will take us in terms of whether that target should be increased or not. But it's not a target we kind of put us as to. It's there as a kind of a place as a reminder of where we've taken the return on capital of this business to over a very short period of time. But the reality is, we have a lot of space to build from at a 21.8% return on capital. And I think what it shows is if - as Tony just said, if you deploy internal capital well, if you drive every piece of return from it. And if, to be honest, you treat every pound as prisoner and you're as a prisoner, this is what you get, and that's the kind of focus. So not touching the target anytime soon, but it's one we review at every kind of capital cycle that we come to. And then the last one, I think, was on buybacks, Dave. I think it's less about a floor price or anything else. I think it's more about a view about where you can generate the best return for shareholders in terms of allocating capital. So clearly, we're in a space now where our balance sheet has never been stronger at 1.3 times, it's in very healthy shape, but we do like efficient balance sheet. And if we felt that capital wasn't going to inbound projects or M&A opportunities weren't there for us or the dividend didn't need to be supported or growing orders and clearly, buybacks apart that suite. I think the important point about what we did last December in a small way was to expand the opportunities available to us and expand the portfolio we have around being able to allocate capital and deliver value. I think that's probably the more important point around that particular program. Great. And sorry, just on the contribution from the investments in 2021 to 2022 in the round, what do they contribute? I would have said around €100 million, €100 some million in both occasions based upon the previous years. Lower depreciation, I can't remember exactly what our depreciation level was, but - and our investment over those. But we really - I think last year was the first year that we had close to €1 billion investments. The previous years were around €700 million or so €700 and some million. So obviously, the contribution wouldn't have been as big as it will be going forward in this particular cycle of investment. Thank you. We will now take the last question. It comes from the line of Cole Hathorn from Jefferies. Please go ahead. Your line is open. Good morning, thanks for taking my question. And Ken I'm just hoping you can give us a little bit more color on the cost buckets into 2023. I realize there's a lot of uncertainty on how energy and waste paper and things move. But the cost buckets you can give us, even if it's just labor year-on-year and some of the other dynamics there. And then looking at verticals business over the longer term, Tony, you called out you've got more paper capacity and less mills and you've gone to integrate kind of better invested projects. You've invested over €1 billion in energy projects alone. How do you see the European containerboard and box market playing out? Are the bigger players like yourselves who've invested and well invested just going to outperform some of the smaller mills that just haven't had the CapEx to invest in their mills. I mean, are we going to see a bit of a two-tiered system in Europe? And I'd like you to hopefully link that to the U.S. I mean you see the big players there. It's very consolidated. Whatever the volumes are the big players generally deliver that. Whatever the volumes are in the U.S., you tend to outperform the market. So I'd just like to hear your thoughts there? Thank you. Thank you Cole, I'll let Tony illuminate on that one for a second and thanks for sharing the questions evenly. I suppose the cost book Cole, I suppose the one thing we've seen over the last couple of years, I know we have the crystal ball, but I'll try to put a little bit of science behind where we sit to kind of guide us slightly. Let's take energy for a start. I mean the reality is energy remains volatile. While the prices kind of settled down, that kind of between 55% and call it, 65%, 70% range, the reality is that either hedging at those levels or contracting at those levels it's still a relatively illiquid market in terms of what's out there. So they're not the prices peer buying energy at. But if I was sitting here today just on a very simple kind of mark-to-market exercise, I said you that, I broadly think that if this persisted for the year, my energy bill year-on-year at the moment, it's probably around flat. And that's where I see it as I sit here now. In terms of labor, which is opposed to the other big cost books, clearly, we did a lot of work around that during 2022, with the full year run rate into '23 will clearly have a bigger impact and some final adjustments that might come through. So that could be a headwind in the order of maybe it's €150 million or so, slightly more probably even between maybe less depending on the CTO program. And remember, we do have an annual CTO program that we do target around €100 million a year, designed just purely to take some of that level of inflation. So I suppose we've got to take both sides of the ledger here in the sense of, yes, we know that some costs have moderated, particularly around maybe distribution and some other raw materials in OCC clearly where it is. Energy could go either way at the moment. But just to kind of help you out, I think I'm broadly flat, as I sit here for the year. Labor clearly a creeping cost and then we do have a large workforce, but then look at the other slide in the sense that we do have a CTO program but we do use our set inflation. We are investing to take out efficiency. The restructuring program in the Americas will take that head count. So I suppose in the kind of classic [Murcia] fashion, we understand what the inputs are and then we're designing opportunities and investments to kind of deal with some of those challenges that come and meet us, and that's what we're doing. So it's difficult, though Cole to kind of give you a full year view on some cost book. It's simply as it's very early. And I think what the world has called us for the last 18 months is things move fairly quickly. But what we have line aside on, we're very comfortable with as we start the year. And Cole, to your question about should we outperform I think it's fair to say that we would be very comfortable and confident that we will always outperform our peers in the way we've set ourselves up. I mean we are a very, very innovative company on the box side, we see ourselves -- we haven't got the final statistics for the year. But up until the end of October, we've gained share in the last year because of our security supply because of our design and innovation across practically every European country. And then on the paper side, in Europe, an integrated producer such as ourselves will always do better than the non-integrated. And we've seen that from all the mills. We've bought two very large mills, Verzuolo and Reparenco, and they would have been significantly underperforming what we're doing if they were independent. And I think that's fair to say that will continue, except in the very, very tight markets and maybe not even then because they don't have a guaranteed source of outlets. They have to go further for their customers. They probably have to discount more and they don't have the transportation savings that we will have, as I said forever as an integrated producer because we run our supply chain so tightly. So I would say putting us at the top with outstanding in any way arrogant, I'd say we're by far the best in managing that as an integrated player and integrated players will typically always outperform nonintegrated players. And then if you have a good box system on the other side of that, then I would say that, that gives you the double profitability that we have shown and will continue to show. With regards to the American market, a different model in America it's a much more commoditized market. So I think it's more traditional in the United States to what Europe would have been 25 years ago. It's still a kraftliner dominated market. It is very consolidated, but there are still some growing independents in there, which are disruptors potentially for that market. But nonetheless, I think, as you say, it's a consolidated market and the big guys have been taking the downtime to make sure that they don't overstock over the last three to four months in America as we can see it. But it's a different - the U.S. market is different to the European market. There's less variety of packaging grades. There's less variety of papers. There's less variety of colors. So it's a different type of market. That's not to say it's a bad market, it can be a good market, too, because of the consolidation, but it's a different we're much more consumer-led merchandising medium in Europe than in the U.S. Thank you. And then, Tony, just maybe a last question is on inventory levels, is there any color you can give on Smurfit Capital, what you're seeing in the wider industry for containerboard or box inventory levels? Thank you. On box inventories, we don't really have any line of sight on that. But on the container side, we're still a bit above where we'd like to be, but not massively. In fact, the numbers that came out is the last numbers that we saw were I think in about three weeks ago, and they were better than we anticipated them to be. And that's really a function of all the downtime that was taken. We took 260,000 tonnes. We estimate about 2 million tonnes of downtime was taken in Europe. So again, I think we took less downtime for our market share because our system was that much better. But overall, I think downtime was taken through inventories are pretty well under control, but we'd like to see them tighter, obviously. Thank you, operator. Yes, and again, thank you all for being with us today. As I said and as Ken has said and shown and demonstrated our results for last year were truly exceptional given the very difficult environment in which we are operating. I think over the years, Smurfit Kappa has made investment plans and developed itself with acquisitions to really put itself in a position to capitalize when markets are doing well. And as I say, while success is never a straight line, this company has never been in a better position to take advantage of any opportunities that come before us. So I thank you all for your support and your interest in Smurfit Kappa. We continue to look forward to the future with optimism, and we look forward to seeing and then speaking to you in the coming weeks and months ahead. So thank you all, and have a very nice day.

EarningCall_304

Good day, and welcome to the CSPi's First Quarter and Fiscal Year 2023 Conference Call. At this time, all participants have been placed on listen-only mode and the floor will be opened for questions and comments after the presentation. Terrific, thank you, Kelly. Hello, everyone, and thank you for joining us to review CSPi's fiscal 2023 first quarter results, which ended December 31, 2022. With me on the call today is Victor Dellovo, CSPi's Chief Executive Officer; and Gary Levine, CSPi's Chief Financial Officer. After Victor and Gary conclude their opening remarks, we'll then open the call for questions. Statements made by CSPi's management on today's call regarding the company's business that are not historical facts may be forward-looking statements as the term is identified in federal securities laws. The words may, will, expect, believe, anticipate, project, plan, intend, estimate and continue as well as similar expressions are intended to identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results. The company cautions you that these statements reflect current expectations about the company's future performance or events and are subject to several uncertainties, risks and other influences, many of which are beyond the company's control, that may influence the accuracy of the statements and projections upon which the segment and statements are based. Factors that may affect the company's results, but are not limited to the risks and uncertainties discussed in the Risk Factors section of the annual report on Form 10-K and the quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. Forward-looking statements are based on the information available at the time those statements are made and management's good faith belief as of the time with respect to future events. All forward-looking statements are qualified in their entirety by this cautionary statement, and CSPi undertakes no obligation to publicly revise or update any forward-looking statements, whether as a result of new information, future events or otherwise after the date thereof. This morning, we reported a very strong start to the fiscal year 2023. We grew product sales 63%, service sales 13% and overall total sales 48% over the first quarter of prior fiscal year. When we last talked with you back in December, we noted that each of the business segments were hitting on all cylinders. We continue to execute with similar fashion during the first quarter and increased our overall gross margins by 2.5 percentage points over last year to 31.7%. The revenue and gross margin led to generating $0.21 in earnings per share, while last year, we lost $0.09 a share during the last year's fiscal first quarter. All in all, we are quite proud of our performance to start fiscal 2023. During the past several years, we've stayed the course as we migrated, our business to offer higher value cybersecurity, wireless and managed service offerings. It was easy - it wasn't easy, especially with the onset of COVID-19 pandemic and its related challenges, but our business model is beginning to show both its value to our customers as well as its potential to our shareholders. The demand for our award-winning products and services is building. We are increasing business with our existing customers, while at the same time gaining new customers. Our Technology Solutions business continues to grow during the first quarter. At the same time, our High-Performance Product business revenue more than doubled compared to a year-old first quarter. It was primarily due to sizable customer engagements, but they fully recognized during the quarter. While the timing of potential orders is subject to movement from one quarter to another, our business pipeline is robust, and we are cautiously optimistic that our HPP business will be growing contributor as the fiscal year progresses. In this morning's news release, I noted our business - and the opportunity pipeline we have in front of us is stronger today than any time in our company's history. Our strategy combined with our unique solutions and top-notch engineers are some of the leading factors. We are continuing to fund R&D so that our product continues to provide these unique solutions to our expanding base of customers. The early market reception to these prior capabilities is opening doors for us with companies that have never talked to CSPi before, and we hope to have some positive news over the coming months. While we have a strong momentum and our opportunities in the marketplace continue to expand, we do have hurdles to overcome to realize our full potential. One of the highest such hurdles is the continued supply chain constraints we are experiencing over a few of our suppliers. The problem has gone a lot better since the height of last summer. However, the historic six-week delivery time frame on orders is still being realized. However, the good news is that our customers continue to stay loyal to us. We believe the supply chain issues continue to exist because China is locked down until mid-December, and they are still enforcing very severe COVID-19 quarantines in certain areas. While some of our suppliers have moved their sourcing out of China, they can't ramp up overnight. So we remain hopeful that China will relax its regulations which will reduce supply chain constraints over time. Our revenue growth during the fiscal quarter was driven by a Technology Solution, or TS, business in managed service practice. We generated revenue of $15.9 million, a 40% increase over a year ago TS revenue and we are winning new customers while earning increased business from existing customers. During the beginning of the pandemic, we quickly shifted to this segment because it was shorter sales cycles and sales were not being impacted by restrictions. And we have continued to focus on this segment as it's become a growth engine over the past couple of years. The managed service practice revenue grew 24.4% from prior year and was driven by customers increase - customers' increasing use of the implementation, installation and training capabilities. Our High-Performance Products, or HPP, business had one of its strongest quarters in quite some time and reinforces the settlement that we have been sharing with you over the past year. We reported revenue of $2.5 million, a significant increase compared to a year ago level of $1.1 million. The primary contributor was from a government contract, which had been expected for some time, and we were just waiting for some critical components to finalize and ship the order. The quarter also included revenue contributions from royalty revenue related to E-2D program as well as Myricom. To summarize, we had a great start to the fiscal year. Our strategy of focusing on higher-margin products and services that meet customer demand is yielding solid progress each quarter, and we have reported two consecutive quarters of 40% plus revenue growth. Despite converting some of the older backlog to revenue, we also booked nearly an equal number, of order - new orders. This demonstrates the strength of our offering. Yet it also highlights our continued engagement in customer loyalty during this period since we had not lost a single order from the backlog. We have successfully transitioned our business during this unprecedented period. And today, we are an active player in the high-growth and margin business. And we believe that we have the resources and wherewithal and strategy to realize our potential. As Victor mentioned in his opening remarks, we had a solid fiscal first quarter with revenue of $18.3 million, a sizable improvement over the year ago fiscal first quarter. We reported gross profit of $5.8 million or 31.7% of sales compared with $3.6 million or 29.2% of sales in the year ago fiscal first quarter. And with each of the revenue sources, we experienced a significant increase in product gross margin compared to the year ago fiscal first quarter level while service gross margin again surpassed 50%. Our engineering and development expenses for the first fiscal quarter were $836,000 compared to approximately $627,000 in the year ago period. As we have disclosed previously, the increase is primarily due to higher personnel costs, which include outside consultants. Our SG&A expenses in Q1 were $3.6 million, up slightly compared to the year ago fiscal first quarter due to increased variable compensation based on higher gross margin profit. We reported net income of $1 million in the first fiscal quarter or $0.21 per diluted share compared with a loss of $366,000 or $0.09 per common share for fiscal 2022's first quarter. The company had cash and cash equivalents of $19.6 million as of December 31, 2022, which is approximately $4.4 million lower as compared to the September 30, 2022 level, primarily due to a previously referenced large financing customer sale recognized in revenue in the fourth quarter of fiscal year 2022, but the cost was paid in the first quarter of fiscal year 2023 during the fiscal '23 first quarter. We have authorized to issue an additional 300,000 shares of common stock as part of our CSPi 2014 employee stock purchase plan. I also want to highlight that the Board of Directors approved a quarterly dividend of $0.03 per share payable on March 14, 2023, to shareholders of record on the close of business on February 24, 2023. The vigilance we have employed over the past couple of years have ensured that we have the resources to execute the multiyear growth strategy of transforming to a cybersecurity, wireless and managed service company. Certainly [Operator Instructions] Your first question is coming from Joseph Nerges at Sergen Investments. Please pose your question, your line is live. Okay. A couple of quick questions, you mentioned in the press release about HPP having a sizable customer engagement in the first quarter. I'm assuming you don't want to name that sizable engagement. Is that - am I correct in that? This customer - you don't want to name the customer itself. And you said the supply chain issues are still a little better than they were last year, but still not up to snuff at this point in time. What you experienced, say, two, three years ago? That's correct. It's gotten a little better, but in certain vendors that we happen to do quite a bit of business. It's not that much better. Okay. Another one would be on a previous call, you've mentioned about the issues of obtaining new personnel or hiring new people. I assume with the latest amount of announcements on high-tech layouts, is that lessening to any extent? In other words, are you able to find people a little easier than you were, let's say, six months ago? Well, we haven't really hired anyone else that we're looking for. But I can tell you it's slowed down from people leaving looking for other opportunities. The environment here at CSPi has been really stable, both on engineering, sales and internal support, which is good. I think people are respecting the job positions they currently have. It may be nervous to be the new person at any other organization in case there are layoffs. Well again, like I said, with the numerous announcements in the last month or so in the high-tech industry, I assume that's helping, let's put it that way a couple of quick things. From your letter, your newsletter - or your year-end letter, you talked about Unified-Communications-as-a-Service growing. And I was just wondering, is that something that you're finding a solid potential down the road here with or? Yes, the pipeline has been real strong. We closed multiple deals in the quarter, and the pipeline is as strong as it's been. And we're hopeful that there's, some large opportunities - multiyear opportunities that we're trying to close now that will definitely help because all these deals that we are signing are three-year deals build on a monthly basis. Okay, that sounds good. How about the cruise industry? Has that opened up a little bit in the last, let's say, a couple of months? Conversations have opened up, which are good, and we are doing some planning right now to roll out either software - security software on the ships or some wireless, but the talks and the engagements are happening on a more frequent basis. Nothing confirmed of exactly when we're going to start doing the work on the ships or with the cruise lines, but the conversational piece has been active lately. Right, well, just for my information, what were you actually doing prior? Is it Wi-Fi what were you putting in the cruise ships in past years? Yes, it was the Wi-Fi and it was - it was not only doing the configuration of the wireless, but we were also doing the pre-configuration and we are all doing the site maps. So we'd go on the ship first, and we would do the site maps of where all the APs would be placed or need to be placed. And then we were also doing the NAC solution, which is called ClearPass, and that's made by HP Aruba. So some of the ships have this capability and some ships are still awaiting this capability. Is that correct, otherwise, you have...? No, they all have them, but it's just they were upgrading to a better quality of product. Some of those ships have older products and more, older APs and being on a vessel where there's a lot of steel and these APs were a lot more efficient. Okay. One other point here, and that is you didn't mention - how did the exchange rate - the currency exchange rate affect this quarter versus - previously, we've had some benefits of the currency exchange rate in previous quarters. Was there a negative to this quarter with the currency exchange? Okay. So again, if it was equal, that would be $500,000 more than we would have had down the - on the..? And one other point I want to make just basically a statement. There's a great deal of current hype around artificial intelligence between Microsoft buying into it, Google buying into it. And I just want to make the point, that have we not incorporated artificial intelligence in our area platform two to three years ago? So somewhere I lag. I'm just trying to say, we're not behind the game in that particular aspect, let's say, but again thanks so much guys. I'm not much of a morning person, but let's just say that helps. I just got one quick question. Well, Joe already touched on the cruise business, which I was going to get an update on that. The High-Performance Product, I know you indicated that the supply chain is still an issue. If you could have gotten your hands on everything you needed, what - if you could give me an estimate of what the additional sales volume would look like over there? No, the HPP I mean, with the product sales, what the Myricom stuff, what would it have looked like if you guys could have gotten your hands on all the parts that you needed to ship, what you have orders for? The backlog is about $4.4 million. Now some of that is related to the ARIA contracts because they've deferred over time. So you keep them in backlog. So that's a portion of it as well as some - we've got product, but the customer doesn't want it. They've got a spread over time. So it isn't that we would get the entire amount at one lump sum, because they are... I would say I would say about $2 million - around $2 million, maybe just shy of $2 million would have been able to go in if we had the components to build the systems. Yes, I would say about half and that's at a very high profit margin - I would, bought for it considerably. And I would imagine that the - since the end of the quarter, I got to imagine that pressure is continuing to ease, getting your hands on the parts? Oh my God. Well, I hope that swings the other way because, yes, $2 million today sounds better than $2 million next quarter. Yes. As soon as we can get it shipped out, we do, because we're at the mercy of some of these larger organizations. Thanks Brett. Good morning, congratulations on a good quarter. Can you tell us what the ARIA revenues were for the quarter? And how much of the backlog is ARIA related? Is this not a big growth area? I mean it seems like there's huge upside with ARIA. Is that not the case? It is. Yes, it is. It's what we're focusing on and moving forward with it. But as I mentioned on previous calls, the technology once we get in we have a really good chance of winning it. But we've had some name recognition problems. It's just - we're not under Gartner, you don't get there until you have revenue. And it's sometimes they go with the larger company, even if they're not - if our product outperforms them. They still kind of go with a company that's a multibillion dollar organization. We've seen that quite a bit actually. So we have over a dozen accounts now. So it's getting a little easier, but we're still not on that Magic Quadrant and when you get into our SIM product. They do a lot of - some of the organizations are looking for their Magic Quadrant, and we're not on yet. And we're talking to Gartner, but there's a lot to go through, and there's a revenue requirement. So it's a chicken and the egg effect how do you get on there unless you have revenue and how do you get the revenue if you're not on it. So - but it's our focus area it's just taking time. Okay. The question is, can somebody larger do more with ARIA than what if you can't get in the door is the question. Okay. A couple of other quick questions, I didn't see anything about the share repurchase, the original 194,000 shares I think only something on the order of 20,000 or 22,000 has been repurchased. Is that correct? Okay. Well again, it seems like with what you've outlined as far as the prospects and everything going forward, it seems like if you don't buy it now, you're not going to be able to buy it. Is that not the case? I know you want to keep the powder dry, but at the same time, it looks like there's huge upside for what you're doing. Okay. Last question has to do with the dividend. You've never been in a better position, good cash position. Interest rates are up. So you hopefully are earning some - have interest income on the cash. And the dividend is 20% of what it was pre-COVID, pre-PPP. Any prospects there for raising the dividend? We talked about it at our last meeting, right? We decided right at this stage with some of the financing deals we've been doing with our customers to keep that sticky, we will - we're looking at keeping the cash at hand right at this particular point. Things may change in the near future. [Operator Instructions] There appear to be no further questions in queue. At this time, I would like to turn the floor back over to the CEO, Victor Dellovo, for any closing remarks. Thank you. As always, I want to thank our shareholders for continued interest and support. We have now reported consecutive quarters of significant growth and momentum we are continuing to experience in the current quarter excites us for the remainder of the year. We have solid revenue conversion, strong pipeline in a product and service portfolio are generating favorable gross margins. Gary and I look forward to sharing our progress in fiscal 2023 second quarter operating results in May. Until then, be well and stay safe. Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.

EarningCall_305

Greetings. Welcome to the Gladstone Capital Corporation's First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. At this time, I will turn the conference over to Mr. David Gladstone, Chief Executive Officer. Mr. Gladstone, please go ahead. Thank you, Rob. Nice introduction, and good morning, everybody. This is David Gladstone, Chairman, and this is the earnings conference call for Gladstone Capital for the quarter ending December 31, 2022. Thank you all for calling in. We're always happy to talk with our shareholders and analysts, and welcome the opportunity to provide the update for the company. Today's report may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. These forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. And many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors in our Forms 10-Q, 10-K and other documents we file with the SEC. You can find them on the Investors page of our website www.gladstonecapital.com. You can also sign up for email notification service. You can also find the documents on the SEC's website at sec.gov. We undertake no obligation to publicly update or revise any of these forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. Today's call is an overview of our results, so we ask that you review our press release and Form 10-Q, both issued yesterday, for more detailed information. Again, you can find those on the Investors page of our website. I'll cover the highlights for last quarter and conclude with some market commentary as we look forward to the balance of 2023, before turning the call over to Nicole Schaltenbrand, our CFO, to review our financial results for the period and our capital and liquidity position. So, beginning with last quarter's results, originations for the quarter were modest at $11 million for the period, which were all add-on investments to existing portfolio companies. Amortization, repayments and exits were $39 million, so our ending investment balance fell by $28 million for the period. Interest income for the quarter rose 18% to $18.4 million, as the weighted average loan yield rose 110 basis points to 12.3% and the average investment balance rose 6.6% to $589 million. Fee income rose on the period to -- by $900,000 with a number of year-end equity distributions and contributed to the 21% rise in total investment income, which was $19.3 million for the quarter. Borrowing costs increased $900,000 or 22% with higher SOFR rates. However, our net interest margin also rose $1.9 million or 17% to a record $13.4 million for the quarter. Administrative costs were largely unchanged. However, net management fees rose by $1.2 million to $4.6 million or 2.9% of assets, as new deal closing fee credits were down and incentive fees associated with the increase in investment yields rose compared to the prior quarter. Net investment income increased $1.2 million or 17% to $8.7 million or $0.25 per share. The net realized and unrealized losses on the portfolio for the period came in at $3 million, and as a result, NAV declined $0.02 per share to $9.06. While higher rates lifted our net interest income, we also reduced our leverage last quarter and we were still able to generate a 10.9% ROE for the quarter. Based upon the portfolio performance, an increase in net interest income, we recently announced a monthly dividend increase to $0.075 or $0.90 annually, and we'll consider further increases in the coming quarters. With respect to the portfolio, portfolio continues to perform well with generally modest leverage metrics and favorable liquidity profile. However, aftermarket auto and building sector headwinds caused us to reclass Edge Adhesives to a non-earning, which represents $6.1 million or 0.4% of assets at fair value. Depreciation for the quarter of $3 million was primarily related to small moves in several equity positions with very little of the depreciation associated with stress or performance of our debt portfolio. Notable portfolio exits for the period included the sale of a couple of equity investments in Targus and Leeds Novamark Capital, which generated realized gains of $10.3 million, and the repayment of R2i, which is a highly leveraged credit, and contributed to the 35% drop in PIK income for the quarter. In reflecting on our outlook for the balance of '23, I'd like to leave you with a couple of comments. Our balance sheet leverage at the end of last quarter was a bit elevated relative to our target range, and the investment exits along with the accretive ATM share issuance last quarter have positioned us well to support the further growth of our asset base in coming quarters. While disappointed with the level of originations last quarter, we continue to be optimistic and are well positioned to continue to grow our debt investments in growth-oriented lower middle market companies by $50 million to $100 million over the balance of the year as we did last year. Most recently, in January, we closed the new deal, NeoGraf, which was a $29 million first lien debt and 2 million of equity co-investment. We have managed our underwriting rigor in the face of interest rate escalation and our fortunate to have our portfolio heavily weighted to senior secured loans, which, at present, represents 72% of our investments. And secured investments have increased to 91% of the total investments with a modest overall leverage of under 3.5 turns. With our floating rate investments exceeding our floating rate liabilities by approximately $425 million and the current floating rates on pace to be up at least 70 basis points for the quarter, we would expect our net interest margin to be up in the range of $750,000 this quarter. During the December quarter, total interest income rose $2.8 million or 18% to $18.4 million based on the increase in prevailing floating rates and increase in earning assets. The weighted average yield on our interest-bearing portfolio rose 110 basis points to 12.3%, with the increase in floating rates on the 91% of the investment portfolio that carries those floating rate. The investment portfolio weighted average balance increased to $590 million, which was up $37 million or 6.7% compared to the prior quarter. Other income increased by $600,000 to $900,000, which contributed to the $3.4 million or 21% increase in total investment income for the quarter. Total expenses rose by $2.1 million quarter-over-quarter, as interest expenses rose $900,000 and higher net management fees rose by $1.2 million with higher average assets, increased investment yields and reduced new deal closing fee credits. Net investment income for the quarter ended December 31 was $8.7 million, which was an increase of $1.2 million compared to the prior quarter or $0.25 per share, which exceeds the $0.21 per share dividends paid and supported the increase to $0.225 per quarter announced in January. The net increase in net assets resulting from operations was $5.7 million or $0.16 per share for the quarter ended December 31, as impacted by the realized and unrealized valuation depreciation covered by Bob earlier. Moving over to the balance sheet. As of December 31, total assets declined to $640 million, consisting of $622 million in investments at fair value and $18 million in cash and other assets. Liabilities declined to $315 million as of the end of the quarter and consisted primarily of $150 million of 5.125% senior notes due 2026, $50 million of 3.75% senior notes due May 2027, and as of the end of the quarter advances under our line of credit declined to $108 million. As of December 31, net assets rose by $8.8 million from the prior quarter-end with the realized and unrealized valuation depreciation, which was more than offset by net proceeds from our common share issuance under the ATM program of $10.5 million. Our leverage as of December 31 declined with a decrease in total assets and ATM share issuance to 97% of net assets. With respect to distributions, Gladstone Capital's monthly distributions to our common stockholders was increased to $0.075 per common share, effective for the months of January, February and March, which is an annual run rate of $0.90 per share. The Board will meet in April to determine the monthly distribution to common stockholders for the following quarter. At the current distribution rate for our common stock with a common stock price at about $10.36 per share yesterday, the distribution run rate is now producing yield of about 8.7%. Thank you, Nicole. You and Michael and Bob, all did a great job of informing our stockholders and analysts that are following the company. In summary, another solid quarter for Gladstone Capital. Company didn't close much last quarter, but it did a good job of exiting some assets and deleveraging the company. So, the company is building additional capacity to support the existing portfolio, but also additional investments in the coming quarters. The company has about $112 million of availability under its bank line, so great shape there. Portfolio is in good shape, modest leverage and very low non-performing assets. Net interest income in the quarter was up 17% based on the higher interest rates in the company's favorable capital structure, and more support the 7% increase to the common distributions that was announced last month. In summary, the company continues to stick with its strategy of investing in growth-oriented middle market businesses with the good management. Many of these investments are in support of midsized private equity funds that we partner with and they are looking for experienced partners to support their acquisition and growth of the business in which they have invested, usually a lot of equity. This gives us an opportunity to make an attractive interest-paying loans to support our ongoing commitment to pay cash distributions to shareholders. Thank you, Mr. Gladstone. [Operator Instructions] Thank you. And our first question is from the line of Mickey Schleien with Ladenburg. Please proceed with your questions. Yes. Good morning, everyone. Bob, first a high-level question. Could you give us a sense of what's going on in the market that prevented you from closing new originations during the quarter? Good morning, Mickey. As you may recall, we had a couple of the two strong quarters leading up to last quarter, so we were probably pretty well focused on closing, I think, about $120 million of assets. So, our pipeline was a little bit thinner. We're also facing a pretty significant step-up in underlying rates. So, I think we were being a little bit more conservative in the approach that we were taking in terms of which industries, which sectors, we're going to be able to support the significant step-up in rate. I think we are being very careful about not only rates, but what's the economic headwinds that are going to affect the revenues in the underlying portfolio. So, while we saw a number of credits that were not clearing, we were a little bit more conservative. I think, the fact that we've already closed one in January and their number is still to come, I'm not too worried about a quarter blip. We tend to have those from time to time. Don't tend to happen in fourth quarter, but the overall level of deal activity in the December quarter was generally lighter than what we would normally expect in our end of the market. Thanks for that. That's very helpful. And it actually leads to my next question in terms of rising interest rates. With the strong January jobs report, as you know, the forward interest rate curve implies about another 50 basis points of Fed tightening. So, how do you see that potentially impacting the portfolio's ability to service its debt? Yes. Let me give you a couple of quick stats and we've talked about this before. You have to understand the nature of our portfolio. We start with smaller credits and they gradually grow. At the moment, roughly 70% of our portfolio is to companies with EBITDA under $25 million. So that leaves 30% that's over $25 million. Of the 70% that are the smaller credits that you would be probably most concerned about those issues, 56% of those credits have leveraged under 2.5. So, the majority of the credits where we would probably face stress are extremely lowly leveraged, in fact, bordering on typical bank type leverage. And the overall leverage profile for that 70% is 3.1x. So, a interest rate move is certainly meaningful, but we're nowhere near anything that would cause particular stress. So, we're feeling like the vast majority of our smaller credits today are very lowly leveraged and absorbing any issues that are currently outstanding. And as I've said in the past, we have roughly 70% of the portfolio that is sponsored back. So, it again has additional supports that come with it. So, at the moment, if we were seeing anything in the way of stress, I think you would have seen a little bit more movement from our third-party outside evaluations of the portfolio. So, since the majority of the loan movements were very minor, I think it just affirms the fact that the leverage profile and the performance of our portfolio in the face of the escalating interest rates is well positioned. All right. I understand. That's a great explanation, Bob. And one last sort of housekeeping question maybe for Nicole. When did you actually place Edge on non-accrual? And did you reverse any previously accrued interest income on Edge? So, we placed it on non-accrual effective October 1, and we did reverse one month. So, the September of 2022 month of interest, which was less than $75,000 of interest was... Thank you. [Operator Instructions] The next question is from the line of Robert Dodd with Raymond James. Please proceed with your questions. Hi, and congratulations on the quarter, and also want to say thank you for that detailed answer to Mickey's question on the interest coverage and the leverage by kind of sized here. That's really, really helpful. On the pipeline, if I can, I mean, you -- in response -- in your prepared remarks and in response to Mickey's questions, like, you talked about -- I mean, obviously, it was a little -- you had originated a lot to kind of entries to the pipeline that started to refill again. I mean, how would you rank the pipeline in terms of looking forward maybe beyond January? How it's stacking up and the quality of the businesses that are in it, given you were clearly -- you're taking a somewhat more conservative stance on what you're willing to underwrite or how you want to underwrite in this economic uncertainty period? It's an interesting question. I would say there's probably a couple of different nuances there, Robert. First off, I think if you read some of the recently released reports, tightening credit conditions has squeezed a lot of folks out of the marketplace today. A lot of the regional banks, a lot of the larger banks and capital constraints in a number of places have really moved all of the borrowers to the private capital markets. So, being open as we are today, we're getting to see an awful lot of stuff. What we are seeing runs the gamut, deals that didn't close because somebody couldn't fund them to deals that probably shouldn't close given the uncertainty of the market conditions. So, I think what we're seeing is a very wide swath of our opportunities, and it's really up to us to stress those against our historical screens to figure out which of those we feel have the forward momentum to be able to deleverage in the way we typically underwrite credits. And so, for us, the good news is, as time goes on, we're seeing current numbers, we're seeing current '23 outlooks and budgets. And if people start to negatively trends to their plan, two things typically happen. Sponsors don't buy them, because they're not going to hit their targets. And two, they are not going to give us the profile to deleverage the risks that we were expecting. So, there's a natural -- the deal falls away, because the visibility or the sponsors don't think they can make the valuations work. For us, today, we do have a number of things out there, but it's all based on trends that we are seeing continued deleveraging. Obviously, because we do deal with smaller credits, there are pockets where things are doing very well. And our focus in those is really just the sustainability of those businesses. So, if we're investing in something that might be positively impacted by electrical vehicles or energy consumption or things like recycling or closed loop or other things that are certainly more on trend and being driven by social trends and government investing, those are places where we're going to see continued growth opportunities. So, we're just more mindful of what the realistic '23 outlook might bring for the wider swath of credits that we're seeing. Got it. I appreciate that color. And I'm kind of kind of following on. I mean, yes, the private capital markets, as you say, are still open. I mean, you're still, [please] (ph), still lending. Are you seeing any increase in competition in your end of the market given, to your point, there's probably somewhat fewer businesses that actually meet everybody's kind of -- not necessarily us, but other's underwriting parameters in this environment? Is it resulting in more crowding for the deals that all getting done? It doesn't seem to be, right? Because spreads... I don't think so. I think the idea of we're consistent player. We've got an established position. More often than not, we're getting calls from sponsors who the banks flaked on them or some lender that was relying on the CLO market to support their business or insurance company to back them isn't there, and we'll certainly get those calls and have preferential opportunities. And the thing in today's marketplace that I would say is there's no reason for us to stretch. I mean, given our traditional pricing, use a benchmark, seven over something like that. Today, that's going to generate senior returns in excess of 11%. There's no reason to stretch for extra credit risk. We have had situations where the senior is approaching what would traditionally be subordinated or second lien returns, there's no reason to stretch the current level of interest rates, and the current demand for private capital is giving us a tremendous opportunity to put money out as senior risk as long as it's in the right business. It's generating great returns for us. Thank you. At this time, we've reached the end of the question-and-answer session. I'll now turn the floor back to Mr. Gladstone for closing remarks. Okay. Thank you all for calling in. I would mention that there's a lot of junk in the marketplace today. A lot of banks have been out of the market and just closed their door to new loans. I guess the regulators are beating on them pretty hard. Anyway, we're in great shape to keep moving forward. I expect this quarter that we're in now, that began in January, is going to be a strong quarter for us. And that's really the end of this presentation. We'll see you next quarter. So, thank you all for calling in. Rob?

EarningCall_306

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 TESSCO Technologies Incorporated 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] Good morning, everyone, and thank you for joining TESSCO's Q3 fiscal year 2023 conference call. Joining me today are Sandip Mukerjee, TESSCO's President and Chief Executive Officer; and Aric Spitulnik, Company's CFO. Please note that the management discussion today will contain forward-looking statements about the anticipated results and future prospects. Forward-looking statements involve a number of risks and uncertainties, and TESSCO's results may differ materially from those discussed today. Information concerning factors that may cause such a difference can be found in TESSCO's public disclosures, including the company's most recent Form 10-K and other periodic reports filed with the Securities and Exchange Commission. Please note that the company will be referencing slides available through the webcast link, on the Events and Presentations page of the company's Investor Relations Web site. With that introduction, I'd like to turn the call over to Sandip Mukerjee, TESSCO's President and CEO. Sandip, please go ahead. Thank you, David. Good morning, everyone, and thank you for joining us today. Q3 was another excellent quarter for TESSCO, as we continue to execute successfully on our strategy. Before we get to the specifics of Q3, let me start by recapping that strategy, which I have shared with you throughout this fiscal year. Our goals have been to drive revenue by delivering excellent service and value, focus revenue opportunities on higher growth 5G and wireless infrastructure, improve gross margins by adding differentiated value through product mix, vendors, TESSCO observer, and operating discipline, launch a modern ERP, improving our operating efficiencies, and utilize TESSCO's operating leverage to grow EBITDA faster than revenue. We do not seek to be the lowest cost distributor. Our customers achieved full savings from the efficiencies gained through our optimized logistics, procurement, and project management expertise. Moreover, we leverage these value-added services and enhanced support resources to generate customer loyalty through improved execution, which has led to real partnerships with our customers. Our Q3 demonstrate the successful execution of our strategy. We achieved double-digit year-over-year improvements in revenue, gross profit, and adjusted EBITDA. Both of our business segments, Carrier and Commercial contributed to a year-over-year increase in revenue of 12%. Our margins continue to improve as a result of pricing strategies, diversification of our supplier base, and focus on higher-margin business opportunities that have been central to our strategy. This quarter, our gross margin was 20.6%, and up 1.5 percentage points year-over-year. Our adjusted EBITDA was $1.8 million, up $800,000 year-over-year. Furthermore, we see continued improvements in the global supply chain. This has improved product lead times and has resulted in bookings returning to more normal levels. We still ended the quarter with a strong sales backlog of $84 million. I will now walk you through the results and highlights of the past quarter, starting with our Carrier market. In Q3, our Carrier revenue was up 12% year-over-year, and our gross profit increased 16%. Year-to-date revenues are up 8%, and gross profit is up 19%. We ended the quarter with a sales backlog of $41 million. Margin improvements are a result of what I had said earlier, our strategy to consistently add value for our customers. This quarter, we introduced new warehousing solutions that allow our customers to manage their general contractors more effectively. We recorded two significant wins this quarter, both related to 5G builds and upgrades. The first is a project with our largest tower owner customer, and the second is a new relationship with one of the largest AT&T turf contractors. Together, these opportunities exceed $40 million, and will primarily be recognized in fiscal year 2024. I will now turn to the commercial market which includes all wireless infrastructure business outside the Carrier ecosystem. In Q3, our commercial revenue was up 12% year-over-year, and our gross profit increased 23%. Year-to-date revenues are up 11%, and our gross profit is up 19%. We ended the quarter with a sales backlog of $43 million. Our scale, technical expertise, value-added services, program management support, and personalized account coverage continue to be the reasons why customers rely on TESSCO. Ventev and TESSCO Observer helped differentiate our offering, and enhanced our margin performance. We continue to refocus on our end-user customers. As a result, our utility market grew 38% year-over-year. These strong results confirm our strategy of helping electric utilities modernize and assist with their overall grid automation projects. Our Q3 growth initiatives in this market included a Ventev business development campaign around automated metering infrastructure, which has already resulted in shipments across multiple investor-owned utilities. We continue to see strong demand in test equipment, and are positioning our Ventev universal broadband enclosure as a simple turnkey solution for utilities that are deploying wireless. In the government market, we have signed new state and local contracts. This market grew 19% year-over-year, and is now up 3% year-to-date. Our VAR market grew 13% year-over-year. We had a number of significant wins this past quarter, including a VAR that moved all of its microwave business to us, a large national service provider that awarded us several large projects for major theme parks, and another sizable win for a VAR to support automation for a large mining company. Furthermore, we continue to win public safety and cellular DAS opportunities due to our inventory stocking position and our technical and logistical expertise. Turning now to Ventev, in Q3, our Ventev revenue was up 13% year-over-year. Year-to-date, revenues are up 19%. Ventev is growing faster than our distribution business. We have improved our Ventev margins and have a 30% year-over-year increase in sales backlog. Ventev's increased market share with a wide range of existing and new customers, including a pioneer in inpatient tower health, providing them with antennas to enable Wi-Fi monitors in hospital rooms, a solution for an NFL stadium, cable assemblies for a VAR that is installing DAS into a subway system, antennas for a large cruise line, antennas to upgrade the Wi-Fi in scientific laboratories, and an innovative solution for a vineyard through the Cisco Design-In Program. Regarding our sales channels, we continue to sell both direct and online through tessco.com and, in Q3, achieved quarterly revenue of $9.9 million, up 6% year-over-year. As a part of our ERP transformation, TESSCO launched a new tessco.com which provides many new features and capabilities for our customers. And as we announced last month, we formally launched our new ERP system. This project has been much more complex, and has taken longer than initially planned. But all our foundational capabilities are now in place, and the launch has been very, very smooth. We're now in Hypercare, which will continue through Q4, along with higher non-depreciation expenses. We're expecting incremental depreciation of approximately $1.5 million in the fourth quarter, which will impact net income but not EBITDA. Expenses associated with ERP will significantly reduce in our next fiscal year, starting April. The new ERP system will provide us with considerable operating efficiencies over our legacy systems, including improved inventory management and freight capabilities. We expect to begin to achieve a strong return on our investment in our upcoming fiscal year, and a positive effect on EBITDA. Thank you, Sandip, and good morning, everyone. At the onset, please note that as the impact of our discontinued Retail segment is not significant for fiscal 2023, our current year results now include activity from our former retail business. For prior years, the retail business is still disclosed as discontinued operations. As Sandip mentioned, we had another strong revenue quarter for our combined Carrier and Commercial segments, totaling $114.9 million, up 12% year-over-year. Sales backlog at the end of the third quarter totaled $84 million, well higher than historical levels. Sales bookings declined this quarter in both segments due to improvements in the supply chain, which means that customers no longer have to book orders as far in advance as they had over the last year. However, we continue to maintain a very large backlog that, for the most part, to expect to ship in the current fourth quarter, with a solid percentage of that business being Ventev. Moreover, our pipeline and customer activity remain strong. Gross profit was $23.7 million for the third quarter of fiscal 2023, compared with $19.6 million for the same quarter in fiscal 2022. Gross margin was 20.6% of revenues for the third quarter of fiscal 2023, compared to 19.1% in the third quarter of the prior year. The improvements we have driven in gross margin throughout this entire fiscal year have been critical to our success. The gross margin gains are related to many strategic actions, including growth in Ventev sales, increased pricing to keep up with inflation, better customer mix driven by our focus on higher-margin opportunities, and vendor diversification efforts to focus on selling higher-margin alternatives. We have taken these actions while continuing to provide our customers with excellent customer service. Third quarter fiscal '23 selling, general, and administrative expenses increased 17% to $22.7 million. This increase is primarily due to a lower-than-normal amount of expenses in the prior-year quarter. This quarter's SG&A is essentially flat from Q2. This overall SG&A expense as a percentage of revenue was 19.8% in the third quarter of fiscal '23, compared to 18.9% in the prior-year quarter. This quarter's variable SG&A as a percentage of revenue was up from 6.1% in last year's third quarter to 6.4% this quarter as we continue to see freight charges from carriers increase, largely due to fuel surcharges and other accessorial charges. Variable expenses consist of roughly 50% in freight-out expenses and the remaining 50% primarily in distribution center labor and sales commissions. Our operational and pricing discipline has enabled us to pass on the rising freight costs, which are a factor in the improved gross margins I mentioned early. Non-variable SG&A as a percentage of revenue is up from 12.8% to 13.3%. This increase is primarily due to full staffing of Ventev and IT teams, which had significant openings during last year's third quarter. Additionally, last year we adjusted our bonus accrual down based on the year-to-date results for the time. As a result, our bonus expense for this quarter is $1.1 million higher than the prior year quarter. We will continue to focus on fixed expense reductions. And the launch of the new ERP will enable us to do even more in fiscal '24. Third quarter fiscal '23 net income was $0.4 million compared with $1.2 million in the third quarter of fiscal year 2022. Higher Q3 FY22 net income was impacted by a time $1 million income tax benefit. Adjusted EBITDA and adjusted EBITDA per share were $1.8 million and $0.19 respectively for the third quarter of fiscal '23. This compares with adjusted EBITDA and adjusted EBITDA per share of $1 million and $0.11 respectively for the third quarter of last year. Turning to the balance sheet, product inventory was essentially flat from the second quarter at $70.9 million. While we remained strategic in our inventory management, we are working on reducing our overall inventory levels. And expect to see a reduction in Q4. Accounts receivables decreased by $5.3 million in the third quarter to $79.5 million. Accounts payable decreased by almost $10 million as we paid down the amount related to the increase in inventory we saw in the second quarter. We ended the quarter with an income tax receivable of $3.7 million. All of the associated tax returns have been filed. And the timing of receipts of these payments is dependent on the IRS in the State of Maryland. In December, we amended our credit agreement increasing it from $80 million to $105 million to support our sales growth and to address supply chain variability. As a result of the working capital factors I just discussed as well as ERP implementation cost, the outstanding borrowings under our line of credit increased $8.1 million to $61.6 million at the end of Q3. We expect annualized improvements in our overall EBITDA performance along with reductions in ERP related cost to begin next fiscal year. Therefore, we expect our borrowings to trend down over the next 12 months. However, due to continued variability in the supply chain, we expect significant fluctuations from quarter to quarter. I am very pleased with how we are executing on our strategy and the results we have achieved. We are encouraged by our year-to-date results, strong sales, and sales backlog. For the full fiscal '23 year, we are on pace to meet our guidance ranges, specifically revenue of $450 million to $475 million which would represent a growth of 8% to 14%; adjusted EBITDA of between $4 million to $7 million which compares to a $0.3 million in fiscal year 2022, and a net loss of $5 million to $2.1 million which compares to a net loss of $3.3 million in fiscal year '22. Thank you, Aric. Before we open the call to questions, I want to reiterate some of the highlights from this quarter. Our Q3 revenues were up 12% year-over-year. Our customer demand and revenue is strong. And we are carrying a sales backlog of $84 million. We successfully improved our gross margins. And we are live with our new ERP system. We expect this new ERP will further improve our operating leverage, which in turn will result in improved profitability. Hi, thank you. Could you elaborate on the impact of product mix on margin this quarter? And then, how you expect that to look in the coming quarters? Hey, good morning, Maggie. Thanks for the question. Where we have flexibility, we are using -- and products are spec'd in, we are using products that give us the most gross margin; a simple way to say what we are doing. And we are engineering that and preparing for that by supplier diversification, so not just single sourcing, giving ourselves more flexibility, and introducing new vendors, new products to customers. We expect to continue that. So, I expect this gross margin improvement that we have seen to continue. Very good. And then on the backlog, could you give a little bit more detail of the composition of the backlog? So, we broke out, during the call, how much of it was Carrier and how much of it was Commercial. So, total backlog is $84 million, $41 million of that is for our Carrier ecosystem, and $43 million is with the Commercial. Let me stop there; see if I answered your question? Yes. And then, okay, so for a third question, could you talk about what's going right in the VAR segment? And then is this level of performance that you've seen in that segment going to be repeatable for the segment going forward? Thank you. Thank you, Maggie. Very, very pleased with our sales performance and focus. And it's a result of all the improvements that we have put in place over the last several quarters; we're seeing the benefits of that; that's one. Second, from a value proposition perspective, being able to provide the complete solution, helping our VARs develop a BOM, bill of materials, that they can do on TESSCO's Web site or working with our sales people, having better stocking position, right, so it's not just the sales people driving, it's also our supply chain people doing correct demand forecast with customers and having inventory available. And then, this might seem simple and mundane, but the whole benefit of helping our customers with program management with logistics, with being able to ship at -- to the points they want at the time they want, that entire value proposition is playing very well with VAR. I am bullish about what our team has done, and I expect this trend to continue. Thank you. Looking at your revenue guidance, the midpoint of that guidance would lead to flat revenues in the fourth quarter versus the quarter you just reported. And seasonally, if we look back over history, the fourth quarter is normally down from Q3. Should we be reading into that, that you are seeing stronger-than-normal seasonality or is that just happens to be the way the math works, and I'm picking one point within the guidance range? Hey, Bill. This is Aric. It's a good question. I think as far as the revenues that we're seeing right now, as we sit here today with a strong backlog of $84 million, a lot of projects in the works here that will be shipping this quarter, we're very optimistic about our fourth quarter revenue number. So, I would say it's a combination of we do believe we'll be in a better situation than we were last quarter, but there's a fairly large range. And you are somewhat arbitrarily picking the midpoint, but I think we've very confident and optimistic about the fourth quarter revenues. And if we were to remove -- I'm going to actually dive into that slightly more. If we were to remove that, the benefit from the backlog, which is a bit unfair, I recognize, but the -- are you seeing better than normal strength out there? And maybe part of the question is that there is so many crosscurrents relative to the economy right now, just I'm trying to use this question as just one more data point as to what's happening out there. So, are you feeling like the underlying activity level is normal? Is seasonally stronger than normal? And trying to pull out the backlog components? What can you do to help us there? So, Bill we used, we thought carefully about what examples to provide and what color to provide. So, I will point you back to sort of things I said, when we talked about VARs, when we talked about Ventev, when we talked about Carrier, the diversity of customers and the diversity of projects, right. So, if you think of our commercial business, examples we gave were projects in scientific laboratories, projects in telehealth, projects with theme parks, projects on cruise lines, so the diversity of projects is what is helping us here, the net-net of all of that is our demand is strong. So, we are very happy with customer demand. And we are not dependent on any one sector or any one segment, we are continuing to expand. That was the commentary behind utilities and government and diversifying away from big revenue pools that have -- that can fluctuate quarter-to-quarter to have a more stable business performance. Thank you very much. Let me actually jump on the utility component of that, you mentioned automated meters, how replicable is the solution that you are providing there. And kind of with that, just the sort of thing where we could see you doing a lot more in the meter business and in the coming quarters? So, we won't get ahead of what we said, but we think the solution we have with Ventev enclosures, it offers a turnkey solution. We've done that with a few utilities. We think it's replicable. But we are working on many sales, business development efforts that I'd like to give the team time to work before I get ahead of things. Great, thank you. And then, one expense question, once your old -- old system goes down and the new ERP system is at a normal, a normal expense level, what will be the expense, excuse me the expense reduction in the June quarter and beyond? Yes, so you've got two different pieces of that, you have the depreciation that Sandip mentioned, which will be approximately $1.5 million a quarter. So, that will be a negative to SG&A and to net income, but no impact to EBITDA. And then, the offset to that is the benefits that we're expecting to achieve both from lower costs related to the old system, as well as efficiencies and freight charges and other more better ways that we're managing the business. We're not specifically calling that number out, but last quarter, we did say it would be several million dollars over the course of the next year. Thank you, Regina. Thank you everyone for joining the call today. We look forward to discussing our year-end results with you in May. Have a great day.

EarningCall_307

Ladies and gentlemen, welcome to the CNO Financial Group Fourth Quarter 2022 Earnings Results Call. My name is Glenn and I'll be your moderator for today's call. [Operator Instructions] Good morning, and thank you for joining us on CNO Financial Group's fourth quarter 2022 earnings conference call. Today's presentation will include remarks from Gary Bhojwani, Chief Executive Officer; and Paul McDonough, Chief Financial Officer. Following the presentation, we will also have other business leaders available for the question-and-answer period. During this conference call, we will be referring to information contained in yesterday's press release. You can obtain the release by visiting Media section of our website at cnoinc.com. This morning's presentation is also available in the Investors section of our website and was filed in a Form 8-K yesterday. We expect to file our Form 10-K and post it on our website on or before February 24. Let me remind you that any forward-looking statements we make today are subject to a number of factors, which may cause actual results to be materially different than those contemplated by the forward-looking statements. Today's presentations contain a number of non-GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures. You'll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix. Throughout the presentation, we will be making performance comparisons, and unless otherwise specified, any comparisons made will be referring to changes between fourth quarter 2022 and fourth quarter 2021. Thanks, Adam. Good morning, everyone and thank you for joining us. We reported operating earnings per share of $2.33, which reflect ongoing market volatility, moderation in our alternative investment returns, and favorable one-time actuarial benefits from the prior year that did not repeat in 2022. Adjusting for these items, we delivered sustainable earnings with strong underlying margins across our product portfolio and rising new money rates supporting investment income results. Paul will cover these items in greater detail. We remain pleased with how the full year sales momentum and solid fundamentals have positioned us for 2023 and beyond. Turning to sales results. Recent strategic investments to accelerate growth resulted in strong production momentum across both divisions. We generated double-digit year-over-year sales growth in direct-to-consumer life, annuities and our Worksite Insurance businesses. Notable investments in 2022 included enhancing our Medicare product offerings and capabilities with new Medicare Supplement Plan and more Medicare Advantage [Technical Difficulty] offered on myHealthPolicy.com. These investments contributed to a strong Medicare selling season during the fourth quarter. We also launched Optavise, a unified worksite brand, which was well received by the market as a one-stop shop for a comprehensive set of worksite solutions to maximize employee benefit programs. In early 2022, AM Best upgraded the financial strength rating of CNO's financial -- CNOs life and health subsidiaries from A minus to A continuing our strong track record of upgrades. We returned $245 million to shareholders in the year, including $180 million in share buybacks. Weighted average share count outstanding was reduced by 10%. Our key capital metrics ended the year strong and remained above target levels. We increased book value per diluted share excluding AOCI by 11% and are nearing $30 per diluted share. Turning to Slide 5 and our growth scorecard. Our sales performance in the quarter continues to illustrate the strength and attractiveness of our distribution model and diverse product portfolio. I'll discuss each division in the next two slides. Beginning with the Consumer Division on Slide 6. The integration of our agent field force and direct-to-consumer distribution continues to open up more opportunities for us to serve our middle income customers and drive growth in our Consumer Division, Sales momentum remained strong in the fourth quarter and capped-off a solid production year. Full year and fourth quarter results were driven primarily by annuities, direct-to-consumer life sales and a strong Medicare annual enrollment period. Life and health sales were up 3% for the quarter. As I shared last quarter, these results are against the tough comparable after record sales in the second half of 2021 in the State of Washington due to new legislation. Adjusting for these sales, Life and Health NAP was up 7%. Direct-to-consumer life sales were up 9% for the quarter and 10% for the year. This is the seventh consecutive quarter of sales growth in D2C Life. The full year reflects the third consecutive year of double-digit growth. Efficient advertising spend, enhanced distribution and solid policy conversion rates are delivering sustainable growth in this channel. Supplemental health sales were up 26% for the quarter and 9% for the year. We were also very pleased with the performance of our Medicare business. Our approach to Medicare includes manufactured Medicare Supplement plans and a broad offering of third-party Medicare Advantage and Part D prescription drug plans. During the year, we expanded the number of Medicare Advantage plans we offer through our digital health marketplace myHealthPolicy.com. Through this platform, consumers can compare plans and enroll online over the phone or through an agent. Medicare Advantage policies were down 1% for the quarter, but up 6% for the year. This contributed to third-party fee revenue growth of 34%. As a reminder MA Policies drive fee revenue and are not reflected in NAP. As I mentioned at the top of the call, we launched our new more competitive Medicare Supplement plans earlier this year and we are pleased to see the product gain traction with agents and policyholders. After the launch, we saw a sharp acceleration in sales growth. Med Supp was up 16% sequentially in the third quarter and picked up steam during the AEP in the fourth quarter. Med Supp NAP ended the fourth quarter, up 30% sequentially and up 14% versus the comparable quarter. During AEP, we were able to instantly connect inbound callers responding to one of our marketing campaigns with banker’s (Technical Difficulty) our agents have local knowledge and are uniquely suited to assist consumers with their enrollment decisions. They can also meet in person. This program accounted for roughly 10% of our Medicare Advantage enrollments. In aggregate, local agents achieved a higher conversion rate on these calls, then our call center tele agents. And most importantly, we hope these burgeoning relationships represent the potential for future cross sales. Our approach to Medicare products and distribution is just one illustration of our diverse product portfolio and omnichannel distribution model are competitive strength in the market. Our key differentiator is the unique ability to marry a virtual connection with our established in-person agent force who complete the critical last mile of sales and service delivery. Annuity collected premiums were up 8% for the quarter and 15% over the prior year. This is our ninth consecutive quarter of comparable period growth. As a reminder, we primarily sell fixed index annuities, which provide consumers with protection of principal, a potential for upside based on the positive changes to a market index and the ability to generate predictable income. Higher demand for these products generally coincides with periods of rising interest rates and uncertain equity markets. Client assets in brokerage and advisory were down 9% year-over-year to $2.6 billion due to ongoing market volatility and declining equity values. More importantly, net inflows and new accounts were up, continuing this positive trend from prior quarters. Combined with our annuity account values, we now manage more than $13 billion in assets for our clients. Our agent recruiting had positive momentum throughout the year. We attribute this performance to combination of successful recruiting strategies that we've put in place over the past several years. The softening labor market also drove more candidates to our career opportunity. We were up 4% for the quarter, which represented our fourth consecutive quarter of recruiting games. As a reminder, it does take time for a new agent to meet the minimal level of production to be counted as a producing agents. Field producing agent count was down 3%. This is a steady improvement over third quarter and indicates that we are at or near an inflection point. Veteran agent retention and productivity remain solid. Agent productivity was up 6% for the full year. Our registered agent count increased 6% from the prior year, expanding the number of securities professionals embedded in our branch offices to serve our customers. Turning to Slide 7 and our Worksite Division performance. The fourth quarter is an important selling season for our Worksite business, because most employers conduct their employee benefits enrollments from October to December. We are pleased to post our best worksite insurance sales quarter since the start of the pandemic. Insurance sales were up 8% for the quarter and up 20% for the full year. This is the seventh consecutive quarter of year-over-year growth and follows two previous quarters of double-digit growth. This growth can be attributed to strong retention of our existing employer customers, stable employee persistency within these employer groups and growth in producing agent counts. Our new Worksite brand Optavise launched in mid-2022 and we remain pleased with the positive reception from the market as well as our captive agents. As a reminder, the Optavise brand unified our worksite capabilities into a one-stop shop for employers and employees. With Optavise clients can access expert guidance, voluntary benefits, year round communications and advocacy services and benefits administration technology. We expect to capitalize on the capabilities of the Optavise brand and expand its market reach in 2023 and beyond. During the fourth quarter, we were very pleased with the performance of our new hybrid enrollment platform Optavise Now. The platform gives our agents greater flexibility to connect with employees, wherever they are including by video or over the phone. We experienced higher attendance and engagement with customers who leverage this technology and expect to expand its use with more clients in 2023. Optavise Now illustrates our unique capability to deliver the last mile of sales and service, it blends of virtual experience with the benefits of personal guidance from an in-person agent. Producing agent counts were up 21% year-over-year and 7% sequentially. First year agent counts were up 60% year-over-year. We credit our worksite referral program for driving these results as agents who come to us by referral typically have higher retention and productivity. The Optavise brand has shown early signs of being a recruiting catalyst and we expect it to generate interest in our agent opportunities. We saw improved conversion rates of new to producing agents and increased productivity in the quarter. We credit recent improvements to our new agent onboarding and skills development programs for these positive trends. The integration of our fee-based businesses continues as expected. Fee revenue within the worksite division continues to benefit from cross-selling. We expect cross sale activity to accelerate with all products and service offerings now under the Optavise brand. Thanks, Gary, and good morning, everyone. Turning to the financial highlights on Slide 8. On balance, we reported solid earnings for the quarter and the full year with some pluses and minuses. On the plus side, number one, continued strong and stable underlying insurance product margins. Number two significant improvements in COVID related mortality impacts in our life products. Three, increases in net investment income allocated to products, reflecting growth in the business and beginning in the third quarter sequential improvement in the average yield on investments allocated to products. Fourth, an increase in fee income. Fifth, disciplined capital management, intentionally ending the year with RBC and holdco liquidity above our targets, given where we are in the credit cycle, while still returning some excess capital to shareholders. And lastly, continued expense discipline seeking to drive operating efficiencies while also investing in growth opportunities. On that point in the fourth quarter, we reduced our headcount by approximately 2% resulting in run rate cost savings of about $10 million. This was accomplished primarily through a voluntary early retirement program through eligible associates, which resulted in a $7 million restructuring charge that's included in non-operating income. Offsetting these favorable dynamics were number one, moderating COVID-related benefits in our health product. Number two, lower net investment income, not allocated to product, primarily reflecting lower returns on alternative investments. And three, fairly significant largely non-economic impacts to our fixed index annuity margin relating to the GAAP accounting for this product in the context of market volatility. As mentioned on our last earnings call, much of this has to do with the methodology that we use to draw the line between operating and non-operating income for this product. Incidentally, as we adopt LDTI in the first quarter of 2023, we'll also be updating our method of determining non-operating income for our FIA's to better identify the volatile non-economic impacts. We think this new methodology will be more in line with the method applied by peer companies. This should result in more stable FIA margins in operating income, more closely reflecting the true economics of the business and we'll be more comparable to the results of other companies. All in all, on balance, solid year and we feel good about how we're positioned entering 2023. We will provide more detail on our outlook for ‘23 at our Investor Day coming up in about two weeks on February 23. We also plan to provide some updated LDTI disclosures at that time. And then subsequent to that, we expect to provide a full financial supplement for 2021 and 2022 under LDTI concurrent with our first quarter 2023 earnings release. Turning to Slide 9. Insurance product margin was down $20 million or 9% in the fourth quarter as compared to the prior year period. Adjusting for the GAAP accounting impacts caused by market volatility on our FIA margins, COVID impacts across all of our products, the unfavorable interest sensitive life unlocking in 4Q '22 and the favorable reinsurance recovery in 4Q '21 as referenced on the slide. Total margin was essentially flat, reflecting the continued strong and stable underlying dynamics of the business. We completed our annual GAAP actuarial assumption review in the fourth quarter, which resulted in no material impact to operating income in total, with about a $1 million favorable impact on annuity margin and about $3 million unfavorable impact to interest sensitive life margin. Turning to Slide 10. This chart summarizes the largely non-economic GAAP accounting impacts on our fixed index annuity margin over the last five quarters. We believe the noise in the GAAP results obscures the economic earnings dynamics of this product. As you can see from the table, adjusting for these impacts, our annuity margin is reasonably stable. Again as we update our method of determining the non-operating income component from our FIAs in the first quarter of '23, operating earnings from our should be more stable again more closely reflecting the true economics of the business. The slight downward trend in the margin in '22 versus '21, even adjusting for these impacts, despite significant growth in the account value over the 12-month period is due to two things. First, some noise in the methodology that we use to allocate NII to products using reserves rather than account value. And second, some modest spread compression resulting from shortening duration to better match the liabilities and some asset turnover during the year, coupled with our up in quality bias. But nevertheless still leaving us with a spread that's consistent with our pricing and generating attractive returns. Turning to Slide 11. Investment income allocated to products was up for a second quarter in a row as the new money rates above 5% over the last nine months has reversed the trend of a declining yield. Investment income not allocated to products fell in the quarter as expected. The $13 million decline reflects lower alternative investment returns, partially offset by favorable FHLB and FABN results. Our new investments comprised approximately $570 million of assets, with an average rating of AA minus and an average duration of 6.2 years. Our new investments are summarized in more detail on Slides 21 and 22 of the earnings presentation. Turning to Slide 12. At quarter end, our invested assets totaled $24 billion, down 16% year-over-year, reflecting declining market values in the quarter driven primarily by higher interest rates. Approximately 97% of our fixed maturity portfolio at quarter end was investment grade rated with an average rating of single A, reflecting our up in quality actions over the last several quarters. In the last 12 months, the allocation to single A rated or higher securities is up 390 basis points. The BBB allocation is down 260 basis points and the high yield allocation is down 130 basis points. These actions continue to position us well relative to potential economic downturn. Turning to Slide 13. At quarter end, our consolidated RBC ratio was 384%, up from 375% at September 30 and our holdco liquidity was $167 million, $17 million above our minimum target of $150 million and up from $162 million at September 30. We are intentionally maintaining some excess capital above our targets, given the near term risk of recessionary economic pressures. Thanks, Paul. We are pleased with our strong performance on the steady execution against our strategic priorities. We remain confident in our growth and shareholder return opportunity. Our market is growing by underserved. In times of economic certainty the guidance and products, we provide our clients is critical. Our distribution model and product portfolio continue to be a key differentiator and how we access and serve our market. Our sales momentum is strong providing a solid foundation for future earnings and our robust cash flow remains a cornerstone of our financial strength. We are hosting our Investor Day at the New York Stock Exchange on Thursday, February 23. At the event, I will be joined by members of our management team to talk in greater detail about our business and the 2023 outlook. We hope to see you in-person for the event. There will also be a video webcast option available, please contact the Investor Relations team for registration instructions. Before moving to Q&A I wish to take a moment to acknowledge the heartbreaking loss of life and devastation from the earthquake in Turkey and Syria. Our thoughts go out to all who are impacted and to the first responders providing medical and humanitarian aid. Thanks. Good morning. I guess to start, the favorable impact of COVID on your health underwriting margin has proved really remarkably durable, particularly in the supplemental health and LTC lines. So just wanted to see if you had any updated thoughts on what's driving this and how long it might persist going forward? I mean I would have expected that maybe the favorable underwriting trends might have been eroded somewhat by pricing changes at this point. So, any color on that and what you're seeing in terms of competition would be helpful? Sure. Hi. Good morning, Dan. It's Paul. So basically, what you're seeing flow through our earnings is, us responding to the case experience and so we continue to experience some favorable case reserve development. In terms of what it looks like going forward, clearly we've transitioned from a pandemic stage to an endemic stage. I think our results will reflect that. The other dynamic is that under LDTI, much of the impacts from COVID plus and minus get offset by changes in reserves. So the dynamic entering 2023 under LDTI will be a bit different. Got it. That's helpful. Thanks. And then maybe just switching gears a little bit just -- with capital levels now having rebounded above your minimum target. Just any thoughts you can share on how you're thinking about the cadence or pace of share buybacks going forward? I mean, should we expect it to be back to -- closer to your run rate level of capital return in the near term or if not, how soon might it take for that to revert to more fully reflect your free cash flow generation versus desire to build a more material capital buffer above those minimum targets, given some of the macro and credit uncertainty you talked about? Any thoughts on that would be great. Sure. So, Dan, we will provide a bit more perspective and the outlook that we share at the Investor Day in a couple weeks. But I'd offer a couple of comments now. Number one, we'll continue to be a little bit cautious in the early part of the year. Again just given where we are and the potential for recessionary economic pressures. Having said that, I think you should expect that we would settle into a run rate over the course of '23 bit more, perhaps in the latter half of the year than the first half of the year. Thank you, Daniel. [Operator Instructions] We have our next question comes from Zach Byer from Autonomous. Zach, your line is now open. Thanks. So recruiting was up 4% year-over-year, but total producing agent count declined 3%. Just kind of curious what dynamics are you seeing in your agent force and you can talk about agent retention trends and timeline for getting new agents up to producing status? Yeah, Zach. This is Gary. Thanks for the question. So just a couple of comments on that. So first of all, just a reminder that the way companies define what constitutes a producing agent varies from company to company. In other words, this isn't a GAAP term that you can compare across companies. The simplest way to think about it, is it takes time, let's say, we were recruiting a new agent in January, it typically takes anywhere from two months to six months for them to really get up to a reasonable production level. So you always see producing agent count lagging new agent recruitment. And if you look in our case, what we've been trying to get our shareholders to understand is, we've seen new agent recruitment grow nicely, which is a really good leading indicator and a good sign. We've also seen the decline in producing agent count shrink every quarter. So the pace of decline is going down, which is a sign that we are at or near the bottom and we would expect producing agent count to turn up. Now all of that is important and necessary and a good leading indicator. But I would tell you that the most important thing is the productivity of the agents and you've seen us demonstrate continued increases in that productivity. While we always need new agents and it's important that we bring in new agents and we get them producing, the most important thing is the productivity and that's continued to trend very positively for quite some time. Yeah. That did. Thank you. I guess my second question is just around expenses. So you took some action in 4Q, but how are you thinking about the level of expenses going forward and should we expect them to decline forward to the statements that you've taken just offset pressures from inflation and natural growth in the cost base? Hi Zach, it's Paul. So again, we'll provide more perspective and the outlook at Investor Day, but I'd offer a couple of comments. Number one, the expenses in the quarter and the fourth quarter particularly not allocated to products were a bit below our annualized run rate, but I'd say the full year 2022 expenses were in line with our expectations. Going forward as we continue to grow the business, I think you should expect some growth in expenses, but we will continue to try to strike the right balance between being as efficient as we possibly can be, while also investing in growth in the business. I think the action that we took in the fourth quarter is proved to the point that, we try to re-hard to be as efficient as possible. Thank you. [Operator Instructions] We have our next question comes from Mark Dwelle from RBC. Mark, your line is now open. Yeah. Good morning. Just a couple of questions, mainly related to the Health segment. Supplemental sales were pretty strong and the Medicare Supplement sales in particular were pretty strong, but there wasn't really any notable change in margin in the quarter. So how long is the transmission time between when you get the sales and when that starts to show up in potentially improve margins? Hey, Mark. It's Paul. So yeah, generally, you've got some strain in the first year even on a GAAP basis from new sales. So sales this year tend to contribute to margin in the following year and in subsequent years. Well, I suppose on sort of a trailing 12 month basis. In general, over the course of 2022, the sales growth will translate to earnings growth in subsequent years. Okay. And then with respect to -- I know you made some changes to the supplement product. I mean, what's the feedback been like from agents force as far as the sale ability and acceptance on that from the customer standpoint. I mean, obviously the numbers are pretty good, but are there more tweaks on the way or if you kind of landed on a winter? Hey, Mark. This is Gary. We feel pretty good about the way the Med Supp product has been received by the market. The feedback from the agents has been good. I would tell you that, there is the potential for some further tweaks, but probably on a state by state basis. In other words, at the present time, we're not aware of major tweaks that need to be made nationwide. Now, all that said, the AEP just ended and we're still collecting feedback and we'll work with our agents if we see something we'll certainly keep our options open, but I would expect it to be more in the range of tweaks as opposed to wholesale changes. One last observation, remember that Med Supp is the product that we manufacture and therefore the one that's most susceptible to these types of tweaks and changes. We're also pretty pleased with the performance of our Med Advantage business and remember that's products where we distribute the product and we continue to get better frankly at our online platform and bringing customers there and working with our agents and so on and so forth. So we expect to continue to see growth there. And again those are products we distribute and manufacturer. Okay, I appreciate the thoughts and I'm sure we'll get more insights on all of that at Investor Day in a few weeks. Thank you, Mark. [Operator Instructions] We have a follow-up question from Zach Byer from Autonomous. Zach, your line is now open. Hey. Thanks for taking my follow-up. Just kind of curious on the benefits of higher interest rates. So obviously, they've been rising and that's been a positive earnings, but how should we think about any uplift going forward? Should NII allocated to the products to be on an upward trajectory and is there still some upside to earnings spreads in your FHLB lending business? Sure. So, Zach, I'll offer some comments and then I'll invite Eric, you to provide some perspective on those two programs. So absolutely, directionally higher rates are good for us, good for the industry. They've already contributed to a meaningful inflection point with the portfolio yield increasing sequentially in both the third quarter and fourth quarter. We haven't gotten yet to a point where it's increasing year-over-year, but I think we're approaching that, and as long as rates stay where they are and perhaps a little bit higher. We should reach that point over the next few quarters and so all good. Sure and thanks for the question. And to follow-up on something Paul said a couple of times will -- at Investor Day, we will have some comments around the trajectory of NII and some ways. I believe that there could be some good guys there on a sustained basis going forward. One of them is obviously depending on market conditions. Higher new money rate feeding into higher book yield, feeding into more NII. A second one, as we continue to expand the institutional funding, a programs be it FHLB or FABN not only will hopefully over time. We'll see the AUM from those programs expand, hence more money. But we will recycle some of the existing inventory in the existing AUM expanding spread and so. And then, thirdly, we -- and as long as circumstances makes sense. We have some floating rate exposure on the books side, benefits from -- has benefited from the shape of the yield curve and that's played through well also. So at Investor Day, you can expect that I'll have some comments around this and put some dimensions around it, but I do think there is opportunity there for something that can really impact the bottom line. Thank you, Zach. We have no further questions on the line. I will now hand back to Adam for closing remarks.

EarningCall_308

Good day and welcome to The Walt Disney Company’s First Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please note today’s event is being recorded. I would now like to turn the conference over to Alexia Quadrani, Senior Vice President of Investor Relations. Please go ahead. Good afternoon. It’s my pleasure to welcome everybody to the Walt Disney Company’s first quarter 2023 earnings call. Our press release was issued about 25 minutes ago and is available on our website at www.disney.com/investors. Today’s call is being webcast and a replay and transcript will also be made available on our website. Joining me for today’s call are Bob Iger, Disney’s Chief Executive Officer; and Christine McCarthy, Senior Executive Vice President and Chief Financial Officer. Following comments from Bob and Christine, we will be happy to take some of your questions. We have a lot to get through today, but we will do our best to answer as many questions as we can. Thank you, Alexia and good afternoon everyone. It’s an extraordinary privilege to lead this remarkable company again, especially at the special moment in its history as we celebrate our centenary. Since I first became CEO in 2005, I have guided the Walt Disney Company through two significant transformations. The first was to confer greater creative control and authority to our creative businesses and to focus on great brands and franchises. It was also aimed at embracing new technologies and expanding internationally. It ultimately led to the acquisitions of Pixar, Marvel and Lucasfilm. Second transformation took place beginning in 2016 when we laid the foundation for Disney to become a true digital company. As we were planning to launch our streaming platforms, the opportunity arose to acquire numerous assets from 21st Century Fox. And that acquisition gave us a bigger library with more franchises, a broader global reach and a talented experienced management team that enabled us to generate even more higher quality content. In 2019, Disney+ launched with nearly 500 films and 7,500 episodes of television from across the world of Disney. Three years later, its meteoric rise is considered one of the most successful rollouts in the history of the media business. Now it’s time for another transformation, one that rationalizes our enviable streaming business and puts it on a path to sustained growth and profitability while also reducing expenses to improve margins and returns and better positioning us to weather future disruption, increased competition, and global economic challenges. We must also return creativity to the center of the company, increase accountability, improve results and ensure the quality of our content and experiences. Now the details. Our company is fueled by storytelling and creativity. And virtually every dollar we earn, every transaction, every interaction with our consumers emanates from something creative. I have always believed that the best way to spur great creativity is to make sure that people who are managing the creative processes feel empowered. Therefore, our new structure is aimed at returning greater authority to our creative leaders and making them accountable for how their content performs financially. Our former structure severed that link and it must be restored. Moving forward, our creative teams will determine what content we are making, how it is distributed and monetized and how it gets marketed. Managing costs, maximizing revenue and driving growth from the content being produced will be their responsibility. Under our strategic reorganization there will be three core business segments: Disney Entertainment, ESPN and Disney Parks, Experiences and Products. Alan Bergman and Dana Walden will be Co-Chairman of Disney Entertainment, which will include the company’s full portfolio of entertainment media and content businesses globally, including streaming. Jimmy Pitaro will continue to serve as Chairman of ESPN, which will include ESPN Networks, ESPN+ and our international sports channels. And Josh D’Amaro will continue to be Chairman of Disney Parks, Experiences and Products, which will include our theme parks, resort destinations and cruise line as well as Disney’s consumer products, games and publishing businesses. These organizational changes will be implemented immediately and we will begin reporting under the new business structure by the end of the fiscal year. This reorganization will result in a more cost-effective, coordinated and streamlined approach to our operations and we are committed to running our businesses more efficiently, especially in a challenging economic environment. In that regard, we are targeting $5.5 billion of cost savings across the company. First, reductions to our non-content costs will total roughly $2.5 billion not adjusted for inflation. $1 billion in savings is already underway and Christine will provide more details. But in general, the savings will come from reductions in SG&A and other operating costs across the company. To help achieve this, we will be reducing our workforce by approximately 7,000 jobs. While this is necessary to address the challenges we are facing today, I do not make this decision lightly. I have enormous respect and appreciation for the talent and dedication of our employees worldwide and I am mindful of the personal impact of these changes. On the content side, we expect to deliver approximately $3 billion in savings over the next few years, excluding sports. Christine will be providing more details during the call. Turning to our streaming businesses, I am proud of what we have been able to achieve since the launch of Disney+ just 3 years ago. We are delivering more content with greater quality in more ways, in more places and to larger audiences. Like many of our peers, we will no longer be providing long-term subscriber guidance in order to move beyond an emphasis on short-term quarterly metrics, although we will provide color on relevant drivers. Instead, our priority is the enduring growth and profitability of our streaming business. Our current forecasts indicate Disney+ will hit profitability by the end of fiscal 2024 and achieving that remains our goal. Since my return, I have drilled down into every facet of the streaming business to determine how to achieve both profitability and growth. And so with that goal in mind, we will focus even more on our core brands and franchises, which have consistently delivered higher returns. We will aggressively curate our general entertainment content. We will reassess all markets we have launched in and also determine the right balance between global and local content. We will adjust our pricing strategy, including a full examination of our promotional strategies. We will fine-tune our advertising initiatives on all streaming platforms. We will improve our marketing, better balancing platform and program marketing while also leveraging our legacy distribution platforms for marketing and programming. This may include greater use of legacy distribution opportunities to increase revenue and more effectively amortize content investment. And as I said before, our new organizational structure will reestablish the direct link between content decisions and financial performance. This is one of the most important steps we can take to improve the economics of our streaming business. There is a lot to accomplish, but let me be clear. This is my number one priority. We are focused on the success of our streaming business and the return it generates for our shareholders long into the future. Before I turn this over to Christine, a few comments about the quarter. James Cameron’s Avatar: The Way of Water, which was easily the most successful film of the quarter has become the fourth biggest film of all time globally with close to $2.2 billion earned at the box office to-date. The global popularity of this film will result in the creation of more opportunities for fans to engage with the franchise, which they have been doing at Walt Disney World’s Pandora, the World of Avatar, as well as in theaters globally and on Disney+, where the first film has delivered very strong numbers. And today, I am thrilled to announce that we will be bringing an exciting Avatar experience to Disneyland. We will be sharing more details on that very soon. Avatar represents yet another core franchise for the company. And as you have seen time and time again, we have a unique way of leveraging creative success across multiple businesses and territories and over long periods of time. Speaking of our parks, we had an outstanding quarter in Q1, while we continued our purposeful efforts to control capacity to preserve guest experience. Last month, we also announced some price adjustments at our parks. We are listening to guest feedback and we are continuously working to improve the quality and value of their experience. We are also proud of our creative success as we led all studios with the most Academy Award nominations, including two best picture nominations, 20th Century Studio’s Avatar: The Way of Water and Searchlight Pictures’ The Banshees of Inisherin. Marvel’s Black Panther: Wakanda Forever received five Oscar nominations. And in addition to an $840 million run at the box office, it launched on Disney+ last week and it has quickly become one of the most successful Marvel films on the platform. Looking ahead, we are excited about our fantastic lineup of new films coming to theaters this year, starting with next week’s release of Marvel’s Ant-Man and the Wasp: Quantumania; followed by other highly anticipated theatrical titles, including The Little Mermaid; Guardians of the Galaxy: Volume 3; Pixar’s Elemental; Indiana Jones and the Dial of Destiny; and Disney’s Haunted Mansion. Lucasfilms’ The Mandalorian, the series that started it all for Disney+, will be back at the beginning of March for its highly anticipated third season. And today, I am so pleased to announce that we have sequels in the works from our animation studios to some of our most popular franchises: Toy Story, Frozen and Zootopia. We will have more to share about these productions soon, but this is a great example of how we are leaning into our unrivaled brands and franchises. The Walt Disney Company also won more Golden Globes than any other entertainment company this year, a total of 9, including for Abbott Elementary, the first broadcast show to win a Golden Globe for Best Series in nearly a decade. Without question, we have a world class television business that fuels both our linear channels and direct-to-consumer services, especially with the assets acquired through the Fox transaction. It goes without saying that the best shows lead to the most lucrative library and have the power to endure because of their quality. The Simpsons illustrates this perfectly. Disney+ launched back in 2019 with more than 30 seasons and it remains one of our top performers today. Across the board, our television business is second to none, and that includes ABC News, which remains America’s number one news network. Power of ESPN brand also continues to deliver for us. In calendar ‘22, ESPN linear ratings were up 8% overall and 14% in primetime and we are also growing rapidly across our digital platforms. We are being selective in our rights renewals and continue to approach rights acquisition with discipline and a focus on supporting both sides of ESPN’s business: traditional linear and digital. ESPN is more than just a network. And today, the team is harnessing innovative technology to deliver spectacular coverage and entertainment to audiences who have a deep connection to the brand and content. Now when it comes to investing in growth and returning capital to shareholders, we will take a balanced and disciplined approach as we did throughout my previous tenure as CEO, when we invested in our core businesses and acquired new ones, bought back stock and paid a dividend to our shareholders. As a result of the impact of the COVID pandemic, we made the decision to suspend the dividend in the spring of 2020. Now that the pandemic impacts to our business are largely behind us, we intend to ask the Board to approve the reinstatement of a dividend by the end of the calendar year. Our cost-cutting initiatives will make this possible. And while initially, it will be a modest dividend, we hope to build upon it over time. Christine will provide more information on that. And finally, on the topic of succession, the Board recently established a dedicated Succession Planning Committee. The committee is chaired by Mark Parker, who will become Chairman of the Walt Disney Company’s Board following our annual meeting. I am excited to work with him in his new capacity and I am grateful to our outgoing Board Chairman, Susan Arnold, for her 15 years of tremendous service. Obviously, there is a lot going on, but as I said before, I am truly excited to be back and to lead this great company through this necessary transformation. I am grateful for our incredible talent and my exceptional leadership team. Thank you, Bob. It’s great to have you back on these calls and good afternoon, everyone. Excluding certain items, our company’s diluted earnings per share for the first fiscal quarter of 2023 was $0.99, a decrease of $0.07 versus the prior year as continued strength at our Parks, Experiences and Products business was more than offset by a year-over-year decline at our Media Entertainment and Distribution segment. You heard earlier that we are embarking on a significant company-wide cost reduction plan that we expect will reduce annualized non-content-related expenses by roughly $2.5 billion, not including inflation. In general, we anticipate these reductions will be comprised of approximately 50% marketing, 30% labor and 20% technology, procurement and other expenses. Around $1 billion of this target was included in the guidance we gave last quarter. That fiscal 2023 segment operating income should grow in the high single-digit percentage range, which is still our current expectation. The bulk of the efficiencies we are realizing this year are related to reductions in marketing and headcount at DMED. The remaining portion of the target represents incremental SG&A and other operating expense savings, which will fully materialize by the end of fiscal 2024. Longer term, we also expect to realize additional efficiencies in our content spending with an annualized savings target of approximately $3 billion of future spending outside of sports. We will share additional details with you as we move forward on realizing these efficiencies. Bob also gave you some details earlier on the company’s reorganization. The new structure and leadership roles are effective immediately and we expect to transition to financial reporting under this structure by the end of the fiscal year, at which point we will provide recast financials under our new segments. Until then, I will be walking through our results under the existing segments. Turning to Parks, Experiences and Products, we are thrilled with the results we achieved this quarter with operating income increasing 25% versus the prior year to over $3 billion, reflecting increases at our domestic and international parks and experiences businesses. At domestic parks and experiences, significant revenue and operating income growth in the quarter was achieved despite purposefully reducing capacity during select peak holiday periods by approximately 20% versus pre-pandemic levels in order to prioritize the guest experience. Per capita guest spend at our domestic parks also showed strong growth. Quarter-to-date, park attendance at both Walt Disney World and Disneyland Resort are pacing above prior year. And based on reservation bookings, we expect to see this trend continue. Disney Cruise Line was also a meaningful contributor to the year-over-year increase in domestic operating income, reflecting higher occupancy in the existing fleet as well as the Disney Wish, which generated positive operating income in its first full quarter of operations. Domestic parks and experiences operating margins improved versus the prior year despite increased cost from inflation, operation support and new guest offerings, pressures, which we expect will persist into Q2 and beyond. At international parks and experiences, higher year-over-year results were due to growth at Disneyland Paris and higher royalty revenue from Tokyo Disney Resort, partially offset by a decrease at Shanghai Disney Resort. At Disneyland Paris, we remain pleased with the positive results we’re seeing from the substantial investments we’ve made. And at Shanghai, results reflect the fact that the resort was closed for roughly a month during Q1 of fiscal 2023. Moving on to our Media and Entertainment Distribution segment, operating income in the first quarter decreased by over $800 million versus the prior year, driven by year-over-year declines across direct-to-consumer, linear networks and content sales, licensing and others. However, we delivered a significant improvement on a quarter-over-quarter basis at our direct-to-consumer business as we progress on our path towards profitability with Q1 operating losses improving sequentially by over $400 million from Q4. The sequential improvement at DTC was driven by higher revenue and lower SG&A costs, partially offset by higher programming and production costs. Notably, in the first quarter, we meaningfully reduced DTC marketing expenses across all three categories: content, brand and performance. At both ESPN+ and Hulu, subscribers and ARPU grew sequentially with ARPU growth reflecting the impact of price increases that occurred in August and October, respectively. And at Disney+, core subscribers increased slightly, in line with our prior guidance from $102.9 million in the fourth quarter to $104.3 million in Q1. Disney+ core ARPU decreased by $0.19 versus the prior quarter, driven by an unfavorable foreign exchange impact and a higher mix of subscribers to our multiproduct offerings, partially offset by a benefit from the recent domestic price increase, which occurred towards the end of the first fiscal quarter. There are a few factors worth mentioning that we expect will impact Disney+ core subscriber and ARPU growth in Q2. The Disney+ domestic price increase has been playing out as expected, with only modestly higher churn, which may also negatively impact the fiscal second quarter given the timing of the December price increase. That impact, in addition to slower than previously expected growth in some international markets, suggests core Disney+ subs may grow only modestly in Q2 at a similar pace to the first quarter. As we have said before, sub growth will vary quarter-to-quarter, and we expect to see higher core subscriber growth towards the end of the fiscal year. Disney+ core ARPU will continue to benefit in the second quarter from the domestic price increase. And while it’s only been 2 months since the launch of the Disney+ ad tier, we are pleased with the initial response, which includes continued demand from top-tier advertisers. As I mentioned last quarter, we do not expect the launch of the Disney+ ad tier to provide a meaningful financial impact until later this fiscal year. And like Bob said, we are reaffirming our guidance that Disney+ will achieve profitability by the end of fiscal 2024. Although, as I have mentioned before, our expectations are built on certain assumptions around subscriber additions based on the attractiveness of our future content, churn expectations, the financial impact of the Disney+ ad tier and price increases, our ability to quickly execute on cost rationalization while preserving revenue and macroeconomic conditions, all of which, while based on extensive internal analysis as well as recent experience provide a layer of uncertainty in our outlook. We remain focused on showing incremental improvements in our DTC metrics, and we will continue to provide transparency into our progress and key drivers. In our prior earnings call, we noted that we expected the improvement in Q2 operating results at direct-to-consumer would be larger than the improvement in Q1. We now expect Q2 DTC operating results to improve sequentially by approximately $200 million as improvements in the first quarter materialized more quickly than previously expected. Additionally, our view on Q2 now incorporates more challenging addressable advertising headwinds. Moving on to linear networks, first quarter operating income decreased by approximately $240 million versus the prior year. Domestic channels operating income grew year-over-year but that growth was more than offset by decreases at international channels. The increase at domestic channels was due to higher results at cable, while broadcasting results were comparable to the prior year quarter. Higher cable results were driven by lower programming and production costs, partially offset by decreases in advertising and affiliate revenue. The decrease in programming and production costs reflect lower NFL and college football playoff or CFP rights costs. The decline in NFL rights expense reflects the timing of costs under our new agreement compared to the prior NFL agreement, and lower CFP rights costs were due to timing shifts. Recall that we had two fewer games in the first quarter of fiscal 2023 versus the prior year as those games were shifted into Q2 this year. The decrease in cable advertising revenue also reflects the CFP timing shift. ESPN advertising revenue in the first quarter was down 4% year-over-year, but was roughly flat once adjusted for the CFP shift. And quarter-to-date, domestic cash ad sales at ESPN are pacing slightly below prior year when the two additional CFP games are adjusted out. Scatter/Data pricing remains above upfront levels. Although it has softened a bit in recent months, however, we are seeing solid advertiser interest for live events such as the Oscars and demand across sports also remains solid. Total domestic affiliate revenue in the first quarter increased by 1% from the prior year, driven by 6 points of growth from contractual rate increases, partially offset by a 5-point decline due to a decrease in subscribers. International channels operating income decreased versus the prior year due to lower advertising revenue and unfavorable foreign exchange impact and a decrease in affiliate revenue, partially offset by a decrease in programming and production costs. As a reminder, the first quarter held no IPL cricket matches versus 13 matches in the prior year due to COVID-related timing shifts. Looking ahead to the fiscal second quarter, we expect Linear Networks operating income will decrease year-over-year by approximately $1 billion. We expect Q2 will have the most challenging comparison for Linear Networks versus the prior year and anticipate a significantly lower decline in the back half of the year. There are several factors impacting the Q2 guide that I’d like to walk through. First, recall that domestic Linear Networks operating income increased in Q1 versus the prior year, benefiting from the timing of costs under a new agreement for the NFL and a timing impact for CFP. These impacts will work against us in Q2. And as a result, ESPN is expected to account for approximately half of the $1 billion operating income decrease. Broadcasting and our other domestic cable networks will be adversely impacted in the second quarter by approximately $300 million, driven primarily by headwinds in advertising, and to a lesser extent, affiliate revenue, and international channels account for the remaining $200 million decrease. This includes timing impacts from BCCI cricket with eight additional matches versus the prior year, other contractual rights cost increases and additional top line headwinds. And at content sales, licensing and other operating results decreased versus the prior year by $114 million as higher theatrical results were more than offset by lower TV/SVOD operating income, higher overhead costs and a decrease in home entertainment operating income. These results came in below the guidance we gave in November, primarily due to softer-than-expected performance of certain theatrical releases. In the second quarter, we believe that content sales, licensing and other operating results will be roughly breakeven. Finally, before we conclude, I’d like to say a few words about our focus on allocating capital in a disciplined and balanced way. As Bob mentioned, over the years, we have invested in our businesses to drive growth and return meaningful capital to our shareholders. Despite the impact of COVID, which had a significant adverse impact on the company’s free cash flow, our balance sheet is strong and supports ongoing investment in our businesses. We still expect cash content spend company-wide to remain in the low $30 billion range for fiscal 2023. The longer-term content cost reductions referenced earlier in the call are not expected to impact this year’s guidance range. We also continue to invest in our parks and experiences globally and in other capital ticks across the enterprise and expect that fiscal 2023 capital expenditures will total approximately $6 billion. This is lower than our prior guide of $6.7 billion primarily due to decreases in CapEx on our domestic parks, reflecting, in part, some timing shifts. Like Bob mentioned, given our recovery from the pandemic, strong balance sheet and commitment to cost cutting, we believe we will be on track to declare a modest dividend by the end of this calendar year. The amount will likely be a small fraction of our pre-COVID dividend with the intention to increase it over time as our earnings power grows. And in terms of our current outlook, as we sit here today, – we still expect that revenue and segment operating income growth for this fiscal year will be in the high single-digit percentage range, and we look forward to updating you on our progress as we move forward. I’d also like to note that shortly after today’s call we will be posting a presentation on our Investor Relations website, which will summarize many of the themes that we are discussing here today. Thank you so much. Hi, Bob, as Christine said, it’s great to have you back. It seems like a very different company than when you left even though it was only a couple of years ago, given the cyclical, but maybe more importantly, the secular challenges across all of your businesses, Linear Film, content competition, etcetera. So in the restructuring – what do you think are the quick fixes and what will take longer term to see the benefits of some of these actions? And on the $3 billion in cost cuts in content, is that largely fewer titles? And what does it mean for ultimate direct-to-consumer margins? Jessica, thank you for welcoming me back. Let me take the second part of your question first. We are going to take a really hard look at the cost for everything that we make, both across television and film because things in a very competitive world have just simply gotten more expensive. And that’s something that is already underway here. In addition, we’re going to look at the volume of what we make. And with that in mind, we’re going to be fairly aggressive at better curation when it comes to general entertainment because when you think about it, general entertainment is generally undifferentiated as opposed to our core franchises and our brands which because of their differentiation and their quality have delivered higher returns for us over the years. So we think we have an opportunity to, through more aggressive curation, to reduce some of our costs in the general entertainment side and in general, in volume. In addition, the structure is now designed to place responsibility of all international programming and investment in content in the hands of one unit so that they can better decide the balance between what we make for global distribution and consumption and what we make for local distribution and consumption with an eye toward possibly reducing expenses there as well as we balance better. Obviously, all designed to deliver the profitability that we talk about delivering by the end of ‘24. In terms of your first question, I mean, indeed, it is times have changed, although in retrospect, looking back at it, not in an extraordinary way. Obviously, it’s gotten more competitive. The forces of disruption have only gotten greater. And there are certain things, certainly, as a residual of COVID, they have just gotten tougher from a macroeconomic perspective. That said, we’re still a company that is focused on creativity at its highest form. I love the fact that we are relinking the creative side of our business with the distribution and the monetization side of our business. And I think by doing that, we will see the impact of that reorganization fairly quickly. But when I think about the secular change that we’re going through, generally speaking, I like our hand. We have an ability to balance how we take our product to market with legacy platforms, whether it’s movie theaters or multichannel TV with, of course, the streamers. We have – and by the way, that helps us in a number of fronts, including advertising, monetization, stronger marketing. And so, I think that when you focus on the company’s assets, in terms of our brands and our franchises. Yes, it’s a tough environment, but the combination of the restructuring and the fact that we’ve got these core brands, which when we get right creatively as we’ve seen time and time again, not only differentiates us, but enables us to deliver fairly strong returns. Thank you. Good afternoon. Bob, I’m sure one reaction you’ll get today from all this news is the future of television, I think is viewed as being streamed with linear obviously declining. I’m sure you generally agree with that trend. So how do you think about that about your strategy as you’ve laid out today in the context of that to make sure you’re maximizing the returns globally of the franchises that you’ve built? And then I was just wondering, maybe, Christine, on the Parks business, really strong margins this quarter, really kind of the return to the kind of incremental margins we’re used to seeing, didn’t sound like there was anything one-time. I just wanted to ask if this quarter is sort of emblematic of kind of how you see the rest of the year playing out from a trend point of view? Thank you, both. Thanks, Ben. Nice to hear from you. I’ve been watching this very carefully for a long time. And what I’m talking about is the impact of technology is basically creating a huge authority shift from the producer and the distributor to the consumer. And as that authority has shifted, it’s made the traditional business more complicated, more to more challenging. And when you think about what streaming is, and we talked about this a lot as it related to multichannel TV, it is the ultimate ala card proposition for the consumer. It gives the consumer so much more authority than they ever had before because in reality, it gives them the ability to watch programs, not channels, not even bundles when you think about it. And because you are signing up in most cases for a 1-month subscription, you can sign up for one program, pay a relatively small amount of money and then end up basically unsubscribing. That’s tremendous change. And I think what’s going on right now is that as the linear business continues to erode, we have been basically eyes wide open on that. Christine commented about some of the challenges related to that, the streaming business, which I believe is the future and has been growing is not delivering basically the kind of profitability or bottom line results that the linear business delivered for us over a few decades. And so we are in a very interesting transition period, but one I think is inevitably heading towards streaming. So, what we are – the way we are basically contending with it, we have alluded to it today already is that – and this, I think is also directly related to our restructuring. We are going to rebalance a bit because those linear channels and movie theaters too still can provide us with significant amount of monetization capability. They enable us to amortize the cost better over multiple platforms and create some marketing cloud. When you think about it, Abbott Elementary airs on ABC, then it goes to Hulu. The demographic difference in age is tremendous. It’s like 60-years-old or around, estimating on ABC and then the 30s on Hulu. That’s a perfect example how the linear platforms, while they still have an audience and could help us monetize can still be used effectively, and we have that ability. And so we are going to monitor it very carefully. We are not in any way stepping away from streaming. It remains our number one priority. It is in many respects, our future. But we are not going to abandon the linear or the traditional platforms while they can still be a benefit to us and our shareholders. So, Ben, great to hear your voice, and I will address the parks question. So, as I mentioned in my comments, we were really thrilled with the performance of parks in the quarter. There were no one-time items to call out. But the one thing I would mention is in previous quarters, we had mentioned that the recovery from the pandemic and our international parks was lagging domestic. And in this quarter, we had very strong performance, especially year-over-year from Disneyland Paris. We had the opening of Avengers Campus over there in July, and that is incredibly popular in driving attendance. And we also have a new hotel that was actually an old hotel that was redone into the art of Marvel. Again, very popular and attracting a lot of consumers to come out and experience that. The other thing I mentioned was the strength at our royalty stream from Disneyland in Tokyo. And the other thing not to forget is, this quarter, our first quarter of the year is seasonally one of our strongest when you look at it relative to other quarters. But the year-over-year comparison, it was an improvement, and we feel great about our business going forward. Thanks. Welcome back, Bob. I have two. The first is, when you go back to the second investment day you had for streaming, the company increased their TAM forecast, their investment spending and kind of vision for Disney+. Now that you have returned with more data and time, what’s the vision for Disney+? You don’t want to give us long-term targets, I get that. But what is the product vision? Is it a more narrow vision, any type of long-term size of the investment and awesome profitability case of D+ will be helpful. And then on linear, to Ben’s question, a big part of the cost structure of sports costs, you have signed a ton in lately. But when you think about going forward, can you help us understand what will change going forward on sports rights investment in terms of must-have and not necessarily must-have? Thanks. Well, the second question, as you know, we have locked in a number of deals already, including some of the biggest ones, which is in college football with the SEC as well as with the NFL, the one that’s looming is the NBA. And I know that’s on people’s minds, which is a product that we have enjoyed having and hope to continue to enjoy having, because not only it’s volume, but it’s quality. ESPN has been selective in the rights that they bought. I have had long conversations about this with Jimmy Pitaro, and we have got some decisions that we have to make coming up, not on something – not on anything particularly large, but on a few things. And we are simply going to have to get more selective. ESPN+ actually has grown nicely for us, and it’s shown us that the ESPN brand can be enjoyed and can be expressed well as a streaming brand. And I think that we are going to continue to look at that as a potential pivot for ESPN away from the linear business. But we are not going to do that precipitously. We are not going to do that until it really makes sense from an economic perspective. On the first part of your question, what either – what’s changed or where we headed from what was the second Investor Day. I think a few things. First of all, we were as a company in a global arms race for subscribers. And it was – the number of subscribers that have become kind of the primary measurement of success not only here in the company, but among in the investment community. And in our zeal to go after subscribers, I think we might have gotten a bit too aggressive in terms of our promotion and we are going to take a look at that. I listed a number of things on the call. That’s one of them. I talked about pricing as well. That’s another where we really have to look at are we pricing correctly, it’s interesting, as Christine noted. We took our pricing up substantially on Disney+, and we didn’t suffer any de minimis. We only suffered a de minimis loss of subs. That tells us something. It may also tell us that the promotion to chase subs that we have been fairly aggressive at globally wasn’t absolutely necessary. So, pricing is definitely one thing, promotion, obviously is tied to that. It’s also obvious to us is we can’t get the profitability and turn this into a growth business without growing subs. So, while we are taking off the table sub-guidance, we are still going to look to grow subs. We just want to grow quality subs that are loyal and where we actually have an ability to continue to price effectively to those subs. In addition, we are going to lean more into our franchises, our core franchises and our brands. I talked about curation and general entertainment. We have to be better at curating the Disney and the Pixar and the Marvel and the Star Wars of it all as well. And of course, reduce costs on everything that we make because while we are extremely proud of what’s on the screen, it’s gotten to a point where it’s extraordinarily expensive. And we want all the quality. We want the quality on the screen, but we have to look at what they cost us. So, we are going to continue to go after subs, but we are going to be more judicious about how we do that. We are going to look carefully at pricing. We are going to reduce costs, both in content and of course, infrastructure, there is a lot that we are getting out there. Marketing is another area where we are going to try to rebalance marketing of the platform versus marketing of the programs. Nielsen came out with something a few weeks ago that was stunning to us, and that was that 10 of the top 15 movies streamed in the United States in 2022 were ours. On that list was Moana and Zootopia and Frozen, but also Turning Red and Encanto. That suggests to us that our brands and franchises work extremely well in streaming. I mentioned how Wakanda Forever has done as well. So, core brands and franchises more efficient pricing, getting better in marketing, being a little bit more judicious at promotion, all of those things is how we believe we are going to get to turn the streaming business to a growth business. And one other thing, the streaming business is going to continue to grow, albeit at the expense of linear programming, but consumption of television is not decreasing, is actually going up. Hi. Thank you. Bob, following up on Michael, there has been a lot of talk in the last year about whether Disney should keep spin or trade ESPN, and it now as a standalone segment, can you give us your view on the future of Disney and sports in particular, and maybe TV in general? How integral is ESPN to the company’s future? Thanks. Thank you, Phil. We are fairly certain that when we created the structure and broke ESPN out on its own that it would lead to questions like this. We did not do it for that purpose actually. ESPN is a differentiator for this company. It’s the best sports brand in television. It’s one of the best sports brand in sports. It continues to create real value for us. It is going through some, obviously, challenging times because of what’s happened in linear programming. But the brand of ESPN is very healthy, and the programming of ESPN is very healthy. We just have to figure out how to monetize it in disrupting and a continuing or disrupting world. That’s it. But we are not engaged in any conversations right now or considering a spin-off of ESPN. That had been done, by the way, in my absence. And I am told the company concluded after exploring it very carefully that it wasn’t something the company wanted to do. Thanks so much. Welcome Bob – my welcome back, Bob come in. Bob, there is some investor skepticism that theme park per caps and margins are elevated due to post-pandemic benefits that might expire. I am curious, in your view, does the theme park division still have healthy growth prospects from here, especially after a pretty good quarter, this quarter. And what do you see as the major growth drivers of theme parks going forward? Thanks. Nice to hear your voice again, Doug. We have been through many of these calls in the past. Well, the answer is yes on the theme parks in terms of their growth. I am very, very bullish about our parks and not just because of the COVID recovery. But to start with, demand on the parks is extraordinary right now. Now, we could lean into that demand easily by letting more people in and by more aggressively pricing. We don’t think either would be smart, because we let more people in is going to reduce guest experience. That’s certainly not what we want. And in fact, if you looked at our results this past holiday season, we actually reduced capacity certainly improved guest experience, and we are able to maintain profit, not just profitability, but a very, very successful or robust bottom line. We are going to continue to look at opportunities like that, which is essentially to simply get more creative in terms of managing the capacity that we have. I am going to come back to that in terms of growth, but let me also address the pricing side. It’s clear that some of our pricing initiatives were alienating to consumers. I have always believed by the way, that accessibility is a core value of the Disney brand. We were not perceived to be as accessible or as affordable to many segments as we probably should have been. So, after basically paying heat to what we were hearing, we started to address it. And the steps that we took were actually were very, very positive. We got really great reaction to it. In addition, and it’s tied to this is that we have put in place just basically more flexibility for the consumer in terms of how much it cost them to go. And interestingly enough, if you look at the increase of the core ticket, let’s say, Disneyland, it has not really increased that much, maybe slightly ahead of inflation over the last few years. But one of the things that was interesting to me and coming in and examining our pricing is, we are making that available to people for only 15 days a year. So, if you look at our new pricing strategy, we made it available, I think was 50 days a year, so we greatly increased accessibility to our lowest price. And it is really well received. So, we are going to manage capacity very, very carefully. Some of that, by the way, has enabled us to essentially shift mix to – from annual pass holders to people who may come just once in a lifetime or once. They tend to be good customers of ours because of their per cap spending when they are there. That’s really helpful. Some of the things that we put in place to manage basically annual pass holders was done to help us manage capacity without having doing too much damage to the bottom line. Lastly, we have learned that when we invest in increasing capacity, the Star Wars lands would be a good example of that, Pandora was a great example of that. We can grow our business. In fact, if you look at the results when we put Pandora and Animal Kingdom from year-to-year, they were stunning in terms of how many more people visited Animal Kingdom. I mentioned on the call that we are going to bring a version of Avatar to Disneyland. We have other opportunities as well. I have talked to Josh D’Amaro about this very recently, like this morning, again, to really look at all the great franchises of the company and see where we can invest in them in the parks to increase capacity while preserving guest satisfaction. Thanks. Bob, I will ask you a question that we have asked Christine a lot over the last year, which is you made the comment about ESPN+ expressing some success in streaming and sports. And there is probably now about 40 million homes who have decided to not be in the bundle. So, what do you need to see out there in the linear world to decide that an ESPN ala carte sports service in streaming should be the big leap for Disney? And then just a small one, you mentioned about how a lot of content can amortize in places other than streaming. You had talked a lot today about cost cutting. Should we think about licensing as also being a potential sort of big profit pool over the next few years? Thank you. I will take the second part first, Steve. Yes. The answer to the second part is yes. Now, when you say big, I don’t know yet. I mean we are not really there. But when we bought Fox we greatly enhanced our television production and film production capabilities, bringing into the company great talent in both the movie and the TV side. As I have talked about getting more aggressive at curating general entertainment. By the way, we are not getting out of that business, but we are going to curate it more. We have opportunities using the great talent that we have to create for third-parties, and we are going to look at that very seriously. I actually think there is a nice opportunity to create a growth business for the company, but it’s way too soon to predict what that can be. Regarding ESPN and when we might make the shift, if you are asking me is the shift inevitable, the answer is yes. But I am not going to give you any sense of when that could be because we have to do it obviously at a time that really makes sense for the bottom line. And we are just not there yet. And that’s not just about how many subscribers we could get. It’s also about what is the pricing power of ESPN, which obviously ties to the menu of sports that they have licensed. Okay. Thanks for the question. I want to thank everyone for joining today. Note that a reconciliation of our non-GAAP measures that were referred to on this call to the equivalent GAAP measures can be found in our Investor Relations website. Let me also remind you that certain statements on this call, including financial estimates or statements about our plans, guidance and expectations, beliefs or business prospects and other statements that are not historical in nature may constitute forward-looking statements under the new security laws. We make these statements on the basis of our views and assumptions regarding future events and business performance at the time we make them, and we do not undertake any obligation to update these statements. Forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from the results expressed or implied in light of a variety of factors, including economic or industry factors, execution risk including in connection with our organizational structure and operating changes, cost savings and efficiencies, workforce reductions and DTC business plans relating to content, future subscribers and revenue growth and profitability. For more information about key risk factors, please refer to our Investor Relations website, the press release issued today, the risks and uncertainties described in our Form 10-K, Form 10-Q and other filings with the Securities and Exchange Commission. We want to thank you all for joining us and wish everyone a good rest of the day. Thank you. Today’s conference has now concluded. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day.

EarningCall_309

Welcome to Hertz Global Holdings Fourth Quarter 2022 Earnings Call. Currently, all lines are in a listen-only mode. Following managements commentary we will conduct a question and answer session. I would like to remind you that this morning's call is being recorded by the company. I would now like to turn the call over to our host, Johann Rawlinson, Vice President of Investor Relations. Please go ahead. Good morning, everyone, and thank you for joining us. By now, you should have our earnings press release and associated financial information. We've also provided slides to accompany our conference call, which can be accessed on our website. I want to remind you that certain statements made on this call contain forward-looking information. Forward-looking statements are not a guarantee of performance, and by their nature, are subject to inherent uncertainties. Actual results may differ materially. Any forward-looking information relayed on this call speaks only as of today's date, and the company undertakes no obligation to update that information to reflect changed circumstances. Additional information concerning these statements is contained in our earnings press release and in the Risk Factors and Forward-Looking Statements section of our 2022 Form 10-K filed with the SEC. All these documents are available on the Investor Relations section of the Hertz website. Today, we'll use certain non-GAAP financial measures, which are reconciled with GAAP numbers in our earnings press release available on our website. We believe that these non-GAAP measures provide additional information about our operations, allowing better evaluation of our profitability and performance. On the call this morning, we have Stephen Scherr, our Chief Executive Officer; and Kenny Cheung, our Chief Financial Officer. Thank you, Johann. Good morning, and welcome to our fourth quarter earnings call. On the close of my first fiscal year at Hertz, I'm very pleased to report on a strong quarter and a record year for the company. Our Q4 results reflect progress made during the year on our growth initiatives, increased efficiency in our operations, strong fleet management and our commitment to prudent capital allocation in all 2022 was about focusing on our service offering and reinforcing the talent at Hertz to deliver for customers and shareholders. As we open 2023, we continue to experience strength in the business with January and the first week of February, closing strong. Our performance in 2022 and this early indication into Q1 leaves me confident in the sustainability of our financial performance the prospect of long-term value creation and the ability of Hertz to deliver a superior product to our customers on a more efficient cost base. Our strong performance also lends confidence to the forward execution on growth initiatives, including expanding our rideshare business, growing our EV platform and revitalizing the Dollar and Thrifty brands. With that, let me begin with the results for Q4. Revenue in the quarter was $2 billion, up 4% year-over-year. Revenue per day and revenue per unit remained strong with both up year-over-year, 3% and 4%, respectively. Transaction days were up 3% year-over-year reflecting stronger performance than seasonally expected. Importantly, core operating expenses per transaction date in Q4 were down 5% sequentially versus Q3, reflecting increasing operating leverage in the business as signalled on our Q3 call. Hertz produced adjusted corporate EBITDA of $309 million in the quarter, resulting in a margin of 15%, and with adjusted free cash flow at $424 million. Our results were the product of continued stability in rate and higher utilization of our fleet, all the while maintaining NPS scores for 2022 that were higher by 10 points year-over-year. Taken together, these financial KPIs were in line with guidance. Depreciation per unit in the fourth quarter was $244 reflecting the low end of the range referenced on our Q3 call. Kenny will speak to the forward direction of depreciation, but suffice to say that we view this level as moving closer to what we believe normalized or expected depreciation will be. More broadly, I should point out that depreciation on our P&L is fundamentally an output, not only of the market for used vehicles, which has begun to reverse its price declines quite substantially in the last several weeks, but also of our fleet strategy as it reflects our purchasing decisions between new versus used cars, EV versus ICE and our expected and actual length of key. As such, depreciation should not be considered in a vacuum. Our goal is to construct a fleet with the highest ROA. As you know, we took advantage of elevated used car pricing in early 2022 as an opportunity to purposely harvest equity in our fleet. Looking back these actions, when combined with the anticipated decline in prices in the back half of 2022, did not impair the adequacy of the equity cushion in our ABS facility. In fact, today, we are comfortable with the level of equity in the facility even under conservative assumptions about forward residual prices in EVs and otherwise. Downward price movement in cars, while depriving us of the magnitude of gain on sale experienced in 2022 is welcome in the context of future fleet purchases as even under multiyear plans with the OEMs, we enjoy the benefit of forward price declines should they occur. Regardless of vehicle prices, we will always keep our commitment to fleeting within the confines of demand. Turning back to our performance overall. Our results in Q4 reflected improved execution by the Hertz team. By example, travel disruptions across the country in the quarter caused our field operations to respond to higher than typical cancellations occasioned by flight disruptions as well as unplanned demand for one-way rentals. With the benefit of better revenue management tools, agile fleet management and the dedication of our people, we put cars on one-way rent at 3 times historical levels in the week leading into Christmas. Delivering for our customers with one-way rentals also enabled us to move vehicles from northern markets in the U.S. to vacation markets ahead of expected demand in January and February. The increased number of higher RPD, one-way rentals and lower transportation costs related to fleet repositioning proved positive for us, helping to offset the negative effect of cancellations. As I noted, our expense base improved in Q4. Last quarter, we set an objective for better operating leverage in the business, particularly given the purposeful investments we made in Q3 to remedy elevated out-of-service levels. DOE or direct operating expense per transaction day in the fourth quarter, excluding $168 million litigation settlement announced in December, was under $33, down 5% sequentially. This is particularly noteworthy for the fourth quarter when operating expenses tend to be higher given seasonally higher labor costs relating to the elevated cadence of year-end travel and correspondingly higher overtime and other labor expenses. Focusing on the full year revenue was $8.7 billion, an 18% increase over 2021. Adjusted corporate EBITDA was a record $2.3 billion and adjusted free cash flow was $1.5 billion, the highest ever for the company. Significant free cash flow generation enabled us to invest across our business throughout 2022, as we launched our new strategic initiatives and began a technology uplift across the company. That cash flow also enabled us to reduce our capital base by nearly one-third. I'm very pleased with our results for the year and come into 2023 with confidence in the company's ability to replace a significant portion of 2022 EBITDA attributable to gain on sale. Our confidence is based on continued improvement in execution as well as levels of demand across the business that are holding at sustained pricing. In the U.S., we closed Q4 with leisure and corporate demand, both progressing back toward pre-pandemic levels, but importantly, at higher pricing. With respect to corporate travel in Q4, we continued our recent success of near 100% corporate contract renewal with many coming at higher renegotiated pricing. Our highest rate business, international inbounds, also continued to recover and we view the return of the non-U.S. traveler as providing upside to our business. Importantly, we saw this momentum carry into January, especially on corporate and inbound. In terms of transaction days, corporate demand was up 28% in January versus January of last year, and international inbound was up 56% on the same comparison, reflecting a strong opening to the year. Similarly, our rideshare business was up 98% January over January, with RPU up approximately 20% in the same period, reflecting higher price and utilization and longer length of keep. Lastly, European business is also showing strength with rate up 20% in January versus last year. With respect to fleet, you heard me reiterate throughout 2022, and that we were focused on maintaining fleet size inside the expected demand curve. Our fleet strategy in 2023 will be a continuance of the same. With ROA or return on assets as the financial cornerstone for Hertz, our objective is to improve the revenue potential across the life cycle of a vehicle managing our fleet operating costs and matching our mix of fleet to available opportunities. All things being equal for the same revenue potential, we will take the path that results in a fleet comprised of lower cap cost as well as lower depreciating and lower maintenance vehicles across our leisure, corporate and rideshare and fleet business lines. With that, we will always remain attentive to customer preference. In terms of operating expenses, we have made progress, as I have noted, but we are not done. We continue to replace third-party employees with Hertz badged employees at lower cost including project engineers, where we are seeing a broader pool of talent at more affordable price points, aided by current dynamics at large technology firms. Regarding labor costs in Q4, we experienced marginally reduced wage pressure and better overall labor availability. Combined with field efficiencies and better technology, we look for improvement from here. We expect unit costs to move lower in Q2 and the back half of 2023 with further reductions in 2024 as we look to substantially complete our transition from data center to cloud-based operations. Looking ahead, we are rethinking our approach across all expense channels and have dedicated a newly staffed team to ensure progress. Whether that means procuring parts locally to secure price benefits scrutinizing our real estate footprint with an eye to selling underutilized parcels or renegotiating vendor contracts, everything is on the table. To vendor Hertz' a more efficient operator for 2023 and beyond. As we close out Q4 and move into 2023, we also continue to progress our strategic initiatives, including through expansion of our partnership with Uber now to include Europe, growth in our EV platform across all segments; expanded use of the Carvana and the proprietary Hertz retail channel, where we continue to secure premium pricing on vehicles sold; and continued focus on expanding our access to corporate and leisure bookings through our long-standing relationships with key partners, such as Delta Airlines and the AAA, both of which are now renewed. We also continue to progress our strategic investments in technologies such as telematics and the continued migration of our business to the cloud. There are two additional and new initiatives that are worthy of mention. These are the revitalization of the Dollar and Thrifty brands and our recently announced approach to collaborating with cities across the U.S. to facilitate the growth of our expanding EV fleet. Let me start with Dollar and Thrifty. These two iconic brands are performing shy of their potential. Each has the considerable brand recognition globally and a long history with customers. However, today, they lack consistency of purpose and are not adequately capturing the opportunity to reach the important customer population that is more price conscious, travels less frequently and is not necessarily drawn to loyalty programs and other attributes that define more service-driven brands. That's now going to change. We intend to revitalize these brands to pursue profitable mid-market growth across both leisure and business. The intention here is to utilize these brands on a more managed cost basis and independent of our Hertz brand to access customer segments that we're not adequately topping today, including OTAs, consolidators, tour operators, select airlines and other partners. We're in the very early days of this initiative. Bringing focus and purpose to Dollar and Thrifty will better position us to successfully compete against comparable brands in the market, and we believe we can do so at an accretive margin. We view this segment to the market as increasing in size and growing through multiple channels, refining the brand identity of Dollar and Thrifty will also enable us to better maintain the value proposition of our premier Hertz brand in the market. The second initiative is a new program that we announced several weeks ago at the U.S. Conference of Mayors Hertz Electrifies. This program is a complement to our standing initiative to electrify our fleet and our corresponding efforts in partnership with BP Pulse to build out the charging infrastructure at airports and Hertz off-airport locations in the markets in which we operate. As a public private partnership with major U.S. cities, Hertz Electrifies will accelerate the utilization of our EV fleet in key metropolitan markets. In addition to a wider proliferation of charging stations to serve leisure, corporate and rideshare customers the partnerships include supplementing municipal fleets with Hertz CVs, sharing telemetry data with cities as they consider electrification projects of their own and developing educational and training programs to help create a pipeline of employees with EV skills. We are beginning with Denver and based on the reception to our announcement at the Mayors Conference in Washington, we expect to have additional cities announced in the near term. Finally, regarding our technology journey, we have considerable progress to report. Our migration to the cloud is progressing well and will allow us to operate more efficiently including through the reduction in considerable consultancy and operational expense by 2024. The Hertz app continues to be reimagined. In 2022, we initiated enhancements to the app for quicker functionality and vehicle selection. This is only the beginning as we will further refine the shop and book elements of the app that move on to in-rent attributes and post-rent elements to provide our customers with a more modern, easy-to-use experience. And our work with Palantir also continues. We are currently focused on development of a fleet control tower to help us manage our large diverse fleet while also rolling out our pricing tools to nearly all markets in the U.S. In all, 2022 was a record year as measured by adjusted corporate EBITDA and adjusted free cash flow and a launch point for projects with tangible benefit to the performance of the company. Looking forward, we expect double-digit margins to hold in a market that continues to show us opportunity. Our ROA mindset remains foundational and is underpinned by a focus on EBITDA and cash flow generation with attention to expanding channels of revenue generation, like rideshare and the Dollar and Thrifty brands and a focus on unit cost of delivery. As we pursue growth, fleet and cost management remain our key levers should demand soften. While we are not seeing demand reduction today, we are positioned to confront that challenge should it materialize. The continued strength of the consumer and evolving patterns of consumption around experience over hard goods, and a potential shift away from historical travel patterns are positive trends for us. But should demand shift, we are positioned from a structurally defensive position. We do not carry a fixed asset base and our fleet profile is flexible. With that, let me turn it to Kenny to walk you through our results in more detail and provide commentary on our liquidity and capital allocation. Thank you, Stephen, and good morning, everyone. As Stephen noted, we had a solid fourth quarter and a record full year. Fourth quarter revenue was up in both the Americas and International segments and totaled over $2 billion, an increase of 4% year-over-year or 7% on a constant currency basis. RPD, RPU and 21:33days for both segments improved year-over-year. Both rate and volume met our expectations for the quarter, as we laid out on our last call, and I'll reiterate that the volume performance was 500 bps better than seasonality typically yield. Utilization increased 100 bps year-over-year despite severe air travel disruptions in the U.S. at year-end. Domestic leisure volumes across the industry have made progress towards pre-pandemic levels within our business, and we see steady improvement in corporate volumes. International inbound have been slower to recover but hold considerable promise for us. As of the fourth quarter in the Americas, corporate was at about 80% of 2019 levels and international inbound grew to about 50%, up from 45% in Q3. As international inbound continues to be covered, we expect it will prove accretive to RPU, utilization and margins. Adjusted corporate EBITDA was $309 million in the fourth quarter, a margin of 15%, growth in corporate and rideshare were large contributors with continued strength in leisure. Geographically, we saw strong performance across all markets. For the full year, revenue was $8.7 billion, an 18% increase from 2021. On a constant currency basis, revenue increased 23% year-over-year with strong increases in RPD, RPU and days across both the Americas and International segments. Adjusted corporate EBITDA for the full year was a record $2.3 billion, a margin of 27%, with both the Americas and our International business at record levels. Our focus on higher-yielding business, a dynamic fleet strategy and a focus on asset return all contributed to an improved business. We generated higher EBITDA while maintaining a tight fleet. Staying on fleet, we continue to dynamically manage our composition of vehicles during the quarter, ending the year with a fleet size of approximately 480,000 vehicles roughly equal to the fleet size at the start of the year, just as we guided. Due to seasonal de-fleeting and other rotation, fourth quarter net fleet CapEx was a source of cash. Fourth quarter net DPU was $244 within the range we quoted on our last call and continued to normalize during the fourth quarter, ending at $300 for the month of December. We expect our average fleet size in Q1 to be higher than what we closed the year in light of elevated levels of demand. Depreciation in the ABS facility let me put a bit more detail to what Stephen spoke about earlier. First, as Stephen noted, we managed the business to margin and ROA, we don't solve for depreciation in isolation. Depreciation is the output of various fleet decisions, including acquisitions and holding periods that we make in order to maximize return on the business as a whole. Second, declining car prices render a lower cap cost, which is the first ingredient to depreciation. We have been and will be buyers of both new and used cars. And as a result, we expect to benefit from downward price trends. For avoidance of doubt, we benefited in Q4 from price declines on EV purchases. Third, the holding period on our vehicles are dynamic. And decisions on length of keep are not made across the whole of the fleet but are specific to model and year. On EVs, specifically, and as we have stated previously, we expect longer length of keep over time. Further, we currently depreciate EVs over a time period that is longer than ICE vehicles. We believe this time period could lengthen given the mechanical profile of the car and with more history under our belt. Fourth, entering 2023, we are less likely to be sellers of vehicles with a primary purpose of capturing excess value, which was an opportunity that may prove to have been unique to 2022. Make no mistake, we will look for smart opportunities to harvest gains and we model for gain on sale in 2023. But we entered 2023 with far fewer nondepreciating vehicles in our fleet. And given the decline in residual prices broadly, we expect operational utility to be the primary driver of physicians on fleet deletions. And finally, the last point I will make is on our available channels for fleet disposals. While not directly impacting gross depreciation expense, we continue to leverage the Hertz car sales and Carvana retail disposition channels, providing us with a meaningful premium over wholesale channels. This represents nearly one quarter of our car sales in 2022, and we look to grow that from here. Two points to make on the ABS facility. First, and as a reminder, equity and the ABS is measured as the excess of the fair market value over ABS book value. This fair market value is determined based on the entire fleet not just one make or model and entering the fourth quarter, we had vehicles that carried excess equity at inception, driven by smart and opportunistic fleet procurement. Second, after vehicle acquisition, incremental equity is typically created by vehicles that are required to be amortized in ABS at accelerated pace compared with economic depreciation rates. This incremental equity cushion to either buffer future decline or be harvested by us selling cars with high built-in gains or high residual value risk. This is what we deliberately did last year. Our actions enabled us to harvest gains. In Q4, our equity cushion went from $2 billion to $1.1 billion. From here, we expect that the cushion will continue to be sufficient under stress scenarios more conservative than those offered by the market. Turning now to operating costs. Our revenue growth outpaced our expenses and as Stephen pointed out, BOE per transaction day exclusive of the litigation settlement was under $33, a $2 per day improvement from the third quarter. Our efforts with respect to reducing third-party spend and maintenance costs and utilizing telematics data are showing benefit. As we continue to grow our EV fleet and progress on a technology investment, we expect further improvement in operating leverage. Looking back on Q4, the quality of our earnings was driven by solid execution in a strong market. Demand exceeded a seasonal expectation across our leisure business and corporate activity proved strong, which was beneficial to mid-week utilization. Our rideshare fleet continue to grow and while at reduced RPD compared to RAC, the economics of these rentals are margin accretive, as we pointed out in the past. Residuals came off the peak in the back half of the year following our significant harvest of fleet equity in Q2 and Q3. Let me now turn to capital structure and liquidity. Our balance sheet continues to remain healthy, and we ended the year with a net corporate leverage of 0.8 times suggesting room for modest incremental leverage on the business when capital market conditions make it prudent to do so. At December 31, our available liquidity was $2.5 billion, comprised of $943 million in unrestricted cash and the balance available under the revolving credit facility. In December, we amended our European ABS facility, the Abbie Italian fleet, increasing aggregate maximum borrowings to EUR 1.1 billion extending the maturity from October 2023 to November 2024. Turning to our cash flow and capital allocation for the quarter. Adjusted operating cash flow of $156 million in the fourth quarter before considering fleet CapEx, which was a source of cash of $312 million due to seasonal de-fleeting and rotation, as I mentioned earlier. Adjusted free cash flow was a strong $424 million, a conversion of over 100%. For the full year, adjusted operating cash flow was $2 billion and adjusted free cash flow was $1.5 billion. I should point out that both the quarterly and annual amounts exclude the impact of the $168 million in litigation settlements, which were paid in the fourth quarter due to their unusual nonrecurring nature. Despite the adjustment for the settlement, full year adjusted cash flows were at record highs. As stated previously, the settlement did not impact our capital allocation our capital priorities of investing in our fleet, funding our strategic initiatives and returning excess cash to shareholders remain unchanged. During the fourth quarter, we repurchased 19 million shares of common stock for $350 million. Overall, we allocated nearly $360 million towards note capital investments and share repurchases during the quarter. For the full year, we repurchased shares equal to nearly 30% of the equity base of the company. Lastly, let me give some highlights for what we expect in 2023. I'll start with revenue. Seasonally, first quarter revenue is normally slightly below Q4 based on a reduction in volumes and flat RPD. However, for Q1 this year, we expect revenue to be flat compared with Q4 with transaction days to hold steady. For Q2 and Q3, we expect both rates and volume to increase, contributing to higher revenue in those quarters. We would expect Q4 to seasonally adjust down from those levels. On fleet, we expect average fleet in Q1 to be slightly elevated to where we ended the year at 480,000 cars, particularly given heightened demand levels, and compensating for slightly higher recall levels in the fleet. We also expect seasonal growth in fleet through Q2 and Q3 to meet higher demand in the spring and summer. From there, typical de-fleeting is expected as the year comes to a close. On net DPU, we anticipate depreciation to further normalize and settle in the range of $300 to $320 in Q1. Regarding net DPU expectations for the balance of the year, we expect it to trend down towards the lower end of the Q1 range, given anticipated mix and changing whole patterns and reflecting some modest gains on sale across the fleet. And with respect to direct operating expenses, we expect Q1 DOE per transaction day to be approximately $33, roughly equivalent to the normalized figure for Q4. From there, we expect it to trend lower from Q2 through year-end. Lastly, in prior years, we anticipate the trajectory of free cash flow generation to be weighted more heavily towards the back half of the year as we de-fleet off the summer peak and through year-end. First half 2023 free cash flow will reflect investments in fleet CapEx as the size of fleets to meet expected demand in the busy summer season. That said, and consistent with our behavior in 2022, we will continue to balance capital allocation among capital spending, share repurchase and other initiatives. In closing, we are pleased with the momentum we have seen early in 2023. And as we assess our prospects for the year, we have confidence in our ability to deliver attractive full year financial returns. Stephen, sort of the high level, and you've been in the CEO seat for, I guess, about a year now. I mean, can you share any of the insights you've gained during the period and some of the key learnings and maybe what gives you confidence in the future of this business and the comment about being able to hold double-digit margins? I would say that if one looks back on 2022, I would say that it will prove to be a down payment, if you will, on the forward for the company in '23 and beyond. I mean we took the large as free cash flow over the course of the year and brought down our equity base by a third. But equally, we took opportunities to invest in fleet and non-fleet CapEx that I think will have lasting benefit to the company, both in terms of its operational fidelity, but equally kind of the growth opportunities that are there. If I look back on the year, I would say -- I would just make a couple of observations on the business, and then I'll give you a sense of kind of where that leaves me in terms of optimism on the forward. First of all, the performance of the business has improved. And I think we're now running a quality of business that's more befitting of the Hertz brand. Second, I think we have changed the mindset across the whole of the company to a true adherence to an ROA sort of mindset. That is we now manage and understand the business across the whole of the company based on financial return, which I think is important. It's not to the exclusion of a view on the customer. But I think we just hone tighter and more efficient in how we manage fleet and otherwise. Third, I would say we brought better human capital to the game. So Hertz is going to be better by virtue of a new group of executives that we brought on to run it. And that combined with the tenure of people that we have in the field and organizational changes we've made in the field to run this better with more line of sight responsibility for production efficiency, customer service also better. Fourth, I would say, and as I mentioned, our technology is improving. It may not all be visible to the market, but we're building better technology tools for our people in the field, better technology for our customers to use and setting the whole of the company up in the cloud as opposed to a data center will be better for us overall. And then I think the last thing I would say is that a big discovery certainly for me and I think for the company, particularly as we look to fleet inside demand is the recognition of the value of a very deep and broad used car market in the U.S. So where does that lead me on the forward? I think, first, we've identified a set of growth vectors for the company, whether that's rideshare, Dollar Thrifty EVs. And I think they all carry a different profile with respect to durability of revenue that will be different than what you see in kind of the classic RAC business. Second, I think we're going to continue to operate with discipline. And importantly, I'm observing the industry to be showing that same discipline, perhaps benefited by the fact that OEM production of cars is still beer, but I think the industry is showing the discipline that we ourselves are demonstrating. I would say that over the last couple of quarters, I think we may have signalled that, in fact, used car prices are disconnected from rates, meaning typically, you looked at this industry and as prices fell on residual rate went that way and that's not happening now. And I think that's important, particularly if the worst of used car decline is behind us in terms of what's most precipitous. So I think we're in a good place and now, I think, in a good place from a capital allocation point of view, which is like we did in '22, in '23, we're going to focus on fleet and non-fleet CapEx serving the growth initiatives and all the while attentive to the opportunity to buy back stock. And so that's kind of where I am, Chris, in terms of what I've seen and where I think we're going. I guess as a follow-up, obviously, a lot of headlines recently around price cuts on EVs, particularly Tesla. And I think there's just some general curiosity in the market about how that impacts Hertz both puts and takes, right, on the purchase and resale side. Is there any way to kind of walk through that and give us a little bit of color of how you guys are thinking about it? Sure. Why don't I start, and then I'll hand it to Kenny to give you sort of more particulars. But look, first of all, as Kenny said, we benefited from price declines in electric vehicles in the fourth quarter. And so we've moved in that direction. I think it's important to also know that we bought now, call it, 20%, 25% of that, which we expect in terms of an overall EV fleet that by 2024 will be a quarter of our fleet. And so as prices come down on electric vehicles, we'll buy 80% of what we want at a lower price point because as we said in the prepared remarks, cap cost is the first ingredient to depreciation on these cars. I think it's also important to understand that in terms of EVs, we rode these up and then down, meaning we started early, bought them at a low price. Obviously, we paid higher as the market did, but then paid lower. So you need to look at kind of overall average cost that's there. And the last thing I would say, and this will play into depreciation as it being an output, not an input, but we have said on various calls that we expect the length of keep around EVs to become longer over time and longer even still to where we sit today. The nature of those cars, the experience of those cars, the ability to re-kit the interior will give us kind of a length of keep well in excess of where we are. And that evolve in terms of the overall depreciation cost of these cars on an annual basis. Yes. Chris, it's Kenny. So let me give a bit more color on what Stephen talked about in terms of depreciation. And then maybe I'll talk a bit about the ABS as well, Chris, to your question. So depreciation, right, I think it's important to note that we don't do a mark-to-market on our vehicles, right? So instead, appreciation is a function of other variables. For example, cap costs, right? In this case, cap costs, the price is coming down, cap cost is lower, lower depreciation, right? The second piece, which Stephen pointed out, which is more relevant to a Tesla is expect the residual value over the whole period, right? With EVs, this is particularly important given their ability to operate for longer. And longer hope here will reduce the impact of residual changes on depreciation. On the pricing side, keep in mind that we did average in tests across the year. So we -- so our blended cost for Tesla is reduced by the early purchases and the most recent ones that we bought in Q4. In terms of the fleet size, I mean, Tesla right now is roughly, call it, less than 10% of our total fleet. So the impact on depreciation is a bit minimized. And the last thing I would say is that all else being equal, a lower cap cost will further enhance the economics of EVs, which is proving to be accretive to our business. Quickly on ABS, Chris, we do bring in the test laws into the ABS at a, what I call a haircut, right, let's call it 5% haircuts. On day one, there is equity to be had. You're in the money on day one. The second piece is subsequently, every month, the Teslas faster in the ABS than the economic death rate, which also provides cushion. So as you can imagine, we look at the pool of cars as a whole, not by maker model. And right now, as I mentioned on the call, we have sufficient cushion entering 2023. Great color on the comments on depreciation, maybe not tracking rates. Can you give us maybe a little bit more color? What is per se giving you confidence there? And then also, how does that then figure into your normalized EBITDA target and how you're thinking about that? Well, I think -- listen, it's important to understand depreciation is not kind of a fixed element, meaning it's influenced by a number of decisions and factors that we make all with an eye toward the ROA or the margin of the overall business. And so I'll just make a couple of comments. First of all, while we're attentive to what customers want, as and to the extent that rate is not being differentiated as between a brand-new car versus a good condition, low mileage used car, we're going to run with lower cap costs, lower-cost cars, okay? And we look at the totality of what the cost of that vehicle is in terms of making those decisions. So I think that we're in a place where, as we think about financial performance, whether it's EBITDA down through cash flow, depreciation is but one element, and we have quite a number of levers to control in the context of it based on what we buy, the length of keep for the vehicle Obviously, as we engage in growth around P&C and Dollar Thrifty, those are going to be two kind of business repositories where older cars are going to go therefore, playing to sort of higher margin and lower depreciation. All of those are factors that influence depreciation. But again, depreciation is but one piece of an overall puzzle and it itself is an output of some very clear decisions we make around the return profile, looking at cap cost, maintenance expense and overall economic return for the car itself. Just to give more color, Ian, on depreciation. So if you look at Q4, right, as I mentioned, net DPU was $244. If you bifurcate between gross and gains on sale, gross was roughly $346 million, and then the gains on sale per vehicle was $102 that's how you get to the, call it, the $2.44. As you look outwards, right, I've talked about we expect in the range of $300 to $320 for the rest of the year, right? So growth appreciation for the most part, faced similar, right? Let's call it $350 for rounding standpoint. The gains on sale, right, we had $100 in Q4, high-low math, let's say that's $50 now. So that $350 minus $50 gets you to $300 for the rest of the year. And that's how we think about it. Yes. The one thing I would say, though, is that we've taken a rather conservative approach to sort of what we believe price decline will be over the course of the year. And I think we said in our remarks that we're more conservative than where the indices or the market is forecasting. And so that obviously plays into the view we have on the forward and we will adjust. So we're taking expense down. I think in the last five weeks, we've seen a correction to use car prices to our benefit, not to our detriment. And therefore, gain on sale may improve over the course of the year to the extent that we see that sort of continue on. And to the extent that the worst of used car decline is behind us. But I think we're taking a prudent and conservative approach to this and have a number of levers to sort of offset where depreciation will be, no less what depreciation will be as we play forward. Yes, the way the years of the good start have you awake our on cars selling prices gone up every week. And then may can you just touch upon on the corporate side. Maybe also international inbound. How is that progressing assortment February? Where February looks like? You know I have been negotiating some of the contract some of the corporate side. How’s that going? And what should we expect on that front. Sure. So let me take them in that order. First of all, the inbound business, which is a very profitable business for us, okay, has been up quite considerably. In fact, the momentum we're seeing carrying into this first quarter, if you just look at the month of January, international inbound was up 56% year-over-year. So comparing January as against January. And that business continues to sort of play very strong. In fact, it played strong even through year-end when, in fact, foreign exchange would have suggested otherwise. So it just suggests to you the strength of demand of travel by non-U.S. customers who are coming to the United States. So very strong, and the momentum is carrying forward into January kind of as an early indicator on where we are on the year. In terms of the corporate business, I would say that January equally sort of told you of the continuation in demand. Demand was up 28% over January, again, with corporate demand coming back now closer to where we saw it. Importantly, I would tell you that if you look at contract renewals, and I made a comment to this in the prepared remarks, we're seeing near 100% contract renewal on our corporates importantly, they're getting renegotiated at higher prices. Obviously, corporates are focused on EVs as an alternative to put their employees in to satisfy their own ESG commitment, but the corporate business is feeling quite good, very strong. I'd also make one other comment to you, which is not just simply about corporate nor about inbound, but about the totality of travel, which is this last Sunday, if you look at TSA figures, they processed on Sunday about 1.7 million travelers across the United States. What's interesting is that if you look at the 4 prior Sundays, they were all consistent in at about 1.2 million. Now one week doesn't make a trend, but steady at 1.2 and then a jump to 1.7, and you just listened to what you hear from the airlines and hotels let alone what we're telling you about our own business. And it seems that travel has been pacing well. One last point on corporate, I would raise with you, and that is if you look at the pattern of corporate demand, it too is changing for the better for us, meaning, over the course of 2022, we saw an increase by about 20% for about 1.5 days to the duration of a corporate rental. That means that people are keeping that car longer. The way in which that's manifesting itself as a person is on a business trip, they may extend by a day and then extend by two more days to keep a weekend in sort of the combination of both leisure and business that as days, by definition, to the rental, and that's been quite beneficial to us in terms of overall activity. Just one point to add. International inbounds, when they come back and Stephen pointed out, they'll be buying VAS and they're very profitable to our business. But right now, despite even, what I would say, softness on international inbound, versus '19, we are seeing VAS of double digit, right? So structurally, our improved VAS program is definitely working. And in corporate, even though we are seeing very, very strong renewals on -- with the economics. The rates on the corporate are lower than RAC, but it is RPU-accretive because they come in midweek and helps with utilization. Stephen, why don't you just to touch a little bit about free cash flow. I was hoping you could give us some guardrails to maybe think about that in 2023. Obviously, I know you're not giving formal guidance on it, but would just love to think about kind of non-fleet CapEx, just corporate CapEx. Anything related to cash maybe going into the funding facilities. It sounds like you have ample equity already in there. But just maybe some guardrails to think about that for this year. Sure. Listen, I just -- I think to give you a context, obviously, the magnitude of gain on sale that we saw at very elevated prices in the early part of 2022, is unlikely to repeat itself. And so the task in front of us is to replace, right, lost EBITDA and, therefore, lost free cash flow that was attributable to gain on sale, order of magnitude with fundamental performance in the business. And I think what you're hearing from us is we believe we will see better on volume, better on rate we'll see that sort of play out throughout the year. We're seeing continued growth, as we've just spoken about across all channels. We're going to start to execute on the growth elements of the business to generate EBITDA and free cash flow, whether that's in margin-accretive activity around the rideshare business or what we do around Dollar Thrifty as we get back to the back half of the year, all of that will be a benefit and considerable offset to what we see decline in terms of gain. Now it's hard to read and extrapolate off of the first, call it, five weeks of the year. But in the first five weeks, you heard Kenny say we've seen a reversal of the direction that residual prices were taking. And therefore, that carries the potential upside to preserve gain on sale, certainly not at the levels that we saw last year but as an offset to perhaps what we thought we might realize over '23 as we were ending '22. So again, that's going to play to sort of overall sort of free cash flow dynamics that are there. I would say there's nothing that we see to siphon free cash flow into the ABS facility. Of course, that could always change, but what you're hearing from us is based on very conservative assumptions about forward price movement in cars, which were not -- which we don't think will necessarily see. But nonetheless, for modeling purposes, we feel we're well positioned in the ABS facility with no need to sort of fund it as it were across the whole of 2023 itself. So that will not be a siphon. I think as it relates to fleet, we're going to be very, very attentive to the kind of rules and the boundaries that we've set for ourselves. The extent to which we spend cash on fleet will be totally a function of ROA that is fleeting inside the forward demand curve and effectively and efficiently deploying capital against fleet will be the way in which we will do it. And as I said before, we're going to look for the lowest cost investment to meet the customer need, which is looking hard at cap cost, maintenance, depreciation out of service, all of that is going to feed into an ROA model so that we're not going to simply look to deplete free cash flow simply because we have a hunch about where we want a fleet. We're going to be fleeting smart. Much of that is going to happen in the first half of the year, as Kenny said, as we build the sort of a market demand level in Q2 and Q3, and then it will come back down in Q4. And that's kind of the dynamics that you'll see us sort of play with, in the context of free cash flow management. And I thought I had to ask this question because it's come up a few times in your prepared remarks, the ROA comment. Is there a way to think about an ROA level that you view as acceptable or that you've kind of tasked the team with trying to achieve maybe in the near term and maybe over the long term? Well, I think -- I mean, listen, you want to be -- the way I would say it is, it's all relative to sort of the competing uses of cash in the business, okay? So we're going to look for a return on the invested dollar in fleet as measured against what we see in terms of the return profile of nonfleet CapEx to the business and equally what we see in the context of share repurchase. They're all valid uses of capital and we need to make relative judgments, not absolute judgments in terms of where we deploy do. And if the return on the fleet is going to pay handsomely relative to other uses, we'll put it there. If there is long-term value to the return profile of a Dollar into nonfleet CapEx, obviously, we're going to look at that. So capital allocation is going to be subject to great rigor, and I'd hate to put a particular number down and say we need it or not. It's all a relative judgment. And obviously, long term, our desire is to keep a very high sort of pull through to free cash flow right, from the EBITDA number. And on a steady-state basis, I'd like that number to continue to be 70% or thereabout in terms of just the efficiency and the pull-through of EBITDA in through free cash flow. That doesn't mean it's going to happen every quarter or it happen every year, but I think you should view that as the target that we want to operate to and the relative sort of outlay and allocation of free cash flow will be subject to the rigors of return. Yes. And just to build on that one. In a steady state, John, right, if you just think the free cash flow build, right, you have EBITDA to operating cash flow, that's 90%, which proved to be correct this year. And then you also have in a steady state, you would have the fleet size, cap costs, et cetera, would be somewhat steady. So nonfleet growth will be minimal in that equation. So -- and then, call it, not CapEx, call it, close to historical levels. Is that how you walk to the 70% of conversion from EBITDA. Well, for Steve and Kenny, thanks for all the details, and it really does help us model and helps manage expectations, so well done for that. But the one thing you left out is on fleet interest expense outlook, $159 million last year, it's down about 45% year-on-year and well down $400 million from a few years ago pre-COVID. Now I know things have changed. But as your hedges roll and you see a step-up in funding costs from the ABS market, what should we be thinking about on fleet interest costs for 2023? And then I have a follow-up. Sure. So I'll have Kenny give you sort of some precision around the numbers, but the hedges that we have in there, Adam, are going to roll on the forward. We're obviously watching and managing them. These are not new to me just given what I did before. And so they've proven to be very valuable to us in locking in sort of the cost function of the interest expense. Yes. So if you think about our structure on the debt stack, right? So roughly 75% of our costs are fixed base, right? And then most of majority -- the majority of our costs are on the ABS side. And roughly 80% of that is fixed as well. Last year, our blended cost was roughly 2.5% is very effective from a cost borrowing standpoint. Entering this year, we expect this number to be roughly around 3% to 3.5%, Adam, for -- on the EPS side. As Stephen mentioned, we have hedges in place. So for example, roughly 40% of the ABS is variable funding notes we are contractually to have caps in place on those. And right now, they're currently in the money as we speak. And we sell this going through the P&L in Q4. Just to clarify that before my follow-up, you're saying 3% to 3.5% of the ABS side, but with hedges in place, that are in the money, you might have up better than that. We should be thinking that, that could be even better than that in terms on fleet interest? And just, Steve, your point on using conservative and prudent assumptions. I think you made that point many times. I didn't know if there was any way you could tell us what your assumptions are on Manheim throughout the year or a range of that? Presumably, it's further declined, but I didn't know what we should be thinking of in there because you're still allowing for $50 per unit of gain on sale. I don't recall how normal that is to have that order of magnitude gain on sale. But any color there without holding it to a specific index our -- of course, of course. Sure. Yes, of course, of course. I would say the following. As you would expect, we model, particularly around the ABS facility on a very conservative basis because I don't want a surprise. And so I want to understand what the risk is to us having to put equity into the ABS facility under a variety of sort of scenarios. And so we model to an annual decline in residual pricing that's probably a couple of hundred basis points wide of what the indices sort of publicly report, okay? Now those vary, and they depend on which segment of the fleet population you look at but I think we model on a conservative basis. And then I look at kind of standard deviation movement to price to sort of understand what's our risk level and tolerance against those very conservative assumptions we believe that there's no scenario as we look forward, whereby we're going to be required to sort of put money into the ABS. Now anything can change, but I think we take a fairly conservative set of assumptions. Now carry that assumption about residual price decline in '23. And I would say that we are on the conservative side, again, carrying that over from the ABS analysis into what we think gain on sale will be. And so I think that we look at what's playing out over the last five weeks. We look at what we're harvesting in terms of the increasing utilization of Carvana and our own proprietary channel, where we capture 5% to 7% premium to what we get in the wholesale market, take all of that together, and I'm still quite optimistic about the ability to harvest fairly have some gain on sale. It won't be what it was at the top of 2022, but there's enough in there, right, to offset gross depreciation. So that's a little bit of the narrative, Adam, in terms of how we think about residual decline relative to the market, primarily for ABS, but then carrying it over to sort of sort out what we think expected gain on sale will be, again, both through wholesale and again, an increasing use of premium channels. I heard in the prepared remarks that like in 2022, you expect to be agile in '23 in allocating capital between capital spending, share repurchases and other initiatives. First, maybe just other initiatives, what is this? This is spending apart from CapEx? Is it acquisition? What are the other initiatives? And then what are the current priorities in that hierarchy for capital spending? And then what would you say are like the major factors that would cause you to allocate capital differently to remain agile as 2023 plays out in your share price, interest rates, travel trends? Or what should we be thinking about? Well, I think the truth is you listed them all out. I mean the fact is that capital allocation sort of comes in what I would describe as sort of three categories, okay? We look at fleet, we look at non-fleet and we look at the opportunity to engage in share repurchase, okay? And we probably look at them in that order with the ability to sort of play in all three, okay? We've talked a lot about fleet and how we think about it. We maintain a level of control around fleet relative to demand, and we're looking to sort of optimize the return on that in terms of the amount of money that we put against it, okay? On non-fleet, we will continue to invest in the fundamental sort of foundational elements of the company so that we can execute effectively in our core business and around growth initiatives. It means technology, it means human capital. It means putting tools in the hands of our employees -- and all of that equally is accretive to us the way in which the business is run and then we look at where share repurchase otherwise sits. When I speak about other initiatives, there are small immaterial opportunities for us, for example, to look at certain franchises that were sold, okay, during bankruptcy, which I think in the better light of day, we sooner own than have as a franchise. These are mostly U.S.-based opportunities. And the ability to potentially buy in one or two of those. Again, I want to be crystal clear. These are immaterial. They are very small. They'd be in the category of bolt-on acquisitions, but they would prove to be accretive to sort of the performance of the company overall. We will look at those as and when they present themselves, but that won't be realized from kind of what we're looking at in terms of fleet and non-fleet and again, what we do in terms of share repurchase itself. And then just last one for me. What is the very latest in terms of what you're thinking in terms of the implications of the inflation Reduction Act on commercial EV purchases and the potential impact to Hertz. Well, I think we're still in a mind that, again, separate out what the provisions that were for individuals, okay, as opposed to provisions that were guided towards us because they were two separate pieces of the legislation. As it relates to us, we still view ourselves as being in a position to benefit from the tax credits. There's still sort of elements of that and rulemaking that will need to go on, the devil will inevitably be in the detail, but we view that benefit as being consequential to us on forward EV purchases. There have been some changes on the individual sort of purchase side where classifications of certain cars have opened up and the like. But as it relates to Hertz proper were of no different view about the benefit of that tax credit that will play to us in the forward sort of acquisition of EVs. Stephen, could you elaborate on your comments around the sharp reversal in price declines of used vehicles in your prepared comments. I know you subsequently touched on that, but any more color there, the drivers, your view of the current market and your thoughts on that into the spring? And then I have a follow-up. Yes, of course. So in -- I want to say, in each of the last four or five weeks, we have seen a tick up in the residual value of cars as computed by Manheim and other indices, okay? It's important to recognize that there's a general pool of cars that they look at and then there is a fleet view, which is obviously more relevant to us. Both have been up, but we obviously watch sort of where we are. And that has been obviously beneficial in the context of how we think about the overall performance of the company and what we think we can do in terms of the movement of cars and gain that we can capture as against that. As for the factors that are guiding it, I would say that new cars remain elevated in price and at a premium in terms of availability. And I think that coming out of kind of a trough period for purchase I think people who are in need of cars are coming to the recognition that a new car, if available, is still at an elevated price point and they're otherwise coming back to the used car market as a source for buying a car. And so I think this is a little bit of the dynamic as to where the OEMs are forecasting sort of opportunities, the price that they're holding and what that means in terms of people coming back into the used car market as a source of a vehicle for them to buy. But it's been fairly consistent in the context of the first four or five weeks of the year. Yes. I'll add two things. I think not only have we seen the week-over-week increases, as Stephen mentioned, we're -- we also see retention. They're actually holding those prices as well, which bodes well for future indication. And then we're also coming up spring break in March, April time frame, which is seasonality, one of the strongest moments for used car sales. And my follow-up. So I'm curious, -- as it relates to the airlines, obviously, the airport business, given the challenge the airlines have been having and will likely continue to have with respect to capacity and their ability to handle harsh weather versus what's been an ongoing momentum in demand recovery. Is that dynamic at all reflected in your outlook? I know that you spoke to some pressure on the top line and perhaps some costs, I believe it was with the BOM cycle in December. And this sort of this dynamic persists. Is that contemplated and how you're thinking about the guidance or your business going forward? Yes. Well, I think the reference we made and that you just made now, just sort of Christmas, I think, is pretty telling in that what we would have lost because you obviously experienced cancellations to the extent that there are airline cancellations as a customer doesn't arrive, we saw a meaningful pickup in one-way rentals, as I had mentioned. And those come kind of with the benefit of being at a higher rate. And then equally, they repositioned cars from areas where we need them less to where we need them more and to avoid spending a couple of thousand dollars on the transportation of a car, that's a benefit. And so there's a wash, if not a positive benefit to that, not that we wish the circumstances that played out in Christmas to happen, but I think we are positioned to be able to respond to it. Now the way we respond to it is a little bit of a function of what I said in response to the question earlier about the business performing better. We have a better insight into pricing. We have a better insight into how we manage the fleet. All of that are elements that enable us to be very quick and very responsive to sort of changing circumstances in travel. I would also point out that there are very few car rental companies that can respond to what we saw in Christmas relative to Hertz. Now there are other majors that can but there are a myriad of smaller players that are not in a position to put their customers in one-way rentals in the way in which we can. And I think that's a very big deal to the extent that customers are going to be anxious about disruption to airline travel, they will know that if they're in a Hertz, if they are in a Hertz rental that we're going to be in a position to serve them no matter where they get rerouted or how they want to get to where they get to. That's a competitive edge for us relative to smaller niche players in the rental car industry. And I think when it's tough, you want to be able to sort of rely on a company to deliver and we did in Christmas, and we will should those disruptions sort of happen again. This concludes today's question-and-answer session. I'd now like to hand the call back to Stephen Scherr, Chief Executive Officer. Please go ahead. So thank you all for your participation today. We look forward to sharing further updates with you all certainly on our next call, if not before. And with that, I'll turn it back to the operator.

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Good day and welcome to the Digital Turbine Report Fiscal 2023 Third Quarter Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brian Bartholomew, Senior Vice President, Capital Markets. Please go ahead, sir. Thanks, Chad. Good afternoon and welcome to the Digital Turbine fiscal year 2023 third quarter earnings conference call. Joining me on the call today to discuss our results are CEO, Bill Stone; and CFO, Barrett Garrison. Before we get started, I'd like to take this opportunity to remind you that our remarks today will include forward-looking statements. These forward-looking statements are based on our current assumptions, expectations and beliefs, including projected operating metrics, future products and services, anticipated market demand and other forward-looking topics. Although we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will inevitably prove to be incorrect. Except as required by law, we undertake no obligation to update any forward-looking statement. For a discussion of the risk factors that could cause our actual results to differ materially from those contemplated by our forward-looking statements, please refer to the documents we filed with the Securities and Exchange Commission. Also during this call, we will discuss certain non-GAAP measures of our performance. Non-GAAP measures are not substitutes for GAAP measures. Please refer to today's press release for important information about the limitations of using non-GAAP measures as well as reconciliations of these non-GAAP financial results to the most comparable GAAP measures. Thanks, Brian, and thank you all for joining our call tonight. I'm going to talk about both the macro economic landscape and our micro operational details in my remarks. But before getting into those specifics, I want to summarize our view on the business and begin with the most important takeaway for investors to have versus getting lost in any one specific detail later in the remarks. Our conviction on our strategy and our long-term financial and operational view on the business has not changed. We're also not satisfied with our near-term results. We have work to do to improve those results against our near-term expectations. There are many things for us to do, but one of the things investors do not need to worry about is ensuring we have laser focus on the controllables and accountability for their improvement. As a CEO, I own that. But also want investors to know that we do the macro situation is temporary, and it will change positively in the near future. And the micro situation issues we're dealing with are largely comprised of extraneous, non-strategic things that are not critical to our long-term success, but are nevertheless headwinds when comparing year-over-year results against the past performer results of some of our prior acquisitions. The foundation of the DT investment thesis has not changed. The core building blocks of the moat around our on device platform, the strategic interest advertisers have for monetization on the platform. The ability to leverage the macro secular trends in digital advertising and having a highly scalable and profitable operating leverage for our business are all in place. That's the underlying investment thesis for Digital Turbine that we believe will power long-term results. Successful businesses are built on years of success, not built on any one quarter of results. And we have some short-term macro and micro dynamics to overcome, but our history is dealt with much more challenging times than this and like those prior times demonstrated, our resilience has made us a stronger company as we successfully manage through short-term headwinds. We hope investors see our ability to overcome those prior obstacles as a predictor for our future success. It's part of our DNA. Turning to the macro environment. The past three years have been the most dynamic I've seen in my 30-year career. It's required companies to operate lean while being nimble, flexible and open to change. I'm going to focus my commentary on today's macro operating environment and what we're seeing regarding digital ad spending, devices and operator and OEM focus areas. First on digital ad spending. At the headline level, and as many others have already reported, pricing has slowed anywhere from 10% to 30% compared to a year ago, depending upon the Company vertical survey company being quoted or digital ad type. However, we believe this is both temporary and much more nuanced in the details as many are painting all digital ad spending dynamics with the same brush. We believe this trend is temporary and will rebound for a very simple reason. Since the beginning of the first ad dollar spend hundreds of years ago, continuing to today and ultimately tomorrow, ad dollars have always followed where our eyeballs are. And today, our eyeballs are on our digital devices, and we don't see that changing. In fact, we see that growing. So like in this past holiday season, where we experienced a deceleration in the short term as advertisers figure out how to best optimize their spends in inflationary and slowing macroeconomic environment the dollars are and will absolutely be there over the mid and long term. Also, we see a lot of nuance in ad dollar spend. For example, platforms that have been heavily reliant upon ad tech tactics like through attribution have been disproportionately negative impacted. Also, platforms that have a difficult time working with advertisers on the return on ad spend or row ad metrics are also having a difficult time. And while we saw year-over-year growth in global devices to nearly 75 million in the December quarter, we are seeing macro slowdown of device growth as consumers pause on upgrades. For example, 2022 saw global device smartphone shipments declined by 12% to 1.2 billion units, which was the lowest level since 2013. And in the U.S., we saw the lowest level of shipments for our DT carrier partners since 2019. And while our revenue shift has moved to revenues over the life of the device versus adjusted activation, it is a headwind, albeit a temporary one as we don't see consumers foregoing upgrades to new devices for a sustained period of time. And finally, it's been well documented in the commentary from many global operators and OEMs and how they're trying to grow revenues in these types of macro environments. This is a tailwind for our business as they look for new revenue streams from companies like Digital Turbine, and I'll provide some specific examples of our success later in my remarks. The takeaway for investors is that we view the present macroeconomic situation is challenging, but also temporary. The macro conditions are more difficult compared to prior years, but not instrumentable and not falling off a cliff. Unlike the macro situation that is currently more supply versus demand driven, the situation in our industry is more demand versus supply driven in the short term. OEMs, operators and app publishers are looking for companies like Digital Turbine that can provide them more dollars while demand sources are being more cautious and deliberate in their spends. The dollars and opportunities are still there, albeit more work and effort is required to capture them compared to prior years. And here in the U.S., I'm pleased to report that we have now extended our contracts with both AT&T and Verizon for three and four years, respectively. Now turning to our second quarter results, we had $162.3 million of revenue, $40 million of EBITDA and $0.29 of non-GAAP earnings per share. In addition, we reported gross margins of 50% and and EBITDA margins of 25%. Non-GAAP gross profit margins were 50% compared to a reported margin of 46% in the third quarter of last year. Many companies struggle to increase margins in this current inflationary environment and the ability for us to continue to show year-over-year margin improvement is something we're proud of. Given the macroeconomic situation, focus and optimization is key. To that end, we've reoriented our capital allocation towards future versus legacy projects. Specifically, we are focused on growing things like our brand business and improving performance on leveraging SingleTap on our DSP and deemphasizing portions of our legacy performance and reseller ad tech businesses. We've also prioritized resourcing our alternative App Store or hub business versus things like our prepaid content media business, which is less than 10% of our revenues and underperforming versus our expectations. Both of these dynamics are having a short-term headwind on pro forma overall top line performance, but the changes should continue to help both our margin profile and sharpen our focus by doing fewer things better. For our on-device business, while our overall devices were up 10% year-over-year, the sale of new devices in the United States was the lowest we have seen in any one quarter since fiscal 2019 despite it being the holiday season. We had expected device sales to be flattish based upon input from our U.S. partners. The disappointing holiday device sales were a primary driver of our quarterly results being behind our expectations. As mentioned earlier, we do expect this to be a temporary issue. In the U.S., our revenue per device, or RPD, of over $5 was up year-over-year. We have RPD work to do internationally as we did not see that same year-over-year growth as the mix of devices was indexed higher in developing versus developed markets where RPDs tend to skew a bit lower. We also made progress on our SingleTap licensing product. We continue to add partners, including being live with high-profile customers like Amazon and EPIC, the creator of the Fortnite franchise, utilizing SingleTap licensing, and we're also gaining momentum with Google as a distribution partner for us. While SingleTap licensing is not yet material in our overall results, the ramp is occurring and the progress is noticeable. We are now on a run rate of many millions of SingleTap licensing installs per month and have already done more SingleTap licensing installs so far in 2023 than we did in all of 2022. Bigger picture for SingleTap licensing, the product market fit is strong, and while we are excited about its prospects, I want to remind investors, it will take time to get to material revenue generation. Similar to the early days of our dynamic install business where we launched on one mobile operator with only a slot or two and then ramped and then added another and so on, it layered on nice sequential growth as we expanded the depth and breadth of carriers and OEMs. I expect a similar trend to emerge with our SingleTap licensing business. On our app growth platform, our AGP business, our business was roughly flat with the prior quarter, but down 24% year-over-year. The primary driver of the year-over-year comparisons are macro declines in ad rates and the consolidation of certain AdColony business lines. As mentioned earlier, winding down our Scandinavian reseller business as it's not strategic. We've also started consolidating the AdColony exchange business into our Digital Turbine exchange which means that some of our long tail publisher and partner revenues are transitioning. This is absolutely the right strategic decision for our customers and partners to deal with one versus multiple companies, but it's creating revenue headwinds and year-over-year comparison issues in the short term, but it will be tailwinds for us next year. And as a reminder, this primary strategic rationale for our AdColony acquisition was for the brand business. I was pleased to see sequential growth in our managed brand and private brand marketplace business in the third quarter as we have rebuilt the team, acquired one of our channel partners in Europe and sharpened the focus. It's early days, but we are now seeing our approach bear fruit in a very challenging macro environment for brand dollars. We're seeing strong growth from brands such as Starbucks, Chick-fil-A and Procter & Gamble, just to name a few that are spending more dollars with Digital Turbine. From a regional perspective, we continue to maintain a diversified global footprint. In the current quarter, we saw impressions relatively flat year-over-year in EMEA and APAC and modestly down here in the United States. Looking at ad placement types, we've maintained a balanced portfolio weighted between banner, interstitial and video. And across all ad formats and geographies, ECPMs declined between 10% to 20% year-over-year, which is roughly in line with the industry trends. And as mentioned earlier, we've made a number of enhancements in the current quarter to our ad tech capabilities such as ad rendering, new ad formats, new bidding methodologies, and so on. We spent the last year integrating the companies and are now finally building upon the integrations with new products and services. Early results are encouraging. So, the combination of the new demand and the expansion of supply types are allowing us to focus on controlling what we can to drive improved performance. Turning to the future, I want to spend a few moments highlighting our growth drivers. I mentioned both SingleTap licensing earlier in my remarks as a strategic growth opportunity, but also as we've mentioned on prior calls, we want to build a Shopify for app stores on device. We believe we're uniquely positioned with our on-device technology, our publisher relationships and our operator and OEM relationships. We have launched our first alternatives App Store with U.S. Cellular here in the United States leveraging our Aptoide investment, and it is generating revenue today. We anticipate launching with an additional Tier 1 U.S. partner in the current quarter. The carrier feedback has been impressive and supportive. We also believe the global regulatory environment will provide additional thrust to our vision. And to achieve this vision, there are some market pain points we're solving, including making it easier for app publishers to port their apps to a new platform, managing payments, installing the apps and managing the curation of the micro stores. I'm making it easier to port the apps and manage payments. We took that first step in accelerating our efforts in this area by taking an equity position in an alternative app store called Aptoide, which has approximately 250 million users, 10 billion downloads and over 1 million applications. Combining these capabilities with things like SingleTap will make installs easier for consumers. And we can further leverage our on-device position with Ignite to drive AI and machine learning to focus on the right apps to feature on the device versus the customer being overwhelmed by being dumped into a big app store with many millions of apps to choose from. The alternative app stores will also help us further leverage our ad tech assets with applications supported by in-app advertising revenue, but the app stores will also help us with our first foray into the in-app purchasing market which is a $100 billion global addressable market today. You'll see us refer to this business as our hub business and variants on the hub, whether it be things like Games Hub, App Hub and so on. And to tie all of this past, present and future together, because of the exclusivity and uniqueness of our position with our on-device and publishers, we're able to create deeper and more strategic relationships with our partners. To that end, we have secured many tens of millions of dollars of revenue bookings for next fiscal year across various verticals such as social media, weather, gaming and so on. We will provide the publishers with an alternative route to market, leveraging our on-device and SingleTap footprint, whether that is through our new App Hub, our dynamic installs, our DSP and so on. This has not just strategic benefit and validation of the DT platform benefit, but also financial benefit and derisks our future revenues. To accomplish all of these new growth areas, allocating resources will be key. I believe in the competency of our business has been our resource allocation against strategic priorities. And unlike many tech companies that overstaffed during the pandemic, we remain efficient and focused given the strong operating leverage of the business model, but even our efficient approach can be optimized further. We're committed to running a lean, sustainable and profitable business. And to that end, we've taken steps to reduce expenses. Our cash operating expenses decreased year-over-year, and Barrett will provide additional details in his remarks. In conclusion, we're disappointed in our near-term results, and I on improving that. We believe today marks the trough for our business as we believe the macro and micro issues we are facing are temporary and non-strategic in nature. Our outlook for the long term remains unchanged, but I know many investors are short-term focused, but we're confident in our future and confident in the investments we're making to drive long-term value for Digital Turbine. I want to remind investors that we have products that our customers want, a favorable regulatory environment and a profitable business model to drive operating leverage from our revenue and cost structure. We've been through many more difficult times in this in our past and are using these turbulent times to drive improved focus and optimization for the long term. Thanks, Bill, and good afternoon, everyone. Our Q3 results reflect our continued focus to deliver sustainable profitability as we make conscious efforts to expand margins and focus on what we can control during this challenging operating environment. Revenue of $162.3 million in the quarter was down 25% year-over-year. Revenue performance was impacted by deceleration in our advertising spending, which was greater than expected during the holiday season. Also, as Bill referenced, while we saw global devices increase year-over-year, we experienced material declines in U.S. devices, which have a greater overall impact given their higher revenue per device than our non-U.S. global operators and OEMs. In addition to the impact from the near-term macro conditions, we also continue to experience headwinds from our prepaid content media products. Our margin expansion efforts enabled non-GAAP gross profit margin on the platform to increase to 50% in Q3, up from 46% as reported in the prior year. Non-GAAP gross profit of $81.2 million decreased 18% year-over-year. Continued focus on margins enabled expansion year-over-year across both business segments. And as a reminder, while gross margin rates can fluctuate from quarter-to-quarter, we generally anticipate long-term margin expansion as we continue to execute on growth and synergy strategies. We continue to remain disciplined with expenses, especially in the light of the temporary worse-than-expected backdrop in the third quarter. Cash operating expenses were $41.3 million in the quarter, decreasing 3% from prior year and represented 26% of revenues in the quarter. Total operating expenses were $69.8 million, which compared to prior year. Given the challenging environment, we continue to examine all of our spending to ensure the best use of our resources. We have executed company-wide expense reductions to begin to rightsize the business for the current environment and to fund key strategic investments. We aim to reduce total cash expenses by 10% and are currently executing against this target in context with the market conditions. We expect that impact of these actions will become more fully reflected in our results over time and remain highly focused on operating efficiency. Now turning to profitability. Our adjusted EBITDA of $40 million in the quarter decreased 30% over prior year and our EBITDA margin of 25% compared to 26% in the same period last year. Given the inherent operating leverage in our business model, we expect the proactive expense measures we are taking will strengthen the platform when we return to growth and enable a greater portion of those dollars to fall to the bottom line. In the quarter, we achieved non-GAAP adjusted net income of $30.2 million or $0.29 per share as compared to $50.9 million or $0.49 per share in the third quarter of 2022. As compared to prior year, we incurred increased expense driven by rising rates and higher average outstanding debt on our interest expense. Our GAAP net income was $4 million or $0.04 per share based on 103.3 million diluted shares outstanding, and that compared to prior year net income of $7 million or $0.07 per share. Healthy free cash flow for the quarter of $29.9 million in Q3 enabled us to exit the quarter with $79.3 million in cash after paying down an additional $25 million in debt using free cash flows from operations to further deleverage our debt position. Our debt balance ended the quarter at $42.5 million drawn on our revolving balance, and our business continues to produce strong free cash flows as we would expect to pay down our revolver further. We continue to be confident in our balance sheet and our capital position, given our profit model, strong cash flows and access to a low-cost credit facility. While we expect these market conditions to be temporary, we are well positioned to resume growth when the macro landscape improves. Now let me turn to our outlook. As we consider the ongoing uncertainties in the macro environment, we currently expect revenue for full year fiscal 2023 to be between $660 million and $670 million and adjusted EBITDA to be between $165 million and $170 million and non-GAAP adjusted net income per diluted share to be between $1.15 and $1.20 based on approximately 104 million diluted shares outstanding and an effective tax rate of 25%. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Darren Aftahi with ROTH. Please go ahead. Two, if I may. So Bill, you mentioned you kind of called out financial mix outside of the macro is just on the device number, particularly in the U.S., that number coming in kind of lower being down versus kind of flat assumption. So I kind of have two questions regarding that. First one is really, how much visibility does that estimate have that's given to you? And my second question is, what is the underlying assumption for the March quarter on devices? And does that assume declines in devices and kind of like further characterize your carrier partner numbers they've given you? Yes. Yes. Thanks, Darren. Yes, so for the -- first, on the December quarter, yes, we usually take our forecast from our device partners in advance in our current -- on that past quarter, excuse me, we had already had visibility on the October numbers, but I think that our carrier partners were expecting larger holiday season and a little bounce back in Black Friday shopping from COVID and obviously didn't see that in some of their results. So, I think they were disappointed as well, although I won't paint all of them with the same brush. And then as far as the assumptions in the current quarter, we've haircut those. That's baked into our guide. And as I'm sure you're aware, the Samsung S23 was announced earlier, that will be launching later this month. And so, our expectations are that, that will be down from prior quarters. So, we want to bake that in our guide. And if it is lower than that, then there might be a little risk, but we've already baked some of that in. So there's upside to it, there will be upside to our guide. Great. That's helpful. And I'll just squeeze one more in. Your licensing partners on SingleTap, like you kind of spoke to kind of the scale of the downloads. I guess as you look further down the road, like how does your pipeline look even though the macro is weak? Is this something that people are chomping at the bit because conversion and efficiency or it's a back burner issue for them to kind of take on this product? Yes. The product market fit is strong. We don't have a problem convincing people that, hey, this is a more efficient way for you to run your business. Really, the largest issue we have are more dealing with last mile operational things. And a lot of the companies that we're talking to and working with have made their own cuts. And so getting them to work and get the data lined up and a lot of last mile operational issues have been the long pull there. But I would say the overall interest in the product, the opportunity to increase conversions and have a more efficient spend of the dollars is absolutely something that we're seeing right now in the market. Two questions on SingleTap. Since there's probably a lot of new investors that are new to the story, just on the challenges to the patent by IronSource, could you maybe give us a little bit of like a factual background as to how long there's been back and forth between IronSource, whether the latest round of challenges to enforceability has anything novel to it and some of the puts and takes around whether your strategic position would be maintained even if the patent was deemed unenforceable? And then I have a follow-up. Yes. Sure, Omar. So let me start with our view on SingleTap is that we have a moat around this business and the moat is not necessarily because of anything on the IP side. The moat is the fact that we've got many, many hundreds of millions of devices already deployed with SingleTap on them out in the field. And then we've integrated that with the ad tech around it. That's really difficult to do. And for investors that have been around our story for a long time will know that that's taken us many years to perfect and get this into now a sustainable business that we're excited about. So that's really the moat is I think that it's not just about the, okay, I can use the technology in the background to download an app. That matters. And to that end, we actually have two patents on SingleTap, not one and there was a ruling on one of the patents that we disagree with, and we're in the process of working through right now how to get that squared away. But the second patent is not impacted. So our view right now is we're going to defend our IP, and we're proud of our IP, and we're going to go after it. But I think the message I'd say I keep for investors is really one around the moat of getting the technology integrated in with the ad tech and the embedded base of devices. That's where I think the real secret sauce is. And again, just for investors that are new to the story, have these patents been challenged before several years ago? Or is this the first time this is happening? Yes. This is the first time this has happened. And it's actually the patent is not -- the Company that you referenced is not -- does not have a patent. It's actually coming from another third party. And then the second question is in terms of early learnings from SingleTap licensing, is there anything you can share about the economics of these early licensing deals? We realize it's still early stage, but wanted to get a sense of how you're thinking about the economics both in the next year and or so and going forward? Yes, we're going to have a variety of different business models with that, and it really is going to come down to a risk-sharing exercise with our partner in terms of do they want to share their incremental revenue with us or do they just want to pay us a SaaS fee to leverage the technology. And we see a combination of both. What we've basically guided investors and analysts to is to think about this business is getting a flat fee for every download that leverages the technology, although we'll have variations around the business model as we ramp and scale it. Can you give us a sense of how much of the 25% decline is from pricing and how much from volumes? And can you just talk about the trajectory on pricing because it sounds like you think pricing has stabilized at this point? Or maybe just talk like monthly what's happened with pricing would be great. Yes. Sure, Tim. Let me kind of break out our on-device business from our ad tech business. What we're seeing right now on pricing on the ad tech side is that's the major driver more so than volumes. Volumes were relatively flat from quarter-over-quarter. So the pricing I referenced in my remarks, 10% to 20% is across the board regardless of ad type or pretty much regardless of geography, whether that's banners, interstitials, videos or what have you. So, it's primarily a pricing story on the demand side. On the ODS side, the major drivers is not pricing. Our revenue per device actually went up from December of this past year, December of the prior year. So that's something we're proud of that we're able to hang in there on pricing. Issue there was much more around volumes on the device side. So, the reduction in volumes is really would hurt us from a macro perspective. Yes. So our expectation right now is we're in the trough. Our expectation is we're going to see some rebounding as we get into later parts of this year, but we're dealing with at the beginning of the year, a lot of advertisers thinking about their ad spends for the year. We're also seeing variations in verticals. I touched on some big brands that we're spending more dollars with us in my remarks. We're proud of that. But some of the gaming providers and gaming performance providers have pulled back and those kind of operating some headwinds and tailwinds against each other. Yes. I didn't hear anything. You talked a little bit about challenges with the prepaid content media. I didn't hear anything on the update on the Verizon and AT&T content media partnerships that we've talked about. So just an update there and when you sort of expect to get that segment back to growth? Yes. So I'm not going to make any comment on one specific partner on the call, Dan, here today. What I'll just say is we have some work to do. We've got a lot of interest from partners and doing a lot of different things on content media, but we're not where we need to be right now. It's a focus area for us to get improved. But at the same point in time, we're not prioritizing that above other things like the potential of things like Games Hub and getting our alternative app store things launched. But we've got some work to do there. We're not satisfied where we need to be and it needs to get better. Yes. Understood. Another one I've heard from investors lately. And I'm just curious -- and it's mostly an issue for other ad tech companies, I think, but curious if you're seeing any concerns. People are starting to talk more about the SDK run time changes and how that's created some challenges for the kind of mobile ad tech networks out there. And that might be driving some of the weakness that we've seen in recent quarters. Just curious if you're running into any challenges with that, as that gets rolled out to more and more devices or if there's any I think it would be confined mostly with the legacy AdColony assets, but just curious in general, what you're seeing anything there? Yes. So no, we're not seeing that as a headwind on our business right now. As you mentioned on the AdColony side, we are in the process of consolidating our exchanges. And so given the overlap of publishers in some cases and not in other cases, that's putting a little pressure on short-term revenues, but it's the right thing to do for our partners, not to have to deal with multiple exchanges. So I think that's something that will be a tailwind for us next year, but not right in the current quarter. What we're actually doing though is putting in a lot of different type of ad tech enhancements, whether those are new renderings, new bidding methodologies and so on, and that started to bear some fruit for us. And that's something I'm excited about because it's commonplace in the industry. And there are things that the legacy companies we acquired had not done. So our view right now is that will provide some nice thrust and opportunity for growth in our business. I wanted to follow up on your comment about helping launch App Store. You said one is live and another one is going to go live sometime this quarter. Can you help us understand like perhaps your goals by the end of the year, how many you think are going to be up, how big a business this could become? And what's the business model for apps to get paid on helping folks launch these app stores? Yes. Thanks, Tony. It's a business we're excited about. It's clearly early days. We just recently launched with our first partner. As I mentioned in my remarks on some of the macro issues, there is tailwinds, right? You've got a lot of operators and OEMs that are looking for new revenue streams in these environments, and this obviously provides that. So for us, we really see three revenue streams for us. It would be incremental opportunities. One is just being able to get a new way to get apps to the phone and get paid on CPIs for that. Another way is for us to extend our ad tech assets into more publishers on more devices. So that's a nice synergy from our acquisitions. But the third one and the one that probably has got the most attention right now, especially from a regulatory perspective is on the payment side. That's a $100 billion market today. And if you think about the marketplace where I paid a 1% from a Visa paid 3% from Amex and you're paying 30% with the current app store environment. So, our view is that's going to get disrupted. And that's just a when question, not an if question, and I think we've put ourselves in a really good position to go do that. And there's a lot of interest out there from a variety of stakeholders. So that's our first foray into it, and hence, the investment we took in Aptoide, who already has a lot of these capabilities built. So something we're excited about strategically early days, but there is a lot of interest out there. That's for sure. This concludes our question-and-answer session. I would like to turn the conference back over to CEO, Mr. Bill Stone for any closing remarks. Yes. Thanks for all joining our call today. We look forward to reporting on our progress against all the points that we made on today's call, and we'll talk to you again on our fiscal '23 fourth quarter call in a few months.

EarningCall_311

Good day, everyone, and welcome to the Dominion Energy Fourth Quarter 2022 Earnings Conference Call. At this time, each of your lines is in a listen-only mode. At the conclusion of today’s presentation, we will open the floor for questions. Instructions will be given for the procedure to follow if you would like to ask a question. Earnings materials, including today’s prepared remarks, contain forward-looking statements and estimates that are subject to various risks and uncertainties. Please refer to our SEC filings, including our most recent annual reports on Form 10-K and our quarterly reports on Form 10-Q for a discussion of factors that may cause results to differ from management’s estimates and expectations. This morning, we will discuss some measures of our company’s performance that differ from those recognized by GAAP. Reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measures, which we can calculate are contained in the earnings release kit. I encourage you to visit our Investor Relations website to review webcast slides as well as the earnings release kit. Joining today’s call are Bob Blue, Chair, President and Chief Executive Officer; Steven Ridge, Senior Vice President, Chief Financial Officer; and Diane Leopold, Executive Vice President, Chief Operating Officer. During 2022, we delivered earnings and dividend growth in line with our guidance, provided safe, reliable and affordable energy while demonstrating careful environmental stewardship, served our customers and invested in our communities, and made meaningful progress on our regulated investment programs focused on decarbonization and resiliency. I’ll begin by highlighting our annual safety performance. As shown on slide 3, our employee OSHA injury recordable rate continues to compare favorably with the Company’s long-term historical results as well as national industry and regional electric utility averages. However, our ultimate goal has been and continues to be that none of our colleagues get hurt ever. Next, on reliability, which our customers consistently indicate is their highest priority. In the past year, customers in our electric service areas in Virginia, South Carolina and North Carolina had power 99.9% of the time, excluding major storms. And it’s worth noting that Virginia reached record summer peak demand in August and all-time peak demand in December. As they do time and time again, our colleagues rose to the challenge and kept our system delivering without major or extended interruption during these demanding load conditions. The scale of our team and resiliency of our system were never more evident than during the December winter storm, when we also did not experience any major or extended service disruptions. Finally, affordability: Our rates continue to be lower than national and regional averages. As we discuss later, we’re very focused on ensuring that our customers are not priced out of the significant long-term benefits that will result from our decarbonization and resiliency investment programs. On that same theme, 2022 was a significant year in terms of advancing our regulated decarbonization and resiliency strategy. In Virginia, the State Corporation Commission approved several rider-eligible investment programs, including our offshore wind project, subsequent license renewals of our four nuclear units, our second clean energy filing of new solar and energy storage projects and Phase 2 of our grid transformation program. Additional rider-eligible investments currently under SCC review include new solar and energy storage projects and our third annual clean energy filing, and high-voltage electric transmission necessary to continue to serve growing customer demand and data center load. In South Carolina, we achieved our second best year ever for service reliability. In December, Moody’s upgraded Dominion Energy South Carolina’s credit rating, citing evidence of the Company’s “improved regulatory and stakeholder relationships”. In our Gas Distribution segment, we invested over $300 million, modernizing infrastructure that is safer, more reliable and better for the environment. We completed our LNG peaking supply facility in Utah, and we increased the number of our renewable natural gas projects in operation or under construction to ‘21. All told, our nuclear units produced about 50 million-megawatt hours of low-cost zero-carbon baseload power. That’s roughly 40% of our total generation production as a company. Our fleet’s performance continues to be exemplary, especially in periods of extreme weather, during which our stations provide vital stabilizing support to the grid and price stability in their respective regions. Our power purchase agreement in Connecticut saved customers nearly $300 million. In summary, the regulated decarbonization and resiliency investment opportunity that we’ve outlined on previous earnings calls will continue to play a key role in driving the long-term growth of the Company for years to come. Before transitioning to comments on the business review, let me also highlight progress around our sustainability goals. I’m pleased to report that through 2021, we’ve reduced Scope 1 carbon emissions from our electric operations by 46% since 2005 and Scope 1 methane emissions from our gas operations by 38% since 2010. Notwithstanding the strong performance, we recognize the need to look holistically at our company’s footprint, which is why during 2022, we expanded our net zero commitment to include all Scope 2 emissions and the material categories of Scope 3 emissions. These new commitments align with our focus on helping our customers and suppliers decarbonize. Finally, we increased the diversity of our workforce to 37%, an increase of nearly 4 percentage points since 2019, while also increasing our procurement spend with diverse suppliers to over $1.3 billion, representing 17% of our supplier spend, an increase of 4 percentage points since 2019. Now, let me turn to the top-to-bottom business review. I’m leading the effort with support from the full management team and in frequent consultation with our Board. We’re devoting all necessary resources to ensure that we thoroughly and methodically review every aspect of our business. When we announced the review in November, I indicated that we would be guided by the following principles as shown on slide 5. A commitment to our state-regulated utility profile with an industry-leading investment opportunity focused on decarbonization and resiliency; a commitment to our current dividend; a commitment to our current credit profile; and a commitment to shareholder value enhancement and to transparency. None of those principles have changed. We are proceeding with pace and purpose. And as a result, we’re able to provide additional commentary on how we believe we should optimally position Dominion Energy at the conclusion of the review, to create maximum long-term value for our shareholders. First, a focus on delivering durable, high-quality and predictable long-term earnings growth profile. We recognize the importance of executing consistently against any earnings guidance offered post review. Second, we believe it is critical to position our regulated utilities to earn a fair and competitive return on investment. We know that investors have choices about where they can confidently allocate long-term capital. Third, we know it is our responsibility to constantly look for ways to optimize the efficiency of our operations without losing sight of the absolute necessity of meeting high customer service standards. In recent years, we’ve driven down cost through improved processes, innovative use of technology and other best practice initiatives. We’ve included our O&M performance metrics in the appendix of today’s materials. As part of the review, we are evaluating what we can additionally do on costs within the context of the significant operational and cost efficiency we have achieved over the years. Fourth, we believe that our financial credit metric performance needs strengthening. We want to emerge from the review with the ability over time to consistently meet and exceed our downgrade thresholds even during temporary periods of cost or regulatory pressure. As part of the review, we’re analyzing the most efficient sources of capital to fund our growth programs while seeking to minimize any amount of ongoing external equity financing need. Finally, we believe it is important to affirm our commitment to the dividend. I’ll note here our announcement this morning that the 2023 dividend, subject to Board approval, will be equal to the 2022 dividend. We believe that it is important to achieve potentially over time and without reducing the dividend, a payout ratio consistent with our current 65% ratio. Since the announcement, we’ve spoken with hundreds of equity and fixed income investors and received valuable and direct feedback, much of which has affirmed our focus on these priorities. Investors have also understandably been focused on the go-forward earnings potential of the Company. Given that the review is still underway, we have and will continue to refrain from providing that guidance until the review is complete. I will say that the outcome will be informed by the principles and priorities I just outlined. We will continue to be deliberate in making ourselves available for input from the Company’s current and prospective capital providers. Let me now turn to address the Virginia legislative session. There is legislation pending that revises our regulatory model. In addition, there is legislation that would, subject to commission approval, provide for a passive equity partner in our offshore wind project. It is too early to predict the outcome of any legislation. We remain engaged with stakeholders in the process. In terms of timing, as shown on slide 6, the Virginia General Assembly is scheduled to adjourn on February 25th. The Governor then has until March 27th to sign, amend or veto legislation that has passed both chambers. In the case that the Governor amends or vetos a bill, the legislation returns to the general assembly for what is typically a one-day reconvened session on April 12th. At that time, the general assembly may vote to override a veto or accept or reject amendments proposed by the Governor. The Governor then has approximately 30 days to act on legislation that has been addressed in the reconvened session. Having a clear and definitive understanding of the future Virginia regulatory construct is a key input for the business review. Therefore, legislation timing will influence the cadence at which we’re able to share more details about the business review in the future. Steven will share some additional thoughts on investor communication in his prepared remarks. I know the business review is of paramount importance to our stakeholders. Let me reiterate my confidence that we’re executing a thorough, expeditious and comprehensive review with the goal of ensuring that Dominion Energy is best positioned to create significant long-term value for our shareholders, our customers and our employees. With that, I’ll turn it over to Stephen to address financial matters before I provide further business updates on the execution of our plan. Our fourth quarter 2022 operating earnings, as shown on slide 7, were $1.06 per share, which for this quarter represented normal weather in our utility service areas. These results were at the midpoint of our quarterly guidance range. Positive factors as compared to last year were weather, normal course regulated growth, the absence of the Millstone planned outage, absence of last year’s COVID deferred O&M and tax timing. Other factors as compared to last year were interest expense and share dilution. Full year 2022 operating earnings per share were $4.11 per share, slightly above the midpoint of our guidance range for the year. 2022 GAAP results were $1.09 per share. Here, I’d highlight one adjustment, which is described in Schedule 2 of the earnings release kit. In connection with the business review, management has reviewed the unregulated solar portfolio that reports to our contracted assets segment. These approximately 30 solar facilities, representing around 1,000 megawatts operate primarily under long-term power purchase agreements with third parties. Consistent with prior commentary, the Company no longer intends to invest in unregulated solar projects for purposes of generating investment tax credits or ITCs. As a result, the Company impaired the portfolio in the fourth quarter and recognized a noncash charge of $1.5 billion. Moving now to guidance on slide 8. Given the pending business review, we are not providing full year 2023 earnings guidance nor are we refreshing our long-term capital investment plans at this time. For the first quarter 2023, we expect operating earnings to be between $0.97 and $1.12 per share. Last year’s first quarter operating earnings were $1.18 and included $0.01 of benefit from weather. Positive year-over-year changes include growth in regulated investment, higher sales and higher Millstone margins. Negative changes include higher interest expense as a result of higher rates, as I will touch on more in a moment; lower DEV margins for certain utility customer contracts with market-based rates; a hurt from pension and OPEB as a result of 2022 asset performance; higher depreciation; the absence of solar investment tax credits; and O&M and tax timing. And just briefly as it relates to pension, I’d note that our pension funded status at year-end was 108%. Turning to slide 9, let me address electric sales trends. Weather-normalized sales increased 3.4% in 2022 as compared to 2021. Components of this growth include a slight decline for residential, as you would expect, with continued back to the office trend and higher growth for the commercial segment driven by data center customers in Virginia. For 2023, we expect to remain above our long-term demand growth assumption of 1% to 1.5% per year, as Bob will touch on more in a moment. Briefly on financing. Since our last call, we’ve bolstered our liquidity at DEI with an opportunistic long-term debt issuance of $850 million late last year and a 364-day term loan facility of $2.5 billion, which we closed last month. These financings provide incremental flexibility, including to address first quarter maturities, which are described in the appendix of today’s materials. We’ll refresh our financing plans pending the outcome of the business review. Let me share some color on two macro topics. First, higher interest rates. We maintain a level of floating rate, typically short-term debt at our holding company and operating segments, primarily to fund working capital as well as more permanent capital needs between long-term fixed rate issuances. This floating rate portfolio represents around 20% of our total debt or $8 billion. Since this time a year ago, we’ve seen our borrowing costs on this part of our capital structure increased by about 400 basis points. We will provide an update on rate assumptions, interest expense, hedging strategies and other mitigants when we conclude our business review. Another macro headwind is fuel costs. We have very clear cut pass-through mechanisms for fuel costs across all our utilities. We employ prudent hedging and mitigation strategies to keep fuel costs low while ensuring security of supply. In aggregate, as of December 31st, we have an under-collected balance of approximately $2.5 billion in fuel costs across the Company. We’ve included a slide in the appendix with these details. As we’ve discussed previously, we don’t want our customers to miss out on the significant long-term benefits of our decarbonization and resiliency investment programs as a result of temporary cost pressures such as fuel. We will continue proactively working with regulators to employ mitigation measures to keep any increase to customer bills as muted as possible. Turning now to credit, which Bob highlighted as one of our business review priorities. We continue to target high BBB range credit ratings for our parent company and single-A range ratings for our regulated operating companies. Over the last several years, we have taken steps to position Dominion Energy as an increasingly pure-play, state-regulated utility with a differentiated clean energy transition profile. And as a result, we’ve improved our business risk profile. Despite this meaningful qualitative improvement, our Moody’s published CFO pre-working capital to debt, one of the primary quantitative metrics used to determine our credit rating, has underperformed our downgrade threshold for the last several periods. Moody’s has indicated publicly that under the status quo, they expect that underperformance to persist. Living consistently below our downgrade threshold is not a place we want to be. As Bob mentioned, we want to emerge from the review with the ability over time to consistently meet and exceed our downgrade threshold even during temporary periods of cost or regulatory pressure. Achieving and maintaining that will require a meaningful credit repair considering both the size of our balance sheet as well as the substantially elevated regulated capital investment over the next few years. Finally, as shown on slide 10, we intend to provide a business review update this spring with final timing to consider the status of the Virginia legislative process. We would expect to use that update to discuss any changes to the Virginia regulatory model as well as next steps as it relates to the business review. That meeting would be followed with an Investor Day in the third quarter that would include a comprehensive update of the business plan. Let me turn to other business updates and the execution of our growth program. As I’ve discussed in previous earnings calls, the strength of our Virginia service area economy supports our robust capital investment programs at DEV. Two recent announcements have confirmed Virginia’s economic strength. First, PJM recently published its annual forecast of demand growth. The Dominion Zone continues to be the highest growth rate among all zones within PJM, covering 13 states in the District of Columbia. PJM projects the 10-year summer peak load to grow at a 5% annual rate. This growth, primarily driven by data center loads, which have been increasing at an unprecedented rate, will require significant new capital investment. Second, last month, Amazon announced its plans to invest $35 billion by 2040 to establish multiple data center campuses across Virginia. These new campuses will combine expandable capacity to position Amazon for long-term growth in Virginia and create an estimated 1,000 jobs. Data centers currently represent about 20% of our total sales in Virginia and have provided strong sales growth to date, a trend supported by these two announcements we certainly expect to continue. Our work continues to advance projects to bring both new and upgraded infrastructure to enable the continued connection and expansion of data center customers. For example, we filed for a new 500 kV transmission line with the SCC with an expected in-service date of late 2025. The submission included around $700 million of capital investment. Turning to offshore wind on slide 12. In December, the SCC approved the cost sharing settlement agreement developed in collaboration with key stakeholders, including the Office of the Attorney General and other parties. We’re very pleased to be extending our track record of constructive regulatory outcomes. As it relates to the project execution, it’s very much on track and on budget. We have continued to work closely with the Bureau of Ocean Energy Management and other stakeholders to support the project’s time line. In particular, we received the draft environmental impact statement, which started the 36-day public comment period that will close later this month. The draft, DEIS, was thorough and contained no surprises. Public hearings have already taken place, and we continue to work collaboratively with BOEM and all of the cooperating agencies. Advanced engineering and design work, which has allowed us to release major equipment for fabrication in advanced procurement and other preconstruction activities for the onshore scope of work. Project costs, excluding contingency, are currently 80% fixed and we continue to expect about 90% of the project costs, excluding contingency, will be fixed by the end of the first quarter. We remain on schedule to complete construction of the project by the end of 2026. We expect the EIS record of decision in late October of this year, slightly later than expected because of the DEIS timing, but still in support of our current project schedule. Next, our Jones Act-compliant turbine installation vessel is currently 65% complete. We continue to expect it to be in service for the 2024 turbine installation season. Turning to other business updates on slide 14. As part of our ongoing resource planning, Dominion Energy South Carolina is replacing several of our older generation peaking turbines with modern, more efficient units. These peaking units which often operate seasonally during certain times of day when the demand for energy is at its highest, play an important role in our generation fleet with their ability to go from idle to producing energy quickly. Modernizing this equipment will lower fuel cost to customers, improve environmental performance and provide reliability and efficiency benefits. These important resources are also critical to support the grid as solar continues to be added to our system. Construction activities will begin later this year for two of the facilities and the all-source RFP for a third facility is on track. On the regulatory front, we filed our 2023 IRP last month. Our preferred plan continues to be indicative of the potential for accelerated decarbonization and assumes all coal-only units are retired by the end of the decade. We look forward to engaging with all stakeholders on this planning process. Next, at our gas distribution business, we continue to see strong support for timely recovery on prudently incurred investment that provides safe, reliable, affordable and increasingly sustainable service including pipeline replacement efforts and expansion of service to rural communities. For example, in December, the Public Service Commission of Utah approved a general rate increase of $48 million, and an allowed ROE of 9.6%. In this constructive outcome, they also approved the continuation of the infrastructure replacement tracker programs and the costs related to our natural gas storage project in Utah, Magna LNG, which was placed in service at the end of last year and will be used to meet system reliability for customers’ gas supply in the Salt Lake City area. On RNG, we remain one of the largest agriculture-based RNG developers in the country. We have six projects producing negative carbon renewable natural gas and 15 additional projects in various stages of development. We’re also reviewing potential tax benefits available to RNG through the inflation Reduction Act. When we launched this business, we did so on the strength of the underlying project economics, and the very robust decarbonization benefit of agricultural renewable natural gas. Those investment criteria have not changed. If the projects are deemed eligible for tax incentives, we would expect to capture that value on behalf of our shareholders. With that, let me summarize our remarks on slide 15. Safety remains our top priority as our first core value. We delivered 2022 financial results that were in line with our guidance range. We continue to aggressively execute on our decarbonization and resiliency investment programs to meet our customers’ needs while creating jobs and spurring new business growth. Our offshore wind cost sharing settlement agreement was approved, which allows the project to continue moving forward on schedule and on budget. And the top to bottom business review is proceeding with pace and purpose. So just starting, Bob, with the business review priorities you kind of discussed in the prepared remarks and you kind of laid out on slide 5, specifically kind of on the dividend comment. Could we maybe try to parse through the awards here a little more closely? I mean, obviously, we understand that you guys are holding the dividend at the current level for obvious reasons and that’s obviously consistent with your support for the dividend. But I guess, what is the language around quote unquote potentially over time mean as we think about the payout ratio bounds in the near term. I guess, what do you mean by potentially? Could this mean a faster or slower trajectory to get to the 60% range? I mean, we’ve received a lot of inbounds on these three words. So, any sort of visibility you could provide would probably be a reprieve. Yes, sure. Shahriar, I appreciate that. As we said in our prepared remarks, slightly more detailed than on the slide. Our current payout ratio of 65%, to the extent that that were to go up, our expectation and plan would be to return to 65% without cutting the dividend. That’s consistent with what we said when we announced the review. We’re doing a business review right now. So, I can’t answer exactly what the payout ratio might end up. But if it is above 65%, our expectation is to get it back to 65%, without cutting the dividend. Got it. Okay. I guess, we’ll wait for additional color there. And then, Bob, you took large impairment on the solar projects. I understand the test was triggered by the decision to not stay on the investment ITC recognition hamster wheel. But what part of the impairment test did you actually fail? Shahriar, hey, it’s Steve. I can take that. So just to be specific, this has to do with our contracted assets solar portfolio. And there were really two primary purposes for the development of the portfolio. The first was to develop expertise in developing solar so we could employ that expertise credibly across our regulated footprint, which is what we’re doing right now. So, in effect, that task has been completed. The second was to generate investment tax credits. We believe given the attractiveness of our decarbonization and resiliency capital investment opportunity, the capital we’ve used in the past to generate those ITCs can be employed elsewhere to greater long-term shareholder benefit. So, the first sort of gating decision was, are we going to continue to invest in that portfolio for purposes of generating ITC? And the answer we’ve said is no. That led to a subsequent impairment test, where we looked at the carrying value or book value and we compared it to a series of discounted and non-discounted cash flows consistent with accounting guidance and ultimately determined that the fair market value was lower than the carrying value, and that led to the impairment. Okay. Got it. Got it. That’s helpful. And then just really quick lastly for me. Just from a legislative process standpoint, I guess, how should we think about the likelihood of slippage into a reconvened session? I mean, put differently, if you had firm clarity on March 27th, could we see the schedule accelerate? Thanks. Shahriar, it’s Bob. It’s way too early to predict what the timing of the Virginia General Assembly and any action on any particular bill, including ones that relate to us, may be. As we laid out in our prepared remarks, the general assembly is scheduled to adjourn on the 25th of February. And then the Governor -- bills go to the Governor at that point, or earlier once they’ve passed. And bills that arrive on the Governor’s desk with fewer than 7 days left in the legislative session, the Governor has 30 days to act on those bills. If he chooses to propose an amendment or veto a bill, then the general assembly, as you noted, comes back for a one-day reconvened session, and then they address those gubernatorial actions. So, I can’t give you any more clarity because we don’t know what the time frame on the general assembly may be. Once we do know something, that will allow us to address our own schedule. So just first on the credit comment. Could you -- you say you’re kind of both targeting high-BBB, but then also seem to imply kind of targeting above current thresholds, which I think your ratings are mid-BBB at the parent. So, could you just clarify, are you targeting the mid-BBB and above that? Are you targeting high-BBB because that’s a big difference? Yes. Hey Steve, this is Steve. I’ll take that one. So, on an issuer rating, we’re actually high-BBB at two of the three rating agencies. At Moody we’re BBB. Our objective is to maintain those targeted rating categories, and the downgrade thresholds, at least at Moody’s associated with that is 14% on the down and 17% on the up. As we mentioned in the call script, we intend to meet and exceed that downgrade threshold even in times of temporary pressures from cost like fuel costs and regulatory adjustments. And that has been one of the drivers of our underperformance historically relative to our downgrade threshold. So, we’re still targeting high-BBB. It’s where we are on two of the three agencies from an issuer rating perspective. And the appropriate downgrade threshold, at least from the Moody’s perspective, is 14%. Okay. And then just on the payout comment, just to maybe clarify that a little better, which I know at this point in the process is purposely probably -- purposely vague. Is it fair to say you’re saying that in the likely outcome your payout ratio will be above the 65% for a period of time, and then you’ll obviously get back and target to that? Yes. Steve, it’s -- I apologize for not giving you a specific answer. But what we’re saying is, to the extent that the payout ratio changes as a result of the review that if they’re -- an obvious point, if our EPS changes as a result of the review and the dividend remains constant as we have said it will, that changes the payout ratio. And what we’re indicating is if there is a change in the payout ratio, we’re going to get back to it, but without reducing the dividend. That’s the point that we’re attempting to make here. Correct. We’re in a business review. And as we have indicated in prior calls and this call as well, we don’t yet know what the outcome of that business review will be. So yes, it’s hypothetical as a good way of describing it. I just want to pivot a little bit, if I could, towards Millstone here, interesting backdrop here. Just wondering if you could provide us updated thoughts, what’s the status of state regional discussions around Millstone, how you’re thinking about locking in more of this market upside to the asset? Yes. Thanks, Jeremy. As we’ve talked about before, we believe Millstone is a great asset, and we believe the policymakers in New England are recognizing increasingly its value for them to meet reliability and any chance to meet the kinds of decarbonization targets that they may have. Our focus is thinking about ways that we can ensure the long-term viability of Millstone. And we’re happy to have conversations with policymakers about opportunities to do that. As we noted in our opening comments, the existing Millstone contract has been very good for customers in Connecticut in recent months and over the last year. We see the possibility of being able to take action with policymakers to give us the certainty we would need in order to extend the life of Millstone and have that valuable resource for New England for some time to come. We don’t have as yet a specific approach to that. But we’re certainly interested in engaging with policymakers on that. Got it. That’s helpful. And then kind of switching gears and realize I’m at risk of putting the horse ahead of the cart here. But as it relates to potential asset sales, was just wondering, does the solar impairment kind of a tip that you might look to sell this asset as part of the business review. And I guess, we’re at with news out of Black Hills this morning with regards to their thoughts on LDC sales. And so I was just wondering if you had any thoughts on what could potentially be or what could be prioritized in the sale process if you chose to do that? Jeremy, I would say that as part of the review, we’re looking at each and every one of our assets and Consistent with the priorities and principles that we’ve laid out on today’s call and supplement to what we provided on the third quarter call. That’s what will inform our ultimate steps as it relates to the business review to the extent that there is changes to business mix, which is, again, something we’re evaluating as part of review, but no decisions have been made. So, we’ll look at everything dispassionately to position the Company to provide the greatest long-term value to shareholders. Got it. That’s helpful. And just a real quick last one, if I could. If you might be able to kind of parse more finally what we might expect on 2Q business review update versus the 3Q Investor Day? Is the 2Q update really just an outcome of the Virginia legislation or potentially more updates on other elements of the plan? Let me do it from the reverse perspective, which is the Investor Day, we intend to provide a comprehensive business and financial update. It will effectively be at the conclusion of the review process. The spring update, which is going to coincide with timing around the Virginia legislative session, will give us an opportunity to comment on what, if any, changes occurred during the session that would impact Virginia, what our perspective is on that, and how that informs the appropriate next steps of the business review. Just, Steve, I think this may be in your wheelhouse. I just wanted some clarification on the impairment. And then how does it impact your base earnings? So, I know like that could impact your future earnings if you decide not to invest, I guess, that’s what you’re suggesting. But when I look at the Q1 ‘23 to Q1 2022 bridge on slide 8, there is a down arrow because of solar ITC. So, I’m just -- is there -- does the impairment impact your ongoing base business earnings? No. So, the impairment doesn’t change the revenue we generate under those existing PPAs. The impairment does have a slight impact on the depreciable life, because -- or the depreciation rather than the depreciable life, because the carrying value is now lower than previously assumed. The bridge is something different. The bridge, when we refer to that ITC, solar ITC, it’s effectively the lack of solar ITCs, consistent with the comments we’ve made on this call and previously with regard to pivoting that capital allocation elsewhere in our business. So, it’s effectively simply saying that a year ago, we would have had some solar ITC in earnings this quarter this year, we do not have that. So, the impairment is a different. It doesn’t have any impact on that bridge. Thanks. And then just one quick bookkeeping question. The Q2 time line that you mentioned for the business review update, is that the Q1 call, or like are you going to do another meeting or 8-K? Just any thoughts around that? It will depend a little bit on the timing, Durgesh. We do typically have our first quarter call in early May. It may coincide, it may not. That won’t keep us from sort of advancing the discussion around the business review when we have the information necessary to actually have that discussion. Just a couple of things to clean a couple of things up, and I apologize, the call cut out, if this is already answered. But the cap -- the go-forward CapEx that you had had associated with sort of that competitive solar adjustment. Can you sort of scale that for us and sort of the cash that you wouldn’t be spending into that going forward? Okay. And then, sort of a bigger picture question following on to Jeremy’s question, and I appreciate the fact that you’re in a strategic review at the moment. But just maybe even anecdotally, Bob, as you look at this, you -- I think Steve made some comments around the need for significant balance sheet repair, if we’re going to get above that 14% -- meaningfully above that 14% FFO to debt ratio. I think dividend [ph] cut is clearly off the table, given your comments, but could you maybe prioritize other options, even just anecdotally in your mind at this point as to how you sort of get back to that level? Yes. The best priority I could give you is that our objective, as we have already described is to strengthen the balance sheet, with the goal of using the most efficient sources of capital without -- with the ability to minimize external equity needs. Beyond that, Ross, we’re doing a review of every line of business. And once we’re finished with that, we’ll be able to outline the ways that we will go about addressing the balance sheet. Okay. I appreciate that, Bob. And then 2023 guidance, I think your comments were that you’re just -- you’re not going to provide it sort of for the full year given the strategic review. So, is that just should we expect sort of quarterly guidance going forward as we walk through the year? And can we kind of use Q1 guidance where we’re at as sort of a starting point status quo guidepost, and then make our own assumptions around where the strategic review lands to sort of get ourselves to a 2023 or 2024 number, or how should we think about that going forward? Ross, I anticipate we’ll be providing quarterly guidance as we go through the year. With regard to using our first quarter guidance as a guide, I would just say there’s a couple of things. On our third quarter call, we provided a pathway to our 6.5% growth in 2023, much of that’s not changed. There’s a couple of changes that you’ll -- that have impacted the first quarter. One is we walk through as much as $0.30 of solar ITCs. We’ve obviously made a comment about that. And it’s the lack of -- the run rate as well as the lack of the incremental is reflected in the first quarter. The other major change -- really the only other big change besides a little bit of tax timing in the first quarter that we wouldn’t -- we’d expect to balance out through the remainder of the year is interest rates, which effectively in the guide we gave on the third quarter call, suggested that interest rates up 2% to 3%. That was a $0.13 to $0.19 hurt or about $0.15 at the midpoint. Those rates have now gone about 4%, which takes that sort of 15-ish midpoint to more like $0.30. So the combination of the lack of solar plus the incremental headwind with interest rate is what informs the first quarter. I would note that over time, we expect that interest rate headwind to ameliorate as I think most people do, unsure exactly what the timing of that will be. But that should be somewhat temporary. Thank you. That will conclude our question-and-answer session. I’ll turn the call back over to management for any additional or closing remarks.

EarningCall_312

Thanks, Justin, and thank you, everyone, for joining us today for WildBrain's Second Quarter 2023 Earnings Call. Joining me today are Eric Ellenbogen, our CEO; and Aaron Ames, our CFO. Also with us and available during the question-and-answer session are Josh Scherba, our President; and Danielle Neath, our EVP of Finance and Chief Accounting Officer. Before we begin, please note that matters discussed on this call include forward-looking statements under applicable securities laws with respect to WildBrain, including, but not limited to, statements regarding investments by the company, commercial arrangements of the company, the business strategies and operational activities of the company, the markets and industries in which the company operates, and the future objectives and financial and operating performance of the company and the value of its assets. Such statements are based on factors and assumptions that management believes are reasonable at the time they were made and information currently available. Forward-looking statements are subject to a number of risks and uncertainties. Actual results or events in the future could differ materially and adversely from those described in the forward-looking statements as a result of various important factors, including the risk factors set out in the company's most recent MD&A and annual information form, which are available on the Investor Relations section of our website at wildbrain.com. Please note that all currency numbers are in Canadian dollars, unless otherwise stated. [Operator Instructions]. I will now turn the call over to our CEO, Eric Ellenbogen. Thanks, Kathleen, and good morning. Thank you for joining us. As we begin, I'd like to address our softer-than-expected second quarter results. I'm sure it's top of mind for our investors. This is primarily an issue of timing, which doesn't change the outlook for our full year guidance. Our second quarter results were impacted by certain productions that were expected to start in Q2 and have moved to Q3. We remain confident that we'll see an acceleration in the second half of fiscal '23 to achieve our stated targets for the year. And Aaron will provide greater detail in his commentary, and of course, we'll take questions at the conclusion of our remarks. Now turning to some of our recent initiatives. Over the past several years, you've heard me speak of the investments and upgrades that we've made in our creative endeavors. The product of those investments have now been visible in our new Peanuts content for Apple TV+ and also in shows like Chip & Potato, Go, Dog. Go! and Strawberry Shortcake, which are all on Netflix. But now we've achieved a new level with our latest Netflix series, Sonic Prime. In December, Sonic Prime, our most creatively ambitious animation project to date, premiered on Netflix with an overwhelmingly positive reception from fans worldwide. The series debuted in the #1 position for kids content, and it spent 3 weeks in the global top 10 on the platform across all demographics, and it reached the top 10 in 66 countries. And for those who don't know, the turnover in Netflix top 10 can be quite rapid, just a few days is considered quite an accomplishment. So 3 weeks in that ranking is quite exceptional. And it's safe to say that Sonic Prime is a bonafide hit with audiences around the world, and Netflix has already announced the drop of the next 8 episodes this summer. Simultaneous with the success of Sonic Prime, our global licensing agency, WildBrain CPLG, working alongside our partner, SEGA, has lined up a robust pipeline of Sonic Prime consumer product launches for this year, which will begin layering into our financial results over the coming quarters. As a reminder, we shared equal participation with SEGA on the Sonic Prime IP. The success of the Sonic Prime series on Netflix, along with Sonic's worldwide brand recognition, is leading to new deals, partnerships and licensees. And just to put that into context, the number of deals we've signed in the last 3 months is at the same pace as some of today's most successful properties in kids entertainment. We're just in the beginning stages of our Sonic Prime partnership, and we expect to see an acceleration in growth in fiscal 2024. Sonic Prime is a superb example of the inherent potential in reimagining and reigniting classic brands for today's audiences. And like Peanuts, the Sonic brand has a decades-long legacy with generations of loyal fans. And I'm sure that everyone listening today has a favorite show, a game or a comic that they love when they were young. And today, the opportunity to monetize such brands by tapping into that fandom and reigniting them for adults and kids to enjoy is sizable, and it's really a big part of what we do at WildBrain. We bring IP to life by delivering engaging content to kids and families everywhere, and we follow that with great consumer products. And at the very core of our DNA is IP and content, and we utilize all the creativity, technology and insights available to identify what resonates with kids and families so that we can deliver them fresh, exciting experiences to build new memories and connections. And we don't just do that with classic IP, we also build audiences for emerging IP. And in that vein, we partnered in the second quarter with Ukrainian producer Glowberry, to bring the popular Brave Bunnies preschool brand into our 360° franchise portfolio. Brave Bunnies was launched in 2020 and quickly gained a successful foothold with broadcasters. Season 1 is already enjoyed by kids on platforms in more than 80 countries. And the consumer products, Spin Master, launched a complementary toy line in Germany and Italy, and the brand's publishing program has seen its first book debut in Italy and Australia. We have been in discussions with Glowberry, tracking the brand for some time. But after the invasion of Ukraine, we accelerated that process. And while we recognize a need to help Glowberry in these terrible circumstances, it's also important for us that this was the right thing to do for our business at WildBrain. So we know what a good brand looks like, and we saw all the hallmarks of early strength with Brave Bunnies. It ticked every box with its ability to engage global audiences through content that could ultimately drive consumer products upside. Now as the majority owner of Brave Bunnies IP, WildBrain will lead global distribution of Brave Bunnies content who will coproduce season 2, with Glowberry and Spanish animation studio Anima. We're going to manage the brand under our franchise group and WildBrain CPLG will handle the licensing and merchandising worldwide, just excluding Ukraine. Turning now to our licensing and consumer products business. After quarter end, worldwide signed a U.S. partnership for Snoopy with MetLife Pet Insurance, which is the leading pet health insurance provider in the workplace, and we have thus rekindled a more than 30-year relationship between Peanuts and MetLife. Our Peanuts brand continues to attract high-quality partners like MetLife around the world. And additionally, after the quarter, WildBrain CPLG was appointed as master licensee worldwide for PLAYMOBIL, which is one of the most popular toy brands in Europe, and it has a brand recognition in the 80% to 90% range across Germany, France, Spain, Belgium and the Netherlands. CPLG will expand the PLAYMOBIL brand into new territories and consumer product categories, including merchandise, publishing, location-based entertainment and promotions. And this is just another example of how WildBrain CPLG continues to build its portfolio with high-quality partner brands, offering their expertise and a global turnkey solution. Similarly, just last week, the CPLG team announced the renewal of representation for Hasbro's portfolio of Kids brands in EMEA, plus the addition of Italy and India, with properties that include Peppa Pig, My Little Pony and Transformers. So we've established a very successful relationship with Hasbro across many of their most popular and iconic family brands in key markets, and we look forward to continuing to grow their brands in these new regions. Further afield, as of January 1, just a little while ago, our CPLG team in APAC is fully up and running with our newly expanded operations in China, Singapore, Taiwan and South Korea, with many exciting deals in development that we look forward to announcing in the coming weeks and months. Turning to WildBrain Spark, results continue to be impacted by the global slowdown in the advertising market, with strong direct ad sales by our team in the quarter led to a sequential improvement. And I'll remind you, it's important to recognize that the true value of Spark lies in its audience engagement and the insights that we capture from that engagement. Engagement is necessary to effectively reach kids and build brand affinity. And according to a recent survey from the Precise Advertisers Report, 84% of kids say that YouTube is the main way that they consume content. And kids continue to be highly engaged on our WildBrain YouTube network, which attracted over 46 billion views across 7 billion minutes of video in the second quarter of '23. And today, Spark has captured over 1 trillion minutes of watch time since launch in 2016. This converts to the discovery of new content, the sustained popularity of our proprietary and partner IP, and ultimately drives the much larger opportunities in consumer products. And with that, let me turn it over to Aaron, who will review the quarterly results in detail and provide for more context for our outlook for the balance of the year. Aaron? Thanks, Eric. Second quarter 2023 consolidated revenue of $140.5 million, reflected a decline of 8% year-over-year. Gross margins were up over 200 basis points as we recognize the synergies from the consolidation of Peanuts representation rights under our global licensing agency. This has been a journey 5 years in the making with Peanuts, and we will continue to benefit from this margin improvement for years to come. EBITDA was $26 million, down 5% year-over-year with the lower revenue, which was impacted by the start date of several projects within content production and distribution. Turning to each of our revenue streams, Content Production and Distribution was $56.1 million in the quarter, down 8% year-over-year. Revenue we expected in Q2 was impacted by start times for several projects which shifted to Q3. These productions have already begun, and we are recognizing revenue in Q3. Consumer Products were $57.4 million compared with $62.5 million in the year-ago period. Revenue was down in the quarter as we saw retailers pivot to reducing overstock that had built up during COVID. This was not brand-specific and was not specific to WildBrain, but was rather a broader industry trend. We also saw an FX headwind in Consumer Products in our Peanuts business. WildBrain Spark had revenue of $16 million, down 11% year-over-year, but saw a sequential improvement from the first quarter with strong direct ad sales. I will reiterate the real value of Spark is in the insights it provides to all aspects of our business and the engagement it brings to our owned and partner brands. Lastly, television revenue was $11 million in the quarter. We recorded a loss -- a net loss of $13 million compared to net income of $4.6 million in the year-ago period, primarily driven by higher change in fair value of embedded derivatives, higher SG&A, lower gross margin dollars and this was offset by higher foreign exchange gain. As we realized last quarter -- as we discussed last quarter, we have begun moderating our SG&A spend and are beginning to realize the returns on those investments. Free cash flow in the quarter was strong with positive $26.4 million compared with negative free cash flow of $0.8 million in the prior year period. Free cash flow for Q2 2023 reflected the increase in collections on trade receivables associated with the larger deals and timing on working capital settlements. Our leverage at the end of the quarter was 4.25. The leverage may fluctuate from quarter to quarter, but overall, we expect it to continue to trend down gradually over time through EBITDA growth and free cash flow generation. Turning to guidance. I want to spend a few minutes to provide context for why we're comfortable with our full year outlook. While the first half results were flat on the top line and down slightly on EBITDA, we are maintaining our full year guidance. Starting with revenue. Within content, we have a production pipeline which informs our view for the balance of the year. The animation studio has a full slate of over 15 projects contracted and in production. Within Consumer Products, we expect the inventory reduction trend we saw in the next quarter to normalize over the balance of the year. While we expect Spark to continue to be impacted by the pullback in the global advertising market, we will continue to leverage the insights generated by Spark to further the engagement in our owned and partner brands. On a consolidated basis, given the visibility of our pipeline, including deals and productions that are already underway, we are comfortable with our full year guidance of approximately $525 million to $575 million. Moving to EBITDA and our expectations for Cadence, we have a tough comparison from the prior year in the third quarter. But given the visibility on deals in our pipeline, we expect year-over-year EBITDA growth in Q3. As you'll recall, the fourth quarter in 2022 was lighter relative to prior quarters in 2022. We have moderated our SG&A spend and expect to leverage the investments we have made. We expect full year adjusted EBITDA of approximately $95 million to $105 million. Finally, we expect free cash flow to end fiscal 2023 similar to the levels we saw in fiscal 2021. I'll now hand the call back to Eric. Thank you, Aaron. So one question I'm often asked is, when are we going to see the results of the WildBrain turnaround really inflect in our financials? I thought it would be helpful to break this down. If you can divide the IP monetization and growth into 2 phases. Phase 1 is content activation, production and rollout. And we spent the bulk of the last 3 years getting the content right, and I'm happy to say we're seeing the results of those creative investments. I spoke to you about our latest Sonic Prime, but let me remind you some of the other brands we have in our portfolio, Caillou, Chip & Potato, Strawberry Shortcake, Teletubbies. And we partnered each of these brands with major streaming platforms and some are now in multiple seasons. We're also attracting incredible talent like Oscar-nominated producer, Bonnie Arnold, who spearheaded numerous long-term projects for us, including episodic series, TV specials and features. And measured just by awards, we've seen a 600% increase in nominations for our shows since 2019 and closed 2022 with 7 wins, including an Emmy. And getting the creative right with the very foundation to sustain long-term growth. And we've done that over the past 3 years, and we've seen associated production and distribution revenue in our numbers. So that's Phase 1, which incidentally continues rolling on a simultaneous basis as we continuously feed more projects into our production pipeline, some of which you know about and some of which we've not yet announced. And as we accumulate multiple seasons of shows, we add considerably to the library value and downstream distribution revenues. Phase 2 is when the content creates buzz and audience engagement that we can leverage into consumer products growth. That's where the rubber meets the road in terms of potential revenue generation. But it takes time, and we're just at the beginning of this Phase 2 for most of our brands. Yet if we look at Peanuts, we produced a significant amount of content for the brand, which will continue to propel the brand's growth, and we have a robust pipeline of more Peanuts content to come. And having built out the important global infrastructure of our in-house agency widen WildBrain CPLG, and with representation of leading brands like Peanuts, we now have the operating leverage to layer on additional brands at higher incremental margin, just as we're seeing with Sonic Prime. In the Sonic Prime series, which just premiered on Netflix, we're signing a lot of licensing deals through CPLG. And the bulk of those licensing results will not start appearing in our financials until fiscal '24, and that's with the brand that already has an existing global audience. We're still in the beginning stages with many of our brands, but we're taking measured, deliberate steps to get the content right and set ourselves up for future growth and consumer products. With our global presence, infrastructure and expertise, we have a global turnkey solution ready to take advantage of the consumer products growth across our entire portfolio of brands where the owners have a deep vault of IP. And with our creative talents and insights, we can identify, iterate and create compelling content that engages audiences. And using our multi-platform always-on strategy for content, we build awareness for brands through both short-form and long-form content. We do this not only for our own brands, but also for partner brands that seek to leverage our expertise. And once we build that brand awareness and engagement, we can ignite that last step in the IP life cycle consumer products. So in sum, we have a strong creative pipeline across multiple IP titles, with meaningful consumer products upside, and we will continue to execute for future growth across this 360-degree platform. Maybe starting with you, Eric. Obviously, you continue to execute really well across the entire business, so congrats on that. Always curious to get your updated view on how the content cycle is evolving in terms of your buyers and the end demand that you're selling into. And then maybe related to that, we are seeing kind of the delay in the timing of kind of some of the deliveries within the industry. Are there specific causes that are behind this with respect to shifts from Q2 or Q3? Or is this just generally normal cadence of the industry as you see fit? Thanks, Drew. So maybe I'll start with the second and more specific question first, and then work back to an overview of industry trends, which you and, I think, everybody on the call follows, but I can give the particular insight around how it affects our business. So what you're seeing here is really a timing issue. And as I have often admonished, we're not managing quarter-to-quarter in these creative endeavors, sometimes the show gets pushed. That's what happened, and it happens regularly. Overall, though, we are excited about our production orders. The show that got held in Q2 is now in full production. We're in Q3, and that will work its way through to our numbers. So there's nothing particularly macro about that. It just has to do with getting the creative right, getting the team and often there have been some delays. On the sort of larger picture of where things are going, it's a different story with each of the streamers. What we know is this -- and this has not changed. Kids content continues to drive not only subscriptions but also retention. And in particular, it's favoring known content. And fortuitously, we are rich in that known content, branded entertainment. And unlike -- which has happened over the past several quarters, you've seen a big throttling back in the number of shows that the SVODs are picking up. No change in spend by the way. Spend has accelerated, they're being more selective. And that's been good for us. We've gotten orders and reorders on our content, and I think we're exceptionally well positioned with the brands that we have. So it's a consistent move to known IP. Sonic is just a great example. And again, not so hard to predict the -- whether something is going to be a double or a home run prior to launch. We had a very good feeling about Sonic. The creatives were just so excited about, what was turning out a studio, it's the biggest thing that we've ever made at our studio in Vancouver, and now we're seeing the results. So it's great, and I think that we have more in the pipeline for the back half of this year. Okay. Super. Maybe one quick follow-up on that. When you look at your consumer products, Peanuts' obviously been a major driver of that in recent years. And it does sound like Sonic Prime will kind of layer on quite nicely over time. Just kind of remind us within kind of consumer products, is it still predominantly Peanuts? Or how are other kind of IP properties that you're monetizing, your own IP, flowing through? Okay. So Peanuts definitely predominates. It is a top 10 IP on a global basis. I think I've said before, which is a stunning number, Peanuts is about $2.5 billion at the consumer level globally. And this is for a property, and I've been doing this for a long time, remarkable at 75 years old soon. And for the longest time, until we got into the picture, it was sustaining those levels or growing without any films entertainment, and we've definitely switched that part on. So that is major. It gives us huge operating leverage, though. And over the past several years, we've consolidated consumer products representation of Peanuts across not only all of EMEA, but also importantly, it's an area that I'm pretty excited about what we're doing in APAC. Because if you want to think about it this way, Japan, incredibly, is about something on the order of over $1 billion of retail. That's just Japan. And you take that against all of APAC, which is something as -- when we inherited it, like $300 million. And so many of the -- particularly in the APAC market, and I would say Korea is a really good example, you see the success in Japan is a very good predictor of what happens across the region. So we're really stepping it up there and going to see growth. But at the same time, in the broader CPLG portfolio, we are seeing a growth now in Strawberry Shortcake licensing, Teletubbies licensing, our proprietary properties which are beginning to take off. And -- but that has to be seeded with the content and that sort of the Phase 1 that I talked about a few minutes ago, that we then began to see the results in the Phase 2, which is happening. I just want to also say that when we have something like Sonic Prime, we're a full partner in that. So we really consider that, in a way and it feels to us, very proprietary and we're very committed to the property. So that's one where we have a partner property in which the consumer products participation is beyond an agency role. I don't know if that answers your question, but some perspective on what we're doing there. I'll start where you left off there with respect to consumer products. I think, Aaron, I think the comments you made about the content -- timing of content in -- falling into Q3, I think gives us a sense of what the cadence could be. Is there any commentary you can make about the CP side over the next several quarters? I know that you had talked about some effects headwinds and some sort of inventory buildup related issues. Should we expect, given sort of the macro backdrop, sort of that CP line to be a little uneven in the near term? But obviously, perhaps some of the items you talked about, including Sonic Prime, starting to drive it towards fiscal '24. I'm just trying to get a sense of what kind of shape that we are looking at, recognizing the uncertainty obviously in the medium term. Aravinda, it's Eric, and I'll hand it over to Aaron and perhaps chime in afterwards, or if you have a follow-up for sure. Yes. Thanks, Aravinda. So first of all, on the -- I'll start a little bit about the content side. As I mentioned, we have significant visibility in that pipeline and the deals in our production and distribution pipelines. And we do expect to have sharp acceleration for that in the following couple of quarters here ahead of us. On the Consumer Products side, it -- we believe it can still be impacted from the industry inventory reductions, and that will take probably a couple of quarters for it to roll through. And Spark will probably continue to be impacted by advertising headwinds. But our pipeline is really strong, especially the Sonic and the content that we've seeded into Peanuts. And so in '24 and beyond, we expect that to considerably pick up. The one thing I will mention is buying was strong in the year-end period. It's just that retailers were clearing inventory. So it's not like everything just dropped off a cliff, it's just have this kind of onetime thing that needs to work its way through. Yes. Sorry. I think Eric spoke at the end, I didn't hear the last bit. But let me just -- I think what you're saying is generally clear. Let me just -- I'll jump into the second question. It's on the balance sheet. Can you sort of give us a sense of how we should think about some of the maturities that you have coming up both in June and in September? And then, I guess, connected to that, interest cost given the rate environment, how we should think about that. I know that you've hedged part of your term loan, what kind of rates we are thinking about net of that? Yes. So we hedged 125 -- USD 165 million of the Term Loan B., and so that's at 5.25. And the converts are at 5.875, and those are fixed. And we have 1.5 years, almost 2 years left there. We have really strong relationships with our lenders and we're very comfortable with our debt management. And so we feel very comfortable with where we are and on the ability to refinance that when -- as it comes due. A couple of questions. Just on the MetLife deal. I was wondering if you could give us idea of magnitude of the deal? Would it be similar to what it used to be a few years ago? David, obviously, we can't share the sort of specific breakout in MetLife, which in over the 30 years grew considerably. Interestingly, post MetLife, the business didn't take a dip but continued to grow. And I would just point that out because, fortuitously, we are so diversified in our licensee base that any one license kind of doesn't matter. And I think there was a lot of concern with my predecessors about like losing MetLife and what the implications would be and so forth, and that has had no effect whatsoever. That said, we're excited to be back with them. I can't go into the exact financials except to say that we are stake, not only in a MG but on the upside. So it is the deal that we've signed, unlike we never had a participation as an example in the sale of life insurance, this feels more like a traditional license where we are partnered with MetLife in success. Okay. All right. And then just a question on the cost saving initiatives. Is that primarily targeted towards SG&A? And can you give us an idea of the magnitude of that? Yes, David. Yes, so over the prior couple of years, we built an infrastructure to help us with our growth in CPA and content. And we feel very confident that we've put together that -- the appropriate level of infrastructure and systems. And so now we're going to harvest those investments that we've been making. And so that's why we feel very comfortable in the infrastructure we have now and we can moderate those -- that continued spending because it's now -- it's been built and it's in place. Eric, bear with me here. I know you always admonished me about sort of advertising around kids content, but we saw HBO-licensed content from Roku, of all places, recently. And it's interesting the way that Disney has rolled out its kind of lower AVOD tier. I mean Netflix is doing what Netflix is doing. But I'm just curious with kind of how the -- your comments clearly ring true on spend not flowing in the ecosystem despite all of them losing money. And I am curious, as we kind of roll out this new tiered product -- I never had a problem watching Ninja Turtles with advertising behind it. But how much can -- do you think that you can continue to expand the product lineup as AVOD incrementally becomes the area of interest and monetary spend from the streamers? So Dan, listen, advertising dollars follow views, and a great area of expansion for us has been fast channels and AVOD. And broad brush AVOD, it isn't it isn't as you well know, just YouTube. YouTube is the discovery mechanism. It is the on-ramp reviews. And I quoted like 85% of kids primarily watch YouTube. But they also heavily watched the SVOD services. And now since their parents pay the bill, they may be watching hybrid SVOD with advertising. So it's kind of a rebalancing of the market. And one of the things that's just kind of fascinating to me, and I'm sure you have some analysis on this subject, is that in the traditional cable model, about half the revenue came out of affiliate fees, which is indirectly consumer dollars and the balance came out of advertising. And I think when the shakeout finally happens, and it's happening, we're going to see a not dissimilar balance between sub-fees and advertising dollars, with a full shift to digital. Very full shift to digital. So I think we'll get rewarded by it. And YouTube is not the only player in town, we have deep experience there. And we continue to lean on Spark for amplification, for viewer insights and a lot of the data that helps us make decisions around content. I should also add that, that very data has been an incredible sales tool. And then taking content, Caillou is a really good example of where we just have these tremendous viewership numbers by region, by watch time, language, et cetera. And with that, ended up with a new series on Peacock, licensed library episodes to Warner's, and uniquely positioned, I think, with the kind of insights that help drive the IP and give us that really long tail. So I don't know if that answers your question around advertising, in particular. But I don't think it's a particular revelation on my part that advertiser dollars are going to follow views. And that's why I think Netflix as a singular example, is going to be quite successful in the advertising area. No, it does answer my question and it does make sense. I was just trying to get sort of your thoughts on the evolution of the market. But you unintentionally let me lead you into my follow-up, which is YouTube itself is now putting into fast aggregation. And so I wonder if that's a chance for you guys to improve brand recognition. And you've talked about this, probably [indiscernible], but I'll give you the platform anyway. There is an obvious shift in short-form video in the marketplace, whether or not they've been TikTok, who knows, but you guys have clear expertise there. So I'm just wondering on sort of the data and insight and sort of branding opportunity there. If you can kind of -- I know it's early, it hasn't really been launched yet, but just how you're thinking about potentially attacking that. Yes. So look, I think you know we're platform agnostic. Our content is everywhere. It's about ubiquity, and that comes in a couple of ways. Deep library, it really helps. It kind of reminds me of a cycle that happened in the music industry, Dan, where everything was about music publishing. And I wish I had bought music catalogs at that point, masters. And then all of a sudden, as all these platforms came in, it was all about the masters. That library is incredibly valuable. And the vault that we have, for example, against whether it's Teletubbies or Degrassi 14 seasons or -- like 13,000, 14,000 half hours that we have, that helps fuel that ubiquity. And so we can kind of share the wealth of that IP across multiple platforms, taken with brand recognition and fandom. And so it's the strategy that we're following. It's about brands, for sure. It represents an incredible asset and is essentially a proxy for marketing spend and gives us then a running start as we reinvent and relaunch these titles. So it's really not about the platforms. I think we're -- I don't want to say unconcerned or ignorant of them. But essentially, we found ourselves on every one of the platforms in every form whatsoever. So on fast channels on Roku, on Samsung TV, and like whoever comes along, we'll be there. I used to say that it's sort of like being an IP toll booth collector, it kind of doesn't matter what vehicle you're driving through, we collect the royalties and revenues associated with the traffic. And I still have that view, again, irrespective of platform. Got it. And while I'm sure I'm getting the hook here with the Grammy's music, I will ask on CPLG just a little bit, if I can. Aaron, maybe first to you. Yes, the toys have been -- was probably actually the strongest e-com category, at least domestically this holiday period, but there was major discounting in part due to the inventory issue that you referenced, but also I think maybe some price competition in this space. I know that there are some concerns out there that because of what happens not in '22, but in '21, that retailers overbought inventory, and so it feels like Q1 is still a bit of a clearance quarter. I think you called out a couple of quarters to kind of get through that. So I'm just -- want to get a sense of your comfort on your normalization question. And for you, Eric, within the toy category, don't get any started with the new Barbie for preschoolers, but there's clear category expansion. So I'm just curious on, with all of your expanded licenses, how you're looking at kind of attracting new audiences in ways that I think is starting to get a fresh look from the top down from all the brands? Sure. So yes, we do think that it could last a couple of quarters, as you said, as retailers clear. But what's important is a lot of what Eric talked about before, we're also in those new brands like Sonic and strong brands like Peanuts, consumers are going to -- are going to be looking for that product. And so they will have to reorder and place new orders for that type of consumer products. And so that's why we're confident going into '24 that it will start to rebound. . So it's interesting, in the toy category, and I won't get you started, Dan, this is amazing. Peanuts does not have a toy business. So all those couple of billion plus in retail sales without toy. So watch that space. And we haven't really had -- I hate the word toyetic, but a toyetic presence. But one of the things that is pretty terrific about the content that is being created -- and truly content first. It's not with an eye to consumer products, our creative groups, it's quite independently and it's just about making great shows. My experience is that the CP follows, you can't reverse engineer, you don't want to ever. And I think that, that is a gigantic white space and opportunity for the Peanuts brand on a global basis. As to -- and incidentally, we have a long way to go with Peanuts even in the domestic market, where, in my view, it's somewhat under-indexed for, as popular as it is, and we have the rocket of Apple TV+ behind us, which has its strongest presence in North America. So a lot of upside. We've got a long way to go with that particular brand, and as with the launch of our other brands. I'm not sure if that picks up where you're going with the toy market. But if not, I'm happy to clarify. No, that's helpful. I think I've used my allotted time anyway. So I'll be on the lookout, Eric, for Woodstock for infants. I appreciate all the color. And there are no further questions over the phone lines at this time. So I'll turn the call back over to Kathleen Persaud.

EarningCall_313

My name is Preben Orbeck, and I'm the Head of Investor Relations. With me here today is our CEO, Kjetel Digre; and our CFO, Idar Eikrem. They will take you through the main developments of the quarter. Our presentation today is a live audiocast, and you can download the slides from our web page. After the presentation, we have time for questions. Those of you who are following the audiocast can submit your questions on the online platform. Firstly, the overall message is that we have increased the top and bottom lines in the quarter from the same period last year, and that we are delivering above our financial targets. Our fourth quarter revenue was NOK12.5 billion, and EBITDA was NOK999 million, excluding special items, with a margin of 8.0%. We delivered NOK59.3 billion of order intake or 4.8x book-to-bill. Our backlog ended at close to NOK100 billion, providing a solid foundation for our growth targets moving forward. Secondly, we continue to progress well with our transition journey. The process for establishing the new subsea joint venture with SLB is progressing according to plan with expected closing during the second half of 2023. As mentioned, we have experienced a record high order intake in the quarter, of which almost 80% is related to Aker Solutions segments, excluding Subsea, meaning Renewables & Field Development and EMM. In terms of our ongoing recruitment campaign, I'm happy to share that we have now welcomed around 3,000 skilled new colleagues during the year across our organization globally. Thirdly, in terms of our outlook and recent developments, we believe that we are very well positioned for the future. We have spent the last two years preparing for the oncoming project portfolio and safeguarding the deliveries will be a key focus for the company in the years to come. Several of these projects will be executed through the alliance model, together with Aker BP and our delivery partners, a model that entails positive upside through incentive mechanisms. Let's now have a look at our full-year results. And as I said, I am pleased with our financial performance in 2022. Our key figures have improved significantly from the year before. We took several steps in 2022 to accelerate our strategy and position the company for the future. The year was successful on many fronts with solid operational performance and a strong order intake. Our main numbers for 2022 were a revenue of NOK41 billion, up from NOK29 billion in 2021, representing year-on-year growth of more than 40%. EBITDA, excluding special items, of NOK3 billion, or 7.3%, with earnings per share of NOK2.53. We delivered a record high order intake of NOK88 billion, equal to 2x book-to-bill -- 2.1x book-to-bill. This included several key wins across segments, both in our oil and gas business and within renewables and transitional solutions. Our order backlog was NOK97 billion at year-end, which is an increase of 98% from the year before. About 60% of the NOK100 billion backlog consists of projects under the NCS activity package with low risk and upside potential through incentives. Let's now move over to some operational highlights of the year. Overall, I'm very happy to see that our main ongoing projects are progressing well. Within our oil and gas portfolio, we have seen high activity levels and strong performance on our North Sea projects. About 2,500 people are currently working on the Johan Castberg FPSO project. Several important milestones have been met during the year, preparing the FPSO for departure from the yard in the spring of 2024. During the year, we have also had the successful delivery of the Njord platform upgrade, making it ready for another 20 years of operation. In Subsea, we have celebrated the five-year anniversary for the NCS frame agreement for subsea equipment with Equinor, and we have progressed well on projects such as the Tommeliten and Eldfisk for ConocoPhillips. In addition, our EMM business has delivered solid performance with healthy returns. Projects within renewables and energy transition accounted for about 22% of our full-year revenues in 2022. Jansz, the subsea gas compression project for Chevron in Australia is progressing to plan, reaching key milestones on 20% progress in the third quarter. The Troll electrification project is also progressing well, with fabrication of modules currently taking place at Stord. When delivered in 2025, it will result in CO2 emissions being reduced by almost 0.5 million tonnes per year, which represent about 10% of Norway's target for reducing its emission in 2030. We have also had high activity in our decommissioning and recycling operations. One example is the Valhall drilling platform, where we have achieved a 99% recycling rate for the complete platform. The steel from offshore platforms is of the highest quality and is therefore in high demand in the second-hand market, but also a key contributor to the circular economy with a significantly lower carbon footprint compared to production of new steel. Within offshore wind, electricity production has started from Hywind Tampen, the world's largest floating wind park where Aker Solutions is delivering 11 concrete floaters to Equinor. And progress is also good for Sunrise, the first HVDC converter station to be installed in U.S. Within CCUS, we are in the process of delivering the first phase of the Northern Lights carbon storage facility, as well as working together with Aker Carbon Capture for HeidelbergCement on their carbon capture facility at Brevik. Lastly, we have experienced high demand for our early phase engineering consultancy services during the year with about 150 studies performed. Of these, more than one-third were related to renewables and energy transition, positioning Aker Solutions for future projects in these markets. Let's now have a look at our main orders during the quarter. The Renewables & Field Development segment is where we experienced the largest order intake this quarter, in total NOK39 billion. This mainly relates to the Aker BP portfolio of projects on the Norwegian continental shelf that will be executed through the alliance model. Yggdrasil is the former NOAKA development, which consists of the Hugin A and Hugin B platforms. Hugin A will be the largest topside ever assembled inside the Aker Solutions' Stord yard area. At Valhall, Aker Solutions has been awarded the Valhall production and wellhead platform, and the Fenris unmanned wellhead platform as well as their substructures. We have also recorded additional intake through growth in scope on existing projects, such as the Johan Castberg FPSO. In the EMM segment, the majority of the order intake is related to modification work on the Aker BP portfolio, including modifications of the Valhall field center and Skarv FPSO to enable the planned tie-ins. This quarter, we also won the frame agreement for maintenance and modification from Equinor on the Johan Sverdrup. Lastly, during the quarter, we announced a letter of intent for the electrification of the Draugen field for OKEA. The contract worth around NOK2.5 billion was booked during the first quarter of 2023, and is expected to reduce the emissions by about 200,000 tonnes CO2 annually. In the Subsea segment, the order intake was dominated by the Aker BP portfolio with awards for the Yggdrasil and Skarv Satellites projects. The scope for both projects covers the subsea production systems, umbilicals and service work and will be executed in the well-proven alliance model with incentive upside potential. Furthermore, we were also awarded the long-term frame agreement with Petrobras in Brazil, with a combined potential of more than 30 subsea trees to be delivered over a five-year period. Only a conservative estimate has been included in order intake. As mentioned, several of the recent awards will be executed through the alliance model with Aker BP and strategic partners. We see substantial benefits of executing projects in this manner. Our integrated model starts already in the concept and FEED stages, where Aker Solutions is deeply involved in designing the projects and solutions. This also enables planning for capacity to safeguard execution, already very early in the process. In these alliance projects, Aker Solutions takes no lump-sum exposure and the majority of the procurement scope is already secured back-to-back at time of signing the contract with the customer. Furthermore, the contracts include escalation mechanisms for cost inflation and wages. Lastly, but very importantly, we have shared upside incentives for delivery on time and quality. So, to summarize this, we believe that working in alliance models where we are aligning around common drivers, enhanced value creation for both our customers, for us as a contractor and for our shareholders. And we already have a proven track record in delivering in these alliances together. Next, let's look at the tendering activity, where the outlook remains positive. Even after the record high order intake, our tendering value is strong at almost NOK80 billion with a good balance across segments. And moving forward, we expect international project sanctioning to increase. About half of the tender value relates to the Aker Solutions segments after the subsea JV transaction. I would also like to reiterate that we remain highly selective in what projects we take on board, especially within renewables, where the industry is still in early development. We are focusing on projects with satisfactory terms and risk reward balance, where we can deliver value both for our customers and shareholders. And looking further ahead, we see robust multiyear market growth across areas where we are relevant. A substantial step-up in capital spending is projected in both oil and gas and renewables moving forward, and energy security is very high on the agenda, particularly in Europe. And we believe that this will lead to high activity levels across our businesses in the years to come. This takes me to the general outlook for Aker Solutions. I'm pleased that we are delivering above our financial targets, while at the same time, growing our business and developing our organization. Looking ahead, we see very positive projections for our industry. We also see volatilities in the geopolitical landscape, which we follow closely. Aker Solutions is well positioned within the businesses we serve, with our all-time high order intake and backlog, of which the majority relates to Aker Solutions segments, excluding Subsea. We have secured record high visibility for our activity levels in the years to come. We have a strong focus on continuously delivering predictable project execution together with our partners, with low-risk models that have upside potential through incentives. Our tendering activity remains high across segments, which enables us to be highly selective on which opportunities to target, and we expect international project sanctioning to increase moving forward. Our financial position is solid, and the announced subsea joint venture will unlock significant shareholder value, as well as be an important contributor to our business through the 20% ownership in a larger and stronger subsea company. Overall, Aker Solutions will play an important part, both in the current upcycle and for the longer-term structural changes in the energy markets. The energy transition is a large undertaking that will require new ways of working across industries and in partnerships and with authorities in order to succeed. And in this, we will play an important role by continuing to develop Aker Solutions into a digitally-driven engineering and project execution company. However, within renewables, it is our experience that the current frameworks in -- the industry is operating under are not sustainable and change is needed. On the positive side, we see that governments set high ambitions for the generation of renewable energy. In Northwest Europe alone, the ambitions for new offshore wind power could imply a demand for more than 1,000 new turbines and substructures each year in addition to other infrastructure and services. However, this demand depends on the industry's ability to significantly expand current capacities, capabilities and develop more effective technical solutions. As of now, the profitability in the value chain is insufficient to ensure that the industry can make the investments needed to deliver on government targets. The renewables industry is dependent on authorities and policymakers, taking an active role in developing frameworks that increases predictability and improves commercial models to ensure industrialization and improving cost of clean energy. Together with our customers, we will continue the dialogue with authorities for necessary steps to be taken to meet the needs of the industry in driving the energy transition. And with that, I will hand it over to Idar, who will take you through the numbers in more detail. Thank you. I will now take you through the key financial highlights of the fourth quarter, our segment performance and run through our financial guidance. As always, all numbers mentioned are in Norwegian kroner. So, let me start with the income statement. The fourth quarter revenue was NOK12.5 billion, up from NOK8.7 billion a year ago. This was driven by continued good progress on our project portfolio across segments. The underlying EBITDA was close to NOK1 billion, up from NOK593 million a year ago, and the margin increased to 8%. The underlying EBIT was NOK712 million, up from NOK303 million a year ago. And the net income, excluding special items, increased to NOK529 million from NOK112 million a year ago. Earnings per share increased to NOK1.1. For the year overall, we delivered revenue of NOK41.4 billion, a solid increase from last year. EBITDA for 2022 was NOK3 billion, and underlying EBITDA margin increased to 7.3%. Earnings per share increased to NOK2.53. And as Kjetel mentioned, the Board has proposed to increase the dividend per share to NOK1 for 2022, equaling 40% of net income. Now moving to our balance sheet and cash flow. We continue to have a solid net cash position, which increased to NOK5.1 billion at the end of the quarter with a leverage ratio of minus 2.2x. Our liquidity buffer was NOK11.2 billion, where NOK6.2 billion was cash. For 2022, we delivered strong cash flow from operation of NOK4.5 billion. This was mainly driven by solid operating margins as well as the favorable working capital development. Our working capital improved to minus NOK4 billion at the end of the quarter, driven by high activity levels, year-end effects and prepayments on ongoing projects. We expect working capital to remain lower for longer and at the back of the recent large order intake and is expected to trend in the range of around negative NOK2.5 million to negative NOK4 billion. Capital expenditure for the full year was NOK714 million, or 1.7% of revenues. We have implemented measures to safeguard the delivery of the record-high NCS activity for the years moving forward, which will temporarily increase our CapEx to about 4% of revenues in 2023. The majority of these investments will be fully covered by the cost base of the projects and will, therefore, not have a negative impact on our cash generation. This is a one-off effect related to the all-time high activity level. And for the -- for next year's onwards, we expect CapEx to be more in the range of 1.5% to 2% of revenue. And after the quarter, we have successfully refinanced our revolving credit facility at attractive terms. It has been reduced from NOK5 billion to NOK3 billion and with maturity in 2028. Now over to the segments. For Renewables & Field Development, the fourth quarter revenues increased to NOK4.6 billion, up from NOK2.7 billion last year. For the full year, the revenue were almost NOK15 billion, up more than 40% since 2021. The underlying EBITDA in the quarter was NOK185 million, up from NOK108 million a year ago, and with a margin of 4.1%. We expect margins in this segment to remain around current levels during the first half of the year and gradually to start kick up in the second half of 2023 and into 2024, as recently awarded project will start reaching profit recognition. The order intake in the quarter was record high at NOK38.9 billion, or 8.6x book-to-bill. This was mainly driven by the Aker BP contracts on the Norwegian continental shelf, and provide a very solid visibility for activity level over the next several years. For the EMM segment, the fourth quarter revenue was NOK3.6 billion. This was up from NOK2.6 billion a year ago, driven by continued good progress on ongoing work. Full-year revenue was NOK12.2 billion, an increase of 32% from 2021. The underlying EBITDA in the quarter was NOK188 million, up from NOK92 million last year, and with a margin of 5.3%. Full-year EBITDA was NOK663 million, with a margin of 5.5%. The order intake was strong at NOK6.1 billion, or 1.7x book-to-bill in the quarter. The backlog is strong at NOK21.6 billion, which is around 2x the annual revenue in 2022 for this segment. EMM delivered 32% increased revenue in 2022, and we expect the revenue to continue at close to the 2022 levels also in 2023. In the Subsea segment, the fourth quarter revenue was NOK4.2 billion. Full-year revenues was NOK14.1 billion, representing 45% growth from 2021. The underlying EBITDA in the quarter was strong at NOK750 million with a margin of 17.7%. The margin was extra strong in the quarter, driven by solid operational performance and some contingency releases. The full-year EBITDA was NOK2.3 billion with a margin of 16.4%. The order intake in the quarter was strong at NOK14.2 billion, or 3.4x book-to-bill, and the backlog in Subsea is close to NOK25 billion. Now, over to order intake and backlog. In the fourth quarter, we delivered all-time high order intake of close to NOK60 billion, or 4.8x book-to-bill. Our backlog is now at NOK97 billion, which gives a very good visibility for activity levels in the next several years to come. About 60% of our current backlog refers to project under the NCS temporary tax regime or activity package. This is an extremely good situation to be in. And as Kjetel mentioned, our focus will be to continue delivering predictable and solid execution of this backlog to harvest upside potential and incentives. I would like to conclude by sharing some of our exciting ambitions for Aker Solutions moving forward, also after the close of the subsea JV transaction. Aker Solutions is in a very good position for growth and value creation. Secondly, through solid execution of our projects, we aim to gradually increase margins and this result in a target to generate about NOK1 billion of free cash flow on average annually, excluding proceeds and dividends from the subsea joint venture. The earnings and dividends from our share of the subsea joint venture will, therefore, come in addition to this amount. Our ordinary dividend policy will remain firm at 30% to 50% of annual net profit. The Subsea joint venture transaction is expected to unlock significant shareholder value, and I would also like to emphasize that the Subsea JV will be an important contributor to Aker Solutions' profit moving forward through our 20% ownership in a longer -- in a larger and stronger subsea company. In sum, I'm confident that Aker Solutions is in an excellent position to accelerate its growth and transition and to deliver solid, long-term shareholder value. Now, to sum up, in the fourth quarter, we continued to deliver strong financial and operational performance, and we have a solid financial position. And, for the full year, we delivered above our targets for revenue growth, order intake and cash generation. After a strong revenue growth of 41% in 2022, we expect to continue to grow our top line in 2023. We expect to see a full-year revenue up by around 15% in 2023. And at the same time, we expect our EBITDA margin to continue to increase in 2023 from last year. The outlook for the company and for our industry is very positive and Aker Solutions is in an excellent position to take advantage of opportunities ahead. Our first question comes from Erik Aspen Fossa in Carnegie. With strong growth in 2022 and '23, your 2020 to '25 10% annual growth rate indicates that growth will plateau from 2024 onwards. Could you elaborate? Yes. When we set our targets back in 2020, when we announced the merger between Kvaerner and Aker Solutions, we said and we communicated clearly that in average, we will grow the top line by 10% up to 2025. And based on a flat development in the first two years and a growth of 40% plus now and with another 50% growth, in average, we will deliver on the 10% growth, but it's flattening out due to the high activity level that we see over the next year to come, but we still see significant growth from 2022 into 2023. We will continue with questions from Erik Fossa. On EBITDA margins, they are expected to improve from '22 to '23 with many projects likely moving into margin recognition in 2024. Should margins continue to improve in '24? And what type of margins should we expect? Yes. Again, we have also said that we will gradually continue to sort of improve our margin over time, and that is the journey that we have -- we delivered on. And we have, in this presentation, also said that we expect that the margin will gradually improve going forward and from the 2022 levels that we saw of around 7.6%. Yes. Cash dividends is, of course, some that the Board have proposed to pay out a dividend for 2022 in 2023 and is NOK1 per share. Moving on to Lukas. A question from Lukas Daul in Arctic. If you can provide some more highlights and milestones on the closing for the subsea JV transaction? Currently, the filing has been performed in the relevant countries and those processes around antitrust procedures are different from country to country, but they are currently ongoing. Some of them will be handled fairly quickly, but others have a more a longer process. And it will, as we have stated and guided upon, be looking at the closing of the whole deal in the second half of 2023. In parallel with that, we are then working with the integration planning, looking at the organizational structure and also the way to actually physically integrate from day one later on in 2023. Yes. And just to add to that, it's all in line with what we plan for, and there is no sort of hiccup that we have seen so far. So, all going according to plan. Thank you. Moving on to a question coming in from Nikhil Gupta in Citi. Subsea margins were strong in second half. Can we expect current run rate as a normalized level going forward? Yes. As in Subsea, we have communicated that some of the uptick in the margins you have seen in the last two quarters is also related to a project that have reached 20% completion, and therefore, we have started recognizing margins and some contingency releases also in the fourth quarter. We communicated earlier on that the underlying margins is more in the range of 15%. An additional question here from Nikhil Gupta is on the CapEx side. When you say it will be absorbed by project, does it mean that you will be compensated for the CapEx? And can you provide some examples of CapEx items that can help safeguard project delivery? Yes. Short answer is yes. And to provide some more color on that one, the activity level that we are embarking on now is quite high, and we have identified several good business cases whereby we invest in equipment like cranes, multi-wheelers, camps and facilities instead of renting those. And then that is a win-win solution for us and the customer. We are saving costs for the customer, and we have a benefit of -- in the business case by investing in those instead of renting it. And the cost of that is fully charged to the project, and therefore, will not have a negative impact on our cash generation. And we are getting a modernization also, because part of safeguarding and making execution more robust is also to introduce new methods around digital solutions, robotized fabrication, et cetera, which makes the execution for the next two years, three years, four years, more robust, but also is a building block for our yards to enter into the renewables area, which follows. Yes. And these cases are definitely cases that then will improve our productivity during the execution of this project and again, a win-win situation for us and our clients. Thank you. Then we move on to a question from Haakon Amundsen in ABG. If you can indicate what EBITDA margins you imply in the NOK800 million future cash or free cash flow guidance on future [AKSO] (ph)? Yes. I don't think we should sort of go deeply into detailed guidance on margins other than what we have said. We will gradually increase the margin over time, and we expect to generate the NOK1 billion in free cash flow over time, all included in that one, including the lease payment from our leasing obligation as well. And then, just to highlight that on the slide, you will see NOK0.8 billion and I'm talking about the NOK1 billion. It's -- underlying, it's the same. It's just the time period we referred to, and we expect us to generate NOK1 billion in average for Aker Solutions going forward. And in addition to the NOK1 billion that we are talking about, we will, of course, have the, gradually, the earnings coming in from the joint venture after the closing that will also result in future dividends payout from the joint venture to the shareholders. And that will come on top of the NOK1 billion in free cash flow generation. Thank you. Moving on to a question from Christopher Mollerlokken in SpareBank. I assume a key risk for Aker Solutions going forward is delivering on the record-high backlog. Could you please elaborate on who you are working on -- how you're working to secure that you are able to deliver on time and on budget? I think if you look at our portfolio of projects in the different segments, we have many customers and more and more. These are the key ones that we know. And we know how to collaborate all our clients and particularly the key ones and those we have large portfolios with engage us very early. And just to run the example of Aker BP, where we have the largest portfolio of projects, when we're entering into this activity level, we are working in the alliance setup. We are engaged very early. We are part of not only designing the facilities, which then suits both us and the market around us, but we're also planning and preparing and safeguarding through actions that we take on frame agreements on standardizing on equipment by also locking up agreements with the sub-suppliers and also introducing the right kind of escalation. So, we have control of the project in a completely different way when we are actually pushing the button and entering into the execution phase. What we are focusing together again in the alliances around now is to actually keep the momentum to make sure that we are acting on a mature engineering basis, but then also executing all the different milestones, placing orders, getting over to the next phases, et cetera. So -- and we've been there before, so we know exactly what we need to do. Just would like to add that high-activity level that we now see is what we expected, and we have had actually two years to prepare for this since the activity package was announced in 2020. And all the safeguarding initiatives that I talked about is also part of this by recruiting people and the safeguarding measures that we have put into our CapEx budget going forward, and that will be covered by the project. So, all in all, we are well prepared for the activity ahead of us. One question from Martin Karlsen from DNB back to the CapEx side. Can you provide clarification on 2023 CapEx compensation, if it's received from -- if the compensation is reflected in the 2023 revenue and margin guidance? Yes. CapEx that we will execute in 2023 related to projects that will be in our early phase will have an impact on the working capital and will only have future impact in earnings and margins when we start profit recognition of those projects. So, in 2023, most of this will have its impact on the net working capital developments. A final question here on -- from Russell Searancke from Upstream is the mentioning of new 3,000 new skilled employees to prepare. And what do you think on the need for recruiting more skilled employees? Yes. As Idar said on an earlier question here, we have had two years to prepare. And after the merger between Kvaerner and Aker Solutions in the summer of 2020, we saw this uptick coming and that's part of our strategy. Then we also knew that we had both to grow the competence and the capacity of the organization all over our global setup. And that's what we have been acting upon. We also have a turnover which is normal. So, the net number is not 3,000. It's lower than that. We also want to sort of look at that number and see that we are attractive in the market, which then resonates with our strategy. So, that is really -- I'm really pleased to see that. In 2022-2023, we will continue some recruitment in the different areas to follow the activity level that we have in front of us. Excellent. That was the final question for today. Thank you all for listening in to this audiocast, and goodbye from us.

EarningCall_314

Good afternoon. My name is Chelsea and I will be your conference call facilitator. At this time, I would like to welcome everyone to the Envista Holdings Corporation's Fourth Quarter 2022 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] I will now turn the call over to Mr. Stephen Keller, Vice President of Investor Relations of Envista Holdings. Mr. Keller, you may begin. Good afternoon and thanks for joining the call. With us today are Amir Aghdaei, our President and Chief Executive Officer; and Howard Yu, our Chief Financial Officer. I want to point out that our earnings release, the slide presentation supplementing today's call and the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call are all available on the Investors section of our website, www.envistaco.com. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations. They will remain archived until our next quarterly call. As announced on January 3, 2022, we closed the divestiture of our Cabo treatment units instruments business for both 2021 and 2022. The results of this business are reflected as discontinued operations in our financial statements as required by generally accepted accounting principles. All references in these remarks and accompany the presentation to earnings, revenues and other company-specific financial metrics relate only to the continuing operations of Envista's business, except for the cash flow measures. During the presentation, we will describe some of the more significant factors that impacted year-over-year performance. The supplemental materials describe additional factors that impacted year-over-year performance. Unless otherwise noted, references in these remarks to company-specific financial metrics relate to the fourth quarter of 2022 and references to period-to-period increases or decreases in financial metrics are year-over-year. We may also describe certain products and devices that have applications submitted and pending certain regulatory approvals or are available only in certain markets. During the call, we will be making forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe, anticipate or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings, and actual results might differ materially from any forward-looking statements that we make today. 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, except where as required by law. Thank you, Stephen and good afternoon to everyone. We appreciate you taking the time to join us on today's call. I'm pleased to report that for the full-year 2022, the Envista team delivered another strong performance. Our core sales growth was up 4.1% for the full-year and achieved an adjusted EBITDA margin of 20.1%. This represents a 40 basis point of expansion in adjusted EBITDA over 2021. We experienced a slowdown in growth in some portions of our business in the fourth quarter. This was expected and primarily related to challenges related to the COVID outbreak in China, the geopolitical issues related to the conflict in Ukraine and continued depressed environment for capital equipment driven by higher interest rates and lingering economic uncertainty. As we reflect on our performance in 2022, as well as our future outlook, I think it is important to provide some context about the underlying demand for dental solutions. As I have shared on previous calls, my leadership team and I have spent a significant amount of our time in the field meeting the dental professionals in their clinics to understand what is happening in real time. It is not an overstatement to say that in 2022, we collectively spent time with over 1,000 clinicians across North America and Europe. What I hear consistently for private practice clinicians, group practices, institutions, as well as DSOs is that they are incredibly excited about the long-term prospects of the [entire market] [ph]. It sees significant opportunities to grow their business by investing in and expanding their specialty treatment offerings. They [indiscernible] the opportunities to enhance their capabilities, optimize their workflows, and digitize their offices. While clinicians are confident in the long-term, they remain mindful of the short-term headwinds driven by increased interest rates, the possibility of recession, general economic uncertainties, and global geopolitical risks. We continue to monitor patient traffic and appointment bookings for specialty procedures. So far, patient demand has been resilient, but we do expect continued volatility going into 2023. While the market remains dynamic, I think it's important to point out that Envista continues to deliver, despite the volatile global supply chains, geopolitical challenges and persistent inflation. Our culture underpinned by the Envista Business System, EBS, enables us to continuously deliver for our customers and shareholders. We leverage EBS principles daily to deliver our commitments. We quickly identify potential risks and opportunities and deploy EBS tools, such as daily management or problem solving process and value stream mapping to ease supply chain uncertainties, improve our operational capabilities, reengineer existing processes, and continuously drive productivity. Our ability to produce results in the face of uncertain times is a direct reflection of our continuous improvement and customer centric culture, our strategic differentiation and the continued transformation of our portfolio. Before I turn it over to Howard to discuss our fourth quarter results in more detail, I want to provide more color on the progress we made in 2022 against our long-term priorities of accelerating our growth, expanding our operating margins, and transforming our portfolio. In 2022, we made significant progress in driving commercial execution across our portfolio. Core growth in our orthodontics business was over 15% in 2022 as the Spark continues to deliver industry leading performance. We're pleased to announce that together with our orthodontics partners, we have started over 300,000 Spark cases around the world. In 2022, we nearly doubled the number of active Spark doctors and further improved utilization rates of individual clinicians, leveraging our EBS toolkit to systematically manage our funnel of new clinicians and develop standard work to flawlessly onboard [new Spark] [ph] customers. Spark is widely seen as the leading nuclear aligner system in the market and our disciplined execution allows us to capitalize on this promise. In addition to Spark, we also saw low single digit core growth in our traditional brackets and wires business in 2022. This growth was despite relatively weaker performance in China and Russia, which normally delivered outsized growth for our traditional brackets and wires. Our relative outperformance in brackets and wires is driven by our commitment to orthodontics and our ability to bring effective innovation to a mature industry. Our Damon Altima product continues to go rapidly by providing orthodontics with more precise finishing capabilities, allowing them to reduce share time and improve office efficiency. We have developed standard tools to bring customers through the ultimate journey and support them with targeted and effective education. Outside innovation, we are focused on our commercial execution. With over 40% of our brackets and wires business in emerging markets, it is imperative that we reinforce our position as the partner of choice for new orthodontics professionals in emerging markets. To that end, we are pleased to be the only multinational supplier to be chosen during China's orthodontic volume-based procurement process. This is a testament to the value that [indiscernible] brackets and wire solution provides in all markets. Long-term, we are confident in our broad orthodontics offerings. Our portfolio is differentiated and uniquely positioned to both benefit from and help drive further expansion of orthodontics treatments globally. Turning to our solutions for implant-based tooth replacements, we delivered solid mid-single-digit core growth in 2022, despite significant volatility in China and Russia, two normally important growth drivers for this business. Led by strong relative performance in Europe, our premium business continues to perform well. We benefited from our focus on providing comprehensive solutions for implant-based tooth replacements, and as a result, we are seeing strong growth in both digital solutions and regenerative materials. The Osteogenics business that we acquired in July of 2022 is off to a strong start. This business is now fully integrated and is starting to benefit from an EBS driven focus on execution and management. We expect our strong implant franchise to continue to grow at or above the market. Critical to our long-term strategy is our commitment to expand operating margins through disciplined execution and a focus on continuous improvement. As discussed in 2022, we delivered a 40 basis point of expansion of adjusted EBITDA margins. We achieved these results while making significant investments in our long-term growth and also facing both meaningful inflation, as well as intermittent supply chain disruptions. Each of our businesses are driving improvements in productivity, systematically aligning our prices and driving down operational costs. In addition, we continue to optimize our organizational structure to improve the customer experience while creating more flexibility to deal with uncertainties in the macro environment. During the second half of 2022, we eliminated more than $30 million of structure costs and continue to look for ways to further streamline our organization. 2022 was another important year in the transformation of our business. We further shifted the portfolio to higher growth and more profitable segments of dental where we can create and sustain competitive advantage. In 2022, we benefited from the divestiture of a slower growing, lower profitability treatment unit, and instrument business. This transition both improved our overall growth and profitability, while reducing our exposure to more cyclical segments at the dental market. Given the economic uncertainty, the transformation of our portfolio puts us in a much stronger position as we move forward. In the past year, we closed two strategically important acquisitions that positions us to drive digitization of the dental market, while exposing us to higher growth segments within the industry. As promised, our acquisitions delivered more than [$40 million] [ph] revenue in 2022 and will enable us to accelerate core growth long-term. While we're excited about the strategic moves that we have made today, we see opportunities to further improve our portfolio. We're committed to pursuing an active, but disciplined approach to capital deployment. We utilize an EBS driven M&A approach to manage our robust pipeline of inorganic partnerships and its investment and are actively cultivating new opportunities. I will now turn the call over to Howard to go through our fourth quarter financials and provide more details on our segment performance. Thanks Amir. On a reported basis, fourth quarter sales increased 1.4% to $660.8 million. Sales in the quarter were negatively impacted by 4%, due to foreign currency exchange rates, while acquisitions contributed 3.1% of growth in the quarter. Our core sales growth was 2.3%, compared to the fourth quarter of 2021. Our year-over-year growth reflects solid mid-single-digit growth in our Specialty Products and Technology segment offset by a slight decline in our Equipment and Consumables segment. Geographically, our developed markets grew 3.5%, driven by very strong growth in Western Europe, offset by more modest growth in North America. Taken together, China and Russia declined significantly in Q4, while other emerging markets grew low-single-digits. Our fourth quarter adjusted gross margin from continuing operations was 56.2%, a decrease of 90 basis points, compared to the prior year. The decrease in gross margin was driven by a combination of inflation and strong growth of Spark, somewhat offset by pricing. Our adjusted EBITDA margin for the quarter was 20.9%, which is 240 basis points higher than Q4 of 2021. Expanded margins were primarily driven by the EBS cost and productivity initiatives undertaken by our team throughout 2022. In Q4, we took further actions to streamline our organization to ensure that we can continue to expand margins while investing for growth. Our fourth quarter adjusted EPS was $0.52 from continuing operations, compared to $0.46 in the comparable period of the prior year. This represents a 13% increase year-over-year. Core revenue in our specialty products and technologies increased 4.5%, compared to the fourth quarter of 2021. Strong growth in Western Europe was offset by significant declines in China and Russia. Within this segment, our orthodontics business grew more than 15% year-over-year in the fourth quarter with Spark continuing to outperform. Our bracket and wires business grew low-single-digits in North America, but was dragged down by double-digit declines in China and a more modest decline in Western Europe. Despite the macro volatility, we are confident that our orthodontics business continues to outperform the market. Clinicians value our comprehensive orthodontics portfolio and our focus on the orthodontics specialist. Our implant-based tooth replacement business declined modestly in Q4 of 2022 versus Q4 of the prior year. This decline was primarily driven by double-digit decline in China and Russia combined. Outside of Russia and China, we delivered positive low single digit growth led by solid performance in Europe. Our regenerative business, including the newly acquired Osteogenics business continues to accelerate. For the fourth quarter, our Specialty Products and Technology segment had an adjusted operating profit of 20%. This was down 210 basis points versus the same period in the prior year, primarily due to Spark and our continued investment to drive long-term growth, as well as a decrease in sales in China and some currency headwinds. Turning to our Equipment and Consumables segment. Core sales in Q4 decreased by 0.9%, compared to Q4 of 2021. The decline in sales was due to the continued slowdown in equipment volumes offset by very strong growth in our consumables business. Our traditional imaging business declined double digits in the quarter with lower volume across most geographies. The lower growth was partially attributable to the strong performance in Q4 of 2021, driven by pent-up demand, as well as macro headwinds, including inflation, rising interest rates, COVID related challenges in China and geopolitical uncertainties. Further, we continue to deemphasize non-strategic geographies and concentrate our efforts in markets where we can build a long-term sustainable competitive advantage. This allows us to accelerate both growth and margins over the long-term. Our new DEXIS iOS business accelerated in the fourth quarter and we continued to make investments to set this business up for long-term success. We remain focused on expanding our reach and optimizing our global distribution. Clinicians remain very interested in investing in iOS solutions to help them improve their overall workflow. The DEXIS iOS solution is well positioned to outperform the market and we expect this business to be a contributor to our core growth in 2023 and beyond. On the consumables side, our Restorative & Endodontics grew more than 7% in Q4 with strong growth in most markets. Our team continues to execute and we are well-positioned to continue delivering results at or above market growth. As expected, our infection prevention business increased double-digits in Q4 of 2022, compared to the softer Q4 of 2021. The pandemic related spikes in demand and inventory levels have now normalized and we believe moving forward this business will grow more in-line with long-term market trends. Equipment and Consumables adjusted operating profit margin was 27.2% in the fourth quarter of 2022, versus 21.4% in Q4 of 2021. Our continued strong margin improvement was driven by a favorable sales mix and improved pricing, as well as our relentless focus on driving productivity. As we move into 2023, the inclusion of our more fully integrated iOS business will further support the growth of our equipment and consumables business, while also positively contributing to our profitability. In the fourth quarter, we generated free cash flow of $95.1 million and we ended the year with over $600 million in cash. For the year, our free cash flow was markedly lower than prior year, due to several factors, including the elimination of cash flows associated with discontinued operations, one-time transaction costs associated with our acquisitions and divestiture, the timing of tax payments and higher capital expenditures to support our long-term growth initiatives. As discussed in our last earnings call, we remain committed to our mid-term goal of delivering free cash flow in excess of net income. We made significant progress in the fourth quarter, driven primarily by sequential improvements in working capital. As we move into 2023, we remain focused on driving free cash flow, while continuing to invest in our long-term growth initiatives. Overall, our balance sheet remains strong and we have ample liquidity and the flexibility to pursue appropriate long-term investments. I'll now turn the call over to Amir to provide an update on our 2023 outlook, as well as some closing comments. Thanks, Howard. Looking forward, we remain confident in our strategy and long-term outlook. The dental market is attractive, underpenetrated and has a strong growth trends. Our business is strategically differentiated and we have proven track record of execution. We have conviction in our ability to deliver on our long-term financial targets of accelerating growth to high-single-digits and expanding our adjusted EBITDA margins to over 22.5% by 20 26. While we remain confident in our long-term targets, we are also mindful of the volatile macro environment. Despite the resilience of the dental market, we expect 2023 global demand to be choppy. Mounting expectations for a recession are likely to be heavy on the minds of both patients and clinicians. The geopolitical situation related to the Ukraine conflict and the associated risk of energy crisis in Europe, as well as China's COVID-related uncertainty and the consumer sentiment will create additional volatility. In-light of this macroeconomic background for 2023, we expect to deliver low-single-digit core growth and adjusted EBITDA margins of over 20%. We expect our core growth to accelerate throughout 2023 as China stabilizes and we benefit from the impact of our acquisitions. Margins are also anticipated to accelerate throughout 2023 as we benefit from the streamlining of our organization and cost reduction, as well as the shift of our portfolio mix toward higher margin products. Our full-year guidance reflects a balanced view of managing through a more volatile economics and environment, while continuing to invest for long-term growth, expanding our margins, and transforming our portfolio. We're pleased with our 2022 results and remain optimistic about the future of the dental industry. Moving forward, our priorities remain the same. We will accelerate growth, expand our operating margins, and transform our portfolio through active and disciplined capital deployment. Our intention is to be the leader in orthodontics, providing differentiated and integrated suite of treatment options, including brackets and wires and clear aligners. Our comprehensive offering empowers orthodontics to provide the best treatment modality for each and every patient. We will further accelerate our growth in implant-based tooth replacement by leveraging our premium implant franchise to provide full solutions across the implant workflow, including regenerative prosthetics offerings by utilizing our premier diagnostics and digital capabilities. We will continue to grow and broaden access to highly profitable and differentiated consumable business. Finally, we will leverage our strength in imaging and diagnostics to build digitally integrated workflows from diagnostics to treatment planning to execution for our clinical partners. Given the near-term macro uncertainty, we will lean heavily in our EBS culture to both improve execution, drive efficiency, and improve cost. We see significant opportunities to invest organically and inorganically in the dental market. We have the financial flexibility and management focus to further accelerate our growth trajectory via disciplined capital deployment and inorganic investments. The progress we made this quarter and in 2022 is a direct reflection of our culture centered and continuous improvement and commitment that we have to our customers and the dental industry. Our purpose is to partner with dental professionals to improve patients' lives by digitizing, personalizing, and democratizing dental care. We're excited about our continued growth journey in 2023 and beyond. Hey, good afternoon, Amir and Howard. Apologies in advance for any background noise here. Maybe just to start, Amir, it's a pretty dynamic environment right now as you alluded to in your opening remarks, but the dental consumer in the U.S. and I mean most of Europe seems to help you today I think a lot of us were fearing then others in dental might have talked more positively about demand visibility improving. Implants north or outside of China and Russia seem they are in okay spot based on your comments here today. I know it might not be perfect visibility, but you're really close to the end market as you alluded to. I really just like to start with getting your impression if you could expand further on your prepared remarks on the health of the dental consumer in the U.S. and Europe and their willingness to spend on discretionary dental procedures? Thanks, Jason. What we have seen is the patient demand remains resilient. Through all the reviews that we have done, visits that we have, what we have seen, the bookings remain the same and on specialty businesses, there is continuity around patient traffic. The challenges and the macro perspective is to continue to see softness in China that has started in Q4 and we have seen that to continue in Q1 and volatility that we see in Russia seems to persist. In large imaging equipment is also – and there's tremendous amount of pressure from investment by large DSOs opening new offices, as well as the interest rate and inflation related. We expect Q1 growth to be muted, but as we go further through the year, we're going to see a faster growth through 2023. In the long run, we feel confident that this industry has tremendous amount of runway. And our capabilities to manage through some of these volatilities have proven and become commodities a lot stronger as we get to a more of a stable situation. All right. Thanks for that. Maybe then on – if I pivot over to the part of the guide here, I thought the EBITDA margin guide here was pretty solid guys considering you had the [profit headwinds] [ph] from VBP. Howard, would you be able to help us think through the magnitude of those VBP headwinds you're absorbing? What EBITDA margin might have been without those pressures? And then also along that margin vein, can you speak to where we're at with Spark in terms of its impact on EBITDA margin profile in 2023, whether you think about that in absolute terms or in terms of incremental margin? Sorry for throwing a few in there together, but thanks again for taking the questions. No problem, Jason. So, as it relates to VBP, let me go ahead and provide a little bit of quick framework here. For us, our China business on the specialty side is about 100 – actually a little bit over $175 million, a $100 million or over $100 million in the implant side, and over $75 million on the ortho side. Remember that most of our business we focus is on the private sector. That's about 70% of our collective business there and that's a faster growing segment we see that as being more opportunities to differentiate with innovation. VBP is primarily impacting the public sector. And so, of course the goal of VBP as we know is to reduce treatment costs and therefore expand access overall. DSOs will certainly be involved in it as well. And at this point, we do expect a little bit of spillover into the private sector. So, as it relates to the outcome of VBP and where we sit today, implants, it's a national program, the bidding is complete, and it's being currently rolled out. Envista, our brands have won in both categories as well. And so, we expect that it's going to be reasonably favorable for us as it relates to being a selected vendor, but recognizing of course that the pricing on that side will probably be about a 50% drop. On the ortho side, much smaller so far, VBP has only impacted about 15 provinces. We think that it's less than 10% of the collective market there. We were, as Amir said in the comments, the only multinational selected to win on the bracket and wires side. We think that the pricing there is going to be a headwind of about 35%, roughly. And in both these cases, we're reasonably pleased with the outcome certainly being selected there. Your next question around margins, maybe I'll address the Spark question. Spark is currently in investment mode. Clearly, we're seeing the momentum and are very encouraged by our growth on that business. And so, we'll continue to invest there. For the duration of 2023, I think we're going to continue to be in investment mode. Clearly, that business is dilutive to our margins today. We think that longer-term that we can get the margins up above fleet average, but today it is dilutive and will be likely for the duration of 2023 as well. The one thing that we have seen that certainly is very encouraging as it relates to our investments is that quarter-over-quarter sequential productivity and the automation investments are paying off. And so, we're continuing to see that improve quarter-over-quarter. I think, you know if you do the math on that, I'm going to say it's roughly about 70 basis points, maybe a little more than that, could be. And so that's – take it somewhere around $20 million plus. Hi, guys. Thanks so much for the question. I guess my first question is just, sort of maybe if you could talk a little bit more about the underlying trends that you're seeing in the first quarter so far? I know that you just obviously talked about China, but maybe focusing more on North America and Europe. Yes. Happy to do it. Thank you, Elizabeth. We have to talk a little bit segment-by-segment. In orthodontics, what we have seen, that continuation of expansion of our Spark business remain consistent. Quarter-to-quarter, let's give you a little bit of a feel, Q4 versus Q3, we had about a 25% step-up. And we're not seeing anything that changes our view so far on that continuation. Bracket and wires in North America and Europe continue to perform, but in emerging markets, specifically China and Russia, we haven't seen yet any major trends or change in trajectory as we saw in Q4. Give you a little bit of a feel, China is a double-digit decline for us in Q4, and Russia was very volatile quarter-to-quarter and that hasn't really changed in walking through January. In the implant side, outside those two geographies, we have performed well and continue to perform well and it is getting operational and our commercial execution is getting better. As you recall, if you go back a couple of years later ago, we decided that we have to make some improvement and changes in our go to market activities around commercial execution in Europe. The outcome of that has been a continuous improvement. We're doing the same thing in North America and in U.S. And we think with those changes, we're going to see a continued progress as we move forward toward 2023. A consumable business at a high-single-digit growth in Q4 and really outperformed the market. Howard talked about the IPS and that business now we have a lot better visibility and a sell-in and sell-out and we think that's going to be a positive approach as we move forward. And last part of our business, we haven't yet seen any change in the imaging side of our business as we walk into the Q1, but I want to highlight a couple of things about imaging. About one-third of that business is services and is annuity business and continuation of what we have been doing in the past several years. And iOS, as Howard mentioned, we have seen a step-up quarter-after-quarter and that step-up continues throughout Q1. Putting all of that together, what we expect, a slower ramp throughout the year, specifically the front part of the year, and as certainty come into our focus in China, we expect to see higher growth, higher margin as we walk throughout the year. That's very helpful. Thank you. I guess as a follow-up, I would also be curious about your comments and maybe this is more for Howard. About the sensitivity of the operating margin guidance that you just gave us to the, sort of macro growth. Obviously, with the low-single-digit core guide, if we were to get to the, sort of [indiscernible] that, sort of how do you see that potential flexibility there? Yes. So, Elizabeth, we are always looking for continuous improvement. Even when we have softer top line, we're going to continue to EBS and look to improve our efficiencies, productivity as well. As Amir indicated in the prepared comments, we did some pretty substantial actions even on the structural side in the second half and continue to fine tune that in the fourth quarter as well. And so, you can see and expect us to do what we need to operationally still protecting obviously the long-term growth drivers for us. We mentioned that in the context of Spark certainly, but in other areas where we have innovation that will drive growth further in the future. We're going to continue and invest there, but as it relates to operations and ensuring that we get the productivity gains certainly that will be a focus, a fundamental tenant of EBS and one that we continue to deploy year-over-year. Thank you. Good evening, guys. Two things stood out to me in the quarter guys and I want to ask on both of them. One, your Western European growth is strong again. This is second quarter in a row that I think your three-year compound annual growth rate, so not even a stack growth, just your compound annual growth rate over a three-year period now up into the upper single, if not low-double-digits. I think over the last couple of quarters that acceleration sounds like it's timed pretty well to some DSO wins you've had with Spark over in Europe. So, one, I mean, is there anything – what can you say about the underlying market, I guess, ex-Spark in Western Europe? Is the consumer demand there for dental services still solid or is it more outperformance on your part? And two, how to think about that European growth then once you anniversary through a couple of those DSO wins in the back half of this year? Does that come back down? Does that normalize the, kind of that end market growth or can you sustain, kind of that elevated growth? Thanks, Jeff. So, the simple answer is a lot of it has to do with execution. But let me just walk you through why we feel confident that that growth is going to continue. As you recall, if you go back and I'll walk you through both implant, as well as the ortho part of our business. We started a very systematic approach and geography by geography. Training a small number of orthodontists carrying them to ramp and then we move to the next level and the next level and countries such as Spain became really a poster child for us of how do you go systematically change the business and create a sustainable growth over time? You mentioned DSO, yes, it is a factor, but it's a lot broader [indiscernible] Western Europe is a lot broader than DSOs. If you look at the number of individual practitioners that they have signed up to our program and they're ramping up. That is a very wide implementation and execution plan. And it wasn't only the product, it's training education after sales support, as well as what we call digital clinical success capabilities that we put in place. We took that model, we went to the next geography, and we replicated from Spain to France and so on and so forth and we're beginning to see that momentum taking shape, geography by geography, and we have a lot more room to go in the European side and specifically on ortho side. Our bracket and wire had always performed well. We always had a great relationship with orthodontist in Europe and that has given us the opportunity to open the door to show him additional capabilities to make him successful. And we have an incredible team on the ground that also really plays an important role and partners that really they see this company as their own company. They see the product, they have a responsibility to show other peers what products can do. On implant side, as you recall, I mentioned that before, about two years ago, we really changed our go to market activities. We had some challenges around customer experience. We consolidated a lot of our order and management contract activities, just to give you a feeling that two-year time period, we had close to about 350 people in [Prague] [ph] and we built the Envista Prague Center based on continuous improvement, daily management, and standard work, it consolidated with 15 different languages, really changed the model of our customer experience from a low call 1 to 1 to a more of a broader holistic approach. And our implant at the outcome has continued to perform every quarter positively. On [indiscernible] the consumables side, we have such a small share in the consumable in Europe. The team has done a great job creating a heat map again using the standards of EBS, take a look at geography by geography, partnering with distributors, understanding dynamic on the market, putting training and supporting place, and we have continued to gain momentum and gain share. So, what you see in Europe is a broad performance across all of our businesses. And we are confident that that is going to continue to grow. We're replicating some of those capabilities in U.S. And we're hoping that you will see the same momentum in U.S. as we go through 2023 and 2024. Hopefully that gives you a little bit of a perspective and our approach, and we're confident when we make those comment about 2025, 2026, we feel confident that push that we're taking is going to pay-off in the long-run. All right. That's very helpful. Thank you, Amir. And then the other number that really stood out to me is that Endo/Resto number up 7% in those two businesses. Unless I'm missing something in my checks, I don't think the market's growing nearly that fast. So, how much of that is share gains for you versus how much is pricing? And it seems like that business has stepped up at least if I use your [E&C margins] [ph] as a proxy that your pricing efforts really kind of picked up in the second half of 2022? So, as you anniversary some of those mid-2022 price increases, how are you thinking about price increases in 2023? Can you support the same level of price increase again in 2023 or just how should we think about that? Thank you. Great. Let me just answer the first part of the question. Again, I want to give you a little bit of perspective background. We had changed our inventory management, our sell-out and sell-in. We have tremendous amount of insight on what is taking place on the ground. We change the compensation of our team and sell-out. We put a whole set of marketing program around education and training. If you look at our traditional consumer business, we didn't have a whole lot of new product to offer. If you look at what we have done in the past six months and what is ahead in next 12 months, it's just a revamp of that business completely. High margin, really well-executed, well-differentiated, we think the consumable business has an opportunity to be a major factor in our growth and margin profile going forward. And combination of exactly what you touched on, price and why we feel confident that prices that we have put in place is not across the board is not geography-by-geography. It's very specific and targeted when we have had innovation, when we have had differentiation. And we think in 2023, we're going to have a whole set of new product categories in that space that gives us an opportunity to ask for premium and customers would see the value of what we put in place, but as across the board, just answering the question, do we expect the same pricing to stay in 2023 as 2022? We think it's going to be a little bit muted. We did not count on across the board price increases, but we have and continue to see price increases as I mentioned around innovation and then we are differentiated. So, we don't think this is going to be a radical change going forward from what we have seen in the past. We're confident that that mid-single-digit to high-single-digit in our consumable and now that we have IPS in a more of balance format is something that we can maintain going forward in the long run. Thanks, guys. Good afternoon. Howard, maybe I'll just start with a rough bridge on some of the moving parts. So, for Spark, we're talking about a 300 basis point contribution to revenue growth in 2022. Maybe if you want to comment on that, but more importantly, is that a good assumption for 2023, maybe 250 bps to 300 bps to revenue growth? Maybe you could talk about the contribution from price this year, Amir, based on your comments just to Jeff's question, maybe that lands around 100 bps? And then the offsets, right, VBP, is that 100 bps the other way, imaging is that 100 bps the other way? Maybe if you could just talk around some of those major categories, the headwinds, the tailwinds, and anything else that I'm not supposedly calling out to, sort of arrive with the low-single-digit core revenue growth, please? Yes. No problem, Jon. As it relates to Spark, what we called out was that our innovation Spark being included in there would generate in excess of 200 basis points. I think that we've done well ahead of that in 2022. In 2023, we anticipate Spark, as well as some other innovation to help drive over 250 basis points of that growth top line. Keep in mind that when we talk about margin headwinds and things like that, that Spark is again currently dilutive to our fleet average as it relates to margins. And so, we continue to work through that, but long-term, we expect that to be north of the fleet average. And so, there is a little bit of a counter impact there. As it relates to pricing this year, we had in excess of 150 basis points for the full-year of pricing. A lot of that coming as Jeff had asked earlier coming by way of the equipment and consumables business. And so, we think that there will continue to be a tailwind associated with pricing broadly. Now, of course, that's before VBP and as we indicated earlier, we think that VBP can be upwards of $20 million of impact that obviously would be both the top line and a margin impact. And so that probably is about 70 basis points going the other way as well. And so, hopefully that provides a little bit of the math and the modeling for you. Yes, that's great. And maybe just a quick tack on to that, Howard, that was great color, when we think VBP going into [2024] [ph] obviously that sort of normalizes, what about imaging? Is your imaging business you're going to focus on, call it some core opportunities, you sort of reset the base maybe 2H 2023 is a good way of thinking about it where the drag, sort of diminishes at that point in time, the back half of 2023, maybe that's a component of the accelerating revenue growth throughout the year and I just got a quicker question? Yes, Jon, you’re absolutely correct. So, we took some very specific action that has started in Q2 of 2021. We decided that we are just going to participate in areas that we really are differentiated and we can ask for price premium and also it was more of an integrated to the overall offering that we have rather than competing on a point solution. So, we have continued through that process in Q3 and Q4, and we think that you have seen the performance and the margin out of consumable and equipment side, a good part of that is attributed to the changes that we have done and redirecting investment, redirecting our resources to areas that it has higher growth, higher margin over time. But your assumption is correct that we expect this business to, kind of normalize in second half of this year and new base and new starting point in 2024, but I want to add us to – I mentioned that before that one-third of this business is services and annuity business. That is going to continue. And that iOS is going to become part of our core growth in Q2. We're seeing momentum. That's another add to this business that we think the market is under penetrated. We have a really good product. We have a great distribution relationship, brand. And I think that's going to be an add-on that we can count on in order to be able to bring this business back up in a different format that we have had it in the past. Got it, got it. Very helpful. And then just the second question, admittedly some annoying modeling questions, but when you guys say greater than 20% adjusted EBITDA margin for 2023, I mean I think you did 20.1% in 2022. And so, are you saying flat? Are you saying modestly up? Are you saying up, but less than the 50 bps to 75 bps that you maybe usually target on an annual basis? And then the last one would just be the accelerating revenue growth to throw a dart at a starting point. Clearly, it's got to be pretty modest 1Q, but is it still in the green to start the year? Thanks guys. Maybe I'll answer the margin expansion question first. And first of all, Jon, as you know, I mean when we spun and became a public company, we had committed to 50 basis, 50 basis points to 75 basis points of margin expansion. I think over the three plus years that we've been a public company, we've delivered over 450 basis points. And so, certainly, margin expansion is one of the things that we look at and remain very focused in on. That said, I mean, there's quite a bit here as it relates to unpacking a lot of the macros and the uncertainties going into the year. And so, we want to be prudent as it relates to what we lay out for the EBITDA margin. And so, we did 20%, just north of 20% in 2022. We're committing to do that at a minimum here in 2023 as well. And then maybe at your second question as it relates to core, look, we're going to – we see that our growth is going to accelerate through the year. Q1 is challenging. I mean with all that's going on in China and Russia and the macros, I think that we want to be prudent and say that it will build throughout the year. We expect Q4 to be very strong. It's not going to impact our normal seasonality. We see Q2 and Q4 as being the largest revenue quarters of the year, but certainly Q1 is going to be challenging. Hi, good afternoon. Thanks for the questions. Maybe just building on Jon's question, just in terms of, Amir, how you're thinking about the long-term targets? Is your thinking around timeline change at all for both realizing the accelerated growth, as well as margin improvement just given the near-term uncertainty in the market? And I wanted to get a better sense of, kind of what you're looking for to drive improvement over the course of 2023? I'd imagine China is probably a major factor in that, but some of the pressures that we're seeing on equipment, the VBP impact, those take a little bit longer to, kind of annualize. So, if there's any other, kind of specifics that you think you want to highlight in terms of cadence over the course of the year that would be helpful. Yes. Thanks, Nathan. We put those targets back in Q1 of 2021. We had made a series of assumptions. The assumption that we are going to meet some challenges along the way our clear aligner is going to continue to grow that 3x target that we put out there. We knew that margin is going to improve over time. Nothing that we have seen in the past 12 months really had changed our view that those targets that we communicated in 2026, high-single-digit, 22.5%, north of 22.5%. Nothing that we have seen has changed of view toward that. And momentum that we saw in 2022, specifically with some of the challenges in Q4, despite up all of that coming in producing result that we have produced gives us the confidence that fundamental capabilities that exists in this company around continuous improvement remains alive and well. So, walking into 2023. We got exactly as you highlighted some of VBP challenges, Russia, China, we have contemplated that. We made the assumption that these lingering issues are going to stay with us. They're not going to quickly go away. We develop a set of scenarios from best case, a worst case scenario, soft landing. And what we think that mid-single-digit growth above 20% EBITDA is something that it is achievable. If we have upside, we will see as we go through the year to see how the market evolves, but based on visibility that we have today, based on the information available today, we think targets are really achievable. The continuous improvement, cost reduction improvement in our margin is just in our DNA. We're going to continue to do that regardless of what we see in the environment. And we have plenty of opportunities. You just saw that what we did with Howard communicated in Q4. We have a year ahead of us, plenty of opportunities to become better in what we do to build a better relationship with our customers, to improve our commercial execution, and to march down the path of long-term strategy of digitizing democratizing, personalizing, this industry, make a meaningful difference and we're committed to it. We have method and tools to be able to execute on. I think with that – sorry, I think with that. [Multiple Speakers] Yes, really appreciate it. So, thank you very much. Appreciate your interest in Envista and we look forward to connecting with you at future events. Thank you. Thank you ladies and gentlemen. This does conclude Envista Holdings Corporation's fourth quarter 2022 earnings results conference call. We appreciate your participation.

EarningCall_315

Greetings, and welcome to The Container Store Third 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. Good afternoon, everyone, and thanks for joining us today for The Container Store’s third quarter fiscal year 2022 earnings results conference call. Speaking today are Satish Malhotra, Chief Executive Officer; and Jeff Miller, Chief Financial Officer. After Satish and Jeff have made their formal remarks, we will open the call to questions. Before we begin, I would like to remind everyone that certain matters discussed in today’s conference call are forward-looking statements relating to future events, management’s plans and objectives for the business and the future financial performance of the company that are subject to risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are referred to in The Container Store’s press release issued today and in our annual report on Form 10-K filed with the SEC on June 2, 2022, as updated by our quarterly reports on Form 10-Q and other public filings with the U.S. Securities and Exchange Commission. The forward-looking statements made today are as of the date of this call, and The Container Store does not undertake any obligation to update their forward-looking statements. Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation schedule of the non-GAAP financial measures to the most directly comparable GAAP measure is also available in The Container Store’s press release issued today. A copy of today’s press release and investor deck may be obtained by visiting the Investor Relations page of the website at www.containerstore.com. Thank you, Caitlin, and thank you all for joining our call today. I’ll first discuss the highlights of our fiscal Q3 performance and Q4 expectations, and then update you on our strategic initiatives. Jeff will then review our financial results and outlook in more detail. As we anticipated, the third quarter continued to be impacted by ongoing macro-related headwinds, which led to a decline in customer traffic and transactions year-over-year. However, we are pleased to have delivered both top and bottom line results above our expectations, thanks to our incredible customer service, compelling Holiday Shop and Preston product offering. We also benefited from a slight pull forward of our transform with Elfa event. Consolidated net sales declined 5.6%, and we delivered adjusted earnings per diluted share of $0.08 compared to $0.28 in the prior year. We remain encouraged by the performance we continue to drive in Custom Spaces. On a comparable store sales basis, Custom Spaces increased 2.1% compared to the prior year as a result of strength in our Preston and Elfa offerings. General Merchandise on the other hand, decreased 7.1% on a comparable store sales basis to the prior year, which once again reflects customers pulling back on their discretionary spending unless they’re provided with a compelling reason to shop. This was evident during our Q2 back-to-school event and remains the case in Q3. For example, our customers responded positively to our Holiday Shop, which featured an incredible assortment of stocking stuffers and holiday wrapping. However, they were less engaged with our more traditional kitchen assortment, which was featured at the front of our stores. Despite the softness in general merchandise categories, our stores continued to provide an air of excitement delivering exceptional service for our customers, resulting in a retail Net Promoter Score of 80, an increase of 2 points from the second quarter. Before I provide more detail on highlights from the quarter, let me briefly touch on the Q4 backdrop assumed in our outlook. As you saw from our Q4 guidance, we assume an intensification of the macro headwinds that we saw in Q3. This assumed intensification includes a further decline in General Merchandise and a decline in Elfa Custom Spaces as a result of customers purchasing fewer spaces. There are also 2 unique to the quarter headwinds reflected in our outlook. First, last year’s 2/22/2022 promotion, which supported the launch of our new branding campaign Welcome to The Organization resulted in record sales driven by a significant marketing investment. Jeff will discuss in more detail by not anniversary in this event, we expect a headwind of over 200 basis points to sales growth in the fourth quarter. In addition, we anticipate a headwind of over 200 basis points in the fourth quarter from the discontinuation of the Closet Works wholesale business, which will continue to experience through Q2 of fiscal year 2023. As a reminder, we strategically discontinued the wholesale business to make our premium wood-based offering Preston exclusive to The Container Store. Our priorities in the near-term will remain focused on profitability and positioning The Container Store for healthy long-term growth on a path to $2 billion in revenue. We will remain diligent with our expense management, while continuing to invest in our strategic initiatives, including new store growth, and infrastructure investments focused on strengthening our foundation and enhancing our capabilities for the future. Now, let me turn our discussion back to the third quarter, and the progress we continue to make with our initiatives focused on deepening our relationships, expanding our reach and strengthening our capabilities. First, on deepening our relationships. As I mentioned, we are motivated by the level of customer engagement we continue to cultivate, especially during moments in the quarter. While we were pleased with the customer response to a curated holiday assortment of stocking stuffers and gift wrap, which performed better than general merchandise overall, we weren’t disappointed by the results of our front-of-store kitchen spotlight and the opportunity to infuse more innovation, freshness and seasonal relevance next year. With that in mind, and with the recent addition of a new Chief Merchant, we plan to refine our assortment in all categories to consistently create way to surprise and delight our customers with fresh and complementary product to the storage and organization category. For example, we see an opportunity to expand on our complementary consumables in the home fragrance and plant-based cleaning categories, which are resonating extremely well with our customers. Additionally, we are thrilled with an early customer response to the expansion of our private label Everything Organizer Collection in late December, which has been featured at our front-of-store spotlight. This versatile line of clear solutions was designed with professional organizers, who helped us develop unique solutions like our new stackable egg drawer, which includes the drawer for easy access to 18 eggs and our deep turntable with removable bins to accommodate larger items, both of those SKUs a standout in early sales. We’ve also made solid progress in the first year of our Organized Insider loyalty program, with more than 120,000 insiders cheering up in Q3. In fact, the month of December so nearly 47,000 insiders tear-up, the greatest number of customers to do so in 1-month since our program launched in March of 2022. All levels of the program continues to have a higher than average ticket with loyalty members spending approximately 60% more than non-loyalty members and top-tier experts spending an average of 5 times more than entry level enthusiast through the end of the calendar year. We have been building momentum with this group of valuable customers to keep them engaged, holding a successful virtual event for them in Q3, and extending exclusive new benefits for the new year to express our gratitude to our highest spending experts. Turning next to our focus on Expanding Our Reach. As I highlighted our Custom Spaces business continued to perform well in Q3 with average base value up 4.1% compared to last year, despite the macro headwinds. However, we continue to express pressure on the number of spaces customers purchased during the quarter. That said, we remain encouraged by the reception we are saying to our broader assortment, and we’re excited to introduce a new brand architecture and branding for The Container Store’s Custom Spaces in November that highlights the breadth of our offering. This included transforming what was the Custom Closets department in our stores and on our website into our Custom Spaces studio and reopening our Chicago Showroom under The Container Store Custom Spaces name. This new expression of Custom Spaces allows us to push beyond Custom Closets, and makes it clear to our customers that we can transform any area of the home. The launch of the Container Store Custom Spaces coincide with our first ever Preston event, which rewarded customers with 20% off their Preston space for making a $500 deposit towards the custom space design. We are particularly pleased with these results, with the average ticket exceeding $8,000, and more than 25% of the spaces sold being non-closet spaces, which is promising as we continue to promote and deliver Custom Spaces for all areas of the home. We’re also excited about the enhancements we’re making to our pilot program in the Chicago and Dallas market, focusing on building up our Custom Spaces businesses. In addition to servicing those markets with our own in-home installation teams inclusive of branded vehicles, we are testing different targeted marketing approaches with campaigns on connected TV, digital media, radio and direct mail, posting up various elements of the marketing mix in these 2 key markets. These market tests are providing key learnings on how we can most effectively increase awareness and lead of Custom Spaces in the future. This leads me to our store expansion plans. Our first small format store in Colorado Springs, Colorado, which opened in September 2022 continues to exceed our sales productivity expectations. And we are delighted to be experiencing similar success in our New – Salem, New Hampshire location, which opened in January. During opening [weekend selling] [ph] 70% of the customers were new to The Container Store compared to 58% during the first week of opening at Colorado Springs. So we remain excited about the prospect of attracting new customers to the brand through new store growth. Additionally, our open to-date Net Promoter Scores at both stores are quite strong at 78 for Salem, and 83 for Colorado Springs. We are on track to open our next new store in Thousand Oaks, California in early spring 2023. And we’re targeting an additional 9 new stores for the second half of fiscal 2023. These stores will be open and existing key markets and will be small format stores at approximately 12,500 square feet. We continue to expect to generate approximately $5 million in revenue per location, or about $400 per square foot in the first year with a target year one store EBITDA margin up 20%. Lastly, we’ll continue to make progress related to strengthening our capabilities. We’ve enhanced our store selling experience by rolling out new mobile express checkout to all our stores, allowing us to efficiently service more customers. And we’ve made notable upgrades to our Custom Spaces installed design tool. The tool now offers new usability features, improving the overall design experience, including a 3D design view and the ability to upsell complementary general merchandise products by adding it to the design itself. In addition, we had a total of 95 in home design specialists by the end of Q3, who collectively contributed 25% of the total custom space sales for the quarter. We believe the addition of the in-home design, its bolsters our ability to deliver an elevated experience and provide additional sales opportunities. Our continued emphasis on the custom space customer experience is reflected in the positive improvement in the Net Promoter Score for Custom Spaces, which rose an impressive 7 points from Q2 to 71. We have also continued to make enhancements to our mobile app and website, while optimizing our site speed and performance. A few highlights include improving site speed across all key pages, resulting in an average 40% improvement in response time, implementation of an online chatbot for conversational commerce flows, and an AI powered custom in-drawer organizer tool that helps you to determine how best to organize their drawers. We are pleased at the reception to these enhancements, and I’ve been gratified to see an increase in our Net Promoter Score for online transactions to 64, a 7 point rise relative to Q2. We attribute this rise to improvements in the online buying experience, including shift and buy online pickup in-store purchases. In summary, macro environment notwithstanding, we are not standing still. We remain committed to building on the momentum we’re making, executing our strategic objectives and driving towards our long-term goals. We have a flexible and agile team, a financially strong balance sheet and the ability and willingness to operate this business with great discipline as we continue to navigate this current environment. Thank you, Satish, and good afternoon, everyone. As Satish reviewed, we delivered third quarter financial results above our expectations as we continue to navigate a challenging macro environment with great discipline, while remaining focused on our long-term strategic objectives. Consolidated net sales decreased 5.6% year-over-year to $252.2 million. By segment, net sales for The Container Store retail business were $239.3 million, a 3.8% decrease compared to $248.6 million last year. The decrease is inclusive of a comp store sales decrease of 4.3% driven by the 7.1% decline in our general merchandise categories, which negatively impacted comp store sales by 495 basis points. The performance in General Merchandise was partially offset by the increase in custom space comp store sales, which were up 2.1% compared to the fiscal 2021 and positively contributed 65 basis points to comp store sales. The sales from new stores positively contributed the remaining 50 basis points to the total 3.8% TCS net sales decline year-over-year. For the third quarter of fiscal 2022, our online channel increased 4.6% year-over-year, and our website generated sales, which includes curbside pickup increased 2.4% compared to last year. Website generated sales represented a total of 21.8% of TCS net sales in Q3 compared to 20.5% in Q3 last year. Unearned revenue decreased to $18.8 million in Q3 this year, versus $32.1 million last year, driven by the pull forward of the transform for Elfa event, and our ability to install some of those purchase spaces within the quarter combined with the pullback in customer spending that we are experiencing. Elfa third-party net sales of $13 million decreased 30.6% compared to the third quarter of fiscal 2021. Excluding the impact of foreign currency translation, Elfa third-party net sales decreased 15.8% year-over-year, primarily due to a decline in sales in the Nordic and Russian markets. From a profitability standpoint, our consolidated gross margin for Q3 was relatively flat at 56.9% compared to 57% last year. By segment, TCS gross margin decreased 10 basis points compared to last year, primarily due to more promotional discounting, including the impact of the slight pull forward of the transform with Elfa event, partially offset by favorable product and services mix. Elfa gross margin increased 570 basis points compared to last year primarily due to price increases, partially offset by higher direct material costs. Consolidated SG&A dollars increased to $121.5 million compared to $120.3 million in Q3 last year. As a percentage of sales, SG&A increased 320 basis points year-over-year to 48.2%. The increase is primarily due to the deleverage of compensation and benefits, occupancy and other costs on lower sales. Our net interest expense in the third quarter of fiscal 2022 increased 36.6% year-over-year to $4.4 million due to a higher interest rate on our term loan. The effective tax rate for the quarter was 33.8% compared to 27.9% in the third quarter last year. The increase in the effective tax rate is primarily related to the impact of discrete items on lower pre-tax income during the quarter. Net income for the quarter on a GAAP basis was $4.2 million or $0.08 per diluted share, as compared to a GAAP net income of $13.7 million or $0.27 per diluted share in the third quarter of last year. Adjusted net income was $4.1 million or $0.08 per diluted share, as compared to last year’s adjusted net income of $14.3 million or $0.28 per diluted share. Our adjusted EBITDA decreased to $22.2 million in the third quarter of this year, compared to $31.4 million in Q3 last year. Turning to our balance sheet, we ended the quarter with $5.8 million in cash, $188.6 million in total debt and total liquidity including availability on our revolving credit facilities of $96.1 million. Our current leverage ratio is 1.4 times. We ended the quarter with consolidated inventory down 3.2% compared to the third quarter last year. At TCS, on a unit basis, on-hand inventory is relatively consistent in comparison to last year, and is inclusive of an increase in safety stock levels. The expected increase of on-hand inventory did not materialize as a result of a shift in the timing of purchases associated with previously mentioned new Elfa product offerings that are expected to launch later in fiscal 2023. Looking forward and given our outlook, we expect to reduce purchases of inventory in Q4 resulted in continued year-over-year inventory declines on a unit and cost basis. Capital expenditures were $46.6 million in the first 9 months of fiscal 2022 versus $24 million in the first 9 months of last year, with the increase related primarily to investments in technology and our stores. Free cash flow in the first 9 months of this year was a use of $27.7 million versus a use of $8.4 million in the first 9 months last year. As we disclosed on our second quarter earnings call in the beginning of the third quarter, we repurchased approximately 940,000 shares for $5 million, under a Rule 10b5-1 plan. We continue to have $25 million remaining of the original $30 million authorization for share repurchases. Additional stock repurchases may be made in the open market or it could be negotiated purchases with the amount and timing determined at the company’s discretion. We do not expect to incur additional debt as a result of the stock repurchases. Now for our outlook. As Satish mentioned, in addition to the tougher macro backdrop, inclusive of FX headwinds, we are facing some unique sales headwinds in Q4. First, our decision not to anniversary the 2/22/2022 event from last year, this represents over a 200 basis point headwind to Q4 total consolidated and comparable store sales. The event last year was held in connection with the launch of our new Welcome to The Organization branding campaign and new logo and was supported by a significant marketing investment. While incrementally profitable last year, we do not believe the level of investment required to anniversary this event would yield the same customer response given the overall macro-economic backdrop. Second, we anticipate a headwind to non-comp store sales of over 200 basis points in the fourth quarter from the discontinuation of the Closet Works wholesale business. We expect this impact to continue until we anniversary the discontinuation in Q2 of fiscal year 2023. As a result for Q4 of fiscal 2022, we expect consolidated sales to be approximately $255 million to $265 million, driven primarily by comparable store sales decline in the high-single-digit to low-teens range. We expect earnings per share in the fourth quarter to be in the range of $0.10 to $0.20 per diluted share. The high end of our outlook assumes our current quarter-to-date demand trends are sustained, and our ability to accelerate the installation of spaces purchased during the transform for Elfa event. The low end of our outlook range assumes a slight deceleration of the current demand trends quarter-to-date, and the installation of Elfa spaces purchase but not installed does not accelerate. The implied year-over-year operating margin decline is expected to be more than entirely driven by SG&A due to fixed costs deleverage on lower sales. While we have taken action to pullback on certain corporate expenses and have reallocated spend due to the current economic environment, we plan to continue prudently investing in our strategic initiatives. From a gross margin perspective, favorable product mix and less promotional activity are expected to be tailwinds to gross margin in the fourth quarter. We also expect a slight benefit to gross margin in the fourth quarter from lower freight and commodity costs. Interest expense for the fourth quarter is expected to be $5 million driven by higher interest rates, and our effective tax rate is expected to be approximately 30%. Before I turn it over to the operator to open the call up for Q&A, I would like to reiterate Satish’s comments that while we are navigating an uncertain macro landscape, we have a strong balance sheet in place, and a management team committed to continue to execute with great discipline against our long-term initiatives, including our sales target of $2 billion. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Steven Forbes with Guggenheim Partners. Please proceed with your question. Good evening, Satish, Jeff. I wanted to start with the new format, the smaller format store concept and really as we think about next year 10 stores that your plan. It’d be helpful, because remind us, what the sort of capital spending needs are right behind this unit growth and what is the average store sort of require in terms of capital spending? And then as we think about overall CapEx, capital expenditures for next year, any framework as we think about the total spending plans for 2023, inclusive of stores plus maintenance plus any other buckets of spend? Yeah, Steve, this is Jeff. Thanks for the question. When we were talking about the 9 new stores that we have planned for fiscal 2023, again, those for me expected to be open in the latter half of the fiscal year relatively consistent cadence throughout the back half of the year. And when we look at the capital requirements for these new stores, generally speaking, depends on where in the country we’re planning to put those stores, but roughly speaking, it’s around $3.5 million investment for a new store, assuming it’s not a build to suit. We do have a few of these that will be built to suit for next year and we continue to look for opportunities on that front to partner with landlords and be in a partnership with them for the longer term. As it relates to going out beyond 2023, we’re not necessarily speaking to that from a capital allocation, there’s a lot of things changing when you think about that. We did talk about in our path to $2 billion that CapEx generally speaking will be 5.5% and 6.5% of our projected sales moving forward and we manage our CapEx investment from that perspective. Hey, Steve, I just to jump in, having attended now both store openings in Colorado, and in Salem, New Hampshire, I have to say that really pleased with how these stores are performing. Yes, there are small format stores. But they’re definitely exceeding our expectations, since of productivity with really strong Net Promoter Scores, in particularly, just the customer response to our formats. It’s so encouraging to see that we’re tracking a lot of new customers. 70% as I mentioned for our Salem, New Hampshire; 58 for Colorado Springs during opening weeks [ph], and just gives us a lot of confidence, as we think about the back half and the stores that we’re going to open for fiscal 2023. That’s exciting. And then just as a follow-up, maybe for Jeff, you talked about a gross margin, I think, gross margin during the quarter, it was nice to see the Elfa segments step back up here. So the 57%-ish gross margin profile, is that the right sort of level to think about the opportunity longer term? Can you sort of hold that level? Or maybe to speak to how we should be framing the gross margin outlook of the business over the long-term here? Sure, Steve, when we talked about the path to $2 billion. I think we talked about the fact that – we would be targeting high-50s from a gross margin perspective throughout that time period on the path to $2 billion. And there’s a number of factors contributing to that whether it’s more heavily weighted to the custom space business, which is a huge area of opportunity for us from a growth perspective. And in the – yeah, the manufacturing now that we have depressed in line and the wood-base manufacturing going forward, we really believe that we can maintain that high-50 percentile. The other area of the business is in our private label merchandise. It’s a higher margin business on the general merchandise side. But I would say more speaking that the weighting of custom space as we lean into that area of the business is going to drive the better margins of going forward, despite having some offset with e-commerce growth and the shipping costs associated with it. Hey, guys, thanks for taking my questions. First one for me just as we think about the competitive landscape, and obviously some of the trouble that one of your, call it, competitors has gone through recently. Do you feel like that this is allowing you to pick-up some market share? And then kind of, overall, how do you feel given sort of the tough macro backdrop? You guys, as a company continuing to take market share and kind of how you feel about that? Yeah. Hi, Ryan, I’ll take that one first. Look, I’d say it’s a bit difficult to quantify any kind of beneficial impact, especially given the democratic profile of the retailers that are having problems. But having said that look and especially given the recent addition of our Chief Merchant, we all looking at refining our assortment and looking at ways to surprise and delight our customers, in particular, with complementary products to our storage and organization categories. We’ve done that very successfully with our home fragrance and plant-based cleaning categories. And we believe there are a lot more other categories, we can go in and introduce. In addition, as Jeff mentioned just a few minutes ago, we bring a lot of innovation with our private label assortment. In particular, when you think about what we’ve done with everything organized a collection; it’s proving to be a real star for us. This is a collection that was put together in connection with our in-home organizers. And so these are very versatile units out there becoming a quick favorite of our customers. And so that’s how we kind of think about how we can take advantage of the general merchandise side of things. But truth be told, look a lot of our growth that we’re looking to be able to deliver in our path to $2 billion is really under our Custom Spaces. That’s where we believe we have a greater opportunity to go grab market share, in particular, in spaces over $2,000, it represents a significant part of that addressable $6 billion market. And we’re focusing our efforts on those premium lines, whether it’s Avera or Preston, that’s why we went through and completely redid our branding expression in-store and online, where we can easily demonstrate how we can transform any area of the home. And we’ve just been really pleased with the launch of Preston with average tickets now exceeding $8,000, and more than 25% of our space is being sold outside the closet. So that’s kind of how we look and how to understand, how to complement both infusing an element of innovation into general merchandise, but also really double downing on Custom Spaces. Okay. Got it. That makes sense. And then second question for me, of the 9 locations that you guys have targeted – or 9 store openings, sorry, that you guys have targeted for the second half of next fiscal year. How many of those you have actual locations identified and you’re currently working with landlords to sign leases and just kind of how that process has gone so far? Yeah, Ryan, all 9 locations have been specifically identified. And I believe we’ve signed 4 or 5 of the leases, and we’re in the final negotiations on the remaining. So we’re feeling pretty good about the pipeline for 2023. Of course, all things supply chain in today’s world could be moving parts to open dates, but right now, our plan dates for those 9 stores is in the back half of 2023. Thanks. Good evening, guys. My first question is, you sit in an interesting viewpoint in the economy at this point, you do have housing exposure, you do have a pretty wealthy customer base, considering where your geographic footprint is in your – you do sell big ticket that there’s some relationship to housing. So I was curious if you could just share high level thoughts of what you’ve observed maybe since the last time that you spoke with us on the last conference call? Do you think that is the consumer getting worse is sort of the quarter-to-date trend? It’s simply just a function of comparisons or is there some sort of change that’s going on there? Anything you can share that’d be helpful. Sure, Chris. We will double team this one. I will take the first part. I think, look, there’s no doubt we’re still navigating a challenging consumer environment, right, it’s impacted by the ongoing macro-related headwinds. We are seeing a decline in traffic and transactions. We’re seeing customers buying fewer items or spaces, and they are requiring a compelling reason to shop, right? One of the reasons we did see strength in our custom space business compared to our general merchandise business, which was actually up 4.1% over LY in average space value, but the number of spaces was down almost double-digits. And so we see customers willing to engage, but – and spend those dollars on the space that they’re looking for, they’re just buying less of them. Similarly, as you heard me say in my opening remarks, a Holiday Shop, which was comprised of some compelling stocking stuffers and gift wrap performed very well, comparable sales are actually over positive over LY. However, we saw less engagement with more traditional general merchandise categories like kitchen in particular. So, it’s what we find is, we need to give our customers a compelling reason to shop. If we do so, they will engage. And for customers who are looking to really take advantage of improving their Custom Spaces throughout their home they will, they’ll just buy perhaps less items of them. Yeah, Chris, the only thing I would add to that just a little more color on our sales outlook. There’s two ways I mentioned in our opening remarks. There’s two ways we look at revenue trends. One is course to GAAP numbers that we report and track internally every day. The other piece is demand comps. And the demand is really just to define that better for you to, say, that demand comps are customer purchases, they’re tracking customer purchase, and they don’t necessarily reflect if the order has been installed or delivered to the customer from a general merchandise or custom space perspective. So, referring back to what I said in my guidance comments, the high end of our Q4 outlook assumes quarter-to-date demand comp trends sustain what we’re seeing today. And our ability to pull forward – not pulled forward, but to accelerate the installation of Custom Spaces that are placed during the quarter. And on the low end, it assumes a slight deceleration in the current quarter-to-date demand comp, and no acceleration of the installation spaces. And the other thing I would call out is, as it relates to sequential trends from Q3 to Q4, keep in mind that Q3 did benefit from an earlier start to the annual Elfa event transform for Elfa, which started 2 weeks earlier. And we talked about, of course, as well not anniversary 2/22/2022 in Q4. So there’s two things there from a trend perspective to keep in mind when looking at the comp. Got it. And so, just so I understand that was the pull forward in the 3Q maybe could you size that. And, if you sort of have a decelerating demand comp, should installations actually accelerate just as like the available labor pool like what’s the constraint? Is it – you maybe a more installers, where you could conclude those transaction and drain that deferred revenue? Yeah. So I’m trying to quantify the impact of pulling forward the [transform of Elfa event] [ph] for 2 weeks, it’s difficult to measure, right? But we do believe that it helped Q3 and it could be a headwind to Q4, as it relates to the trends, when we look at it from Q3 to Q4 on the demand comp side of quarter-to-date, it’s a slight acceleration from what we saw occurring in Q3. Got it. And then just one quick follow-up question you talked about potential good guys in terms of freight and commodity costs, is that more showing up on the Elfa side, not the TCS side, the gross margin? Yeah. So when you look at the gross margin for the quarter, while we did see more promotional activity this quarter and Q3, but we’ve benefited from a better mix. And to a lesser extent, we did benefit from lower freight costs, and we are seeing them come down and we expect to see more benefit in Q4 and go forward. It just takes time for us to average the lower freight costs and their inventories. And I would say that’s all in the TCS side. From an Elfa margin perspective, we saw an improvement there and that was really all driven by pricing. Thank you. There are no further questions at this time. I’d like to turn the floor back over to Satish Malhotra for any closing comments. Yeah, once again, thank you so much for joining us today. We are on our mission on a path to deliver on our ambition of $2 billion in sales and we are committed to doing that. I wish you all the very great night.

EarningCall_316

Ladies and gentlemen, thank you for standing by. Welcome to the RADCOM Limited Results Conference Call for the Fourth Quarter and Full Year 2022. All participants are present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded and will be available for replay on the Company's website at www.radcom.com later today. On the call are Eyal Harari, RADCOM's CEO, and Hadar Rahav, RADCOM's CFO. Please note that management has prepared a presentation for your reference that will be used during the call. If you have not downloaded it yet, you may do so through the link in the investors section of RADCOM's website at www.radcom.com/investor-relations. Before we begin, I would like to review the Safe Harbor provision. Forward-looking statements in the conference call involve several risks and uncertainties, including, but not limited, to the Company's statements about the 5G market and industry trends, the role the Company is expected to play in the 5G transformation, sales opportunities, sales cycles, visibility, leads, pipeline and backlog, the expected impact of currency rates, the Company's market position, cash position, potential and expected growth, including scalable and profitable growth, and momentum in 2023 and thereafter, levels of recurring revenues and gross profit from such activity, its expectations with respect to research and development and sales and marketing expenses, as well as grants from the Israel Innovation Authority, the Company's expectations with respect to its relationships with Rakuten and AT&T, its ability to handle future growth and meet demand, its expectation to continue enhancing its software solutions and demand for its solutions, deployment of its 5G solutions in cloud environments and the potential benefits to its clients, its ability to capitalize on the emerging 5G opportunities and win more market share with new and existing customers, the potential of the Company’s vision and the use of artificial intelligence in its products, and its revenue guidance. The Company does not undertake to update forward-looking statements. The full Safe Harbor provisions, including risks that could cause actual results to differ from these forward-looking statements, are outlined in the presentation and the Company's SEC filings. In this conference call, management will refer to certain non-GAAP financial measures, which are provided to enhance the user's overall understanding of the Company's financial performance. By excluding certain non-cash stock-based compensation expenses, non-GAAP results provide information helpful in assessing RADCOM's core operating performance and evaluating and comparing the results of operations consistently from period to period. The presentation of this additional information is not meant to be considered a substitute for the corresponding financial measures prepared in accordance with generally accepted accounting principles. Investors are encouraged to review the reconciliations of GAAP to non-GAAP financial measures included in the quarter's earnings release, available on our website. Thanks, operator. Good morning, everyone, and thank you for joining us for our fourth quarter and full year 2022 earnings call. The fourth quarter was a solid finish to a record year as we expanded our install base with multiple top-tier mobile operators. During 2022, we delivered record revenue each quarter, representing a third successive year of growth. Fourth quarter revenues were $12.3 million and full year revenues were $46.1 million, a 14% year-over-year growth, and we reached an inflection point for the Company, delivering a profitable year on a non-GAAP basis while generating a positive cash flow of $7 million, ending the year with a record level of cash and on a non-GAAP basis, a net income of $2.9 million. We also had an encouraging start to 2023 by announcing that we had secured another North American contract for our solutions. This exciting news continues the positive momentum since the beginning of 2022. This additional win brings us over $50 million in new contracts over the last 12-month period. The new multi-year contracts secured during 2022 on top of our current agreements provide good visibility and a strong backlog for 2023 and beyond. As the business grows, we carefully manage our expenses and believe we can maintain scalable, profitable growth. We delivered a record-breaking year despite the current economic headwinds. We believe this positive momentum will continue into 2023 and expect an even more robust growth year in 2023. Based on our current visibility, we are providing full-year 2023 revenue guide of $50 million to $53million. Turning to our customer activities. In 2022, we announced the renewal of our contracts with AT&T and Rakuten. These are important milestones as they remain key strategic accounts with whom we have strong relationships and partnerships. We continue to innovate and provide software enhancements to ensure excellent customer experiences and offer an advanced assurance solution that provides intelligent insights in a cloud-native solution. We also announced in 2022 that Rakuten Symphony selected our cloud assurance technology as its service assurance solution that will be globally available in their Symworld marketplace. The integration of RADCOM ACE into Rakuten Symphony streamlines network operations and helps teams understand what is happening in their network and where there are customer affecting issues. It also provides built-in workflows and unified data analytics to enable more operators to deploy and roll out 5G rapidly. Being part of this could open significant opportunities for RADCOM in the future. Turning to the new contracts. In 2022 we secured multiple new contracts, including DISH in the US and a European mobile operator. Thanks to solid execution by our teams, we have made good progress in these accounts, which began to be reflected in fourth-quarter revenues. Most revenues will be recognized during 2023 and beyond. As these networks advance, we believe there could be further opportunities to expand with these operators. For example, DISH has previously stated that the enterprise could generate significant new revenue streams. This is where our cloud assurance technology can help. DISH can offer enterprise customers our assurance solution to monitor these private networks to ensure service quality and certify SLAs. The operators can sell premium services and value-added packages, including service assurance that runs over their 5G cloud across multiple market verticals. For the new North American contract we announced last month, we provide real-time insights into the network as the operator maintains its 4G network while expanding 5G coverage nationwide. With our recent wins and positive customer feedback, we remain confident that our product offerings align with market needs, are best-in-class, and will increase our market share by winning opportunities as the 5G transformation continues. In 2022, our multi-year contracts provided recurring revenue that accounted for approximately 70% of our revenue. Our software-centric business offers a robust business model that delivers high gross margins and significant recurring revenues while providing customers with great value and predictable long-term pricing. Our team executed exceptionally well in 2022. Even though we extended our customer install base, our customer support headcount remained approximately the same throughout the year. This is a testament to the professionalism of our employees and the scalability of our innovative software. Our solutions can be quickly deployed in the operator’s cloud network and rapidly roll out new customer features. This agility and operational efficiency drove our financial performance this year while simultaneously delivering on the customer’s expectations and requirements. As a software-focused company, we maintained a high gross margin this year, 73%. This helps our operational efficiency and improves our profitability KPIs. I'm incredibly proud of the management team and our employees, and I thank everyone for their continued hard work and dedication. In 2023, we plan on gradually increasing our sales and marketing teams to take advantage of the strong demand for cloud assurance technology reflected in our pipeline. Operators continue to roll out 5G and invest in their networks, and we believe that the 5G market remains strong while still only being at the early stages. The complexity of these networks requires automated assurance solutions to optimize performance and provide the cornerstone to building networks with extensive automation. With the uncertainties around the macro economy, some operators may take longer to roll out their 5G network than others. Still, the market direction is clear, and we believe our position as a best-in-class assurance provider for 5G will continue to drive positive returns. With this transition to 5G and the cloud, operators want to become more efficient and reduce their CapEx/OpEx spending. This is also an opportunity for us, as I will elaborate on later. Our long-term vision is to help telecom operators become more autonomous. To achieve this goal, networks must be software-driven, more intelligent, and more automated. This is what our solution enables through AI and automation making the operators' network more intelligent and automated through AI-powered analytics. Our solution analyzes massive amounts of network data and provides insights that drive automated network operations. I mentioned that operators are under pressure to reduce CapEx and OpEx spending. This is another area where our innovative software and advanced AI can help. Our solution enables operators to save costs by automating their network operations and automatically finding places to optimize that prevent revenue leakage and customer churn. In addition, as we have a cloud-based solution, operators reduce CapEx spending on assurance hardware. In other words, our solutions empower operators to do more with less and improve their services. These benefits can help operators navigate the current economic headwinds. So, although there is uncertainty around the macro economy, we are well-positioned to win more business through our ability to help operators save costs and optimize. Our solutions were born in the cloud and designed for telecom operators. This helps us remain focused as we enhance our solutions, increase our 5G capabilities, and expand our AI-driven insights. AI has been in the news recently, with ChatGPT going mainstream. This type of AI is called Generative AI, which creates new content, such as images, text, and videos. Generative AI has three models of working. One of those models is called GAN for short. This AI model generates synthetic data as an alternative to real network data. We use this AI technology to train and improve our solutions for advanced 5G use cases, develop our AI models, and offer our customers new use cases. Later this month, we will showcase our latest product innovations, AI capabilities, and exciting new use cases at the Mobile World Congress in Barcelona, Spain, the leading telecom industry event. We will hold many meetings with customers, top-tier operators, and partners. The event is expected to draw around 80,000 visitors as it ramps up after a couple of years of being a primarily virtual event due to COVID limitations. Turning to the pipeline. We continue to see strong demand for our advanced cloud assurance technology reflected in our sales pipeline as we manage multiple customer engagements at different stages of the sales cycle with a healthy mix of new logos and a current installed base, with most opportunities focused on 5G. We see good momentum for the 5G market and believe it will stimulate growth as it ramps up, creating more sales engagements that can lead to additional multi-year contracts and increased market share. Our solid financial results and new contracts demonstrate our strategy's effectiveness, and the unique market position in supporting telecom operators as they roll out 5G. Also, our recent wins provide a growing stream of recurring revenues and improve an already strong backlog, providing us with long-term visibility into 2023 and beyond. We believe this solid footing will drive consistent financial results in the future and continued improvements to the bottom line. Despite the economic headwinds, we also believe that the 5G market will drive additional demand for our solutions, increase our business and lead to further wins in the future. As a result, all the foundations are in place for a strong 2023 and a fourth consecutive year of revenue growth. Based on our current visibility, our 2023 revenue guidance is $50 million to $53 million. With that, I would like to turn the call over to Hadar Rahav, our CFO, who will discuss the financial results in detail. Thank you, Eyal, and good morning, everyone. Now please turn to Slide 8 for our financial highlights. While the slides contain GAAP and non-GAAP results, I will refer mainly to non-GAAP numbers, excluding share-based compensation. We ended the fourth quarter of 2022 with $12.3 million in revenue and a new record quarter, an increase from $11.2 million in the fourth quarter of 2021. Gross Margin. Our gross margin in the fourth quarter of 2022 on a non-GAAP basis was 73%. Please note that our gross margin can fluctuate depending on the revenue mix. Our gross R&D expenses for the fourth quarter of 2022 on a non-GAAP basis were $4.7 million, a decrease of $60,000 compared to the fourth quarter of 2021. We received a grant of $160,000 from the Israel Innovation Authority during the quarter, compared to a grant of $194,000 in the fourth quarter of last year. Our net R&D expenses for the fourth quarter of 2022 on a non-GAAP basis were $4.5 million, similar to the fourth quarter of 2021. Sales and marketing expenses for the fourth quarter of 2022 were $2.9 million on a non-GAAP basis, an increase of $347,000 compared to the fourth quarter of 2021. G&A expenses for the fourth quarter of 2022 on a non-GAAP basis were $942,000, an increase of $105,000 compared to the fourth quarter of 2021. Operating income on a non-GAAP basis for the fourth quarter of 2022 was $608,000 compared to an operating loss of $158,000 for the fourth quarter of 2021. Net Income for the fourth quarter of 2022 on a non-GAAP basis was $1,320,000 or a net Income of $0.09 per diluted share compared to a net loss of $237,000 or a net loss of $0.02 per diluted share for the fourth quarter of 2021. On a GAAP basis, as you can see on Slide 7, our net loss for the fourth quarter of 2022 was $0.03 million, or a net loss of $0.0 per diluted share, compared to a net loss of $1.4 million, or a net loss of $0.10 per diluted share for the fourth quarter of 2021. At the end of the fourth quarter of 2022, our headcount was 284. Now let’s turn to the full year results. We ended 2022 with revenues of $46.1 million, an increase of 14% from $40.3 million in 2021. On a non-GAAP basis, our gross margin was 73% in 2022 compared to 72% in 2021. Our gross R&D expenses for 2022 on a non-GAAP basis were $19.0 million, which was approximately the same in 2021. In 2023, we plan on investing in R&D at approximately the same level as in 2022. We received a cumulative grant from the Israel Innovation Authority for $762,000 during the year. In 2023, we expect grants from the Israel Innovation Authority to be about half. Sales and marketing expenses for 2022 were $10.9 million on a non-GAAP basis compared to $9.5 million in 2021. In 2023, we expect a gradual increase in sales and marketing to support an increasing pipeline of opportunities. G&A expenses for 2022 on a non-GAAP basis were $3.6 million, an increase of $301,000 compared to the entire year of 2021. Operating Income on a non-GAAP basis for 2022 was $1.1 million, compared to an operating loss of $2.1 million for 2021. Net Income for 2022 on a non-GAAP basis was $2.9 million or a net income of $0.19 per diluted share, compared to a net loss of $1.9 million, or a net loss of $0.13 per diluted share for 2021. On a GAAP basis, as you can see on Slide 7, our net loss for 2022 was $2.3 million or a net loss of $0.16 per diluted share, compared to a net loss of $5.3 million or a net loss of $0.37 per diluted share for 2021. The increased share-based compensation expenses negatively impacted GAAP net loss in 2022 compared to 2021. In 2023, we believe that the dollar/shekel ratio will stabilize at the current levels and will not require hedging. Turning to the balance sheet. As you can see on Slide 11, our cash, cash equivalents, and short-term bank deposits as of December 31, 2022, were $77.7 million. Great, thanks so much and congratulations on the great and consistent execution you guys really are delivering that the right mechanics in your business and it's good to see. I was hoping we could talk a little bit about the commentary around sales and market putting what do you think your OpEx investment will look like over the course of 2023? I assume your gross margins will stay pretty much where they are, but I also would assume that it is a little bit more aggressively on the sales, just some guidance there? So thank you Alex and yes we are finishing a great year with improvements on all of our KPIs. As pointed out, we are looking to keep our operation expense in similar levels in in general as we are seeing out ability to be efficient and continue to deliver on with our current team, even so we are growing with our customer base. We are keeping our R&D expense and technical staff in similar expense compared to 2022 and we are looking to gradually increase our sales and marketing as we see there is additional opportunities and we want to have better reach to more accounts as 5G is progressing. Just so I can understand, I mean I would think that you have at least some wage inflation to deal with, is it the shekel that is offsetting, the weakness in the shekel over the last year offsetting the wage inflation is that how you are delivering stable OpEx or because it seems like [indiscernible]? So yes, we do have some weakening of the shekel in terms of the dollar which allows us to optimize and beat our cost as our R&D main cost is in Israel and in shekels. We did also some optimization and cost savings activities to adjust our operational expense and this is why we are able to maintain similar leverage despite also the inflation and some salary adaptions we need to do. One of the other variables is a little challenging for us to analyze externally is the change in cash generation in the company over the course of the year has raised your cash balances and the interest rate on your cash balances are going up. So can you give us some sense of where we ought to be in terms of the interest income over the course of 2023? It was up quite sharply quarter-to-quarter and I do not know whether that is a function of something unusual in the numbers, a translation just the rise of interest rates on your balances. Yes sure. So we ended the last two years with consistent cash flow and believe that with the transition to profitability together with strong collection from our large customers and the expected interest on the bank deposit of course based on the [indiscernible] we will continue to generate cash during 2023. Well yes, I would assume so, but I guess my question is, in the interest income line should we be using 500K a quarter to roughly 2 million for the year similar to what you earned in 2022 or is there something in there that in 2022 that overstated that it should be down a little bit or interest income to go up? Can you give us some guidance on the interest line for 2023? Yes the other two lines Hadar could you just a little guidance on is the NRE line, is that going to be as you are now getting a little larger, is that NRE line some of the government subsidies going to start coming down? We are assuming it is going to come down 150K for the year, is that right or is it going up or any thoughts on that? Yes, the NRE, the subsidies you get from the government, the NRE line, any sense of whether that is going to go up, down, sideways for 2023? So currently the innovation [indiscernible] concentrating in only companies in the [indiscernible] and we believe in [indiscernible] ground to going to 2023 it will be not only 50% from growth 2022 and it will be recognized given the trust [indiscernible]. We guided the tax, will be on a similar with of course it was in 2022 because we believe that our [indiscernible] large territory offset the expected profitability [indiscernible]. Okay thanks. Can you talk just a little bit about the pipeline? What the whiteness of what you are looking at is, is there a lot of transactions that are being slowed down as a result of the conditions in the marketplace and to what extent you think that you could have some news flow in the first half of the year or is it going to be mostly in the back half of the year, just some sense of timing of what you are chasing? Thanks. So our timing is solid and we have a good mix of opportunities between our existing customers and new customers. We are monitoring like everyone the news and we see telecom operators continue to invest in 5G, but they are also looking how they need to adapt to the new macro economy. It's very hard to predict in telecom and in RADCOM in specific when exactly these will happen. But I think most importantly is that we are starting 2023 with very good visibility into the year based on our good performance in 2022 which gives us the confidence that this would be another gold field. Any we have in our pipeline the mix of opportunities different stages, definitely some could still happen in the first half of the year as long as there is no unforeseen delay due to the macro economy, but is very hard to predict. Hey guys it is Faith on for Arjun. Again, congrats on the quarter. I just wanted to talk a little bit now that you've breached that inflection point, what are the levers that you guys have at your disposal from both the top line perspective as well as margins that I know you touched on previously to kind of keep this level trending as you kind of go back towards historic net income numbers? So, thank you Faith and good morning. I think to start with 2022 was a third consecutive year of growth and as you see our guidance, we are looking to continue growing also in 2023 in double digit levels. In the software company with the gross margins of 73% in 2022 and we are looking to have similar levels in 2023. A lot of the top line goes to the bottom line. I mentioned in my prepared remark and was asked in the previous questions, we are able to maintain our operational expense in controlled manner and we did not see a need to increase our operational teams despite these goals and additional customers that we work with. This is why we say that a significant part of the top line is inflated to the bottom line. We see this trend in profitability KPI improving along the last three years along with growth. So as we are expecting to also grow this year working and executing with our existing and new customers we are expecting this to be improving also the profitability and continue to generate cash flow during 2023. Okay great, thanks. And then I just want you to talk about RADCOM ACE for a second, we've been hearing a lot about it in your recent deals, can you just talk about how this solution brings customers to the table and how it is contributing to the overall pipeline? So, RADCOM ACE is a solution that was born in the cloud for telecom operators as they transform into 5G. And like many of our competitors who are based on legacy and platforms that will build for the 4G networks and appliance base, we build ground up all our technology around [indiscernible] and cloud native architectures. This allows us now to be focused not only on the infrastructure, but we are continuing to add more innovation into the value. Some of our other market players are busy today to ingrate or build cloud native solutions, this is something we already have for the last two years and we got endorsement from the recent wins, companies like DISH that are very advanced in the cloud may be the only operator that is fully cloud native utilizing AWS. So this allows us to direct our R&D investment into creating additional edge. And as pointed out before, AI technology is amazing and we are trying to harness these great tools to allow additional value to our customers as they are required to optimize and save costs and by leveling this technology we are able to add a lot of machine based applications for automation and it is aligned with our long term strategy to help operators become more autonomous. So we are seeing great response from our customers and prospects about RADCOM ACE and we believe this is probably the best product out there for 5G assurance in the cloud. This concludes the RADCOM Ltd. fourth quarter and full year 2022 results conference call. Thank you for your participation. You may go ahead and disconnect.

EarningCall_317

Good day, and welcome to the Haemonetics Third Quarter Fiscal '23 Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session, instructions will be given at that time. As a reminder, this call is being recorded. Good morning, everyone. Thank you for joining us for Haemonetics third quarter fiscal '23 conference call and webcast. I'm joined today by Chris Simon, our CEO; Roy Galvin, President of our Global Plasma and Blood Center businesses; and James D'Arecca, our CFO. This morning, we posted our third quarter and year-to-date fiscal '23 results to our Investor Relations website, along with updates to our fiscal '23 guidance and the analytical tables with the information that we will refer to on this call. Unless otherwise noted, all revenue growth rates we will discuss today are organic and exclude the impact of currency fluctuation, strategic exits of product lines, acquisitions and divestitures. Additionally, to help investors understand Haemonetics ongoing business performance, we will refer to non-GAAP financial measures. These measures excluded certain charges and income items. For additional details about excluded items, comparisons with the same periods in fiscal '22 and reconciliations to our GAAP results, please refer to our third quarter and year-to-date fiscal '23 earnings release posted on our IR website. Our remarks today will also include forward-looking statements, and our actual results may differ materially from the anticipated results. Please refer to the safe harbor statement in the earnings release and other filings with the SEC for a complete list of risk factors that may impact our results. Additionally, in order to protect customer confidentiality, we will not be able to discuss any customer-specific details except as disclosed previously. Thanks, David. Good morning, and thank you all for joining. Today, we reported third quarter organic revenue growth of 21% and adjusted earnings per diluted share of $0.85, 1% growth over a record third quarter last year. Our third quarter results show that our long-range plan is driving continued strong performance. With growth in revenue across all of our business units despite the macroeconomic environment, we continue to build significant momentum. We're harnessing this momentum to invest further in our plan and create additional opportunities to accelerate transformational growth. In Plasma, our value proposition is unrivaled, enabling us to support the industry's record recovery by helping customers win donors and increase productivity to grow collections. Recently, we amended our non-exclusive supply agreement with CSL for the use of PCS2 devices and disposable kits to extend the term from December 2023 to December 2025. We look forward to continuing to provide CSL and all of our plasma customers with the highest level of service and support. In Hospital, we remain focused on growing our market share, both in the U.S. and internationally by advancing our technology and seeking targeted acquisitions to improve standards of care. In Blood Center, we are capitalizing on opportunities created by our agility and resilience to win with customers and extend our leadership in the new markets. We are pleased with our performance and the steps we have taken to accelerate revenue and adjusted EPS growth. We are not immune to the macroeconomic challenges of foreign exchange, inflation, supply discontinuities and geopolitical risk. However, heightened demand for our products continues unabated. The essential nature of our solutions and the durability of our businesses even during uncertain times have us well positioned for sustained growth and market leadership. We have demonstrated perseverance and the ability of our global manufacturing and supply chain to fulfill our customers’ needs uninterrupted. With increasing capital capacity and a robust allocation strategy, we are confident we can continue to deliver best-in-class solutions to our customers and attractive returns to our shareholders. We look forward to a strong fiscal '23 finish and carrying that momentum into fiscal '24. Now on to our business results and guidance. I will begin with total revenue and hospital, and Roy will discuss Global Plasma and Blood Center. Corporate revenue grew 21% in the quarter and 22% year-to-date due to accelerating growth in both Hospital and Plasma. We now expect fiscal '23 organic revenue growth in the range of 18% to 20% compared with 15% to 18% previously. Hospital revenue grew 14% in the quarter and 17% year-to-date as we meaningfully grew revenue and market share despite hospital staffing shortages, budgetary constraints and COVID-related challenges in China. Hemostasis management revenue grew 7% in the quarter and 8% year-to-date. Growth in North America, our largest market, was 16% in the quarter and 13% year-to-date, driven by strong adoption and utilization of TEG disposables. International growth was partially offset by a difficult year-on-year comp due to a large national European tender for ClotPro in fiscal '22 and the effect of COVID in China. Vascular Closure revenue grew 33% in the quarter and 37% year-to-date. The adverse seasonality and procedure volumes that we experienced in our second quarter persisted, but we saw encouraging improvement in December and into our fourth quarter. Our growth is disproportionately being driven by converting new electrophysiology accounts from the top 600 hospitals, further increasing our U.S. penetration and market share. We are excited about CE Mark certification for VASCADE. As we move forward with commercialization in Europe, we plan to use a direct sales model and leverage our existing back-office infrastructure. This is one of many investments we are making to solidify our leadership position in Vascular Closure and accelerate revenue growth. Transfusion Management revenue grew 13% in the quarter and 23% year-to-date. Growth was driven by new software implementations in the U.S. and U.K. and our previous investments to expand the sales force. Lastly, Cell Salvage revenue grew 1% in the quarter and 2% year-to-date, benefiting from favorable order timing among EMEA distributors and strong capital sales, partially offset by weakness in China. In November, we received FDA approval for our Cell Saver Elite Plus featuring new intelligent control software to enhance simplicity and efficiency. It is another example of the investments we are making to solidify our market leadership and we anticipate full market release in the U.S. before fiscal year-end. We are enthusiastic about opportunities in our hospital business and the strong value of our products. We've done a lot of work to transform this business into a growth engine and feel very confident about the continued momentum. We update our expectation for hospital organic revenue growth to be approximately 19% in fiscal '23, the lower end of our previously issued guidance range of 19% to 22% due primarily to COVID-related challenges in China. Thank you, Chris. Good morning, everyone. This is my first time speaking with you since I joined Haemonetics at the start of our third quarter, and I'm very pleased to be here to talk about our Plasma and Blood Center result. It's been a great quarter for both businesses. In Plasma, revenue increased 42% in the third quarter and 48% year-to-date. North America disposals represented 85% of our plasma revenue and increased 46% in the quarter and 52% year-to-date, driven by strong growth in collection volume and price as a result of the technology upgrades. Volume growth was pronounced across all geographies. In the U.S., plasma collections grew 26% in the quarter and 34% year-to-date, excluding CSL. In Europe, collections grew in the mid-teens in the quarter and year-to-date. Both geographies have surpassed pre-pandemic collection levels and are going to meet patient demand. We remain focused on providing our customers with the tools necessary to support continued recovery in attracting and retain their [ph] donors. Our Persona technology represents over half of the Nexus collections in the U.S. today and is an enabler of plasma volume growth and improved central efficiency. Since the commercial launch of this technology, more than 12 million Persona procedures have been completed. The real-world data collected has reinforced the safety profile establishing the original impact plasmapheresis clinical trial when combined with our NexLynk DMS software and other digital tools, plasma centers also experienced shorter door-to-door times and an overall more favorable donation experience. The substantial cost per liter improvement available to our integrated Nexus platform is unrivaled within the industry, and we are just getting started. Encouraged by the strength of our business and the opportunity to continue to support CSL as a result of the newly amended agreement, we are raising our fiscal '23 organic Plasma revenue guidance to 35% to 40% growth, up from the 30% to 35% growth we communicated last quarter. In Blood Center, revenue grew 3% in the quarter and declined 1% year-to-date. The environment for this business continues to be challenging. However, we remain focused on providing top quality products at the highest level of customer support while utilizing the strength of our supply chain and our technology to increase our market share. Apheresis revenue declined 3% in the quarter and 6% year-to-date. This business was affected by unfavorable order timing, lower revenue from convalescent plasma, staffing and donor shortages at blood centers across the globe and COVID-related challenges in China. Partially offsetting these was an increase in capital sales from our Egyptian plasma effort undertaking partnership with a global plasma customer. Our [ph] blood revenue increased 2% [ph] quarter and 11% year-to-date. Growth in this product line, both in the quarter and year-to-date was driven by our hard supply chain that's enabled us to serve customers in need and favorable order timing in EMEA and Asia Pacific. Before I discuss updated Blood Center guidance, I would like to remind everyone that earlier in the pandemic, we benefited from increased levels of safety stock across many of our customers. What we observed in the third quarter is the beginning of inventory rationalization, which we believe will continue into the fourth quarter and potentially beyond. We are confident in the continued durability of our Blood Center business and update our expectations of revenue declined to negative 2% to 4% in fiscal '23 compared with a negative 2% to 5% previously. Our guidance reflects strong year-to-date results and the anticipated impact of inventory rationalization. Thank you, Roy, and good morning, everyone. As you heard from Chris and Roy, all of our businesses are performing exceptionally well. The demand for our products is strong, and we are doing everything we can to ensure uninterrupted supply and best-in-class service to our customers. In order to ensure continued success in fiscal '24, we are proactively making changes to our manufacturing and supply network. This includes increasing our production capacity for plasma disposables and securing additional vendor contracts. Most initiatives are underway, resulting in an additional impact on operational efficiencies in the second half of our fiscal '23, which I will discuss in more detail momentarily. Moving on to gross margins. The third quarter adjusted gross margin was 52.5%, a decrease of 240 basis points compared to last year when we reported one of our highest ever adjusted gross margins of 54.9%. We continue to experience strong volume growth and realize benefits from price and our operational excellence program. Offsetting these benefits was a 70 basis point onetime inventory charge due to the effects of COVID in China, additional inflationary pressures, including operational inefficiencies as we work to increase our production capacity and higher depreciation expense. Adjusted gross margin year-to-date was 53.7%, a decrease of 40 basis points compared with the first nine months of the prior year. The primary drivers include strong growth in volume, benefits from price, mix and our operational excellence program, offset by higher manufacturing and supply chain costs and depreciation expense. Adjusted operating expenses in the third quarter were $101.4 million, an increase of $17.6 million or 21% compared with the prior year. As a percentage of revenue, adjusted operating expenses increased by 90 basis points to 33.2%. Adjusted operating expenses year-to-date were $299.9 million, an increase of $46.7 million or 18% compared with the prior year. As a percentage of revenue, adjusted operating expenses year-to-date decreased by 10 basis points to 34.7%. Higher adjusted operating expenses in both periods were driven by higher performance-based compensation, continuous investments in sales and marketing, higher freight costs and normalized spending levels, partially offset by additional savings from the operational excellence program. In our third quarter, we also had higher research and development costs, primarily driven by increased investments in product innovation. Adjusted operating income was $59 million in the third quarter and $164.5 million year-to-date, representing increases of $0.2 million and $24 million, respectively. As a percentage of revenue, adjusted operating margin was 19.3% in the third quarter and 19% year-to-date, down 330 basis points and 30 basis points, respectively, when compared with the same period in fiscal '22. We reaffirm our adjusted operating margin guidance in the range of 18% to 19%. Our adjusted operating margin guidance includes higher performance-based compensation, approximately 380 basis points of impact from macroeconomic headwinds and increased operational inefficiencies, partially offset by $26 million in target fiscal year '23 gross savings from the operational excellence program. The adjusted income tax rate was 25% in the third quarter and 24% year-to-date, compared with 21% and 22% in the same period in fiscal '22. The higher income tax rate in our third quarter was related to changes in jurisdictional earnings as well as a onetime catch-up related to executive stock compensation. We expect our fiscal '23 adjusted income tax rate to be approximately 24%. Third quarter adjusted net income was $43.6 million, up approximately $1 million or 2%, and adjusted earnings per diluted share was $0.85, up 2% when compared to the third quarter of fiscal '22. Year-to-date adjusted net income was $116.5 million, up $17 million or 18% and adjusted earnings per diluted share was $2.26, up 17% when compared with the first nine months of fiscal '22. The combination of the adjusted income tax rate, interest expense and FX had a negative $0.02 a $0.12 impact on adjusted earnings per diluted share in the third quarter and year-to-date, respectively, when compared with fiscal '22. We are updating our fiscal '23 adjusted earnings per diluted share guidance to be in the range of $2.90 to $3 compared with the previous guidance of $2.70 to $3 The midpoint of our adjusted earnings per diluted share guidance includes an approximate $0.16 headwind from volatility in foreign exchange, adjusted income tax and slightly higher interest expense. Now let's discuss our balance sheet and cash flow. Cash on hand at the end of the third quarter was $224 million, down $36 million since the beginning of the fiscal year, primarily due to the $75 million accelerated share repurchase program, $35 million in earnout payments related to previous acquisitions and a €30 million investment in Vivasure Medical, partially offset by higher net income. Free cash flow before restructuring and restructuring-related costs was $119 million compared with $75.8 million in the first nine months of the prior year. The higher free cash flow before restructuring and restructuring-related costs was mainly due to a higher cash flow from operating activities. These include significantly higher net income, lower inventory, primarily due to the Nexus conversions in the U.S. and higher accrued liabilities, including higher performance-based compensation, excluding capital placements, inventory increased year-over-year We believe in our ability to generate strong cash flow and update our guidance for free cash flow before restructuring and restructuring related costs for fiscal '23 to be in the range of $160 million to $180 million compared with $150 million to $180 million previously. The updated guidance reflects higher net income and fiscal benefits from net working capital in fiscal '23. Before I turn the call back to the operator, I'd like to summarize a few key takeaways from today's call. In our Plasma business, we are experiencing unprecedented growth in collection volume across all of our customers, disproportionately contributing to the anticipated 35% to 40% revenue growth in our fiscal '23. Our technology is enabling substantial cost per liter improvement, and we are making meaningful progress with our innovation agenda. Hospital growth is propelled by revenue growth in hemostasis management and vascular closure, strengthening our market leadership and improving our adjusted gross margins. This business continues to prove itself as a growth engine, and we look forward to continued momentum in fiscal '24. The margin expansion goals we presented in our long-range plan are on track despite the additional near-term operational inefficiencies. The operational excellence program continues to drive meaningful benefits for our company from mitigating the effects of macroeconomic headwinds to helping effectively meet customer demand for our products. And finally, the strength of our underlying business, coupled with steps we've taken over the past few months will enable consistent expansion of our capital capacity. With the capital allocation priorities being unchanged, we will be disciplined with allocating capital to high-impact, high ROI project that accelerate growth and value creation. Hi, good morning. Thanks for taking the questions. Chris, maybe kind of a first multipart question. But just kind of given the current environment right now and your recent commentary at a conference, and you sounded very confident in growth in every year of your LRP, and including next one. Just how should we think about that, especially in the context with the amended CSL agreement and how you're thinking about that influencing the near-term plan? And then just on CSL, maybe just - I know you don't want to get into the specifics on revenue. But for whatever assumptions investors want to make on the revenue impact for '23, '24 or '25. Can you just maybe talk about the potential flow through to EPS? I mean at Analyst Day, you gave a slide that gave us some incremental detail there for fiscal 2022. But just maybe walk us through the puts and takes if anything has kind of changed on that end, sorry for the multipart there. Thanks, Drew. Appreciate you dialing in. In terms of the macro environment and our degree of confidence, it remains quite high, right? There are external challenges for sure. But I think as an organization, we benefit as much in this environment as we are challenged. We look at the durability of our Blood Center business. We look at the essential nature of what we do in a hospital, whether it's cardiovascular, interventional cardiology, trauma transplant, right? These are all high demand issues. So if hospitals are staff and functioning, we're going to continue to perform as we have. And then Plasma has done very well in good markets and in bad alike, and there's clearly strong forces at work that are helping what our customers are leaning heavily into, which is to drive increased plasma collections. So there are challenges on the cost side. James highlighted a bunch of those, and we're happy to talk through those. But from a macro perspective, there's real uptick in demand, and we don't see that abating across any of our three businesses anytime soon. In terms of the CSL agreement, I know there's a ton of curiosity around that. And I appreciate that you can understand that the terms of the agreement are strictly confidential. What I would say at the macro level, again, is this is good for patients. It's good for donors, it's good for customers and it's good for shareholders. Our view from this from the outset has been that we are playing the long game, and we will continue to invest and deliver accordingly. Anything that gets pulled forward from the CSL agreement will be additive to our prior commitments around growth in each year of the LRP and the overall margin expansion that we've outlined. Got it. Thanks. And then just maybe a near-term question, but with a biotech companies readout potentially in the second quarter, how are you kind of thinking about that as a potential structural impact for plasma over the longer term? Thanks for taking the questions. Yes. Thanks, Drew. We look at that near and long term. We've done a bunch of modeling. We don't profess to have any proprietary insight beyond what we hear from key opinion leaders and what we know from other algorithms of competitive entries in the biologics space. Candidly, from a patient service perspective, we hope that anti-FcRn has a role to play going forward, particularly in therapeutic areas where IG may not be the most efficacious treatment. From what we have seen and the most recent communications, we stand firm around our original assumptions, which is we've always talked about the long-term growth in demand for IG somewhere in that 6% to 8% range. And you can shave a point off of that, I guess, in either direction, depending on the relative success of the FcRn players. But from our vantage point, we feel quite good about that base assumption. We're going to watch carefully to see the next milestone readouts and talk closely with all of our customers about their view on this. But 6% to 8% demand for IG converts nicely to 8% to 10% demand in collection volumes, probably closer to 10% to 12% organic growth, just given changes in the nature of subcutaneous for example, requires more IG for the same dose equivalency. So we'll see this revert eventually to that long-term mean of 8% to 10% with a bit higher in our business because of mix and some of the other things that we have going on. But there's nothing we've heard or seen that would back us off of that long-range forecast. Yeah, good morning. Thanks for taking my questions. So I want to ask one on the gross margins. We've seen some really strong growth from the overall company from the Plasma business here. And you - but yet your gross margins have been down. And I understand there is some one-off factors, but inflation and things like that. But I guess, is there just a mix effect happening with the Plasma gross margins being lower, that's where you're seeing the strongest growth? Or I guess why is it - I would have guessed you would have seen more leverage, just given the - how fast that plasma business is growing? Hi, Mike, it's James. Thanks for the question. Yes, on gross margin, it actually is - the mix element has been favorable to us, along with our OEP savings. But what's taken us in the opposite direction and offset those benefits is really a few things, which we've kind of highlighted. One is the additional depreciation from our Nexus systems. And then the other one, which is the bigger part is the manufacturing headwinds on inflation that you just referenced. But also, as I noted in my remarks, we've been experiencing, I would say, larger than usual operational inefficiencies due to the strong growth. That's put us in a position to have to buy components and other manufacturing inputs at spot prices. So things like sterilization or hard-to-find parts, which in the past used at the order in advance. Now when you have to go into the spot market, it raises the prices and it's having an effect on our margin. Longer term, however, we see that part of it that - I'll call the temporary inefficiency part of it abating as we - as our production plans become more - more crystallized. So we do see, over the longer term, the one effect that you just said, mix, really helping us volume helping us and then by removing those inefficiencies that I just spoke about, that's what will push our gross margins much higher as we get out into our LRP. That's helpful. Thanks. And then I understand that you don't want to really comment on the specifics of the CSL agreement, but we do have to update our models for '24 and '25. And I think for the most part, based on what you said at the Analyst Day, we took our CSL out of our - we're assuming no CSL revenue beyond '23. So I mean, is that kind of the message here just to be conservative and not put anything in there for now until you guys give your guidance, I guess, for '24? Or... So Mike, it's a challenge, and we appreciate what you're trying to do on that. We just need to balance disclosure requirements on one hand versus - and our desire for transparency with the need to protect customer confidentiality across the board. This is now effectively a three year agreement. So we think differently about the duration. Sitting here where we are at this point with less than two months remaining in the fiscal year, yes, we can confirm there will be revenue from CSL in FY '24. The process that we're about to go through with all of our customers is to get very clear about what the demands are. We are facing unprecedented demand. It's great. We've expanded our manufacturing capacity. Our supply chain resilience, et cetera, to respond, and the response has been nothing short of extraordinary in the eyes of our customer. So we feel great about that and our ability to continue to deliver over the next two months, we'll sit down and go through this in detail with each of our customers, and the additional volumes will be included when we guide in May for FY '24. Hi, good morning. And thank you for taking the question. I actually have two. If you previously gave us $88 million for CSL contribution this fiscal year and then you raised the guidance for the fiscal year for plasma. Is that raise all attributed to the new extended agreements? Or is there something else in there? Hey, Joanne, what we'd say is the guidance that we've put forward for the year reflects strong volume momentum, favorable mix and improved price across all of our customers, right? But as I said, we increased production and improve both the agility and resilience of our supply chain to provide uninterrupted supply. We and our customers are benefiting from that and as are the patients that they care for. Okay. My second question has to do with China. Could you just peel apart for us what is happening in that market for you? And then how do we think about it falling off over the next couple of quarters and becoming less of a headwind? Thank you. Yes. So we - two of our businesses are well represented there, both our Blood Center business and our Hospital business. I'll get us started and if there's any further follow-on questions, I'll defer to Roy for the Blood Center piece. Blood collections in plasma are different. They are overseen by the central government. And fortunately, for us, because of the government's approach there, we've had good volume and demand throughout. We're the share leader there, and we've benefited by that. So blood is largely unaffected. That's probably not fair to the folks on the ground who are working feverishly to actually be able to deliver. But from a results perspective, it's largely unaffected. Where we're getting challenges is in the hospital base in terms of procedure volumes. And with the various waves and the change in policy towards COVID, both our cell salvage and our TEG businesses have had meaningful challenge kind of delivering. We thought going into this, that we'd see abatement in the second half of the year. We don't expect meaningful abatement certainly over the next two months, and we'll get our heads around this and what that means for next year's guidance. That's the primary driver of why we now see hospital coming in closer to 19% for the year. Thanks. Congrats on a good quarter here. A couple on plasma and a follow-up on hospital. Maybe Chris, the language in the queue on CSL as it mentioned PCS2. Just wondering if there is a potential that they take a look at Nexus Persona just considering the real-world experience out there with yields and how that plays into the extension? And then the follow-up on plasma will just be again, how do we think about the additional volume flowing through to margins? Obviously, excess volume plays at the margin. So what is the potential movement in margins, both gross and operating from the additional volumes? And I'll have one follow-up on hospital? Thanks. Thanks, Anthony. The CSL agreement is essentially an extension off of the existing agreement, which is non-exclusive for PCS2 devices and the disposables through those devices. So that hasn't changed. As it pertains to how we think about plasma and volumes and margin, maybe I'll invite Roy to comment. Thanks, Anthony. The plasma business overall is growing very well in the U.S. We're seeing a growth overall sitting around 46%. So it's gone very well overall. We're pleased with how things are going. As far as the business is concerned long term, we're really going to have to watch how the economy impacts that and how the growth of the sort of business continues as we see changes in the macroeconomics around the U.S., which are really helping drive some of the growth in the plasma business. As far as margin is concerned, obviously, that will be driven as we move forward with any kind of conversions around product, and that's something we'll see in the future possibly. But at this point, we're just really focused on grabbing the volumes, continuing to drive our production upwards and making sure we're successful as we can be supplying our customers and staying ahead of their demand. Great. Maybe the follow-up on hospital just on VASCADE, maybe just a recap on the penetration in the 600 target EP sites in the U.S., sort of where that sits. And how we should think about how the European launch of VASCADE MVP should play out over the next few quarters? Thanks. Yes. Thanks for the question, Anthony. In terms of VASCADE continues to exceed even our own high expectations for that product mix. What we're seeing in the U.S., clearly, there's some seasonality and some challenges. We're not immune from those in terms of electrophysiology procedures. What's really impressive for that team is as we saw some slowdown in procedure volumes, they leaned even harder into new account opening So we're well through the first half of the top 600 in the U.S. We're pushing hard into that second half, and they did even more of that as the quarter progressed. So you saw the momentum coming through, particularly in fourth quarter and now carrying - excuse me, in December are now carrying over into our fourth quarter. So that's a team that is a resourceful as they are focused and they've been able to get there on new account openings this quarter rather than utilization. Obviously, we need the utilization, and I think that will continue going forward. So we feel very good about it. In terms of the CE mark in Europe, that presents a real opportunity. We're fully a year or more now ahead of schedule in that process. The team has been very thoughtful about how to use some of the benefits that we're seeing across our business to get the additional investment. We're talking about a $1.3 billion international TAM for that product family. And the European launch is the first opportunity to go against that. We're trying to take a page out of the playbook from the U.S. team. So it is very targeted, very focused by country and by key account within the country. We expect to have our first set of cases supported later this quarter in Italy and very quickly thereafter, we'll move to Germany and the other European markets. So the outperformance we're seeing across hospital and the other businesses is providing the opportunity to fund additional investment in making that European launch that much more robust. And I think we've got a really good playbook. We'll leverage our existing back-office infrastructure, but we're putting dedicated teams on the ground in the major markets to make sure that there's no negative effect on our other hospital-based businesses. Hey, everybody. Thanks for the question. Maybe to start just on plasma. I think you were up on an absolute dollar basis, about 6% quarter-over-quarter in fiscal 3Q. Normal, I think, from a volume perspective in North America, you said is 3 to %, so a little bit above, but not too much. And then when we think about the guide for 4Q, I think it's implying something maybe a little bit bigger of a step down than the normal kind of 7% or so in the fiscal fourth quarter. So just are we back to normal in this kind of catch-up and bolus that's driving that faster growth on some of the easier comps is largely behind us? Or how do we think about where we stand relative to a world without COVID or normal and getting back to the typical seasonality that we would see. Just help me think about the trajectory in plasma please? Thanks for the question. What we're actually finding is that we're seeing continued seasonality in the business. We're doing a little bit better than we expected. It is slowing down a little bit as the growth comes through. Our customers are still impacted a lot by staffing problems and donor issues. So we're still seeing that affecting the business overall. But we are definitely seeing slightly above normal seasonality still continuing to occur, which is a good sign. This is our fifth quarter and we were we've seen above seasonality in the business. The only thing I would add to that, Andrew, is we think about sub-segments within plasma, we think about new centers versus mature centers. And what's very powerful and will be at the core of our focus as we get our plans together for FY '24 is these new centers are - represent twice the volume they did on a percentage basis, pre-pandemic. And they continue, even in the most recent period to track almost spot on into the historic growth uptake. So that's a really encouraging sign. What's less clear is how fast the remaining gap on the mature centers will close. We see really good things happening on the Southern border, for example. But that's one we're watching for, and we'll have the conversations I mentioned alert our customers to really dial in on that. Great. And if I can sneak one more in. Just on VASCADE and everything you just sort of talked about in a prior question. When we think back to the Analyst Day and the LRP, obviously, there was a little bit longer time before you expected to be in Europe. So when we think about getting into Italy really pretty soon in some countries to follow, should we view that as incremental to at least the interim growth trajectory in that LRP? And help me think about what the timing there can look like and the magnitude maybe of some of these early launches? Yes. It's a bit too early to guide for '24, particularly on a market like that, that is so nascent. What I would say is this is a great example of how outperformance against what we thought was a pretty ambitious LRP year-to-date in FY '23 is allowing us to free up funds to invest in growth as it presents itself. So we didn't have any plans in FY '23 when we started the year for a build-out of a direct sales force in Europe this year. We've been doing that. You see that passing through. It's a little bit of a challenge in terms of our operating margins, but it's exactly the right thing to do in terms of creating momentum. So I think this is yet another example of accelerating a planned investment and maybe expanding beyond the base of the planned investment to ensure that the upside is there for us. And as James said, it's - these are challenging times, things are expensive. It's expensive to be doing the hiring, but we think we'll be better served for it, and we'll come back as part of the FY '24 guidance in May and give you as much detail as we can about how VASCADE is going to contribute accordingly. Hey, good morning. Chris, you mentioned the investment capacity expansion. And I'm just curious if you could give us some commentary when you look at plasma and maybe VASCADEÂ as well with CSL back and the momentum you're seeing, do you now have what you need to be able to supply that demand. And I don't know that I've asked you about VASCADE in the past, but I don't know what facility where you're making that. But I guess if you could give us some color on how you - when you're looking at this LRP '23, '24, '25, do you have all the capacity you need right now? Yes, Dave, thanks for the question. Look, if you ask me, like what am I most proud of, right? I am most proud of this organization's ability to respond to unprecedented demand, and it's exactly as you highlighted, it's across the board, but it's particularly on plasma disposables and on the VASCADE products. And so our teams have leaned in. We mentioned back in June, we had opened a new facility in Pittsburgh, PA. We've asked things of that facility that we never intended to ask at this point in the process, and they've responded wonderfully as has the rest of the network. So thankfully, we did OEP, we're doing OEP. We're on track for those savings this year and cumulatively. But the big benefit of OEP is agility and the increased capacity, the resilience to be able to deliver. It is a challenge, and we are managing day-to-day. But I'm proud to say that as an organization, we haven't disrupted or stocked out any of our major customers, and that's a testament to the supply chain effort. So I feel quite good about our ability to meet the higher targets that we've put forward. And I think that's part of the strength and the goodwill that we're building with customers. I said earlier, we're playing the long game, and we're playing to win and being able to supply them in this environment is a huge part of it. VASCADE as we acquired that from Cardiva, it's actually manufactured in a separate stand-alone plant down in YMS [ph, We've got plans underway to essentially double the capacity. They've risen to the challenge as well, and we don't have any worries about being able to meet demand. Great. And maybe a quick follow-up. I think I can interpret the CSL news correctly, but you know, do you have any additional thoughts on the Terumo device? And I guess any update that you're seeing of installs or how it's being used. I think the extension says something, but I'd just love to get your most recent thoughts? Yes, Dave, I appreciate the question. We're not going to comment on competitor’s conversion or proprietary activity at any of our customers. We're really pleased, as I said, global manufacturing and supply but also our own rollout, right? We completed our technology upgrades back in September or August and September. Our focus is on helping those customers scale and deliver record volume. Persona is a big part of that. The yield enhancements, the emerging data that gives us increased confidence that this is a safer and better way to collect, we're leaning into that. And I think we'll continue to seek opportunities to further advance our competitiveness, whether it's yield or speed or connectivity or overall donor engagement. We're hitting it hard, and we're going to continue to lean into it. Thank you. And this concludes our question-and-answer session. Thank you for your participation in today's conference. You may now disconnect. Everyone, have a great day.

EarningCall_318

Good morning, everyone. And welcome to the Anavex Life Sciences’ Fiscal 2023 First Quarter Conference Call. My name is Clint Tomlinson, and I’ll be your host for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. The call will also be available for replay on Anavex’s website at www.anavex.com. Before we begin, please note that during this conference call, the company will make some projections and forward-looking statements. These statements are only predictions based on current information and expectations and involve a number of risks and uncertainties. We encourage you to review the company’s filings with the SEC. This includes, without limitation, the company’s Forms 10-K and 10-Q which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements. These factors may include, without limitation, risks inherent in the development and/or commercialization of potential products, uncertainty in the results of clinical trials or regulatory approvals, need and ability to obtain future capital, and maintenance of intellectual property rights. Thank you, Clint. We appreciate everyone joining us on today's conference call to review our most recently reported financial results and to provide our business update. We are excited with the continued advancement of our lead product candidate ANAVEX 2-73 in Alzheimer disease and Rett syndrome as we maintain our attention on execution across each of our clinical programs, and overall business operations. We were very pleased to present top line data of the randomized double-blind placebo controlled Phase 2b/3 study for the treatment of early Alzheimer disease at the CTAD Congress 2022 on December 1. The trial met both co-primary and secondary endpoints showing statistically significant reduction of clinical decline as measured by those endpoints. We are excited about the data and plan to submit the data for publication and peer reviewed medical journal in the near term. As a reminder, Alzheimer disease represents a growing burden to healthcare systems and societies worldwide. This disease is often multifactorial, and complex in nature. We believe that our precision medicine platform and novel central nervous system mechanism improve the chance of clinical success. We are pleased by the results of the placebo-controlled Phase 2b/3 Alzheimer disease trial, which data suggests that ANAVEX 2-73 blarcamesine, an orally available small molecule activator of the upstream sigma-1 receptor is pivotal to restoring neural cell homeostasis and promoting neuroplasticity and might be at the forefront of biomarker guided pathway based targeted precision medicine drug development. We look forward to presenting the complete data set of the study as well as the other long-term study data of the other programs, including Parkinson disease, Dementia and Rett syndrome. With a deep portfolio of promising therapies, we believe that Anavex remains well positioned to address the urgent needs of patients affected by neurodegenerative in rare neurodevelopmental diseases. Going back to the Rett syndrome program, we announced recently on February 2 last week, the completion of enrollment of the randomized placebo-controlled EXCELLENCE Phase 2/3 study for the treatment of pediatric patients with Rett syndrome. We expect to announce top-line results from this study in the second half of this year. In Parkinson's disease Dementia, we are planning to announce the data from the 48-week open-label extension of the previously successfully completed Phase 2 study. In other indications, recent communication with the FDA confirms our strategy to advance ANAVEX 2-73 for the treatment of Fragile X syndrome. We plan to initiate this trial soon, and we'll share more details about this clinical program in the near term as it becomes available. Further, pipeline expansion of the Anavex platform using gene biomarkers of response applying precision medicine of neurological disorders is expected, including planned initiation of an ANAVEX 2-73 imaging-focused Parkinson disease clinical study sponsored by the Michael J. Fox Foundation, a planned initiation of our Phase 2/3 three clinical trial for the treatment of a new rare disease indication and the planned initiation of ANAVEX 3-71 Phase 2 clinical trial for schizophrenia. And last but not least, we expect several clinical publications involving ANAVEX 2-73 and ANAVEX 3-71 and a Rett syndrome burden of illness study. And now I would like to direct the call to Sandra Boenisch, Principal Financial Officer of Anavex, for a brief financial summary of the recently reported quarter. Thank you, Christopher, and good morning to everyone. We continue to demonstrate operating fiscally responsibly. During our first fiscal quarter, general and administrative expenses were $3.3 million, compared to $3.1 million for the comparable quarter of fiscal 2022. Our research and development expenses for the quarter were $12.1 million as compared to $8.7 million for the comparable quarter of fiscal 2022. Overall, we reported a net loss of $13 million or $0.17 per share, inclusive of $5.3 million in non-cash compensation items. Our cash position at December 31, 2022, was $143.6 million. During the quarter, we utilized cash and cash equivalents of $5.8 million to fund our operations. At our current cash utilization rate, we believe we have sufficient cash runway to fund operations and clinical programs beyond the next four years, consistent with guidance in previous quarters. The increase in research and development expenses over the comparable period is primarily related to the expansion of our team and an associated increase in compensation and non-cash charges period-over-period as well as costs associated with our Phase 2b/3 study, ANAVEX 2-73-AD-004, and the manufacture of additional clinical trial supply for upcoming pipeline programs. Thank you, Sandra. This is an exciting time for the company, and we remain on track for completion and readout of ongoing clinical trials and initiation of additional biomarker-driven precision medicine clinical trials as planned. Thank you, Christopher. We will now begin the Q&A session [Operator Instructions] The first question is going to come from Soumit Roy at Jones Research. You can go ahead, Soumit. Hi, everyone. Congratulations on the progress. Could you give us a little color on what kind of details on the Alzheimer data we are going to expect? Are we going to see some MRI data? Or time course of how the reduction in the cognitive decline has occurred or something like that? Yes. So several items will be in the paper, in the publication. Of course, we made sure that the study has a lot of biomarkers in additional measures of end points. So among them is MRI, which is a very important marker of pathology, which is the most accurate picture of the brain, and it's very well described that brain atrophy moves in this pathology aggressively. So that will be part of the analysis as well as additional biomarkers of pathology like a better intel as well as the biomarker, which are specific to Anavex, which is the sigma-1 variant analysis, which was clearly prespecified which you remember, we noted that patients with a wild type sigma-1 receptor did much better compared to those who had a variant. But because the variant carriers were in the minority, often that signal overall was not affecting the significance of all patients, but it was notable that there was a better outcome in patients with wild type sigma-1 carrier status in previous studies. So we are looking forward to seeing how this plays out in this study as well. But then also, we will see the response to the endpoints of the study depending on doses as well as over the period of time because we measure every three months the time points of the -- within the study. And then you will see additional endpoints, which have been included in the study, like quality of life, sleep quality and other behavioral measures, which are related to the Alzheimer pathology. Thank you for the detail. That was really helpful. Should we expect the data to come out first half of this year? Or are you -- it'd be more like second half would be our expectation? We actually try to do this as soon as possible because we want to share that also with the agencies in the FDA in Europe. So we are really keen to do that as soon as possible. But at this point in time, it's too premature to give guidance on the timing, but you can be assured we do that as soon as possible. Hi, good morning. Thank you very much for taking my question. So Christopher, can you talk about your plan for the regulatory discussion with the FDA on the Alzheimer's indication? Have you started any [technical difficulty] talk to the FDA? Okay. No problem. So yeah, I was wondering your plan for the discussion with the FDA. Have you started anything? Or do you have to wait for additional data to be available before you can start that conversation with the FDA? That's correct. The FDA engages when you have data, and that's exactly where we are. So the data means a complete data set as far as possible, and that's what we want to -- that's why we're also keen to complete that, as I just mentioned, because that's how you can engage with the FDA as well as with the European EMA, agency. Okay. And then switching to the Rett syndrome study. I believe though press release announcing over enrollment had the language that with the FDA's input, you are using the primary endpoint. So I wanted to confirm that the primary endpoint is RSBQ and you see similar to -- or the same to the one used in the EBITDAR study? And so has the FDA agreed that the AUC, the modified RSBQ scale can be an appropriate endpoint for Rett syndrome study? Yeah. We have it described in clinicaltrial.gov, and it was also never change in clinicaltrial.gov for the EXCELLENCE study. It is the RSBQ primary endpoint, and the CGI is key secondary endpoint over the course of the trial. Okay. Great. So the last question, I believe that the original plan is to initiate all those studies that you talked about by year-end last year. And I understand that the focus was on the Alzheimer's disease program. But are there any specific reason for the delay? Or -- also, are you able to provide any specific in terms of timing? When do you expect to initiate those studies? Yeah. So we were very ambitious last year when we made those plans. And the attention to detail required really to finance and work on the specific protocol because it's easy to start any trial. It's more difficult to finish a trial successfully, and that's what we're aiming for. So I think we should appreciate that initiating a trial is not difficult, it's about making the trial successful and meaningful for when it's growing. And so when you look at each trial, there's always things to consider and you learn to improve it as you go before you really start it. And we didn't want to rush it. So that's why we want to say -- we want to do this with the right timing. But obviously, we will catch up very nicely now with all these trials, which we plan to do. And they are still on track to be executed. Good. Thank you. Again, we are very much looking forward and we're very excited about the company's potential as we build on biomarker-driven precision medicine studies with significant unmet medical need and economic burden. And we're looking forward to upcoming data readouts in the Parkinson's dementia and Alzheimer's disease with complete data set as well as Parkinson's dementia open-label extension and the pancreatic Rett syndrome study. Thank you very much.

EarningCall_319

Welcome to the Wynn Resorts Fourth Quarter 2022 Earnings Call. All participants are in a listen-only mode until the question-and-answer session of today’s conference. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. Thank you, operator, and good afternoon, everyone. On the call with me today are Craig Billings, Brian Gullbrants, and Steve Whiteman [ph] in Las Vegas. Also on the line are Ian Coughlan, Linda Chen, Frederic Luvisutto and Jenny Holaday. I want to remind you that we may make forward-looking statements under safe harbor federal securities laws, and those statements may or may not come true. As we prepared for this call, I looked at an old analyst note that was published after our Q4 2019 earnings. The expectation for 2022 EBITDA Wynn Las Vegas in that note was $482 million. Here we are three years in the global pandemic later and Wynn Las Vegas just printed $816 million of normalized adjusted property EBITDA, $816 million. I'm confident that this is an all-time record for a stand-alone Las Vegas strip property. And mind you, we did not deliver this result by nickel and diming on service standards and reducing staff to drive operating leverage. The team did it by focusing on what we do best. Great products, great service, great programming, and it showed in our market share and pricing power. The Wynn Las Vegas team absolutely crushed it in 2022. Our business in Vegas is stronger and more relevant than it has ever been. I'll talk more about the fourth quarter in Vegas in our outlook in a moment. Turning to several other significant events, I'd like to touch on our concession renewal and the reopening of Macau. I was in Macau for nearly three weeks in December. And after going through the then required quarantine, I was fortunate to attend the signing ceremony for our new concession. I'm proud of the plan that we put forward as part of the concession renewal and believe that the CapEx and programming we proposed will be additive to our business there over the coming years. I would like to thank the government of Macau for their faith in us. And importantly, I would like to thank the Wynn Macau team for their dedication to our business over the past three very difficult years. Fortunately, recent actions by both Macau and Mainland authorities to reopen the market give us great confidence that the difficulties are behind us and the near-term future there much brighter. Over the past several weeks, we've welcomed back an increasing number of guests as the region has reopened to travel and tourism in a meaningful way. With our premium product and service levels, we are well positioned to lead the post-COVID recovery in Macau, and our strengths were evident during the recent Chinese New Year holiday period. In the casino, mass table drop reached 95% of 2019 Chinese New Year levels with strong play across the spectrum from premium mass to core mass. In direct VIP, turnover was 40% above pre-COVID Chinese New Year levels. And importantly, we estimate that our hold-normalized GGR market share during the month of January was consistent with 2019 levels despite all the changes in the junket environment, define the expectations of those who continue to incorrectly believe that we are solely a VIP focused organization. On the non-gaming side, hotel occupancy was 96%, and our tenant retail sales increased 34% compared to Chinese New Year 2019. Overall, during the Chinese New Year period, we delivered our strongest EBITDA performance since the onset of the pandemic, approximately $4 million of normalized EBITDA per day. Turning back to Las Vegas. The team at Wynn Las Vegas turned in a fourth quarter record with $219 million of EBITDA. We saw broad-based strength across casino, hotel, F&B, entertainment and retail, all well above Q4 2021 levels, despite the difficult year-over-year comps. Our investment in people, facilities and programming and our team's deep sense of personal ownership of our business continue to drive growth. We continue to monitor economic trends and forward bookings at Wynn Las Vegas. We're encouraged that the strength we have experienced over the past several quarters has continued into Q1. Similarly, our forward-looking indicators also remain quite strong despite well-known macro concerns as room bookings are pacing at/or above pre-COVID-19 levels on substantially higher ADRs. Turning to Boston. Like Vegas, Encore had a strong quarter, generating $63 million of EBITDAR. We saw strength across the casino with record gross gaming revenue and on the non-gaming side with strong hotel revenue, driven by both ADR and occupancy. The strength has continued into the first quarter with EBITDA per day in January, largely consistent with trends we have experienced over the past few quarters. We were also pleased to launch retail sports betting at Encore Boston Harbor last week, averaging a little over 0.5 million a day in handle over the first six days, which is about 80% of the average daily handle at Wynn Las Vegas. During those six days, we also signed up about 30% more Wynn Rewards members than normal. We continue to expect the book to be a significant driver for new customer acquisition over time. We also continue to advance our plans for our upcoming development project across the street from the property that will include incremental parking, food and beverage and entertainment amenities. At Wynn Interactive, our overall EBITDA burn rate in the quarter ticked up sequentially to $28 million due to a well-publicized World Series bet that went against us. Adjusted for that single bet, burn was roughly flat. Our team continues to stay disciplined on cost while driving improved marketing efficiency. We're looking forward to the potential for a significant catalyst for WynnBET in Massachusetts with the combination of our recently launched retail book and the expected upcoming launch of online sports betting. Lastly, we are quickly advancing our planning for Wynn Al Marjan Island, our integrated resort in the UAE. We're in the late stages of programming for the resort, and I expect we will be driving piles for the foundation of the property by the middle of the year. I also expect we will share renderings, programming and plans publicly over the next few months. The more time we spend in that market, the more confident we are in the project. At Las Vegas, we generated a fourth quarter record of $219.3 million in adjusted property EBITDA on $585.5 million of operating revenue during the quarter, lower-than-normal hold negatively impacted EBITDA by around $10.5 million in Q4. Our hotel occupancy was 89.9% in the quarter, up 350 basis points year-over-year and up 50 basis points versus Q4 2019. Importantly, we've stayed true to our luxury brand and continued to compete on quality of product and service experience with our overall ADR reaching a record $492 during Q4 2022, up 11.8% versus Q4 2021 and 53% above Q4 2019 levels. Our other non-gaming businesses saw broad-based strength across F&B, entertainment and retail, which were up nicely year-over-year and also well above pre-pandemic levels. In the casino, our Q4 2022 slot handle increased 20.9% year-over-year and was 69% above Q4 2019 levels. Similarly, our table drop was up 1.1% year-over-year and was 43% above Q4 2019 levels, despite still suppressed international play during the quarter due to COVID-related travel challenges. The team in Vegas has done a great job of controlling costs without negatively impacting the guest experience, delivering adjusted property EBITDA margin of 37.4% in the quarter. On a hold-normalized basis, our EBITDA margin was up approximately 1,300 basis points compared to Q4 2019. OpEx, excluding gaming tax per day was $3.8 million in Q4 2022, up 25% compared to Q4 2019 levels but well below the 59% increase in operating revenue. In Boston, before getting into the details, I'd like to point out that following the closing of the sale leaseback transaction on December 1, we're now reporting adjusted property EBITDAR for this business. In Q4 2022, we generated adjusted property EBITDA of $63.3 million with EBITDA margin of 29%. We saw broad-based strength across casino and nongaming during the quarter. In the casino, we generated $190 million of GGR, a property record with strength in both tables and slots. Our nongaming revenue grew 13% year-over-year to a record $56.8 million with particular strength in the hotels, driven by 93.9% occupancy and a $404 ADR. We've stayed very disciplined on the cost side with OpEx, excluding gaming tax per day of approximately $1.17 million in Q4 2022. This was a decrease of over 8% compared to $1.3 million per day in Q4 2019 and up modestly relative to Q3 2022. As we've discussed on prior calls, the year-over-year EBITDA and OpEx comps were impacted by a combination of contractual labor agreements, which added around $45,000 per day to our OpEx base, beginning late in Q2 2022, along with a nonrecurring benefit of $2 million in Q4 last year. We're well positioned to drive strong operating leverage as we continue to grow the top line over time. Our Macau operations delivered an EBITDA loss of $59.1 million in the quarter on $190.3 million of operating revenues. Lower than normal hold negatively impacted EBITDA by around $25 million in Q4. While the COVID situation in the region was challenging during Q4, as Craig noted, we were encouraged by the meaningful uptick in visitation and demand we experienced during the recent Chinese holiday period. Our OpEx, excluding gaming tax, was approximately $2 million per day in Q4, a decrease compared to $2.4 million in Q4 2021. The team has done a great job remaining disciplined on costs in a difficult operating environment. Longer term, we are well positioned to drive strong operating leverage as the business recovers over time. In terms of the new concession, we approached the tender process very prudently, carefully balancing our commitments to the government with our responsibilities to our shareholders and, of course, our liquidity position. We're currently advancing through the design and planning stages, but these projects require a number of government approvals creating a wide range of potential CapEx in the very near term. As such, for 2023, we expect CapEx related to our concession commitments to range between $50 million to $220 million. Our future non-gaming investments, including new center set to be home of a unique spectacle show and innovative food halls and an events and entertainment center. As Craig noted, we believe these investments play into our strength as we have a demonstrated track record of introducing innovative non-gaming investments that drive increased tourism and ultimately, strong shareholder returns. Turning to Wynn Interactive. Our EBITDA burn rate increased sequentially to $28.3 million in Q4 2022. However, adjusting for the well-publicized World Series bet that Craig mentioned, it was roughly flat with our Q3 2022 burn rate of $17.7 million. The team continues to control costs while driving improved marketing efficiencies. Moving on to the balance sheet. Our liquidity position remains very strong with global cash and revolver availability of approximately $4.5 billion as of December 31. This was comprised of $952 million of total cash and available liquidity in Macau and $3.5 billion in the U.S. These numbers exclude the undrawn $500 million intercompany revolving credit facility Wynn Resorts entered into with Wynn Macau. We were pleased to close the sale leaseback transaction for the real estate of Encore Boston Harbor on December 1 with gross proceeds of $1.7 billion, further bolstering our already strong liquidity position. Importantly, the combination of very strong performance in Las Vegas and Boston, with the properties generating $1.04 billion of adjusted property EBITDA during 2022 together with our robust liquidity, creates a very healthy leverage profile in the U.S. With our properties performing well in each of our markets and our robust liquidity, I'd like to note our intention to repay our upcoming May 2023, Wynn Las Vegas bond maturity with cash from the balance sheet, reducing our domestic gross leverage by $500 million. Finally, our CapEx in the quarter was $27 million, primarily related to normal course maintenance. With that, we'll now open up the call to Q&A. Craig, Julie, whoever wants to kind of take this one. Craig, I know you spoke a little bit about kind of what you guys saw in Macau during Chinese New Year. To the extent you're willing to kind of comment on what you've seen in the aftermath and kind of the weeks following the holiday, that would be great. Sure. Thanks, Carlo. It's been pretty good, actually. Frederic, do you want to take -- do you want to provide a little more color on that? Sure, Craig. Thank you, Carlo. We have seen typically after post Chinese New Year in the past, the period does see a slowdown. But we have been very encouraged to see the business remaining very, very strong with mass gaming, direct VIP and retail sales better than previously similar period in the past. So, we have seen the resilience of the business post Chinese New Year, I'm very encouraged with that. Great. Thank you. That's helpful. And then, Craig, you talked a little bit about, obviously, what you saw on the VIP side. I believe you said direct VIP was 40% above or so. That was 2019 Chinese New Year levels. Can you comment at all as to what the experience has been with whatever junket VIP there is in the market today? Yes. There was some junket activity over the course of Chinese New Year. Obviously, the situation has changed a lot from the pre-COVID period. I think it's actually a little bit too early to call out what role the gaming promoters and the junkets will play in the market, but there certainly was some activity. Sort of following on Carlo's question, on what you saw in Chinese New Years in the period. Since then, can you talk about the migration of the junket VIP business into the direct and into the premium mass component of your mass business? How do you -- so do you think -- what otherwise would have been the junket, what percentage of that do you think is migrating versus maybe not coming back quite yet? I think it's -- Joe, I think it's way too early to be talking about percentages given the market really just fully reopened on January 8th, so really a month now. We certainly are seeing former junket customers migrate into both, premium mass and into direct. Remember, direct is tricky because there you're talking about credit extension. And so you have to be quite prudent in how you manage the direct business. But unfortunately, it's just a little too early. What I would say is volumes came back, volumes came back strong. The narrative that we're VIP focused, I think, proves to be pretty false. We competed very strongly during the Chinese New Year period, and we're incredibly proud of the results that we had. And when you look back in 2019, we always thought that the direct VIP component was something around 10% to 20% of the total VIP turnovers. Are we fair in picking that? Can you remind us of that? Just was hoping to get a little bit more color on maybe the cost and margin picture as things start to rebound in Macau. Julie, I think in the prepared remarks, you mentioned you were down around $2 million a day in the fourth quarter in Macau, if I called it correctly, down from $2.4 million back in 2019. Just as you're sort of re-ramping, I mean, I think we all really underappreciated the amount of operating leverage that was going to happen in certain markets in the United States, and kind of trying to put some of the tea leaves together around how this may play out for Macau. So just any kind of thoughts on expenses and margins as the recovery begins here? Sure. Yes, you're correct, Shaun. We did talk to our OpEx per day in Q4 with $2 million, which was down from $2.4 million the year prior. We worked really hard last year to preserve cash and to manage OpEx down while we were closed. So obviously, that's not representative of how things will be necessarily moving forward. As you know, we're fully open now and staffing full time in different F&B outlets and so on. So, where that shakes out in terms of margin, it's really going to depend on the mix of business that comes back in that market. It's pretty much the same answer we give when we're asked about margin in Vegas. It's very much mix dependent. And we don't manage our business on margin. That's really the outcome. We manage to our brand, and we staff accordingly. And we're very tight in terms of staffing. We're very focused on doing that appropriately, and we're very focused on -- but we're very, very focused on our service delivery centers as well. And I would just add, it's primarily a mass mix now. So, you're going to have -- that's inherently higher margin. And a portion of the cost savings that we implemented during the COVID period, which, thank God is long behind us, we will maintain. So, the margin profile should be healthy. So again, it's -- we're really talking about a couple of weeks here. So, it's a little bit early to start forecasting specific margins. Great. Understood. And then maybe just the follow-up. Another thing that kind of came up in the prepared remarks was the CapEx outlook in Macau, and I think you gave a pretty wide range. Can you just kind of talk about what would sort of dictate maybe the high versus the low? What are some of the different either projects that could get underway or things that could impact the outcome of the range that you discussed? Sure. So, I think just taking a step back, if you think about our total commitment when we put through our concession proposal, we've committed to $2.2 billion over 10 years. And that's -- obviously, that's a mix of CapEx and OpEx. But we're very focused on getting the CapEx done as quickly as possible so that we can start to drive strong returns from it. The limiting factor is really the approval that we need locally to break ground and build anything. So, it's really not in our hands. That's why we've given such a wide range because from our perspective, we're pacing towards getting through our D&D and designing everything, but we have to go through government approvals for anything that's construction related. So, the range we gave was $50 million to $220 million. Hi. This is Cassandra on behalf of David. You mentioned that digital was nearly broke even in the fourth quarter, excluding the -- resorts. Can you discuss the upcoming launches and whether we should expect the business to inflect to profit this year? Sure. The upcoming -- the most significant upcoming launch is Massachusetts, where obviously, we have Encore Boston Harbor, and I would hope and expect that we will have a reasonable market share because of that -- the presence of that property as our competitors have in other markets. We are driving the business as hard as we can while being prudent. I would expect some point of inflection in late 2023, depending upon how much user -- money good user acquisition we do in Massachusetts, but we have the burn at this point, really, really well under control. And again, as we talked about before, the long-term strategy is really focused on Massachusetts and positioning ourselves for iGaming, which would make the business accretive to our land-based resorts. Great. If I may follow up. Can you talk about your upcoming maturity? And any thoughts about tapping to the capital market now since we have seen some activity in the last few weeks? I think Julie just mentioned in the prepared remarks that we're going to pay down our upcoming maturity with cash on the balance sheet. I wonder just circling back to how things are trending post Chinese New Year, obviously really strong numbers through the holiday. There's been chatter that the drop-off in the market overall, it was a little bit more than seasonal. So, I wonder if you could sort of give your take on that. Is it reasonable to think that there'll just be kind of increased volatility maybe around kind of shoulder periods, or I guess, how would you kind of frame that more than normal for the seasonal drop-off post the holiday? Hi Robin. Yes, I'm not sure you've been talking to, Frederic just mentioned that actually we've been performing above what we would normally see during that drop-off period. But when you say performing above, I didn’t know if that was a combination of you talked about your expenses being down, and so it could be overall EBITDA. But just wondering on the... Okay. So, would you then assume that that's a growth in market share? In other words, what's your take on sort of the overall market volatility that maybe you're gaining share in, it sounds like in that period, but just your take on this. It's a week, right? In the grand scheme of things, it's a week. So, it's hard to read any tea leaves in a week. What I would say is that the market roared back, Macau was a rager on the mass side, on the direct VIP side, on the retail side and on the occupancy side during Chinese New Year, and it outperformed our expectations for the lull period shortly thereafter. Anything beyond that, it's just too early to read. Okay. And just to clarify, when you say it outperformed your expectations, but you meant specifically that it was a better sequential drop off than what you'd seen in '19 or just better than what your expectations were for this year? I wanted to circle back on the $4 million EBITDA per day for Chinese New Year that you mentioned. Is there any way you could put that into historical context, I don't know what it was in 2019 or during other Golden Week or Chinese New York periods? Yes, it would have been -- I don't remember if we've quoted it previously. So, I want to be careful in terms of prior disclosure. But it's substantial relative to prior periods. It's not -- it's certainly not where we peak. I'll put it to you that way, because the junket contribution wasn't there this year. And that was, call it, $700 million to $1 million of EBITDA in a normal Chinese New Year. I think the point is, it's a substantial number, given that the market really opened at the beginning of January, and it gives us confidence in the remainder of 2023 and beyond. Understood. And then, just pivoting to Las Vegas. I mean, to what extent since China is effectively reopened, have you seen that high-end Asia business kind of resurface your Vegas property? Too early to say. I mean, our box [ph] drop in the fourth quarter was pretty strong. So, we've been doing pretty well on the back of domestic box [ph] business. And in fact, those folks from the region that chose to sit it out -- sit COVID out over here. So again, a little bit early to say. You have to go through the process of getting a visa, you have to arrange travel, et cetera, et cetera. But certainly, international travel is a tailwind that we hope to see in Vegas in 2023 given that really in 2022, it was only -- the only real inbound visitation was some from Europe and from Latin America. I may have missed this. But in Las Vegas, can you just provide any additional color on what you're seeing in terms of forward bookings, not only in -- I guess, the first quarter should be particularly strong, but even as we look out over the course of the year, what you're seeing, and any expectations as it relates to kind of convention mix? Sure. I'll start, and then I'll ask Brian to comment. So first and foremost, we have been really intentional over the past year and how we've approached our business in Las Vegas. Our business here is more relevant with the best customers than ever before. And so even with the tailwinds, we've outperformed, yet we're keenly aware of the broader economic environment from interest rates to gas prices to layoffs, and we have a 2023 playbook for any number of economic scenarios. Brian, do you want to talk about your view on 2023 and then perhaps dig a little bit more into convention? Absolutely. As we look to '23, not only were we pacing strong coming out of '22 going into '23, has just accelerated. I'm so excited about what we've got coming in '23. When you look at it, we've got the best teams in the business. We've got the best assets in the business. In Vegas, we've got strong pace of group, particularly as we look forward into '23 and then even beyond. Q1 may be a record for us. It's just really done well. We have strong pricing power in every channel. We got a new show we just launched with Awakening. We've got several projects coming in '23 that are really exciting. And then we kind of kicked things at the end, up a notch with F1 in November. So our outlook for the year, pending no other macroeconomic impacts looks pretty good. We're feeling pretty good about what we can see right now. So on the group side, very strong. We're doing really well on what we can control. We don't control the macro economy. That's a fact. So, how that flows, I don't know. But we're feeling good about our business here. Fair enough. Then if I can just sneak in a quick follow-up on Macau. As you think about how to grow the direct VIP business, you're thinking about that as an opportunity. Is one way to think through maybe some of the customers who’re used to that, both VIP and in the mass market segment as a target customer? And is there any way to frame how big that business could grow? Every customer is unique. And so, it's really difficult. If I had a broad strokes playbook, I probably wouldn't share it on a public call. But every customer is unique. And so, the ecosystem now, which is comprised of junkets but different, promoters and us, it gives us the ability to address a subsegment of those junket customers. Some of them, they're going to -- it's going to take years to figure out. But certainly, a portion of those will migrate into our direct business. You saw it over Chinese New Year. And some of them will migrate into premium mass. But I don't think there's a broad swath playbook that we can talk about. Okay. Well, with that, we'll now close the call. Thank you all for your time today and your support of Wynn Resorts. We look forward to updating you very soon.

EarningCall_320

Good day, ladies and gentlemen. Welcome to the ePlus Earnings Results Conference Call. As a reminder, this conference call is being recorded. Thank you for joining us today. On the call is Mark Marron, CEO and President; Darren Raiguel, COO and President of ePlus Technology; Elaine Marion, CFO; and Erica Stoecker, General Counsel. I want to take a moment to remind you that the statements we make this afternoon that are not historical facts may be deemed to be forward-looking statements and are based on management's current plans, estimates, and projections. Actual and anticipated future results may vary materially due to certain risks and uncertainties detailed in the earnings release we issued this afternoon and our periodic filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K, quarterly reports on Form 10-Q, and in other documents we filed with the SEC. And the forward-looking statements speaks only as of the date of which the statement is made and the company undertakes no responsibility to update any of these forward-looking statements in light of new information, future events, or otherwise. In addition, we'll be using certain non-GAAP measures during the call, that included a GAAP financial reconciliation in our earnings release, which is posted on the Investor Information section of our website at www.eplus.com. Thank you, Kley and thank you everyone, for participating in today's call to discuss our results for the third quarter of fiscal 2023. This was a strong financial and operational quarter for ePlus. We continue to successfully execute on our growth strategy to deliver IT solutions focused on digital transformation, hybrid workforce plans, security, and cloud. With broad-based growth across all customer size segments and vertical markets, we believe we are gaining market share, aided by the breadth of our solutions across the technology stack. The strength of our third quarter results also reflected fulfillment of several enterprise customers large projects due in part to some relief in the supply chain. The investments we have made in our teams and in our capabilities are driving growth and delivering value to our customers. Consolidated net sales increased 26% and our adjusted gross billings increased 29.7% with particularly strong growth in our Technology segment. We are continuing to generate operating leverage, driven by strong topline growth and balanced SG&A management, which has supported our expanded solution offerings. Our net earnings increased 35.1% to $35.7 million and diluted EPS increased 36.7% and both above our revenue growth rate as our focus on operational efficiency continues. As our customers continue to invest in upgrading their IT systems to accommodate remote and hybrid work, ePlus is well-positioned to provide integrated and flexible workplace transformational systems. Our offerings include multi-vendor architecture support, vendor life cycle management, and on-premises data center infrastructure provided in an as-a-service model, such as our Storage-as-a-Service solution. With our customers transitioning more of these processes and workloads to the cloud, they increasingly look to ePlus to develop more strategic security roadmaps and build more sophisticated and more comprehensive security solutions to protect these new virtual workplace environments. As a result, our security business has grown to more than 22% of our adjusted gross billings over the trailing 12 months as compared to almost 20% last year. Our services revenues comprised of professional and managed services increased 7.9% in the quarter and more than 9% fiscal year-to-date. While we don't expect services growth rates to be aligned with top line revenue, as a significant portion are from recurring managed services recognized ratably over the term of the contract, our expanded service capabilities are fundamental to providing comprehensive solutions for our customers. Service margins, while down year-over-year, have stabilized sequentially. We continue to see some pressure in services margins due to project delays and services mix, supply chain constraints and some larger land-and-expand deals at lower margins. Managed services are a key driver of financial growth and a differentiated value-added solution for customers. These offerings generate higher-margin annuity quality revenue and create sticky long-term relationships with customers who value the reduced IT complexity and cost savings that we deliver. Our managed services business also serves to broaden our available market opportunity, as we leverage our capabilities to provide specialized IT expertise in adjacent areas such as cloud and security advisory services. Moving on to our financing segment. Third quarter sales were $11.7 million compared to $17.9 million in the same period last year, primarily due to lower proceeds from sales of leased equipment. As we have frequently noted, our financing segment produces variable results quarter-to-quarter due to the timing of large transactions. That said, its unique offerings remain an important competitive differentiator, providing our customers with flexibility in how they acquire and optimize their IT investments. As we look ahead to 2023, global IT spending is expected to grow at a low single-digit rate this calendar year, according to Gartner, reflecting an uncertain economic outlook. Despite the potential for an economic slowdown this year, we believe that spending in our areas of focus, including security, cloud and networking remains a necessity for many organizations as they support a hybrid workforce and execute on their digital transformation plans. At the same time, the tight labor market for tech workers continues to drive corporate spending on outsourced IT services. Our ability to hire and retain skilled professionals in this tight labor market is a competitive differentiator and a valued service to our customers. We continue to monitor the market and we'll make adjustments as necessary to optimize solutions delivery and staffing levels. In closing, I'm very pleased with our financial results and the progress we have made in broadening our capabilities and strengthening our position to capture future growth opportunities. As a reminder, our fiscal third quarter is seasonally strong, as it marks the end of the budget year for many of our customers. Backed by the strength of our balance sheet, we continue to have the financial flexibility to pursue attractive acquisition opportunities that expand our geographic footprint and are aligned with our growth strategy. Thank you, Mark, and good afternoon, everyone. Our third quarter fiscal 2023 results reflected solid execution by the ePlus team and the continued success of our strategy focused on capturing opportunities in high-growth end markets. Third quarter consolidated net sales increased 26% year-over-year to $623.5 million. Technology segment net sales rose 28.3% to $611.8 million, driven by 31% growth in product revenue and 7.9% growth in services revenue. Adjusted gross billings were $888.6 million, up 29.7% compared to $685 million in the year ago quarter. The adjusted gross billings to net sales adjustment increased to 31.2% and compared to 30.4% in the third quarter of fiscal 2022. Our end market mix on a trailing 12-month basis remained consistent with previous periods. Our two largest markets, telecom, media and entertainment and technology represented 28% and 18% of technology segment net sales, respectively. Health care, SLED and financial services accounted for 14%, 13% and 9%, respectively, with the remaining 18% from other end markets. As Mark mentioned, due to a decline in proceeds from leased equipment sales year-to-year, our financing segment revenue totaled $11.7 million compared to $17.9 million in last year's third quarter. Consolidated gross profit increased 18.1% to $138.4 million, and gross margin was 22.2% compared to 23.7% in the previous year's quarter. Within our Technology segment, gross profit increased by 22.4% to $127.9 million. Technology segment gross margin was 20.9% compared to 21.9% in the year-ago quarter. The decrease in gross margin was due to increased costs for managed services as well as several large competitively priced project-related contracts that blended down our services margin. Product gross margin of 19.2% was stable compared to 19.3% in the last year's third quarter. Financing segment gross profit declined 16.7% to $10.5 million, mainly due to decreased sales of leased equipment, partially offset by higher transactional gains. Third quarter SG&A increased 12.8% year-over-year as we continue to strategically invest in our team to better serve our customers' growing IT needs. At quarter end, our headcount totaled 1,745 and compared to 1,554 in the prior year quarter. The year-over-year change includes 158 customer-facing employees, 101 of whom are professional services and technical support staff members. Increased third quarter SG&A spend also reflected higher variable compensation tied to our improved gross profit performance as well as higher travel expenses for more frequent in-person client meetings. Interest expense was up year-over-year due to higher interest rates and increased borrowing on our credit facility. Overall, operating expense growth was well below our consolidated net sales growth, resulting in an operating income increase of 28.7% to $46.5 million. The effective tax rate was 27.7% in the third quarter of fiscal 2023 compared to 26.4% in the year ago quarter. Consolidated net earnings in the third quarter of fiscal 2023, inclusive of other income, which includes foreign currency transaction gains and proceeds from a class action claim were $35.7 million, or $1.34 per diluted share compared to $26.4 million or $0.98 per diluted share in the year ago quarter. Non-GAAP diluted earnings per share were $1.38 compared to $1.10 in the third quarter of fiscal 2022. Our diluted share count at the end of the quarter totaled $26.6 million compared to $26.9 million in the third quarter of fiscal 2022. Adjusted EBITDA was $53.3 million, 27.6% ahead of the comparable quarter in fiscal 2022. Summarizing our year-to-date performance, net sales in the first nine months of fiscal 2023 increased by 15% to $1.576 billion, mainly attributable to Technology segment net sales growth of 16.6% to $1.532 billion. Adjusted gross billings were up 18.9%, again, reaching another milestone of $2.36 billion. Year-to-date consolidated gross profit amounted to $385.2 million, 11.4% ahead of the year ago period. The consolidated gross margin was 24.4% compared to 25.2% a year ago, with Technology segment gross margin of 22.8% compared to 23.2% reported for the first nine months of fiscal 2022. Net earnings increased by 6.3% to $86.5 million, or $3.24 per diluted share. Adjusted EBITDA was up 9% to $141.9 million, and non-GAAP diluted earnings per share increased 8.3% year-over-year to $3.66 per diluted share. Our balance sheet remains strong with cash and cash equivalents of $99.4 million at December 31, 2022, compared to $155.4 million at the end of fiscal 2022. The decrease in cash and cash equivalents reflected the effect of share repurchases on a year-to-date basis as well as increased working capital needs due to strong demand for our products and services, while inventory increased 57.9% to $244.8 million from fiscal 2022 year-end, we reduced inventory by $30 million sequentially compared to the fiscal second quarter. Shifts in our inventory levels primarily explain the changes in our cash conversion cycle, which increased to 51 days in the third quarter of fiscal 2023, compared to 48 days in the quarter ended March 31, 2022, while improving sequentially by three days. On balance, we are pleased with our third quarter financial results and believe we are well positioned in the market in spite of current economic uncertainty. To recap, this was a strong quarter for ePlus with broad-based demand across all of our customer size segments and vertical end markets. By targeting faster-growing end markets with a comprehensive suite of integrated solutions, we continue to bolster our competitive position and capture incremental market share, supported by our strong balance sheet, expensive industry partnerships and talented team, ePlus remains well positioned for continued long-term growth, and we remain cautiously optimistic despite the uncertain economic environment. Hi. Thank you. You mentioned the fulfillment of -- for projects for several large enterprise customers in the quarter. Can you give us a little more detail on what types of projects or solutions these were and an idea of maybe the magnitude of that or how we might expect that to impact financial results sequentially? Sure. Hey, Maggie, how are you? So a couple of different things there, if I could. I'll touch on why the quarter was up so nicely overall, and then try to work in the deals. So first off, we had a really strong tech quarter both from top line to bottom line. All our customer size segments and verticals were up nicely. Security continues to grow. Some of the focus we put on the mid and enterprise counts grew nicely for us in this quarter. And that's where we're talking about land and expand. We have a few really nice deals in the security, in the data center cloud and in the services space with nice-sized deals with decent margins. Now with that said, some of the things that also added to this quarter that were positives. We saw some easing of the supply chain. So we did see some movement in the supply chain. And I think you may have noticed our open orders are down 5% sequentially, and that's by design, trying to bring that in line. It's still above historical levels. Our inventory was down 30 million sequentially by design, trying to get product out the door, the land and expand deals as you talked about, and then just some year-end budget. But some of the land and expand are with some of your big mid to enterprise customers across, as I said, data center cloud, security and service opportunities. That's great. And any thoughts about how we should consider the impact of that sequentially or on a year-over-year basis for next year? Okay. Yes. In terms of Q4, if I had to look at it, Q4 is traditionally one of our smaller quarters, Q2, Q3 are bigger quarters. We still have a lot of the supply chain, and it's fluctuating by vendor and by solution area, Maggie. So it's literally moving in and out as we go forward. If I look at Q4 sequentially, it would be down. Finance is going to be a really tough compare for us. We had some early buyouts last year. So I think finance will be a tough compare -- and then the -- if I look at the supply chain, I don't know if we'll get as much relief as we did with some of the focus we put on this quarter. Just a follow-up on that last comment with respect to supply chain constraints. How might that affect the results when you're considering performance for the next fiscal year or fiscal 2024? That's a tough variable, as you know, Maggie, that I think everybody is kind of struggling with. These times are moving -- the lead times are moving in and out by vendor -- there are some that are starting to loosen up. We saw networking actually loosened up. So we actually had a nice quarter with -- in the networking section of our business. I do expect that this will continue for a couple of quarters. One of the things that, I guess, a benefit for us as it relates to supply chain, we're not really in the laptop, PC business. So some of the decline that some of the folks are seeing in that space were not going to be affected by -- but for the fiscal year, I think we'll still have the supply chain issues that we've been dealing with over the last year or so. Yes. Thank you. Good afternoon, everyone. Just a follow-up question regarding the strength that you had in the quarter, a lot higher than consensus. And I think higher than although you didn't give guidance certainly higher than you had indicated on the last call. It sounds like demand was good. It sounds like supply opened up. But was there some pull-in where orders that you because of are loosening supply in your own inventory, were you able to fulfill backlog faster than expected? In other words, pulled some sales into this quarter or the December quarter? Yes, Matt, I think there's probably a little pull through. I wouldn't say significant, though. So if you look at it, as I touched on, the back -- the open orders are down 5% sequentially. So there's some there. The inventory is down by $30 million. We've put a very focused effort on getting equipment out the door as soon as we get it. So there's definitely some potential pull through, not dramatic though, to be honest. So, I think we benefited that in the quarter due to some supply chain things that we saw came in a little quicker than we thought. And also, some of the land and expand deals also help with some of the growth that you saw. I don't know if I pulled it out on my piece, but our tech net sales were up almost 28 in change percent. So we saw a really nice quarter in tech across all verticals and customer sizes. And we'd like to think that's by design. And these land and expand deals. So we're talking about, what multimillion dollar orders that you were able to fill perhaps at a discount or at least fulfill orders more efficiently than competitors and then you were giving up some price there because your gross margin was down pretty significantly quarter-on-quarter. Yes. So Matt, I can't comment on the competitors, since I'm not watching their business. What I'd tell you, yes, these are large multimillion dollar deals. As we've always said, we're really focused on the mid to enterprise. We don't play in the small to medium -- in the small size segment of customer base, if you will. So these are larger deals that require a lot of work upfront advisory services that then lead to these multimillion dollar deals that traditionally, the margins are a little tighter because it's competitive upfront. So the margins are a little bit down. The other thing that contributed to our gross margins being down, our service margins were down a little bit. So that's -- those are the two pieces that affected the gross margins. Okay. And you said that the open orders were down sequentially. Was your backlog down? And how does that compare to your backlog to sort of normal levels? I know it's been well above normal levels. What are some of the -- what are the product constrained areas that you're still seeing? Because we're hearing from some distributors and suppliers that networking demand -- I mean, orders and supply seems to be improving, but you're not seeing that across the board? Yes. We're not seeing it across the board. The networking has got the longest lead times and it's improving some, but that's probably the biggest piece from a, I'll say, supply chain and lead time standpoint, Matt. Good afternoon. So just to start off with some of the strength you saw in the quarter. So, I guess, the upside, I guess, relative to consensus, or maybe your internal expectations was mainly driven by demand. It was more weighted towards just market demand as opposed to dipping into your open orders? Well, no, Greg, I'd actually say it's a combination of the two. So when I looked at the quarter, once again, if you -- I'll just go by customer size segments in the mid to enterprise. We actually grew very nicely. And that's by design with some of our account planning and some of the things that we're trying to do there. I think I mentioned it on to Matt or Maggie as well as our tech segment had a very strong quarter, where the net sales for tech were actually up 28.3% overall. So I think it was by design on some of that, but there was also some supply chain easing with the open orders going down 5%. And in terms of the inventory going down $30 million, so there was a real focus internally to try to get the product out as soon as we got it in, get it out the door. So it's a little bit of supply chain easing plus a nice quarter by the team. Okay. Is it like 1:1, the $30 million decline of inventory that turns into revenue, or how should we think about the magnitude of what's left on the balance sheet in terms of open orders -- in terms of revenue potential? Yeah, yeah. On the inventory, it would be at 1:1 on the inventory. But on the overall sales, that's a small percentage, as you can imagine, Greg, with our numbers. So yeah, it's a 1:1 on the inventory, for sure. Okay. And then the OpEx level this quarter, is that a good way to model going forward, or is there any other puts and takes why it might increase or decrease from here? Yeah. I think there's a couple of things there. I think the overall level is good on the OpEx. I think there will obviously be some movement based on a smaller quarter in terms of revenue in GP based on Q3 being our largest quarter-to-date so far. So that will be the variable from an OpEx. It will be in that range overall less that difference, if you will, Greg. But realize we are watching it pretty closely. So we're watching the market. And with all the economic uncertainties, if you think about all the different tech layoffs, we're watching very closely, and we're going to adjust accordingly. Actually, I look at the tech layoffs it’s potentially an opportunity for us. It sounds a little bit crazy with everything going on. But I think with the solutions and skill sets we have, we might be able to pick up some of those opportunities. But when you look at Gartner projecting 2.4% IT spend and stuff like that. We're watching it and managing it very closely in terms of the OpEx. It actually, overall, our OpEx as a percentage of GP and AGB actually went in the right direction this quarter for sure, Greg. Okay. And then to your point about the tech layoffs, we are seeing some more cautious commentary in the industry. Are you seeing anything in terms of maybe customer decision cycles, sales cycles extending, or anything that you see that would maybe give you some more caution going forward? Yes, there's definitely some caution in ePlus, Greg. I mean as you know, there's always challenges and opportunities in this kind of market. But I do see some budget tightening. Some are the sales cycles getting a little bit longer, especially with some of the bigger customers. So there's definitely some of that going on as the economic uncertainties, kind of, stay out there. So yes, the sales cycles are longer for sure. Okay. And then lastly, you launched a new service, storage as a service. Pure Storage. Can you just talk about how that works? Are you just reselling it? Are you actually providing service? And when you launch something like that, is it market driven? Like have you been -- is it something that your customers have been asking you to do, or is it just something net new that you see as an opportunity? Hi, Greg, it's Darren. What I'll say is we've been selling Pure as a Service, which is their offering for years now, when we saw for our customers as they were looking for a more customized approach that we know their environment. We know the other components of their data center and their cloud play. So this ePlus Storage as a Service is powered by pure currently, and we're looking at all the storage potential, where we're providing additional services, taking calls, engaging our managed services centers to provide additional value-add helping the customers with sizing, future investments and consumption over time as opposed to having to buy it all upfront. So its a really nice play where we saw customers demanding it, and the team is really excited about the customers that are reaching out now with that recent announcement. So more to come. All right. Thanks, Regina, and thanks, everybody for joining us for our Q3 2023 conference call. We look forward to speaking with you in Q4. Thanks, and have a good day.

EarningCall_321

Good morning, and welcome to the Flexsteel Industries Second Quarter Fiscal Year 2023 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Alejandro Huerta, Chief Financial Officer for Flexsteel Industries. Please go ahead. Thank you, and welcome to today's call to discuss Flexsteel Industries' Second Quarter Fiscal Year 2023 financial results. Our earnings release, which we issued after market close yesterday, Monday, February 6, is available on the Investor Relations section of our website at www.flexsteel.com under News and Events. I am here today with Jerry Dittmer, President and Chief Executive Officer; and Derek Schmidt, Chief Operating Officer. On today's call, we will provide prepared remarks, and then we will open the call to your questions. Before we begin, I would like to remind you that the comments on today's call will include forward-looking statements, which can be identified using words such as estimate, anticipate, expect and similar phrases. Forward-looking statements, by their nature, involve estimates, projections, goals, forecasts and assumptions and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Such risks and uncertainties include, but are not limited to, those that are described in our most recent annual report on Form 10-K as updated by our subsequent quarterly reports on Form 10-Q and other SEC filings as applicable. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. Additionally, we 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. And with that, I will turn the call over to Jerry Dittmer. Jerry? Good morning, and thank you for joining us today. In spite of challenging macroeconomic environment, I am pleased with our performance in the second quarter. I am encouraged by the progress we have made on our strategic initiatives and ability to gain share in the market, allowing us to deliver sales for the quarter of $93.1 million, which was in the range of our guidance as our growth initiatives helped to partially offset the challenges posed by high retail inventories and waning consumer demand. With the softer demand level, we continued to prudently manage spending, deliver on our cost-saving initiatives and offset competitive pricing pressures and inflationary costs to deliver adjusted operating income of $1.0 million. As discussed in previous quarters, we are committed to driving working capital efficiency and paying down debt, further strengthening our balance sheet. During the second quarter, we were successful in making strides in both as we have improved working capital by $9 million and reduced our outstanding debt by $10.9 million. In the near term, macroeconomic headwinds pose a challenge to industry growth. However, our commitment remains on delivering long-term profitable growth, and we are making pragmatic investments to support these plans. We recently announced a realignment in our organizational structure, reallocating more dedicated resources to new growth pursuits, expanding our sales force, adding sales leadership to gain market share and investing in resources to support the expansion of product management, development and engineering. As an organization, we are focused on navigating the challenges in the current environment while positioning ourselves to deliver on our long-term strategic initiatives. I'll now turn the call over to Derek to discuss our strategic initiatives and operational priorities before Alejandro takes you through further details of our financial results. I'll be back at the end of the call with some closing comments on what we see ahead. Thank you, Jerry, and good morning, everyone. As Jerry emphasized, we are firmly committed to our strategic growth plans. Given the current economic uncertainty, many furniture manufacturers are responding by scaling back resources and investments, but we're gearing up for growth. We are managing expenses and cash flow prudently to stay nimble, but we remain on the [indiscernible] and are driving investments for future growth. I'd like to expand upon some of the recent growth investments Jerry highlighted earlier. First, we are realigning our leadership structure to accelerate new growth initiatives. Tim Newlin, who is a 25-year veteran of Flexsteel has been named Vice President, Strategic Business Development. In his new role, Tim will leverage his experience and deep knowledge of the furniture industry to accelerate innovation and incubate new ideas that will expand FlexSteel's business models, brands, products and channels in profitable and fast-growing areas of the market. David Crimmins expands his responsibilities as Vice President of Sales and Product. David has leadership responsibility for driving our omnichannel strategies in our core business across retail, big box and e-commerce. Additionally, he will strengthen the integration of our product and sales teams to improve our new product speed to market and success rate. Second, we are strengthening resources and investments dedicated to each of our 3 major sales channels. For example, in our retail channel, we recently created a new role of Retail Sales Vice President, who is solely focused on driving continued market share gains in that channel. We are also expanding our retail field sales team by over 10% to promote stronger customer relationships and gain share. And we've committed to implementing a new CRM solution by mid- to late 2023 to improve our customers' experience. We are making similar investments to support the big box and e-commerce channels as well. Third and lastly, we are investing in our product development and engineering capacity to substantially increase both the number and speed of new product launches in the future. We're confident these collective structural changes and investments will make us more competitive and help drive profitable growth. Now turning to our specific growth initiatives. Recall that our growth strategy for new business has 3 legs: number one, new sales distribution, 2 new product categories and 3 new consumer segments. We're making solid progress on all 3 fronts, and the growth potential of these pursuits will accelerate into the second half of the year. Let me share a few highlights. Beginning with new sales distribution, we've made a meaningful entry into big-box distribution this year with a major customer who will become a top 10 and potentially even a top 5 account for us. We are selling a broad set of Flexsteel products to them this year that span all 3 of our major product categories: motion furniture, stationary furniture and case goods and will include launches of our major new products this year, such as Flex, the Charisma brand and some exclusive offerings tailored to this retailer. We also have market tests scheduled in the second half with several other large big-box retailers, which could evolve in the meaningful revenue next fiscal year. Next is new consumer segments. Last quarter, we launched our new brand, Charisma, designed to serve customers, especially younger generations seeking good quality, stylish furniture at affordable popular prices. Initial retail adoption has been good, and we will extend the sales distribution of Charisma into e-commerce and big box in the second half of the year. Development is already underway to expand the product offering of Charisma, and we expect to show several new smaller stationary frames at the upcoming April High Point market. Last is new product categories. We remain on track for a third quarter launch of Flex, our small parcel contemporary modular furniture solution built to flex with people's ever-changing lives. Flex has been well received across all channels of our business and will be available for sale this quarter across 4 different distribution platforms, including direct-to-consumer, traditional retail, e-tailers and big box customers. To protect our innovation, we filed both design and utility patents for this product. The other new product that we're extremely excited about is decliner, our fleet solutions recliner, which begins shipping to customers in March. Customer feedback has been overwhelmingly positive, and we expect strong and broad sales distribution for this product across both traditional retail and adjacent channels. Development is already in progress to offer additional product enhancements, and we are committed to driving meaningful innovation in the health and wellness category to make decliner a leader in this emerging space. The organization is intensely focused near term on ramping up sales for these growth initiatives, and we're excited to see the results in the coming quarters. From an operational viewpoint, we are executing well, maintaining strong service levels and continuing to deliver strong results from our cost savings initiatives. In the near term, these savings are being used to fund price reductions to respond to competitive pressures. While these pressures won't dissipate completely, we do expect the pricing environment to improve modestly in the second half of the fiscal year since both retailer and manufacturers' inventories have improved slightly. As a result, we expect more of our cost savings efforts to fall to the bottom line. With that, I'll turn it over to Alejandro to give you additional details on the financial performance for the second quarter and outlook for the third quarter of fiscal year '23. Thank you, Derek. Good morning, everyone. For the second quarter, net sales were $93.1 million, down approximately $48.6 million or 34.3% compared to $141.7 million in the prior year period. While down from the prior year, our sales results were within our guidance of $87 million to $97 million provided during our first quarter earnings call. From a profit perspective, in the second quarter, the company delivered operating income of $3.8 million or adjusted operating income of $1.0 million or 1.0% of sales, which was within our guidance range of negative 1.5% to positive 1.5% for the quarter. We recorded net income of $2.9 million and earnings per diluted share of $0.53. Adjusted net income for the quarter, which excludes the onetime benefit related to the settlement of the Indiana EPA litigation was $0.4 million, and adjusted income per diluted share was $0.08. Gross margin as a percent of net sales in the second quarter was 17.0%. The over 1,000 basis point improvement from the prior year quarter was largely driven by effectively reducing ancillary charges, prudently managing costs and navigating competitive pricing pressures. -- partially offset by volume decline, deleveraging of fixed costs and continued inflation in domestic transportation charges. Operating income was also supported by a $2.7 million reduction of SG&A expense, mainly through reduced compensation expense and control of other SG&A spending. Moving to the balance sheet and statement of cash flows. The company ended the quarter with a cash balance of $1.8 million and working capital of $107.1 million, which represents a reduction of $9.0 million during the quarter, primarily driven by a $10.6 million decrease in inventory. The result of the strong working capital management was solid operating cash flow of $11.6 million during the quarter. As previously communicated, debt reduction is a key priority. And in the quarter, we reduced our outstanding borrowings by approximately 36.1% or $10.9 million. Looking forward, guidance for third quarter sales is between $93 million and $103 million. While our strategic growth initiatives will begin to drive meaningful revenue in the second half of the year, the continued macroeconomic challenges will continue to put pressure on our core product offerings. However, we are optimistic that our growth initiatives will help to offset the soft consumer demand and result in quarter-over-quarter growth in the second half of the fiscal year. Regarding profitability, the impact of our growth initiatives will allow for profit margins to improve sequentially each quarter in the second half of the year. However, competitive pricing pressures, along with continued slumping demand will temper our profitability expansion. We will continue to focus on practical spending levels in line with lower sales levels, but invest in our growth strategies to drive long-term profitability. As such, we are projecting operating income as a percentage of sales in the range of 1.0% to 2.5% for the third quarter. with the largest drivers of variability in the range being consumer demand, competitive pricing conditions and macroeconomic headwinds. We expect gross margins in the range of 16.5% to 18% in the third quarter as our growth initiatives and cost savings initiatives will drive margin expansion. However, we see this being partially offset by continued pricing pressures in the market due to the compressed demand previously discussed. If sales continue to improve as expected during the remainder of the fiscal year, gross margins should sequentially improve quarter-over-quarter to between the mid- to upper teens. We intend to prudently control SG&A costs and expect SG&A costs between $15 million and $16 million in the third quarter, which is higher than the second quarter as we are actively investing in our growth initiatives discussed by Derek. Regarding our cash flow outlook for the second half of the fiscal year, we expect working capital to be a source of cash, largely driven by a modest reduction in inventory, partially offset by growing account receivable balance due to the higher revenue. However, the timing of the working capital reduction will be heavily weighted in quarter 4 as we expect working capital to be a modest use of cash in quarter 3 as accounts receivables grow in line with sales, and we deepened our inventory positions of our best-selling fast-moving SKUs. For the third quarter, we expect capital expenditures between $1 million and $1.5 million as we invest in the expansion of our ERP capabilities. We also may continue to opportunistically repurchase shares at a modest spending level if the stock price remains at a significant discount to our view of the intrinsic value. We continue to forecast our debt levels at the end of fiscal 2023 in the range of $4 million to $12 million. The effective tax rate for fiscal 2023 is expected to be in the range of 27% to 28%, excluding the impact of any revaluation of deferred tax asset valuation allowances. Now I'll turn the call back over to Jerry to share his perspectives on our outlook. Thanks. I'm optimistic about our future, slowing economic growth and weighing consumer demand are obvious challenges for the industry neuter. However, we continue to make prudent investments to ensure our profitable growth and success long term. In the near term , we remain focused on delivering on our strategic initiatives, controlling costs and generating cash flow to pay down debt and preserve liquidity while sensibly investing in growth opportunities. With that, we will open the call to your questions. Operator? Good morning, guys and thank you for taking the question. Yes, you've done a very good job of reducing your own inventories. And Derek, you mentioned I believe that inventories overall and the retail level have improved slightly. So what is your sense as to when inventories overall in the retail channel, will get back to so-called normal levels. Yes, Anthony, this is Jerry. Good question. So we just completed our West Coast market out in Vegas since we got a chance to talk to several hundred dealers and kind of see what's going on. And the answer is it's still pretty choppy. We have several people are ordering. They're seeing their inventories come down. There's still a lot of people that have inventory. Their foot traffic is down a little bit, and so the inventories aren't going down quite as quickly as they had hoped. Is it 3 to 6 months? Is it the rest of the calendar year? -- depending on the retailer, that's really the answer. So again, we're seeing some that have come down well and others that they said it's going to take another 6 to 9 months to get it down. Got it. Okay. So it sounds like a mixed bag there, okay. But it sounds like also we are past the peak levels as well. So that's good to hear. Do you have any ballpark estimate as to how much of the various growth initiatives you guys talked about? How much did that contribute to the quarter in terms of operating performance? Yes, I won't comment to the quarter, but we have provided guidance in the past and in our current forecast for all of our incremental growth initiatives is between $30 million and $40 million of revenue in the full fiscal year. Got it. Yes. And then as far as margins for those initiatives, whether the big box rollout or Charisma or Flex, are the margins for those products comparable to the company average? Or how would you characterize that? Okay. That's great to hear. And then in terms of the operating margins overall, certainly nice to see pretty good improvement from last year. Back in fiscal '21, you were at roughly 6.5% operating margin, i certainly realize it's a much different operating environment now. But it looks like ocean freight costs have come down, labor rates have stabilized. -- obviously, you gave guidance for Q3. But then as we look beyond the Q4 going out to fiscal '24, just I know you haven't given guidance yet, but just overall, broadly speaking, how should we think about the progression of the operating margin going forward? Anthony, it's Derek. So as we look out for the balance of the second half, we are starting to work through some of our higher cost inventories. And so we'll see margins stabilize and sequentially improved throughout the quarter. We expect a similar trend in fiscal year '24. So sequential improvement kind of year-over-year. We do plan on investing more behind our growth initiatives. So I stated earlier in the call, we're adding roles dedicated to our strategic growth initiatives. We're expanding capacity around new product development. So some of the incremental margin improvement year-over-year will be tempered by higher investments, which we believe will have a phenomenal ROI and will drive long-term profitable growth. Got it. Yes. Thanks for the update Derek. And then any update on the Mexicali facility. Where are you guys with that? Yes. So certainly, in the near term, we do not foresee a need to utilize that, and we're still evaluating and pursuing opportunities to potentially sublease that in the near term, but still keep it as a long-term option to support our growth. It sounds like you had some very interesting developments put, particularly decline are beginning to ship in March and the imminent launch of Flex. You addressed the impact on margins with Anthony, but can you discuss both of those initiatives? And then the expected impact of your strategic growth plans on the overall business, revenue or margins or product penetration, but really more broadly. Okay. I think as -- we look at all of our growth initiatives. Recall that we've kind of split them out in these 3 legs, new consumer segments, new sales distribution, new product categories. I think the impact of these growth initiatives on the company longer term will position Flexsteel where the market is going to grow. We're still certainly dedicated to our traditional retail channel as obvious by the investments that we mentioned earlier. But in 2 to 3 years, a much larger proportion of our sales will come from big box channel and e-commerce. A larger proportion of our sales will come from more modern stylish furniture that is geared towards younger generations. And I think what you'll find is that we're pivoting toward differentiated innovation as a competitive advantage as a company. And I think Flex and decline are good examples of that in the near term. And we're going to continue to challenge ourselves on how we bring meaningful innovation that's different than the competitive set because there's a lot of furniture out there. So I think everything that we got going on near term is really an example of how we're trying to transform the company for the long term. Can you discuss your entry into the big box segment, particularly the impact on margins, both short term and longer term? And then other nuances perhaps like inventory or storage requirements or fulfillment requirements and any challenges you faced thus far? Yes. I think in terms of big box, the margin profile is better than the current portfolio average. So as Alejandro alluded to, we expect this. We expect all of our growth initiatives to drive margin expansion, kind of long term, big box included. The vast majority of what we're selling through that channel right now is online. And we are not building inventory necessarily in line in retail stores. I think that will evolve in the future, but it is predominantly an online business. I think challenges. I think there's -- I'll phrase it differently, JP. There's been some really good learnings around the expectations that, that channel has that I think long term will actually make us a stronger company. We're thinking differently around our factory audits, quality programs, fulfillment service, again, that I think it's going to force us to build capabilities that will serve us well in other areas of the business, which will only lend itself to accelerated growth. Yes, JP, this is Jerry. So we have -- obviously, we're used to sending product to a lot of different dealers, a lot of different places all over the country because we have broad distribution -- this distribution is the same. And the big box players, there's 3 to 4 of them that we are in deep trials with right now, and they're working quite well. Derek's point of the learnings, there are a lot of learnings there because a lot of this product does not go through our normal distribution networks, things like that. Most of this product is online. Some of it is that we do have trials that are going to be at some big chain stores here coming up. The exciting part here is that the learnings we're having are going to really help us in our core business also because it's really helped us balance it. A lot of this is product that we have. We are also in the process of developing new products for these channels also. Understood. That's helpful. How should we expect your capital allocation priorities to change, if at all, as you focus on strategic growth? And in particular, how much debt are you comfortable carrying in your capital structure? And how do you intend to modulate dividends and the share repurchases? This is Alejandro. JP. Good question. We've talked about this. First and foremost, we're focused on paying down our debt and with the outlook of somewhere between $4 million and $12 million by the end of fiscal year 2023. That doesn't mean we're not opportunistically looking for growth opportunities to invest in, but we're measuring those against an ROI profile. So first and foremost, pay down debt and then look for strategic opportunities to invest, whether that be equipment, machinery capabilities or even expansion from a production perspective. And then at this time, we're not thinking about changing our dividend outlook. -- for our investors. But obviously, that's something we discuss with our board on a very regular basis, and we'll continue to have those discussions. But we want to add the best value possible back to our shareholders. JP, just to add to Alejandro's comments. As we think longer term, again, our intent is to start to build up both cash as well as debt capacity to pursue strategic acquisitions. -- long term or, I guess, midterm, we'd be comfortable going up to 3, 3.5x EBIT in terms of debt levels to pursue the right acquisition. But we do want to continue to strengthen the balance sheet so that we can pursue those opportunities if the right one comes along. The other question you had, JP, was in regards to our share repurchase. We will continue to look at that and be opportunistic if our stock stays at a level that we feel it's a very good investment for our shareholders. We will continue to do that. Okay. And then one final point of clarification. Derek, you alluded to an ROI expectation on your strategic growth initiatives before. Can you put any sort of color around that? Yes. I mean the only color I'll give JP, is -- we look at all of our investments relative to our cost of capital. And we have confidence that how we're deploying capital is going to generate shareholder value creation. So again, I won't give you specific ROI numbers, but rest assured that we've got confidence that these things are value added. Just to confirm, the product that's going into the big box retailers, that's your brand, correct? You're not doing any type of private labeling... We're actually doing some of both. So we do have -- actually, they are sometimes using their own brands. They are sometimes using our brands and sometimes we are off of just coming out with some new labels that we may also use going forward. Currently though, John, the vast majority of what is flowing through big box today is Flexsteel branded, but we are exploring some other white label options for, what I'll call, lower cost product. Okay. All right. So you'll be able to discuss that more as you get through the process of testing and all of that, correct? Roughly $60 million. It's been, I think, since the beginning of the year, kind of floating between $55 million and $60 million. So it's stabilized and back to normal levels. This concludes our question-and-answer session. I would like to turn the conference back over to Jerry Dittmer for any closing remarks. Thank you. In closing, I would again like to thank all our Flexsteel employees for their outstanding performance and service during the second quarter. We are really excited about our future and what everyone is bringing with us. I would also like to thank you for participating in today's call. Thank you for those that ask questions. And please reach out any additional ones. We look forward to updating you on our next call. Thanks, everybody. Have a great day.

EarningCall_322

Good day. As a reminder, today's conference call is being recorded. Please note that statements made on this conference call include forward-looking statements based on current expectations, which are subject to risks and uncertainties discussed in the company's filings with the SEC. You are cautioned not to place undue reliance on these forward-looking statements as actual events could cause the company's results to differ materially from those forward-looking statements. It is now my pleasure to introduce your host Mr. Adam Wyll, President and COO for American Assets Trust. Thank you. Mr. Wyll, you may begin. Thank you. Good morning everyone. Welcome to American Assets Trust Year-End and Fourth Quarter 2022 Earnings Call. Yesterday afternoon our earnings release and supplemental information were furnished to the SEC on Form 8-K. Both are now available on the Investors section of our website, americanassetstrust.com. At this point, I would typically turn the call over to our Chairman, Ernest Rady, but he's a bit under the weather today, so I'm going to read his prepared remarks and begin the discussion of our year-end and fourth quarter 2022 results. I would first like to wish all of our stakeholders continued health, safety, and prosperity and express my sincere appreciation for your continued support of American Assets Trust through these most extraordinary times. As you've heard me say before our disciplined business decisions are predicated on taking a long-term view that we believe will support the growth of our earnings and drive shareholder wealth creation. We remain encouraged and optimistic with the high-quality irreplaceable properties and asset class diversity of our portfolio. We believe this combined with the strength of our balance sheet, ample liquidity, top-notch management team, not to mention a very nimble and efficient operating platform, will allow us to continue growing our earnings on an accretive basis and contribute to our outperformance over the long-term. Meanwhile as the Federal Reserve is persistent in its ongoing attempt to tame inflation caused by the unprecedented fiscal stimulus enacted by the federal government, we are confident in our thesis of our portfolio being an effective protection against inflation, which will provide a tailwind of sorts to our rents, not to mention the rising replacement costs of our properties and reinforce the increasing flight to high-quality assets like the ones we own that are in the path of growth, education, innovation, and mass transportation. Though I understand that we are on the verge of a recession, I am nevertheless incredibly proud of our company and team for achieving our highest annual FFO per share since our IPO over 12 years ago, particularly as we face our fair share of challenges. I want to mention that the Board of Directors has approved the quarterly dividend of $0.33 per share for the first quarter, an increase of $0.01 per share or approximately 3% from our previous dividend, which we believe is supported by our financial results and is an expression of our Board's confidence in the embedded growth of our portfolio this year and beyond. The dividend will be paid on March 23rd to shareholders of record on March 9th. I, along with Bob and Steve, will go into more detail on our various asset segments financial results and guidance. So, on behalf of Ernest and all of us at American Assets Trust Inc., we thank you for your confidence in allowing us to manage your company and for your continued support. I'm going to continue along with my own prepared remarks. You've heard us speak consistently to our focus on making meaningful capital improvements to continue to enhance, improve, and amenitize our properties to remain best-in-class. We know how well-received those have been by our tenants and customers and it truly is making a significant difference in our ability to retain existing tenants, attract new tenants, and increase rents. We believe these capital improvements contributed to our office portfolio, comparable leasing spreads increasing 17% and 22% on a cash and GAAP basis respectively in 2022 as compared to 2021; our retail portfolio comparable leasing spreads increasing 5% and 17% on a cash and GAAP basis respectively in 2022 as compared to 2021; and our multifamily portfolio realizing same-store cash NOI growth of 11% in 2022 as compared to 2021. Briefly on the office utilization front, we continue to see incremental progress of return to work since Q3 with more strength in San Diego, Portland, and specifically, at our Landmark in San Francisco than in Bellevue right now. We note many companies have implemented or are implementing increased in-office work requirements for their employees and together with the recent tech layoffs, we sense a shift towards employers having more leverage, not to mention more and more employees realizing they need to be seen in the office for job security, mentorship and collaboration. We think this should all continue to push a higher office utilization in our portfolio over the course of this year. Meanwhile, our multifamily portfolio saw a positive, yet decelerating rent growth leading up to year-end with some softening since Q3. In Q4, in San Diego, we saw leases on vacant units rent at an average of approximately 1% over the prior rates, which was negatively impacted by higher comparable rents at Pacific Ridge from master leases that previously terminated, while rates on renewed units increased an average of 11% over prior rents with minimal concessions. Additionally, in San Diego, net effective rents for our new multifamily leases are now 29% above pre-COVID levels and 17% higher year-over-year compared to the fourth quarter of 2019 and 2021 respectively. In Q4, in Portland at Hassalo on Eighth, we saw vacant units at Hassalo lease at an average of approximately 6% over prior rents and renewal units leased at an average of approximately 8% over prior rates with minimal concessions. In Portland, net effective rents for new multifamily leases are now 4% above pre-COVID levels and 13% higher year-over-year compared to the fourth quarter of 2019 and 2021 respectively. Though our multifamily leased percentage decreased a few points towards the end of 2022 due to seasonality, we are pleased to report that as of the end of January 2023, our lease percentage had increased from approximately 92% to 96.5% in San Diego and remained at about 94% in Portland. As you know, our multifamily communities reside among favorable demographics with fairly low unemployment rates, strong income growth and high homeownership costs, so we remain bullish long-term on our multifamily fundamentals. On the retail front, we remain confident about our dominant best-in-class retail portfolio that resides in supply-constrained and densely populated markets and where consumer spending has been strong. In Q4, we saw a very active retail leasing activity. And as a result, our retail lease percentage is now at approximately 94% with only 3% coming due to expire in 2023. We have a fair amount of retail deals and documentation right now and remain optimistic those deals get inked in Q1 or Q2. Briefly, in regards to retail tenants that have filed bankruptcy, we are in active discussions with Regal Theaters that are at Alamo Quarry and current expectation is that they want to hold on to that location subject to finalizing documentation and in court approvals. And with respect to Party City, our location in Waikele Center is franchise-owned and not part of the bankruptcy process and our other location is at Gateway Marketplace and that we know that sales are an above-average performer for them. We are in very preliminary discussions with them in the bankruptcy process. Finally, on the development front with respect to La Jolla Commons III, we are optimistic of the near-term space requirements in the UTC submarket that currently sits with just 4% direct vacancy and we will be patient with One Beach Street, as San Francisco is not without its near-term challenges, but we remain bullish on San Francisco's long-term prospects. We have no specific leasing news to share on these developments at this point. Thanks, Adam, and good morning, everyone. Last night, we reported fourth quarter and year-ended 2022 FFO per share of $0.56 and $2.34 respectively and fourth quarter and year ended 2022 net income attributable to common stockholders per share of $0.16 and $0.72 respectively. Fourth quarter FFO decreased by approximately $0.07 to $0.56 per FFO share compared to the third quarter of 2022 and is primarily comprised of the following. First, Embassy Suites Beach Walk was lower by approximately $0.02 per FFO share, as expected due to the normal seasonality between the high season of Q3 and Q4. Second, we increased our reserve for straight-line rents receivable related to two tenants in the fourth quarter combined with higher accelerated non-recurring straight-line revenue in Q3 that did not occur in Q4, which together reduced FFO per share by approximately $0.04 in Q4. Third G&A and interest expense combined with approximately $0.01 per FFO share higher in Q4, which decreased FFO by approximately $0.01 per FFO share. Same-store cash NOI for all sectors combined was strong in Q4 ending at 5.5% growth year-over-year for the fourth quarter and 9.5% growth in 2022 over 2021. Though, the 2022 year-over-year same-store retail NOI growth was essentially flat, if we exclude the 2021 property tax refund of approximately $2.4 million for Alamo Quarry that was received in Q3 2021, our same-store retail NOI growth increased from flat to 3.9% in 2022 and same-store cash NOI for all sectors combined on a year-over-year basis increased from 9.5% to 10.7%. Let's talk about liquidity. At the end of the fourth quarter, we had liquidity of approximately $414 million, comprised of approximately $50 million of cash and cash equivalents and $364 million of availability on our revolving line of credit. Note that, subsequent to year-end, we repaid $36 million outstanding balance on our revolving line of credit such that we have full capacity of $400 million on it today. Additionally, as of the end of the fourth quarter, our leverage which we measure in terms of net debt to EBITDA was 7.0 times. Our objective is to achieve and maintain a net debt to EBITDA of 5.5 times or below. Our interest coverage and fixed charge coverage ratio ended the quarter at 3.8 times. Let's talk about 2023 guidance. We are introducing our 2023 FFO per share guidance range of $2.16 to $2.30 per FFO share with a midpoint of $2.23 per FFO share, which is approximately a 4.7% decrease over 2022 actual of $2.34 per FFO share at the midpoint. I'm going to break this up into two parts, a high-level overview; and a detailed overview. From a high-level overview, I look at 2023 guidance as follows: Starting with 2022 FFO of $2.34 per share there are four things that make up the decrease. They are number, one, start with subtracting $0.03 of non-recurring revenue that occurred in Q3 that we talked about on the Q3 earnings call. That brings you down to $2.31 per share, which would be an approximate FFO run rate as of year-end 2022 before the following adjustments. Number two, interest expense will increase in 2023 by approximately $0.10 per FFO share. This relates to $150 million of term loans that were maturing in March 2023 that we refinanced and increased from $150 million to $225 million effective January 5, 2023. The interest rates on the refinanced term loans increased from approximately 2.65% to 5.47% for the full year period, with a one-year extension. Number three, we are including approximately $0.06 per FFO share of bad debt reserves that we believe are more likely than not to occur based on our internal probability and risk assessment of specific tenants within our portfolio. Approximately $0.03 of these reserves relates to our office sector and $0.03 relates to our retail sector. We thought it would be better and more transparent to break out the reserves separately so you can understand what's driving same-store cash NOI, which we discuss in more detail below. Number four, lastly, we had a positive outcome on the legal settlement in January 2023 related to certain building systems at our Hassalo on Eighth in Portland. This will contribute approximately $0.08 per FFO share in 2023 on a one-time basis. Combined these adjustments, should get us to our guidance midpoint of $2.23 per FFO share. Now, the following is a more detailed overview of the 2023 guidance. Again, starting with $2.34. Number one, same-store office cash NOI, excluding reserves, is expected to increase approximately 4.3% or $0.08 per FFO share in 2023. Number two, same-store retail cash NOI, excluding reserves, is expected to increase approximately 4.2% or $0.04 per FFO share in 2023. Number three, same-store multi-family cash NOI is expected to be approximately flat in 2023 due to increased overhead security and repair and maintenance costs that we expect to occur in 2023. Note that we take a conservative approach and expense the majority of repairs and maintenance expenses that others may not. Number three, same-store mixed use cash NOI is expected to be flat in 2023. Our 2023 guidance is prepared by our partners at Outrigger in Waikiki, that have boots on the ground and have an awareness in Waikiki from other hotels and retail properties that they own and/or manage. Our 2023 guidance for the Embassy Suites Hotel in Waikiki is based on the following: revenue is expected to increase approximately 10% in 2023; operating expenses are expected to increase significantly to approximately 17% in 2023 due to inflationary impact on operating expenses, such as food costs, labor and overhead. Some of the metrics that Embassy Suites Hotel 2023 guidance is based on include: occupancy is expected to increase approximately 8.7% from 77% in 2022 to 84% in 2023; ADR is expected to increase approximately 3.3% from $352 in 2022 to $364 in 2023; RevPAR is expected to increase approximately 7.4% from $283 in 2022 to $304 in 2023. Our 2022 NOI for Embassy Suites Hotel doubled compared to 2021 year-to-date and is approximately the same as it was pre-COVID, even without our guests from Japan. Unfortunately, Japan Tourism to Oahu has been much slower than expected due to weakness in the Japanese currency. However, exchange rates are trending in a better direction since last October, which is a positive to our Japanese guests returning to Oahu. Number four, estimated bad debt expense reserves is expected to decrease FFO by approximately $4.2 million or $0.06 per FFO per share in 2023, which we have previously described in more detail above. Number five, all four sectors above excluding reserves are expected to generate a total same-store cash NOI growth year-over-year in 2023 of approximately 3.4% or $0.12 per FFO share. Including reserves, all four sectors are expected to generate a total same-store cash NOI growth in 2023 of approximately 2% or $0.06 per FFO share. Number six, non-same-store guidance including One Beach Oregon Square building 710 in Bellevue Spring 520, combined they are expected to contribute approximately $0.01 per FFO share in 2023. G&A is expected to increase approximately $3.8 million and decrease FFO by approximately $0.05 per FFO share in 2023. The increase in G&A includes approximately $1.9 million in non-recurring legal expenses, relating to opportunistic litigation that we have initiated against certain vendors in which we are hopeful to see a meaningful recovery later this year, if not early next. Number eight, interest expense is expected to increase approximately $7.4 million and decrease FFO by $0.10 per FFO share in 2023, which we have previously described in more detail above. Number nine, GAAP adjustments. Primarily relating to straight-line rents will decrease FFO by approximately $7.9 million or $0.11 or per FFO share in 2023. A large part of this relates to a large abatement that has expired June 2022 for a tenant in our Landmark at One Market Street building. And number ten, litigation settlement will increase FFO by approximately $6.3 million or $0.08 per FFO share in 2023, which we have previously discussed above. These adjustments, when added together, will be approximately $0.11 per FFO share and represent a net decrease in 2023 midpoint over 2022 FFO per share. While we believe the 2023 guidance is our best estimate as of the date of this earnings call, we do believe that it is also possible that we could outperform towards the upper end of this guidance range. In order to do that, number one, tourism and travel to Waikiki needs to see a meaningful return from our Japanese guests, which are cautious -- which we are cautiously optimistic about. And number two, we need to outperform our multifamily guidance by continuing to see increasing rents and/or less expenses than budgeted. And three the office and retail tenants that we reserve for continue to pay rents through the year. As always, our guidance, our NOI bridge and these prepared remarks exclude any impact from future acquisitions, dispositions, equity issuances or repurchases, future debt refinancings or repayments other than what we've already discussed. We will continue our best to be as transparent as possible and share with you our analysis and interpretations of our quarterly numbers. I also want to briefly note that any non-GAAP financial measures that we've discussed, like NOI, are reconciled to our GAAP financial results in our earnings release and supplemental information. I'll now turn the call over to Steve Center, our Senior Vice President of Office Properties, for a brief update on our office segment. Steve? Thanks, Bob. Leasing activity in our office portfolio returned to the levels achieved in 2019, with 64 deals totaling approximately 475,000 square feet. At the end of the fourth quarter, our office portfolio was 89% leased, with our same-store portfolio dropping to 92.5% leased, primarily due to rightsizing of tenant offices closing or downsizing in Bellevue as follows. At City Center Bellevue, VMware renewed in 75,000 square feet in Q2 that rents at $64.75, but let approximately 17,000 rentable square feet of their space expire in Q4. HomeStreet Bank downsized from approximately 13,000 square feet into a 7,000 square foot sublease because we didn't have a 7,000 square foot suite to accommodate them. At Eastgate Office Park, Great American Insurance downsized from approximately 15,000 square feet into a 7,000 square-foot short-term sublease and Cronos closed their office of approximately 7,000 square feet, opting to work from home. All of these expiring leases were well below market. The weighted average ending rate of the City Center Bellevue leases was $46.45 on a full service gross basis, versus the mid to high 60s for deals recently closed out for signature. Likewise, the weighted average ending rate of the Eastgate leases was $25 triple net versus the mid-30s for closed or pending deals. Even with the headwinds of rightsizing and work from home, the quality of our office portfolio continues to yield strong rent growth. In the fourth quarter, we executed 17 leases totaling approximately 97,000 square feet, including one comparable new lease for approximately 2,400 square feet with increases over prior rent of 19% on a straight-line basis; 12 comparable renewal leases totaling approximately 75,000 square feet with increases over prior rent of 25% on a straight-line basis; and four non-comparable new leases totaling approximately 20,000 square feet, two of which were new medical office leases totaling approximately 15,000 square feet at triple net rents 35% and 41% higher than comparable office rents at Solana Crossing and Torrey Reserve respectively. We are encouraged by current tour and proposal activity across our portfolio, especially in the small to midsized tenant range. This bodes well for our current vacancies and future rollover. Our average vacant space is under 7,000 square feet, with just 11 spaces greater than 10,000 square feet, including the three floors at One Beach ranging from 30,000 to 37,000 square feet each. The average space size rolling in 2023 and 2024 are approximately 7,300 square feet and 5,600 square feet respectively. The largest tenant rolling in 2023 is Autodesk and approximately 93,000 square feet on the fourth and fifth floors of Landmark in San Francisco, which we currently expect to renew. We continue to believe that strategic investments in our portfolio will position us to continue to capture more than our fair share of net absorption and premium rents, despite current market headwinds. And while we are not immune to potential additional attrition due to current conditions, we believe that the flight to quality will continue to drive solid performance from our office portfolio over the long-term. We will now begin the question-and-answer session [Operator Instructions] The first question today comes from Haendel St. Juste with Mizuho. Please go ahead. Hey, guys. Good morning. A couple of questions first on the leasing front. Steve, I guess first of all I appreciate all the details related to the guide. Steve, I wanted to ask you a bit about the office demand trends you're seeing. I appreciate the color on the number of tenants who are coming whose lease are maturing and the average side. But I'm curious, how many other tenants beyond Autodesk have leases maturing in a maybe 30,000 square foot plus basis? And what do you think that line is plus or minus that gives you a good amount of optionality and doesn't necessarily pose a probably being too large for tenants in this current environment? Thanks. Good question, Haendel. The answer is Autodesk is it. I mean everything else is full floor or less. So it really is a lot of small tenant rollover. So we're really not exposed beyond Autodesk to the big tech situation that you're seeing in multiple markets. So we're actually well positioned and it's a small tenant rollover. And actually that's where we're seeing the most new tour and proposal activities in the small to midsized tenants. Got it. Got it. Okay. I noticed Industrious is in the list of top tenants on the office side. Maybe comment on that. Is there anything unique or different about the leases they're doing? Are they longer? They require more CapEx? Are they based around the percentage rent base? Some comment on that would be appreciated. Thanks. I am sorry, you're talking about Industrious? Actually their initial lease was two floors done back in 2017 or 2018 and that was their typical co-working situation. The newer leases are enterprise-level deals. I think Databricks is their – a big tenant. It just took down two half floors in our latest lease at City Center Bellevue. So they're really kind of moving towards the enterprise level tenant. Okay. And one on the retail side, it seems like all of the leasing done in the fourth quarter was renewals. I don't know if that's just a unique confluence of events but maybe if there's anything to share on the new lease side, or is there something maybe underlying this from a demand perspective but some color or some thoughts on the retail leasing in the fourth quarter? Yes. I mean – hi, Haendel, it's Adam. So a lot of that was renewals in the fourth quarter. We did have a handful of new deals including a 14,000-foot Sola Salon at our Carmel Mountain Plaza, which is a great deal for us. We finally replaced the P.F. Chang's restaurant at Del Monte Center with a Kona Steak & Seafood, which will be opening in the next month or two. That's 7,000 to 8,000 square feet. And even at Alamo Quarry, we had a couple of wins about 5,000 square foot deals with Navy Federal and Yardbird Furniture, which is a subsidiary of Best Buy. So pretty good progress there. I think now that we're up to 94%, 95% leased and we've got some in the hopper that should hopefully round that up another percent or so. We feel like things are functioning pretty, pretty well on the retail side for us. So given that you are in a higher occupancy level and with a lot of space vacancies have been addressed. How do you then feel about pricing power in near-term the outlook for spreads on the retail side? I mean I think it's probably going to be pretty consistent with what we've been seeing. It should be – of course, we're looking for increases over expiring rents. And to the extent we can get that we will. We'll do as well as any of our peers with similar situated Class A shopping centers, Haendel. So for the most part we're seeing positive spreads. There may be roll downs in certain instances on, more difficult spaces but -- we'll just have to see what happens. Hey, guys. It's Adam Kramer on for Ron. I appreciate all kind of the guidance commentary and breakdowns earlier, really helpful. I guess just thinking about the multifamily portfolio. If I heard correctly, I think the comments was kind of NOI flat year-over-year in 2023, some kind of elevated expenses there. Wondering just maybe on the revenue side, on the leasing side, for multifamily kind of what's happening there? What are you seeing in kind of your markets that maybe is driving some revenue, but kind of not enough to kind of offset what's going on in the expense line? Yes, sure. So Adam, we are seeing -- I think we're looking at our numbers right now and we are expecting 2-plus percent revenue growth on our multifamily side, but the expenses are just -- they're a little more challenging for us particularly on some of our older products like, Loma Palisades or Mariners Point, some of these are older and around for 60 40 years. They take a little more TLC. So we've been kind of putting a lot more OpEx, into those to get them back to where they should be in terms of, roofing or balconies or painting and landscaping, just to make sure they're humming properly. So, we're seeing a little more expenses on that side. Perhaps, we're being a little conservative because it's a little more difficult to predict this upcoming year, but that's kind of it at a high level. Abigail, did you have anything to add to that? Sure. I can add to that. Thank you, Adam. I think also on the revenue side of it, some things that we have to consider with these older products is that, we have the right cap when renewals come up. So our revenue can only go up about 10%, with those units that are renewing. And then when there is a state of emergency that's put in place as we have today in California, we're also capped with new units that are coming online, for rents and there's a cap on those two. So we'll stop lift the state of emergency, that we can go forward with pushing the revenue in the rents for new units, as much as possible. And as we move into the spring and into the summer historically, that is when we start to see units rent quickly and they rent at a higher rate. So we'll continue to push where we can. Got it. And just on a market-by-market level, kind of how are you using concessions? And it seems like based on a commentary from others, there's probably some concession usage being done. So maybe just kind of quantify how much concessions on the multifamily side? Sure. In the fourth quarter, concessions were minimal. What we saw was that our growth rate for San Diego were $32.24. Our net effective rents were $32.08. So when you look at that on a cost basis, it's just a little under $200 per unit and we had 85-week leases in the fourth quarter. So a little bit of softening there in concessions that had to be offered in that fourth quarter. So moving forward into Q1, concessions have pretty much dropped. So we don't -- we're not offering those right now and are just moving forward with gross rents…. Got it. That's, great. And then just one more if I could. Just I think it's a typical question I probably asked before. But just on capital allocation from here, kind of weighing development versus M&A, obviously you've been active in office the last few years office M&A. So maybe just kind of your thoughts there, I mean, I don't know, if share buyback is something that would be on the table at a point, but we'll love to just hear kind of the latest thoughts on capital deployment. Hi Adam, this is Bob. Yeah, in terms of capital allocation, I mean, right now, we're just mined in the store. We're always looking for opportunities. But right now we have not seen anything that makes economic sense. I know Ernest is looking at things daily. We all are. Steve is looking at the markets things are brought to him. I see things and you see things and Adam does as well. But when you run the economics of them, it just doesn't make sense. And sometimes during the markets like this, it is sometimes in the best interest to just take care of what you got, keep it in pristine condition and push rents as much as you can. We're big believers in the office sector. But every sector that we have, I mean look at the retail, look at the same-store growth before reserves, look at the leasing spreads on retail that are coming in. What we have, we believe is gold. And we don't want to make a bad acquisition, but having said that we also look at every opportunity that is presented to us. And if nothing else we learned from those opportunities that are presented. This concludes our question-and-answer session. I would like to turn the conference back over to, Adam Wyll, for any closing remarks. Thanks again for all that have listened in today, and those that have been stakeholders along the way. We remain encouraged by our operating fundamentals, notwithstanding the challenging economic cycle and volatility in the capital markets today. But we'll be prepared for any scenario to the best of our abilities. And we've been through many cycles before. And our properties, our platform, our balance sheet have successfully guided us through the ups and downs each time. So as Ernest would say if he were here, "When the going gets tough, the tough get going." So we're going to roll up our sleeves. And get back to work. I appreciate it.

EarningCall_323

Good afternoon. I am Park Cheol Woo, Head of IR. I would like to welcome everyone to the Shinhan Financial Group’s 2022 Fiscal Year Earnings Presentation. Several housekeeping rules before we begin the earnings presentation. We are holding today’s earnings presentation via digital platforms including the Shinhan Financial Group IR YouTube channel and the Zoom applications. The YouTube live channel is in Korean only and questions cannot be asked. And so if you’d like to view today’s IR in English or if you have questions to raise, please join us through the Zoom application. More details on how to join us is explained to you on our website www.shinhangroup.com. We now begin the 2022 fiscal year earnings presentation. In today’s presentation, we have with us the Group’s CFO, Lee Taekyung, the main presenter and the Group’s CDO, Kim Myoung Hee; the Group CRO, Bang Dong-Kwon; the Group CSSO, Ko Seok-Hon; Shinhan Bank CFO, Kim Kihoon; Shinhan Card CFO, Kim Nam-Jun; Shinhan Securities CFO, [indiscernible]; and finally from Shinhan Life, the CFO, Park Kyoung Won. Today’s earnings presentation will proceed as follows. CFO, Lee Taekyung will walk you through the overall business results for 2022 achievements in the digital area will be presented by Kim Myoung Hee, after which we will have a Q&A session. Greetings. I am Shinhan Financial Group CFO, Lee Taekyung. First of all, thank you for participating in our fiscal year 2022 annual business results presentation despite your busy schedules. On Page 4 of the business results presentation, I will first go over the highlights. Please go to Page 4. ‘22 Q4 due to factors such as-non recurring items and recognition of cost to prepare for future uncertainties, net income was lower than the market consensus and recorded KRW326.9 billion. Regarding the major non-recurring items which occurred in Q4, I will explain in more detail from the next pages. On an annualized basis, group’s cumulative net income posted KRW4.6423 trillion and despite uncertain economic conditions at home and abroad, we steadily improved net income excluding the KRW321.8 billion of sales gain from Shinhan Securities HQ building sale income, it was a 7.5% increase YoY. Group’s annual CIR posted 45.5% and despite the digital-related cost increase and inflationary factors is being managed at a stable level. Group’s annual credit cost ratio posted at around 33 bp level and despite additional provision for future uncertainties due to deterioration of the internal and external economic environment, it is being maintained at a stable level. And going forward, Shinhan Financial Group will maintain a conservative provisioning policy. Last, I would like to go over the Group’s capital policy. At the BOD meeting held today, the 2022 year-end dividend per share was decided at KRW865. And if the previous quarterly dividends are included, the annual cash dividend payout ratio is 23.5%. In addition, if we include the two rounds of share buyback and cancellation that took place last year, 2022 TSR is 30%. Going forward, we will strive forward to maintain an appropriate capital ratio and also continuously improve our shareholder return ratio. Let’s go to Page 5. First, I will go over the main reasons why Q4 performance fell short of the consensus. First item was the KRW146.4 billion of valuation loss, which was recognized for the Principal Protected pre-2000 Personal Pension Trust, which was newly recognized because of the newly released interpretation by Korea Accounting Institute. However, since this was mostly valuation loss from bond price decline due to interest rate hike, losses will be recovered in full amount when the bond reaches maturity and most of this will be recovered as valuation gains within 2 to 3 years. Second is the customer investment product-related losses of KRW180.2 billion, KRW130.7 billion after tax. At the beginning of last year at the 2021 annual business results presentation, I mentioned that the estimated loss related to the sale of investment products could go up at maximum to KRW200 billion after tax. Of this, considering the amount recognized in 2022, expected loss of about KRW70 billion should have been remained, but when we had about KRW80 billion, which was unforeseen at the time such as the decision of the Heritage Fund dispute Mediation Committee, we expect a total of KRW150 billion worth of additional losses going forward. Third, valuation loss on non-marketable securities increased by KRW73.5 billion YoY and recorded KRW104.1 billion. For this, the ERP expenses of KRW145 billion. Lastly, reflecting factors such as conservative future economic outlook, additional provisioning was KRW197 billion. On Page 6, there is the major business performance of the overall group. So please refer to it if needed. Then starting from Page 7, I will go through the detailed performance of the group. First, Page 7 is the Group’s interest income. 2022 annual group interest income went up by 17.9% YoY recording KRW10.6757 trillion, driven by 15 bp quarterly group margin increase in interest-bearing assets, 4.5% YoY increase. Q4 quarterly bank NIM on the back of decrease in core deposits continuing from Q3, an increase in funding costs following LCR management, posted 1.67%, a 1 bp decline QoQ. I will now cover bank loans in one. Bank loan growth, despite the continuous decline of household loans, saw solid corporate loan growth and grew 3.8% YoY. Corporate loans driven by increased demand from large and medium-sized companies following the direct funding market crunch grew 11.2% YTD. On the other hand, household loans with a sharp rise in interest rate leading to factors such as demand decrease and DSR regulatory effect decreased 3.7% YTD. Please refer to Page 31 for more details. Please refer to the next page, Page 8, for Shinhan Bank’s margin loan and deposits. Next is Page 9, group non-interest income. Group’s non-interest income following securities-related income decreased due to market interest rate increase and fee income decreased following capital market and real estate market deterioration went down 30.4% year-over-year, compared to the previous quarter due to factors, including the aforementioned change in accounting or principal protected trust and recognition of alternative investment valuation losses, went down 89.8%. Fee income decreased by 5.6% YoY. This is mainly due to credit card fees, securities, brokerage fees and fund bancassurance fees. Credit card fees decreased due to factors such as lower merchant fee rates, although credit card purchases increased. It decreased 13.6% QoQ. Credit card fee income decreased due to a reduction in interest-free installment plans, leading to lower volume and increase in seasonal marketing promotional expenses. IB commissions decreased due to real estate market slowdown in the capital market downturn. Next, on Page 10, group G&A and provisioning; trading costs despite the decrease in ERP size, due to DT related marketing expenses and overall increase in general cost levels due to inflation, increased by 4.7% YoY. Group CIR recorded 45.5%, up 0.2 percentage points YoY and is being managed stably. The group’s annual credit cost posted KRW1.3057 trillion and driven by items such as KRW517.9 billion of additional provisioning to respond to the uncertain economy, increased 31%, but credit cost ratio posted 33 bps, a 6 bp increase YoY and is being stably managed. As economic uncertainty is growing to prepare for potential credit risks, we plan to continue our conservative provisioning stance. In addition, through actively supporting vulnerable borrowers for individuals and companies and through active support for high-quality businesses among real estate PF, which are recently becoming problematic, we will work hard continuously to mitigate this risk. Looking at the delinquency ratio, which can be seen as a leading indicator of credit cards, in the case of the bank, it is maintained at 0.22 percentage level, up 3 bps QoQ. However, in the case of credit card, with the interest rate rise and increasing requests for readjustment of fresh start fund and financial products, credit limit cuts for preemptive asset quality management it went up 18 bps QoQ. Please refer to Page 11 for a preemptive preparation for future uncertainty plans. And please refer to Page 12 for details on the group’s asset quality management. Next is Page 13, capital management and major profitability indicators. As of the end of December, the CET1 ratio increased by 0.1 percentage points QoQ and is tentatively expected to post 12.7%. This is attributable to a sharp decrease in credit RWA due to a decrease in foreign currency loans and currency derivatives as the value of the yuan rose despite the factors that reduced the ratio due to year-end dividends. Next, on Page 14, the group subsidiaries income. Despite the negative non-interest income trends and spike in provisioning, the bank’s net income grew YoY owing to the increase in interest income on the back of margin improvement. In the case of non-bank subsidiaries, in the case of the Shinhan Card, despite across-the-board increase in operating profit, including credit purchases, loan and lease, a rapid rise in funding costs, merchant fee cards and provisioning increase led to a slight decline in net income. In the case of securities, operating profit was down, owing to the losses and valuation of AFS securities and volume transaction volume. The net income rose YoY due to gains from the sale of the head office. In the case of insurance, despite the falling income from asset management due to the base effect of the ERP program of last year, operational profit – the insurance profit increased, resulting in higher net income YoY. In the case of Shinhan Capital, capital saw net income grow YoY due to the solid growth in interest income. But on a QoQ basis, net income fell due to increase in real estate PF related provisioning and valuation loss and equity securities on the back of rising funding rate. In the case of subsidiaries related to the capital market, including asset management, asset trust, REIT management, the continued downturn of the capital market business led to a decline in net income YoY. The next page is on the Group’s global business and please refer to it at your leisure. Starting from Page 16, I will talk about the mid-term capital policy of the company. This is Page 16. The shareholder return policy at your left have been reported to the BOD last February and have been communicated through the IR presentations to the market. The mid-term financial targets for 2025 on the right have been resolved at the BOD of last August. In the case of the mid-term financial targets, this is a framework that is necessary to enhance corporate value and to achieve sustainable growth for various stakeholders and short-term shareholders, customers, employees and society as a whole. First of all, from the double-digit ROE, we have changed our ROE target with more specific numbers and our ROTCE, which deducts intangible assets from ROE has been added as a management indicator. Although this is not an easy number to achieve, that 10.5% and 12% respectively are the midterm goals that have been set. Towards this end, we intend to pursue growth in the size of the Capital Life business, which is less capital intensive and for the more capital-intensive areas, growth in quality will be pursued to achieve efficient capital allocation. In this process, asset growth will be managed at the nominal GDP growth rate level. This must be achieved on the basis of solid robust capital stability. For this, our plan is to maintain the CET1 ratio above 12% at a stable level and the surplus capital that can be secured as much as possible will be used for the shareholder returns. That is our principle. The reason for setting the CET1 ratio above 12% is because we consider the 10.5% regulatory ratio. And after going through regular stress testing, we consider the level of CET1 ratio that will allow us to continue providing credit and financial services to the customers and the society at large. Next, on Page 17, the results of the 2023 shareholder returns and the 2023 shareholder return policy directions based on the mid-term financial targets. Through the BOD that was held today, our company has resolved to pay out year-end dividends of KRW865 per share through this resolution to quarterly cash dividends up until now and the two treasury buyback cancellation included, we have been able to achieve 30% total shareholder return ratio that we have announced back in last February. Let me now explain about the 2023 shareholder return policy discussed in the 2023 business plan that was passed last year at the BOD. First, for the cash dividend to raise the predictability of dividend, not only the quarterly dividend, but the year end dividend will be of the same amount. For instance, for a total of KRW2100, it will be KRW525 each. Also, the treasury buyback and cancellation will be reviewed on a quarterly basis. Meanwhile, the distribution of profit generated this year will be 6 to 4 ratio and retained earnings is set at 68% and the remaining 40% can be used for shareholder returns, but depending on whether the economic uncertainties continue and on the results of the regulators stress testing, we expect total shareholder return ratio of 30% to 40%. As part of the 2023 shareholder return policy today, our BOD resolved to buyback and cancel KRW150 billion of treasury stock. The size of this treasury stock buyback and cancellation will depend on the CET1 ratio this year. But given the dilution of the shareholder equity, we are taking into consideration the volume that will be converted to common stock as of the May 1 this year. Good afternoon. I am Kim Myoung Hee, the CDO. Let me walk you through the Shinhan Financial Group digital division’s 2022 business results. In 2022, based on the digital division strategies, we have pursued the creation of 6 customer values and strengthening of four core capabilities by each key index of the digital strategy framework at the right, the key highlights will be explained. First, the more friendly financial services, the digital platform of the group has grown into a financial platform, which is visited by 22.28 million a day, up 30% YoY. The two mega platform, the Bank SOL and the card businesses play led to growth, while non-financial platforms had 3.62 million visitors, up 92% YoY. The group’s MyData service users are 6.96 million. Bank card, securities and life insurance are opening on MyData services, and so in all financial areas, customized personal services are now being provided. The second area is more secure. 6.71 million customers use the Shinhan Sign Certificate to safely access not only the Group’s financial platform, but also for public and private sector partners sites safely. The digital innovation branches, which makes use of a range of video technologies and devices has grown twice as high YoY and has expanded to 173 branches. Next is the more creative; through the digital new business, KRW9.5 billion in operating profit – operating income was posted data business and non-financial platform sales growth has started becoming a new source of income for the Group. Also, the Group as of today has invested KRW260 billion in strategic investment to expand the future digital ecosystem. For the four core capabilities, namely data process, technology, people organization, please refer to the presentation materials. On the next page, I will explain about the DP results posted and the strengthening of the foundation for sustained growth going forward. The Group digital platform since 2020 has posted a yearly average of 26% growth, continuing a solid growth trend. Key financial platforms such as SOL pLay and Alpha has posted 18.6 million MAU, successful launching of the new SOL, the accessibility of the Card pLay and strengthened consulting services and the U.S. improvement of Alpha has become more customer friendly. These were the key reasons behind the MAU increase. As you can see from below, the digital new business operating income also showed steady growth on the right-hand side. The efforts to strengthen the basis for the Group’s growth is described. The license necessary for digital life has been preemptively acquired to pursue the relevant business opportunities. Despite the rapid fingers in the digital age to carry on the core values of the financial business and to ensure sustained growth, we are strengthening the data utilization framework and ICT modernization is being pursued. The Shinhan Financial Group will continue to place top priority on creating customer value in 2023 and will strengthen our digital core capabilities toward this end. Thank you, Mr. Kim for that detailed explanation. Started from Page 20, the corporate sustainability and other details about the Group and the affiliates are included, so please refer to them at your leisure. Thank you. I have two questions. The first one is on net interest margin. We saw a small drop in the bank net interest margin this quarter. And subsequently, this year-to-date, we have seen further decline in the interest rate environment. So would appreciate management’s forward-looking outlook on net interest margin for this year, please? And the second one is on the capital return plan that you have laid out. So compared to some of your peers, the CET1 ratio target of 12% is a bit lower than peers. Can I understand what is the reason behind that? And also the full year ‘22 payout ratio of 30% is also a little bit lower than peers. So just wanted to understand, going forward, are we likely to see a divergence in payout ratio among different Korean banks? And also, so far, what is the feedback from regulators on your ambition to increase the payout ratio towards 40%? Well, I believe that you asked two large questions. First is about NIM. And second is about capital policy. So for our NIM, we will hear from our bank’s CFO, and I will talk about our capital policy going forward. Thank you very much. I am Kim Kihoon, the Bank’s CFO. Thank you very much for your great questions. And for Q4, looking at the market interest rate, it rose greatly from Q3, and in our case, until Q3, I think we had some room and from Q4, we had some funding. And that is why regarding the LCR management and for our liquid deposits, we had the money move toward time deposits. So that is why in Q4, the funding costs went up steeply and I believe that led to the downward NIM trend in Q4. In addition, after entering into 2023, we are seeing the market interest rate go down and be stabilized, but the overall funding costs – well, it is a bit higher than the time deposit rate. So if the trend in Q4 we believe will continue until Q1 of this year. We believe that will continue. But from Q2 of this year, we believe that there will be some stabilization of the money moved toward time deposits. And in Q4 of the previous year, there was a time deposit that we had at higher interest rates, and we believe that we will have lower rates for those. So we believe that from Q2, it will be stabilized. So from Q2 to Q3, we will have moved toward a stabilization trend. And added to that, for the quarterly NIM basis in 2022, when we compare to 2022, we believe that in 2023, we will have a rise. Thank you very much. I would like to answer your question related to our capital policy about CET1 ratio of 12%. You mentioned that it is slightly lower than our peers. And we have had a consistent CET1 ratio goal of 12%. It is firstly because of the regulatory framework. So we have the capital buffer ratio of 4.5% at DSIOP, it’s 8%. And then we have taken on cyclical CapEx. And if we add that, it’s about 10.5%. And then there is the management buffer really against M&As and others, which is 2.5%. So that is why this will reach the number and then we had some internal stress tests. And when there are the regulatory stress tests – looking at the scenario that we recently received, well less than 1% is due to stress test. So we believe that sufficiently, if we have 12%, even if we add that, it’s going to be that number. So we believe that even if there is an economic crisis, then this will become quite sustainable, and we can provide financial services to our customers and to the local communities with confidence. Secondly, I think you asked about our dividend policy about PSR, 30%, which is lower than our peers. Well, I don’t know the rationale behind the other peers, but in our case in 2022, well, we had 30% that we had committed to, including share buybacks and we had KRW150 billion of share buyback that we have resolved. And when we look at – by fiscal year for the dividends, we had the business decision of the retained earnings. So I think we can calculate it based on last year and the KRW150 billion that was resolve to date or that has been confirmed after our financial plan. So I think it can be included as 2023. But when we calculated to other bank standards, how they calculated it, then we believe that including the KRW150 billion, it’s 33.2%. So I don’t think that our TSR is lower than our peers. And regarding the third question, related to differentiated TSR policies for Shinhan, Well, I mentioned in the mid to long-term plans for capital policy is not just – I believe, to get more profitability compared to our capital. So we need to get more income, more earnings. And based on that, not only 100% is important, but I believe that if we have excess of CET1 12%, we need to acquire this at maximum, so that if we have shareholder return, then we will have – differentiating between Shinhan and other peers. And for the response by the financial authorities in the past, well, they have been emphasizing loss absorption is very important. And that is why I think that the CET1 12%, while we have seen some numbers by the regulatory authorities for that. So that is why the profitability compared to our capital and for our capital buffer. I think you can take all of that into consideration for a differentiation. And you have seen, I believe, a lot of the news in the media. So I think those will be the points that differentiate us from others. Thank you very much. So I have a question about the digital business. I have two questions, actually. First question, recently, your affiliate’s consolidated data platform had been created, so [indiscernible] this utilization system of the data what kind of directions are you seeking? For instance, improving internal work processes? Are you emphasizing cost savings or by using the data, or are you trying to seek new sources of income or where is the emphasis, versus the overall data governance and data strategies? That is my first question. And my second question is recently in the securities affiliate, the Token Securities business will be pursued. That has been a news report that I read. So what kind of underlying assets do you see, and what kind of partnership strategies do you have? Is there anything if so, can you share that with us? Mr. Baek, thank you very much for those questions. While we are preparing our answers, please hold for a few seconds. So recently, we have announced the Group consolidated data platform. The bank card, life and securities, we will be using a consolidated data platform So this platform has been created for the customers, more personalized and customized services will be provided. As you have mentioned, cost savings and new sources of income – yes, there might be that impact, but our primary purpose is to center on the customers to provide more customized and personalized services that have been our primary market. And so in the case of our Group, we will continuously use the data well, so that the data are well collected, generated and stored, and is also effectively utilized, so that for each group affiliates, they will all strengthen their data governance structures. And overall, as a Group, these data will be used from each affiliate, and they will consolidate it into our platform. So the more personalized, ultra-personalized services can be provided to our customers. This is our purpose. Secondly, with regard to the securities, with regards to blockchain business, we have been continuously monitoring the regulatory trends last year at the Group level, digital assets safe have been operated. STO; in the case of STO, the capital business – there is product regulatory laws and regulations. They are being devised at the moment I do believe. And so those who have the necessary expertise, the Shinhan securities had been preparing for this blockchain business. And so in 2022, they have a new department on blockchain that was instituted and along with a fin-tech company, we are pursuing an STO infrastructure business. And so in keeping with the regulatory trends and developments in order to provide these new financial services, we will be continuing to put our best foot forward. Thank you very much. We will take the next question. From Daishin Securities, we have Park Hye-jin on the line. You are on the line. Please ask your question. I am Park Hye-jin from Daishin Securities. I have two questions. First is on 17 Page of your presentation. In May, you can see there is a lot that will be converted to common shares. So regarding share buyback and cancellation well, because you said you made a resolve today. So will it be done every quarter. And going forward, for the share buyback and cancellation, will they be more predictable? Will they be more regular? Second question is about digitalization and I think you have paid keen attention to digital using many of your presentation pages. So what is your take on Internet bank from Shinhan’s perspective? I believe you asked two questions. You asked about capital policy, and you also asked about Internet bank. And related to digital, our CSO will answer that, and then I will answer the question about capital policy. On May 1st, we will have about KRW750 billion that converted to common shares. And regarding this, we have the existing share amount. So we have plans for share buyback and cancellation taking the dilution into consideration with our existing shareholders and you asked about predictability for each quarter. And we have been mentioning that for the cash dividends, they will be uniform, as most as possible. And share buyback and cancellation, we will keep an eye on CET1 ratio for each quarter. So we will see if we can have enough room. And if the share price is low, it could be higher. So it will depend on the circumstances. So it’s quite difficult for it to be very predictable. But at most, we will have adequate asset growth, and we will make more room that exceeds CET1 target, so that we can have active share buyback and cancellation. I am CSSO, Ko Seok-Hon. Thank you for your question. And regarding your second question, I would like to answer that. for Shinhan Financial Group, regarding our willingness to enter into the Internet-only bank industry, while in principle, well KB Financial Group has – KakaoBank, Woori, K Bank, Hana has casting financial investments previously. So in principle, that is not blocked. Then for Shinhan, we are not excluding opportunities to invest in Internet-only banks. But our foremost priority is, in Shinhan Financial Group’s digital and platform competitiveness and strengthening that competitiveness, so that we can have connection and expansion through non-banking entities, so that we can strengthen our competitiveness in digital. Despite this, regarding investment in Internet-only banks or alliances with Internet-only banks, we are not excluding those possibilities at all. So I think that will be my best answer going forward. Thank you very much for those answers. At present, there is no incoming questions. So, we will wait for further questions. If you have any questions, please join the Zoom application and press on the hands up icon. Yes. We have one more question from SRS Securities, Shim Jongmin [ph]. Mr. Shim, you are online. Yes. I am Shim Jongmin. Thank you for giving me this opportunity. I have one simple question on Page 17. On the lower right-hand side, there is the shareholder return policy and the regulator, stress testing results need to be agreed upon, that is mentioned. And the CSSO also, when you provided an answer for a previous question, well under 100% of the results of the regulator stress testing, that was a standard. So, are you saying that the internal stress testing by the regulators have been introduced, or are you going to agree with the regulators and conduct the stress testing, so what had taken place? Depending on which had taken place, what are the additional provisioning can be required by the regulators, I think that can be sort of assessed. Thank you very much for those questions. With regards to stress testing, so I am going to disclose what happened – discussed internally. As you are aware, in the case of U.S., the stress testing loss buffer in 2008, after the financial crisis, this has been maintained in the United States for over 10 years and the regulators for their part. They recently introduced the stress testing in Korea. And so we have several scenarios. There is a need to have more sophisticated scenarios to reflect reality to a greater degree. But we need to continue monitoring the situation. In my view, we can – as I know there in the loss stress as efficiently. However, but to compare to United States, your company has a stress loss this percent. I don’t think we are at that level in Korea. I think we will need further consultations with the regulators for the banking sector. So, what I said was where we are at present. Additional provision is a separate matter, I believe. For expected losses provisioning is set aside, where unexpected losses take place, to prepare for those kind of situations, stress testing is conducted. So, I think this is two different matters. Thank you for your answer. We have the next question from HSBC, we have Won Jae-woong. You are on the line, sir. I have one question. Recently, there is delinquency and DCR that seems to have inched up in your trend. And for this year’s trend, what is your outlook for this? Do you have any guidelines? Secondly, for loan growth for the bank and for digital bank, I think your growth estimates or targets are quite different. So, for your loan book growth, what is your guidance for growth this year? I believe you asked two questions. First is about delinquency and second question is about loan growth. For delinquency, our CRO will answer and for loan growth, I will answer your question. Hello. I am the CRO, Bang Dong Kwon. Thank you very much for the opportunity. For delinquency, as you aforementioned, it is true that it is on the rise. And at the latter part of last year, it was on a rising trend. And I think that we had some changes. So, with the interest rate rise, it is true that the payment capability went down, and there has been some expectations about government support policies. And for real estate prices, well, there is a time lag it has on the real economy. And when we take all of those factors into consideration until Q1 and Q2 of this year, for the vulnerable borrowers, we think that it will probably deteriorate, and we are seeing some signs. However, from late last year, we have been quite preemptive by the bank and by the credit card, but our subsidiaries have made preemptive preparations. So, we are going to see some results of these preemptive measures from Q1 to Q2 of this year. And we believe that at the end of Q2, this upward trend in delinquency will go down, although we are seeing a rise in delinquency. As was mentioned in the presentation, until so far, we are seeing our collateral or securitized portions that are going up, and we are seeing the loss absorption capabilities that have been strengthened through our conservative provisioning policy. So, taking all of those into consideration, it seems that even if the delinquency trends virtually continues, well, we believe that there might be some possibilities of it impacting our credit costs, but it will be quite limited. Thank you very much. Regarding the credit cost to add to the previous answer. On Page 10, you can see that for the credit costs, you can see the trend on the left graph. And we have preemptively provisioned KRW1 trillion. So, we had 0.37% for the previous 3 years, and pre-COVID in a normal economic environment from 2018-2019, 0.26% and 0.31%. So, we have a bit higher than that. So, of course, for delinquency rate, it can go up. But for credit costs, we believe that it will be quite limited. Secondly, regarding loan growth, well, you asked about the target difference between our bank and digital bank – digital. And as I have aforementioned, for the nominal GDP rate, well, we don’t think that the growth will exceed that amount. And I mentioned that we need to grow in quality, so we need to have profitability compared to our capital, and the economy is quite uncertain. So, that is why I believe, compared to the past the growth in loans will be a bit lower than the past. And not only for the bank, but also for the credit card, I think we are at a similar position, and we have plans with that in mind. Thank you very much for those answers. We will receive further questions. Next question from JPMorgan Securities, Mr. Cho Jihyun. Mr. Cho you are on line. Thank you very much for this opportunity. I have three questions actually. First question, when doing a quarterly dividend, you said that it’s going to be uniform and even. So, what will be the floor – what percentage will be the floor? Is there any guidance on the expectations for that? So, if we have the guidance, we may be able to know – so is the additional shareholder return at once, you have achieved more than 12% CET1 ratio, would that be in the form of share buyback and cancellation? And then you talked about KRW140 billion of valuation losses that have been recognized all that once, or was it done on a real-time basis, and that is the reason why this amount is large? And on Page 11, the real estate exposure, that was about the Principal Protected Trust. The capital share seem to be larger for the real estate exposure. The metropolitan region you are referring to. And also you have been provisioning well, I think you have managed this well. But going forward, the real estate market situation and within the group affiliates, what kind of exposure is there in the second-tier financial institutes exposure. How well do you think this exposure will be maintained, managed going forward in the real estate PS market? So, you have three questions. I will take the number one and number two and the third will be answered by our CRO. So, we talked about the quarterly dividend. So, as I have repeatedly said, the per share cash dividend will be slowly maintained or increased. So, last year there was a KRW2055. In 2023, it will not go down. It might be slightly more than that. So, that is the reason why it’s a good example of KRW2,100 and divide that by four, that will be KRW525 for quarterly dividend. So, that is our plan going forward. And of course, for the surplus amount, excess of 12%, the excess amount will be subjected to buyback and cancellation. And then talking about the Principal Protected Trust, so yes, it was a lump-sum recognized that we haven’t been recognizing in the past. But there has been a new interpretation for the accounting rules. It came out in December last year. And so we changed our accounting rules. And so there was a lump-sum recognition of this amount. The third question will be answered by our CRO. Good afternoon. I am the CRO, Bang Dong Kwon. Thank you very much for the question. With regards to PF capital exposure and lower projections, well, the capital exposure is about 30%/. On the PF and bridge loan together is about KRW8.8 trillion and 30% is for the capital. So, average value is high. So, that’s the current situation. With regards to real estate market, recently it’s a hot issue. Well, in our view, as you are well aware, the permit delays and the progress rate delays, these are risk factors, and the ForEx rate has gone up and also the construction materials cost has gone up. They are actually impeding these products as well. And the bridge loans, they are now being converted to the principal PF loans. And so because of these issues, there are concerns about the real estate PF. However, despite that, in order to more clearly give a picture of our situation, among KRW8.8 trillion, below sub-standard is about KRW50 billion, and the precautionary is about KRW48 billion. So, below our precautionary, it’s about KRW480 billion. That’s what is being managed. And so in the case of our group, yes, the delinquency is slightly inching up. There was about KRW90 billion in January in terms of delinquency. But this is the result that I have looked into. We do believe that demand can go up during the first quarter of this year. But internally, with the creditors, with the borrowers group, we will be continuing to consult and cooperate and respond to the situation. And the government policies are coming out as well, and we will be proactively responding these regulatory trends. So, we will be fulfilling our roles. We will be providing support for those companies undergoing temporary difficulties and challenges, and we will try to contribute our bit in resolving the situation going forward. And talking about the Principal Protected Trust, so the question was whether it will occur on a quarterly basis. So, in the next quarter, some write-back of reversals will take place from this amount, because there will be a maturity of some marketable securities. So, in next quarter, although the amount will be small, not losses, but actually we will be gaining from this. Thank you. Thank you for your answer. We have another question coming in from Hyundai Motor Securities, we have Hongjae Lee on the line. You are on the line, sir. Thank you for the opportunity. I have one question. It is a quite micro question. And on the 16th page of your presentation material, regarding shareholder return policy, it says until 2025. So, is there a special reason why you have set 2025 as the reason? So, will it be updated every 3 years, is that your plan? Also well, it is actually a few years into the future, but when we hear your presentation, 12% of CET1 ratio, well, it seems that the buffer is sufficient. So, CET1 ratio of 12%, well it seems that it would be better to hear more from you about the changes that might happen for this. CET1, 12%. What was your exact question related to that? Can you repeat your question – the latter part of your question? You mentioned in your presentation, the CET1 ratio, 12% that it is a sufficient buffer. And after 2025, I thought that there were no reasons for CET1 ratio of 12% to change. But why do you have 2025 as the cutoff point in that presentation slide? Yes. Thank you. I now understand your question. The reason why it’s 2025 is because, first of all, when we discussed this last year, well – this was discussed when we talked about our strategy and our mid-term strategy framework was until 2025. So, that is why that year is included. And the second reason behind that is ROE and ROTCE, 10.5% and others that are targets. Well, these are numbers that are not quite easy, in the Korean financial markets, it’s quite challenging. So, we want to try our best for the next 3 years going forward. And we will see the situation after the next 3 years, and then we will have another discussion. And for CET1 ratio, well, even if it goes beyond 2025, I think this will still hold. Thank you very much for your answer. Because of time constraint, we will wait for a few seconds for any further questions, and then we will wrap up. Because we have no further incoming questions, I would like to wrap up the Q&A session. With this, we would like to conclude the 2022 Shinhan Financial Group’s fiscal year earnings presentation. We would like to thank everyone for participating in today’s earnings presentation. And the materials for today’s earnings presentation can be viewed again in our website, as well as our YouTube channel. In the case of our YouTube channel, not only last IR events, but also other promotional videos have been uploaded. So, please refer to them at your leisure. Thank you very much for your attendance today.

EarningCall_324

Welcome to the AZEK Company's First Quarter 2023 Earnings Call. [Operator Instructions]. Please be advised that today's conference is being recorded. Thank you, and good afternoon, everyone. We issued our earnings press release and the supplemental earnings presentation this afternoon to the Investor Relations portion of our website at investors.azekco.com. The earnings press release was also furnished by an 8-K on the SEC's website. I'm joined today by Jesse Singh, our Chief Executive Officer; and Peter Clifford, our Chief Financial Officer. I would like to remind everyone that during this call, we may make certain statements that constitute forward-looking statements within the meaning of the federal securities laws, including remarks about future expectations, beliefs, estimates, forecasts, plans and prospects. Such statements are subject to a variety of risks and uncertainties as described in our periodic reports filed with the Securities and Exchange Commission that could cause actual results to differ materially. We do not undertake any duty to update such forward-looking statements. Additionally, during today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. These non-GAAP measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations of such non-GAAP measures can be found in our earnings press release, which is posted on our website. Good afternoon, and thank you for joining us. The AZEK team delivered financial results modestly ahead of our guidance for the fiscal first quarter of 2023, driven by favorable sales combined with strong operational execution. As previously discussed, our results were impacted by the residential segment's channel inventory correction primarily within our Deck, Rail & Accessories business. During the quarter, we saw steady Pro and Retail sell-through demand, and we achieved normalized levels of inventory in the channel which are at or below historical average days on hand based on expected demand for 2023. As a reminder, our sell-through demand is typically the best indicator we have of actual end-use consumption of our products. Our teams have done a great job in an unusual environment, and we have had strong execution within the quarter from our operations and sales and marketing teams, enabling us to effectively navigate through the channel inventory correction. We are on track with our plans for 2023 and believe that our focus on the customer, while aggressively getting short-term inventory adjustments behind us, will put us in a strong position for the balance of 2023 and into next year. In the first quarter of 2023, we generated $216.3 million of net sales and $15.1 million of adjusted EBITDA and we increased our cash from operating activities by approximately $37 million year-over-year to $6.4 million in the fiscal first quarter. As we progress through this year and into fiscal 2024, we see opportunities to increase our cash conversion through a reduction of working capital and a moderation of capital expenditures from a heavy investment period over the last couple of years. As a company, we continually monitor several internal and external data points to understand the health of the industry and our business, in particular. The key digital metrics remain steady and continue to show interest in the category consistent with secular trends around outdoor living and wood material conversion. At a company level, AZEK continues to perform well with web traffic growth positive year-over-year and more importantly, sample orders were up significantly over the same period last year. During the quarter, we once again conducted a survey evaluating the sentiment of our thousands of dealers and contractors to understand downstream demand. Dealers expressed cautious optimism that they could sustain growth in 2023. Our contractors also reported similar views with backlogs at approximately 8.5 weeks, roughly the same as last quarter and consistent with the same period in the year prior. Overall, our Pro survey results are largely similar to slightly positive on their outlook for 2023 versus the October results with the most common concern being the uncertain macroeconomic environment. These data points are consistent with what we experienced in the first quarter with residential sell-through volumes coming in positive on a dollar basis and marginally better than our full year volume planning assumptions. While this is an encouraging trend to kick off the fiscal year, we are still several months away from the start of the primary outdoor living building season and recognize the continued economic and geopolitical uncertainty. These results and our execution against our strategic initiatives gives us increased confidence in the year, and we are reaffirming our 2023 planning assumptions. Turning to an update on our initiatives. We made significant progress in the quarter and continued to execute against our strategic growth initiatives, picking up incremental shelf space across both Pro and Retail channels. These wins will phase in over the next few quarters, positioning us well heading into the spring selling season this year and into 2024. From a branding perspective, we completed a refresh of TimberTech, AZEK Exteriors and StruXure, connecting these brands together under consistent messaging to better serve our customers. Our upgraded branding and product positioning highlights our market-leading portfolio, which includes our TimberTech composite decking and our proprietary TimberTech Advanced PVC decking with unique performance characteristics. We are excited by the brand refresh and look forward to continuing to build our strong outdoor living and exterior brands together in the future. Equally exciting after previewing the 2023 new products late last fall at customer events during the TimberTech Championship, we are seeing strong customer receptivity to the new colors in our TimberTech decking portfolio as well as our new TimberTech furniture invite collection. We also simplified and upgraded our railing portfolio and have announced 2 new high-performance PVC options, Statement Rail and Pinnacle Rail, adding a high-end PVC railing option to our already strong portfolio of aluminum and composite offerings. Our recent acquisition of INTEX, combined with our acquisition of StruXure last year, puts us in a terrific position to continue to drive core and adjacent growth in outdoor living. In Exterior, where we have seen particular resiliency to date, we continue to receive strong positive feedback from our Captivate prefinished trim and siding launch and are adding additional resources to increase capacity and take on incremental demand. Each of these new products in decking, railing and exteriors highlights how brands under the AZEK company can expand our total addressable market size further advanced material conversion and inspire homeowners to create beautiful low maintenance and sustainable outdoor living spaces. During the quarter, we also continued our progress on increasing the use of recycling in our products. An example of this is the ongoing increase of PVC recycling in our advanced PVC decking product, where we are now running more than 60% recycled in the core of our board. In addition, we announced 2 new partnerships 1 with online clothing resellers, thredUP, in which we will collect thredUP polyethylene plastic mailer bags as well as their post-industrial plastic film waste and transport them to AZEK vertically integrated polyethylene recycling facility. The materials will then be processed and incorporate it into new TimberTech decking. Our Return Polymers business unit also announced the partnership with Trusscore to leverage our full-circle recycling program. As part of the partnership, we will collect, grind and recycle Trusscore PVC material helping to ensure that as much waste and scrap as possible is recycled and used to make new PVC products. Each of these partnerships highlight the unique ways in which we are executing against our goal of diverting 1 billion pounds of waste and scrap materials annually as we seek to create a more sustainable and circular future. We are also proud to announce a number of awards in the quarter, and the Real Leaders 2023 Impact Awards, AZEK ranked #40 out of 300 public and private companies and ranked #4 in the home and lifestyle category. This award recognizes a diverse group of companies from around the world that prove that businesses can both thrive and help build a better world. Additionally, AZEK has been shortlisted on the inaugural World 50 I&D Impact Awards for the progress, transparency and communication of our DE&I initiatives with winners to be announced in March of 2023. Finally, JUST Capital ranked AZEK in the top 25% of the largest publicly traded companies addressing the issues Americans care most about, from wages to workforce retention to impact issues such as ethical leadership and carbon reduction and pollution control among others. I would like to thank the entire AZEK team for their contributions to these awards, a testament to the company-wide commitment to our purpose of revolutionizing outdoor living to create a more sustainable future. AZEK has a broad portfolio. And as we discussed last quarter, it is overwhelmingly driven by repair and remodel spend. We estimate that within our residential segment, repair and remodel represents approximately 85% of net sales and that new home construction comprises approximately 15% of net sales. Recall that our planning assumption that we shared on the last call for the year assumes a 10% decline in residential sell-through volume in fiscal 2023. While our sell-through volume trends to date have been modestly better, we are not changing our assumptions or our view of fiscal year 2023. It is early in the season, and we continue to operate in an uncertain environment. Under the planning assumptions, we would expect to deliver $250 million to $265 million of adjusted EBITDA in fiscal year 2023. As a reminder, we exited fiscal 2022 well positioned to deliver against our margin expansion plan, including positive price carryover, recycled benefit, improving productivity and a moderating raw material environment. Given our lower production levels in the first half of 2023 and the balance sheet lag, we would expect to see the benefit of our margin and sourcing program in the second half of the year as we work through higher cost inventory and underutilization. Exiting fiscal Q1, we are now at normalized inventory levels with our channel partners, where we are at or below historical average days on hand. In the quarter, we were once again able to secure additional shelf space and product placement as an outcome of our winter negotiations. Our focus on having the combination of the best products, the best sales team and a broad portfolio, combined with increased capacity puts us in a great position to continue to gain incremental shelf space in both the Pro and Retail channels. Our fiscal second quarter is traditionally a channel replenishment period for our industry ahead of the building season. We have improved our lead times. And given the current environment, we are working closely with our channel partners in a disciplined manner to maintain lower inventory levels coming into the season. We expect channel inventory replenishment to be meaningfully lower than Q2 2022, which we believe is prudent and better positions us for the second half of the year. If demand during the season comes in stronger, we are confident that our capacity, finished goods inventory, flexibility of our plants and the overall health of the supply chain will enable us to service customer demand without an increase in lead times. As we communicated on the last call, we expect the majority of our revenue contraction will occur in the first half of the fiscal year with the combination of Q1 inventory destocking in our channels and more modest preseason build in Q2 compared to the prior year. As we move into the back half of fiscal 2023, we expect to have lower levels of inventory in the channel, and we'll also be lapping the prior year's channel destocking in Q4. Our assumptions for the second half of the fiscal year also include the benefits from continued price realization, sourcing benefits that we are already experiencing, completed productivity gains and our current recycled rates. Starting this quarter, we are also planning on lowering our internal balance sheet inventory levels as volumes seasonally adjust higher and we sustained production levels lower than demand levels. The second half tailwinds I just highlighted, combined with company-specific strengths around new product innovation, portfolio breadth and category leadership with best-in-class aesthetics gives us increased confidence in our ability to navigate the next few quarters, achieve the adjusted EBITDA range outlined with our planning assumptions and expand our margins in the back half of the year. Thanks, Jesse, and good afternoon, everyone. As Eric highlighted upfront, we have uploaded a supplemental earnings presentation on the Investor Relations portion of our website. Before we get into the first quarter results, I wanted to provide some color on the operating environment during the quarter. The demand environment has remained stable and consistent with the fourth quarter. Sell-through profile was positive on a dollar basis and down mid-single digits on a unit volume basis. This consistent demand environment allowed us to complete our targeted inventory reductions in the channel during 1Q '23. Inventory days on hand are at or below pre-pandemic levels across the portfolio. From an operating perspective, the focal points for 1Q '23 are around managing our conversion costs down to match the reduction in production levels without impacting service levels to our customers. Production levels in the quarter were down over 40% plus across most of our facilities year-over-year. On the commodities front, we saw the bulk of our purchase portfolio stabilized during the quarter at cost profiles to support our deflation assumptions. With the deflation we've seen, we continue to add to our carryover deflation benefit for fiscal 2024 based upon our current raw materials balance sheet lag. Note, we do expect to gradually compress our current balance sheet lag of 5 months back closer to 4 months by year-end. For the first quarter of 2023, we saw net sales of $216 million, which was modestly above our guidance. Net sales declined 17% year-over-year, driven by the previously communicated channel inventory reduction. The sales bridge elements for the first quarter included a volume decline of approximately $85 million partially offset by positive contributions from carryover pricing in the high single-digit range and $21 million from carryover M&A. 1Q '23 gross profit decreased by $41 million or 46% year-over-year to $47.6 million. 1Q '23 adjusted gross profit decreased by $35 million or 33% year-over-year to $71.9 million. The adjusted gross profit decline was in line with the decline in net sales and higher decremental margins from lower production levels. Note, there is approximately a 2-month lag on our labor and overhead, which will push some of the lower production level cost pressure into fiscal 2Q '23. Selling, general and administrative expenses increased by $10.3 million to $73.4 million. The bulk of the year-over-year increase was driven by SG&A contribution from recent M&A and transaction-related expenses. Adjusted EBITDA for the quarter was $15.1 million, modestly above our guidance and compares to $58.5 million in the prior year comparable period. The primary driver of the year-over-year change in adjusted EBITDA was the significant volume reduction caused by our channel destocking efforts, which caused large declines in both production and net sales levels. Net income for the quarter was a loss of $25.8 million or negative $0.17 per share, driven by the previously mentioned volume reductions given the channel inventory reduction. Adjusted net income for the quarter was a loss of $13.9 million or adjusted diluted EPS of negative $0.09 per share. Now turning to our segment results. Residential segment net sales for the quarter were $179 million, down 18.8% year-over-year, driven by the previously mentioned channel inventory calibration impact, which was largely in our Deck, Rail & Accessories business. The Exteriors business saw positive growth year-over-year and recent acquisitions contributed $21 million in the first quarter. Residential segment adjusted EBITDA for the quarter came in at $26 million, which was down approximately 60% year-over-year. Commercial segment net sales for the quarter were $36.8 million, down 4.7% year-over-year. We saw similar performance in both our Vycom and Scranton Products businesses as end markets, including marine, graphics and semiconductor, saw channel destocking in the December quarter, and we expect that to continue in the near term. Commercial segment adjusted EBITDA for the quarter came in at $5.2 million, an increase of $400,000 year-over-year. Segment adjusted EBITDA margin expansion of 170 basis points year-over-year was driven by favorable price commodity performance. From a balance sheet and cash flow perspective, we ended the quarter with cash and cash equivalents of $86.9 million and approximately $147.2 million available for future borrowings under our revolving credit facility. Working capital, defined as inventory plus AR minus AP, was $340.6 million. We ended the quarter with gross debt of $677.7 million, which included approximately $79.2 million of finance leases. Net debt was $590.8 million and our net leverage ratio stood at 2.3x at the end of the first quarter. Net cash from operating activities was $6.4 million during the quarter versus negative net cash from operating activities of $30.6 million in the prior year period. Capital expenditures for the quarter were approximately $30 million, down $35 million versus the prior year period. During the quarter, we repurchased 353,000 shares of our common stock for approximately $7.5 million or an average purchase price of $21.23. The remaining authorization under our share repurchase program is approximately $311 million. As we have communicated, we are mindful of our long-term net leverage ratio remaining in the 2 to 2.5 range. And as a result, we will likely push our repurchase activity to later this fiscal year. As we turn to the outlook, let me provide some context and color around what we are seeing and assuming for the balance of the fiscal year. We are now 1 quarter into the fiscal year. And while the selling season is still a few months away, we are reaffirming our 2023 planning assumptions outlined last quarter. As a reminder, our planning assumptions from our last call were: Sales unit volume down approximately 10%; carryover pricing for the year in the 3% to 5% range with M&A adding approximately 2 points of growth. It is important to note that the bulk of our net volume reduction for the year is in the first half of 2023. We are expecting a 3Q volume decline, which will be offset with positive volume growth in 4Q '23 as we lapped the prior year channel destock. SG&A increasing approximately 2% to 3% year-over-year, with the net increase primarily driven by the SG&A contribution from recent M&A and normalization of incentive compensation. Strong free cash flow generation, driven by a return to more traditional CapEx levels of $70 million to $80 million as well as progress against our targeted working capital reductions in inventory. Under these planning assumptions, we expect adjusted EBITDA in the $250 million to $265 million range for the full year fiscal 2023. From a segment expectations perspective, we believe our residential business performance and modestly better deflation will offset any softness in our commercial business which has seen some channel inventory correction. Before we turn to our guide for the second quarter, I wanted to provide context for the operating environment we expect in fiscal 2Q '23. Channel inventories are at normalized levels to start 2Q '23. As a reminder, 2Q is historically a channel replenishment quarter for our industry ahead of the traditional building season. In fiscal 2023, with lower lead times, available capacity, coupled with our own finished goods inventory levels and a sell-through demand assumption of volumes down 10% for the year, we are intentionally working with our partners to manage the amount of inventory entering the channel ahead of the season in a very disciplined and measured way. If demand is stronger, we are confident that our capacity position, the flexibility of our plants and the overall health of the supply chain will enable us to serve customer demand without an increase in lead times. Additional context on our 2Q '23 guidance includes sales volume is expected to decline in the approximate $55 million to $70 million range, partially offset by positive contribution from carryover pricing in the high single-digit range. Production levels will start to normalize in the back half of 2Q '23. We expect production levels will be down approximately 30% year-over-year versus the 40% plus decline seen in 1Q '23. By the end of the first half of 2023, the bulk of the underutilization will fully flow through for labor and overhead. AZEK inventory levels on our balance sheet will start to decline, consistent with our previous commentary. For 2Q '23, we expect consolidated net sales between $340 million to $365 million. We expect adjusted EBITDA between $57 million to $63 million. In closing, it is important to highlight some of the key elements in our implied outlook for the balance of fiscal 2023 between 2Q and 4Q, which include: number one, the residential channel inventory normalization has been completed; two, material input costs have settled at price points that support our 2023 deflation assumptions. It will now carry over modestly more deflation into 2024. We expect to start seeing the benefit of lower raw material prices in 3Q '23; three, we expect production levels to normalize in the second half, positively impacting utilization and setting the stage for plant productivity; fourth, we anticipate sales volumes will recover significantly from the 1Q '23, seasonally low and channel destocking impacted profile; five, we expect the whole price in our core markets; and lastly, six, with channel inventory reductions complete, we will start reducing inventory on our balance sheet and expect to finish the fiscal year with approximately $40 million lower inventory year-over-year. As a result of this reduction, we will see compression at our balance sheet lag on inventory, enabling raw material deflation to flow more quickly from the balance sheet to the income statement in fiscal 2024. Thanks, Pete. I would like to take a moment to again recognize and thank our dedicated team members, channel and supplier partners and contractors that support the AZEK company. Thank you for your continued focus and dedication and your contribution to the results in the first quarter. Our execution in Q1, including our shelf space games, combined with the continued progress we expect to make in Q2 increases our confidence in our ability to deliver above-market growth and margins in an uncertain environment. We are well positioned to realize the benefits of our recycling and sourcing initiatives late in Q2 and through the balance of the year. The fundamentals of our business are strong as is our confidence in our future. With the residential channel inventory normalization behind us, we are focused on our strategic growth and margin expansion initiatives that will enable us to deliver against the planning assumptions we laid out for 2023. We have a clear strategy in AZEK-specific initiatives to drive above-market growth and we believe that we are well positioned to win and deliver on our long-term goals. With that, operator, please open the line for questions. Question on inventory. You talked a lot about the channel being in line and I think towards the end of the prepared remarks, you talked about another $40 million, I guess, coming off your inventory. I heard that right. Can you just talk about how your internal inventory should shape the next couple of quarters with the kind of demand view that you've laid out? Yes, Keith, this is Peter. Roughly speaking, we expect to take about $30 million of inventory out of our system here in the second quarter. Obviously, we built $20 million in the first quarter, so it would be down net $10 million. which means over the third and fourth quarter, we'd be taking on an additional $30 million in inventory. And that's the cadence we're talking to. And one other inventory question on Exteriors. Exteriors was, I think, the way you said it was up in the quarter in terms of sales. How do you feel like your Exteriors inventory is and where the -- where distribution is out there? Yes. Our Exteriors business has been steady. And so as you consider the progression over the last really a few quarters and over the last few years, we have had appropriate supply to be able to meet external demand. As such, it's been very consistent. And within normal ranges really over the last few quarters, and we continue to see that. Question on the volume outlook. I know you said the bulk of the unit volume declines are in the first half, and I think you said that the expectation is that volumes should eventually turn positive in your fiscal fourth quarter. I'm just curious if you can expand a little on the confidence in that. What are the assumptions behind that? I guess for volumes to be positive by then, does that assume sell-through also needs to be positive? Or are you kind of taking a view on the progression of channel inventory through the year? Just any color on that kind of second half volume outlook? Sure. Thanks, Matt. At a high level, if you consider what we've said on our planning assumptions, which is that we expect sell-through volume to be down 10% for the year. Now that's sell-through. That is not what we're talking about specifically relative to our sell-in. Obviously, the revenue we book is what we sell into distribution. And the way to think of it is we have, in the first half of the year, brought in Q1, brought our distribution and channel inventory down significantly and then as we commented on Q2, we are not inflating the inventory as much as either last year or against a little on the low side compared to historical norms. That, combined with the fact that we are not -- that we are lapping on inventory drawdown in Q4, if you do the math, the sell-through assumptions of minus 10% lead to revenue stability in the back half of the year. Second one, just the growth initiatives, you spoke about progress with shelf space of Pro and Retail. I'm just curious if you can get into how meaningful are those wins and kind of how those play into the volume guide. Yes. No, I appreciate the question. As we've talked about, our -- we operate with a portfolio of initiatives. And what we've said is the intent of our initiatives is to drive, call it, 2 to 3 points of growth on an annualized basis. Now that's new products, that's adjacencies. That's what we're doing, downstream relative to increasing the number of contractors and consumers. And it also includes the benefit of increasing shelf space which potentially gives us access and more ability to get after certain geographies and customer bases. So the way to think of our initiatives is we are on track with what we've described in total against that 2% to 3%. That's a new one. So if -- I guess just thinking about kind of the preseason kind of selling period being kind of below normal. Is that kind of what you're hearing from your distributors? [indiscernible] Is that more intentional on your part? I can't tell. As we consider the dialogue with our channel partners, both distributors and dealers, it's a bit of a push/pull. And I would say it varies by channel partner. So with certain channel partners in particular, some of our dealers, there's an intent to be more cash efficient coming into the season. And then our dialogue with our distribution base is and will continue to be what's the right inventory level to have in stock to be able to service your customers and our joint customers and to make sure that we have incredibly high service levels and also making sure that we are a bit more cautious than -- so we don't get into the same situation that we may have had in previous quarters. And so I would say it's a dialogue. I think if anything, we, as a manufacturer, are probably being a little bit more conservative than some of our channel partners as we make sure that we're trying to put the right inventory in -- at the right time. I'll just reiterate what we see from an aggregate standpoint from the marketplace is stable and pretty normalized. And we are lapping an elevated time period of inventory build, and we want to make sure that we're appropriate. So that we really set ourselves up for a strong performance in the back half of the year. Okay. Okay. That's good. And then just on the raw material kind of deflation timing, would you expect that to be positive for the full quarter in Q2? Or is that more you'll turn positive as you kind of exit the quarter in Q2? Yes. It will be the latter. As we communicated on the last call with the business slowing a bit, our lags elongated a bit to closer to 5 months. And so we're highly confident we can see the deflation that we're putting onto the balance sheet here through the first 4 months of the year. And we expect to meet or exceed the $30 million of second half '23 deflation that we articulated on the last call. And candidly, we can already see some upside to carry over on 2024. Jesse, you guys gave us a lot of different numbers here to kind of unpack how demand is kind of progressing. I think your guide is calling for a 10% sale decline in sell-through, but your channel partners, I think, are calling, say, mid-single digit declines and the survey implies the dealers are expecting maybe positive growth. Can you kind of help us unpack that? Does that kind of imply at least your base case assumptions, at least currently feel relatively conservative? Yes. First off, I'll just stress, we are very early in the season. We're sitting here in February trying to assess where we will be as we exit September. And I think what we're just trying to do is be prudent as we look at the market assumptions that we highlighted, which is really related to down high teens in new construction and down mid- to high single digits in R&R, we are -- that rolls into our down 10% assumption. We think it's prudent to hold to that. Having said that, your -- what we're seeing as we work our way through the first 3 to 4 months is our channel partners modestly more optimistic than that, from where we sit at this point. And through 3 months, our -- through some lower seasons, our sell-through is more positive than that. So we just think it's really prudent to let the season play out and operate under the macro assumptions. So hopefully, that gives you a little bit of perspective on how we're seeing things. That's helpful color. I guess, perhaps a question for Jesse. Your 2Q guide implies decrementals in the 70% range. I mean, obviously, you're still curtailing production pretty heavily. By 3Q, should we assume decrementals are more normalized and you're largely done curtailing inventory at your end? And when we look at EBITDA on a year-over-year basis, will it be up year-over-year? Or is it really more of a 4Q event where we see that year-over-year inflection? Yes, Phil, this is Peter. So if you think about the cadence of the year from a production perspective, so obviously, we were down close to 47% actually in the first quarter on the core kind of production volume, it gets closer to down 30% in the second quarter, and really, we're still down modestly in the third quarter, but we're up in the fourth. So it's kind of a consistent story of our sales volume is kind of flat in the back half of the year. So as our production volume. So really, what's different when you think about the back half of the year margins is a couple of things. So one, first and foremost, the channel destocking is completely behind us, which was obviously causing a lot of churn on the manufacturing facilities and really a key driver of probably about $10 million a quarter of underutilized manufacturing costs in both the first and second quarter that don't reoccur in the back half of the year. And then as we articulated on the call last quarter, the change in accounting was almost entirely a first half of the year nuance and mostly a first quarter, so that is still on pace to be or was about $6 million in the first quarter, likely wrap up the remainder of that, which will be about $2 million or $3 million in the second quarter. So you've got about $28 million of cost that's sort of not recurring in the back half of the year. And then as we just stated on some of the commentary in previous questions, we're really confident in the $30 million of deflation that we committed to and hit in the second half of the year. Sorry, Phil, if I could just add. We have an intentionality to -- as we talked about on the last call, that within the first half of the year to make sure that we are at an appropriate and appropriately conservative inventory position in the channel, which we feel we are very much on track to do. And also that we start to make progress against bringing our own inventory level down. And there was an intentionality of having, for lack of a better word, the underutilization associated with that, be more, and hopefully, primarily concentrated in the first half of the year. And so as you -- you'll see improvement in the decrementals in Q2, partially because of volume, partially because some of what Pete just described is a little less, and then as the intent is to get that behind us and then be able to focus moving forward on real demand and appropriate utilization and then obviously getting the benefit of what Pete just highlighted. Got you. That's helpful. I mean, Pete, I don't want to put words in your mouth, but I mean, you're talking about $30 million of deflation, $20 million cost that kind of goes away, and that's nonrecurring. It does feel like 3Q EBITDA could be up year-over-year or at least flat. Are we thinking about it correctly? Yes. I mean I think the way you could think about it is everybody is doing their math and can kind of back into the back half of the year quality of earnings. For the average of that, I think the third quarter will be modestly below that average, but above the prior year. And then certainly in the fourth quarter, we're going to be above that average and obviously well above the prior year. Great. First, I just wanted to clarify, Jesse and Pete. I mean you talked about your planning assumptions for the year and having -- at one point, if you look on the slide, it kind of says net sales assumes down 10% unit volume. But you've also kind of referred to that as your outlook for the market itself and really sell-through. So are we talking about the same thing here in terms of what you're expecting AZEK sales volumes to be that, in effect, they're in line with the market sell-through outlook? Or are there any other nuance differences here? And part of what I'm getting at is also the propensity for any potential share gains in the market given some of the new products that you've described earlier. Yes. The way -- I'll start with -- we're operating in an uncertain environment, and it's really important that we acknowledge the assumptions. And our assumption is, as you pointed out, that the market will be down 10% and that our sell-through will be down 10%. The way to think of the initiatives that we described and some of the good things that we were doing relative to volume on the organic side, is that those are elements that give us increased confidence that we can manage through any volatility against that 10%, so another way of saying that is if the market stays steady, and we have perfect internal execution. From an organic standpoint, in theory, we could be better than that 10%. But there is a lot -- we're in the first quarter. There's -- and we happen to be in the time of an upcoming Super Bowl, but there's a lot of game left to play here. And we want to make sure that we are providing appropriate assumptions and then our capability to deliver against those assumptions. I'll make one other minor point that 10% sell-through is not inclusive of price and not inclusive of our acquisitions, which are modest. As Pete said in his prepared remarks, it's primarily a Q1 thing on the acquisitions when that becomes very modest. And then as we move into the back half of the year pricing, year-over-year is no longer an additive element. So hopefully, that gives you a perspective. I'll reiterate, it's a planning assumption and our intent is to execute against that planning assumption and make sure that we're in a good position to deliver with confidence. No, that's very helpful, Jesse. I understand and see what you're saying there. So thank you for that. I guess, secondly, just trying to think about the -- some of the benefits that you've highlighted that will hit much more so in the back half of '23. And I think just hit on an earlier question around the raw material benefit where I think initially, you talked about $30 million of deflation hitting the back half and out of a $50 million annualized number. So that would point to maybe $20 million of additional incremental benefit to be realized in 2024. Now it sounds like there's a little bit of upside perhaps to both of those numbers. Correct me if I'm wrong, Pete, but also how to think about the sourcing benefit as well. You highlighted in the slide that it's a $30 million benefit in the back half of '23. Would that also be a similar type of would you just kind of double that to get to an annualized and you could see a similar incremental dollar amount realized in 2024? Just trying to think about those 2 things. Yes. I mean the timing is going to shift. But I mean, again, I'm not going to monetize and give guidance on '24. But I would say, look, we've got off to good start. There's modest upside that's not irrelevant already carrying into 2024. There's probably a little bit into 2023. Some of that might be us being conservative in terms of breakage in other places. We haven't seen any in the 1Q results, but I think it's still early. The one point I just want to clarify, and Mike, just to make sure we're clean on the question, we use sourcing and deflation as -- they're the same thing. We happen -- depending on what you're reading in the text, you should consider those 2 as the exact same thing. So they're not additive. It's just a different way to describe because we're getting some of the deflation because of some aggressive sourcing action. And so those 2 are the same and they're not additive. So you may not have meant that, but I thought I'd at least clarify that. That's helpful. One last quick one. Amortization expense for the year, can you give us any guidance on that, that would be helpful. Thank you. Good afternoon, everyone. My first question is, you mentioned in your comments that sample orders have been up meaningfully. Are you saying that there's been any change in terms of demand or the end market interest as we've seen lumber prices move off of their low and perhaps continue to move higher through the spring? I would say -- I don't know that I can correlate sample activity to lumber prices specifically. I think there, at times have been a little bit of a lull in some of our digital activity. But what we've seen in general, as we pointed out, we've seen growth, we saw growth last year. We continue to see growth on the sample side. it's really an outcome in our case of really 2 things. One, general interest in the category and then specific marketing capability and efforts on our part that have, at times, disproportionately benefited us versus the industry. And so you should think of it as an indication of consumer engagement between ourselves and the large potential mass of -- the large mass and potential customers. Okay. All right. That's helpful. And then following up, can you talk a little bit about the Exteriors business and the strength that you've seen there in the winter and how you're thinking about the outlook for that as we get into the spring and the summer? Yes. We don't break out outlook specifically for any of our businesses. But having said that, a couple of key characteristics on Exteriors. As I answered in the previous question -- one of the previous questions, the Exteriors business has been nicely matched between supply and demand. So it hasn't had that same kind of volatility. It's been make and sell within the quarter, and there's much less inventory and has been much less inventory in the system. We have, with our initiatives, pretty consistently been able to expand our position in the marketplace. And given our position with 2 terrific businesses in that sector, we have -- we've continued to secure not only additional shelf space, but launch new products that allow us to incrementally access more of the market. And the other element there, as we talked about, that business has and is exposed a bit more to new construction. And in those areas where we have exposure to new construction. We have seen those volumes come in, but they've been offset with really good performance in the rest of the cohort, driven by some of the elements we've talked about. But I'll come back to once again in its entirety, we're assuming relatively -- we're assuming that down 10% across all of residential, even though, as we've highlighted, we haven't yet seen it. Jesse, first question, can you talk a little bit about how the StruXure acquisition is going, especially as you get the products out and the reception with the -- on the retail side and even sort of on the distributor side if at all, that is part of the plan? Yes. Really, I appreciate the question. And for those of you that were at IBS, you would have seen that we combine both the TimberTech and StruXure presence just because they're quite natural there. So if you take a look at StruXure's core business, it has -- we've made meaningful progress since we've owned that business. As we talked about when we bought it in debottlenecking, manufacturing, upgrading manufacturing and putting that business in a very high service level. So we've unlocked a lot of capacity there. And so within that core business, it has a steady and growing core, and it continues to penetrate both the commercial market with increased resources. So think of hotels, campuses, corporate campuses and other opportunities there, restaurants as people convert their outdoor living spaces from temporary spaces to more permanent spaces. So that business continues to do quite well, in particular, on the commercial side. And what we've done in the last couple of months is launched a kind of a prefab standard pergola system that we are selling both through the StruXure channels, but also through the TimberTech channels. And we continue to gain traction with those products being placed. It's still early with those products, both expanding within StruXure's core, but also selectively being placed into our dealer base that is selling outdoor living products. And so we've had really good reception with both our contractors and our dealer base, and we would expect that expansion of that product coming into our core channels to continue. A couple of quick ones here. In terms of the second quarter price carryover high single digits, I guess when we looked at it, we were thinking that you're lapping 1 price increase from last year that still is benefiting the fiscal first quarter. And so if price has been relatively stable, I guess, can you help us understand the carryover effect still being high single digits versus dropping down? And just -- I know you've got the guide for the year implies that it falls off through the year, but maybe just give us a little more color on that cadence. Yes. We were actually lapping 2 price increases. So one was kind of low single digits and then back in May, we basically had a, I'll call it, mid-single digits price increase. Right. Okay. So some timing difference there in terms of kind of effective and impacting P&L and things like that. I guess I want to get your updated take on your portfolio. I mean you've done a lot on the residential side. Your competitor obviously just divested the commercial business. Your commercial business has been a decent rebound? How are you thinking about positioning for that business and the overall portfolio mix as it stands today? Yes. As you pointed out, I think our commercial business has done just a terrific job of navigating through the last 2 years of uncertainty. As you might recall, that business was meaningfully impacted early on in the pandemic and made some structural changes and has done a really nice job of getting its profitability up and also well positioned. For us, it's a core part of our business and has really been the founding of the company. And we'll continue to make sure that we manage the portfolio as a company appropriately, and that's where it makes sense and make sure we do the right thing not only for the business to continue to expand it, but also for the long-term health of our overall business. The first one is, can you just help us with the magnitude of the Vycom channel destock in the first quarter, maybe what you're thinking about for the second quarter? And how we should sort of think about margins from this segment going forward? Yes. I think the way to think about the balance of the year is, look, as we've kind of articulated a bit, look, we would hope to have a little bit of 2023, probably deflation upside and a little bit of strength in residential that any choppiness that we might see in the back half of the year on any channel destocking on the commercial side that we could handle and sustain that. Okay. And then I know it's not -- certainly not your base case, but what would have to happen in your opinion, for you not to be able to hold price in your key markets? So John, as we talked in the past, we price to value, and we feel really good about the value proposition we have in the marketplace, whether it's our Deck, Rail & Accessories business or our Exteriors business. And we feel good about our ability to continue to manage our value in the marketplace and continue to be able to optimize our margins based on all the great work we've done on the sourcing and cost reduction side. So nothing specific other than to say, in general, the way we operate is we sustain price and we make sure we focus on driving the value for that price. And I'd just add, obviously, it's one quarter only, but based upon performance metrics of 1Q, we didn't really see anything at all that would cause us to think about our planning assumptions for the rest of the year on pricing differently. So obviously, it's early, but you mentioned earlier that the sell-through demand trends for residential have been modestly better than the planning assumptions. Is that pretty widespread across products? Or if not, maybe what product lines are you seeing the better sell-through? Yes, Trey, I'll answer it at a very high level. It's pretty widespread. We've -- as we look at our data, whether it's the Pro channel or Retail or we look at our Exteriors business or Deck, Rail & Accessories business, in aggregate, the business has performed incrementally better as we've highlighted on the call. Yes, so pretty widespread. Okay. So I guess just following up on another question from earlier. With the sample requests that you were talking about and just mostly driven by continued interest in the space. Can you talk about maybe what the sample requests that you're seeing and what you're sending out if they're suggesting any change in appetite as far as like high end versus the more entry level or any expected trade down from the consumer to a more entry-level product based on what you're seeing there? Yes. As we look at our sample data and I don't exactly have the mix in front of us, I'm operating a bit off of memory. But typically, for the samples that we send out, they tend to skew higher end. So they tend to be our Advanced PVC products that have terrific aesthetics. And so in general, historically and even more recently, the segment, a lot of the segment that we're servicing with the samples tends to skew a bit more premium and I think your underlying question might be, are there any leading indicators to really highlight any changes in mix, and I think as we've looked at it, in general, all of our categories have continued to perform well. We, at times, have -- we've been modestly under-indexed in the good part of the category in certain parts of our decking business. And so we've been incrementally been able to perform well there. But in general, if you take a look at our core business, it's operating within the same kind of price bands. So there might be a little bit of movement between product A and product B, but if you're in a premium band, you stay within a premium band; if you're in a kind of an entry-level band, you stay within that entry-level band. I'm just curious on the trends maybe you're seeing in January just because it sounds like there's a nice uplift in overall kind of housing-related activity in the month. Just curious if that translates into better trends in your business. Yes. We don't disclose any specifics month-to-month. What I would say is what we're seeing now is pretty consistent with what we've seen really over the last 3 months in aggregate. So there's not anything meaningfully different we're seeing in the data. As we highlighted, we felt incrementally better about Q1 and there's nothing really that we're seeing that's changing in the data right now. Really appreciate, once again, all of you taking the time to join us this evening. We look forward to chatting with you further as necessary and look forward to meeting you again on the next call. Thanks, and have a great evening.

EarningCall_325

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trimble Fourth Quarter 2022 Results Conference Call. Today’s conference is being recorded. All lines have been placed on mute to prevent any background noise. [Operator Instructions] Welcome, everyone. Before I get started, our presentation is available on our website; and we ask that you refer to the Safe Harbor at the back. Our financial commentary today will reflect non-GAAP performance metrics, including organic growth comparisons, which will relate to the corresponding period of last year, unless otherwise noted. The Trimble 3-4-3 operating model simultaneously balances a view on looking forward 3 months, 4 quarters and 3 years. As I think about framing today’s commentary on 2022, I think there is a parallel to look back 3 months at our fourth quarter, 4 quarters to look back at the year 2022, and 3 years back to 2020 when we began our Connect and Scale journey. COVID, supply chain disruptions and net divestitures over these last 3 years has created a dynamic that makes it challenging to discern the signal from the noise in any given quarter, especially when looking at the year-over-year trends; whereas the long baseline reveals the definitive patterns of progression. As I reflect on the fourth quarter of 2022, let’s begin on Slide 2 with our key messages, which are consistent with the commentary from the prior quarter. Our key growth metric is annualized recurring revenue, which met our expectations and grew 16% to a record level of $1.60 billion. Congratulations to the team for delivering this record performance, which compares to $1.19 billion of ARR at the end of 2019. Total revenue for the year was a record $3.68 billion, up 7% over 2021, and up 6% compounded since 2019, growing through COVID and business model transitions. Total revenue in the quarter was $857 million, flat with last year, and towards the lower end of our guidance range. The delta between the ARR and total revenue performance reflects a slowdown in hardware sales through our dealer partners, as dealers continued to sell-through their inventory while processing mixed macroeconomic sentiment. For perspective, over the last 3 years, the sum of our civil, agriculture and survey hardware and related software has grown at a 12% compound annual growth rate, with agriculture growing above and survey growing below this baseline. Gross margin finished at a record level of 61.8%, exceeding our expectations, reflecting software mix, the cumulative impact of model conversions and abating supply chain disruptions. For the year, we achieved a 60% gross margin, a record annual level, up 170 basis points year-over-year, which compares to 57.7% gross margin in 2019. EBITDA margin of 24.3% met our expectations in the quarter and ended at 25% for the year, up 210 basis points as compared to 22.9% in 2019. Finally, earnings per share of $0.60 was exactly at the midpoint of our guidance for the quarter. Moving to Slide 3, let’s look at the progression of our Connect and Scale strategy through the lens of our reporting segments, beginning with Buildings and Infrastructure. The big event for the team was our Trimble Dimensions user conference in November, where we had over 5,700 attendees from the global engineering and construction industry, which provided a great forum to reconnect with our customers and partners. We launched many new innovations, including the Trimble Construction Cloud, powered by Microsoft Azure, which is an industry cloud built to streamline construction projects by connecting users, data and workflow. We also announced extensions of our machine control technology platform to new OEMs and new machine types, further expanding our reach to connect the physical and digital worlds. The highlight financial achievement in the quarter was delivering over 20% organic growth in ARR, in addition to record levels of ACV software bookings and record levels of cross-sell bookings. We also had a strong start for our newly acquired Bid2Win business, where we’ve had some early cross-sell wins. As we have previously discussed, we continue to allocate incremental capital towards our own digital transformation, as well as our go-to-market efforts, which are generating strong interest from our customers and partners and demonstrating encouraging signs of internal productivity and efficiency. The work we are doing in this business will be highly leveraged across the entirety of the company. In Geospatial, revenue was down further than expected, as dealers moderated their inventory levels in the face of softening demand and macro uncertainty. Looking at the indicators, we see softness in residential, and while a portion of the expansion of infrastructure is getting consumed by inflation, underlying optimism remains in the market. For perspective, I look at the 3-year CAGR that I talked about on Slide 2 in order to calibrate the long baseline performance. Strategically speaking, in 2022, we continued to launch new innovations in GNSS, 3D laser scanning and handheld data collectors, and we achieved a double-digit increase in ARR as our business model strategy takes hold. In Transportation, we delivered revenue and ARR growth in line with expectations, in addition to delivering the fourth quarter in a row of operating margin expansion. Connect and Scale progression also came in the form of continued development of connected workflows, such as Connected Maintenance, Connected Locations and Engage Lane. The big story, of course, in the fourth quarter was the announcement of the Transporeon acquisition. To refresh memories, Transporeon operates a leading cloud-based transportation management platform, powering a global network of 145,000 carriers and 1,400 shippers. The platform integrates with more than 3,000 systems and powered more than 25 million transactions in 2022. For me, this is the very definition of a Connect and Scale business. I had a chance to spend a few days in Europe with Stephan Sieber and the Transporeon team in January, and my level of conviction of strategic and cultural fit has only increased. We are still working through regulatory approvals and we expect to close the deal in the first half of this year. We are excited to get to work together. In Resources and Utilities, revenue and ARR growth were led by our positioning services, utilities and forestry businesses. Our definition of utilities covers our work with electrical and water utilities, but our positioning services business can also be thought of as a utility, in this case, precision GPS as a utility. In October, we announced that we crossed a hurdle of 34 million hands-free miles driven with General Motors and their Super Cruise program. Our precise GPS technology enables a vehicle to maintain its lane position in various environments, and we are working on several other Tier 1 and OEM program opportunities. Moving to agriculture, revenue was flat year-over-year, and up when excluding Russia and Ukraine. The 3-year, double-digit CAGR growth on Slide 2 is instructive for calibrating the long baseline growth of the agriculture business. With a product lens on Connect and Scale, we are now bundling our guidance hardware, software and our positioning services, providing both easier access to the technology and a better value proposition for our customers. With a go-to-market lens on Connect and Scale, users and customers are at the center of our strategy. In pursuit of this strategy, we announced this week that we are taking a different approach to our go-to-market relationship with CNH Industrial. Moving forward, our distribution to aftermarket customers, after a 12-month transition period, will be done entirely through independent dealer partners, with the product bearing the Trimble brand. Less than 20% of our revenue in the Resources and Utilities segment goes through CNH to their dealer network today. We expect to maintain this revenue and address aftermarket demand and the needs of farmers through our direct relationships with our independent dealer network. This evolved approach to distribution will also enhance our ability to offer OEM brand agnostic solutions to customers to help them orchestrate their field operations with mixed fleets of equipment. Our new approach to aftermarket distribution will improve our ability to sell our full range of technology solutions to aftermarket customers, including guidance, selective spraying, variable rate application, water management and our Connected Farm works center software solution. Our evolving strategy will also enhance our ability to cooperate with OEMs across the industry for their needs for factory-fit equipment. Thank you, Rob. Starting on Slide 4, I'd like to begin my financial commentary this quarter by discussing organic growth trends across the components of our business. As Rob mentioned earlier, our recurring revenue businesses grew strongly year-on-year in the fourth quarter, with ARR up 16%. The strength of our recurring revenue offerings in a weakening and uncertain macroeconomic environment validates our focus on the continued evolution of our business model. While our recurring revenue streams were strong in the fourth quarter, revenues of hardware and related software were down. Organic hardware revenue was down 13% versus prior year and came in below our expectations. The factors driving the slowdown in our hardware business in the fourth quarter were consistent with what we described in our third quarter call. During the fourth quarter, our dealers continued to reduce their inventory levels, reflecting both our improving supply chain execution and uncertainty in the future economic outlook. The drop in demand was most pronounced in our Geospatial segment, as our surveying end customers ordered less than they did earlier in 2022. Hardware backlog reduced sequentially during the quarter as expected. From a geographic perspective, revenues were up modestly on an organic basis in both North America and the Rest of World, with strong trends in Latin America, but were down in Europe and in Asia Pacific. Year-on-year, Europe trends were meaningfully impacted by the loss of business in Russia and Ukraine and were up 1% organically excluding that impact. With that as a backdrop, I’d like to turn now to our total financial performance for the fourth quarter and full year 2022. Starting on Slide 5, fourth quarter revenues of $857 million were flat on an organic basis, and down 8% when including the impact of foreign currency and acquisitions and divestitures. Gross margin was up 400 basis points, reflecting both the accelerating mix shift toward software and the positive net impact of our price increases and moderating cost inflation. EBITDA margin was up 20 basis points and operating margin was down 20 basis points, as increases in our gross margin largely offset higher spending against our Connect and Scale strategy, especially our digital transformation and higher spending on travel and trade shows. Diluted earnings per share were $0.60. Looking at cash flow, both cash flow from operations and free cash flow were, as expected, down year-on-year, with the single biggest factor being the amortization of R&D for tax purposes. We did not repurchase any shares during the quarter, and do not plan to restart our repurchases until we are well on the way to de-levering following the issuance of debt to fund the Transporeon acquisition. Turning to Slide 6 and results for the full year 2022, we achieved success across a number of critical dimensions. Organic revenue grew by 7%. Gross margin improved by 170 basis points, reflecting the positive impact of our ongoing mix shift. EBITDA margin was 25%, even as we restored spending across a number of areas that had been constrained during the COVID pandemic and as we accelerated investments against our strategy. Cash flow was down year-on-year principally as a result of an increase in our inventories and a change in U.S tax legislation, both of which we expect to normalize over time. As we move to complete the Transporeon acquisition, we take this on with a strong balance sheet. Working capital remains negative. Our year-end net debt to EBITDA ratio stood at 1.4x and the ratings agencies maintained our bond ratings and stable outlooks following the announcement of the transaction. Turning now to our quarterly and annual results by segment on Page 7. Speaking to the fourth quarter, Buildings and Infrastructure achieved organic ARR growth of over 20% and recurring bookings growth in the high teens. Sales of civil construction hardware were down year-on-year by just over 10%, leading to organic revenue growth for the segment of 2%. Dealers continued to reduce their inventory levels, and end market demand moderated. Segment margins at 25% were down year-on-year, impacted by lower civil construction revenue, our Dimensions user conference, subscription transition and Connect and Scale investments. Revenues in the hardware centric Geospatial segment were down 12% year-on-year on an organic basis, driven principally by declining dealer inventory levels and softer end market demand across the surveying sector. Segment revenues were also pressured by lower shipments to U.S Federal customers, which vary meaningfully from quarter-to-quarter and can be difficult to predict. Segment margins remained over 25% despite these headwinds. Revenues in our Resources and Utilities segment were up 6% organically driven by growth from Cityworks and positioning services sold to agriculture customers. Our agriculture revenue was impacted by the loss of business in Russia and Ukraine, with an estimated year-on-year impact of minus 5% to the segment in the fourth quarter. Segment margins improved in the quarter sequentially and versus prior year, coming in just under 36%. Our fourth quarter results in the Transportation segment reflect improvement across a number of dimensions. Organic revenue grew 5%, driven by higher year-on-year sales of Enterprise and Maps software solutions. ARR for the segment grew at a mid-single digit rate in the quarter. Revenue trends in our mobility offerings improved sequentially from prior quarters, driven in part by higher sales to our largest OEM customer. Operating margins of 14.5% were the highest since 2019, and reflect strong performance by our team in managing costs. Let’s turn next to our guidance for 2023 on Slide 8. The projections I will share with you today exclude the impact of our pending acquisition of Transporeon. Starting with ARR, we expect organic ARR growth at a mid-teens level in 2023. Our strong outlook for ARR growth is grounded in the solid bookings momentum we achieved in 2022, the potential for accelerated cross-sell as our digital transformation rolls out to a growing portion of our business, and the essential role that our software plays in our customers’ operations. Our outlook for revenue, excluding future acquisitions and divestitures, is $3.7 million to $3.8 billion, reflecting an expectation of organic growth in the range of 2% to 5%. As a reminder, divestitures of businesses in 2022 will impact total reported revenue growth trends, with the biggest impact in the first half of the year. Our cautious outlook for 2023 organic revenue growth is rooted in an expectation of continued dealer inventory reductions over the next several quarters, and softer end market demand in an environment of limited GDP growth. We expect revenue from hardware and related software will be down in the low single digits organically for the year, offset by strong recurring revenue growth. From a margin perspective, we expect that gross margins will improve by over 200 basis points as our business mix continues to shift in the direction of higher margin software. We expect a modest increase in operating margins, as we invest against our strategy in an environment where organic revenue growth is harder to come by. I'll note here that our leadership teams have been working hard over the last several months to adapt our spending plans to the current economic climate. Allocating capital against our strategic priorities is always a major focus for us, and the need for sharp focus is never higher than in a time of weak economic growth. We are confident that we can continue to progress our strategy within the constraints of our operating plan. Income from equity investments is expected to be relatively flat with 2022, and net interest expense is forecast at approximately $70 million. Netting this out, we project to achieve earnings per share in the range of $2.66 to $2.86. We expect that cash flow will grow significantly in 2023 driven in part by reductions in inventory levels. We expect free cash flow for the year of approximately 1x non-GAAP net income. Our cash flow forecast for this year now assumes that amortization of R&D costs under Section 174 of the U.S tax code will not be repealed within a time frame that will allow us to recover the accelerated tax payments that we made in 2022. While we believe that there is bipartisan support for this change, we are less confident than we were a quarter ago that this legislation will pass soon enough to help us this year. By way of reminder, this issue impacts the timing of tax payments and has an immaterial impact on our tax rate. If Section 174 is repealed within the next several months, our free cash flow would benefit by approximately $150M. Note that our cash flow guidance excludes the impact of transactional costs related to the pending Transporeon acquisition. While we are not offering quarterly guidance, a few factors are likely to impact the sequential evolution of our financial results as the year progresses. We expect organic revenue to be down in the first quarter and flat in the first half of the year, reflecting the strong growth in hardware and related offerings that we saw in the first half of 2022. We expect organic revenue to be up in the mid- to high-single digits in the second half of the year. Influenced by these revenue growth patterns, we expect operating and EBITDA margins to be relatively flat in the first half of the year, and up in the second half. While we expect mid-teens organic ARR growth for the year, growth in the first half is likely to be slightly lower driven by planned churn from a small number of customers. We expect ARR growth to improve sequentially through the year. From a segment perspective, we expect organic revenue growth for the year in the Building and Infrastructure, Resources and Utilities, and Transportation segments, with the strongest growth in Buildings and Infrastructure. Revenues in the Geospatial segment are expected to decline for the year, with the highest levels of organic decline in the first quarter as we lap strong numbers from the first quarter of 2022. Geospatial trends through 2023 will continue to be impacted by reductions in dealer inventory levels and ongoing softness in demand in a number of the segment’s end markets. We expect margins to be stable in Buildings and Infrastructure and Resources and Utilities. We project growth in Transportation margins, while Geospatial margins will be down modestly for the year. Let me thank our colleagues, customers and partners for their support and their work in our strategic and financial progression. I’m proud to say that we continue to win culture and innovation awards, and proud to announce that we received approval of our emissions reduction targets by the Science Based Targets Initiative. Our objective is a 50% reduction in scope 1, 2 and 3 emissions by 2030. In addition, we released our first task force on climate related financial disclosures report. In 2022, our highlight financial metrics were ARR growth and gross margin expansion. Our 2022 ACV bookings give us confidence that we can continue to grow ARR at a double-digit rate in 2023. Hardware demand remains the hardest revenue stream to predict. While the signals are mixed, and even a bit confusing in the short-term, the long-term secular attractiveness remains. Our ability to uniquely connect the physical and digital worlds provides a guiding light for our business and remains the foundation of our right to win in our served markets. We have surgically reduced our expense structure and moderated spending across the Company to ensure discipline and focus in an uncertain environment. What remains certain is our conviction to grow our business by focusing on our customers and continuing to execute our Connect and Scale strategy. Hi, good morning. I just wanted to maybe start out with the CNH aftermarket deal. Can you maybe give us a little bit more color on why it makes sense to do this now and what this could potentially do for the resources and utility segment, particularly as you engage more with the independent dealers? Hey, good morning, Jonathan. It's Rob. So let me give you -- break it down in three respects, context, strategy and next steps. For context, let's talk about Connect and Scale, and our strategy means to connect users data and workflow and the users are at the center of our universe. And in that we believe we need to be closer to the customers that user, that farmer. So when we talk to the customers, and we work with, by the way over 100 OEMs today, and obviously, the farmers themselves, what they're asking us to do is to help them manage a mixed fleet. And I personally visited farmers in the last 6 months in Mexico, Chile, Brazil, Japan, Australia, Germany, and here in the U.S. So the strategy is we -- go-to-market strategy is we sell-through multiple avenues today to reach our customers we sell. We have a direct sales, particularly the enterprise farms, we sell-through OEMs, we work with over 100 OEMs and then we sell-through a channel, and the channel breaks down into a Trimble channel that we already have today to reach the aftermarket as well as selling through CNH dealers in the aftermarket. So what we're moving from is where we sell to CNH today, so call it CNH --from Trimble to CNH corporate to reach the CNH dealer. That's the from the to -- the to be state we'll be going from Trimble straight to independent dealers. And those independent dealers will be capable of selling the full line of Trimble CAT, which is more than guidance, because we also do variable rate, we do selective spraying, we do water management, and we do software. So as we look forward to this, as we work through the transition, we need to sign up the dealers to be independent dealers directly with Trimble. And we think it can expand the available set of products and capabilities they have to take to market, we think that will help us be incrementally closer to the end users of the technology and in a context of customer success, which is part of our strategy. And we think we can help customers and those users become more successful with the technology because when we're out there in the field, talking to them, they are asking for help to integrate and manage a mixed fleet of technology as well as mixed fleet of equipment. Got it. And then just as a follow-up, I think you've also referenced some additional investments that you'd like to make for that Connect and Scale in the 2023 timeframe. Can you help us understand where those investments are going to go? And again, maybe why that makes sense to make those investments now, given the macro environment? Thank you. Sure. So we've been investing in this strategy incrementally, really for the last couple of years. And demonstrable evidence of where we see the attractiveness of it and I'd say momentum for it is in the growth of the ARR. So the work we're doing up front really is touching more of our software businesses first, and particularly the recurring revenue businesses that we have. So a post of 16% organic growth on ARR, the 1.6 billion. This is supporting growth, continued growth and as and I think from a shareholder value perspective, this would be the most valuable revenue stream that we have at the company. The investments, they pick up systems, they pick up people, they pick up process, so from a systems perspective and customer facing, I think internal facing from a connect -- The scale part of Connect and Scale, enabling us to efficiently and effectively grow. Look at people and the work that we're doing, we look at customer success. Customer Success is about net retention. That's the metric you look at for customer success. And the economics of net retention are very, very powerful. So I'm of a mind, we're of a mind that we continue down this path. And if anything, we continue down this path with more, more conviction. And behind all of this there's a strong balance sheet 24.3% EBITDA in the quarter. So we believe this is emphatically the right thing to do at this moment. Hey, good morning, everybody. It seems like there's a lot of structural progress next quarter on margins on ARR, which is, I guess, continuing and the surprise, I guess, for us was just a bigger destock in the hardware than we would have thought. And so, I had a couple of questions around that. One is, were you able to see those elevated levels of inventory, previously dealers and for the normal after what you look in your outlook, or are they low? I mean, there's any characterization that I guess there's been a debate in construction in North America anyway, as to whether large projects will fill in, smaller projects go away. And that seems to be the case. But maybe your mix of your customers is more fragmented than the big ones. I'm just trying to look for context around why that decline happened and is continuing and how big it is. Yes, hey, Rob. Its David Barnes. First point I'll make is that the supply chain, the constraints, and then the removed constraints has really moved trends around in our shipments, in our dealer inventory, that were hard to predict and in some cases, challenging to understand. So just by way of reminder, we had unsustainably and undesirably high hardware backlog early in 2022. Our supply chain even today isn't fully freed up, but to the extent that it freed up it happened very dramatically at the end of second quarter. So we shipped a lot of product, you'll recall that the hardware revenue was way up at that timeframe. So dealer inventories did grow. And I'll say it took us a while to figure out how quickly the dealers were able to find customers for and deploy that inventory. And that happened exactly while some of the end markets that our dealers serve slow, particularly in the geospatial side. There's probably the highest within Trimble level of exposure direct and indirect, to residential home construction, which slowed. There's some anxiety about the general economic outlook. So these two things happened all together, freeing up our supply chains, very big backlog, lots of shipments and I created the destocking that we talked about a quarter ago, and it has picked up. We're not through it yet. We think we have a pretty good sense of where our dealers want to be and where they will be over the sustained period of time. It's my guess that we'll have two more quarters, Q1 and Q2 of meaningful inventory reductions in our dealers and anything after that will be smaller. But the guidance we've given reflects that expectation. And any guess on if those two quarters happen, or would dealers be lower than normal at that point, and they maybe don't have perfect visibility into the channel, I understand. Yes, well, what I'll say is that we still do have isolated cases of supply challenges in our Ag, one of them. But I think at that point, they'll be -- so that there may be some reasons For dealers to have a little more inventory than they would have had pre-COVID, not much though. Supply is really good. Hey, Rob, the thing I remind you on as we look at this noise of one quarter to another, big increases in the first half of '22. And the decline, we just reported, Rob had a good chart in his presentation of the multiyear trend. We're still way above where we were. So we do think that a lot of this is the noise of the resetting of the supply chain. That's the bigger factor really than any fundamental change in demand. Hey. Hi Chad. So I just want to go back to the CNH agreement. I just think in better understand the medium-term organic growth potential and maybe you can talk about what needs to be done to set up the independent channel. And when you expect that to be in place, and just how much of your product portfolio, you'll be able to sell within that channel versus how much you're able to sell with CNH. Hey, Chad, so this is Rob. I'll start with the quantitative framework. We had a chart on the second slide that showed over the last 3 years. The CAGR of the hardware businesses has been 12%. Those three businesses are surveys, civil construction, And Ag. Ag has been above that 12%. growth over the last 3 years. And Ag grew this year. And it grew even more if you exclude Russia and Ukraine, which was we were selling quite a bit of kit and to Russia. And so we'll start to lap that later this year, mid this year. So to call that context, in terms of the growth that we've had. And I'll give you some more context when we look at -- we look at units, we look at pricing, we look at share of wallet, we look at market share, and we think we're holding our own on a global basis and probably growing, growing in, Europe holding around and North America growing in Brazil. So we now turn to the to the CNH part of your question. For this only for that we're talking about the aftermarket business that we have with CNH. As we -- and that business that we sell-through CNH into the aftermarket today is primarily guidance. So an opportunity we have as we move to independent dealers. And remember we have independent dealers today, they're Trimble, four line Trimble dealers today in agriculture. As we move the business that goes through CNH, that gives us an opportunity to expand the product portfolio to a set of independent dealers. Those independent dealers could very well be dealers we already work with today, that just will happen in a direct route with a direct relationship with us at Trimble or it may be a fully New Dealer, we have a 12-month transition with CNH on this part of the arrangement. And it's a very positive conversation. I want to say that we've been having with the CNH with the CNH team. So optimistic here, it's the right thing to do with what our customers are asking for. And it's time to get to work to set it up. That's helpful. And then just my second question. So can you give an update on the digital transformation? What percentage are you done -- [indiscernible] '23. Can you talk about some of the focus areas for this coming year, and if you can quantify just like the incremental cost to execute expecting for '23. So from -- I'll start with the second part, the incremental cost is about 100 bps to the bottom line consistent with what we've we had this year as well. So that's the cost side of the equation. On the focus side of the equation, the digital transformation, there's a meta theme, its more than a system transformation for us. So, I think about people, I think about process and think about systems and the systems themselves. And then we think about the go-to-market specs of the digital transformation. And it's primarily focused right now on supporting our software businesses, particularly software businesses within buildings, and infrastructure. And that connects with the Trimble construction one dialogue that we've had with you and others. And so, first point of reference I look at is continuing to grow the ACB bookings, which is the leading indicator for the growth of the ARR. When we look at net retention as a key metric as well with inside that go-to-market. We look at the organization of the sales team itself and the go-to-market. So in France, Benelux, we've put the construction sales team together, software team as 1 organization. We've mostly done that in North America as well. And so it's getting the sales team aligned to sell consolidated offering of Trimble Construction One. And then with Trimble Construction One, it started out as a general -- targeted to general contractors and then we will be releasing more persona-based bundles. Remember, we sell to owners in the public sector. We sell to architects and engineers. So we have targeted portfolios to sell to those personas with the go-to-market team, a sales team that comes more and more together, as 1 organization to be enabled and equipped to sell everything that we do. On the system side, in the second quarter, we'll have the next, I'll say, big release of the systems. Those systems are meant to increase the efficiency and effectiveness of our own sellers. And it moves closer and closer to having commerce capabilities -- e-commerce capabilities from an external -- with an external lens. On the people side, we continue to invest in customer success. And on the process side, we continue to invest in developing the playbooks for how we go-to-market starting with that software business, but then the next wave after that goes into software and other parts of Trimble and then into the hardware that we sell-through our dealer channels. And I was asked -- we got asked a question earlier in the call about visibility into dealers and their inventory. This is another reason that we think that the systems investments are a good thing for us to get increased levels of precision on that visibility. Hope that helps, Chad. Great. Thank you for the question. So I wanted to ask about the e-Builder, Viewpoint SketchUp contingency. This business is obviously doing quite well and a pretty stark contrast to some of the more conservative macro views that you've expressed. And even just on an ARR growth basis, really strong compared to some of the peers in the software space. We've talked about the macro, but I'm just wondering from a portfolio basis, if you can speak to the playbook with these businesses what's working in this environment? And just how do you intend to port those lessons learned over once the Transporeon acquisition closes? Sure. Good morning, Kristen. This is Rob. I will answer the question. So you're correct, that contingent of businesses is doing very well and it's even more than e-Builder, Viewpoint, SketchUp, it's from a Tekla Structures offering our mechanical electrical plumbing software as well or project management software, really the whole contingent is performing. I'll say 1 thing that is nice on the software side and the recurring revenue is certainly get a higher degree of predictability. There is not a wholesale in between the retail and so you get a clear demand -- a clear view of the demand, which is why, by the way, on the hardware side, we're looking back at the 3-year trend on the CAGR so that we can see the signal through the noise. In terms of what's working with it, I would say it's the value proposition meets the digitization of the market. So call it the secular aspect of digitization, had a chance to meet with a number of construction companies during my travels over the last month was with one of the largest European contractors in the world yesterday here in Colorado. And digitization and data and sustainability are at the top -- very top of the agenda of those customers, and they know they need to adopt technology in order to further their strategies. Most of these -- many -- most of these companies have solid backlog and they need technology to help them get the work done. From a value proposition perspective, we are hearing strong resonance with the -- I'd say both the integrated and connected offerings and Trimble Construction One certainly seems to have resonance with the customers that we're talking to, even in its early form that it is. We see that and as evidence of that, we had a record level of cross-sell ACV bookings and building infrastructure in the fourth quarter. So that tells me that there's -- it's not just marketing resonance. It actually has resonance in terms of turning into business. So the value proposition it's around a connected offering. So customers increasingly are looking to move from optimizing tasks to optimizing the system. And to do that, they need to have more connected data and more connected workflows. We are hearing customers say they -- this is -- because this is where they want to go, they want to buy it from one company as opposed to having to stitch together multiple, let's say, multiple vendors on their own. They like the ease of the dealing with the one company or even the one overall account representative. So there's an aspect of ease to doing business with us, meets a level of connectivity which is ultimately they’re trying to get to do their work better, faster, safer, cheaper [indiscernible], and it is resonating. Thanks for that, Rob. And [indiscernible] some of those lessons with Transporeon, how you see maybe some of that value proposition or combining the offerings, how you see that bleeding into the transportation business once that acquisition has closed. Yes. Sorry, I forgot about that -- great to. Thanks for the question. So on Transporeon, I'd say the great news of Transporeon is they already have that through the 140,000 carriers. About 1,400 shippers in the network. 3,000 integrations of PRP and [indiscernible] management systems and already last year had $25 million --transactions run through the system. It is definitively a platform company really and in the mode of connect and scale. So they have a set of connected capabilities. They're selling it through a dedicated sales force. There's a land-and-expand play within that. There's strong net retention. There's strong growth retention in the business. So actually, I see as much that we can take from Transporeon to Trimble as much as we -- I think that we could take aspects of Trimble into the Transporeon business, I would like to say, it's 1 of the many reasons I'm excited by that because I think it will be DNA additive to us as where -- and I know this, as we're e-Builder and Viewpoint acquisitions were additive to us at Trimble to take the best of and take it to other model transitions that we've done. And I see the same thing in store with Transporeon. Hi, good morning. Thank you so much. Hope everyone is doing well. So my first question is the gross margin grade expansion 200 to 250 basis points, how much of that is price cost tailwind? And how much of that is software versus hardware mix change? And are there any other factors driving this leverage this year? Tami, it's David. The way to think about that is essentially all of the gross margin improvement is the evolving mix of our business. We are continuing to take price mostly in hardware, but at a lower rate so that's not real the margin driver. What's driving our margins up is we're becoming more and more of a software business and those have higher gross margins. Got it. So if prices keep coming down, input prices, could that be a source of up site to your gross margin rate? It's -- there's a number of puts and takes in our hardware gross margin. We've already seen a benefit. So in the third and fourth quarter of '22, we got to the point where for our hardware businesses, our price realization more than offset our cost improvements. So that's sort of baked into the run rate now. We are continuing to take pricing at a moderate level in our hardware businesses. So that ought to help our margins just a little bit on the hardware side, but by far bigger story is the mix shift. Got it. So one quick one. One is to back to the destocking comment. Can you talk about what sales to end users look like in the fourth quarter against the dealer destocking is to date sales to end users overall moderate, and fourth quarter versus the third quarter? Yes. So let me frame it up this way. If we look at our dealer destocking, I would say it had a negative approximately 400 basis point impact on our organic revenue trends. So we reported flat. We would have been roughly up 4% without the dealer destocking. So if you look specifically at hardware, our hardware revenues organically were down 13. So I think you can infer, Tami, that there was some market softness, particularly in Geospatial surveying market in Q4, which partly we think is temporal. We had a lot of new products last year and as in many businesses, when you have new products, you get a spike in orders, and we had a clean supply chain to deliver those through. So we've got a bit of a pullback for that reason. Fundamentally, I would say the secular end market sales to retail trends feel up -- maybe not up as much as they were earlier in 2022, but the general direction is up. There's some soft areas, including anything tied directly to residential construction that is clearly contracted. But on the balance with what's happening in infrastructure, we think the secular direction of demand is up. But with the dealer destocking and the customer ordering patterns earlier in '22, we're seeing a pullback for those reasons. Hi, guys. Good morning. Just a couple of quick ones. So I think you mentioned churn in the first half impacting the ARR growth, what type of customers or what segment are you seeing these come from? Yes, hey Jason, its David Jason, it's David. We do expect churn from a handful of customers, principally in our Transportation segment. These are customers that made a decision to come off our platforms many quarters ago, and they're just now implementing them. So I see that as noise, not signal our customer satisfaction and retention in transportation is on a secular positive trend. We just expect to see a number of these probably in the first quarter pull off. So that will reduce our ARR growth rate a little bit lower in Q1 from what we expect to see for the full year. Okay. And then maybe if I were to simplify it, your construction software portfolio seems to be executing quite well. But it's -- completely different drivers than the hardware destocking element. So are you seeing any macro impact on this construction software portfolio? Thanks. Yes, good morning, everyone. Rob, I'm wondering if you could just talk about the progress on Trimble construction. One, what proportion of new orders does it account for now? And when we last caught up, you were seeing tripled-AASP versus base orders before. I'm wondering if that trend has continued? Hey, Jerry, good morning. It was so, on TC1, the Trimble Construction One, the best evidence I can give you on the progress is that comes in the form of the record level of cross-sell and upsell that we had in the quarter on from an ACV bookings perspective. And the reality is not all of that is the Trimble Construction One branded portfolio. So there are some aspects where we can just sell across the portfolio, which I'd say, a subset really of TC1. That cross-sell is a percent of the total ACV bookings and Buildings & Infrastructure software was nearly 30%. So for us, that's a record dollars, record percentage level. And when we go through the business reviews, we look at almost every account to look at what they're buying and why they're buying it and looking at the competitive win ratios. What we're seeing is when we're selling the bundled offerings, whether it's less than the full TC1 offering or it's TC1 as we're seeing the sales cycles reduce. We're seeing the size of the bookings go up. We're seeing the win ratios go up as well. And so in aggregate, it looks to be a winning formula. And I would add to that, Jerry, that it's still relatively early in the game for us. And so with the sales kickoff meetings that we've been having in the last weeks, it is really a big emphasis to the team. So to get the offering out to the general contractors and then the next person is after that in architecture engineering owners and public sector and then geographically rolling that out as well and aligning the sales team behind that and then actually doing the sales enablement work underneath the covers, which is critical to help the sellers with their effectiveness. So I'd say, Jerry, lots in aggregate or in some, I think lots of good things happening on this front, and we'll keep updating you here every quarter. Yes, good morning. First question, I just wanted to clarify a comment from earlier. I think around the cost for Connect and Scale, there was a mention of 100 basis points. Is that -- what is built into the '23 guidance? Or was that the cost for '22? And then maybe just as an extension to that question, just talk about the -- where you've settled now on the -- maybe the model that you're planning to implement on the hardware-software bundles that are transitioning those conversions. I think there were several options presented at the Investor Day. I'm just curious, can you speak to the -- maybe what year 1, year 2 economics will look like on those. Yes. Hey, Rob. It's David Barnes. I'll try both. On the Connect and Scale discrete investments spending on that '22versus '21 was about 100 basis points around $40 million. Embedded in our guidance for 2023 is a deceleration in the rate of growth. So we'll spend somewhere in the order of another $20 million or a little more than that, $1million incremental, $23 million above $22 million. We still have more to do and we are -- we believe this is a high priority investment. With regard to the model options, I would say the menu that we presented at the Investor Day is still out there. This topic is tied with digital transformation, our ability to sell hardware and software bundles together in recurring basis is heavily dependent on the rollout of our digital transformation. We're doing it in a somewhat [indiscernible] way now, but the bulk of that opportunity is ahead of us and all the options that we showed at the investors still options we're considering. And Rob, I want to add just a bit of context too, on top of the Connect and Scale investments because it's a capital allocation call. And so we've taken down spend in other parts of the company, in part to help fund what we're doing here. So we've thought a lot about the cost management aspect of our model. If we look over the last 3 years, organically, ARR has grown double-digit over 12%. Total revenue has grown 6%. The gross margin dollars have grown faster than that, as the mix shifts more software-centric. And our total headcount organically has grown2% over that time frame. So a third of total revenue growth, [indiscernible] of the ARR growth. And so it's very much in context of how we're thinking about allocating capital at Trimble and where we're putting it to work. Well, maybe as a follow-on to that, Rob. Transporeon following that completion of that, you will be in somewhat of a deleverage mode, but how much flexibility are you giving yourself or to be able to do a transaction like, I guess, a rivet or something along those lines, I guess, on the capital allocation side to supplement Connect and Scale? Let's say, from a flexibility -- if we're talking acquisition and deployment of the balance sheet, I would say here in the next 12 to 18 months, not a lot of flexibility because our primary commitment is to deleverage. So certainly, anything at scale, I would say we've limited some flexibility of the balance sheet. Now if it's not at scale, and so if it's -- whether it's a rivet size acquisition or it's Trimble Ventures, where we put single-digit millions to work. In that aspect, I would say we do retain some flexibility with caution to stay close to making sure we understand our model and that we're taking a relatively conservative view of the balance sheet. Now to the P&L, let's not forget that in 2022, 38% of our total revenue now recurring. $1.6 billion that's grown, we believe will grow double-digit again in next year. So our P&L has more visibility than it's ever had and therefore the business model has got more resilience. And so -- and we maintain the investment grade. So I look at those factors altogether, and I'd say there's [indiscernible] flexibility on a smaller size of capital deployment, not a lot of flexibility on transformative sized deals for the next couple of years. Hi. This is [indiscernible] on for Gal. Thanks for taking my question. Just wanted to follow-up on a prior question regarding digital transformation. How is the progress for revenue being transacted through the connected digital platform tracking versus your expectations? And where did that shake out as a portion of revenue for FY '22. At the Investor Day, I believe 2% of revenue had or had been expected to be the target as communicated so as that met or exceeded and do the projections show that your investor base still stands for the portion of revenues expected to transact through the digital platform in the future? And then just 1 brief follow-up. Thanks. The short answer is yes. Yes, with the 2% our business in Europe, and that's live and working, and we're just about to roll out the next phased to North American principally to our North American software businesses and with further rollouts from there. But we're moving forward. Got it. That's helpful. Thank you. And then just one follow-up. Has anything changed from the time Transporeon was announced that would maybe alter the expectations for revenue and EBITDA initially communicated at the announcement of the acquisition or everything all good there so. Yes. Look, we've communicated the financial parameters there. We still don't own the business. Obviously, we're talking to them, but we have no update to our outlook, and we'll update that outlook once the transaction closes at some point in the first half of this year.

EarningCall_326

Good day, ladies and gentlemen, and welcome to the Exelixis Fourth Quarter and Full Year 2022 Financial Results Conference Call. My name is Vaishnavi, and I’ll be your operator for today. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to your host for today, Ms. Susan Hubbard, Executive Vice President of Public Affairs and Investor Relations. Please proceed. Thank you, Vaishnavi, and thank you all for joining us for the Exelixis fourth quarter and full year 2022 financial results conference call. Joining me on today’s call are Mike Morrissey, our President and CEO; and Chris Senner, our Chief Financial Officer, who will review our progress for the fourth quarter and full year 2022 ended December 31, 2022. P.J. Haley, our Executive Vice President of Commercial; Vicki Goodman, our Chief Medical Officer; and Peter Lamb, our Chief Scientific Officer, are also on the call today and will participate in our question-and-answer portion of the call. During the call today, we will refer to financial measures not calculated according to generally accepted accounting principles. Please refer to today’s press release, which is posted on our website for an explanation of our results for using such non-GAAP measures as well as tables deriving these measures from our GAAP results. During the course of this presentation, we will be making forward-looking statements regarding future events and the future performance of the Company. This includes statements about possible developments regarding discovery, product development, regulatory, commercial, financial and strategic matters. Actual events or results could, of course, differ materially. We refer you to the documents we file from time to time with the SEC, which under the heading Risk Factors identify important factors that could cause actual results to differ materially from those expressed by the Company verbally and in writing today, including, without limitation, risks and uncertainties related to product commercial success, market competition, regulatory review and approval processes, conducting clinical trials, compliance with applicable regulatory requirements, our dependence on collaboration partners and the level of cost associated with discovery, product development, business development and commercialization activities. Exelixis had a strong fourth quarter and full year 2022 across all components of our business. We’re pleased to see continued growth of the cabozantinib franchise in the U.S. and globally in the fourth quarter and full year ‘22 while advancing our discovery and development priorities to build the Exelixis product portfolio of the future. As we had a complete corporate update a few weeks ago at the JPMorgan Healthcare Conference, Chris and I will provide a summary of top corporate and financial highlights for the fourth quarter and key 2023 priorities before moving into Q&A with the full team. First, we saw a strong performance of the cabozantinib business with continued growth in demand and revenue in the U.S. CABOMETYX maintained its status as the leading TKI for RCC in both the first-line I-O TKI market and the second-line monotherapy segment. Fourth quarter cabo franchise net product revenues grew 25% year-over- year compared to fourth quarter 2021. Cabo franchise net product revenues grew 30% for the full year of 2022 compared to full year 2021 and have approximately doubled since 2020. Importantly, global cabozantinib franchise net product revenues generated by Exelixis and its partners were approximately $520 million and $1.9 billion in the fourth quarter and full year 2022, respectively. Chris will review our 2023 financial guidance in his prepared remarks. Second, our top priority for 2023 is to advance the Exelixis development pipeline with new potential cabo indications, expedite zanzalintinib, development with new pivotal trials and pursuing XB002 monotherapy and combination expansion cohorts with the goal of moving this agent into full development by year-end. Our discovery organization is advancing XB010, XB014 and XB628 in preclinical development towards potential INDs with a range of additional projects vectoring towards development candidates for both biologics and small molecule platforms. Third, business development activities will continue to be a critical focus for Exelixis throughout 2023. The two new option deals with Cybrexa and Sairopa are off to a great start, and we’re working closely with those teams to advance their efforts to get to an option decision as quickly as possible. Our strategy to access clinical and/or near clinical stage assets that have the potential to provide differentiated benefits to patients with cancer will continue to be our primary focus in 2023. The option deal framework is a capital and resource efficient way to generate clinical proof-of-concept data and only pay for success if that data is supportive. And finally, on January 19th, the Federal District Court in Delaware issued its ruling in the first Exelixis versus MSN case, what we refer to as MSN I. MSN’s validity challenge to the cabozantinib compound patent was rejected and MSN’s proposed generic product was ruled to not infringe the Exelixis’ N-2 polymorph patent. MSN did not dispute the validity of the N-2 polymorph patent. So, it is also -- so it also remains valid and in force and no intellectual property in the Exelixis cabozantinib patent state has been invalidated. Our attention and resources have now shifted to MSN II, which goes to trial in October, and we will continue to vigorously protect our intellectual property rights. So with that, see our press release issued an hour ago for our fourth quarter and full year 2022 financial results and an extensive list of key corporate milestones achieved in the quarter. I’ll now turn the call over to Chris. Thanks, Mike. For the fourth quarter of 2022, the Company reported total revenues of approximately $424 million, which included cabozantinib franchise net product revenues of $377.4 million. CABOMETYX net product revenues were $372.6 million and included approximately $7 million in clinical trial sales. Gross to net for the cabozantinib franchise in the fourth quarter ‘22 was 27.9%, which is higher than the gross to net we experienced in the third quarter of 2022, but overall in line with our expectations for the year. This increase in gross to net deductions in the fourth quarter of 2022 primarily related to higher PHS, Medicare Part D and co-pay assistance expenses. Our CABOMETYX trade inventory increased by approximately 750 units when compared to the third quarter of 2022 to approximately 2.7 weeks on hand. This increase in inventory was partially related to the timing of the Christmas and New Year’s holiday at the end of 2022 and the beginning of 2023. Based on what we can see in the trade, most of this inventory has been utilized in the first few weeks of January 2023. Total revenues also included approximately $46 million in collaboration revenues which includes approximately $34 million of royalties earned from Ipsen and Takeda on their sales of cabozantinib. And finally, clinical trial sales have historically been choppy between quarters, and we expect this to continue in future quarters. Our total operating expenses for the fourth quarter of 2022 were approximately $472 million compared to $329 million in the third quarter of 2022. R&D expense was the primary driver of the increase in total operating expenses, which was primarily related to higher licensing expenses for the three business development deals we announced during the fourth quarter, which added approximately $130 million to our R&D expenses. Benefit from income taxes for the fourth quarter of 2022 was approximately $1.3 million compared to a provision for income taxes of approximately $19 million for the third quarter of 2022. The Company reported GAAP net loss of approximately $30 million or $0.09 per share basic and diluted for the fourth quarter of 2022. This net loss was impacted by the approximately $130 million in new business development deals we announced in the fourth quarter of 2022. The Company also reported a non-GAAP net loss of approximately $10 million or $0.03 per share basic and diluted. Non-GAAP net income excludes the impact of approximately $20 million of stock-based compensation expense net of the related income tax effect. Cash and investments for the year ended December 31, 2022, was approximately $2.1 billion. This level of cash and investments supported by our ongoing cash flow from operations provides Exelixis with the flexibility to invest in internal discovery activities and also allows us to pursue external business development opportunities to expand our pipeline. And finally, turning to our financial guidance for the full year 2023. We announced our 2023 financial guidance at the JPMorgan conference in January and is detailed on slide 19 of our earnings presentation. All right. Thanks, Chris. As you heard on the call today, the Exelixis team had a great year in 2022, and we have even greater expectations for 2023 and beyond. As we hit our stride this year, we’re thrilled to have the momentum from our cabozantinib franchise performance and are completely focused on the growth drivers across all components of the business that we hope will enable Exelixis to help many more cancer patients in the future. I’ll close by thanking the entire Exelixis team for their individual and collective efforts to support our range of discovery, development and commercial activities. The team is highly motivated every day to fulfill our mission to help cancer patients recover stronger and live longer. We set our expectations high and drive for results. While we grew considerably in 2022, we remain committed to being nimble and creative and to foster a culture of collaboration and engagement. We look forward to updating you on our progress in the future. Thank you for your continued support and interest in Exelixis. And we’re now happy to open the call for questions. Hey guys. Thanks for taking my question. And apologies for the background noise. I’m crossing streets in New York City right now. Just on XL092, I just want to get a read from you as to what kind of data we can expect this year? I know previously, we’ve seen data at ESMO last year. Just wanted to get an idea about updates to those -- combination studies that we can expect. Thank you. Sure. Happy to. Thanks, Mike, and thanks for the question. So, in terms of XL092 where zanzalintinib, as it’s now called, of course, we presented the first clinical data at ESMO last year, which, again, confirmed the overall profile in terms of the shorter half-life compared to cabo, and we’re pleased to see early evidence of activity and a tolerable safety profile. We’re heavily focused on execution this year in terms of the Phase 3s that we’ve recently initiated and additional Phase 3s that we plan to initiate this year as well as the expansion cohorts on our ongoing Phase 1 studies. And so, we’ll be presenting additional data as we have a meaningful data set to present, but I don’t have any specific updates in terms of timing on that for you today. Just two quick ones for me. I mean, first, on your 2023 product sales guidance, just help us understand some of the key assumptions for where the additional growth is coming from this year for CABOMETYX. And then, secondly, on the CONTACT-02 study, which is the CRPC trial, help us understand your key powering assumptions for CABOMETYX as well as the control arm in the post-hormone therapy setting in prostate cancer. Thanks so much. Thanks, Michael. So first question, Chris, why don’t you start; P.J., you can provide some commentary on the -- on that as well; and then we’ll pivot over to Vicki on second question. Sure. Michael, it’s Chris. So, as you know, our guidance is $1.75 billion to $1.675 billion. That has growth in the range of 13% to 20%. And all of that growth is coming from new -- from current indications, no new indications. And we haven’t assumed any comparator sales in there. And I guess P.J. can talk about the market dynamics around growth. Yes. Thanks, Chris, and thanks for the question. With regards to the business, we had a strong 2022 and finished the year not only as the number one monotherapy TKI and RCC, but also the number one TKI I-O combo. As we’ve talked about previously, we are seeing continued growth in demand driven by market share increases from increasing duration. And particularly in the last four months or so of the year, we saw an increase in new patient starts. So both of those together should fuel growth, we believe, in 2023. On top of that, we’re certainly excited to have 44-month follow- up data from the 9ER study presented at ASCO GU and believe that will further support our positioning in the marketplace. So, that’s how we’re thinking about growth in 2023. Sure thing. So, in terms of CONTACT-02, as you mentioned, this is our study of cabozantinib and atezolizumab in metastatic castrate-resistant prostate cancer. As we’ve announced, we expect to have data for the progression-free survival endpoint in the second half of this year. And in terms of the power, what I can say is it’s powered for both progression-free survival as well as overall survival to demonstrate a meaningful effect in those two endpoints. Hi. This is Skyler [ph] on for Do Kim. Thanks for taking my question. Regarding the CONTACT-03 study, I’m wondering if you can speak to what you believe the incremental opportunity is, given cabo monotherapy is already leading second line RCC, just where you see the upside and the market share revenues? Yes. Thanks for the questions, Skyler. This is P.J. Happy to address that. So, CONTACT-03 -- as you mentioned, we have a strong position in the second line setting in RCC with approximately 50% market share with CABOMETYX monotherapy. But certainly, these patients -- they have metastatic disease, and they’re still greatly in need of more and better options. So, should CONTACT-03 be positive and atezolizumab adds to cabo in that setting, we kind of think about that opportunity in a couple of different ways. One is, we believe with better data, we can expand that market share beyond 50% for sort of the CABOMETYX backbone in that setting. And we do believe that much of the 50% would convert from CABOMETYX monotherapy to combination therapy. So, we see market share expansion. And then as you see a potential double in that setting, we would expect a longer duration of therapy there. So both expanding the cabo market and a longer duration of therapy is how we think about framing the growth from CONTACT-03. Congrats on the progress. I just have one here, which is I think that Ajinomoto announced a deal in January. And I think that was the most recent addition to your ever-evolving ADC tech stack. So just wondering if you can talk a little bit more about the specific technology you got access to there and how those capabilities with the deals and partnerships you already have. Thank you. Yes. This is Peter. Thanks a lot for the question. You’re absolutely right. That’s the kind of most recent addition to our kind of suite of collaborations on the antibody drug conjugate side. I think as most people know, we’re really kind of advancing our ADC pipeline, both through some internal efforts, but also through a network of collaborators. We have Invenra who makes most of our antibodies and also is a very nice bispecifics platform. And then we have a couple of collaborations that give us access to some site-specific conjugation technology as well as a range of payloads, those are Catalent and NBE. And Ajinomoto is really another access to a different site-specific conjugation technology. So, we’ve been using it on the research side for 6 -- certainly 9 months now. I’ve been very happy with the way it’s performed. So, we went ahead with the deal. So, we’re using it to make a variety of different ADCs with different payloads, but with a very controlled drug antibody ratio. Just one, in terms of the future direction of XL092, I know the message here is that we’ll get future updates as STELLAR-002 data mature. I was just wondering sort of what impacts ongoing cabo trials sort of dictate the future course of the program. So i.e., CONTACT-01, I assume that probably takes long off the table. I’m curious if you’d say contact-02 will dictate whether or not you’d explore 092 in the prostate setting. And then just one follow-up on CONTACT-03. The ability to expand share beyond 50% in the second-line setting, is that just primarily patients who got a non-cabo regimen in the front line, just given the protocol restrictions in that trial around having gotten cabo frontline? I just wanted to clarify that. Thanks. Yes. Jason, thanks for the questions. Vicki, you want to take that first question, and then P.J can follow up on a second? Sure. So in terms of XL092 or zanzalintinib, so as we’ve said before, we are looking at data that we have from the cabo program and using it to inform zanza development. And I think a prime example of that is the first Phase 3 that we started last year, STELLAR-303, which is a non-MSI-high colorectal cancer. And that was based on data that was presented early last year, again, demonstrating the promise of the combination of atezolizumab and cabo. And with the similar kinase profile, we started this Phase 3 with zanzalintinib. I think in terms of the comment about lung cancer, we’re evaluating the data from CONTACT-01. I wouldn’t necessarily say that lung is off the table based on that one trial. Obviously, that’s a difficult patient population in which to develop drugs. And I think careful evaluation of data may lead us to consider how best to develop zanza in a lung cancer population. It’s P.J. Yes, with regards to your question, the assumption of expanding market share in the second line with CONTACT-03, should it be positive? The assumption there is for patients who didn’t receive cabo in some form, either a combo or monotherapy in the first-line setting, and there is still room to expand that market share, should that -- should we have a positive trial. So for zanza, I’m just curious if you could characterize the Cmax or AUC over let’s say, like a 24-hour period. And maybe comment on the tissue distribution compared to cabo, just to help us gauge the potential for maybe like a superior efficacy profile. So, that’s my first question. Number two, really glad to see the start of that non-clear cell STELLAR-304 study, a very high unmet medical need. So, from a modeling standpoint, could you give us a sense of what percentage of non-clear cell patients are eligible for the trial? Specifically, I understand excluding the cribriform [ph] histology, it’s really difficult to treat. And so, we’re curious about how that would impact the TAM. Thank you very much. Yes. Thanks for the question, Andy. So obviously, with zanza, the focus as we were developing it was on modulating the pharmacokinetic properties to take it from -- what cabozantinib has is a half-life of around 100 hours in patients, we’re looking to reduce that. And as we showed in the data that came out late last year, happily zanza have half-life around 20 hours, so -- which is significantly shorter. We don’t see nearly as much accumulation, but it’s still consistent with once daily dosing. So, that was the overall goal, initial goal, at least, which was achieved. If you kind of dig into the data and to your question, start looking at actual drug level, Cmax, AUC, obviously, we’ve looked at that sort of calculating three fractions of drug as well. We’re very confident that we’re at doses that are pretty similar to the approved doses of cabozantinib. I think that calculation is also backed up by some of the changes that we put on the poster as well with respect to various biomarkers, for example, changes of VEGF, VEGFR and AXL, which again, looked very similar to what we saw historically with cabozantinib. So, at the end of the day, I think we’re in a nice spot with respect to Cmax and AUC with what we expect to see from efficacy. And I think the efficacy we showed in the initial poster was certainly encouraging to us, pretty nice waterfall plus, but with a reduced half-life again, which we think should lead to easier AE management going forward. Sure, happy to. So, in terms of non-clear cell overall, about 25% of renal cell carcinoma is non-clear cell. Papillary actually makes up most of that. So, it’s about 15% of the overall RCC population, whereas chromophobe is only about 5%. So between papillary unclassified, you’re already almost at 20%. So again, the majority of patients with non-clear cell RCC would be eligible for this trial and ultimately for treatment. Just one for me for CBX-12, we got some data at your meeting or the initial data there. We saw some interesting signals in ovarian and breast cancers. Just wondered if we could expect a clinical update this year on that program, or any update sort of with respect to future plans for development? Thank you. Yes. So we’re obviously also encouraged by the early data showing some early responses even while we’re still in dose escalation. So following that update late last year, we’ll work with the team at Cybrexa on future clinical updates. I would say that, again, we’re still in dose escalation at this point and looking forward really to working with them to achieving a recommended Phase 2 dose and moving into the next stage of development, which would be expansion in a range of tumor types, obviously, which will be informed by some of the early data that we’re seeing in dose escalation. This is Eyli, [ph] on for Akash. Thanks for taking our questions. So we have to if we may. The first is about the R&D spend. So, what’s roughly the breakdown of your R&D spend per program in your 2023 guidance? And given some of the setbacks we’ve seen in the last couple of years, I guess, what programs do you feel most confident that will show a positive return on your invested capital? And also, like what’s your appetite to do a larger $2 billion to $4 billion M&A transaction? I guess, my second question is on cabo. So, just curious, do you think cabo will still be a growing product over the next three years on just RCC alone? There’s a lot there. So, we’ll try to answer those questions one at a time. We may have to check back with you around specific sub questions. But, Chris, take the first one? Sure. From an R&D expense perspective, I mean, what we’re seeing is we’re seeing the costs related to the cabo studies coming down, and we’re seeing the costs related to the zanza and the XB002 study is increasing as we look at 2023, and those will continue to grow into the future as the studies continue to enroll. And then from a discovery perspective, we’re continuing to do our discovery investments, including what’s driven the big increase this year in 2022 where the BD deals, and we’ll continue to look at those. Yes. And in terms of -- I’m not going to give future guidance for the out years, obviously, leading TKI for RCC across the first line I-O TKI market as well as second line. So trials we have going between 313 and CONTACT-03, those look good. And again, we’re in the data business, so good data, but gets the opportunity to keep growing the business. So stay tuned. Yes. Okay. And that’s -- we’ve been talking about that for a while, looking for -- the opportunity to pursue larger later-stage assets and potentially larger deals that won’t qualify the size, obviously. It’s all about conviction in the asset and the probability of success. Our view on that and then the ability of those assets to generate differentiating data that we can then move forward into the commercial setting. I think we’ve -- I think it’s fair to say, we’ve proven that when we can generate differentiating clinical data, we can use that to drive the top line growth with cabo, and we’re certainly proud of that and understand that we have to do it again and again and again and doing it through both internal and external sources is the plan. So stay tuned. Great. I have a couple of questions on the pipeline. The first one on STELLAR-002, the LAG-3 PD-1 combos is really interesting. Has LAG-1 -- just give us a little bit of a sense, it’s obviously approved in melanoma. What has LAG-3 with PD-1 showed in, let’s say, RCC? And which other solid tumors are you interested in? And then for non-clear RCC, any sense, is cabo -- what’s the leading drug in that segment right now in first line? Does cabo or Opdivo have any share, or is it really sunitinib that’s dominating that segment? All right. Great. So thanks, Yaron. Vicki, you want to take the first question, and then P.J. can address the second? Yes. So as you noted, LAG-3 in combination with nivolumab is approved in melanoma. Other data, I would say, across other tumor types right now that are in the public domain are relatively sparse. But we’re interested in the combination across a range of different solid tumors. So, we’ve expanded that trial across several major tumor types now to really evaluate that combination, not only in the GU tumors, such as RCC, but in other major solid tumors, including hepatocellular carcinoma and others. So, really an interesting combination that we’re looking forward to what it will show up in terms of activity. Hi Yaron, this is P.J. With regards to the non-clear cell RCC market currently, I guess I’d characterize it as relatively similar to what you see -- what we see in the overall market, including clear cell. Certainly, cabo has good utilization. There’s guidelines in that market. Combos get utilization as well. But I guess how I think about it is with a Phase 3 -- there’s no randomized Phase 3 study in that setting. So, should there be a positive Phase 3 study there, I think, it’s a significant area of unmet medical need without a high level of data available. So, I think that would really provide an opportunity to drive a new standard of care in the setting for a lot of those patients. And maybe if I can, just throwing a quick question, on the 27.9% gross to net, can you give us any sense at all, how much of that is 340B just given how fast that program has grown over time? Thank you. Yes. Yaron, thanks for the question. Yes. I mean, it’s continued to grow throughout 2022. I’m not going to give you a specific number. But as we look at 2023, we think gross to net is going to be in the range of 31% or so. And as we’ve seen in prior years, we saw that be higher in Q1 and then -- and go down as we went through the year -- throughout the year in Q2, Q3 and Q4. But thanks for the question. Hello. This is Cheng [ph] on the line for Jay. Thanks for taking the question. So maybe for cabo, I think you mentioned there’s higher new patient start in second half ‘22. And just curious whether that is due to maybe more patients in the first-line setting and whether that will -- that trend will continue in 2023? And separately, on zanza, I think in the press release, you mentioned you expect to initiate the next wave of Phase 3 studies. So maybe some color on the next wave of Phase 3 study in terms of the indication and also the combination approach we should expect? Thank you. Yes. Thanks. This is P.J. So with regards to the new patient starts, I think not necessarily new patients from an epidemiological setting increasing that in first-line RCC. I think what we’re seeing there is we’ve taken share from competitors, particularly in the second half of the year. I think the team is executing at a high level. We have a great balance of data in terms of superior overall survival, safety, and tolerability and quality of life, and that’s well received and perception of that data is strong in the marketplace. So additionally, as things kind of opened up after the pandemic, I think the opportunity to really interact more with healthcare professionals and educate them on the data, helped drive to increase new patient starts and gave us momentum in the second half of the year. And with zanzalintinib, so just as a reminder, of course, we initiated our pivotal program last year with STELLAR- 303 and 304 in microsatellite non-MSI-high colorectal cancer and non-clear cell renal cell carcinoma, respectively. And as we’ve mentioned, we intend to initiate multiple additional pivotal trials in 2023. I’d say, stay tuned there for additional details, and we’ll certainly be happy to provide more color once we announce those trials. Great. Just on zanza, kind of when we should see the next data sets or the next data for STELLAR-304 and 303 and then if there’s any interim PFS reads that we should be thinking about? Yes. So, in terms of -- for 303 and 304 specifically, of course, these are Phase 3 trials that we’ve just initiated in the last few months or six months or so. So, we’re really focused right now on getting countries up and running, enrolling patients. In terms of timing, this will all be event-driven. And so, it’s too early at this stage to say when we expect those analyses, but we’ll have more details forthcoming as those are available. The Phase 1 data, I would say, as I said earlier, when we have a meaningful data set, we will be sharing those at medical conferences. And then a question for Chris, I missed it. But the revenue contribution for clinical trial sales for ‘22 or Q4 would be great. Just a quick question. Could you please remind me where we are with COSMIC-313, so with the triplet in frontline RCC in terms of the next readout? And I saw that there may be some data at ASCO GU next week by risk score. What could we learn from that? And how could that inform your thinking about eventually getting this maybe into registration? Sure, happy to. So in terms of COSMIC-313, just as a reminder, we had the readout for the primary endpoint of progression-free survival last year. At that point, the overall survival data were immature. We did discuss the data with FDA and they asked to see more mature survival data before considering a filing. So, we are expecting that we will have the second interim analysis of overall survival sometime later this year based on current projections. As appropriate, depending on the data, we would have a conversation again with FDA about whether or not a filing would be appropriate. In terms of the ASCO GU data, they’re still embargoed at this point, so I can’t share any details. But yes, we do have a presentation by an IDMC risk category and really, again, just looking at the study enrolled poor and intermediate risk patients whether we see differences in the benefit and safety profile across those risk groups. I just want you to know that I’m sitting comfortably in my chair in my office, and there’s no vehicular traffic around. I’m actually quite safe right now. So I appreciate your interest. Just real quick on zanza as well. I’m just wondering how you guys are thinking about the -- do you have sort of like a menu of Phase 3 trials that you have conceptualized and just waiting for data to confirm those, or do you -- is it purely going to be data-driven based on some of the Phase 1 and Phase 2 trials that you’re having going right now? Yes. So first, I’m glad you’re safely seated in your office. In terms of zanza development, we’re looking again at data from a number of different sources. Of course, the cabo data, again, coming back and referencing 303, our study in colorectal cancer also looking at emerging data from ongoing zanzalintinib cohorts, in particular, from STELLAR-001, but will increasingly be looking also from STELLAR-002, all of which may inform future development. That said, we’re also looking at the competitive landscape, areas of unmet need, really to evaluate what are the best opportunities here and really places where we can make a difference for patients, and so we’re factoring all of that information and as we consider next indications for zanza. Yes, because I would think that there’s indications that, let’s say, bevacizumab has or pazopanib or sunitinib where those are not indications for cabo and perhaps those are some areas where you could take the market share. Is that a good way to think about it? Looking at lots of different possibilities. Certainly, we could think about where other TKIs have shown activity as well. I would say cabo is a particularly good place to look because, of course, we have a similar kinase profile, but then also looking at novel combinations, right? And so, I think the nivo-rela combination is a great example of that, where we see good evidence of activity, then there may be unexplored areas where we can -- where it might be -- makes sense to develop those combinations. Right. Okay. And then just at a really high level, what would you say to investors is the most important milestone outside of, let’s say, the MSN litigation? But just from the ongoing portfolio, what’s the most important data point to Exelixis holders this year? Yes. So Mike, it’s Mike. We talked about it in the prepared remarks, the main priority for us is to advance the non-cabo pipeline in development, both zanza and XB002. Obviously, we’ve been very successful with cabo, to our business and a few companies that even have one franchise molecule like cabo want more. And there’s certainly, the large unmet medical need for patients across the board, and we think both zanza and 002 are first step in that direction, and then we have a strong discovery and collaborative pipeline of molecules coming up as well. So, our focus is building a pipeline of molecules that we can get over the goal line from a clinical and regulatory point of view and then get into HCPs and patients’ hands as quickly as possible. Operator, do we have any more questions? I assume we don’t. So, I would say thank you very much for joining us today. And certainly, you’re welcome to give myself a call or shoot us an email if you have any follow-up questions. Thanks again.

EarningCall_327

Good afternoon, ladies and gentlemen. And welcome to LiveRamp's Fiscal 2023 Third Quarter Earnings Call [Operator Instructions]. As a reminder, this conference call is being recorded. Thank you, operator. Good afternoon, and welcome. Thank you for joining us to discuss our fiscal 2023 third quarter results. With me today are Scott Howe, our CEO; and Warren Jenson, President and CFO. Today's press release and this call may contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. For a detailed description of these risks, please read the Risk Factors section of our public filings and the press release. A copy of our press release and financial schedules, including any reconciliations to non-GAAP financial measures, is available at liveramp.com. Also, during the call today, we will be referring to the slide deck posted on our Web site. At this time, I'll turn the call over to Scott. Thank you, Drew, and thanks to all of you for joining our call today. There are three key messages I hope you will take from our time together. First, we delivered another solid quarter, demonstrating the durability of our business model. Second, we are making steady progress with our key initiatives to reaccelerate revenue growth, including an improvement in sales force productivity and two new integrations with the Walt Disney Company and Amazon Web Services. Finally, we made meaningful operating margin improvement in the quarter and we expect the improvement to continue in FY24. Third quarter performance met or exceeded our guidance on the key financial metrics, including revenue, gross profit and operating profit and also demonstrated the durability of our business model. In recent calls, I've talked about our efforts to strengthen our sales force and our broader macroeconomic concerns. Revenue growth, which I characterize as a lagging indicator given the high subscription component of our business came in as we expected in Q3. Total revenue in the quarter grew 13% year-on-year, Subscription revenue grew by 14% and Marketplace and other revenue grew by 9%. The growth in Marketplace and other was less than we expected due to slower growth in third party data sales, reflecting macro pressure on advertising spend. Our Q3 customer count of 910 was down from Q2. We held steady with large strategic customers and declined in small and medium sized businesses and low ACV accounts. The declines in SMBs partially reflects the challenging macro, but also our strategy to prioritize larger, more profitable enterprise accounts. Our $0.5 million to $1 million customer count grew by 6% from the prior quarter and our 1 million plus customer count increased by 2% to 94 million. We think expanding channel partnership initiatives, which I will elaborate on in a moment, will eventually help with SMB new logos. We had a notable seven figure new client win with a global advertising agency network for data activation. This client is using our identity products to help its clients create consistent audience segments deploy targeted advertising campaigns and measure the effectiveness of those campaigns across platforms. We also added a new six figure client in the recreation vehicle space where we are enabling collaboration between the corporate marketing team and their network of distributors. Existing clients continued to grow, albeit at a more moderate rate. Subscription net retention was 101% in line with our guide. Platform net retention was 102%. Just as revenue is a lagging indicator, pipeline and growth bookings are more leading indicators. These measures are stabilizing and we're seeing some encouraging signs on bookings while we're not where we want to be, we saw a sequential improvement from the prior quarter and the highest bookings of the year. Bookings were broad based across the US sales force with 90% of reps closing deals in the quarter. Our new first year reps made a meaningful contribution, collectively accounting for nearly one third of total bookings. Our ramped rep count defined as an experienced rep of more than six months, increased by 20% from the prior quarter and was the highest since Q4 fiscal '22. Our qualified pipeline is robust. We have our ramp up annual client and partner conference occurring in 30 days, and we have a number of really interesting client and partner conversations in play. We had success upselling large customers across a number of different products and a variety of sectors. We had a seven figure upsell of a major auto manufacturer to support activation and measurement of advertising campaigns. We had a high six figure upsell of a leading US grocery retailer to support their scaling retail media network using our Safe Haven product. Finally, we had a six figure upsell with a men's clothing retailer for data activation and attribution measurement. We usually don't speak about specific clients, but many investors have asked about our relationship with Interpublic and Acxiom, given its historical significance in approaching contract expiration. I am pleased to say that we have extended our relationship with Interpublic and Acxiom and terms consistent with our previous contract. We are the first to acknowledge that one quarter is not a trend, and we still have much room for improvement. The stabilization in Q3 bookings is encouraging, especially in a difficult macro environment. But our work is hardly complete and now we must build upon the Q3 performance. One last thing on Q3. We continue to walk the talk on improving our operating income. Our non-GAAP operating income increased by $11 million year-over-year to $26 million, and our margin expanded by 6 points to 16%. That was a record high for us in any quarter. So let's next talk about how we're planning to accelerate revenue because, obviously, that's a big potential value driver. We're making progress but the journey continues. On our last call, I outlined several efforts we had implemented to reaccelerate top line growth: one, improve our US sales force productivity; two, deepened channel partnerships; three, expand our network of destinations; and four, something I don't think I talked about as much but is always happening, continuous product improvement. As discussed on prior earnings calls, we experienced above normal attrition in our US sales force in FY22, driven in part by exogenous factors such as the great resignation. We rebuilt our sales force and returned to normalized sales capacity this quarter. As importantly, we're streamlining our go-to-market motion with simplified and standardized pricing models and also verticalizing our sales force and creating sales plays for clearly defined use cases and business outcomes in each vertical. Above all, we've been working to unlock our new sellers and reverse the bookings weakness trend. As I mentioned, we're seeing signs of progress. Our Q3 growth bookings are stabilizing and represented the high watermark fiscal year-to-date. 90% of reps closed a deal last quarter and new reps made larger than expected contributions. While the macroeconomic environment is unpredictable, we enter our Q4 with a strong pipeline and some interesting conversations in play and our upcoming ramp up client and partner conference is a great chance to push these discussions forward. That said, there is more work to be done here. Our second major top line initiative is to deepen our channel partnerships. LiveRamp has a long history of developing productive channel partnerships with data management platforms a decade ago, continuing more recently with DSPs and SSPs and customer data platforms. We continue to deepen our channel partnerships, including the ones we discussed last quarter with Salesforce's new CDP called Genie and Snowflake. This quarter, we have an exciting new partnership with Amazon and its new AWS Clean Rooms. We designed and released a new cloud identity solution that is purpose built for AWS customers with embedded capabilities in the customer's AWS environment. Interoperable with key AWS services and can be purchased and deployed directly through AWS marketplace. Together, we make it easier for advertisers and marketers to incorporate insights in the campaigns and improve reach, relevancy, frequency and measurement, all while protecting consumer data. Our continued work with AWS allows LiveRamp's person based identifier, RampID, to be used as a key to connect data and drive more impactful audience modeling and planning for global clients, ensuring they can extend the utility of data safely and securely and remain compliant with regional privacy regulations. This is just one example of our expanding channel partnerships. We are also expanding channel sales efforts with other cloud providers, cloud data warehouses, marketing clouds and global systems integrators. I think this can be a major driver of future growth for us, but let me also caution that we're still in the early rollout with many of these partnerships and we know that the sales cycles typically span two to three quarters. Our third major sales initiative is expanding our network of digital destinations, websites, CTV providers and other channels where customer data can be utilized. By offering turnkey solutions with the largest network of publishers and digital destinations, LiveRamp establishes itself as the indispensable scale leader, which will drive growing usage of LiveRamp solutions, fuel international expansion and ultimately drive incremental bookings and revenue. Last quarter, we announced significant new identity integrations with two of the largest advertising publishers in the world, Meta and Google. This quarter, we have two more major integrations to discuss, starting with the Walt Disney Company and its streaming properties. Earlier this morning, at the AdExchanger Industry Preview, Disney announced our collaborative effort to make LiveRamp's RampID interoperable with Disney's Audience Graph so that advertisers can reach their audiences at scale in a rapidly changing environment. The interoperability between LiveRamp and Disney will set the stage to enable audience based addressability at scale across Disney's connected TV and streaming inventory. We're excited to expand our business with Disney and offer these new capabilities to customers. We also recently announced Pinterest, who will use our Safe Haven data collaboration platform to enable secure data collaboration and campaign measurement amongst brands, publishers, retailers and data owners, regardless of where their data is stored. This cross cloud interoperability is a big deal because it is frequently the case that collaborators use different cloud providers for their storage and compute needs. The first advertiser to collaborate with Pinterest using our technology is grocery retailer, Albertsons, who will use it to deliver closed loop reporting for brands that participate in its retail media network. Finally, our fourth top line initiative is constant product improvement to meet the needs of the world's largest and most sophisticated companies. LiveRamp is the data collaboration platform of choice for the world's most innovative companies. The most pressing need for large sophisticated marketers is building a platform that gives them a holistic 360 degree view of their customer, allowing them to connect data to every customer interaction, activate advertising campaigns across the marketing landscape and measure the results. This is a relatively simple concept but it is complex to execute in a fragmented media environment with increasing global privacy regulations. Nonetheless, LiveRamp is uniquely positioned to power these requirements because of several core competencies, which we now bundle together into our core Safe Haven data collaboration platform. First, Foundational identity. We offer groundbreaking leadership in consumer privacy, data ethics and foundational identity. Our identity solutions create a single view of the customer at scale. ATS, LiveRamp's authenticated traffic solution is now deeply embedded into the digital ecosystem. We work with more than 80 DSPs and 80 SSPs, nearly 80% of the top 50 comScore sites and over 12,000 domains. All but a few of LiveRamp's top 50 destinations no longer rely on cookies or mobile device IDs. As a result, today, more than 80% of our brand customers are sending to almost entirely future proof destinations. And by late spring, it will be more than 95%. In short, due to our efforts over the past several years, our identity solution is future proofed for the deprecation of third party cookies and is completely configurable for however our clients and partners choose to integrate their data. Our flexible collaboration is a second differentiator. Our technology facilitates complete flexibility to collaborate wherever data lives. We believe the future is one in which permissions, consent and secure data collaboration can occur without needing to share or reveal personally identifiable information, which is not just a preference, but increasingly, a legal requirement in some markets. We worked hard to make our data collaboration platform extensible, scalable and agnostic. And the proof is in the many partnerships we're now starting to announce, including Microsoft, Snowflake, AWS, Salesforce and GCP. Finally, we have established the premier global ecosystem, an expansive data rich network of top tier partners for incomparable scale and reach. Clients can access the widest array of first, second and third party data and a global network of activation partners, all of which are ever expanding. I've talked about some of the recent progress here, including Disney and Pinterest, and you should expect a handful of other global partnerships to be announced throughout the coming months. The benefit from this hard work, marketers and their agencies can safely use relevant data and every addressable customer interaction. Marketers pocket greater return on investment, destinations deliver more relevant messages and greater profitability and consumers gain both more control and have better experiences. Other companies may offer one of these capabilities, but we uniquely provide all three at unparalleled scale. Historically, we've done this directly to sophisticated enterprise marketers but we increasingly see an opportunity to embed ourselves into other technologies, particularly with respect to the cloud and cloud data warehouses. One of the subtle yet significant changes is bringing our capabilities to our customers' computing environment, including clouds and clean rooms, just like we are doing with AWS Clean Rooms. We will empower this collaboration across clouds through data federation and connect more first, second and third party data to drive tangible business outcomes for our customers. While bookings reacceleration is obviously a top priority for us, before wrapping up, let me speak about our profitability. Over the past few years, quarter after quarter, we have delivered methodical and meaningful improvement in operating income, both dollars and margin. And this will continue to be another of our top priorities. We expect our non-GAAP operating profit to increase by nearly 50% in FY23. In FY24, we expect operating income to grow at a similar rate and margin to expand even more, driven mostly by the $30 million to $35 million in cost savings from the cost actions announced last quarter. But we're not done yet, as Warren will discuss shortly. In summary, we delivered another solid quarter of results ahead of our projections and demonstrating the durability of our business model. We are making steady progress with our key initiatives to reaccelerate revenue growth, including an improvement in sales force productivity and two new integrations with Disney and Amazon. And we made meaningful operating margin improvement in the quarter and we expect the improvement to continue in FY24, but know that we are not satisfied. Think of today is just a progress report on a methodical journey to reaccelerate top line growth, achieve steady margin improvement and ultimately unlock greater shareholder value. With that, thank you again for joining us today and a special thanks to our exceptional customers, partners and to all LiveRamp-ers across the globe for their ongoing hard work and support. We look forward to updating you on our progress in the coming quarters. Thanks, Scott, and good afternoon, everyone, and thanks for joining us. Today, I would like to focus my remarks on three areas: first, share a few highlights from the quarter; next, provide a few preliminary comments on our FY24 priorities and outlook; and finally, confirm our top line and update our bottom line guidance for FY23. For the quarter, please turn to Slide 5. Total revenue was $159 million, up 13% and subscription revenue was up 14%. Excluding a $4 million onetime contract settlement, which we called out last quarter, both subscription and total revenue were up 10%. International was up approximately 27% and adjusted for FX was up 37%. Marketplace and other increased 9%, data marketplace, which represents roughly 80% of ongoing marketplace and other, was up 5%, reflecting softness in the overall advertising market. Subscription net retention was 101 and platform net retention 102. The year-over-year decline in subscription net retention was driven by a lower relative contribution from upsell bookings and usage. The sequential decline was driven by the same factors. Platform net retention was also negatively impacted by slower growth in Marketplace and other. Usage was 16% of subscription revenue, driven by data providers, platform partners and the $4 million onetime contract settlement. Excluding the settlement, usage was 14%. Subscription customer accounts decreased by 10% sequentially while our $1 million customer account increased to 94, up 9% versus the prior year. The decline in total customers was driven by a reduction in small and medium sized customers with comparatively low ACVs and profitability. Current RPO or our next 12 month contracted backlog was $324 million, up 12% year-over-year. ARR ended the quarter at $426 million, up 12%. Bookings rebounded sequentially and on an absolute basis, it was the strongest quarter this fiscal year. Beneath the top line, our profitability get improved. Non-GAAP gross margin was 76%. Non-GAAP operating income was $26 million, up from $15 million a year ago. And our operating margin was a record 16%. In terms of fall through for every dollar of incremental revenue, approximately 62% fell through to operating profit. Included in our GAAP results were approximately $12 million of restructuring charges, principally associated with real estate reserves and severance. Operating cash flow was $16 million. And finally, we continue to return capital to shareowners. In the quarter, we repurchased 2.3 million shares for $50 million and fiscal year-to-date, we have repurchased 6.1 million shares for $150 million. Further in December, the Board approved an extension and expansion of the authorization. We currently have $218 million available for share repurchases through December 31, 2024. Trends and a few preliminary thoughts on FY24. Before moving on to our guidance, I thought I might spend a few minutes and talk about two things. First, what we're seeing in our business and next provide a few preliminary thoughts about FY24. As is always the case, there are both positives and some challenges. But overall, we see a lot going for us. First, what we have plenty to do, the leading indicators of subscription growth are showing signs of improvement. Gross bookings improved by more than 30% sequentially in Q3 and we have line of sight to a similar level of bookings in both Q4 and Q1 of FY24. Ramp per reps are delivering. Rep productivity was the highest we've seen this fiscal year and a significant number of new reps ramped in the quarter. Our sales channels are expanding, as Scott discussed. Our cloud offerings are taking shape. And finally, I'm pleased to say that our relationship with Acxiom has been renewed on terms consistent with our existing agreement. And in fact, we see upside to this relationship going forward. Acxiom and IPG are great partners and we're excited to continue to work together on go to market solutions for our shared customer base. Next, LiveRamp offers a set of products and capabilities that are unique and table stakes for the industry. Our competitive advantage is clear. Foundational identity. Person based identity is the unifying key to connect data across the ad and martech universe. This foundation is what makes it possible for brands to personalize and use data in every interaction with our customers. We make every impression addressable. This is the foundation for Customer 360 and this is what we do, and no one comes close. Our reach is unparalleled. We reach every media channel, display, TV, Meta, TIKTOK, Pinterest and with PAIR Google too. This creates a powerful network effect. And finally, we are grounded in privacy and data protection. We work to anticipate change and work within ethos that puts the consumer at the center of our decision making process. Our next set of product enhancements are exactly what customers need and are asking for, federated cross cloud with advanced privacy enhancing technology. We work with clients that have standardized on a single cloud provider but more importantly, enable collaboration and permission data sharing between the majority of brands where they and their partners operate across multiple cloud providers. Today, our federated cross cloud collaboration module is in beta with over 20 large brands and publishers. Next, third party cookies are now largely irrelevant to the long term success of LiveRamp. LiveRamp's ability to connect enterprise data to consumer experiences no longer relies on the third party cookie. Over the past years, we future proofed the open web with ATS. We have also established new integrations across social and CTV. And soon, we'll be announcing martech capabilities, starting with e-mail and SMS. With the launch of PAIR this spring, our brand customers will have the ability to do everything they do today without the need for third party cookies. We now have cookieless integrations with all major media types and with nearly all of the top 50 publisher destinations. In other words, brands and publishers are future proofed. Please turn to Slide 15. The value we provide also goes well beyond programmatic. Speaking of this, we're thrilled with our expanded partnership with Disney. This is just one of several CTV announcements you'll see in the coming months. LiveRamp is the go to choice for any premium CTV provider to make their inventory addressable in a controlled and privacy first way. And finally, our model is scaling and margins are expanding. We are delivering and expect to continue to deliver meaningful margin improvement. We expect FY23 operating profit of between $60 million and $63 million, an increase of approximately 45% year-over-year. In the second half of FY23, we expect our operating margin to expand by approximately 7 points year-over-year. The headcount reduction an real estate rationalization steps we discussed last quarter will be finalized by the end of Q4. We continue to expect $30 million to $35 million in annual OpEx savings stemming from these actions. But to be balanced, we also have challenges. The macro environment remains uncertain and we continue to feel bookings pressure as our customers continue to tighten their belts and new budgets are tough to come by. As we said last quarter, these pressures are impacting our ability to attract new logos, conversion rates and contraction. And make no mistake, we do face competition, too. Taking into account both the positives and challenges, a few early thoughts on FY24. First, expect from us a conservative and tempered outlook for top line growth in both subscription and marketplace. Next, we will continue our efforts to progressively build on our bookings momentum, sales force productivity and the work we are doing in customer service to better serve our customers and minimize contraction. From a product perspective, we expect to continue to roll out our product suite in the cloud and further enhance our Safe Haven platform by launching federated cross cloud capabilities. As I mentioned earlier, this capability is now beta with approximately 20 clients, including several major publishers and brands. In FY24, we are committed to increasing non-GAAP operating profit by roughly 50% year-over-year. In the back half of FY24, we expect our location strategy initiatives to set us up for another year of strong operating income growth in FY25. Lastly, we expect to return the majority of our FY24 free cash flow to shareowners through our repurchase program. We believe this is a great investment and will by enlarge offset the impact of forecast dilution. In summary, a cautious outlook on the top line, continued focus on bookings and product, but a strong increase on the bottom line, coupled with the majority of our cash flow being returned to shareowners. Q4 and full year FY23 guidance. Please turn to Slides 12 and 13. Keep in mind, our guidance excludes intangible amortization, stock based comp and restructuring and related charges. For the full year FY23, we continue to expect revenue of between $595 million and $600 million and we now expect non-GAAP operating profit of approximately $60 million to $63 million, up from our previous guide of approximately $60 million. As always, and in particular, given the macro uncertainty we’d ask that you be conservative in setting your revised models. A few other call outs for Q4. We expect subscription net retention to be roughly 100 and platform net retention to be approximately 99. In Q4, we expect our gross margin to be roughly 75%. We expect to incur approximately $10 million of restructuring charges. These charges are primarily associated with the continued rightsizing of our real estate footprint. We expect stock based comp to be roughly $22 million in Q4 and $103 million for the full year. In addition, we are exploring certain tax strategies that could generate a meaningful cash tax benefit. If implemented, these tax strategies will result in an incremental noncash stock charge during the quarter. This incremental charge is not included in our guidance. Before opening the call to questions, I'll now close with a few final thoughts. We are going after big long term opportunities where we have a right to win, identity, data collaboration and marketplace and doing so wherever data may reside. While we are operating in a challenging environment, we are using this as a time and an opportunity to strengthen our operating muscle and deliver meaningful and durable bottom line improvement in cash flow and at the same time, do the things necessary to create sustained efficient growth. On behalf of everyone here at LiveRamp, thanks for joining us today and thanks to our terrific customers. Operator, we will Nice job on the execution. I had a couple of questions. First one, you guys have had a lot of interesting partnerships that you guys talked about in the prepared remarks with some big players out there like AWS, Meta, Pin’s, et cetera. Just wondering if you could just talk a little bit about what kind of potential you see from these partnerships to kind of drive the business going forward? And then Warren, I had a follow up for you. You talked about a tempered outlook for fiscal '24 revenue growth. Can you provide any detail or color on this? When I think about the partnerships, you can really kind of group them into several different categories. First, we've really made a push on our destination partnerships. We believe that the part of the value we provide is the reach and ubiquity of all the places they can utilize their data. And so wherever they're interacting with their customers, we want to enable that securely and safely and easily with their data. And so the Disney example is a great case study there. Pinterest is another. I would tell you there, I think what the number one impact is that it just embeds us into the very fabric of the ecosystem and improves the durability of our business. Now over time, you're going to see an additional potential revenue driver, because just as our major marketing partners recognize that they have really valuable first party data, so to do all those destinations, whether it be Disney or Pinterest, and I talked about this with the Pinterest example, they recognize they have valuable first party data. And so they're looking for someone who's unbiased, who isn't in the media business to help them unlock that. And so all of the ATS destinations that we have we're already underway with really interesting conversations with our major partners to help them unlock the value of their data. You'll see that play out over the next couple of years. And then there's another group of partnerships, which are really the tech partnerships. And there, I think the value will be driven by our ability to grow this SMB channel. And Shyam, you've listened to our calls for years now and we've always talked about the challenges we've had with SMBs. We see higher churn there. Oftentimes, those clients come on and they realize -- they don't use our full breadth of functionality, and so they punch out. And our cost to serve that segment is really high. So it is an anchor on our profitability. We think there's an opportunity when we embed ourselves into Snowflake or AWS or Salesforce with the Genie partnership, or with Microsoft and Azure. I mean there's just a wave of these things that we have underway now. It allows us to reach those SMB clients, I think, more effectively. And in addition, our historical strength has really been with the CMO. Take a company like Snowflake, they are really strong with the CI. And so it's a nice complement where they can bring us into conversations and vice versa and really help one another with the selling efforts. So again, I'll just caution what I said in the prepared remarks, we're early stages in this. We've gotten a lot of traction very early, but we also know it takes two to three quarters to recognize revenue from these things. And so I don't expect big amount of revenue until the back half of next year. This year, we did about $10 million. I would expect that to grow fairly significantly next year. But I think the real proof will be the tail end of next year and in the following year. And then, Shyam, let me touch a little bit on our FY24 outlook. I'm going to make a couple of broad comments that I think sort of set the stage. First, everybody should just recognize it's still early. So we, like you, are going to be watching the macro environment unfold over the coming months and then, of course, we'll update you as we give our formal guidance in May. Secondly, is we feel that this is the exact time that it's appropriate to be conservative in setting expectations for the top line. It's just the best way to go is you do your planning and it also recognizes that there is fundamentally a lot of uncertainty broadly and also in the ad marketplace. So sitting here today, I would say, be conservative on the top line, think about a low single digit growth rate for the company. With that in mind, though, we would also ask everybody to think about the guidance that we've given on the bottom line, we're expecting to deliver roughly 50% increase in operating income in FY24. So for us in thinking about all this uncertainty and the broader ecosystem today, as you think about FY24, there are three things you can expect from us. Number one, a conservative top line, you can expect significant margin expansion, and you can expect a strong return of capital. I just first wanted to follow up on the low single digit view for fiscal '24. Just given that the Q4 exit rate is kind of more mid to high single digits, so for that 4% to 6% range. So what are some of the drivers of kind of the incremental weakness from the Q4 exit rate? And just given that it feels like the dynamics should be getting a little bit better into back half, but I just wanted to kind of get your views on the puts and takes there.? I'd say the following, the headline would be really just thinking about marketplace. We clearly saw weakness as others have in our third quarter and in particular, in December. And then we just have our January results into and we also saw pressure. So I think we just have got to be really cautious as it relates to data marketplace. We would say, think about flat to down potentially next year again, sitting here today, obviously, better on the top line related to subscription. Finally, on this point, again, where we are in the planning cycle is it just pays dividends to be conservative across all of the assumptions. Again, there's just way too much uncertainty. We want to see our bookings trends continue and even strengthen more and then deliver on a lot of the initiatives that we have in place. That color on marketplace versus subscription super helpful for us and makes sense on setting a conservative guidance next year. Just as a follow-up, I wanted to -- congratulations on just all the great partnerships. And I wanted to dig into a little bit more on the AWS Clean Room. Historically, you've had a really strong relationship with retail and CPG verticals in your clean room offering. So just as it relates to AWS, what's the opportunity to expand kind of meaningfully outside of retail verticals, given just retailers maybe hesitant to be an AWS kind of customer? That's question one. And then second, you called out SMB specifically for AWS but are large enterprises addressable here as well? Well, I think they are, Elizabeth. I don't know if you're planning to attend ramp up, but it's really interesting, one of our first sessions that Warren is going to lead is kind of a discussion on commerce networks. And so we'll have a major retailer on stage, I think it'll be Albertsons. We'll have General Motors on stage talking about the future of connected cars and we'll have one of the major airlines, I think, on stage talking about connected travel. And I think that illustrates what we're seeing. What started as retail media networks has really become commerce networks. And commerce networks really apply to almost every vertical. So for instance, in the connected car business. Automotive manufacturers, I mean, basically any retail shop, any automotive repair, every gas station, they should be forming partnerships and collaborating on data. And in the travel space, all you have to do is look back to the late '90s when all of the travel marketers formed partnerships based on miles. Well, now we're entering a new age where the partnerships and collaboration will be on intelligent data usage. So there are very few industry verticals that we don't think should be experimenting with data collaboration. I think it's going to be one of the drivers for marketing and data usage over the next few years. And so I think there's a tremendous opportunity. I think AWS sees it, Snowflake sees it, GCP sees it. And we’re forming similar partnerships with every major cloud provider. The good news is that regardless of who wins there, we're going to be supporting them and helping their clients and data partners. Elizabeth, I might add just one thing to what Scott said. It's interesting if you think of all the partnerships that we have in place and have been announced, it's pretty ubiquitous. And if you think about multiple industries, there are three things that are just table stakes. So it doesn't matter whether it's retail, health care, financial services, et cetera. You have to have foundational identity, you have to have unparalleled reach and you have to have the strongest approach to privacy and security and fundamentally, that's what we do. This is actually Peter Burkly on for Kirk. Maybe, Scott, just to start with you. Given the choppy macro, I'm just curious if you could kind of double click on the dynamics of just how all the choppiness is sort of impacting net new client addition versus sort of the upsell expansion opportunities? And then maybe just a quick follow up for you, Warren. It looks like you guys are guiding to 100% NRR for next quarter. Just curious as you look out a year, does that keep trending down in the near medium term to the low 90s, or do you see that sort of at the bottom? Just curious if you could kind of touch on that a little bit. I think the macro environment overall is cause for conservatism as everyone builds their models. That said, I would tell you I'm really pleased with some of the progress we're making with our sales team. I mentioned in my prepared remarks we were really impacted by this great resignation. We saw a lot of our sales reps leave. We're really a talent magnet for other companies and boy, they paid our sales reps 50%, 60% more to jump ship. So we've now rebuilt that capacity. I would tell you I'm really pleased with our pipeline. I think it's at an all time high. Our bookings sequentially were up. And so there's a lot of interesting conversations underway. Bad macro economy or not, there is still a lot of interest in doing clever things, sophisticated things with data. And in fact, in a bad economy, it actually encourages companies to be more innovative. So I think we can benefit from that. But you have to temper that with the other side of our business. I mean, if -- I was just talking about the data subscription side, our data collaboration platform. This other side of our business that Warren touched on our data marketplace, that's where we'll absolutely see macroeconomic pressure. We saw it last quarter. We're seeing it in the early weeks of this year. And when we listen to the calls of a lot of the major media companies, we hear them talking about it as well. So all this to say is I just echo something Warren said, which is it's early. We wanted to get out in front of guidance for next year and talk about things in broad brush strokes, but we will learn a lot more in the next quarter or so before our fiscal year starts by seeing how the macro economy develops, what happens to data marketplace and how our cloud partnerships continue to develop as well. And then, Peter, let me take the second question. We're not going to give long term guidance on net retention on this call or probably ever. But what I can flat out tell you is nobody would even be remotely satisfied with a net retention trend that dips down into the low 90s just full stop. So for us, we think we're doing the right things to really turn around what has been a downward trend. It's what we're doing to drive higher bookings and drive higher upsell. Secondly, it's all the work that we have going on to focus on usage and working with all our partners. So you can expect that to continue as well as the work that we're doing to reduce any impact of contraction. So no long term guidance today. But make no mistake, 100 is not our end objective whatsoever. Scott, there's a sense out there maybe that the competitive set is expanding, some players in clean rooms and CDP and ad tech build out, some lighter weight kind of onboarding and any resolution capabilities. I'm wondering if you could give us your take on that trend, whether or not you were there behind the scenes powering some of these? And then we’d imagine larger clients want to use one provider with many activation opportunities. But wondering if you place in the market for some of these newer lighter weight offerings out there? Well, it's interesting. I mean we're pretty unique but we've always faced competition. And if you go back a decade, people would talk about us competing with DMPs or more recently DSPs. But in reality, that masks what was really happening, which is we power those things. And I think that is going to be the case going forward as well. And sort of DMPs and DSPs will increasingly be talking about CDPs and the marketing clouds. Well, we've had some recent announcements. CDPs, I think it was last quarter, I talked about our sales force collaboration for their Genie launch. And more recently, I've talked about, obviously, AWS today and Snowflake where we continue to push forward on that partnership. It's so funny. I oftentimes get investor queries when they see the announcement of Disney and Trade Desk or today's Acxiom Snowflake partnership. And we just smile because when an announcement occurs with two partners that we're working with, what gets left unsaid is that they're riding our rails to deliver the joint value. So every time you see one of those things, I think that's an opportunity for LiveRamp. And just to make it real clear, when I think about what clients need, they obviously need storage and compute. They need a service layer and they need the ability to do segmentation and a good view eye. Those will be provided by the marketing clouds, the Adobes, the Salesforce's of the world, that's never been the business that we've been in. However, the concept of foundational identity, our ubiquity and the connected ecosystem, we stitch it all together. And so we make the marketing clouds actually work, we make the data that sits in them, be usable at all the destinations that matter. And so we think there's a real essential role for us. You heard me talk about the fact that we've knead ourselves into the very fabric of the ecosystem. And I think all of these partners are potential growth opportunities for us long term. I was actually interested in Warren's comment on CTV data partnerships and specifically making media more addressable. So we've heard in a lot of conversations, there's just limited access to truly addressable inventory in connected TV. So just curious what you think your role is in that ecosystem and if you think you could serve as a catalyst to making more of that inventory truly addressable? I love this question. And what I would tell you is too often people talk about CTV, you're hearing about programmatic CTV, which is a very small slice of the CTV environment. Well, we play there and we power the folks that play there. But we see the much bigger opportunity to be making the entire upfront CTV inventory addressable and targetable. And so we already have partnerships with virtually every major CTV player, not just for programmatic but for the vast majority of their inventory. And those that you haven't heard us talk about historically, I think you'll hear us talk about in the coming months. So really important part of what our clients are trying to do, they don't just do programmatic, they don't just do display advertising. They advertise on CTV, they advertise an e-mail, they want to make their data available at point of sale, and we enable all of those things. So we are much more ubiquitous than any one media tactic. Really excited about what you'll hear from us and the capabilities we’ll expand there in the coming year. Craig, I would add one thing on the point is, I know in certain places in the market, there's just so much demand that you don't even honestly need to do targeting. But I think that's a short term phenomenon. And I think the Disney announcement today was a really great example of where the streamers will go and what will be done. The bottom line is when you use data effectively, you're going to create better CPMs, you're going to create higher levels of revenue. A couple of specifics. On the ATS publisher growth, you saw -- I think that moved from 1,500 to 2,000 quarter over quarter, which has been flat for the last few quarters. I'm just curious what drove that, if there's any specific partnerships that contributed there? And then two, on the on Safe Haven, I'm just curious if you could give us an update on the ARR trajectory? And sorry if you did already, I might have missed it, but it would be helpful. On the ATS, what I would tell you is I'm not sure that there's any one single thing, rather, I would just say we've reached critical mass. And it's not driven now by Google's timeline for cookie deprecation rather it's just driven by the fact that addressability works more effectively. Our publishers are seeing fairly significant. Microsoft published a case study about a year ago, showing 40% lift in yields when they switch from cookies to authenticated inventory, and the vast majority of our publishers are seeing similar things. And so those stories, those case studies travel fast and virtually every major publisher wants to deepen their partnership. And it's not just in the US, it's worldwide. And I think this is another thing that really sets us apart that we probably don't talk about nearly enough, we're not a US company, we are a global company. And if you are a global advertiser, the only way you can reach your audience in dozens of countries that you want to be in is through LiveRamp. So all of the partnerships that we're signing are global. And in many cases, we are the only authenticated option in some of those markets. So I think all that's coming together. That said, it's still early stages in terms of the vast amount of media flowing through these authenticated channels. So I think that plays out over the next couple, three years. And Mark, the only other thing I would add is in our deck, you'll see a bunch of case studies that we've linked to, and if you haven't had a chance to take a look at the case studies, I would encourage you to do so, because you can really see the effectiveness of overall ATS. And then to your second question, one thing that we’d suggest everybody sort of think about is increasingly, LiveRamp is a platform sale, and Safe Haven is our enterprise platform. So we don't think in terms of discrete products. What we think of is how do you use that platform for different use cases. A use case could be activation, it could be measurement, it could be identity or it could be collaboration. So increasingly, we're going to be just talking about the platform and not a discrete element called Safe Haven. Safe Haven is our platform. To your specific math though, as we go through this transition, Safe Haven influenced ARR is up about 62% year-over-year. It's gone from roughly 20% of ARR to about 29%, again, year-over- year, so up 900 basis points. I’m on for Nick Zangler. So we were wondering, as [Fast] services continue to proliferate with like Vita announcing today. We were just wondering about your exposure to that and if it's visible enough for you to frame up how that's contributing to CTV growth, if at all? And maybe just any long term thoughts on [Fast]. I would -- let me kick things off. And we want to comment -- and maybe Scott with specific things that may or not have been announced. But big picture think about our TV strategy. And our TV strategy is to make every impression addressable. So for us, we have partnerships with all the major MVPDs, with DISH, with DIRECTV, with all the major publishers, whether it's Fox, Tubi, Paramount, Warner Media, Hulu, Roku, today, we announced Disney and also in mobile. So as we think about our approach to CTV, it boils down to that first statement, we intend to make every impression addressable and CTV is an important part of the overall value that we create. I mean I don’t know if I have much to add other than as some of the streaming services start to accept advertising, you can get a nice revenue bump simply through volume. But that gives you one quarter. The next quarter, the volume doesn't grow infinitely, you have to start turning the yield lever. And the only way you improve your yield is through better targeting, both context and user and that's what we provide. So I look at things like this as an opportunity for us and it feels a lot like the business that we've been in forever. Great. Well, thank you, operator, and thanks to all of you for joining us today. Let me conclude again with just a few final thoughts. First, we're really excited about the markets that we play in. There are big long term opportunities and we believe that we are playing and demonstrating our right to win, whether it's in identity, whether it's in data collaboration, whether it's in measurement or whether it's in marketplace and then doing so wherever data may reside. Second point would be we are in an uncertain environment. And I'd repeat the three big takeaways you should walk away with for FY24. You're going to see us forecast a conservative top line, you're going to see us give guidance that will involve significant margin expansion, and you'll see a strong return of capital. And then finally, we hope all of you are going to join us at RampUp on February 28th and March 1st. We've got a great lineup of customers, clients and partners and competitors, and everybody else who will be in attendance and we'd love to have you there. So if we can help with your registration, please reach out to Drew or Cassandra. With that, again, thank you, and we look forward to the follow up calls.

EarningCall_328

Good afternoon and welcome to the Moelis & Company Earnings Conference Call for the Fourth Quarter of 2022. To begin, I will turn the call over to Mr. Matt Tsukroff. Good afternoon and thank you for joining us for Moelis & Company’s fourth quarter 2022 financial results conference call. On the phone today are Ken Moelis, Chairman and CEO and Joe Simon, Chief Financial Officer. Before we begin, I would like to note that the remarks made on this call may contain certain forward-looking statements that are subject to various risks and uncertainties, including those identified from time-to-time in the Risk Factors section of Moelis & Company’s filings with the SEC. Actual results could differ materially from those currently anticipated. The firm undertakes no obligation to update any forward-looking statements. Our comments today include references to certain adjusted financial measures. We believe these measures, when presented together with comparable GAAP measures, are useful to investors to compare our results across several periods and to better understand our operating results. The reconciliation of these adjusted financial measures with the relevant GAAP financial information and other information required by Reg G is provided in the firm’s earnings release, which can be found on our Investor Relations website at investors.moelis.com. Thanks, Matt. Good afternoon, everyone. On today’s call, I will go through our financial results and then Ken will comment further on the business. First, we achieved $202 million of adjusted revenues in the fourth quarter. For the full year, our adjusted revenues of $970 million were down 38% from the record prior year. Regarding expenses, our full year compensation expense ratio is 63%. For the full year, we reported a non-compensation ratio of 15.6%. The increase in full year non-compensation expenses is largely due to a normalization of travel and related expenses. Looking to the first quarter, we expect non-compensation expenses to be in the $40 million range, excluding episodic transaction-related costs. Our full year pre-tax margin is 22.5%. Regarding taxes, our normalized corporate tax rate for the year was approximately 27% and our effective tax rate was approximately 22%. The difference is driven primarily by excess tax benefits related to the delivery of equity-based compensation in the first quarter of 2022. We may recognize a tax benefit in the first quarter of 2023 related to the annual vesting of RSUs later this month. For purposes of quantifying the excess tax benefit, we expect the impact to EPS to be approximately $0.01 for each $1.25 difference between the vesting and breakeven price of $36 per share. Regarding capital allocation, we remain committed to returning 100% of our excess capital. Our Board declared a $0.60 per share dividend. We will have returned approximately $316 million to shareholders with respect to the 2022 performance year, which includes this declared dividend. And lastly, we continue to maintain a fortress balance sheet with $413 million of cash and liquid investments and no funded debt. Thanks, Joe. Before I begin, I just want to thank our bankers and the entire organization for their focus on our clients and their commitment to excellence in what has been a challenging year for M&A in the capital markets. The financing markets are the lubricant to complete M&A and financing has been a challenge. Despite the difficulties of completing transactions, our new business origination activities remained strong. However, as long as access to capital is limited, M&A transaction volumes are likely to be less robust. We also price our services based on transaction values, which have been lower. And at the same time, we are experiencing inflation in our costs, primarily compensation. The current business environment, however, is the reason that we have maintained an unlevered balance sheet since our founding. This environment will change and our goal is to be ready for it when it does. Restructuring activity is increasing, but this cycle will be longer to fully develop. However, it might also be more sustainable over a longer period of time. Companies took advantage of attractive debt markets between 2019 and 2021 to refinance their debt and are now just beginning to see the higher – the impact of higher interest rates. Again, global market capitalization has doubled since 2012 and private equity AUM has more than tripled over the past 10 years. As markets expand, transactions follow and there will be increased demand for high-caliber bankers operating within a focused organization, delivering comprehensive advice. This is the opportunity we are pursuing and the reason why we continue to build for the long-term. We hired 4 new managing directors and promoted 8 since the beginning of the year. By continuing to invest in the platform, I remain confident in our ability to execute for our clients, employees and shareholders. Thanks. This is Brian McKenna for Devin. So I am curious how dialogues with sponsors have trended thus far in 2023 relative to the last couple of months in 2022. Has there been any pickup in conversations? And then are you seeing any early signs of dialogues starting to move through the process toward formal announcements? Yes. I’d say it’s fairly volatile. And I think the sponsor dialogue has been improving pretty significantly as of the start of the year. There is an opening in the financing markets. We have actually seen a dividend recap deal, which in the sponsor community is a pretty significant event. Terms are better. But it remains to me very volatile as these markets, as I said I think Chairman Powell effectively shutdown the market or really market deteriorated pretty significantly in the September speech at Jackson Hole. Last week in the beginning of the year, a lot of the market has taken it to mean party on and started to get fairly optimistic, at least part of the market. But I think it remains volatile. As I said, the indication that we are all waiting around for a single individual statements to me is an indication that the market is not healthy. We hadn’t done that for 5 years before that. It’s probably not a good indication. But again, the activity level I would have to characterize is getting more active over the last 3 or 4 weeks than 8 weeks prior and maybe significantly so, at least in conversation, I might even say significantly so, but we will see if the markets hold long enough to complete some of these. Okay, great. Thanks. And then just a question on the comp ratio, assuming the first half of this year is still somewhat slow and then if revenues start to normalize in the back half of the year, should we expect the comp ratio in the first half to be in a similar zip code as the back half of 2022 and then you will kind of true that up into 3Q and 4Q or should we expect somewhat of a steady accrual throughout the year? I am going to turn it over to Joe for the first quarter, because we do have some events in the first quarter that always cause us to have a differential in timing. Our belief is that the general comp ratio of the firm should fall between where it fell over the last 3 or 4 years. Again, depending on revenues because our comp ratio did increase last year based on a very difficult market and our desire to hold the culture and team together. So again, depending on the revenue, I think that’s the range we are viewing for the entire year. But I want to turn it over to Joe, because we have some first quarter… Yes. So in the first quarter, that – in a couple of weeks, we will be granting equity. We expense all the equity granted to retirement eligible partners at the time of grant. Accordingly, our pre-bonus comp expense is likely to be much larger in the first quarter than the next three. So within a challenging revenue environment, which we are still experiencing, the comp ratio is likely to be higher than the target ratio. And I would imagine that we would think of, whatever, probably what you were just describing, it’s probably the 6 to 8-point spike in the first quarter. But again, we expect that the full year ratio will settle back, assuming again, revenues pick up. Thank you for your question. The next question is from the line of James Yaro with Goldman Sachs. Your line is now open. Good afternoon, Ken and Joe. I just wanted to return to previous comments that you made, Ken, in December around the middle markets slowing down quite precipitously. And maybe that’s not exactly your language. But I guess the question is, how would you compare and contrast the dialogue across larger versus middle-market firms and in terms of your expectations for which might come back to transacting on the M&A side first? Okay. So I will start with the strategic dialogue. It’s been pretty active. I found the strategics to be – it’s a good time. They don’t have – they have most of it when you talk about investment grade strategics has access to financial markets. They – it’s a good time for them. The financing markets have moved in basis points, not in availability and they do have goals they want to achieve. So they have been actively discussing and a significant amount of transactions. Some of that – by the way, I do think some of the regulatory environment is also impacting that to the negative, but there is a lot of dialogue there. On the sponsor community, I believe there is a huge pent-up demand. Sponsors cannot sit still. I am not sure it’s that different within large and middle-market because both are trying to figure out an economy and a cost of capital that makes sense for them to invest in. So I think some of the larger ones have switched their focus maybe to providing other sorts of capital and might be more active just because they can more easily deploy their capital in other areas and maybe they also have – get more pockets of alternative capital, providing solutions, preferreds, things of that nature. But the dialogue is definitely, I’d say, improving. I think October, November, December you really had a wait-and-see attitude. They knew that they were in the middle of a cycle of interest rate raises. I think now you’re starting to see people take a view that we are possibly near the end. Some people want to be more aggressive on that, but that’s what makes markets. But I think you are having some part of the market say I think I see one or two raises. And as soon as that’s done, I really think most of them feel like it’s time to start figuring out prices, accessing financing markets at the new levels and moving on. Okay, that’s incredibly helpful. Just for my follow-up, when you think about some of the – putting aside M&A and restructuring, what do you think about your capital advisory businesses, in particular, the sort of fundraising businesses, how do you expect that – those to perform over the course of 2023 and what appears to be a somewhat more challenged sponsor fundraising backdrop? Well, last year, I think last year was a unique year. There was a lot of capital committed going into the year, then everybody talks about the numerator-denominator problem. You had a shrinkage in the denominator, total assets under management as all assets shrunk. And therefore, people ran out of ability to commit. Now I think that slate starts clean in January. And again, it will depend if the denominator holds and we have markets – public markets that hold. So I think that might return over the course of the year to a positive fundraising market. And what we’re really focused on is more secondaries, continuation funds, a little more higher value-add part of that process. And I do think that we will be active. And we’re building into that part of the private equity services much more than primary fundraising. Thank you for your question. The next question is from the line of Ken Worthington with JPMorgan. Your line is now open. Hello. Good evening. This is Michael Cho for Ken. Thanks for taking my question. Ken, Joe, I just wanted to just touch on your restructuring business. I was hoping I can – we can just get some updated commentary on kind of how mandates have trended sequentially? And if there is any particular industries or geographies that have been more active than others recently? So on the geographies, I can’t discern a real difference. I mean I think the main markets are Europe and the U.S. where you see they are pretty much going into the cycle in a similar way, facing the same issues, whether people want to get ahead of the cycle and manage their liabilities. What was interesting is, again, we’ve said it was slower than the crisis restructuring markets of ‘08, ‘09 and even COVID. But this idea that the maturity wall was going to force people to – there is always a discussion if there is a large maturity wall in ‘24 and ‘25, I think. I think – I do not think that maturity wall will be as much of a motivating force as people are thinking. If the market stays at least where it is today, all of a sudden, financing markets are opening up, people are finding solutions to not restructure but to access capital. By the way, it’s one of the reasons why I think the previous questions was about our private funds group, but we have beefed up our capital advisory group because we think innovative financings around that marginal one turn of leverage that you just have to solve in order to access the bank market and the private lending market. We think there’ll be a lot of activity around that last turn of leverage that just keeps companies from having to enter restructuring. And that might actually be more active than the restructuring that every – that people were focused on. Again, it is improving, but I do think we’re not seeing stress. I was just with a major – one of the leaders of a large group of private equity firms and they said there is no distress in the portfolio, no defaults. And companies are actually performing. And if the financing markets come back, I think the wall will take care of itself. Now that’s a lot of what ifs though that the financing market could change and as I say, in a Jay Powell speech. But for now, they are trending in the direction of being accessible. That’s great. Thanks for the color. And I guess just to follow-up on that. And just relating to your business today in terms of restructuring, I guess, behind those comments, I mean, is it fair to say you’ve seen some, I guess, deceleration of growth in terms of the mandate trends or for the pretty strong for the quarter as well? They have been accelerating and they were building toward what I think was everybody looking – again, when I say everybody, there is always a restructuring going on somewhere even in a good economy, 1% or 2% of the companies are having distress that needs to be addressed immediately. But the idea of getting in front of a ‘24, ‘25 wall, which was in – it was getting in vogue in the late part – half of last year that there would be no access, so get ahead of it. I think you’re going to see companies delay and think about whether or not the financing markets might open again and give them a chance to regular way finance. So yes, our backlog is increasing. Our M&A – our restructuring volume was up significantly year-over-year, but the idea that the wave of ‘24, ‘25 maturities would cause people to accelerate their plan to address their liabilities. I think it’s slowing down a little bit. I think there is a hope and a belief that the capital markets might open and give people a regular way access to refinancing. Okay. Great, great. Thank you. And if I could just squeeze one more in on the other side of the business when we kind of think about the M&A environment. I mean, you’ve made it clear around retaining culture and continuing to invest and the MD headcount continues to develop as well. I guess just near-term, just given your statement around caution around the deal environment, I mean, do you think there is kind of a stabilized or normalized MD count number for this type of environment looking ahead in the near-term? Which type of environment are you referring to? The environment seems – it’s like this weather and you’re living in New Hampshire. As I said, look, we want to build – we have a lot of white space we can build to. What our goal in managing the company we do it every year is to go through our labor force which is now 1,000 people and figure out who’s not right, who’s not going to – who’s not the right skill set and proactively address that and then continue to build around people who can address it and create quality. I do believe we are going to look back. At some point, I hope it’s months and soon, but there is a large pent-up demand for our clients to transact and to move forward. And lastly, one of the challenges we have is those clients, which we fought hard to get in the front door, both strategics and sponsors, we talk about sponsors. But behind every sponsor transaction is an actual company with the CEO and a CFO who we get to know these things aren’t awarded like apples off the tree, you develop relations and expertise in that system as well. And we can’t go dark on them and just say, so long your team is not around for the next 6 months, but we will hire a team back when you want to transact. So I think we will continue to grow the footprint, but we will continue to also be very diligent in making sure that we’re focusing on the bottom couple of percentile that we think does not make it and be very careful, especially in a bad environment that we’re analyzing that carefully and moving as quickly as we think we – as we should. Thank you for your question. The next question is from the line of Brennan Hawken with UBS. Your line is now open. Hey, good afternoon, Ken. How are you, Joe? Just wanted to follow-up on that a little bit and maybe clarify. So has some of that work already started on going through and parsing through the workforce and the talent you have and the bankers and whether or not everybody’s got the right skill set because when you look at – I think it’s 151 MDs in the release, it seems like that includes the eight promotions and the four external hires suggest that the year-end was like around 139, but maybe there was already some review or maybe I’m not backing into the right year-end number. So has that review process begun already? And what was the year-end MD headcount? Well, first of all, that review happens every year. And sometimes during the year, that’s our job, is to manage that workforce and stay on top of it. And Joe has just shown me what the end of the year headcount was. 142, the answer to your end of the year headcount. But look, we do that every year. And all I’d say when it gets tough, you might – if the bar is 2%, you might go to 3% of the system. We’re not looking at it as a change, Brennan. We’re looking at it as something we do every year. We do it midyear. We do it all year, by the way. We have these conversations. We don’t wait and do it once a year. But that’s always ongoing. And so yes, the answer to you is that, that process has begun because it’s continuous. Fair enough. A good hygiene. I get it. So the – I’d love to clarify, you guys gave a little color on near-term expectations of comp ratio and whatnot. It sounds like we will see some noise here and you seem to expect that the comp ratio will come down as the revenue ramps. So the ratio seems like maybe in this environment so uncertain, maybe more of an output. So another way to maybe ask the question might be how should we think about fixed expense comp. And you spoke – I think, Ken, you spoke to continued inflation in banker cost. Is that on the fixed side? Or is that a comment about recruiting? And how much should we think about that fixed expense base growing in 2023 based on what you know today? Yes. Well, we don’t have a fixed expense side that we keep – if you – first of all, the managing director pool of the firm is down very significantly in-line with revenues. You can think on that. I don’t have the exact number. I can get it for you. But the managing director pool, which we view as our equity partners and the outcome of the firm are very definitely down. What happens is I think we all fought – all the firms, especially probably the boutiques, fought very hard to keep their talent. 2021, I get my years mixed up. But 2021 was a very difficult year to maintain your workforce in the light of what was a very significant deal stream. So – and then what happened in 2022 is I think everybody wanted to keep their quality people. We worked really hard to keep them. And there is been some softening, but not much. The inflationary impact on the non-managing director workforce is – I would just say that compensation level is much stickier than it is for people who are promoted and our equity partners in the outcome of the firm as managing directors. And when you were talking about the comp ratio, I just want to be clear that we do expense this and it must go in the time period it is in from what I understand, what we call retirement-eligible equity. It just happens to hit in that quarter. And it’s – we expect our comp ratio to be back in line. It’s not dependent solely on revenue. There is a significant one-time sort of comp charge that we get hit with on retirement-eligible equity awards in the first quarter. Right. And it’s that combined with potentially a more challenging revenue that will give rise to the comp ratio issue that we described earlier. But I – we have talked about it in the past. We used to disclose fixed, but none of our competitors do. We are at a competitive disadvantage and we really don’t want to start sharing that detail. We don’t disclose it. Yes. That’s why I was trying to ask for a growth rate rather than an absolute number. I get it. And is the cadence of the quarterly dynamic similar to how it was at least proportionally when you used to disclose it, so we could think about it at least from that seasonal pattern? I think you are probably – I think that would probably be difficult. I am not sure that you would be able to extrapolate that maybe on a full year basis. But again, you would have to embed some inflation in that as well. Alright. I will stop trying to poke around here, because I don’t think you guys want to play Pat-a-Cake with me. Shifting gears a little bit here, Ken, your comments, you recognized the short-term environment is somewhat cautious, but you are optimistic over the long run, that’s fair. What – based on what you can see today and what your expectations are, do you think it’s – 2023 will be a year where you can grow revenue, or do you think that the challenges are pretty significant and it’s kind of hard to make that call at this stage? I hope it is. But it’s almost impossible. I think anybody making that call would have to be sitting somewhere in the Fed Chairman’s brain at this point. And I think, by the way, that’s – my view is that’s an unhealthy economy. We never had this commentary. I don’t remembering sitting there wondering, will the Fed Chair smile at the next meeting or what will his intonations be. For the first 7 years, we were a public company. So, again, I am optimistic because I think there is such a pent-up demand to do things. The economy is – it’s a dynamic economy and there are great CEOs and the private equity guys have a lot of capital and they also own a lot of companies. They need to realize value on. There have to be transactions at some point. And how quickly that happens is a little out of my control. But I want to be there when it happens because you – I was just at a pitch today where we are talking to a client, six managing directors in the room. And I would say the average experience that we have – most of those people were together for 15 years or 20 years, partners. That comes across the client relationship, the culture of the firm being that deep and knowledgeable about each other and being able to finish each other’s sentences and know what we want to accomplish. In my mind, that’s worth keeping. You can’t – to the extent you want to be smaller for a couple of minutes, that’s a really bad decision when you give up that asset, the asset of a culture and an ability to communicate with 20 years of knowledge of each other. So, again, that’s a long answer because I really don’t know. But I am fairly optimistic that when it stops, when I think the economy or the markets and feel people get a feeling that the Fed has stopped, I think you will see a spring uncoiled that will be pretty dramatic. Thank you for your question. The next question is from the line of Matt Moon with KBW. Your line is now open. Good afternoon. Just a couple of clarifying questions for me. Previously, you have talked about kind of the contribution from restructuring being kind of anywhere between 20% to 25% of revenues, just kind of curious as to where that stood in the fourth quarter and kind of given your commentary just given the backdrop in the environment, is it possible to see that kind of trend higher than the upper bound of that range kind of in the near-term? Yes. So, I think the restructuring, again, it’s hard for us to break out totally, but we think it was closer to 10% in the fourth quarter than 20% or 25%. And that’s probably – I think that’s the full year that I gave you. Sorry, 10% for the full year and the fourth quarter might be up a little bit. Look, it is possible. But this feeling that there was an immediate wave coming, the company results are not that bad yet. And the financing markets are showing a little bit of blue sky. And so again, we continue to have a lot of conversations at firms that are talking to us about how to negotiate problems they are in. Some of those might be just to refinance their debt at some point, because the results are good enough and the financing markets open up at a new interest rate. That’s not good. If you are a private equity firm, look, that’s not perfect for your rate of return on the equity. But it is what it is and they will refinance rather than restructure, which is smart. So, we will see where that all goes. And if the market – to your point, if the market has another serious downturn or we are all wrong and the Fed has to go to 6% instead of 5%, yes, I do think you will see a rather significant kick-up in restructuring and it can become that big a force. But I just want to be clear as of right now. This market doesn’t feel like that’s happening in the short-term. Understood. Makes sense. And then shifting gears, Joe, just a couple for you as well, just curious on the comments just related to kind of the one-time step-up in the first quarter related to the comp ratio of 6 to 8 percentage points. Is that off of the full year 2022 number, or was that after the first quarter of last year? And then once we get to the first quarter when we received that comp ratio, is it fair to think about the full year expectation at that point just excluding that 6% to 8% figure? Yes. So, the first question is what’s the base? And I would say it’s the end of year, the 63% is the base on which I would take the 6% to 8% spike. And then over the course of the year, we would expect, again, revenue dependent to get back to the kind of low to mid-60. Yes. Understood. And then last one is just related to the buybacks. It seemed pretty minimal in the quarter. So, just curious, just in terms of after a strong year for buyback activity if we should assume given the environmental comments that should be a little bit more cautious on that front kind of at least for the next couple of quarters. I don’t know. I can’t predict the next couple of quarters, but I would say for the next quarter given the current environment, I would be cautious. But of course, we have this February, we have a vesting event and part of the vesting event is a buyback that’s embedded in that. So, that’s already kind of factored in. Thank you for your question. The next question is from the line of Steven Chubak with Wolfe Research. Your line is now open. Good evening. This is Brendan O’Brien filling in for Steven. So, to start, I guess I wanted to ask on the non-comp expense. It came in lighter than what we were anticipating this quarter. But based on the guidance, it sounds like you are expecting a pretty meaningful step-up sequentially here. So, I was hoping you could unpack what is driving that sequential increase and how we should be thinking about the trajectory in non-comps for the remainder of the year? Yes. So, I would not consider that as – I mean as a sequential increase math-wise, but I think I have been communicating or guiding that 39 to 40 is our underlying run rate. I don’t see much of a change to that. And what happened in the fourth quarter was just a series of small non-recurring benefits that basically added up to a fairly meaningful change. But it’s not something that I would be counting on. It’s – the run rate is still the same kind of 39, 40, again, prior to any transaction-related charges that happen episodically. Got it. Thanks for that color. And then I guess, Ken, I believe it was last quarter that you indicated that you believe activity would accelerate once there was greater certainty around the path of interest rates. Given we are getting closer to the end of the rate hiking cycle, I want to get a sense as to whether you still expect the Fed pause will serve as a catalyst potentially, or do we need to see how the environment or the impacts through the macro economy kind of play out before you feel like strategics and sponsors will feel comfortable dipping their toes back in? No, I think look, if you get – if the Fed paused today, if there was a breaking newsflash on CNN, Fed announces it’s done. I think you would see activity rip. I really believe that. Remember, what you are seeing now, though, and I keep – is our fourth quarter, which we are announcing today, is probably transactions that at best started their earth in September, October. The first quarter is a reflection of the activity in the conversations you probably had in October and November or maybe September, on some strategic deals, it could go back as far as a year ago. So, when we announced our quarter, I need to say we are almost reporting on the activity of ancient history. It just takes that long to get to the revenue line. So, the first quarter is going to reflect November, December or October, November, December, some point like that. If – as you said, if you could – if you told me that the Fed announced today that was done, I would say we don’t have enough people. We need a bigger boat. I think it would move very rapidly. Now, I am not expecting that, but you asked the question. Thank you for your question. There are currently no further questions registered. [Operator Instructions] There are no additional questions waiting at this time. So, I will pass the conference back to Ken Moelis for any closing remarks.

EarningCall_329

Good afternoon, and welcome to Ares Capital Corporation's Fourth Quarter and Year Ended December 31, 2022 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded on Tuesday, February 7, 2023. Good afternoon, everybody. Let me start with some important reminders. Comments made during the course of this conference call and webcast as well as the accompanying documents contain forward-looking statements and are subject to risks and uncertainties. The company's actual results could differ materially from those expressed in such forward-looking statements for any reason, including those listed in its SEC filings. Ares Capital Corporation assumes no obligation to update any such forward-looking statements. Please also note that past performance or market information is not a guarantee of future results. During this conference call, the company may discuss certain non-GAAP measures as defined by SEC Regulation G, such as core earnings per share, core EPS. The company believes that core EPS provides useful information to investors regarding financial performance because it is one method the company uses to measure its financial condition and results of operation. A reconciliation of core EPS to basic and diluted net income per share, the most directly comparable financial measures can be found in the accompanying slide presentation for this call. In addition, the reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on Form 8-K. Certain information discussed in this conference call and the accompanying slide presentation including information related to portfolio companies, was derived from third-party sources and has not been independently verified. And accordingly, the company makes no representation or warranty in respect of this information. The company's fourth quarter and year-end December 31, 2022 earnings presentation can be found on the company's website at www.arescapitalcorp.com by clicking on the fourth quarter 2022 earnings presentation link on the home page of the Investor Resources section. Ares Capital Corporation's earnings release and Form 10-K are also available on the company's website. Thanks, John. Hello, everyone, and thanks for joining our earnings call today. I'm here with our Co-President, Mitch Goldstein and Kort Schnabel; our Chief Financial Officer, Penni Roll; our newly appointed Chief Operating Officer, Jana Markowicz and other members of the management team. For those of you who don't know ready know, Jana has been an important member of the Ares direct lending team for over 18 years, and we're delighted to have joined the executive team at Ares Capital. Jana currently serves as a Chief Operating Officer, Head of Product Management and Investor Relations for our U.S. Direct Lending strategy. Our newly pointed President, Kort Schnabel will speak later in the call, but I'd like to formally welcome him as well. Kort has been instrumental in helping us grow and manage the U.S. Direct Lending business over the last 19 years, and we're thrilled to have him on board. A warm welcome to both of them. This morning, we reported strong results for the fourth quarter and the full year. We generated record quarterly core earnings per share, $0.63. This 26% quarterly increase in core earnings was largely driven by the benefit of rising market interest rates and our net interest income, but also from strong capital structure and fee income on the fourth quarter transactions. For the year, our core EPS of $2.02 matched from a prior record in 2021. On a GAAP basis, our fourth quarter and full year earnings of $0.34 per share and $1.21 per share, respectively, were below our core earnings and has been recognised $0.03 per share and $1.08 per share, respectively, of net unrealized depreciation due largely to widening market yields. Despite these markdowns, which we've taken stride with the transitioning market, we generated net realized gains from the full year 2022 as we continue to deliver positive realized gains in excess of our losses. The realized gains and losses is the more important metric in grading our performance than the unrealized gains and losses, which has substantially less impact on our long-term results. In our view, our track record of strong credit performance compared with other BDCs demonstrates the merits of our long-tenured proven investment process as we work to deliver differentiated results to our shareholders. I'd now like to shift and provide some thoughts on the market and the economic environment. 2022, as a year of transition for the U.S. economy and one that brought significant volatility to the capital markets. As overall capital formation slowed in both the liquid and private credit markets, we believe the competitive dynamics and the risk-reward environment for Ares Capital shifted positively can be as attractive as we've seen in quite some time. Market spreads on new deals are at least 100 to 150 basis points higher than at year-end 2021, and we believe that the total return opportunity afforded by the higher base rate in addition to the spread expansion is very compelling. These enhanced economics are being achieved in transactions that also have reduced leverage and meaningfully better documentation. We think this is an exciting development for our new investment business, and we remain active in the market. To dig in a bit deeper, the senior loans that we originated in the fourth quarter had a weighted average yield of more than 10.5%, with weighted average leverage less than 5x debt-to-EBITDA. Many of these investments focused on larger businesses. We provided loans to companies with a weighted average EBITDA of more than $500 million in the fourth quarter. We believe the volatility of 2022 also continues to widen the fairway for us and to expand the market in direct lending generally. Larger companies continue to shift their focus to private capital alternatives as a preferred and more reliable source of financing for their businesses. And with challenges faced by the banks due to risk capital constraints and the lack of liquidity in the syndicated market, we believe private lenders have steadily gained share throughout 2022. This has led to our involvement with larger companies. At year-end 2022, the weighted average EBITDA of our portfolio companies reached $275 million, an increase from $162 million at the end of 2021 and meaningfully above the weighted average from 5 years ago of $62 million. We believe this offers significant benefits to Ares Capital as we grow as larger companies generally have stronger credit profiles as a result of more diverse revenue streams, broader customer bases and more experienced management teams. As demand for our capital solutions has grown, we've responded by continuing to augment our direct origination capabilities through continued hiring and the addition of new capabilities. Today, we believe we employ the largest direct lending team in the United States with approximately 170 dedicated investment professionals. We believe that the scale of our team enables us to have complete market coverage by industry and by geography and to drive compelling opportunities in every channel that we target. For example, despite a 22% drop in U.S. M&A volumes, and a 45% decline in broadly syndicated transaction volumes in 2022, we reviewed more than $500 billion in transactions. This volume is comparable with or even slightly higher than the amount we reviewed in 2021, which was the busiest year in the company's history. Despite this, during periods of volatility, our inclination is to become incrementally more selective on new deals and utilize the experience of our large and tenured portfolio management team to focus on risk management efforts. We do have an expectation that a slower U.S. economy and the higher rate environment will create more stress in the portfolio, and we're focused on getting ahead of it as we have in past economic and market cycles. Led by partners with an average of over 15 years tenure at Ares, we believe we have the largest and most experienced portfolio management team when compared with other direct lenders. And this team works in collaboration with our core investment teams to actively monitor and engage with our borrowers and sponsors. Our goal is to identify problems early and develop strategies to maximize our outcomes in companies that are underperforming to plan or having more difficulty in the higher interest rate environment. The economic benefits from our credit and portfolio management process have led to a strong culture focused on downside protection and risk mitigation in our lending activities. Since inception, Ares Capital has generated a cumulative 1% net realized gain rate on our investments. This means that along with generating gains on many investments, we have also successfully minimized losses in the portfolio in more difficult times. One statistic to call out here, we've actually achieved about 0.9x multiple on invested capital on all the loans that have been placed on nonaccrual over the years. Despite the more challenging backdrop and the higher prevailing interest rates, we feel the portfolio is defensively positioned today due to our long-standing underwriting strategy of focusing on market-leading companies with high free cash flows and what we believe to be resilient industries. Using market interest rate levels at year-end, our overall interest coverage for the total portfolio was 1.8x. These strong coverage metrics allowed us to receive 99% of contractual interest in our portfolio during the fourth quarter. The health of the portfolio is also demonstrated by stable weighted average portfolio grade and nonaccrual rates to remain quite low relative to historical averages. Finally, the strength of our portfolio continues to benefit from the substantial amount of equity invested in our companies. Most often from large and well-established private equity firms. At year-end 2022, we calculated the weighted average loan-to-value in the portfolio to be approximately 45%, which we believe gives us strong cushion to the downside in these loans. These metrics, along with our positive view of the company's earnings power, support of our decision to increase our regular quarterly dividend 3x during 2022, moving from $0.41 per share in the fourth quarter of 2021 to $0.48 per share in the fourth quarter of 2022 which builds on our long-term track record of delivering consistent dividend growth. 2022 represents our 13th consecutive year of stable or increasing regular dividends to our shareholders. Supplementing this growing regular dividend, we paid $0.12 per share of additional dividends in 2022, resulting in $1.87 per share of dividends for the year, which represented a 15% increase in total dividends versus 2021. With that, let me turn the call over to Penni to provide more details on our financial results and some further thoughts on our balance sheet. Thanks, Kipp. For the fourth quarter of 2022, we had a record level of core earnings of $0.63 per share compared to $0.50 per share in the prior quarter and $0.58 per share in the fourth quarter of 2021. For the full year 2022, our core earnings per share was $2.02, matching the core earnings per share for 2021. Our 2022 earnings significantly benefited from the increase in market interest rates driving a 17% increase in net interest and dividend income per share as compared to 2021. The growth in these recurring earnings roughly offset the decline in capital structuring fees in 2022 relative to the higher fees earned during the more active 2021. On a GAAP basis, we reported GAAP net income per share of $0.34 for the fourth quarter of 2022 compared to $0.21 in the prior quarter and $0.83 in the fourth quarter of 2021. For the year, we reported GAAP net income per share of $1.21 compared to $3.51 per share for 2021. Our core earnings for 2022 as compared to 2021 and was stable year-over-year, where our GAAP net income for 2022 was reduced by the net unrealized depreciation taken on the portfolio throughout the year, driven primarily by market volatility. Conversely, our GAAP net income for 2021 benefited from the net unrealized appreciation seen on the portfolio throughout that year as we saw a rebound from valuation declines incurred in 2020 as a result of COVID. While we have seen volatility in asset values over the past few years, our underlying portfolio continues to perform well through this volatility, as Kipp mentioned earlier. Our stockholders' equity ended the year at $9.6 billion or $18.40 per share compared to $9.4 billion or $18.56 per share at the end of the third quarter 2022 and $8.9 billion or $18.96 per share at the end of 2021. Our portfolio at fair value at the end of the year grew to $21.8 billion, up modestly from $21.3 billion at the end of the third quarter and more meaningfully from $20 billion at the end of 2021. The weighted average yield on our debt and other income-producing securities at amortized cost was 11.6% at December 31, 2022, as compared to 10.7% at September 30, 2022, and 8.7% at December 31, 2021. The weighted average yield on total investments at amortized cost was 10.5%, which increased from 9.6% at September 30, 2022, and 7.9% at December 31, 2021. The yields on our portfolio reflect rates given our predominantly floating rate loan portfolio. Shifting to our capitalization and liquidity. We ended the fourth quarter with a debt-to-equity ratio net of available cash of 1.26x. Pro forma for the $223 million equity offering that we closed in January of 2023, our debt-to-equity ratio, net of the available cash declined to 1.21x. Our liquidity position remained strong with approximately $3.9 billion of total available liquidity, including available cash, pro forma for our financing activities in the beginning of this year. After accounting for the $750 million of unsecured notes that come due this month, our next nearest debt maturity is not until March of next year. With this level of dry powder, we believe that we remain well positioned to take advantage of the current investing environment. As Kipp stated earlier, we declared a first quarter 2023 dividend of $0.48 per share. This dividend is payable on March 31, 2023, to stockholders of record on March 15, 2023, and is consistent with our fourth quarter 2022 dividend. We continue to consider our taxable income and the amount of spillover when setting our overall dividend. We recognized that we had a strong level of core earnings for the year, which far outpaced the total dividends we paid. When looking at our taxable income for the year, our current estimate of undistributed taxable income sometimes referred to as our spillover at year-end 2022 is $675 million or approximately $1.27 per share after considering the shares issued in our January equity raise. This spillover reflects the realization of a tax deduction related to a legacy Allied Capital investment which reduced our total taxable income for the year and thus reduced our spillover. After considering this deduction, our estimated spillover for 2022 is generally in line with the $678 million that we carried over last year. Importantly, this 2022 spillover level is more than 2.5x greater than our current regular quarterly dividend rate. We continue to believe that having a healthy level of spillover income is beneficial to the stability of our dividend. We will continue to monitor our undistributed earnings and balance these levels against prudent capital management considerations. With that, I would like to welcome Kort to his first Earnings Call and will now turn it over to him to walk through our investment activities. Thanks, Penni, and hello, everyone. Before I get started, I just want to say, after 21 years at Ares I could not be more excited to serve as new Co-President of Ares Capital Corporation and for the opportunity to help lead our company into the future. I look forward to spending more time with all of you on the phone here in the months and years ahead. Okay. Let's move it forward, and I can provide more detail on our investment activity and portfolio performance for the fourth quarter. I will then conclude with an update on post quarter end activity, backlog and pipeline. Over the course of 2022, we completed over 180 investments across 23 distinct industries. In line with the overall loan portfolio, the top 3 industries where we made new financing commitments in 2022 were software and services, health care services and commercial and professional services. Our new investments were made into what we believe are high-quality companies, which present opportunities for attractive risk-adjusted returns, driven by lower leverage levels, tighter credit documents and higher spreads. As we've seen in the past, periods of volatility amplify the secular shift towards private capital. This dynamic is clearly illustrated by LCD's recent report which shows that 98% of the new LBO issuance in the fourth quarter of 2022 was completed by private capital providers, a market traditionally supported by the broadly syndicated channel. We believe that our scale, competitive position and flexible capital have enabled us to take advantage of these opportunities. Importantly, we were a lead arranger on 85% of our investment during 2022 and 95% of our investments in the fourth quarter. The ability to lead transactions is an important benefit we derive from our trusted relationships, our scale and the attractiveness of the capital solutions we provide. We strongly believe our approach provides us greater control over capital structures, pricing and documents, and longer term, better tools to drive successful credit outcomes. We also believe the size and quality of our incumbent portfolio drives differentiated access to attractive investments. In 2022, over 50% of our new commitments were to existing borrowers, which is consistent with our history. Incumbency enables us to support our strong performing portfolio companies that we know well, which we believe limits underwriting risk on new commitments. Shifting to our portfolio. As of year-end 2022, our portfolio remained well diversified across 466 different borrowers, with an average hold size of only 0.2% at fair value. Excluding our investment in Ivy Hill and the SDLP, which we believe are diversified on their own, no single investment accounts for more than 2% of the portfolio at fair value, and our top 10 largest investments totaled just 11.8%. We believe the diversification of our portfolio differentiates us from our competitors as it reduces the impact to the overall portfolio from any single negative credit event at an individual portfolio company. We also believe this diversification plays a significant role in ensuring that we have predictable revenue, which gives us confidence in the level of dividend we have declared. Kipp discussed this a bit earlier as well, but we do believe the fundamentals and overall credit performance of our portfolio remain healthy. The weighted average EBITDA of our underlying portfolio companies demonstrated solid growth in the fourth quarter, expanding 11% year-over-year. This overall healthy EBITDA growth is skewed to our larger industry concentrations, which, in aggregate, are growing at a faster rate than our smaller industry concentrations in the overall portfolio. This underscores what we believe are one of the many merits of not being a benchmark style investor as we are able to be selective, not only in regard to the companies we are financing, but also the industries we target more generally. The weighted average grade of our portfolio companies of 3.2 was consistent with last quarter and improved slightly from 3.1 in the fourth quarter of 2021. Also, our portfolio management team believes that the share of companies that were highly impacted by inflationary pressures, supply chain disruptions and staffing shortages remained at stable and manageable levels. By our measures, those impacted represent less than 10% of the total loan portfolio. Our nonaccrual rate during the fourth quarter increased slightly as we added 1 net new company to nonaccrual, resulting in nonaccruals at cost of 1.7% as compared to 1.6% in the third quarter of 2022. Our nonaccrual rate is currently below our average during 2021 and well below our 10-year average of 2.4%. Amendment activity continues to represent a small number of companies relative to the size of our portfolio, although it has picked up since prior quarter. We do expect that amendment activity is likely to increase in future periods as well, but remain manageable. It is important to note that the amendments we enter into often come with positive to us as the lender in the form of fees, incremental spread, tighter documents and sponsor equity injections. Finally, I'll provide a brief update on our post quarter end investment activity and pipeline. From January 1 through February 1, 2023, we made new investment commitments totaling $226 million, of which $158 million were funded. We exited or repaid on $372 million of investment commitments. As of February 1, our backlog and pipeline stood at roughly $265 million. Our backlog contains investments that are subject to approvals and documentation and may not close or we may sell a portion of these investments post closing. So while it's been a pretty slow start to the year, even for the typically seasonally slow first quarter, we do expect things should pick up here in regular course. Thanks a lot, Kort. We're thrilled to formally have you on board here at the company, and I know you'll add a ton of value here and Co-President with Mitch. In closing, 2022 was a year of strong performance for the company, and we believe that we're well positioned to navigate through any uncertainty that lies ahead. Our long track record of successfully managing the company throughout economic and market cycles, provides us with confidence as we enter a different environment in 2023 and likely beyond. Over the past 10 years through September 30, 2022, which is the latest full reporting quarter for all the BDCs, Ares Capital has differentiated itself versus the competition in almost every relevant performance metric. The company has delivered the highest regular base dividend per share growth rate, the highest NAV per share growth rate, the highest total return on its NAV and the best equity return on our stock. In each case, when compared with every other externally managed BDC with a market capitalization of over $700 million that's been publicly traded for the last 10 years. Let me close by saying that we're deeply grateful to our investors for the trust and confidence they've demonstrated in areas and their support to the company. I'd also like to thank our team for their hard work and their dedication throughout 2022. To start, I thought maybe we could just touch on the dividend policy. I know that you've talked about how you've approached that both today, but also in the past. I guess compared to where you were last year in paying out a small supplemental dividend per quarter, is there anything that we should read into the fact that you didn't establish something similar headed into '23, especially with the level of earnings power currently embedded in the portfolio? Melissa, it's Kipp. No, I don't think there's anything to read into it. We obviously chose to increase the dividend pretty materially. The regular dividend last quarter from $0.43 to $0.48 to obviously acknowledge the increased earnings power. We said we were going to reevaluate the spillover, which when we trued up from a tax perspective is kind of the same as it was at year-end last year. So we really tried to pursue the increase through a regular increase rather than a special. But I don't think there's anything to read into. And obviously, we have opportunities going forward to do other things, whether it's a regular increase or a special in the future. But I wouldn't read anything into it. Okay. And then a follow-up to your comments about sort of nonaccrual rates and how they compare to sort of the historical average portfolio. You did say that you expect stress to increase from incredibly low levels currently. In that context, are you expecting sort of a reversion to mean for this portfolio? Or are you expecting that to take a bit higher than the long-term average? Yes. I mean it's hard to tell. We obviously tried to lay out in the prepared remarks. I did, and I think Kort did as well. look, our expectation that it's probably going to be a more volatile year than we would expect the increase in amendment activity and all of that to lead to increases in nonaccruals and defaults, not only for us, but we expect for our competitors and focus in the business in general. Based on how we see the portfolio and the economy as a whole though, I think more of a reversion to average is likely. We get asked the question a little bit differently than you asked at most of, but I'll ask the question that we had asked instead of the one you asked, which is we don't expect the current environment is going to create an extraordinary amount of defaults that flow through historical averages. We see this as a pretty regular credit cycle where defaults are likely to go up and not exceed the averages. I think is how we're seeing things today. First question I just had was, if I look at your capital restructuring fees, they basically doubled this quarter versus the prior quarter on kind of a modest level of increasing commitments in the quarter. Was there anything kind of onetime going on in the numbers this quarter? Or is that just kind of more indicative of the current lender-friendly environment allowing you to kind of generate more economics from the deals you guys are joining? Yes. I mean nothing extraordinary. I mean I think we're -- fees generally for new deals are higher. Is the simple answer, Ryan. Yes. I mean the average fee rate on new commitments is higher relative to the average and relative to prior quarters. The other one I had, you mentioned portfolio monitoring being a big competitive advantage for Ares versus some others. And I do believe that you guys do have a more robust and deeper portfolio monitoring team. I'm just curious, can you maybe help me understand why that is a competitive advantage that if you have a business which is potentially going to come under stress because of the economic environment they're in. What can that portfolio monitor team actually go in and do that can actually create better outcomes versus a different platform who maybe isn't able to get as early or maybe be creative in their solutions? Yes. I mean I think it's -- we could go on and on about this, to be honest, for a while, but I'll try not to. I mean I think our philosophy, and Kort mentioned this, too, is we want to bring substantial flexible capital solutions into the companies that we onboard into the portfolio. The way that we underwrite and the way that we approach our transactions is a lead investor helps us, right, because we're a substantial source of capital, we have direct relationships with either private equity firms and/or companies and/or management teams, where I think we're viewed as a valued partner rather than just money. And that value partnership transitions all the way through post closing and in the monitoring stage. So I would say it's pretty easy on the companies that are performing well, right? In the LBO lending business, club financial statements, you don't do much and you celebrate the fact that the company is performing at plan or better. In the underperformers, we're able to actually leverage the nature of that underwriting the nature of that relationship, et cetera, to be very early, right? We try not to be surprised. Our management teams and the owners of companies where we're invested typically don't want us to be surprised, right? So when things are not performing to plan, we tend to be in the room. We have quality information we can often provide other portfolio company data and information in existing industries where we're particularly deep to help management teams understand some of the complexities that they may be experiencing. But it really is all about that early intervention, seeing the early warning signs and good communication. How can we help? We can help in a whole host of different ways. We can provide amendments and modifications. We can change the nature of the loans that we've underwritten because we have the flexibility to do that. We can bring capital to the table if it's needed in situations where liquidity is less than optimal. Hopefully, that gives you a flavor for it, Ray, but we go on quite a while about that. First of all, welcome to the new team members. Congratulations on your assignment to Ares Capital. Most of my questions have been asked. I just wondered the amendments and modifications that you do, they drive a certain amount of fee income. Does that show up also in capital structuring and servicing fees? And would we expect that to sort of impact the level of capital structure and servicing fees in 2023? Yes. I appreciate those comments around Kort and Jana. The amendment fees do show up in the structuring fees line, again, with the... Sorry, Penni is telling me now it shows up in the other income line. So you'll see it there. And will you see a modest increase there if there are more amendments in the portfolio? Probably. But these are huge fees. We're charging, right? They tend to be 50 basis points or less depending on severity of outcome. I want to start with a question on NII. Clearly, the earnings power of the portfolio was used to rate environment. I'm just curious what you think net investment income generation will look like when we eventually transition to a neutral rate environment? And then also to kind of follow on from a previous question, how you're balancing elevated rates versus growing the core dividend? Yes. I mean, Melissa asked the question as well about the dividend before. I mean, the answer to your question is I don't know because I don't know what the normal rate environment is going to be. I think we're working on an expectation that rates are elevated. They likely will go up from here. They likely will not stay there. We can all debate how long folks think they'll stay there or not, but our best guess would be that rates will normalize and begin coming back down. My own personal view is we're unlikely to see a 30 basis point LIBOR or SOFR again anytime soon. And that I think a lot of folks may look back is that potentially being a bit of a failed experiment. So our base case probably has rates down the line way out, normalizing down certainly from here, but my guess is as good as has as to where that is. It's been one of the reasons that we were cautious about raising the dividend as much as we did last quarter and frankly chose not to raise the dividend this quarter because we'd like a stronger view on where we see rates normalizing in the future. Okay. That all makes sense. And then my follow-up relates to the handful of companies in the portfolio that are underperforming expectations. I'm just curious to the issues you're seeing there are more specific to inflation supply chain issues or more so the impact of rising debt service costs. Yes, it's a little bit of both, to be honest. We started seeing the inflation that everyone's been reading about in the portfolio as far back as probably the fall of '21. So it's not that we weren't expecting that. I bundle a lot of these operating concerns for companies into the same bucket, whether it's need to pass through price increases, labor shortages, production challenges, supply issues, it's just harder running companies these days. I think for our management teams than it's been in a while. To your point, though, that being said, there are other companies that are not experiencing any of those issues, which simply have a lot of depth and are dealing with higher debt service costs and very limited negative influence on their overall operating results, but just dealing with higher rates. So I'd say it's a little bit of both. Can you give us any thought that you've experienced to start on house sponsors react in terms of making amendment requests or injecting capital in terms of different lines, right? I mean whether it's financial stress, i.e., higher rates, or operational strength, does that tend to or economic stress, does that tend to change how the sponsors respond in terms of in getting more capital or asking for amendments and how fast, et cetera? This is a lot of -- I mean, just high interest is one thing, but deteriorating economic environment or something else. I mean, any color on how those different environments interact with sponsors coming to you? I mean I guess the only thing that comes to mind, to be honest, is most of the sponsors that we deal with are long-standing and valued sort of relationships where we've done multiple deals with them over multiple years. And we find that when companies are experiencing issues regardless of perhaps the driver of that issue, that if the private equity firm is kind of happily invested in the company. It's a somewhat recent investment, particularly in the last fund or the fund prior to that, i.e., it's fresh and they feel that they still have the ability to generate an equity return despite a blip or 2 along the way that an amendment and often the continued investment of equity in that company is good for them and it's good for their limited partners. It tends to be good for us as well. The places where sponsors often walk away as you would probably imagine, are either companies that are materially underperforming where they don't see the ability to earn an equity return or recovery regardless of almost any outcome that you can create or potentially sort of that old fund problem, right? We do hear occasionally how it was in a fund that we raised 10-plus years ago, and we don't have any more capital to support it, the funds out of its investment period, et cetera. So I think some of that is more common than a sponsor feeling good or bad about a potential investment, whether it's rates or the supply chain, right? It tends to be just how they think about their position and obviously, their investors' capital on a go-forward basis more than anything else. Just one on the portfolio activity in the fourth quarter in terms of originations and repayments both increased sequentially. Wondering how much of that was potentially due to the normal year-end seasonality? And how much of that could be due to either a shift towards larger borrowers and/or other trends, just given the elevated activity came in despite slowing economic conditions. I mean don't know -- I mean I'm looking at Kort. I don't think there was anything unusual about the fourth quarter. I think -- it's Kort. I think it's a mix. It's what you said, it's a mix of both. It's a little bit of the seasonality. And certainly, as we're seeing larger borrowers and larger opportunities come in, that drove some of it also. And probably on the earlier fee question as well, obviously, fee rates are up, but we did have the opportunity to underwrite a few larger deals in the fourth quarter, and that helps drive some syndication and structuring fee income as well for us. Got you. Very helpful there. And just one more follow-up. In terms of the spillover income and realizing that there's some regulatory constraints around that. Are there any other specific factors or other events that could drive a decision towards either paying out a portion in terms of a special dividend versus retaining some versus increasing the regular dividend there? The weighted average -- the portfolio weighted average EBITDA up pretty substantially over the last year. How important is that in credit performance relative to other measures like net leverage or interest coverage, how important is just the size factor? It's reasonably important. I made the point in the prepared remarks, but I'll just reiterate it. I mean larger companies tend to be more diverse, right, in terms of their revenue and their profits. They tend to have greater reason to exist, right, on the downside to the extent you need to actually work things out. And in the private equity landscape, they frankly tend to be owned by larger better capitalized, better established private equity firms and almost all the time, they have better management teams and small cap companies. So I would tell you, I'd much rather lend 5x debt-to-EBITDA if it was $300 million EBITDA company that I would do a $10 million EBITDA company. And we've seen that the credit profile of these larger businesses is just better for a host of those reasons. Understood. Then looking at the backlog and pipeline, it looks like there's household, personal products, pharma, maybe that's a little more defensive. Is that -- am I reading that properly? Is that something on your part or just those deals are more likely to be getting down these days? Yes, I mean, I think we're being pretty cautious in the current environment. Those examples, in particular, things that are common industries when we target investments regardless of whether it was a backlog for this quarter or not. But yes, we're definitely taking a more defensive posture wanting to see how 2023 plays out. The backlog is pretty light as Kort was talking about going into Q1, and we're hopeful it picks up. And my guess is it will be more diversified and larger here as winter comes to an end in the spring rolls around and folks reevaluate deal activity and how to get things done for the remainder of the year. But I think that backlog, the industry mix is in line with what we've done historically. Just a question on your capital structure and that you've raised equity a few times over the past few quarters. And just curious how you look at that today versus raising additional unsecured debt? And then what that might mean for kind of your plans as you project the 23 year at this point? Yes. Thanks for the question, Erik. We don't really talk a lot about our capital raising plan. I mean, look, the equity issuance for us is a pretty strong statement that we have a desire to grow the company because we see the investment opportunity around us as being exceedingly attractive. Hand in hand with that is obviously the fact that we try to maintain a leverage ratio somewhere between 0.9 and 1.25x our equity capital base, and we're at the upper end of that. So the equity raise, there was certainly a consideration as well around the leverage ratio and how we thought about availability. Plans for raising capital or TBD, we'll see how the environment looks around us. We've got a maturity on a bond deal here in the next week or 2, if I remember correctly, which we can satisfy with existing borrowings. So we don't have any need to go out and raise that capital, but we're always opportunistic and thoughtful -- that market seems to be -- the high-grade market seems to be finally healing a little bit, and our existing unsecured notes are trading better, I'd say, more in line with market reality. So hopefully, that market is reopening for us. But we'll see for the remainder of this year, and we're probably not going to provide any comments beyond that in terms of our thoughts around capital raising, if that's all right. But thanks for the question. That was helpful, particularly with regard to the fact -- kind of the trading of those unsecured notes and that market seems to be loosening. So -- that's all I had today. This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. DeVeer for any closing remarks. Please go ahead. I don't have any other than to thank everybody for joining us today, and we look forward to being in touch and finding you on this call next quarter.

EarningCall_330

Thank you, and good afternoon to everyone participating in Delta Apparel’s Fiscal Year 2023 First Quarter Earnings Conference Call. Joining us from management are Bob Humphreys, Chairman and Chief Executive Officer; Justin Grow, Executive Vice President and Chief Administrative Officer; and Nancy Bubanich, Chief Accounting Officer. Before we begin, I would like to remind everyone that during the course of this conference call, projections or other forward-looking statements may be made by Delta Apparel’s executives. Such projections and statements suggest prediction and involve risks and uncertainty and actual results may differ materially. Please refer to the periodic reports filed with the Securities and Exchange Commission, including the Company’s most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. These documents identify important factors that could cause actual results to differ materially from those contained in the projections or Forward-Looking Statements. Please note that any forward-looking statements are made only as of today, and except as required by law, the company does not commit to update or revise any forward-looking statements even if it becomes apparent that any projected results will not be realized. Good afternoon and thank you for your interest in Delta Apparel. Before we begin, I would like to briefly introduce Justin Grow and Nancy Bubanich to those of you on the call. Justin recently rejoined Delta Apparel as our Executive Vice President and Chief Administrative Officer and has been with us for almost a decade in various roles, including General Counsel and Vice President of Administration. Among the multiple hats Justin wears for the company, he is heading up our Investor Relations efforts. Nancy has been with the company since 2006 and has held a variety of accounting and financial leadership roles during that time. Since 2021, Nancy has served as our Chief Accounting Officer and was recently appointed to serve as our Principal Financial Officer. Nancy has a deep understanding of our financial affairs, including our manufacturing costing and inventory evaluation systems. Additionally, Nancy has arranged and managed our offshore financing for years, and recently she added an additional lender to support our investments in El Salvador. This past year, she arranged capital lease financing for our Salt Life retail store build outs. She also manages our relationship with Wells Fargo and the other lenders in our U.S. revolving debt facility. As you can see, Nancy has been quite busy. I’m very excited to have Justin and Nancy with us on the call today. Now turning over to our results for the first quarter of our 2023 fiscal year, we are extremely pleased to report double-digit sales growth across four of our five go-to-market channels, including DTG2Go, Salt Life, Global Brands, and Retail Direct. These strong top-line results were led by record quarter in our own demand digital print business DTG2Go including nearly 20% sales growth year-over-year. Our Salt Life business also brought in record sales for the quarter with 17% growth over the prior year. Our top-line performance for the quarter provides a great example of the resiliency that we have been able to build into our business over the years with a strength in the majority of our go-to-market channels, allowing us to overcome some of the demand headwinds in the mass retail channel impacting our Delta Direct channel and the overall industry for several quarters now. Our top-line performance also reflects the resiliency of our team of 8,500 associates across four countries, and its ability to execute our strategies, serve our customers, and navigate what remains a fluid, macro-economic and retail environment. As expected, our profitability of this quarter was impacted by the reduced demand in the mass retail supply chain, as well as the elevated costs. We continue to see in our business, particularly in our Delta Group segment, with respect to cotton and other raw materials, as well as energy and labor. Although cotton prices have somewhat normalized from the unusual highs of last year, that high-cost cotton is now flowing through our cost of sales and pressured our bottom line results this quarter. In addition, the manufacturing shutdowns that we and many across the industry initiated during the quarter to calibrate output with a lower demand also impacted profitability. We expect to continue to work through last year’s higher price cotton in our second quarter and began to see the benefits of lower input costs in our financial results as we progress through the back half of our fiscal year. Let me now turn the discussion over to Justin, who will go through our business highlights in more detail, and then to Nancy who will follow-up with a review of our financial results. I will then join with - now to open the call up for questions. Justin. Thanks, Bob. As Bob mentioned, we were pleased to deliver solid top-line performance this quarter with net sales of $107.3 million that were down only slightly to our record first quarter sales last year $110 million, in what was a markedly different demand environment for basic tees compared to last year when the industry generally couldn’t make enough product quickly enough to satisfy market demand. In our Delta Group segment, the DTG2Go team executed well during the holiday season, and posted record first quarter sales including strong double-digit growth over last year and increased average selling prices. Customers continue to appreciate the lower inventory investment and better inventory risk management, quicker time from order to porch, more efficient replenishment, small order and quick activation programs, and unlimited color and design options that DTG2Go digital print strategies offer. In addition, DTG2Go continues to leverage the competitive advantages provided by its multi-facility fulfillment network and internal source for blank garments. Its ability to reach 99% of U.S. consumers in two days or less, and access Delta Direct’s low-cost blank tees supply are true market differentiators, and DTG2Go margins and profitability should benefit from increases in customer adoptions of Delta Direct garments going forward. Demand for DTG2Go’s digital first strategy continues to exceed current capacity, and we are steadily improving our output on new technology that we were the first to implement in a full production environment only 15-months ago. We expect the learning and expertise gain during this early operational phase to solidify DTG2Go position as not only the largest, but also the highest quality digital first printer in our market. In addition, DTG2Go business with traditional e retailer and other customers utilizing previously implemented technology continues to grow significantly. We remain extraordinarily bullish on the long-range penetration of digital strategies across the print wear industry, which some experts predict this year to reach 3% of an overall market estimated at well over 20 billion, and to increase the 6% of a much larger overall market by 2028. DTG2Go’s first mover advantages and industry leading position set the stage for what we believe should be many years of strong double-digit top-line growth while targeting consistent operating margins in the low teens. Although DTG2Go provided record output and much improved service to our customers in the important holiday season, we still have challenges ahead of us to further improve machine efficiencies, reduce maintenance expense, and reduce labor and supply cost. We have an experienced team driving these improvement initiatives and expect to start achieving our targeted costs during our fourth fiscal quarter. Our Global Brands channel also delivered double-digit sales growth for the quarter and continues to serve as a valuable supply chain partner to large multinational and regional brands, major branded sportswear companies in all branches of the United States Armed Forces. The growth in that channel was accelerated by the expansion of business with new customers. We saw the same dynamics during the first quarter in our retail direct channel, where we provide retail ready products directly to sporting goods and outdoor retailers, farm and fleet stores, department stores, and mid-tier and mass retailers. This channel also posted double-digit first quarter growth and continues to expand its customer base across both brick and mortar and e-commerce retailers, many of whom are benefiting from a recent shift in consumer focus toward products with price points in the range of those we offer. Our team has worked extremely hard over the years to build a world class platform that meets the high service levels and compliance sophistication required to do business with the world leading brands and retailers. It is rewarding to see these big players in our industry put more emphasis on near-shore sourcing strategies like those we offer in Central America and validate the investments we have made in the region. With these global sourcing strategy tailwinds, our vertical manufacturing, including DTG2Go digital print offerings and what we estimate to be an addressable active wear market in the United States, ranging from $8 billion to $10 billion and growing. We believe our global brands and retail direct channels are positioned to generate further growth opportunities across our Delta Group segment. In our Delta Direct channel, we saw the lower demand we expected within our retail licensing customer base that sells through to mass market retailers, which drove lower revenue in the channel. We continue to see indications of an over inventory environment in this channel and expect demand to improve at these higher inventory levels gradually work down throughout the year. In the meantime, we remain proactive in managing our manufacturing output to align inventories with market conditions. We idled our manufacturing facilities in Central America for an additional three weeks during the quarter and also operated several of them at less than full capacity and initiated related workforce reductions. Although these production curtailments come with associated expenses and margin impacts, which Nancy will touch on more in a moment, we plan to continue to leverage the flexibility we have in our vertical platform until we see better equilibrium between inventories and demand. We will also focus on opportunities in higher margin areas, such as our ad specialty and promotional channel where we offer customers a one stop shop for our Delta and soapy products, along with the selection of golf apparel, outerwear, work wear, hats, bags, and accessories from other select brands. Shifting gears to our Salt Life Group segment, the Salt Life Team delivered record sales along with excellent bottom line performance for the quarter. The strong top-line performance included over 25% growth across Salt Life’s direct-to-consumer retail and e-commerce channels, as well as strong double-digit growth within its wholesale customer base. Salt Life continues to add significant new wholesale customers and its products are now sold in approximately 1800 retail doors across 48 states and internationally. As Bob indicated in our press release, the Salt Life business truly hit on all cylinders this quarter. It is off to a strong start as it moves into its spring selling season. The momentum in Salt Life’s direct-to-consumer channels is particularly notable, and the team deserves kudos for not only building out brick-and-mortar retail and digital footprints to keep pace with its growing consumer base across the country, but doing so in a profitable manner. Salt Life currently operates 21 branded retail doors standing in Florida, Georgia, South Carolina, Texas, California, Alabama, and Delaware, and is targeting six to eight new openings this fiscal year, including first locations in New Jersey and Virginia, as well as three new full price doors in one outlet store in the Florida market. These retail locations are highly productive boxes, typically averaging around $500 in sales per square foot and generating four wall profit in their first year of operations. On the e-commerce side of Salt Life’s direct-to-consumer business, the saltlife.com website now ships to all 50 states, including steady order flows to Midwest and Western states outside of the brands traditional Southeastern stronghold. Moreover, sales on the site during the quarter were up almost 24% over the prior year with site traffic, order counts, and average order value all up significantly over the prior year. We expect our Salt Life e-commerce business to continue to grow and importantly to grow profitably. From a macro viewpoint, the Salt Life brand is clearly resonating with consumers and benefiting from the myriad of marketing initiatives, the Salt Life team is advancing, including steadily growing the followings across YouTube and social channels like Instagram, as well as the brand’s proprietary online content portal, the Daily Salt and Podcast, above and below. We continue to see a tremendous runway for growth for Salt Life across the U.S. and internationally accompanied by operating margins in the mid-teens. Thank you, Justin. For our fiscal year 2023 first quarter net sales were $107.3 million, representing a 3.1% decline compared to the record net sales and our fiscal 2022 December quarter. However, as Bob and Justin mentioned, we did achieve double-digit sales growth across all, but one of our five to go-to-market channels. Net sales in our Delta Group segment were 97 million compared to 101.9 million and last year’s December quarter, and were driven by record sales of 24 million in our DTG2Go channel, and double-digit sales growth and our global brands and Retail Direct channels. That was offset by the softness in the Delta Directs retail license channel. Net sales in our Salt Life Group segment were 10.3 million, which represents 17% growth over the prior year. The double-digit increase was driven by continued organic growth and direct-to-consumer sales through the Salt Life brands, retail stores and e-commerce site, as well as growth in the wholesale channel. Gross margins were 12.7% overall for the quarter compared to 20.8% in the prior year first quarter. The decline was driven by higher input costs, both in our active wear and DTG2Go business as well as 250 basis point decline from the additional production entailments initiated during the quarter that were partially offset by gross margin improvement and the Salt Life Group segment. Gross margin and the Delta Group segment were 8% for the quarter, a decline from the prior year first quarter gross margins of 18%, primarily driven by the additional production curtailments as well as higher cost inventory flowing through the cost of sales, including elevated, cotton, energy dyes and chemicals, freight and labor costs. The Salt Life Group segments gross margins improved 370 basis points to 57% compared to 53.3% in the prior year first quarter. Improvement resulted from a favorable mix of sales, including increased direct-to-consumer retail store and e-commerce sales. Selling, general and administrative expenses were 18.9 million in the quarter, increasing 180 basis points year-over-year to 17.6% of sales. The increase was primarily driven by the Salt Life retail store expansion, including seven new locations opening since the prior year quarter, as well as increased distribution, labor and supply costs in our active wear and Salt Life businesses. We currently expect SG&A for the full-year to generally be in-line with our SG&A for fiscal year 2022. Our equity investment in Green Valley Industrial Park in Honduras where our save a textile facility is located, provided dividends during the quarter of almost a million dollars and continues to generate profits recorded in other income, provide an excellent return on our investment in that entity. Other income for the quarter also included a one-time two and a half million gain related to a settlement of a litigation claim. We experienced an operating loss of 2.6 million for the first fiscal quarter compared to operating income of 5.9 million in the prior year quarter, while our EBITDA for the quarter was 1.3 million compared to 9.5 million last year. Interest expense was 2.9 million in the quarter up from the prior year, first fiscal quarter expense of 1.6 million, and due primarily to higher debt levels and interest rates. Overall, we incurred a net loss for our first fiscal quarter of 2023 of 3.6 million or $0.51 per diluted share compared to net income of 3.6 million or $0.51 per diluted share in the prior year. Turning to our balance sheet and liquidity, total inventory at quarter end was 258.9 million compared to 183.1 million a year ago, when the market was generally in a low inventory position and transportation delays impacted the timing of deliveries in our Salt Life business. The year-over-year inventory expansion reflects higher raw material, transportation and labor cost inputs as well as an increase in units on hand. As previously mentioned, we continue to take proactive measures in our active wear business to balance our manufacturing output with demand and appropriately manage on-hand inventory. We expect our inventory to decrease sequentially by quarter as we progress through the year. Net debt, including capital lease financing and cash on hand was 185.2 million quarter end up 14.6 million from September. We also expect our debt to decrease as we progress through the back half of the year. During the quarter, we invested approximately $2 million in capital expenditures relating to Salt Life, retail store openings and information technology initiative. Thanks, Nancy. Following two consecutive years of record company performance, we are pleased to start our 2023 fiscal year with a solid top-line quarter nearing last year’s record, first quarter results, despite much softer demand in our Delta Direct channel. Moving forward, we will continue to leverage the versatility of our multiple go-to-market strategies and believe we can drive organic growth through both new customer acquisition and expansion of existing customer relationships. We see tremendous potential and opportunities ahead for our investments in DTG2Go, leading edge, digital technology platform, as well as Salt Life’s authentic lifestyle brand positioning, and believe we are only at the beginning of the exciting growth trajectories in both of those businesses. On the cost side, we are now seeing some welcome moderation and freight and distribution labor and expect these trends and lower cost cotton in our inventory to positively impact profitability as we move through the back half of the year. As always, we will be keenly focused on managing our working capital and expenses, investing in our businesses opportunistically, and keeping the best interest of our stakeholders front of mind. Thank you. [Operator Instructions] Our first question today is coming from Dana Telsey from Telsey Advisory Group. Your line is now live. Good afternoon everyone. I wanted to go through the puts and takes as we go through the balance of the year in terms of what you are seeing. You mentioned the Delta Direct business being over inventoried and demand to improve gradually. As you think of that inventory number, which was up significantly this quarter, I think to around $258 million, how do you square the two as you go through the year and as you think about the second quarter where you mentioned that cotton costs should come down, how do you see the gross margin evolving as we go through the year? Thank you. Okay. Several questions in there. We see our gross margins improving sequentially by quarter throughout the fiscal year and based on our current outlook would be back to a normalized or more normalized gross margin by the time we got to our fourth quarter. We see inventories going down sequentially both from a unit standpoint and from evaluation standpoint as we go through the quarters. So right now, we are shipping product with our highest cost cotton in it, and of course we are replacing that product with more current price cotton. So there is a significant difference in the per pound valuation in those cottons that are going out of our inventory versus what is coming in. So those will be the big drivers of that and we will continue to manage our manufacturing output as we said in our call, to balance these inventories. As you think about the customer base and the different customers, what is happening with order trends and how do you see them changing? Well, it varies by type of customer. If you look at product that is being sold at in the mass markets, it is still very slow and very choppy, and we are not seeing a lot of people that feel like they have visibility into a [Ford] (Ph) order look and it is kind of hand to mouth buying when necessary. If you look at our global brands customers, that business is strong from a shipment standpoint right now and ahead of last year. But we are also seeing hesitation, I would say caution about Ford commitments, as they have worked through their inventories. And if you just look at the apparel marketplace, while our inventories are high and we don’t like that there is a lot of major brands out there whose inventories are much higher yet. And so obviously that has to be worked off over the course of the next year or so. So we in our outlook have built in a more cautionary look on our global brands business as our customers their work through their future inventories. Well, it is progressing well. We always want to make more and we want to make more faster, but obviously we had very strong growth in DTG2Go in the very important holiday season and shipped more product than we have ever shipped obviously in units and in dollar amount and obviously had our best quarter ever with Fanatics. If we had been able to produce more of Fanatics and non-Fanatics, then we could have shipped more. So we still had more orders than - or more capacity to sell product than we were making. And so our customers manage their order intake to make sure the service level is maintained. But in any event, there was robust demand from consumers for Fanatics and other people’s e-commerce business and retailer business during the holiday season that we can fulfill through DTG2Go. So we continue to make productivity gains and where we are today is we have capacity now that holiday is behind us to meet really full demand that is out there and that full demand is considerably higher than it was this time last year. Got it. And then just lastly on the balance sheet, given the current results and the loss, any adjustments to the balance sheet or how you are thinking on the puts and takes of the balance sheet side? Well, a couple of things. One is we have dramatically reduced our capital expenditure budget for this year compared to the prior several years, so, that keeps obviously more cash in the house and we are committed to reducing our inventories over time. So those are the two drivers that will allow us to have a lower debt level by the time we get to fiscal year end. 24 million. Okay. Obviously, a record sales quarter. You talked about expecting to achieve your target expense ratios by the fourth quarter in that business. What are you doing to achieve and what has to happen to get there? Well, I would say, we have got to continue to make productivity gains to run this equipment to the levels that we were expecting when we purchased it. And so, while we have made tremendous strides over the last 15-months, you got to remember 15-months ago we started up with a beta test site equipment in our facility and started managing how we would develop this. And then ultimately, the Fanatics business came in and wanted to work with us to develop that. And what we have found since then is this equipment is really was not ready to run in our type of production environment of seven-days a week 18-hours a day, and run at the productivity levels that we need to process it. Good strides have been made, the equipment manufacturers have had people in all of our facilities learning and debugging and helping us build those productivity gains, but we are not yet where we need to be. So that is one of the things that we will continue to work through and believe we have line of sight to be - not completely where we would like to be, but where we are starting to achieve the financial performance that we expect in our fourth quarter. We will be transitioning to more Delta Apparel made blanks over the course of the next several quarters. So, Fanatics had a base of inventory than they needed us to process, and we have taken more time to do that than any of us expect it. So obviously that hurts the profitability when we are processing that inventory that they have purchased from someone else. And then shipping costs to us, and those types of inefficiencies that we work hard to avoid in our business. Training our operators to be more efficient, quality and quality defects need to come back down, but we are seeing good progress on that. So we have made some key hires over the last 120-days that have extensive experience in operating multiple facilities of digital printing, not necessarily on apparel, but digital printing and we are seeing encouraging progress on that. So the internalization rate, I assume in the first quarter was lower than it is going to be moving forward, as Fanatics was using their old inventory there. What was your internalization rate and how much will - as that increases have an impact on reducing your inventories to a greater extent? So, we used about 50% Delta produced garments during our first quarter. I think at our peak use, we have been in the mid 70%. There will be some products that Fanatics wants to market that we either can’t or don’t want to make, so we will never produce a 100% of that. But both sides for a lot of different reasons want Delta to make all the garments that they can. It is just a better economic model and a simpler transaction there. A little bit, but it is not going to move the needle this quarter, but by our third quarter and fourth quarter, it will start to move the needle. Okay. Then how do you get to where next year you can actually not have demand exceed capacity in, in the business? Well, I don’t think you can. And we are not seeing that happen so far in digital print over holiday. I mean, you think about it, you are trying to basically quadruple your output for about four weeks. And so you just think how daunting it is to have trained operators to come in and do that and make first quality product. It just doesn’t work particularly in today’s labor market. Now the good news is our business is getting less seasonal for our digital print operations being driven by a lot of different factors, and one of them being by the type of customers that we are going after that have a more year-round business. So obviously the more that we can get, the easier it is for us to have operators that can ramp up during holidays. Okay. Moving over to Salt Life, one of the things you mentioned you had significant new wholesale customers. Could you expand on that a little bit? Well, I think it is more, uh, probably doors than necessarily customers. I mean, we continue to open up more local two or three chain or two or three store operations, but we are still seeing our major accounts add more doors to their portfolio that carry Salt Life. Okay. Your sales per store are very impressive. How many of your stores are doing more than a million dollars a year right now and could you talk about your top stores, what type of numbers they are doing and what type of operating margins they might have at those peak numbers? Well, I would love to tell you our best stores is [Stero] (Ph), so - but Destin, Florida is right up there with it. We probably have about seven stores that are over a million dollars in annual revenue and just about all of our stores are still growing. The first quarter was choppy on same-store-sales growth and some of the weather patterns that we have seen recently. But then we see weeks with outstanding same-store-sales growth as well. And so if you look at it at about $900,000 in revenue, it is about a 10% operating margin. But then once you get up to about 1,000,003 or million four, it is about a 30% operating margin. And so obviously, those things are powerful producers of cash flow and recordable earnings when they get to that level. Great. On inventory and production, you took three-weeks of downturn. How much does it cost you per week to take things down and what -. A little over a million dollars. It depends on what locations and where are the fabrics coming from and if we are taking production out of our textile facility as well. But in a round number, it is about 1.1 million per week of unscheduled downtime. No, it will be less than that. But we continued to look at a lot of ways to manage our inventory and, we will continue to do that and look at the least disruptive way to get our inventory balanced with unit demand. Okay and inventory’s excluding Salt Life because you obviously have a bunch more stores, you need a bunch more in the stores. Were units - how were units excluding Salt Life on inventory? Compared to September, primarily the Delta Direct units were up. Obviously, like you said, the Salt Life retail store units were up, but also, as I mentioned, we had more imports come in for the busy Salt Life season. And as well, we have more DTG units because obviously the sales have increased and we are expecting them to increase. But Nancy, correct me if I’m wrong, inactive wear I believe we were up about 30% from the prior year level of units, which again is dawning and I’m not really comparing this to other companies we compete with, but just other people in the apparel business that I see. I would say we are on the low side of average in unit growth in inventory, which is - now you think about the sophistication, we all thought we had, I don’t know how as an industry, we were so wrong in so many places, and so many people were hoarding inventory or buying more than they needed, and then all of a sudden, the merry-go-round stopped and everybody had too much inventory at every step. Okay. And lastly, on back on Salt Life, the migration of new stores, how many do you expect per quarter or is it all going to come near the Christmas season? No, actually we got several that we will be opening very quickly. And so, our ones going up the east coast, we have planned those to open for obviously the season, so there is no need to open them, at the end of the season. So, we will have a couple of new stores opening there, we have already opened a couple of new stores this fiscal year, so they will be opening sooner than later. Yes, good afternoon. You all issued a S3 I think in December, ATL offering it would be pretty brutal to raise money at these stock levels. Is there a way of avoiding that or is that something you think you are going to have to take on in the next six-months or so? No, that is a renewal of a shelf offering that has been in place for, I believe the previous eight-years, two cycles of that and it simply was maturing and we renewed what was in place. Thank you. We have reached end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments. Okay. Well, thank you for your interest today, and we will look forward to communicating with you next quarter on second quarter results. 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_331

Greetings, and welcome to the Take-Two Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nicole Shevins, Senior Vice President of IR and Corporate Communications. Thank you, Nicole. You may begin. Good afternoon. Thank you for joining our conference call to discuss our results for the third quarter of fiscal year 2023 ended December 31, 2022. Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer; Karl Slatoff, our President; and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q&A session following our prepared remarks. Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors. These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. I'd also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year-over-year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Our press release also contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measure. In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at take2games.com. Thanks, Nicole. Good afternoon, and thank you for joining us today. During the third quarter, we continued to execute on our ambition to create the highest quality, most engaging interactive entertainment franchises in the industry to deliver them across an array of platforms and to captivate our global audiences. All of our new game releases and post-launch content have received significant critical acclaim, and we're pleased to have the highest catalog sales based on units sold in the Americas. The strength of our portfolio reflects the passion, vision, artistic acumen and hard work of our world-renowned development teams and studios, and we're immensely proud of our long-standing commitment to quality. Notwithstanding our creative achievements, our third quarter net bookings of $1.38 billion were slightly below our prior guidance. We believe that as a result of macroeconomic conditions, consumers shifted holiday spending toward established blockbuster franchises and titles that were offered with pricing promotions. While our catalog benefited from this trend, it affected the performance of certain of our new releases and recurrent consumer spending for some of our console and PC games. Despite the current market, we believe that our long-term success will be driven by our consistent ability to create the best entertainment experiences, including sequels of our beloved franchises and the introduction of engaging new intellectual properties. Sales of Grand Theft Auto V exceeded our expectations during the holiday season. And to date, the title has sold in more than 175 million units. During the quarter, Rockstar Games released an array of new content for both, Halloween and the holiday season as well as a new story-driven update Los Santos Drug Wars. The update launched in December and continues to deliver exciting new story and gameplay features to players across the winter season, including a new business, tax emissions and much more to come, which is continuous to drive stronger engagement with our player race. We were also pleased with the performance of Red Dead Redemption 2, which outpaced our expectations driven by successful holiday promotions and events. To-date, the title has sold in more than 50 million units. During the quarter, Rockstar Games continued to release new updates for Red Dead Online, including a new Halloween Hardcore Telegram Mission and new Call to Arms locations for Halloween and the holidays. We remain incredibly pleased with the enduring quality of these entertainment experiences. Grand Theft Auto V was ranked number three for units sold in the US during calendar year 2022 on all platforms and was number two overall for 2022 on Steam. Additionally, 2022 was GTA V's tenth consecutive year in the NPD top five for unit sales. Red Dead Redemption 2 also continues to resonate strongly with players, ranking as the number one selling game on Steam for the quarter end, number three for 2022. NBA 2K23, which remains the number one selling sports title in North America continues to expand its audience and to date has sold in over 8 million units. Full game sales for NBA 2K23 are up 3% year-over-year, and MyTEAM users grew more than 50% over last year, as players enjoyed assembling the rosters of the NBA's all-time greatest stars to dominate the competition. In addition, NBA 2K23 Arcade Edition remains the number one game in Apple Arcade since its launch in October. 2K and HB Studios supported PGA TOUR 2K23 with the limited-edition holiday bundle that included NBA 2K23 and new content featuring branded gear from Barstool Sports, 100 Thieves, and Dude Perfect. HB Studios will release more content and features, including the addition of Pebble Beach, cosplay functionality and ranked patch making. On December 2, 2K and Firaxis Games launched Marvel's Midnight Suns on Windows PC via Steam and Epic Games Store, PlayStation 5 and Xbox Series X|S. The title launched a critical acclaim with BGC rating at a five out of five, calling it a modern strategy classic. PC Gamer said it was completely brilliant, scoring at 88 out of 100 and Rock Paper Shotgun called it one of the best Superhero games. The title is being supported with a series of post-launch content that can be purchased individually or as part of the game seasons pass. During the quarter, Zynga's in-app purchases performed in line with our expectations, and we saw mobile trends improve from prior lows, particularly during the holiday season. The label continued to experience strong engagement among its active players and we believe that we're maintaining our global market share. Our advertising business outpaced the broader industry, as we continue to introduce new ad supply and products, optimize our networks to increase ad yields and roll out Chart boost throughout our inventory. A few key highlights of our mobile offerings during the quarter include Empires & Puzzles was a top performer due to strong seasonal content and Black Friday offerings. This is one of our first titles to leverage our direct-to-consumer platform for in-app purchases, which we believe can enhance significantly the margins for our mobile portfolio over the next few years. Rollic’s Balls’n Ropes reached the number one spot for most downloaded game in the US in December, giving Rollic a look a total of 20 games that have reached the number one or number two spot in Apple's US App Store. We acquired Popcore, which offers a unique balance of hyper-casual experiences that also prioritize long-term player retention rates. This strengthens our leadership among hyper-casual publishers with respect to downloads in revenue. Following the acquisition, Popcore's game Tap Away reached the number one spot for most downloaded game multiple times throughout the quarter in Apple's US App Store. Zynga's casino titles remained resilient with Game of Thrones Slots posting its best quarter ever. Top 11 had a strong quarter, driven by various in-game updates celebrating the World Cup. CSR Racing 2 released Race Pass, which features innovative new rewards that are driving stronger retention and monetization. Our combination with Zynga remains highly accretive to our business. We remain committed to delivering our planned synergies, and we're well on our way to exceed our target of $100 million in annual cost savings within the first two years post close. During the quarter, recurrent consumer spending rose 117% and accounted for 78% of net bookings. Turning to our outlook. We're operating in an environment that is, in many ways, more challenging than we anticipated. And we're lowering our fiscal 2023 net bookings guidance to $5.2 billion to $5.25 billion to take this backdrop into account. To be clear, I take personal responsibility for our revised downward guidance. We believe there's always more to achieve, particularly when we fall short of our expectations. We've embarked on a company-wide cost reduction program that will optimize our expense structure, while also positioning us to deliver on our anticipated growth trajectory. We expect to achieve savings in excess of $50 million as a result of this initiative. Our balance sheet remains strong, allowing us to navigate these uncertain times with confidence. We've always managed our business for the long term as we achieve the powerful synergies from our combination with Zynga, release new titles from our robust multiyear pipeline and execute on our cost savings initiatives we expect to deliver sequential growth and record performance over the next several years. Our business and creative teams have done a phenomenal job during these challenging times, and I'd like to thank all of our colleagues for their tireless work. I'd also like to thank our shareholders for their continued support. I look forward to sharing our progress with you on all of our key initiatives. Thanks, Strauss. As we focus on the remainder of the year and beyond, we remain steadfast in our commitment to providing the most captivating and engaging entertainment experiences for our audiences across all platforms and geographies. We believe this is the best strategy and path forward to achieving our goals, driving our expected long-term growth and bringing value to our shareholders. Turning to our upcoming releases. On February 24, Private Division and Intercept Games will launch Kerbal Space Program 2, its early access for PC on Steam, Epic Games Store and other storefronts. KSP 2 will bring an array of content for players to explore and the title promises to be the most visually impressive game in the franchise. Those that purchased KSP 2 in early access will help inform the future development of the game by providing feedback directly to its creators leading up to the full launch of the title. In addition, Private Division has announced several new projects. After us, a riveting exploration debenture game from Piccolo Studios is expected to launch this spring during fiscal 2024 for PC, PlayStation 5 and Xbox Series excellence. Private Division announced a publishing partnership with Bluebird team to develop a new survival harder game expected to launch after calendar 2024. And we unveiled our new Private Division development fund to support smaller independent teams with project financing and mentorship opportunities. On March 17, 2K and Visual Concepts will release WWE 2K23 for PlayStation and Xbox consoles and PC on Steam. In celebration of John Cena’s 20th anniversary as a WWE superstar, the 16-time World Champion’s record-setting philanthropist and WWE 2K23 Executive soundtrack producer will be featured on the cover of each addition of the game. In addition, global music phenom Bad Bunny, 2022's most streamed artist in the world will make his WWE 2K debut as a preorder bonus. Building upon the success of WWE 2K22, this year's installment features a unique take on the 2K showcase, the introduction of the fan-favorite WarGames matches and expenses to several marquee games. Fans can look forward to a deep roster of WWE Superstars and Legends, including Roman Reigns, American Nightmare Cody Rhodes, Ronda Rousey, Brock Lesnar, Stone Cold Steve Austin and more. 2K will support the game with an array of post-launch content and may be purchased individually or through a season pass. Throughout the balance of the fiscal year, Rockstar Games will continue to support Grand Theft Auto Online with additional content updates. And 2K and Firaxis games will continue to release add-on content from Marvel's Midnight Suns and Sid Meier's Civilization VI: Leader Pass. In mobile, Zynga’s Rollic studio will release a vast array of titles as they've done previously, while the label’s other studios remain at work on a variety of games, including several in soft launch that we expect to release in fiscal 2024. We will have more to share on our pipeline when we report our fourth quarter results in May. Thanks, Karl, and good afternoon, everyone. Today, I'll discuss the key highlights from our third quarter, before reviewing our guidance for fiscal year 2023 and our fourth quarter. Please note that our third quarter results include our combination with Zynga, with respect to the comparability of our results relative to last year. Additional details regarding our actual results and outlook are contained in our press release. As Strauss mentioned, we delivered net bookings of $1.38 billion, which was slightly below our prior guidance, as consumers displayed more cautionary purchasing behaviors during the holiday season. As in prior periods of economic headwinds, full game sales from our catalog of industry-leading intellectual properties were relatively resilient. However, we felt pressure on some of our newer releases that are in earlier stages of building their player base, alongside softness in recurrent consumer spending. During the period, recurrent consumer spending rose 117% and accounted for 78% of net bookings. Zynga’s in-app purchases performed in line with our revised expectations. However, this was offset by weakness in recurrent consumer spending for several of our console and PC games. Digitally delivered net bookings increased 72% and accounted for 95% of the total. During the quarter, 69% of console game sales were delivered digitally, up from 63% last year. GAAP net revenue increased 56% to $1.41 billion, and cost of revenue increased 97% to $692 million. Operating expenses increased by 123% to $889 million, primarily driven by the addition of Zynga, as well as higher marketing and stock-based compensation expenses. The GAAP net loss was $153 million, $0.91 per share, which was impacted by $302 million of amortization of acquired intangibles and $24 million of business acquisition costs. Our management tax rate for the period was 18% as compared to 60% in the prior year as a result of our combination with Zynga. We ended the quarter with over $1.1 billion of cash and short-term investments and paid down $200 million of revolver borrowings, reducing our debt to $3.1 billion. Turning to our guidance. I'll begin with our full fiscal year expectations. We now expect to deliver net bookings of $5.2 billion to $5.25 billion. Our forecast takes into account the current economic environment and consumer purchasing trends that we have been experiencing, which we expect to continue into the fourth quarter, including lower expectations for some of our recent game releases and softer recurrent consumer spending as well as the shift of an unannounced mobile title and a focus on enhanced profitability for our hyper-casual business. The largest contributors to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Empires & Puzzles, Toon Blast, Rollic’s hyper-casual mobile portfolio, and Red Dead Redemption 2 and Red Dead Online. We expect the net bookings breakdown from our labels to be 46% Zynga, 36% 2K, 17% Rockstar Games and 1% private division. We forecast our geographic net bookings split to be about 65% United States and 35% international. We expect recurrent consumer spending to grow by approximately 85% and represents 77% of total net bookings. Our digitally delivered net workings are expected to grow by approximately 60% and represent 95% of the total. Our forecast assumes that 74% of console game sales will be delivered digitally, up from 68% last year. We expect to generate more than $400 million in non-GAAP adjusted unrestricted operating cash flow, and we expect to deploy approximately $170 million for capital expenditures. Our GAAP net revenue to range from $5.24 billion to $5.29 billion and cost of revenue to range from $2.53 billion to $2.55 billion, which includes approximately $694 million of amortization of acquired intangibles. Total operating expenses are expected to range from $3.4 billion to $3.41 billion as compared to $1.5 billion last year. This increase reflects the inclusion of Zynga, business acquisition costs and higher personnel compensation and marketing expenses, which we anticipate will be slightly offset by our expected cost synergies from our integration with Zynga. As we've mentioned on prior calls, in light of the current backdrop, we have been evaluating cost savings opportunities that can structurally enhance our margin and make our company more efficient and nimble for the long-term. After a comprehensive review, we now believe that we can deliver over $50 million of annual savings, which we will begin to execute on this quarter opportunities include personnel, processes, infrastructure and other areas, particularly in publishing and corporate funding. This program is in addition to the over $100 million of annual cost synergies from our combination with Zynga and is not expected to impact the delivery of our robust multiyear pipeline. We expect the GAAP net loss ranging from $704 million to $721 million or $4.40 to $4.50 per share, which assumes the basic share count of 159.8 million shares. We expect our management tax rate to be 18% throughout the year. Now moving to our guidance for the fiscal fourth quarter. We project net bookings to range from $1.31 billion to $1.36 billion, compared to $846 million in the fourth quarter last year. The largest contributor to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, and Empires and Puzzles, Toon Blast, Rollic’s hyper-casual mobile portfolio, and WWE 2K23 We project recurrent consumer spending to grow approximately 105% and digitally delivered net book to increase approximately 70%. Our forecast assumes that 80% of console game sales will be delivered digitally, up 75% last year. We expect GAAP net revenue to range from $1.34 billion to $1.39 billion and cost of revenues to range from $688 million to $708 million, which includes approximately $198 million of amortization of acquired intangibles. Operating expenses are expected to range from $871 million to $881 million. At the midpoint, this represents a 120% increase over last year. This increase reflects the inclusion of Zynga, business acquisition costs and higher marketing and personnel expenses, which we believe will be slightly offset by the realization of some of our anticipated cost synergies. And GAAP net loss is expected to range from $197 million to $214 million of $1.17 to $1.27 per share, which assumes a basic share count of 168 million shares. In closing, while we are disappointed to have lowered our outlook for the year, we are highly confident in our long-term growth potential. We believe that the actions we are taking now will position us to deliver sequential growth and record performance over the next several years, which we anticipate will drive meaningful shareholder value. I'd like to thank all of our stakeholders again for their support. Thank you. Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to thank our colleagues for their firm commitment to creativity, innovation and efficiency as we continue to navigate a challenging economic landscape. I'd also like to express our appreciation to our shareholders for their continued support. We'll now take your questions. Operator? Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Eric Handler with MKM Partners. Please proceed with your question. Good afternoon, and thanks for the question. Strauss, I wonder if you could talk a little bit about mobile advertising, specifically, have you been able to integrate advertising into Zynga games that previously had not included advertising? And what about the 2K games prior to the acquisition of Zynga? And then secondly, if you could just talk a little bit more about the direct-to-consumer platform with mobile virtual currency purchasing. Besides Empire & Puzzles, how many other games have integrated the DTC capabilities? Thanks, Eric. I appreciate it. To answer your question, we have enhanced advertising within the Zynga portfolio. Certain titles within that portfolio did not have advertising and now do. And at 2K, with regard to their mobile titles, there's no change. With regard to console titles, we have a limited amount of advertising, but there's no change there as well. With regard to direct-to-consumer, that's a new initiative for us and for the team at Zynga that's being rolled out modestly. We are seeing early signs of success. And obviously, that has a very significant effect on our contribution margins. Hey. Good afternoon, everybody. May be two, if I could. Coming back to mobile. I don't know if this one’s for Strauss, but can you give us maybe your higher level thoughts as you think about the mobile market? And I know it's hard to tease apart macro versus what's going on, on the user acquisition side with Apple ATT. But, I guess, putting macro aside, if you think about the mobile market over the next couple of years, how do you think about the growth rate of that business? And how are you thinking maybe different about the mix of in-app purchase versus ad revenue or the right genres or new IP versus existing franchises, the right cost structure, there's more opportunity there. Just how are you thinking about that as that market has obviously been very dynamic? And then I have a follow-up, but I'll stop there. Well, I'll see how I do it then you can determine what your follow-up is like. So in terms of the mobile market, look, the reason we were interested in combining with Zynga is we believe that mobile will continue to be the fastest-growing part of the interactive entertainment business, and we still are of that belief. Yes, there's been some year-over-year pressure, which is, in our view, related to the economy primarily and to a lesser extent, probably, sort of, post-pandemic changes in demand. We think those are near term. And in fact, the trends recently are quite positive in terms of demand. And Zynga has the best portfolio of mobile games in the business. Most of our competitors, good as they may be, have one, two, three, four titles that matter. We have a whole lot more than that. We have these forever franchises. And we also are blessed with phenomenal leadership in that division. So we remain highly optimistic about the growth in the future. I'm not sure I can give you an exact growth rate, but I do think it will continue to be a rapidly growing part of the business. It also diversifies us. We attach a different audience on the mobile side, skews more female. It skews older. And by having a diverse company that has console and PC and mobile titles, we address every part of the interactive entertainment business, and we find ourselves as one of the top three pure plays in the business. With regard to our expectations about in-app purchases and ad revenue going forward, look, in-app purchases still are only relevant for about 10% of the market for 90% of the users, that's not something they're interested in. So if you're selective and careful about how you target it, advertising makes all the sense in the world, because we ought to be able to find a way to monetize all of the viewing, all of the engagement, not just the engagement that leads to spending, particularly because we're not in the toll booth business. We're in the entertainment business. And we want to be able to deliver titles that consumers can enjoy without regard to spending. Spending should enhance the experience for sure, and it does. But in order to be commercial, we should have a robust advertising business that's not intrusive, that's positive for the consumer than consumer experience, and that's exactly what Zynga is building. With regards to new IP -- I'll finish your, I wrote down your questions. So let me just grab you on new IP and then I'll stop talking. On new IP, that remains the biggest challenge in the mobile business. And making new hits in mobile is really, really, really hard. We're working on a bunch of titles about which we're very excited, but it's super hard to make hits. Hit ratios in the business are low. Yes. Just one quick follow-up, Strauss, and that's really impressive that you got all those, by the way. I was keeping note. So that's impressive. On the -- any -- you talked about the next couple of years getting back to record bookings, which you've talked about for a while now. I think you talked about sequential growth. Does that apply to fiscal 2024? I guess just any early thoughts about how we can start thinking about fiscal 2024? And then I'll hop back in the queue. Thanks again. What we said today is we expect sequential growth and record results over the next couple of years, and that remains our expectations. We'll give you exact outlooks, including guidance in the coming months. Hi, everybody. Thanks for taking the questions. Could you go into a little more detail about where you saw the strength in PC and console versus where some of the softness was? Was it more on recurrent consumer spending or unit sales? And how does that compare to past periods of macro weakness that you've seen? So in terms of the strength of PC and console, really our strength has been in the catalog. I mean what we have said before is that -- what we've observed over this period of time is that folks that the big established franchises, particularly those that have been discounted did quite well over the last quarter, and that was our experience as well. So that part of the business did very well for us. A little bit tougher on sort of new releases that are still establishing their player basis. And when folks making difficult choices between games if they can afford to play, they're obviously going to gravitate towards things that they know that they're more familiar with. So, a little bit tougher on the new releases for the younger games. In terms of RCS, we already said on the mobile side, our in-app purchases were in line with expectations, and we continue to buck the trend in advertising. And we did experience some softness on the PC and console side in RCS. And again, that dynamic is what we expect that dynamic in this kind of economic environment. So really -- maybe it was a little bit more exacerbated than we originally expected, but we are continuing to see that. Great. Thank you. And then just on the cost savings side, is the cost reduction program, is it particularly focused on the mobile business or various areas? Or is it kind of just general corporate overhead? It's a combination of our corporate departments and also some of our publishing functions. So it includes all of our labels. And it's outside of the $100 million plus in synergies between Take-Two and Zynga that we've talked about already that has to do with the acquisition of Zynga. Okay, thanks. Hey, guys, good afternoon. Just sticking with Zynga, I think you mentioned in your preamble that mobile trends had improved, maybe a little bit more detail there? And can you comment on whether Zynga's net bookings were up quarter-on-quarter. And if you've seen this improving trend line continue into the current quarter? And then I have a follow-up. Yes, I think the way to characterize it is we have seen some improving trends and the way to describe it is it's really been some improvement off of the lows that we've seen in the past. Okay. And then Strauss, some of your competitors have suggested the market is shifting towards these mega franchises. Curious if you agree with that premise? And does this in any way if you do, impact how you invest across your development pipeline? And are you inclined to hold back with the launch of titles until market conditions become more favorable? Thanks. Yes, we emphatically agree. The strategy of our company is to make hits across the board. We believe that we have the best collection of owned intellectual property across console, PC and mobile in the marketplace. And our approach has always been to bring out new iterations of beloved franchises. We have 11 franchises that have each sold over 5 million units in an individual release, well over 65 that have sold over 2 million units in an individual release. I don't think anyone else can say that. And look, we have the highest grossing entertainment property ever created of any sort of within our four walls, thanks to the focus of Rockstar. So that is very much our approach. And the truth of the entertainment business is, whether you like it or not, the entertainment business is a top 20 business on a good day and top 10 business on a less good day. We need to be there and that has always been our strategy. Hi, everybody. So I'm looking at your grid, the grid of games that you plan to release from fiscal 2023 to fiscal 2025 and next to mobile, you have 38 games. And it looks like 10 of them were not Zynga Games. Are you still confident that you can get all those games to scale? And is $100 million in annual bookings still the level that you aspire to as it was for Zynga's forever franchises prior to the acquisition? And then I have a follow-up, please. Sure. I'll take that one. So I would say, the aspiration for any title that we released in the mobile context would be the $100 million of annual bookings. But I can tell you for sure that, that won't be the case release, with that entire release. So our expectation going in, again, the -- how we release mobile is you take it out, you see how it does, you invest a little bit more, you revamp it, you rebalance it, you invest a little bit more, and then you grow from there. What we know that there are going to be titles that we put out that will fall on the mobile side. But the idea is that we need to put the titles out in order to find the ones that can reach that $100 million level or plus. So that is certainly -- that is the strategy, and that's going to be our path going forward. So that's still our expectation. Okay. And it's -- do you think versus when you acquired Zynga, it's going to be harder to get to that $100 million threshold, and will that affect kind of the number of new games that you guys will be potentially launching over the next year or two? No, I don't think the business has gotten easier or harder. I think it's pretty much what we expected. As I said, hit ratios in mobile are low, we really good about what's being developed. And just as -- I have one quick follow-up here. So some experts have noticed that Google has begun sending rejection notices for ads exposures and formats that are not compliant with its new better ads experience policy. This poll this allows interruptive interstitial ads among other practices, and it was announced back in July. So are you starting to see the effects of this policy for Rollic hyper casual games on Android? Great. Thanks for taking the question. The first one is on RCS this quarter in terms of the growth came in a bit below expectation. You mentioned that Zynga was in line and the weakness was from console PC. Any franchise to highlight that kind of came in below expectations or any factors that led to this underperformance. Okay. Got it. And then just a follow-up on NBA 2K. You mentioned that MyTeam's players were up 50% year-on-year, which is a fairly large amount. So are there any kind of main drivers to highlight there? And were these gains partially offset by declines potentially in MyCAREER mode? Or was it mostly additive? Thanks. Yes. I wouldn't say that it would necessarily offset by declines in MyCAREER mode. I think that the goal for NBA is to -- and how we've been growing over the years and how our path to growth in the future is to get more players involved in more modes, so driving across all of the loans. Now we know that we're not going to get everybody to play the game a 100% across every single mode, but that is certainly the goal, because the more engagement, the better ultimately the RCS performance is for those titles and also the more loyal the audience and it's a much better path for us to grow. So our focus has really been on getting players across those modes, and we've had some great success, as you can see on -- not just on MyCAREER, but across the -- in MyTeam area, but across the board. Thank you for taking the questions. Maybe two, if I could. First, on the mobile front, obviously, we've lapped the launch of IDFA. And I wanted to get your perspective on whether you feel like, in terms of driving a mixture of user growth and in-game monetization and in-game engagement, whether you've successfully sort of realigned your marketing strategy in mobile to address a post-IDFA world or whether you're still thinking it's sort of a work in progress, so that once demand is back in the mobile landscape, you can sort of capitalize on it? That'd be number one. And number two, a competitor of yours talked about withdrawing or pulling back from the mobile shooter market earlier in the earnings season. I'd love to get your perspective on how you think about developing, implementing and sort of launching AAA titles either alongside traditional PC console titles in the mobile format? Or how we should be thinking about even mobile-only formats of what historically have been AAA type quality titles? Thanks, so much. So in terms of the effect of IDFA, we've been living that for quite a while now. And I would certainly say that, that has stabilized. And I don't think we're expecting -- there's no surprises down the road that we're expecting at this point. And there's been some improvement in how we are able to target since then. So I think there's been some adjusting going on. I don't want to characterize that as we're sort of back to where we were, because that would be a mischaracterization. But we certainly feel like we've got our hands around it, and then we're going in the other direction. So that's positive in terms of our ability to target. I would also mention, too, that in the hypercasual space, it is a much wider funnel and targeting is not -- it doesn't require as much targeting as it does in the normal mobile business. So that's also helped our ability to attract new audiences. Yes. And on the second part of the question, we've said all along, and I said it today, the hit ratios in the mobile business are very low. And when we announced the combination with Zynga, the most current question was, well, obviously, you're going to take Take-Two IP to mobile is not great. And my answer was, that is potentially a very exciting opportunity, but it's really, really hard to do. One of our competitors has done it really well with the title, and we're impressed by that and admire it. But we have a healthy respect for how difficult it is. The vast majority of hits in mobile are native to mobile. They are not based on existing IP. They do not come from a console. I'm very optimistic that we're going to give it a try, and I'm really hopeful that we'll do well with it. But it's not a slam dunk. Hey, thanks. Just in your commentary about some of the new release underperformance. You're essentially attributing to macro or at least partially due to macro, but there's been two other companies who have sort of had the same problem. You have several other patters that have had record launches in the quarter, and it seems from the data that's been released, overall console spending was pretty stable versus a year ago. What makes you think the issue is macro-related versus this is just the way the video game industry is going to be from now on? And if that's case, how does that cause you to rethink your pipeline going forward? It's a really good question. What causes us to believe that it's macro related is that we don't just pull our expectations out of the year. We based our expectations on prior performance of similarly rated titles within that genre. And so in the case of certain of these titles, we've had great scores and terrific critical acclaim and yet the unit sales were lower than expected on an apples-to-apples basis by comparison to prior releases and prior periods. So that is -- that sort of leads us to believe, okay, that's probably a macro result. But I don't mean to imply for minute that quality doesn't matter, quality does matter and the biggest titles will obviously continue to perform with regard to market conditions. So what you're saying is, does that mean you should only put out blockbusters and anything that's short of an expected blockbuster, you can't put out. I think the answer is semi-yes. We can't put out something that we think is going to be a B title. It's never been the case. We have to put out AAA titles. However, not everything is ever going to be Grand Theft Auto. It just isn't going to be that way. And we have shown that we have the ability to launch new franchises. In the case of Borderlands or more recently, Tiny Tina's Wonderlands. Going back farther BioShock, from Rockstar, Red Dead Redemption. These are new intellectual properties, and we were willing to take the risk and support our creative team's vision and passion, and we've been able to create big hits. That's not changing. And there's nothing in our recent performance that leads us to say, we shouldn't invest in this way to the contrary. I believe we should continue to invest in this way. But right now, is the market more selective? Sure. In tougher times when food and fuel is more expensive and people are a little worried, they're going to be more selective. And when they're more selective, they're going to go to promotional titles and they're going to go to blockbusters. Thanks. Good evening. It sounds like this has been mostly in monetization, as I apologize if I missed it, but it would be helpful just to get a sense of overall engagement in the quarter as a metric for the market right now. It sounds like apart from the new releases that some of your base titles actually had pretty solid engagement. Is that fair? Engagement has definitely been strong across the board. And I would characterize it certainly as a modernization -- as a monetization issue. And we've seen that not just on the PC and console business, but also in the mobile business as well. So, that is specifically engagement that seems to be -- is not the issue for us. Right. And just a follow-up on that. Is there anything that you guys have seen to suggest that Game Pass may be changing the way people engage with new titles or just a sense of if that has had an impact in terms of engagement in the quarter over the last several quarters? I don't really think so. I mean, we don't make our frontline titles available day in date. We're thrilled to be in business with subscription services for our catalog titles at the appropriate time. We think that's the right way to support subscription. And subscription is still a relatively small business -- you're talking about businesses. I think the last announcement of Game Pass was 25 million subs. We're not talking about huge broad-based business yet. And in any case, no, I don't believe the business is cannibalizing our business. Hi. Good afternoon. Thank you for taking my question. I have two. Can you first give us more details on Zynga's direct-to-consumer effort? Do you see a certain region or user cohort responded more strongly to the channel? No, we're not seeing any regional differences, particularly. I'm not sure we've been looking for them though, because it's really early still. Got it. Thank you. My second question is on the impact of more discounting in December. And how would you characterize the environment in the March quarter, is discounting still affecting negatively on the guidance for March? I don't think that discounting in particular is driving our expectations for the quarter. What's driving our expectations for the quarter is just our perception of market demand. Just wondering if you changed your typical marketing approach for these new titles that launched in the holiday season and -- if not, do you plan to do that in the current quarter in response to what you're seeing in the market trends you discussed? Thank you. No, we didn't change our approach to marketing. Our marketing approach varies title by title and reflects our view at any given time for what the opportunity is and in the context of the cost of the marketing programs. But if your question is, did we create a sort of self-inflicted wound by somehow spending less, for example, on marketing and getting worse results? The answer is no. But equally, it's not like we've created a self-inflicted wound by spending more on marketing and not getting results. We tailored the marketing to the opportunity. Unfortunately, the opportunity set was a little smaller than we thought. Hey, Charles, Karl, Lainie thanks for taking my questions. Two from each, just curious, specifically, I know you haven't called out titles, but for the quarter on the weakness in recurrent spend the Grand Theft Auto Online and NBA 2K Live Service, did they meet your expectations for the quarter? And have you changed your forward view of growth from those games? Obviously, they're a big portion of your ex-oil live service business. And the second question, on your cost reduction plan, $50 million, do you feel like that's sort of a starting point or you sort of grow that as you think about it more over time? Or do you feel like that's enough. Thanks, guys. So for the quarter, our NBA business was in line with our expectations. Our other titles were a bit lower than what we had expected. As I mentioned, our PC and our console business for RCS was overall lower than what we had expected. And for the $50 million, this is like an ongoing cost reduction initiative. So we expect this number will grow over time. So efficiency is one of our core tenants as a company. So we're always looking for efficiency throughout the organization. And these are permanent and structural changes to the organization's overall corporate overhead structure, so these are expenses that we expect to reduce our overall structure over time. I just had a slightly longer-term question. Can you guys talk a little bit about whether or not you're a believer in sort of cloud gaming moving to the fore over the next five years? And, if so, what implications, if any, does it have on how you think about the business, your business? Thanks. Yes. I mean, we’ve been believers in our gaming. We were one of the first licensees, if not first license -- licensor, sorry, to Stadia, to support that project. But remember, cloud gaming is a technology. It's not a business model. It's a distribution technology. And our view is, broader distribution is always a good thing in the entertainment business. If we can reach more consumers with our properties, we're happy to do it as long as the terms make sense. And I think broader distribution over time probably benefits us in any number of ways, including the cost of distribution, which I believe will go down over time. That said, I've never felt like cloud gaming would be size -- would represent a seismic change. Because I think if you're prepared to pay $60 or $70 for frontline title, you're also prepared to buy a console. And I think Stadia found that out. So bringing high-quality titles to consumers who don't have consoles will probably have an effect around the edges, but I don't think it will be a revolution in the business, I think it will be more an evolution in the business. And there's still technical challenges to be addressed. Yes, thanks. Hey, Strauss, another big picture question. As you look out over the next several years, maybe in the next 5 to 10 years, I'm curious, kind of, your thoughts on how AI can impact the business good or bad? Or again, what you see on the horizon as potential disruption opportunity? Just any thoughts there would be helpful, particularly how you're thinking about AI. Thanks, again. You know, I'm the first person to be skeptical of other people's side. And I would like to note that, AI stands for artificial intelligence, and there is no such thing as artificial intelligence. All that said, I'm really excited about what we're seeing right now with ChatGPT and other leaps forward in artificial intelligence and machine learning. And I do think that we'll be and others will be creating tools that will enhance our development and probably reduce some of the costs for what we have to do today. But I don't think you're going to see it have an effect on the overall cost structure of the business, because I think it will just raise the bar. I think any time you make things easier, we're going to want to do more and our teams will want to do more. The belief among college students, the ChatGPT is not going to allow them to just make a query in sending their homework. The problem is -- the question is describe what actually happened on the night of Paul Revere's ride, if that's the question, and everyone gets the same question, which you do in class and everyone uses ChatGPT, whoops, everyone's going to submit the same assay last time I checked. And so ChatGPT is today's hand calculator. When I was a kid, there was no such thing. I hate to admit, but it's true. So I had to do math longhand. And then hand calculators came along and parents were up in arms that thought, 'Oh, kids won't have to learn math anymore. And the answer is yes, you still have to learn math, turns out. You absolutely have to learn math. Like you have a tool that makes it easier to do. And ChatGPT is the same thing. We are ushering in a very exciting era of new tools. And they're going to allow our teams and our competitors' teams to do really interesting things more efficiently. So we're going to want to do more. We're going to want to be even more creative. And no, it's not going to allow someone to say, please develop the competitor to Grand Theft Auto that's better than Grand Theft Auto, and then they will just send it out and ship it digitally and then that will be that. People will try, but that won't happen. Okay. Maybe I'll sneak in one -- a second one, if I could, as well. Just really around productivity. Obviously, you guys are pretty far along in the return to office. When you step back and think about that big pipeline and all the projects that you've laid out, how do you feel like things are progressing from a productivity standpoint now that, again, you're pretty far along in the return to office. Thanks again. We've been pretty flexible about return to office, and our teams have been great. One of the many wonderful things about working at Take-Two, the amazing people that we work with. We're more than 11,000 people strong around the world. And our attrition rate remains much, much lower than the industry average. And I think that's because -- this is an extraordinary place to work where we seek the best and the brightest on both the business and the creative side, and we encourage people to pursue their passions and excellence at the same time. So productivity is strong. Performance is strong. We probably never had a period this long with all of our titles showing up or performing. I believe in the last two years, we've had the best reviews and the best scores we've ever had. And that's why the business challenges are a bit frustrating, because our people are delivering. And we will deliver over time as long as we keep doing that, and that's the plan. Thank you. There are no further questions at this time. I'd like to turn the floor back over to Strauss Zelnick for any closing comments. Thank you for joining us today. I wish we were giving you better news across the board. There is so much good news here, and we're really proud of it. As I said just a minute ago, the thing we're most proud of is our phenomenal colleagues all around the world to whom all of us are so grateful. And as for our results, we plan to do better. We thank you for your support.

EarningCall_332

Good day, everyone, and welcome to the Evolution Petroleum Second Quarter Fiscal Year 2023 Earnings Release Conference Call. [Operator Instructions]. Please also note today's event is being recorded. At this time, I would like to turn the floor over to Ryan Stash, Chief Financial Officer. Please go ahead. Thank you, and good afternoon, everyone. Welcome to our earnings call for the second quarter of fiscal 2023. Joining me today is Kelly Lloyd, our President and Chief Executive Officer and a member of our Board of Directors. After I cover the forward-looking statements, Kelly will review key highlights along with our operational results. I will then return to provide a more detailed financial review. And then Kelly will provide some closing comments before we open it up and take your questions. Please note that any statements and information provided today are time-sensitive and may not be accurate at a later date. Our discussion today will contain forward-looking statements of management's beliefs and assumptions based on currently available information. These forward-looking statements are subject to risks and uncertainties that are listed and described in our filings with the SEC. Actual results may differ materially from those expected. As detailed numbers are readily available to everyone in yesterday's earnings release, this call will primarily focus on our strategy as well as key operational and financial results and how these affect us moving forward. Please note that this conference call is being recorded. If you wish to listen to a webcast replay of today's call, it will be available by going to the company's website. With that, I'll turn the call over to Kelly. Thank you, Ryan. Good afternoon, everyone, and thanks for joining us on today's call. Our results in the second quarter of fiscal 2023 were solid and continued to demonstrate our assets' ability to generate strong free cash flow. We used our cash flow to once again fund operations. We used it on capital spending and shareholder dividends. In addition, I'm pleased to report that we have delivered on our commitment to eliminate our remaining debt position during the period. We have now fully integrated multiple acquisitions, paid off our debt and are generating meaningful free cash flow to fund our strategic objectives. Of course, none of this would have been possible without the hard work of our team. I want to thank all of our team members for their continued dedication and strong execution as we remain focused on driving near- and long-term value for shareholders. During the second quarter, we paid a cash dividend of $0.12 per common share. This was 60% higher than the same period for fiscal 2022 which we view as a clear indicator of the growth and strength of our business. Our Board recently declared a cash dividend for the third quarter of fiscal 2023 of $0.12 per share. This will mark the 38th consecutive quarterly cash dividend paid by the company since we began our return of capital program in December of 2013. Since the inception of the program, we have returned more than $94 million or $2.85 per share of capital to shareholders. As we have discussed in the past, there are very few small-cap E&P companies that can say they have consistently paid a dividend for that length of time throughout several tumultuous commodity price cycles. We believe this reinforces the strategic view our Board takes as we prudently grow the business through the targeted acquisition of solid, long-life and low-decline assets that will continue to support a sustainable quarterly dividend for the immediate long term. In short, maintaining and ultimately growing the payment of a quarterly cash dividend remains front and center for our Board and management team. Turning now to operations. Second quarter fiscal 2023 production of 7,250 net BOE per day was down around 5% from the 7,598 net BOE per day for the first quarter of fiscal 2023. In large part, this was due to downtime associated with the severe winter storms we experienced, and to a lesser extent, some temporary compression issues and some downtime in the Barnett associated with offset operator activity. As of now and barring any future extreme weather circumstances, operations are back on track. Looking at our second quarter results in more detail, net production at Jonah Field for the second quarter was 1,902 BOE per day. Slightly impacting production levels in the second quarter was the decision to maximize natural gas production, thus reducing NGL recoveries during the period to capitalize on relatively higher natural gas prices, which averaged $11 per Mcf for the quarter. The Jonah Field is our most recent acquisition, and we remain pleased with its performance. Similar to our other assets, the field is highlighted by long-life, low-decline reserves that generate significant cash flow. In addition, the asset base provides access to attractive Western markets. Second quarter net production for our Williston Basin was quite flat to the first quarter at 489 BOE per day, of which approximately 76% was oil. The Williston Basin oil production was impacted by the winter storms during the quarter. However, this was offset by the reactivation of the gas pipeline. We are pleased to see the ONEOK gas pipeline come back online in late September for the first time since our acquisition. This has led to increased optionality for natural gas in NGL sales. In early January, we along with the operator, Foundation Energy Management, began operations on one of our Bakken recompletions and continue to work closely with them on high-grading opportunities in the field such as expense workovers, additional recompletions and sidetrack drilling opportunities. Also, technical evaluations remain underway to assess our Pronghorn and Three Forks drilling locations. Net production for the Barnett Shale for the second quarter was 3,304 BOE per day, of which approximately 76% was natural gas. As discussed previously, impacting sequential production volumes were severe winter storms, temporary issues at select compression stations and certain offset operator activities, all of which have been addressed. Hamilton Dome Field net production was substantially flat for the second quarter at 413 BOE per day. We continue to support the operator, Merit Energy, in their efforts to restore production at previously shut-in wells, adjust water injection locations and volumes and execute on other targeted maintenance projects. Additionally, in the quarter, we and Merit began upgrading facilities to proactively reduce emissions throughout the field. Second quarter net production at Delhi Field was approximately 1,131 BOE per day. Denbury, the operator at Delhi took steps to minimize the severe weather impacts, which resulted in only minor downtime during the second quarter despite the storms. They are continuing to perform conformance workovers and upgrades to the facilities. With that, I'll now turn the call over to Ryan to discuss our financial highlights. Thanks, Kelly. As mentioned earlier, please refer to our press release from yesterday afternoon for additional information concerning our second quarter fiscal 2023 results. My comments today will primarily focus on financial highlights and comparative results between the second and first quarter of fiscal 2023. A key highlight of the second quarter was our continued solid generation of cash flow including adjusted EBITDA of $16.4 million. This was $24.66 on a per BOE basis, which was an increase from the first quarter. We have now generated $33.5 million in adjusted EBITDA for the first 2 quarters of fiscal 2023. As Kelly discussed, during the second quarter, we continued to fund our operations, development capital expenditures and dividends out of operating cash flow while also repaying all of our remaining debt. Supported by our continued strong operational and cash flow outlook, we paid a dividend of $0.12 per share in the second quarter and declared a dividend of $0.12 per share for the third quarter of fiscal 2023, payable on March 31 to shareholders of record as of March 15. Our cash dividend program has and will continue to be a top priority as we clearly recognize the strategic importance of returning value to our shareholders. During the second quarter, we enhanced our already strong balance sheet delivering on our commitment to paying off our debt in the second quarter. We eliminated our remaining debt position of $12.3 million. Our borrowing base remained at $50 million, and we had cash and cash equivalents of $3.7 million and working capital of $2.9 million as of December 31, 2022. The result was growth in our liquidity to $53.7 million, a 45% increase from only 6 months ago. This is a direct result of our targeted and immediately accretive acquisitions over the past couple of years as well as our continued focus on cost control. We are ideally positioned for the continued execution of targeted future growth opportunities that meet our strategic vision. As a result of eliminating our outstanding debt position, we are not currently required to maintain any hedges on our production and our existing hedge positions are set to expire next month. Looking at the second quarter financials in more detail. Our total revenue of $33.7 million was 15% lower than the first quarter due to a combination of factors, including lower oil revenue associated with 1% lower sales volumes and a 13% decrease in realized pricing. Lower natural gas revenue due to a 5% decrease in sales volumes and 8% lower realized pricing despite declines of almost 30% in Henry Hub pricing. Decreased NGL revenue due to 8% lower sales volumes and a 27% decrease in realized pricing. The result was an average realized price per BOE decrease of 11% to $50.49. Lease operating expenses decreased 21% quarter-over-quarter to $15 million in the second quarter. On a per BOE basis, lease operating expenses were $22.55 for the second quarter compared to $27.35 in the first quarter. Primarily contributing to the decrease in LOE were changes in estimates from prior periods and reduced ad valorem and production taxes due to lower revenues in the current period. Also contributing to the decrease was lower work-over expense in the Williston Basin and reduced CO2 costs at Delhi Field associated with the decrease in crude oil prices from the prior quarter. As a reminder, our CO2 costs at Delhi Field are directly impacted by the price of oil. Therefore, lower oil prices result in lower CO2 costs. General and administrative expenses were $2.6 million for the second quarter versus $2.5 million for the first quarter. The slight sequential increase was primarily due to higher noncash stock-based compensation in the second quarter that was partially offset by lower professional services fees compared to the first quarter. The end result is that on a cash basis, second quarter G&A was essentially flat with the first quarter. Net income for the second quarter was $10.4 million or $0.31 per diluted share versus $10.7 million or $0.32 per diluted share in the first quarter. Adjusted net income for the second quarter was $9.6 million or $0.28 per diluted share versus $10 million or $0.30 per diluted share in the first quarter. During the second quarter, we invested $1.1 million in development and maintenance capital expenditures. For fiscal 2023, we continue to expect total development capital expenditures of $6.5 million to $9.5 million. This estimate includes upgrades to the Delhi Field central facility, workovers at Hamilton Dome field, the Barnett Shale and the Jonah Field and sidetrack drilling opportunities and low-risk development projects in the Williston Basin, excluding the development of Pronghorn and Three Forks locations. We expect capital spending on our existing properties were continuing to be met from cash flows from operations and current working capital. Of course, our spending outlook may change depending on conversations with our operating partners, commodity pricing and other considerations. After repaying our outstanding debt and upon emerging from blackout, we entered into a Rule 10b5-1 share repurchase plan in December that authorized up to $5 million in buybacks, subject to limitations on trading volume and stock price. The plan is effective through June 30 and can be extended or renewed by the Board. The plan also had a 30-day cooling off period, so there were no repurchases made until January. We plan to provide an update on our buyback activity in our third quarter 10-Q to be filed in May. I will now turn the call back over to Kelly for his closing remarks. Thanks, Ryan. We continue to benefit from the targeted acquisitions that we have completed over the past few years, including 2 in just the last 12 months. As a result, we enjoy a larger and more geographically diverse asset base and commodity mix. This provides us with a solid platform for significant cash flow generation that we will continue to use to support and enhance our well-established shareholder capital return program. Our shareholders expect a consistent and meaningful cash return on their investment, and we remain committed to maintaining and as appropriate, increasing our dividend payout over time. Another component of our capital return strategy is the share repurchase program that we put in place and began making purchases through after having fully repaid our revolving credit facility at the end of the second quarter. This provides the optionality to opportunistically repurchase our shares from time to time through open market transactions, privately negotiated transactions or by other means in accordance with federal securities laws. As in the past, we will maintain a conservative balance sheet and remain disciplined in our management of capital as we fully recognize the cyclicality of our business. Our ongoing commitment to remaining fiscally prudent was evidenced by our prompt pay down of our debt position following the closing of our most recent acquisitions. We are well positioned to execute on targeted high rate of return and immediately accretive growth opportunities as appropriate. We will continue to execute our strategic plan, focused on maximizing total shareholder returns and optimizing every dollar that we invest. Our approach of building a targeted asset base of PDP reserves capable of supporting cash payments to shareholders has served us well over the past decade and will continue to benefit our shareholders for many years to come. As we've discussed in the past, we will closely evaluate and only execute on targeted acquisition opportunities that are immediately accretive, provide long life established production, strategically expand our base of assets and do not result in material dilution. Any transaction must also clearly support our long-standing thesis of providing a significant total shareholder return for our shareholders. With that, we are ready to take questions. Operator? It's -- yes, is the answer. Again, with the outstanding team we have here, it's made a good smooth transition. So I appreciate you asking me that. On the CapEx issues, the press release and as Ryan just reiterated, provides a range of $6.5 million to $9.5 million. And then you explain what that capital spending is going to be directed to. And then there's a phrase in the remainder of that [indiscernible] where it says does not include any CapEx for the Pronghorn and Three Forks locations in the Williston. Could you give us a ballpark idea of the potential magnitude that some of those wells might add to the fiscal 2023 CapEx? Sure. It all depends on the pricing in there and one of the reasons we've been really going back and forth on this pricing in that part of the world has moved a lot and it's moved up and we're starting to see it ease a bit. But -- so it's kind of a range per well, a fully completed well. And look, I don't want to give an exact number, but I would say, just to be safe, anywhere from $7.5 million to $10 million. Right. [Indiscernible] are working in locations, every location is different. So some of them may [indiscernible] 50%, some of them may be more like 30%, where the ultimate location goes. Yes. That would assume that we would drill and complete the well this fiscal year, John, right? So I mean that would obviously require decision. That's right, but again, that's sort of the concept. It depends on -- every location has a different sort of working interest. You've got -- you have prices moving around significantly for the service side of things [indiscernible] part of the world. And you've got permitting process timing. All those sort of issues to play with. But just on a per well base. I think we've advertised for somewhere in that, and it was a broad range, but we don't want to get too specific at this time. No. That's perfectly acceptable and I understand. And what's the status of some of these locations? Have wells been proposed by the operator, and have they sent you an AFE? So as far as Pronghorn, Three Forks wells, no, we are working with them closely. They have not proposed any wells there. We have -- they have proposed AFEs on the recompletions in the Bakken, up hole vertical recompletions in some old Bakken wells, and we've actually recently begun one. And the other part -- the other thing we're working about -- we've spoken about the [indiscernible] or [indiscernible] in the past. And I mean, John, basically the way this all jumbles together, they all have their own pros and cons, and they have their cost associated with them and expected results and risk. And so you're putting them all in there. We're working together, coming up with at this time what makes the most sense to do right now. And on that front, what jumped to the head of the line and we're excited about it is the recompletion up hole vertical well, it was drilled deeper than the Bakken coming up [indiscernible] when completing it there. So that -- those programs have jumped to the front of the line, just when all the variables into the mix. So that's what we're focusing on with the operator right now. Yes. We can get some production growth from those sidetracks and the recompletion. Okay. Well, thanks for all that detail and putting some numbers around it. I really appreciate it. And I'll pass it on to the operator. Congratulations on the quarter. I want to start off -- yes, I want to start off by talking about the average daily production decline of about 5% quarter-over-quarter. I just want to go through the causes of that. I know you discussed it on the call, but -- so -- and kind of a little bit of my thinking kind of just running it . So oil was down just 1% while gas and NGLs were down much more at 5% and 8%, respectively. In my mind, that kind of squares my understanding of how I think natural gas sometimes can be impacted more because of sort of pressure changes that have an impact and liquids can fall out and freeze. So sometimes, I think back in some ways, almost counterintuitively be more vulnerable to oil. And then, of course, there's the compressor down in the Barnett. So I guess the first question is just am I right about the general impact of freezing weather with oil versus like flowing. I know operations are hard no matter what, like trying to drill a new well. But in terms of flowing, my accurate on that's just oil versus gas. And then the follow-up there would just be would production have been up quarter-over-quarter or just flat without any of these sorts of disruptions, the weather and the compressor. Would it have been up if you could kind of quantify like what kind of path you are on? And if we should expect things to bump back next quarter to get a production bump. So I'll talk a little bit about the first part of your question. In general, oil is liquids, right? And they have a tendency to be able to freeze. However, it depends on where you are, like our operator foundation in the Williston, they're very used to and very good handling and winterizing the wells. Now the biggest impact there on the oil side, honestly, was if you get 3 feet of snow, you can't drive down the road to get to the well, right? But as far as their equipment goes, they've done a great job of . So it wasn't affected too much. And in Delhi, there were some problems in Delhi, as we alluded to in the first quarter. So the fact that we're flat some of those recovering the issues in the first quarter, we did have to shut down because things were there a little bit in the Delhi side. So I would actually argue probably oil, which is liquids is more to the freezing storms. But everything you can freeze a valve. When you get storms that bad and everything goes up, it can impact anything you're doing. Okay. That's helpful. And on the sort of -- if you can quantify or ballpark just would this have been -- would we have seen increases this quarter based on just kind of the path you're on? If we didn't get the weather or the compressor shutdown, should we see that -- should we see a bounce back next quarter with things cleared up and the compressor coming back online? Just trying to kind of get a normalized idea of how to think about production going forward. Yes, that's -- so I'm not going to -- I don't want to say too much as far as going forward. Now looking backwards, what I can say is overall, the net impact was about 5%. We have a corporate decline rate, which lower than 5% per quarter. So yes, I think you can kind of understand the impact there. I don't want to get too specific, and I don't want to give guidance, but we were lower than when we ought to have been doing the impacts of these things. [indiscernible]. Yes, it's hard to say, Don, if the Barnett was, as you can probably see the most of the impact quarter-to-quarter or to say with any degree of complete certainty where we would have been if this hadn't have occurred, right? We certainly would have been closer to last quarter than we are today, but it is on decline. And Diversified has done a great job reactivating wells. And but at this point, they've reacted most of what they're probably going to. And so we're probably going to expect to see some decline going forward, but we would certainly hope that there would be some bump to your point, next quarter from this quarter with some of these issues have been rectified. Assuming nothing else crops up, right, as you know, can have in this field. Okay. Okay. That's helpful. And then I'd like to dig a little bit deeper into the production costs since from my perspective, that was kind of a major driver behind the EBITDA [indiscernible]. I think -- could we talk through that some more and help me think about how to model it going forward. So one of the key things look like -- I understand sort of ad valorem and all that stuff. But the biggest driver you said was the change in estimates from prior periods. And I think in the past, you said that has to do with a lag in commodity price changes and that impact on LOEs, something like if you're consuming gas on site to drive the compressors or something like that, then, of course, that "cost" is going to be tied very closely to commodity prices and then it's sort of a billing cycle thing that creates the lag. Is it a pretty straightforward one quarter lag where I could do -- if I did say like a correlation analysis, where I took commodity prices, but it did a one quarter lag versus forecasting, would that hone in on a good prediction there? Or would that kind of lead me astray? Not really 1 quarter, but it was... it was easy, right? So I mean a lot of the costs we have in the -- let's talk about the [indiscernible] where we tend to see -- we see more variability here that most of our costs, a lot of the LOEs in gathering, right? And we get built out a 2-month lag for that. So it's really not 1 month, that's 2 months. And there is impacts there from commodity prices on gathering and processing side. And so as we've seen, as I mentioned last quarter, as we've seen prices go up, that does filter through in our estimates have updated throughout. And so while we had a negative impact past quarter, we had a official positive impact this quarter in the Barnett. And so we reported around [indiscernible] a barrel you can see in our press release for this quarter on LOE for the Barnett. I think last quarter, I said a range of $20 to $25, and I don't think that's a good range for the Barnett. Now some of that, obviously, as you mentioned, depends on pricing. And if pricing is lower, we certainly at the lower end of that range, and not higher. But I still think the $20 to $25 a barrel for the Barnett is probably a good longer-term way to model that. And on the other areas, obviously, we've seen, those have been pretty consistent, really, if you look on the other areas, kind of area to area, with the exception of [indiscernible]. So the Williston having some less workover activity this quarter, which we saw a little bit of drop in LOE in that area specifically. And if you recall, Donovan, last quarter, we spoke to Williston. Foundation was doing a really good job of pulling strings completely and changing amount, getting ahead of the curve, which should have the effect of keeping them on long and having less downtime. So we front-loaded some of that LOE workover costs at Williston. Last quarter in -- you see the effect of it this quarter. I see. I see. Okay. And then last question and I'll hop back in the queue. But since you paid off the debt and you've got the buyback, but this also means that all things considered, it means you're in a great position to be considering or more actively looking at deals as a possibility, kind of seeing where can you get the cheapest barrels and maybe that means buying back your own shares, but that also means comparing against what opportunities that are out there. So how actively are you guys looking at deals right now? And are they more in the form of potential asset purchases or things that you are looking at maybe picking up an entire company? Okay. So you can -- the answer in -- a theoretical answer is we're open to whatever is the best deal and what makes the most sense at that time. Honest answer for what we've actually had dug into has been more acquisitions of assets. And that's not for any reason. Look, over the past, we consider all sorts of deals and what's the most accretive and what's going to be the best return for our shareholders. I'm just -- in the last few months what we've had, we've been able to go meet with people about has been more [indiscernible], but that's just happens to be the case. We're not opposed to that. And I'll just say, acquisition front, we're competitively looking all the time for acquisitions. And I don't want to get too into the on expected pricing and all that. But I think I've said this before, and you've seen it in the last couple of quarters, no deal is better than a bad deal. And sellers have been pricing in high pricing forever when the curves were severely backward dated. And we've seen these strips start to change. And I think we're going to fairly quickly be able to see sellers' expectations, see if they move as well. I can't say -- I can say that we're somewhere along the commodity price curve. Certainly, with natural gas, I think we're a lot further top than we were a couple of months ago. So I agree. We're starting to -- we have been, but we're digging in as much as ever on the acquisition front. So I have a couple of questions. Number one, is rather interesting pricing that you got from Jonah production. And just wondering if those elevated prices for gas are still out there? Or has that come down with the overall decline in gas prices? Yes. So it's interesting, right? So when we bought the property, I wouldn't say we predicted what -- we could have predicted what happened, but we were bullish on California and kind of pricing in the West and the winter sort of held true to an extreme nature, right? If you know -- if you followed California weather, it's been a very cold -- maybe unusually cold winter out there and with kind of the energy policies in the state, they're short natural gas. So you get these phenomenons in the winter that we saw here in December. We actually saw it in -- we've seen it in January as well a little bit. [indiscernible] and some in February, prices are coming down a little bit. But I'd say it's definitely surpassed our expectations. I think we had been hopeful that we would see this winter premium, which we had seen in the historical data we reviewed when we bought the asset. Just not to this extent. So I mean it's hard to say [indiscernible] or are we going to see us again. It's certainly possible for abnormally cold winters, but one is going to be a big driver of that along with hydroelectric power and lots of other variables, but we've certainly been really pleased this winter. So basically, the pricing tightness there, the spread versus Henry Hub is still ruled a pretty big spread there, right? In other words, in your press release, you said you were getting like $11 per Mcf for the gas, right? So still kind of up in that range, obviously, probably not exactly, but is that a fair statement, [indiscernible]? Okay. So I don't want to give too much. I will say, factually, there have been days this quarter where we received gas prices that were at least in that range, that. Yes. I mean I think of all, it's been -- if you follow -- look, we sell out of kind of Opal, right, of the tailgate there. So if you follow the daily pricing, yes, it was high in January. It's come down a little bit in February, right? They go at a premium to Henry Hub, but it's certainly come down. So we're hopeful we don't know how this quarter is going to end. We're hopeful we'll have strong pricing again this quarter, but we're only -- we're not even halfway through this quarter yet. Yes. And John, look, I don't want to say anything that sort of falls into the spectrum. So I'm not going to comment on why California's in the situation it is. But I can say, clearly, there is insufficient natural gas being delivered to California because all the routes are maxed out, and yet they're still record high prices. Yes. That's fine. You don't have to go -- I'm with you on the -- on that end of it. So as far as the 2 Birdbear wells you mentioned, sidetracks, are those testing new geographical areas like new units? Or is it more kind of infill type? So the Birdbear itself, and this is something we're continuing to do work on. And the question is, is it a conventional play? Is it a nonconventional play? And -- or is it just very chopped up and so you need to make sure you go out and count or along the way. And the answer is, yes, they're both infill and yes, they're both new. It depends on how small the pocket is that you're going into, and you may encounter several of these across the wellbore. I'd say, let's put it this way. From a closeology perspective, they're close. Okay. And then I think I kind of missed this, but you mentioned on the vertical recompletions, are these new zones within the wellbore set rate or not? That's correct. Yes, these opportunities [indiscernible]. There's several of them, not as many as we'd like, but there are at least [indiscernible] where they were drilled deeper and bypassed the [indiscernible] and so you go up hole and put a big single vertical [indiscernible] back on it. And then the [indiscernible], if those were to come up, would you possibly tap into your credit facility if the dollars were more than what you had cash on hand? Or would you work it out of cash flow or kind of what's your thoughts on that? I mean it's kind of more -- really more of a working capital, right, decision. I think we wouldn't drill the wellness we thought they were going to be cash flow positive, right? So obviously, cost upfront. But given that we're now debt-free, and we have good cash flow. Certainly, we would hopefully do them out of cash flow. It just depends where we are in the cycle from a working capital standpoint. But what I would say, I'm not going to borrow long-term capital to drill the wells, right? Right, right. Got it. Last question. There was a recent article in the journal about kind of highlighting Denbury and the fact they had the CO2 pipelines. And we talked about it a little bit a few months back. And I was just wondering if there's been any progress in the utilization of that pipeline system to gather industrial CO2 gases and so forth? And if so, would that -- how might that benefit evolution if industrial producers of that were to utilize the pipeline, would that help you all out? Would that affect the contract that you have with the oil prices and the use of CO2? So that's interesting. Yes, it does. I mean I've had people ask if they get the green pipeline certified and you have a tap on the green pipeline, are you going to be able to get carbon credits and all that? And honestly, I don't know the answer to that. We have some smart people looking into it, but I think they're sort of waiting for more guidance from the governmental types. But as far as we're taking, I always get this word wrong, anthropomorphic rather -- so new -- like CO2 created from big machinery complexes and all that. Man-made CO2. If you take that and put that in the green pipeline, and we can get some of it allocated to Delhi versus the other fields, then I would assume it's probably going to come at a cheaper cost than what we're getting from Denbury's Jackson. [indiscernible] projects. Yes. I guess where I was kind of going with that in the bigger picture is would that help to lower the overall cost for your Delhi operations? In other words, would you be able to capitalize on that, would cause renegotiation of the contract or whatever that you're in right now, given that you're paying CO2 costs based on the price of oil barrels and so forth? Right. It's -- it potentially is the answer, but we're not at that. So let's -- if there's a way for [indiscernible] and Denbury to come to a better contract that benefits both parties. I'm sure we'd both be up for. But at this point, I just -- we're not far enough along to speculate. You mentioned when you were discussing acquisitions, some of the impact of the pricing volatility. Can you provide any real color on what impacts the drop in natural gas prices over the last 6 months is having on buyer -- or I'm sorry, seller expectations? And also, is it having any impact on the types of properties that you're seeing in the market. So yes, good question. And I think the answer is -- I mean this rundown has really been fairly rapid. And it's -- what we're going to see at least this is my expectation, you'll see some of the sellers' expectations start to move more in line with -- if you recall they were extremely right? So sellers generally wanted to get the high front month and keep that flat forever and sell it to you on that kind of a "strip" whereas a conservative prudent buyer, you're going to have to use a discount to the strip. So now that we've come back with the front and the back, are a lot closer to equal, I think you're going to see -- start to come to the realization that this is the real price they're going to get. So we expect to see some movement there, and we expect it to be helpful from a buyer's perspective. And as far as types of deals coming to the market, I just -- not particularly yet. I think [indiscernible] we will. If -- again, we had a production response to high prices, I think we're going to see a production response to low prices but there was a lag. So I think in the months or whatever time period that we're going to be down there, I think we'll have some new assets in the market, and we'll have some real opportunities. Secondly, on your -- on Jonah and the Barnett, are you seeing much from the operators as far as what their plans are for, let's just say, the next -- the rest of your fiscal year over kind of other projects to enhance production or have they slowed workover activity or put some things on that they otherwise might do in just given where prices have fallen to? Yes. I mean I think from the Barnett specifically, right, so they've pretty much reactivated most of what they had on their -- what their list was when they bought the asset. So at this point, they're more just fixing things as it comes up. So I don't know if we're going to see any more proactive reactivations there. Jonah, I think Jonah is probably pretty similar. I mean there weren't a lot of reactivations to begin with. They were one recomplete that I think they did finish that, but there's really not a lot of other activity, at least in our portion of the acreage that we own in Jonah that they've sort of hinted. So we haven't heard a lot that prices, other than, like I said, for the Barnett sort of no longer proactively reacting well on a lot of impact yet to that. Yes. And so Jonah in the first quarter, did some sort of consolidating of compression, but that's already been done. So we're seeing the benefits of that now. But I don't know that they have a whole lot else other than normal wear and tear. Sure. I'll just do 2 more quick ones. The first 1 is just for the natural gas pricing west of the Rockies, are there any kinds of lags at all in terms of revenue recognition, just if we're following that spread and trying to anticipate each quarter based on how that does relative to Henry Hub and everything. Is there like there's a price blowout near the tail end of December, does that spill over at all in terms of into the next quarter, that last week or something? Or is it a pretty cut and dry, it all falls in whatever you look up in terms of spot pricing, that kind of lines up 1:1. So yes, a couple of things, right? The way that we market our gas, we're [indiscernible] of operators that we sell probably the majority of it on what they call inside FERC. If you're familiar with that, sort of pricing. So a lot of the pricing gets set actually at the beginning of the month. But it's -- unless you subscribe to [indiscernible] the publication or you have Bloomberg kind of hard to find that pricing necessarily. A lot of it does sold at that. The remainder is sold on a daily basis. So you're going to take the average of the month that we're going to sell over the whole month, and that portion of it, less than half is sold on a daily basis. So it's a little bit as to the price. So in your example, if you had a run-up in prices at the end of December, we would see some of the benefit that in December for the daily pricing but not as much from the -- what we call the baseload volume we sold. But again, in January, with the run up right, obviously, that would benefit us in January from the month pricing, if that makes sense. Okay. Yes, that's interesting. And then the last is just I was feeling need to kind of check in on the conventional assets, Delhi, Jonah and Hamilton. When you're in a sort of sustained higher price environment, I know gas has come down a lot, but a lot of times, the operators will sort of circle back around and think or ask themselves, can we turn this up somehow to another level or another phase or anything like that. And so I know there's the heat exchange project at Delhi, but just have there been any sort of incremental conversations or incremental interest in doing other types of additional phases or investments or things in those fields, maybe not a decision yet, but just increased interest in like, hey, we might want to do that. Let's see. So that's a really good question. I'm thinking one of the -- I had an answer in mind, but it's not really a choice we made in the [indiscernible], the pipeline coming on has really been helpful with natural gas and NGL sales. And this is -- we're just starting to see the benefit of that. I mean it hadn't really been on the whole time we've owned it. So that's not really a CapEx just it was down, now it's not. So we'll see some benefit there. Hamilton Dome, look, Merit has done a great job of adjusting their production -- injection rates and going from there, and they've been able to keep that pretty flat. So it's not just sort of one [indiscernible] thing. Let's do it. It's constantly adjusting and moving and tending to things. So it's kind of never ending. But I think we've seen really good benefits from that. In Delhi, yes, I mean, Here's -- the biggest thing at Delhi that we're pushing for is getting 5 back on, right? So that's one we think, economically, it for sure is very good economic project that Merits being on the books. So that would be the big impact, honestly. [indiscernible] but a lot of barrels if you can side in. And ladies and gentlemen, at this time, and showing no additional questions, I'd like to turn the conference call back over to Kelly Lloyd for any closing remarks. Great. Thank you. Thanks again to everyone for taking the time to listen and participate in today's call. As always, please contact us if you have any additional questions. We appreciate your continued support and look forward to updating you on our ongoing efforts when we report our third quarter results in May. Have a good day. Ladies and gentlemen, that does conclude today's conference call. We do thank you for joining. You may now disconnect your lines.

EarningCall_333

Thank you for standing by, and welcome to H&R Block's Second Quarter Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be question-and-answer session. [Operator Instructions] Thank you, Lateef. Good afternoon everyone and welcome to H&R Block's second quarter fiscal 2023 financial results conference call. Joining me today are Jeff Jones, our President and Chief Executive Officer, and Tony Bowen, our Chief Financial Officer. Earlier today, we issued a press release and presentation, which can be downloaded or viewed live on our website at investors.hrblock.com. Our call is being broadcast and webcast live, and a replay of the webcast will be available for 90 days. Before we begin, I'd like to remind listeners that comments made by management may include forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties, and actual results could differ from those projected in any forward-looking statement due to numerous factors. For a description of these risks and uncertainties, please see H&R Block's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, as updated periodically with our other SEC filings. Please note, some metrics we’ll discuss today are presented on a non-GAAP basis. We’ve reconciled the comparable GAAP and non-GAAP figures in the appendix of our presentation. Finally, the content of this call contains time-sensitive information accurate only as of today, February 7, 2023. H&R Block undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances after the date of this call. Today I will begin with a summary of our Q2 results, progress on Block Horizons, and the momentum we have entering the tax season. Then, Tony will provide details on our financial performance, and we’ll open it up for Q&A. Second quarter results met expectations and we’ve performed well in the first half of fiscal 2023. I feel confident about our positioning as we move into tax season and the third quarter, and I’m pleased to reaffirm our full year guidance. In the second quarter revenue grew 5% to last year on continued business momentum and a strong ending to the 2022 tax season. We are seeing signs that consumers are feeling more pressure this year versus last year given the rollback of government stimulus and the broader inflationary environment. As a result, clients turned to H&R Block in Q2 to bridge the gap in their time of need, and we saw higher demand for our Emerald Advance product in December, which we view as a good leading indicator for tax season. On the expense front, we managed well despite the macro environment, and our capital allocation practice remains solid as we repurchased another 2% of shares outstanding in the quarter. Turning to Block Horizons, I continue to be pleased with the progress we are making. Starting with Small Business, revenue growth was strong as a result of the extended filing season and our bold marketing of the up to 30% price advantage we provide over CPAs. As we’ve talked about, we’re also building out our year-round services for bookkeeping and payroll, and we are seeing positive adoption signals on these products. We are also feeling good about the value our new business formation tool is offering clients. There are often tax and legal benefits to small business owners from being incorporated, and we built this product with a partner to answer this clear need, with the added benefit of being a revenue driver to Block. It also provides an opportunity to increase tax prep revenue if we file both a personal and business return the following tax year. Another way we’re moving this segment forward is increasing training and certification levels. Half of our small business tax pros have achieved the advanced level, which focuses on levers to directly drive customer and revenue growth through 13 hours of additional training. In all, I’m very happy with the results we are producing in Small Business. The second component of our Small Business imperative is Wave, which is a one-stop money management platform for small business owners offering invoicing, payments, accounting, banking, payroll, and advisory services. For the quarter, revenue growth was 13%. Our main focus is accelerating revenue growth and determining the ways we’ll drive long-term profitability. Moving to Financial Products, we were pleased to roll out Spruce in the Assisted channel via all company and franchise offices in January. We knew that educating our tax pros on the clear and different value propositions of Spruce and the Emerald Card would be critical to the success of both products. As such, we added dedicated training and feel good about the readiness of our field and how we’re informing clients. The goal for Spruce this season is to educate clients on its value, generate sign-ups, and ideally have all or a portion of the tax refund deposited as an initial step. The next steps are about ensuring that once an account is open, clients are engaging with the platform, setting up direct deposit, and using Spruce for their day-to-day purchases. In just the first few weeks, Spruce is living its purpose of helping our clients to be good with money and enabling them to grow in their own personal financial confidence. In fact, our very first Spruce sign up in the Assisted channel came from a longstanding H&R Block client who came to her appointment with an interest in Spruce because she had seen our marketing beforehand. This client had historically deposited her refund at another bank, but after learning about Spruce’s specific value proposition and features, such as low fees, the ability to easily deposit cash at retail locations, the fee-free ATM locator in the mobile app, and FDIC backing, she chose to put her refund balance on Spruce. At the same time, we are continuing to innovate the platform. Importantly, we are making it easier for clients to convert their payroll to Spruce - they will soon be able to set up direct deposit electronically from within the app, skipping the manual forms and phone calls to HR. Building on our learnings from the DIY launch last year, our marketing approach for Spruce was strategically planned for before, during, and after the tax event. As of December 31st, we had 171,000 Spruce sign ups and $117 million in customer deposits. Given the initial launch in the Assisted channel, we look forward to updating you on the trends and learnings after tax season. Turning to Block Experience, we are blending technology with human expertise, and we continue to make great progress. This imperative underpins many of the ways we will win in both Assisted and DIY, and our go to market strategy reflects these advancements this year. Let me share more about it and why we feel confident in our ability to execute this season, which just began with e-file opening on January 23rd I’ll start with the Assisted channel. We are leveraging our technology to empower clients to choose how they want to be served - fully virtual or fully in person, and everything in between. You’ll recall that last season we increased the use of virtual tools by more than three times and we are continuing to make progress on client adoption. We are also improving the operational efficiencies within our innovative fulfillment network. You’ll recall we piloted this last year and are further rolling it out this season. The network benefits our clients by allowing them to more quickly access tax professionals who have capacity and increases our productivity. While the employment market is currently a challenge for many companies, we have successfully met our hiring and staffing goals. Our tax pros tell us that they return to H&R Block year after year because of our culture. They build strong relationships with their clients and teams, and are passionate about helping people. In addition, we hear positive feedback about the flexibility we offer related to scheduling and remote work. In Assisted, we are taking modest price increases this season. Despite inflation being materially higher, we feel that these modest price increases are appropriate as we continue to deliver a great value for price. We’ve done the work to position ourselves for success and I’m looking forward to the rest of the season. Turning to the DIY channel, we have spent a significant amount of time understanding how we can return to share gains by speaking to both our clients and our competitor’s clients, and we came away with clear learnings: there is a large awareness gap that H&R Block has as a competitive product, DIY filers do not believe that it is easy to switch to new software, and they do not want to be surprised on pricing when they get to the end of the experience and are ready to file. With these three challenges in mind, we responded. First, on the awareness front, we’ve allocated more of our marketing spend to DIY-specific messaging and are boldly addressing the clear advantages of our product, such as a better product experience, a price advantage to our largest competitor, how easy it is to switch, and the access to our network of expert tax professionals for assistance. We’re also identifying underpenetrated markets where we have a large opportunity and are going deeper in these regions with even more personalized messaging. As you may have seen already, our television advertisements are focused on bringing top of funnel awareness and addressing the ease of switching, which we know is the biggest barrier. We then leverage digital to optimize conversion, such as search, display, and social content, like TikTok, Instagram, and Pinterest, to deliver messaging on the value proposition I just discussed. In addition, reflecting trends of the creator economy, we have targeted campaigns for groups such as the self-employed and students. Second, we made it easier than ever to switch, including customized flows for clients moving from TurboTax. With just a couple of clicks, clients can drag and drop their previous year’s TurboTax return into the H&R Block online flow, which then auto populates into the current year tax flow. We’ve also created simple, step by step instructional videos to demonstrate this to clients. At the same time, we launched newly built AI technology, which is powered by models from millions of returns and AI algorithms, and other technology such as optical character recognition. This new feature automatically scans the prior year TurboTax return to identify if the client may have missed out on refund dollars. If it identifies opportunities, we notify the client and connect them to one of our expert tax professionals who can help them file an amendment. Clients only pay if they amend their return to get an additional refund. This technology is a gamechanger, and as the possibility of a recession looms, it’s important that consumers get every available dollar of their tax refund. Finally, to solve for pricing transparency, we present price previews to clients throughout the DIY experience so there are no surprises when they get to the end. Like in Assisted, we are taking modest price increases this year. We feel very good about our improved positioning and go to market strategy in DIY this season. The progress we continue to make across the business is significant, and I am excited about what is ahead. With tax season upon us, and after spending time in the field already, I can’t wait to see what we’ll accomplish for clients this year. Our performance continues to be on track for the first half of the year and, as a result, we are pleased to reaffirm our full year outlook for 2023, as Jeff mentioned earlier. In the second quarter, we delivered $166 million of revenue, which increased 5% or $8 million to the prior year. This was primarily driven by client volumes and net average charge improvements as we had a strong end to the 2022 tax season, partially offset by lower Emerald Card revenues. As we mentioned last quarter, we expected this impact due to Advanced Child Tax Credit payments being loaded on Emerald cards last year. Total operating expenses were approximately $450 million, an increase of about 3% or about $13 million, primarily due to higher corporate and field wages, along with increased bad debt expense. This was partially offset by lower consulting and outsourced services as well as favorable developments in insurance loss reserves. EBITDA was a loss of approximately $246 million, an increase of 3% or $6 million to prior year. Interest expense was approximately $19 million, a decrease of about $4 million, or 18%. Recall that in June of 2021 we issued notes at 2.5% and paid off our $500 million 5.5% notes early, in May of 2022. This was partially offset by increased interest expense on our CLOC due to higher interest rates. Although we are seeing higher interest expense on our short-term borrowings, this will be more than offset with higher interest income in the fourth quarter when we enter a positive cash position, assuming interest rates remain similar to current levels. Pretax loss was effectively flat to prior year at $298 million and our effective tax rate was 25.9% compared to 36.7% last year. As a reminder, our effective tax rate in fiscal year ‘22 was 15% and we expect it to increase to approximately 22% in fiscal year ‘23. Loss per share from continuing operations increased from -1.09 to -1.43, while adjusted loss per share from continuing operations increased from -1.02 to -1.37, primarily due to the larger net loss from lower income tax benefits in the quarter and fewer shares outstanding. As a reminder, the only adjustment we are currently making to adjusted earnings per share is amortization related to acquisitions. Turning to guidance, we’re pleased to reiterate topline growth, EBITDA that outpaces revenue, and EPS that grows even faster. As a reminder, we did not assume any benefit from 1099Ks in our outlook. We also remain confident in the longer-term target we provided in August, of adjusted EPS growing double digits annually through fiscal year ‘25. Our capital allocation practice remains strong. In Q2 we bought a total of 3.2 million shares for $130 million at an average price of $40.22. As Jeff mentioned, this was another 2% of our shares outstanding, for a total of $350 million or 5% of shares repurchased in the first half of the year. Given our narrow trading windows, we have historically executed most of our share repurchase in the early part of the year. Overall, I believe this is a great use of capital and I feel good about what we have accomplished this year. Before moving into Q&A, I’d also like to highlight the strength of our business during periods of economic downturns. Both the tax industry and H&R Block have a history of resilience. The industry is most correlated with employment, which remained strong in calendar year 2022, boding well for the tax season in ’23. And, as trends over the last couple of decades have shown, when times are tough clients want to ensure they are getting their maximum refund by turning to our trusted brand. We’ve also seen more small businesses formed during tough economic times, and if the backdrop deteriorates more meaningfully, our government has a history of stepping in to provide stimulus distributed through the tax filing system. You’ll recall our biggest compensation line item is for tax pros, which is largely variable in relation to filing volumes - meaning we can flex expenses in line with business trends. And as I mentioned before, rising interest rates are actually a near term positive for H&R Block. The bottom line is, our industry volatility is low and our business is resilient. In summary, we feel very good about the performance of our business and are looking forward to the rest of this tax season. Our next update, including filing volumes, will be on our Q3 call in early May. With that, I’ll now turn it back to Jeff for some closing remarks. In summary, we are pleased with our first half performance and are confident in our ability to drive value for shareholders through our business results and capital allocation practice. As we end our prepared remarks, I would like to sincerely thank our hard-working associates, franchisees, and tax professionals, who inspire confidence in our clients and communities everywhere. With tax season in full swing, our Block family is hard at work and I cannot thank them all enough. Thanks, Yes, hi Jeff, Tony. Jeff, just, I know it's early and whatever color you can give would be appreciated. Just how the tax season has started and is it in line with your expectations better than expectations, I guess, worse than expectations? Any commentary you could give from what you're seeing early on? Hi Kartik. Thanks for the question. Yes, obviously we won't get into details about the current quarter and season, but I will say that we have seen clients filing earlier in both the Assisted and DIY channels and we think that's true for the broader industry as well. And if it makes sense, when you think about those that really need their money, their refund and with stimulus payments ending from last year, so that's one insight I can provide, otherwise we probably don't want to get too deep into our current performance. That's fair. And Jeff, just I know Block Horizons strategy small business, when you look at the end of the season, what would you define as success? I guess what metrics are you looking at to see if the program is working up to your expectations or if there is some tweaks that might be needed? That's great question and obviously there are a number of different metrics we're looking at financial performance, operational, because there are a number of pieces to the small business strategy. I think if I start at the top, we've had two really good years in small business performance and so we expect to continue to see Assisted tax growth for small businesses, that's a core component of the strategy. We're also building year-round capabilities in bookkeeping and payroll. So we want to see that we're not only growing those businesses but operationally, we're able to deliver the kind of experience that we want and we know clients expect. And then, as you know, we're also launching new products like the business formation service, that's a brand new product and so for a year like this, when it's coming out of the gates, we're looking closely at operational performance and making sure that we're really delivering for clients when they raised their hand and say they're interested in that service. So a lot of different metrics. But we feel very good about the small business imperatives performance over the last couple of years and the expectations that will continue. Hi, thanks, good afternoon. We've seen estimates out there that this year refunds on average will come in lower which could potentially make consumers more price sensitive. Can you discuss your expectations on how lower refunds might impact the elasticity of consumers, especially the lower end with subprime consumer that may be a little bit more stretched given the effect of inflation? And what the ultimate impact could be on market share performance given some of those dynamics? Hi, George, it's Jeff, I'll kick this off. I mean I think at the highest level to start, we don't control the size of the refund. So we do the work for the customer, we deliver the experience and the outcome but what we do control is the price and the experience and how that adds up to value for the customer and I think that's one of the reasons why we are taking the steps we're taking on pricing this year is one example, knowing that every dollar matters, so expertise matters and despite a much faster, higher inflationary backdrop, we're only taking nominal price increases in Assisted to make sure that value is really strong. So that's really what we can control and we just continued to be focused on the best experience providing expertise in making sure that the price value equation continues to be strong, because we see it strong and that's been several years of building that as we've talked about. Yes, George. I would just layer on, I mean I think we do expect that refunds could come down a little bit this year as you remember, last year they increased. But even if they do, I mean early season clients in particular, still getting very large refunds relative to obviously the price they're paying for their services and many of them are leveraging products like Refund Transfer to pay for that tax preparation. So we don't expect that to be a near-term issue that would impact any kind of client volume. Got it. That's helpful. And then can you refresh your views around the topic of tax filing complexity this year and its impact on Assisted net average charge? What are some of the puts and takes that you expect in this tax season compared to last year's tax season? Yes. We can tag team again, but I think starting with, it's obviously been a few unusual years with a number of different things that were causing the filer to how to think about federal stimulus, unemployment benefits et cetera, and we expect this to be a more normal year in general. That said, we continue to see consumer opting for expertise, even in the DIY channel and looking at growth of products like Tax Pro Review, for example where they start as a DIY filer but at some point in the process, recognize they have questions in -- push to help button to get their questions answered or also may turn it over to work for us to finish for them. So even with a normal - in air quotes a normal year, we still see the consumer opting for expertise in, that's why we like the way that we're positioned with our network of experts. Thanks, good afternoon. I guess, let's with the advertising campaign with regarding DIY really stepped it up this year and very much going against your largest competitor. Just wanted to delve into that a little bit more, how are your marketing dollars, advertising dollars allocated this year? What type of increase year-over-year this year versus last if any? And then how are you approaching Assisted in DIY as far as balancing those dollars versus past years? And then also kind of your media channels, certainly have been very active on TV with the DIY. Just curious what more you can share about the marketing approach? Thanks. You got it. Let me try to break that down a bit and keep me honest If I miss a piece of the puzzle. I mean just starting at the highest level, we know that the brand H&R Block has tremendous assistance and we know that people know that we have tax pros in locations. What they don't know is that we offer a DIY software products, they don't know that to the same degree. So our allocation this year is skewed more than in the past to DIY messaging. And over the summer, we did a lot of research to understand why had we been growing revenue and volume and new clients in DIY but not market share in DIY and there were three real reasons, number one, far and away number one was the lack of awareness that we offered the product broadly. Number two was a misunderstanding about how easy it is to switch and number three, is about pricing and a little bit about the actual price, bit more about the frustration that comes when you're surprised by what you're charged when you get to the end of the process. And so we've really gone out of three of those head on. You see it reflected in television really top of the funnel, as we think, building awareness but we are more active than usual in digital channels, really delivering the details about the value proposition and then once you arrive at the website, having built a custom flow, particularly for TurboTax switchers to really educate them on how easy it is to switch video content to teach the filers how to find your TurboTax return and upload it to Block, so a number of things, very specifically to really go at those exact barriers that we understood clearly from clients from the summer. Thanks, Jeff. Appreciate it. You did a great job, as you say, getting all the pieces of the puzzle there on the multi-part question. Just a follow-up on that with the one piece I think we missed was just, was there more overall marketing dollar spend? Or was it relatively in line with last year or a normal increase? And then a follow-up on that, just on the same topic, is this the AI driven technology that you've highlighted? How differentiated is that in the industry, clearly you're promoting it a lot? But is it truly differentiated? Or your peers, they're not promoting it as much, but is that something that you have that is truly differentiated? Thanks. Yes. Absolutely. So on your first question, think dollars about flat all contemplated in the outlook. It's really more about allocation and allocation between virtual/assisted and DIY and then within the channels like I just walked through. On your second question, we haven't actively run any advertising or marketing for the AI technology and have no plans to do that. We announced in a press release and it is an industry first. There is no one who has ever used AI to proactively and retroactively look at a prior year return to see if there are any available refund dollars. And in the product if any are identified, we notify the client and then we connect them with a Tax Pro to actually do the rest of the legwork to figure out exactly what it could be and then decide if they want to file an amended return. So that's how it works. Again, we announced it in a press release. We're not actively advertising it and don't have plans to actively advertise it. Got it, thanks. I appreciate that. If I can just go up one or two more in there and maybe get Tony involved. The -- just curious Tony, first-off, how are you progressing on buying in franchisees this year consistent with expectations and just any mention of comparison to last year? And then my other question is just -- and Jeff, I think we'll bring you back to this as well, but I heard Tony mentioned in the guidance, there is no consideration for 1099-K, which is a good thing, but I'd just like the big picture view of what H&R Block is expecting on that front in future years and how that would impact the industry and H&R Block specifically? Thanks for let me put them all through there. I'll stop right there. Thanks. So franchise acquisitions are going well this year. We've done that for a number of years. It's ebbed and flowed a little bit but kind of been in that 100 to a 150 location range and I think it be in that range again this year. We still have some active kind of negotiations that are occurring and some deals that are yet to close, but we'll probably be in that zone and feel good about franchisees' willingness to sell to us is obviously a willing buyer. And Scott, on your second question. I mean, it's obviously hard to speculate on what might be the impact of a piece of legislation that isn’t final or passed. I mean, 1099-Ks are topic that depending on how it was implemented could impact lots of people or fewer people. We don't really worry about trying to judge, win something, might get passed, we just every single year learn what the changes are, train on the changes and communicate to client the value of expertise. We'd see doing the same thing next year, but again we didn't build any assumptions of 1099-K into this year's financials. Hi guys, thanks for taking my questions. I have just a couple of follow-up or clean-up calls, most of the questions have been asked and answered. On the Wave side, I know we have a new CEO there who is completing a strategic review. I think last time we were together on a call like this. In Q1, revenues were up 18% year-over-year. In Q2, they're up 13%. Is there anything to read into that? I appreciate the question and I think the only thing I would read into it, is that we're not pleased with that progress. Zahir has been enrolled for a handful of months. He's doing a phenomenal job of interrogating all parts of the business. We want to return that business to a higher growth rate, obviously, it is growing but we want to return it to a higher growth rate and importantly he is looking very carefully at how do we accelerate the path to profitability in addition to restoring to a higher growth rate. So we will have more to share in the future, but for now, that's the message for me about what we're seeing in Wave. Well, it could complicated fast just recognizing all the things they do in their business. So I try for now to just keep it at a high level and say that the way that they -- the way that their clients use the product to send invoices and receive payments isn't performing at the level that it used to. And so that's the primary place that we're interrogating but to be clear, his work is looking at the entire business every piece of performance, what we can do for monetization and what we can do on the expense side. Yes. I just put a finer point. I think what Jeff is saying is, where the small businesses that are sending out those invoices are sending fewer invoices than they were previously which obviously is probably more of a macro-environment type issue but beyond that, we know that we can do better within our own control and own performance. Got you. That's helpful. All right. And then moving on Spruce. It was launched last year in DIY only, I believe that's correct. And this year, starting in January, it's being rolled-out to the Assisted offices as well. How -- again, it's very early in the tax season but what has been your experience so far with the tax pros and with consumer driven demand? Yes. Again I appreciate the question. You're exactly right. Last year we launched a beta version of the product in the DIY flow only. This year we're back in DIY, we're marketing direct to customers and we have launched it in the retail channel. I feel very good about the way it was received, the plans we built to make it easy for the tax professional at the desk to explain the value proposition. We've only been at it a few weeks and so it's way too early to comment beyond the operational clean-up things that we're working on to improve the experience. We're focused on account creation, ideally it is the tax desk, but ultimately loading funds into the account and then, keeping those clients engaged by spending and so there's a number of pieces that go way beyond account creation, because this really is the formation of a year-round relationship with the clients. And as we get to Q3 and beyond we'll be updating you on what we've seen in performance. Great. And then last question for Tony. In your prepared comments, you talked a little bit about within operating expenses, insurance loss reserves, providing a favorable impact. Just wondering if we can get a little bit more color on that. And then the increased bad debt, what is that related to? Yes. So I'll start with the bad debt. I mean part of that is driven by the fact that we had a stronger EACs and when we participate in those EA loans we book our portion of the bad debt all upfront. As you know, Alex, a lot of that revenue is recognized over several months as there is an interest income component through the period to where those loans are ultimately paid off. On the insurance loss reserve, it's a fairly technical topic, but essentially we have an actuarial assumption based on some expected losses that actuarial assumption changed during the quarter, and that's what that positive benefit resulted from, so not something that typically occurs, but it's a change from kind of pre pandemic and post-pandemic, some of the expectations on losses, specifically related to workers' compensation.

EarningCall_334

Good afternoon. I am [indiscernible], Head of IR at Woori Financial Group and I will be moderating the conference call from this quarter. Let me first begin by thanking everyone for taking time to participate in this earnings call for Woori Financial Group. On today's call, we have President, Chun Sang-Wook, who also oversees the Group IR function; Group CRO, Jung Seok-Young; Group CFO, Lee Sung-Wook; and Group CDO, Ouk Il-Jin. Today's call will start with a presentation from President Chun Sang-Wook on the earnings highlights. After which, we will have a presentation on the group's capital management and shareholder return policies. After that, we will have the Q&A session. Please note that this call is being simultaneously interpreted for overseas investors. Good afternoon. This is Woori Financial Group President, Chun Sang-Wook. I will now present the fiscal year 2022 performance of the group. Please turn to Page 3 of the material that is available on our website. First, let me discuss the net income. For the full year of 2022, Woori Financial Group's net income was KRW3,169 billion. This is a 33.7% increase year-over-year. This healthy performance is the result of stronger profit generation capabilities, stable management of our [indiscernible] and cost control efforts. For the fourth quarter of 2022 alone, our net income was KRW508 billion. Next moving on to net operating revenue. The 2022 group net operating revenue was KRW9,846 billion, an increase of 18% Y-o-Y. Net interest income was KRW8,697 billion, while non-interest income was KRW1,149 billion. Due to efforts to improve our profit structure and provided by IR benchmark rate, group interest income grew consistently quarter-over-quarter. In addition, despite market uncertainties, non-interest income showed solid performance driven by core fee income as our subsidiaries focused on their core operations. Moving on to expenses like SG&A and credit costs. The Group's 2022 SG&A was KRW4,535 billion, representing an increase of 9.3% Y-o-Y, but the cost income ratio was 44.4%, which is a 3.1% point decrease versus the previous year. Groupwide efforts to control costs have been leading to the improvement in our cost income ratio. In spite of concerns of an economic recession, we have proven our stable risk management capabilities. The Group's 2022 credit cost was KRW848 billion and the credit cost ratio was 0.25%. Next let me discuss our dividends. Today, the BOD of Woori Financial Group in light of wide range of factors, including the 2022 financial performance and the Group's mid-term plan decided and disclosed a per share dividend of 2022 of KRW1,131 per share, including the already paid interim dividend of KRW151. The Group has been improving a wide range of shareholder return policies in order to strengthen our shareholder value. On the Group capital allocation policy and midterm shareholder return policy, the group CFO, Lee Sung-Wook, will explain the details after I have discussed the earnings performance. Now let me go into more detail about the performance by each of our business lines or areas and please turn to Page 4. First, let me discuss our interest income and net interest margin. For our 2022 group net interest income, it grew 24.5% year-over-year to come in at KRW8, 697 billion. In addition, the bank's NIM for the full year was 1.59% showing a 22 basis point increase versus the previous year and the growth in NIM has been maintained in the fourth quarter. In 2023, SBLK is expected to end its rate hikes this year, we are planning to continue efforts to improve our profit structure. Next let me go over our asset growth and our loan portfolio. Woori Bank's loans as of 2022 totaled KRW296 trillion, which is a 2.6% level higher than last year, due to rising rates and a decline in housing transaction volumes, retail loans posted a 3.6% decrease or KRW134 trillion as of 2022. On the other hand, for corporate loans, it continues to show a strong growth increasing 7.6% Y-o-Y to KRW158 trillion. As economic uncertainties grow, we believe it is important to focus on profitable performance. Therefore, the group is planning to continue to maintain a prime asset ratio of 85% plus, which is one of the highest in the industry while also faithfully conducting its role in supplying liquidity in line with economic conditions. Next let me move over to the group's non-interest income. Group non-interest income recorded KRW1,149 billion. One-off factors due to rising interest rates and exchange rate movements occurred, resulting in a decrease in foreign exchange and marketable securities related profits. However, our full synergies generated across the group led by the Asset Trust and Financial Capital business resulted in core fee income growth of 16.2% Y-o-Y. In 2023, again, we plan to continue to improve our profit generation capabilities focusing on core fee generation. Next let me talk about expenses and capital adequacy. Please turn to Page 5. Next is on the group's SG&A expenses. In 2022, the group's SG&A expenses increased 9.3% year-over-year to KRW4,535 billion, and the cost-to-income ratio stood at 44.4%. Although some one-off factors such as early retirement costs in the fourth quarter was reflected in the figure, considering the group's annual target limit of 40%, it was managed at a stable level. As inflationary pressure is rising, Woori Financial Group will actively manage SG&A expenses by streamlining sales channels but will continue to make bold investments in future growth resources such as digital domain. Moving on to credit costs. In 2022, the group's credit cost was KRW848 billion and the credit cost ratio was 25 BP. In preparation for a possible economic recession, adjustments were made to the future economic outlook, resulting in additional provisions reflected in the figure. Excluding one-off provisions, the current credit cost ratio stands at 20 BP still managed at a stable level. Due to the recent hikes in interest rates and sluggish real estate markets, concerns over the asset quality of related loans such as real estate PF are increasing. Accordingly, Woori Financial Group is further strengthening monitoring by individual borrower and project. As uncertainty at home and abroad is expected to continue in 2023, the group, based on the risk focused sales culture well established within plans to concentrate its capabilities on asset-quality management. Let me now elaborate on capital adequacy and dividends. As of the end of 2022, the group's expected common stock ratio, or CET1 ratio is 11.5%, up 0.1 percentage point from its last year-end. Due to a surge in the exchange rate in the second half of the year, risk weighted assets temporarily increased, but this was a result of solid profit growth and asset risk weighted asset management in consideration of economic conditions. The past 2022 was a year in which we upgraded our ability to generate profits and manage risk despite macroeconomic uncertainties. In 2023, Woori Financial Group will continue its efforts to improve profitability, but also focus on risk management to respond to factors of financial market instability, expanded protection, rights and interest of financial consumers, as well as actually carry out various social contribution activities. This concludes the presentation on Woori Financial Group's earnings for the year 2022. Next, Deputy President, Lee Sung-Wook, Group CFO, will give a presentation on group's capital management policy and direction of our shareholder return policy. Good afternoon. I am the group's CFO, Deputy President Lee Sung-Wook of Woori Financial Group. Based on the recent favorable performance forecast of major financial holding companies, we are witnessing rising demand and expectations for increased shareholder return in the market. Therefore, I would like to take this opportunity to elaborate in detail the group's capital management policy and the direction of our shareholder return policy that we have been preparing through continuous engagement and communication with the market. Please refer to Page 19. For your reference, this material was devised based on the discussion at our Board of Director proceedings. As President Chun Sang-Wook also mentioned, the 2022 year-end dividend is KRW981 per share and when including the interim dividend of KRW151, it is KRW1,131 with an annual dividend payout ratio of 26%. This is a KRW231 or 25.6% increase from last year's dividend of KRW901 per share and the dividend yield is at 8.8%, which is expected to be the highest amongst our competitors. The group has been continuously communicating with the market about actively promoting various shareholder return policies within the scope of maintaining capital adequacy. And this time around, we would like to definitize our approach to base our policy on CET1 ratio and push ahead with from this year and onwards, a shareholder return policy that takes into account the total shareholder return rate that includes dividends and share buyback and cancellation. The current regulatory requirement for common stock ratio was 8.0%. And when the countercyclical buffer of 0% is imposed at the maximum of 2.5%, it is 10.5%. Our provisional common stock ratio at the end of last year was 11.5%, which is significantly higher than the regulatory requirement. However, considering the possibility of rapid changes in the financial environment and deploy the role as a stable funding source we set our CET1 target at 12% and plan to meet the target early on. To this end, based on the maximum regulatory requirement of 10.5% and our CET1 target of 12%, the group's asset growth rate in consideration of the nominal GDP growth rate outlook will be managed at 4.5% levels. And within this range, we will carry out shareholder returns at a total shareholder return rate of 30%, which includes dividends and share buyback and cancellation. Since the dividend payout ratio in 2022 was approximately 26%, this means that a share buyback and cancellation of 4% will take place within 2023. The share buyback and cancellation of 2023 will be announced upon resolution by the Board of Directors meeting sometime after the second quarter. Even if the total shareholder return rate is maintained at the 30% level, with the future increase in the group's net income and the effect coming from the share buyback and cancellation kicks in, we expect stock related indicators such as dividend per share and earnings per share to showcase a continuous upward trajectory. In the future, if the common stock ratio as of year-end exceeds 12%, we will review our mid to long-term shareholder return policy to gear towards expanding shareholder returns and share our thoughts with the market. Furthermore, in order to improve the predictability of dividends and to regularize the payout, we will pursue amending the Articles of Incorporation for quarterly dividends at the General Shareholders' Meeting in March. This concludes the presentation on the main contents of Woori Financial Group's capital management and shareholder return policy. In the future, as well, Woori Financial Group will continue to engage and communicate with the market on our key initiatives. Thank you very much. So now we will start the Q&A session. [Operator Instructions] So the first question will be coming from Daishin Securities. It will be Mr. Park Hye-jin. So please go ahead with your question. So yes, this is Park Hye-jin from Daishin Securities. There are two questions that I would like to ask you. The first question is with regards -- first, I would like to thank you for your explanation about your capital management policy. If you look at the earnings calls of other companies, as you have just mentioned, for the CET1 ratio for the buffer, I think that was 150 basis points to 200 basis points that they are all taking into consideration. So in terms of the CET1 target, if we exceed more than 12% on the CET1 target, when do you think that a natural timing would be? And the second question is that if we look at 2023 in terms of your net interest margin outlook, what would that be? So thank you for your question. And maybe if you could give us a few couple of -- a short period of time while we prepare for your questions. Yes. This is the CFO, Lee Sung-Wook. And in the fourth quarter, if you look at our capital adequacy versus the end of September, we actually had an above – that was 63 (ph) basis points, and that means that there was an impact of KRW170 from the actual exchange rate difference and also the increase of risk weighted assets as the changes in the interest rate and we took active risk management capabilities. So as a result of that, for the capital adequacy ratio in itself, there was a significant improvement versus September. So going forward, when will we be able to reach 12% in the CET1 ratio? As we have mentioned during our dividend policy, we do think that on asset growth, that would be around 4% to 5%. So that means that there will be around 20 basis points to 30 basis points improvements taking place next year. So as a result of that, we do expect that, of course, there can be some volatility within the market environment and we don't know what will happen going forward. But we do think that as of the end of 2024, that is the timing at which we will be able to achieve our target level. In terms of our NIM outlook and maybe if I could talk to that question also. So if you look at 2022, there was a continuous increase in the interest rate. And so as a result of that, there was an increase of around 1.59% in the NIM, which is around 20 basis points higher than that. And if we look at the situation during the fourth quarter, it was at 1.68%, which was a 6 basis point increase Q-o-Q. So we do think that going forward, if you look at our expectations in terms of the monetary policy trend, it is slowing down and the long-term market rate has also started to fall on. In addition to that, if we look at the -- there is a lot of core deposits that have been moving over to other products. So as a result of that, we do think that there are -- the one question (ph) in our margins. So if you look at October during the conference call at that time, we did said that the 1.7% target or above would be what we would be able to achieve for this year. But if we look at the full year, we do think that if, as mentioned before, the slowdown in monetary policy, also the core deposits slowing down and all things taken into consideration, we think that we will be at the upper range of the 1.6% level in terms of our year-end performance. Thank you very much. Yes. Thank you very much. So the next question will be coming from NH Securities, it will be Jung Jun-Sup. So please go ahead with your question. Hi. Yes. Thank you. I’m Jung Jun-Sup, [indiscernible] Securities. Thank you very much for this opportunity. I have two questions. For the first question, as you have already mentioned with regard to CET1. So this year, there are many macro factors that we have to look into, but especially Basel III. I don't know that it's going to be most stringent. So with regard to that, what kind of impact do you think it will have on the bank or the financial group? Just some more information on that is my first question. And my second question is, as we refer to the other earnings calls from other groups, in the fourth quarter, we've seen a great increase in credit cost, there could be many reasons behind that. And depending on the group I know that in terms of capabilities to manage risk, it may differ, but you can see that for our credit costs and corporate activity, it increased versus previous quarter, but it wasn't a great jump. So in the future, with regard to provisioning, I would like to go and ask for your reference on the outlook for provisioning? Yeah. I am Jung Seok-Young, in charge of risk. So let me first answer your first question with regard to the Basel III, the credit risk cost that would be introduced and what kind of impact that will have on our capital. So as of the end of January, or as of the end of December, we've looked into this tentatively. And as for the bank, it will be a 30 to 40 BP improvement effect. And in this financial holding, it will be 10 to 20 BP improvement effect. But of course, in the first quarter, we will have to go into the calculation once again. But tentatively speaking, unlike other groups, based on Basel III standards, our capital ratio, we think will improve And the second question has to do with credit costs for provisioning. Is that correct? So with regard to provisioning, as of last year, in the case of last year, in consideration of the future economic outlook and whether we can actually absorb vender losses what we wanted to do was strengthen our management. So it was about KRW270 billion that we have added in provisioning for the group, and it will be, as was mentioned in the earnings call, it would be about a 20 BP increase in the CCR and the 25 BP in total last year. But this year, as you all know, with the rate hikes, it had an impact on retail, SOHO and also for SMEs and it is to have an impact going forward. So that may lead to a sluggish economy and then it would, of course, exacerbate the earnings for companies, and we believe that it would be about 25 BP of credit cost that would have to increase due to the economic conditions. Thank you. Yes. Thank you for the opportunity to ask question. I would like to ask an additional question about your capital plan. So on CET1, you did break it down into three different areas. And so I think that you're saying that the break is about 10% to 12% or above 12% and then when it's under then 10.5%. So with regards to the possibility of being under 10.5%? I do think that, that could also be a situation that may take place going forward because if you do acquire security arm and it's a very attractive asset. And I do think that there could also be an issue that there could be a temporary fall under 10.5%. Of course, I don't believe that, that would be an issue. But if it does follow under 10.5%, what happens to your capital management plan? What would be the situation there? And secondly, in terms of your dividends, I do think that you're saying that you want quarterly dividends to take place to try to enhance the overall visibility of dividend, but what would be the situation and how would that take place in terms of the actual? So maybe if you could just wait for a second, please. So for your first question about what happens when our CET1 falls under 10.5%, in actuality just a quick to the answer, I think that if it goes down to 10% or below 10.5%, realistically, I don't think that this would be possible because right now, it's 11.5% as of now. If it was a deflation of around 1% point then that would be the buffer that we would have. If it's 1%, then that means that in terms of risk-weighted assets, that's around KRW20 trillion in assets, corporate. So that would mean that it would have to be a very large-size securities company. And if it's just a midsize, then in actuality, I think it would have an impact of around 50 basis points to 60 basis points. So we don't believe that in actuality the CET1 would fall under 10.5%, and there will be a very strict internal management about this topic, so I don't think that this should be concern. And about the quarterly dividend payout in terms of what the size would be and what the way going forward would be, it has not been determined yet. But in general, I do think that on a per year basis on a per quarter basis, this is something that needs to be at the BoD level. But I think that the breakdown will probably be like four to one in terms of the quarterly payments versus the year payments, but this again is something that we will have to discuss and then determine. So this is Chun Sang, the President that is in charge of the group IR. So maybe just to elaborate a bit on the first question to answer, in terms of the numbers, of course, the CFO has talked about the numbers in themselves, but I do think that we are looking at M&A opportunities, and we are interested in acquiring securities or brokerage firms. But one of the main principles that we have is that we will maintain an appropriate level of capital adequacy ratios and also be able to have enough room to look at shareholder returns. So that would be the basic fundamental principle. So as a result of that, for the scenario that you just mentioned, we do not believe that, that would be a likely scenario taking place. Thank you very much. I am Baek Doosan from KIS. I have two questions. So first, with regard to AC, it's about 105% and I can see that there is significant buffer with the LCR and then I think that in the case of NIM, by utilizing this, we may be seeing NIM to turn to a positive choice? Is there a possibility on that. I would just like to see that, I'd like to understand the exposure by subsidiary and how you are to manage this exposure? Thank you. I am Lee Sung-Wook, CFO. So with regards to LCR, 105%. So you can see that we still have a significant buffer versus the requirements. Last year, LCR due to the volatility so that we actually had a significant amount, but considering the capital market and the situation we don't think that it will be the major issue to lower LCR because the situation has stabilized. So what we're going to do is really we can -- we will probably see an improvement in NIM and also to make sure to protect the downside. I am Jung Seok-Young, in charge of Risk Management. So you asked a question on the PF or real estate. As of the end of last year, in the group, it was about KRW2.8 trillion of exposure. And you can see, it was about 1.7% and versus total it's slightly higher. And then versus the total loan book, it's about 0.8%. So it's less than 1% in terms of the proportion. So you can see that the exposure is not that significant. And particularly, out of the KRW2.8 trillion, [indiscernible] guarantee is about KRW1.7 trillion. So you can see that with regard to the risk exposure, the PF risk is about KRW1.7 trillion basically. So in the case of the group, the real estate PF starting from the second half of last year, we've been closely monitoring this and managing this with our subsidiaries and especially the real estate bridge loan where the local projects, we've been very much stringent and prudent on loan management, and we will continue on with such monitoring and assessment and management. And with the existing PF, we will be following the policies of the government. And it is for what we were going to do is at the time we will find a way to enable settlement in installments and other alternatives where it can be paid back. And then in the case of the subprime, especially for areas where there are untold loss and where there is a delay in construction. So in the case of these real estate projects that have issues, we're going to speak with the creditor group to find the way for restructuring or for any other ways to service the debt. So we will be looking into the right responses and policies to respond accordingly. Thank you. Yes. Thank you. I am [indiscernible] from DS Investment Securities. Thank you for the opportunity to ask questions. There are two questions that I would like to ask you. First is, with regards to your capital management plan. If you look at other banks right now, I do think that in terms of the overall stance that they are looking at rather than paying a cash dividend doing a share buyback and try to provide shareholder return in that effort. So from our stance in terms of our cash dividends versus the dividend -- the overall share buyback what is the direction that you would be moving and going forward? And how much do you believe each area would represent? And the second is that in terms of your quarterly dividend once the BoD has approved, when would the quarterly dividend actually start? What would be the timing for that? So if you give us such a period of time, if we could prepare and then answer that would be appreciated. Thank you. Yes. So this is the CFO, Lee Sung-Wook. So in terms of the 26% dividend payout ratio and also the 4% treasury share buyback that we're going to do for this year, in actuality for our investors on the dividend side, there are some that for cash dividends and for long-term investors, some actually prefer share buybacks. So in actuality, we do think that there needs to be an appropriate balance. So around 26% or so would be the dividend amount. And then if we do have more capital room then we are planning to look at trying to increase the amount of share buybacks that we do and a portion of that going forward. And secondly, in terms of the quarterly dividend payouts, this year, it would be newly introduced in terms of our policy. So for the first quarter, we do think that there could be a very steep slowdown in the economy. So as a result of that, we think that maybe towards the second quarter would be the first quarter in which we would start our quarterly dividend. This again is not determined yet. But once we discuss at the BoD and finalize, that's the general sense that we have as of now. So due to time, I think that we can just take a couple of more questions. Shim Jong-Min from CLSA Securities. Please go ahead with your question. Hello. I am Shim Jong-Min from CLSA. Thank you for the opportunity. I have two questions. The first question has to do with asset growth. You've mentioned that it will be managed at 4% to 5% levels. So again, in the case of loan growth, would that be lower than that, would that understanding be correct? And with regard to loan growth for next year, could you give us some more information on that? Thank you. And the second question has to do with M&A. So I know that in terms of the securities firm. If there are maybe a medium or large-sized security firm, that depending on the candidate, I note that recently, there was some small venture capital M&A strategies that made your strategy at the current time. So could you give us some more color on the M&A strategy that you have for the group? Thank you. In 2022, it was already disclosed. So the group assets overall, you can see that it's 6% for banks to support SMEs; and for non-banks, it's about 7.5% growth overall. And in the case of one loan, 8.5% increase for corporate and decreased 3.6% for mutual loans, there was about a 2.5% increase year-over-year. And next year, overall, I mentioned that we'll be managing at 4% to 5% levels and based on risk-weighted assets, that's the case. But in actuality if we look at the banks, it would be -- 4% would be the stable guidance that we have because banks take on the lion share. So to recap, the one denominated loans would be about 4% increase that we'll be seeing going forward. Thank you. I am Chun Sang-Wook, in charge of IR. Let me give you some information on the M&A possibilities. As I've already mentioned, with regard to our M&A principles. We have two principles. First is within the capital adequacy ratio, and it's about finding ways to maximize shareholder returns. And of course, it's not about -- we don't have a set scale or volume or size of the target company. But it's about being able -- that's favorable to create synergy as a wealth management company, for instance, and there would be particularly a retail-based type of securities firm that would help us provide balanced profitability. And as mentioned, there would be within these two principles in terms of identifying the right target that befits the criteria. Thank you. So today, due to the time for additional questions, I don't think that there are any other requests, so we will wrap up the Q&A session here. So if you do have any other questions, please do not hesitate to contact our IR team, and we will make sure to get back to you. So with this, we would like to wrap up the 2022 Woori Financial Group earnings conference call. Thank you very much.

EarningCall_335

Good morning again to everyone following our announcements on the 27th of January 2023. Let me also just start up front to say thank you for your support. First of all, to our shareholders, to our partners and not least to our colleagues, it is a result for 2022 that is not satisfying, but we are getting there. And I hope we are also able to give you quite a lot more details in the following presentation. So with that, highlight of 2022. We had a revenue of €14.5 billion. Revenue declined compared with 2021 driven by Russia and Ukraine exit as well as certain project delays. We ended with an EBIT margin of negative 8%. EBIT was hampered by some of the discussed supply chain disruptions, high inflation, energy crisis, some higher warranty provisions and also the offshore impairments. The total order intake was 11.2 gigawatts with an ASP of €1.07 million per megawatt. The wind turbine order intake in gigawatt was down 9% (sic) [19%], but increased 3% in value due to the strong price increases to be seen a little earlier – later, sorry. And then in Service, strong performance in Service for the year. We had a 27% revenue growth in 2022 and had a 21.4% EBIT margin. We also progressed in sustainability and was recognized for it. Our circularity solution for wind turbine blades creates now an industry breakthrough. We'll talk more about it a little later. And then we were ranked as number two in the world from Corporate Knights. Yes, that is back from number one last year, but now in pursue of number one again. And then strategy was reaffirmed with progress within our core areas and also the business enablers. So I will say here, prime focus, not surprisingly, is to restore profitability in the turbine segment where there remains the focus by also building the industry discipline and maturity across not just as Vestas, but for the whole industry. So with that, let's go to what is currently the global business environment and that is another repeat. The businesses in here, our priorities are the same. But we also just want to highlight that when we look into 2023, we expect a business environment that is remained challenged with somehow still a cloudy visibility. We see high inflation that impacts production and also our execution cost generally across the board. We see some of the geopolitical uncertainty that also results to some extent in some trade barriers threaten both timelines and to some extent, also the visibility. We see that, yes, it is clearer and better than it was maybe a year ago, but also still with an unknown. When we talk about the energy crisis, I think it is maybe surprisingly in certain markets it improves a lot; in other markets, the market design is actually reducing wind power installations right now. And of course, we will talk much more about governments and also policy execution when we get a little later into the presentation. So let's start looking at the Power Solution. Power Solution, it all starts with a healthy backlog, and therefore, the increased pricing is a key factor for our value creation from Power Solution. When we look at it, all regions, we're contributing with a strong end to the year. They delivered 11.2 gigawatt of order intake. That is a 34% increase in ASP from Q4 2021 to 2022. The value of order intake in 2022 was €11.9 billion versus €11.6 billion in 2021. And actually, the fourth quarter order intake was the largest quarterly order intake in €1 billion in the history of Vestas. We remain adamant that we must continue to strengthen our commercial discipline and also the value chain together with our partners and that is to both through customers, but also through the supply chain to our very important partners in there. We ended having now a total 8 gigawatt of PSAs of the V236 offshore platform. Also here, we'll highlight that we are concerned about some of the offshore PPA levels we are seeing in certain countries, concerns with some of the government's aspirational target setting where electricity prices has to have a market price that is, in many cases, often 6, 8 and 10 times higher than what is being predicted as the PPA pricing. When we then look at it, wind turbine order backlog remains high at €19.1 billion, and that is also a slight increase from Q4 2021 to Q4 2022. You will see the breakdown across our regions to the right. And then again, please note the ASP and also the progress we have there which, of course, is also part of our execution for 2023. When we then look at the Service business, it was an absolute stellar year, but also a year where I have to say thank you to our more than 12,000 service people that works in the business that has kept our solutions running, absolutely incredible. So when we look at it, the Service continues to prove. It's importance to customers, especially in periods where high power prices. There has been transactional sales and also repowering activities at a very high level in a very busy year, especially also for the people that are still making our turbines running in countries like Ukraine under severely difficult conditions. When we look at the Service contracts, we also had signed a service contract in 44 different countries in 2022, including a 25-year AOM 5000 service contract in our largest wind project in Latin America of 846 megawatt. We're also increasing focus on the aging assets and repowering solutions with multiple agreements signed in 2022, with our closest customers and partners really appreciate what we are doing together. When we look at the – to the right, the service order backlog is €30.4 billion. We have 144 gigawatts under active service contracts and we now have an average contract duration in excess of 11 years. Again, here, importantly, and positively is when we look across the three regions, they are all growing in a year that has also been delivering on what we already have signed up as an agreement. With that, I'll go to the next slide, which is a new overview, which also illustrates our progress in building and leading and also developing the Vestas development activities across many countries currently. So commercially, a very busy year where we secured 11 – 13 gigawatt in new secured pipeline and had 1.6 gigawatt of order intake generated, including some of the side deals we are doing with our closest partners. There is a high activity level in many major energy markets, and I think it's a reflection here that it happens in Americas, both North and South. It happens in Europe, and it definitely happens in Asia Pacific where Pacific, as in Australia, is a very, very interesting and exciting hub for many things. We also see that the development portfolio includes now a high number of onshore projects and also now a few offshore and a few Power-to-X projects across our markets. Contribution from CIP and the ownership in CIP amounted to €30 million in the year. Of course, we are very pleased with the ownership and also very pleased with the partnership we have with CIP, and intend to develop and keep developing that accordingly to what we do with other global partners of Vestas. When we then look at the sort of the facts to the right, order intake generated was 1.6 gigawatt, as mentioned, new secure pipeline was 13 gigawatt, as mentioned, and then we end with a total project pipeline of 32 gigawatts. This is the first time we show the 32 gigawatt to most of you. And therefore, please remember the nature of 32 gigawatts. It is early generation. It is early part of development that also means that whenever we contract and have governments there, there will be a process of permitting and others, so it will not be all 32 gigawatt that materialize in orders going forward. But we are excited about it. We can see it's moving in the right direction also towards the target we discussed when we had the Capital Markets Day of an annual order intake in the region of three to five gigawatt when we come a bit further on. Development pipeline split below, again, here positively we have split across both Americas, EMEA and Asia Pacific of the 32 gigawatts and really appreciate the progress the development team has made in 2022. With that, we come to the sustainability strategy here. And I would just say, we absolutely have had a breakthrough. We announced that today, and I hope some of you will pick that up separately, but also on recycling and not least circular economy for blades. We now have something where we don't need to develop anything else than just using the blades that we are pulling down and then we can decomponize that which we are very excited, both with the partnerships and also now in large into customer discussions. As mentioned before, we were ranked as the second most sustainable company in the world by Corporate Knights and the most sustainable energy company in the world, which of course, we are very pleased with also demonstrating that our activities and way of working with it is appreciated from the external world. We have seen a decrease in our own carbon emission and also the CO2 avoided due to the lower levels of produced and shipped turbines and solutions in the year. Part of that, when we look at our own carbon emission, to some extent, mitigated by lower produced and shipped solution, but at the same time, used more carbon emission due to the very, very high activity within the service area. Safety in the end, we ended slightly higher on the TRIR which is not what we want to see, but also have had to appreciate that part of the higher activity levels across a number of countries have led to that safety is a key priority and we work constantly with it. Thank you, Henrik. And let's start out with the full year income statement first. As you said, it has certainly been a challenged year where both the revenue and profits ended, as we all know, where they did. First of all, on the revenue side, a decrease of 7.1% year-on-year, roughly €1 billion. This was mainly driven by the Russia-Ukraine war as well as some delays we saw in the Project business that were then only partly offset by the higher activity levels we had in Service. Gross margins decreased by 9.2 percentage points, driven by pretty much the same topics that we have been discussing throughout the year, lower profitability in the Power Solutions segment, in particular, which in turn was driven by impairments, by warranty provisions and by the instability that we've had in the supply chain. As such, it's not a big surprise that the EBIT margin is suffering as well. It decreased by 10.8 percentage points year-on-year, driven, of course, by the lower gross margin and by further impairments that sits in the SG&A. And all in all, that's what takes us into the minus 8% that we had for the full year. Finally, let me also mention the €444 million of special items we had linked to the adjustments to the manufacturing footprint and the Russia exit that we announced earlier in the year around Q1. Q4 then actually saw higher activity levels, but also with challenges to profitability. So, revenue increased by 5% year-on-year or roughly €200 million. But with the gross margin that decreased by 12 percentage points year-on-year, driven by the same topics really that I mentioned on the previous page, impairments, warranty provisions and supply chain instability. This is what then brings us to an EBIT margin that decreases by 12.8 percentage points year-on-year. Again, pretty much the same explanation as before. So, I'll not go more into it here. But of course, clearly, this is something we are working on bringing back to a better territory. In the Power Solutions segment, I guess, the numbers in some ways speaks for themselves. And arguably, this is where we have the biggest challenge, but also the biggest opportunity for bringing us back into positive territory again on the profitability side. Revenue decreased by 14% year-on-year. And if you look at the bar chart to the right-hand side here, you can also see how the offshore segment had an impact on the activity levels for the year as that got more than halved in 2022 compared to 2021. EBIT margin before special items decreased by 14.7 percentage points. Again, as it highlights here also, same reasons as we have only seen on the previous slides. And as I said before, clearly, bringing the Power Solutions segment's profitability up is one of the key topics that we are addressing in the company right now. The Service business, we mentioned already had like strong performance, strong growth specifically with a revenue increase of 27% compared to 2021. This was driven by higher onshore activity, which includes transactional sales and indexation uplifts. The 2022 EBIT margin was €675 million, which is an increase of 17% compared to last year. And that leads then to an EBIT margin percent of 21.4. As highlighted earlier in the year as well, we've had some single project effects on the margin and higher transactional sales as well, which has had the slight dilutive effect compared to where we started after the year, but I would like to stress again that I think it's a very good performance from the Service business to see these levels of growth and these levels of profitability. SG&A. I mentioned already a bit. And as you can see here, there has been an increase. The increase has in part been driven by the impairments we saw on the offshore V174 platform in Q1 and Q4 to the tune of more than €100 million, €109 million to be precise. And that brings us to a relative SG&A level of 8.8%. But again, if you factor in the high inflation that we've had during the year, and the offshore impact from the impairment, I think in some ways, the development is less, say, of an increase than what it might look like when you look at the underlying numbers. On the cash flow side, we had a free cash flow of €953 million, driven, of course, by the negative operating activity effects that we have seen. When you have profits that we do have, then, of course, that also has an impact on the cash flow that you're seeing. I would like to stress again though the strong Q4 cash flow we had of close to €1.3 billion. And then finally, I will also highlight here that our cash flow from financing activities stood at roughly €850 million as a result of the EBI loan we did earlier in the year as well as the bond issuance that we did back in March. Net working capital was over the year generally stable when you look at, say, the typical movement patterns we have seen. It was negatively impacted by an increase in level of inventories, which was then offset by down and milestone payments and by the receivables as well. And that is what takes us into the €1.35 billion that we have by the end of 2022. Investments came out at roughly €750 million in 2022. This was driven by the investments in the V236 offshore platform as well as investments into the EnVentus modular platform as well. There's a small offset coming from divestments of the Lauchhammer blade facility. But looking at the picture, actually, not a big change in investment level compared to last year and in some ways also not compared to the years before. Provisions and LPF remains a focus area for us for reasons that I say quite obvious. I would argue when you look at the chart to the right-hand side here, LPF continues to be at high levels as a consequence of the extraordinary repairs and upgrades that we are currently carrying out. Once the provisions in the quarter amounted to 9% of revenue and for the full year, 6.3% of revenue. The higher warranties primarily relates to increased repair and upgrade cost, but also then a few select cases that came up in Q4. Of course, it's fair to say that this is an area that a lot of focus goes into, and this is an area that we also naturally have to say, improve our performance on. And that's, I guess, given when you look at numbers like this. Finally then, capital structure. Net debt to EBITDA remains well below threshold. I would also like to say though, that when both the nominator and the denominator sits at very low levels, it is a ratio that is highly, highly volatile. And with a net debt negative for, say, a net cash position of €46 million and a negative EBITDA of €63 million, then you would technically end up in 0.7. But as said, when the numbers are as small as they are, then it's not necessarily the most meaningful ratio to look at. What is key to stress here is that restoring profitability in our view, is the route back to, say, having a more stable development on this metric and clearly 2023 is a year where we will do our best to achieve that. Thank you, Hans, and as normal practice here by year-end, we also do a short review on our strategy and not least also execution of the same which I will spend the next few slides on and also, of course, include that in probably our Q&A for later. So when we look at everything we do, it is centered around the wind. If we look at our core areas, the onshore, the offshore, the service and development it sits in and around our core, where we also, with our customers, provide solutions that are leading to approximately 220 million tonnes of CO2 avoided every year. We've also seen this year that the enablers are actually supporting the core of the solutions. We have seen that the service adjacencies, among other things that come into, where we are now also offering digital solution on spare parts for both the industry and also our customers start ramping up. We've also seen in PtX and Hydrogen, we are participating. It is a very inspiring area. It's a very exciting area, but it's also an area that probably for us, in terms of turnover and EBIT won't come with a real impact until we get later into this decade. And then again, another year where Vestas Ventures invested and also co-invested in a number of new investments, among other things, an electrolyzer company. And also, we have increased our investments into models on the tower side. All of that, of course, sits and support the customer and supplier partnerships, we value so highly. And we also, and I encourage you to read about in the Annual Report where we also described about how we see the closest partnerships developing in the years to come. When we talk about that, we also work in a world where we see changes. We see that currently today, that wind electricity approximately sit around 1% of the world’s supply. If we then look at it, there is still 99% to go of the energy supply. But I think more importantly, we can all see that happening on a daily basis that the approximately 20% of electricity is expanding because the electrification is happening as we speak. Just as a fact here, three years ago, new sales of electric cars was only a bit more than 3%, last year, it was more than 13%. So it’s actually increasing annually. And I’m pretty sure that transformation is something we will see only accelerating. And therefore, adding more on the demand side for renewable green electricity in the years to come. Some of the challenges unfortunately sits on the right-hand side because this is where we also see what will it take to get to Net Zero. Most people and most governments can calculate these targets. They’re easy to set and calculate. We can announce pledges and we can state policies but the difficulty in this chart is actually in delivering not least the frame and also the permitting that fulfills these targets. I will say here, it seems like around the world, governments are tracking this differently. We’ve seen IRA from the U.S. being introduced. We have also seen EU in a year of energy crisis in Europe, have a target of 31 gigawatt and actually delivering 15 gigawatt in 2022, which is, of course, disappointing and not really facilitating for further capacity ramp up in Europe. So this is the one chart, which I’ll also say is very different to the financial reporting because this is cumulative, meaning that if you’re a short 16 gigawatt from last year, that actually adds to the demand and not least also requirement for speeding up the energy transition. When we then look around us currently, I think there is a huge debate, which we can’t avoid just commenting on. Of course, we welcome IRA in the U.S. We think IRA is, again here, a frame that sets out how we’re going to do the energy and not least the sustainable energy transition in the U.S. Don’t forget on the IRA that it is a continuation and an extension of something that was called PTC prior. PTC is a part of it but it is expanded, but it now has a 10-year tenure rather than typically a few years tenure with all waste gave very difficult planning processes for the industry. So I will say here and again recognize politicians for taking both our input and opinions on it, and really appreciate we now have a 10-year frame in the U.S. to expand on, which, of course, will happen as we speak. EU is working right now with the Green Deal infrastructure. I think the rhetoric has been somehow negative towards the IRA in the U.S. But I think we are also getting closer towards saying we need to also have our own frame here, but it probably has caused some concerns that it’s both an EU and also 27 countries that have to find a common ground on this one and hopefully not in our eyes, leading to individual countries opening up for state subsidy towards individual target setting or individual manufacturing. So for us, we see generally the industry working towards have long-term policy that gives certainty around the investments. Let’s not forget this is 30 years energy supply solutions, not just quarter-on-quarter or month-on-month. We need simple and fast permitting to enable fast build-out and then just a little bit of heads up here. Let’s work with auction prices that actually reflect the current cost, but also the public funding that incentivize industry maturity and discipline. We have seen in the last quarter, in fourth quarter, we saw, what I would call, a very failed onshore auction in Spain at €45 that was totally unsubscribed. €45 was highly aspirational. But when you then compare that with the average electricity price in Spain of €170 in 2022, as an average, you could wonder, why was it we didn’t have a connection between market price and also providing the consumer with further capacity at lower cost. We can talk more about that, and I’m sure we will have that over the coming weeks, months and potentially also quarters. When we then look at our own portfolio of business, onshore, growth is actually picking up. We believe it will be pick up also with some of the comers in there, especially the U.S., especially also Latin America, which you have seen from our side. And we can also see from the orders coming through in Q4, it takes longer, but you can also see that there is a broad sense of order intake in more than 30 countries in that. So we see onshore 8 to 10 compounded average growth rates towards 2025. When we look at offshore, percentage is big, but I think also the percentage will always remain big when individual projects can influence 5 gigawatt of installation in 2022. I think the only highlight here is to say many countries are now embarking in offshore. I think it’s almost becoming a bit of a competition between countries to attract both the customers and OEM. I think there, I will just highlight the scalability in the future is 10, 20 years ahead, and therefore, the predictability and visibility of not least PPA levels, but also how to do localization is absolutely top priority for an industry if it has to make sense for the three partners in the triangle, governments, customers and OEMs of the industry. When we look at our Service business, a very, very solid year. We’re happy with it. Of course, it has been challenged in a year with most of the markets being challenged in terms of electricity and energy crisis. But here we see again a compounded average growth rate, 8% to 10%, and we see our installed fleet taking part of that as well. Great business. And of course, we keep investing in the business. On the development side here, we also see from 1.6, we’re just a little bit shading the 2025 because having a meaning about what will it be and what could the number be in 2025, we generally will say it will grow more than 10%, and the ambitions are there for the development, and we are excited about it. But as you will also appreciate individual orders and FOI can influence that target setting quite positively or negatively as it happens to be in a single year. And then we come to our long-term financial targets. They remain the same, and we work tirelessly towards all of them. When we look at it, its revenue outgrow the markets. EBIT margin more than 10%. Free cash flow is positive over the cycle and return on capital employed is 20% over the cycle. The industry absolutely needs structural change to increase profitability, especially within the wind turbine segment. It’s obvious. Vestas is on the right strategic path and our effort focused on strengthening the commercial discipline in customer dialogues, which we are demonstrating success in also through 2022. We need to lower the frequency of new technology introduction or at least make them last and upgrade easier and then, of course, mature the assessments of the risk we are having and sharing with our customers. In spite of the 2022 financial results, a challenging business environment and lower near-term visibility, a 10% EBIT margin is in 2025 absolutely realistic. 2023 is the year where we will be doing everything we can to put Vestas back in black. And that is actually the say and work around investors for all our employees currently. When we then look at our sustainability slide, there are no new topics with the exception of today that we have announced the breakthrough within blades and not least the blade circularity. We are proud of that. We’re also proud of the partners. And I think in there, we will expand that towards the world and towards customers. And I’m pretty sure we will have some exciting things with customers being tested in the coming quarters. That also led us maybe smile a little bit when we originally set the target of the circularity has to happen before 2040 because we didn’t have the technologies. Now we start seeing the technologies coming, not from necessarily with investors, but in partnerships with external people that also no things on areas where we probably can learn a lot. So we look forward to comment on 2040, but we are not just there yet, where we start moving some of those yearly year targets, too. So sustainability overall, it is a license to operate, and it will be a license to operate not only for us in the industry, but both for our customers and not least also our partners in the supply chain. That leaves me with the last, which is the outlook for 2023, where, of course, some of it you already had, but here it is with a bit more details from 27 of January. So revenue, €14 billion to €15.5 billion. Service is expected to grow minimum 5%. On the EBIT margin before special items, it’s from minus 2% to plus 3%, and the Service margin in there is expected to be approximately 22% for the year. And again, there highlight that we will have a one-off income of approximately €150 million, contributing to the margin in 2023 from the sale of the activities to KK. The total investment is for the year expected to be approximately €1 billion, and that is with a normal update on a quarterly basis following that. It is important to note that some of those basic assumptions in here of course, and based and behind the guidance is more uncertain than normal. It is another difficult year to work through the backlog, but also work through what is the world is giving us of visibility and predictability in the forecast. But I will also say that is, to some extent, also reflected in that our EBIT margin is with a range of 5%. The 2023 outlook is, of course, based on the current foreign exchange rates. So with that, I will just say thank you for listening in, and I’m sure there will be a number of questions following that. So with that, I will hand back to the operator for Q&A. Good morning and thank you very much for the presentation. I have three questions. I think I want to first start off with the U.S. IRA. Clearly, there are some incentives for wind manufacturing on that side. I wanted to ask how that would benefit your business, if at all? And how would you envisage that flowing through? The second question I have is around ASPs. Now we’ve had huge movements over the last couple of years, and that has been great to see. But I want to try to understand a little bit of the pricing impact for 2023. So is there any chance you could give us the deliveries for 2023 for onshore that are consistent with your revenue guidance that you’re giving? And then the last question I have is, you’ve highlighted the 2025 margin target of greater than 10%. I just want to understand a really high level, what are the situations that could drive an outcome for that target to be realized earlier? And equally, the other side of that, obviously later as well. So just trying to understand some of the drivers there as well, that would be really helpful. Thank you. Thank you, Ajay. I’m still sitting on the chair when you asked for it earlier, because I think on a day like this, where you announce a loss of this nature, I don’t intend to indicate earlier sort of confirmation of a 10% positive target. But let me do it in the right order. I think on the U.S. IRA, it is clear that it is still in work in progress. Customers are putting their projects through the treasury approval backlog. And as such, the whole thing here is then that you – and we will have with our customers to work through the assets and the different asset types to be qualified, first of all, as normal under the BTC and secondly, also under the AMPC. We are doing that diligently project by project. And therefore, what will be most predominant driver you will see in our part is, of course, that the activity will start picking up gradually when we come through 2023. You’ve seen in Q4 that we have started taking orders. Some of the orders are earlier sort of applicants towards the IRA. And there, we are just working through the details. But we can see the same as other market participants. This leads to a rather aggressive build-out over the coming years in the U.S. But I think it’s probably one or two quarters too early to say about the scope and the magnitude. But I think it’s fair saying all customers are back in the planning and also in the planning for projects right now. I’ve heard numbers of coming into this pre-selection and also approval process, and they are high, and we see that. It will come through to us. Of course, you will have to look for the order intake first, that’s the first sign. And then afterwards, you will see that it, of course, comes through also positively towards delivery. And there will also be some of the probably equipment that will qualify for it. So a combination of several factors. So watch out for the order intake is probably the best early view. Then on the ASP. If you see the ASP just for the year of 2022, we have had a significant development in ASP just over the last four quarters. So your answer is – or your question is not to be answered in such as for quarterly or for the year because some of the projects that are not so attractive from an ASP, of course, is being executed in 2023. And if we can push some of the more attractive orders in, they will also come in 2023. But there is a likelihood that the ones we took in of 2022 will influence our 2023 to a lesser degree. So therefore, I’ll rather talk to the time line of it. You can see, and I think we’ve spoken to it, our backlog has probably never had a broader range in terms of pricing which also means that you and we will have to see an expected improvement quarter-on-quarter and then individual projects can influence the profitability when you compare quarter-on-quarter. But there will be a phasing of improving quarter-on-quarter, but we won’t guide on the individuals. But expect first half is negative, then trending towards positive in second half. When we then say on the long-term targets, I think here, if you take just the breakdown of 2022, clearly, in 2022, we have been providing quite a lot of warranty provision. That is not a sustainable level for our quality and our expectations. So quality is one that will drive an improvement towards 10%. And then, of course, when you look at the pricing here, and the way both customers and the supply chain has actually sort of reacted to the conversations, I think it’s fair saying our Q4 order intake was the highest in terms of €1 billion. So we can see that the progress is there. So pricing and pricing discipline is the most important factor in getting towards the 10%. And probably that goes without saying when you are able to change more than 30% in the year, at some point in time that is the biggest lever towards the 10%. But of course, we have to execute flawlessly in our supply chain as well. But that one, I think we have been there before. So on that one, we are probably cautiously optimistic that we can get our own house in order. Just one clarification, please. Just on the U.S. IRA. What about the tax incentives on the cells and turbine manufacturer? Do you get the benefits of that kicking through to your numbers? And therefore, you see margin improvement from U.S. orders? Or do you not see that benefit coming through to you? Of course, the – say, effects of, I guess, what you’re referring to is the AMPC. Of course, that is something that we are currently looking into and which, of course, we are also expecting for that to have a positive impact. And we can discuss that more at some point once that becomes more clear. But I mean, naturally, given the nature of how that is structured, this is something that we are currently looking into right now. Thank you very much. First question goes to the Service business. I just noted that the backlog value is sequentially down a bit from Q3 2022 into Q4 by a bit more than €2 billion. We’ve been used to that almost being on a constant positive trend. So if you could explain what’s happening in the Service backlog value there? And then secondly, could you give any clarification to what provision levels you are assuming in the guidance for 2023? And thirdly, if I may, we now see that energy prices have come down quite a lot during the fourth quarter and also here into 2023. Do you in any way see that as being a challenge in terms of settling new deals with customers that there might sort of be new uncertainty on longer-term PPA levels? Thank you. Okay. Thanks, Casper. I’ll take the two first questions. On the first one, on the Service backlog, I can understand why you’re asking, because so did we, when we looked at it. This has been a year where, obviously, you’ve seen some fairly significant movements. And where, for instance, indexation uplifts had led us to go through things quite in detail. And unfortunately, as it turns out, there was simply an error in the way that the system has been set up and how the service backlog was calculated, so to say. So, we have made the correction that you’re pointing to is, of course, unfortunate. It’s not something that impacts profitability. It only impacts the volume that sits in the backlog, but that’s why we have made the correction that is leading to the slightly different development that you’re looking at than what you would have anticipated when expecting to see a backlog number here from Q4. On the provision level, what we are looking at there, I think we indicated that already that the levels we are at quite right now got quite unsatisfactory. We’ll not give you, say, a specific number on it. But I can say that, of course, we are not assuming that 2023 is going to be as difficult as 2022 was when it comes to the provision levels. Clearly, there is an expectation that we can manage to improve on the side of provisions in the year we’re in now. On the energy prices, I think you’re right. To some extent, it has come down. But I also think that’s probably nice because that meant that we seem to be able to come through a winter season without having a blackout or other things. But I also think we have to get used to that what we’re still seeing in terms of electricity prices. And I just said with the table sort of to see what was the average through 2022, Casper. I mean we still have some of the lowest is Finland with approximately €155 per megawatt hour in 2022. And we have had some of the highest fast approaching close to €300 per megawatt hour. So, I think we are in a period now where – which is also what we are encouraging everyone to sort of say, find the right plateau. So, we don’t have aspirational of 10% or 20% of the market price. Market price is coming down. PPA levels are probably finding a natural home and we see that in many countries right now, right from Asia Pacific to Europe. So, I think there is a positive in here, and we’ve just gotten used to that electricity and energy won’t be for free. And there is also a security element of it. So, we think there is a good one. Actually, I think if there’s one positive, I will say, is that the energy crisis have led to that the private sector is much more interested in talking to each other over the private PPAs than necessarily depending on the public PPAs. I think that’s actually a benefit, Casper. And then prices will find its equilibrium over the year or maybe the years to come. Understood. And the reason for asking is basically that my thinking is that what you want to see is stability in PPA levels as that will enable customers to sign deals. And is that also what you are seeing right now, Henrik? You can see we have made progress in some of it. And some of the people that we – customers we have done deals within Q4 have been on the hunt for both stability in terms of PPA, but also you cannot come to a financing group and getting your project approved if there isn’t also a reasonable stability in the price and the investment level of the solution. So, I think everything here contributes to it. And we can have a quiet hope that some governments will also start saying one of the ways of getting the price down to a normal balance would probably be to add a little bit more capacity, but that’s just a slight hope from our side. Thank you. Also a few questions from my side. Henrik, the first question goes to the order pipeline. Maybe you could give some color on how do you see the pipeline moving and maybe excluding the U.S., which you have already addressed? That will be the first question. I was just about to search in the annual report, because I didn’t think we had one in there. Now, Claus, as we are saying, we have had an increasing prospects of projects in the pipeline, and that’s still the case. And therefore, as I said, have we reached a low point through 2021 and 2022? I’m pretty sure of that. Why is that? Because at least what we have now seen is that’s the surroundings, whether it’s our customers, whether it’s the finance industry, whether it’s the off-take industry, we have now seen that there is a better understanding of that we get things done. So there is a likelihood that we will see some of those orders being easily executed than they have been in the last four quarters to six quarters, because it has been difficult. And some of the projects we have announced in Q4, they have been more than four quarters under the way, and that’s not normal business practice. So our order pipeline outside U.S. is growing, and I hope we are able to share some of it continuously through the quarters. But as we also said last year, you can probably also see that a number of the orders are getting bigger in onshore simply because they are going to be used for either clean offtake to industrial players or potentially also to future of the hydrogen. So therefore, you will see maybe a bit more lumpy parts depending on in which quarters the larger orders come. So, we are cautiously optimistic on that front. So should we expect that this, hopefully, higher activity level will start out already from Q1 and thereby follow a strong Q4? Or is it more a back end 2023 we should expect? I won’t give you any order quarterly guidance. We are working diligently, and I can assure you, every time we can sign an order, we sign the order, if it’s right pricing because that also triggers us that we can start having a better capacity planning. And Hans can sit here next to me and enjoy the cash flow and the reservation coming in. So that’s what we are going to do. Fair enough. Then the second question. When we talk about these warranty provisions and if we skip out the existing issues and look at orders you are taking in today, what is the provision level, i.e., all these issues? No, I think, you don’t take a warranty provision against something, where we are working towards in a longer perspective, which we have been quite open around that. We expect to come back into a range where the first milestone for us is passing 3% in warranty provision, which historically has also shown to us. That has not been the case. And a couple of the cases we have seen here in Q4 are new cases brought on quite old components and raw materials, which is disappointing. But therefore we are addressing it and we are addressing that in the normal way we do it. But it shouldn’t happen. So there’s not much else to say about clouds and that we work diligent through. Is it painful? Very. Claus, that you sit and book warranty provisions against specific projects customized to something that’s in Sweden or Germany, that’s not [ph] how it works. Sure. Just trying to figure out, the magnitude of issues in the new projects versus the issues you've had with already installed turbines? There – but there you’ll also see from the no clouds and the way we run warranty, that’s a general warranty as across what actually comes in as quality challenges. So that is booked as across Vestas. Thank you. I had two maybe bigger-picture [ph] questions. One is, you’ve highlighted that permitting has been one of the reasons why the activity levels in 2023 would be lower. So what would you do if you were in charge of improving? I mean, what concretely would you want the countries or the EU to do to improve permitting in time for the 2030 targets to be met? And my second question was on the European IRA. So there is, you’ve talked briefly about it in the previous call. But there is a cryptic remark in your presentation, which says that public funding should keep in mind in – should drive industry maturity and discipline. Can you talk a little bit more? Are you saying you really don’t want any manufacturing subsidies in Europe? Or are you saying something else? Thank you. Thank you so much, Deepa. So if I look at 2030, as I said to the graph, I am both concerned and also disappointed to see that we continuously every year sit and highlight a goal that is far from what we are actually achieving. And let me just reminder, it was exactly the same that happened in 2021. And in 2021, I will say that’s part of the reason why we then see an energy crisis hitting Europe, because we are behind in doing what we actually laid out to do. And that’s of course disappointing. Some of it in Europe is that we have built an enormous bureaucratic red tape. And to some extent, you cannot fix energy policy and supply nationally if you have given your municipalities the permitting to sit and decide on. So therefore, you have to do some sort of ease of either the permitting process in time or in administration and bureaucratic documentation around it. So either or that’s the only way Europe will get to a 2030 thing. And that goes for both onshore and unfortunately also goes for offshore, which we also have seen recent examples of that it’s just worrying that we are going the opposite way of actually making it easier. On your European one, we don’t believe that individual state subsidy for manufacturing and other stuff, we are actually pretty much dead against that. So if we look at it, it is about creating a visibility for both customers that are building for OEMs that are part of the capacity of the buildout that if we have the visibility of capacity, then it’s profitable, and then we can invest and we can create that. So it’s not necessarily sitting here and asking EU about competing with an IRA. U.S. have invested in renewable transition for more than two decades. They have come and therefore also potentially have a higher, I would call it a little bit higher predictability in energy prices, or at least the electricity prices seems to be at a better level. So what we are saying here, the visibility of a 10-year framework is actually what both customers and industry will be looking for, because 10 years also drives investment into capacity and new factories. And with the current ASP, we will be willing and we can see that on our CapEx investment, we invest in both technology and localization with that number. Thanks very much. Good morning, everybody. Can I start with offshore? I mean, the offshore revenue already dropped significantly in 2022, I think now below €1 billion with obviously some delays in execution. So I was a little bit surprised by your comments I think in the press release this morning that you expect offshore activity to further decline over the next couple of years from the current low base. So, I mean, do you really see lower revenue this year and next before the expected bounce back to 3 billion in 2025? And then the second question on the 1 billion CapEx guidance for 2023, I was hoping you could give us a bit more granularity on this so that we could understand a bit better the magnitude of the increased CapEx in offshore in particular. And if I may just a final question on China’s decision to or the consideration that there could be an export ban on solar wafers and wafer technology? Any first thoughts on this, on the potential indirect consequences for the wind industry? Thanks very much. Gael, thanks. I think I'll take them in order, and I can see we are now developing into a little bit of discipline here that restriction was two questions, so everyone ask three. So just a little encouragement to stick to our two questions. On the offshore, I think actually, it's positive in a sense of that we have had our prototype up 15-megawatt. It starts the first electricity generation by end of Q4 last year, Gael, which means that we are ramping up as planned for the V236. We cannot ramp it any sooner than what is also manufacturing and serial manufacturing, which will then go by end of 2024 and into 2025, and therefore you shouldn't expect any of that. What we've also seen is some of the projects of the old platform deviates from year-to-year, and we don't expect to see much more of it, which is also a reflection of that you have seen some of the impairment of the existing platform. So we are just sort of cautiously saying here, not much more will happen on the old platforms, and we cannot have offshore turnover from the new platform before it's actually in serial manufacturing. So that is the reason. Then we have, as we also shared here, a couple of projects that moves, which also just illustrates that offshore projects they do come with a higher execution risk when you are at sea and has to use both ships and cranes at sea. In terms of the breakdown of CapEx for 2023, we don't do that. And Gael, you will also appreciate it's simply an industry where it will be very nice to know that breakdown maybe for you, but I'm pretty sure there will be others that will be even more interested in it because that tells you also around where we are localizing and potentially what platforms we are investing more in. So from a competitive angle, that's not what we will share. On the last one, on China, I will just say it's part of our geopolitical uncertainty. And it's beyond what – at least what I see and know it's so new, let the industry work through that, especially the solar industry. And as I said right now, I just welcome any positive effect for the wind industry, and that's where we are working. So we will see how that affects us. Yes. Hi. Good morning everybody and thanks for your time. My first one is a follow-up on 10% margin target. So in the annual report, you talk about more than €3 billion revenues in offshore by 2025. Service will grow as installed base grow. The question here is more on the onshore volumes that you will be required to hit the 10% number. And on the same topic, this 8% to 10% onshore CAGR that you mentioned in the presentation, shall we assume that you need a similar type of growth or maybe more than that given you want to outgrow the market in order to reach to 10% by 2025? So basically, what is the sales growth that you need in onshore to hit 10%? That's the question number one. No, I don't think you can say necessarily that there is a need to get to a certain turnover of that. And I think we have said that very clearly in the last many quarters, Akash, that getting to 10% is the profitability. And if we have a choice, we prefer to have profitable order backlog, and we have to have profitable turbine execution and that has to come to 10%. There isn't an implied 8% or 10% growth in the top line sort of indicated for getting to 10% EBIT. Thank you. And my second one is on Service. Here, I'm wondering if you can provide split of sales between transactional item and the sales that come from the backlog that you have – big backlog that you have in the segment? And also, when we look at your loss factor production – loss production factor chart, and given that more service contracts are tied to performance of turbines, can you explain how much of the year-on-year margin erosion in Service in 2022 was tied to higher loss production factor? Because we see the chart shows production factors still rising. And what impact have you baked in your service guidance of 22% margin in terms of how this loss production factor may progress in 2023, given the warranty issues and product issues that you have? I'll see if I can try and give you some meaningful answers to that. I think, first of all, when you do look at the Service business, of course, it's a €3 billion business. And that also means that, I mean, it doesn't take a lot of, say, high-single digit or double-digits, even low-double-digit numbers to move things around quite a bit as we also saw earlier in the year with some of the one-offs we had. I think if you look at the uplift we've had during the year, in terms of, say, the top line growth that we have experienced, Akash, then, of course, it's a fairly significant part of the difference to the original guidance that comes from the increased transactional sales that we've had. That's probably the best way of explaining what is the additional sales we've had from that. That also means, of course, that we are looking at, say, meaningful impacts if you go to the 27% that we have now compared to where we started the year, then I said, it's not that it's only €20 million or €50 million we have achieved from that, it's more. But it's in some ways also a bit difficult to distinguish about, say, where does it come from, which is, I guess, also what leads a little bit into the next point you have as well, which is, say, the lost production factor. I have to admit I would be challenged to do like a one-to-one bridge from the loss production factor into how the service business itself would perform. We're obviously making assumptions around how the turbines will be spinning in terms of the performance levels that are to be expected. But it's not that you can necessarily just make a one-to-one comparison between the service margins and the lost production factor. That would be a very, very difficult calculation to make. Does it have an impact? Of course, it does but it's difficult to put a specific number to it. Yes, thank you. Two questions from me as well. Actually, firstly, on the same topic on the Service business. So in terms of the 22% you guide in margin, it's a limited uplift from what you had in 2022. And then again, you say you should be around 25% margin by 2025. So can you just sort of talk us through the levers on the margin, both in 2023 and then what's going to lift further into the 25% level by 2025? And then my second question, just a clarification on your Development business. So on the slide, you highlight the contribution from Copenhagen Infrastructure Partners as part of the development. So the development earnings you will from this year include into EBITDA, does that include the CIP contribution? So I think your first question, and I already forgot kind of what – I'll just look through my notes again, so get back to the second one. So the development income from CIP will not be part of the EBIT for this year either. I think that's a fairly simple one to answer. And then your first point was then, I think, on the longer-term EBIT guidance for Service. It's Service on towards 25%. And as we can see, Kristian here, some of it has been transactional. Some of it probably also there have put some pressure on the margin and some of that we are investing in the business, both from a digital platform part, as mentioned on Covento. And we are also investing in what is called LEAP, which is actually asking employees in the Service business to work differently when they service a turbine. So we are investing in the business with work tools that are supporting the business. Last region went live here in the beginning of 2023, and some of those efficiencies and synergies are coming towards 2025. And then as I said, maybe here as we are also here, it's important to be able to scale, to do what we have just done in 2022 to support our customers. And therefore, if that sacrifices a percent in investment of scalability, that's probably what we are just saying here. Between 2022 and 2025, we believe we will get there by part of it. But you can't grow 27% every year, that's for sure. Thank you. Two questions. Firstly, on the warranty provisions, is there any scope for you to recover that from your subsuppliers in any way? And is that something that could potentially come next year? And just secondly, on the EnVentus platform, can you remind us how many of your orders at current run rates are coming in on EnVentus and how long it will be before your onshore – before the product is efficiently developed and differentiated to be all of your onshore volume rather than relying on the 4-megawatt platform? Thank you. Thanks, Mark. And with that, I think also after this, we will stop the Q&A. But Mark, on the warranty there, it is, as always, when we have questions to either components or things that have come from the components or the raw materials our partners have been using, then it's a joint effort to both, first of all, root cause and secondly, also figure out who pays for it. So some of it came late in Q4. And therefore, we are in those discussions. So I won't further comment on it because it's down to individual discussions with one or two of our partners in supply chain. In terms of the EnVentus, I always say it's progressing. We're happy with it. We can see it's coming through in the main energy markets. It's incredibly important in parts of Europe. But I will also still say, Mark, sometimes you have to remember that we're also a bit addressing in terms of why is the permitting so long. Just here out here, when you got a permitting eight – seven years or eight years ago and you didn't have to apply for it, you're actually applying with two generations old technology in certain European countries. And I'm just raising it. It is a little paradox that you're actually applying for a permit and you then approve eight years later, which is an eight year old technology compared to a much higher efficiency, much lower outcome of levelized cost of energy. So therefore, again, an encouragement of speeding up the permitting, so you can actually get the latest technology available. It is a strange process that has some, I will call them, value destroying consequences. So EnVentus is working. We are ramping it up, but we are also ramping part of other technologies up to address the other markets in especially Americas and also in Asia Pacific. Good. Otherwise, thank you so much for listening in. I know we are going to meet many of you over the coming weeks on the road. We look forward to see you. And as such, thank you so much for the support in 2022, which was a difficult year, for sure, for Vestas. So thank you. See you out there.

EarningCall_336

Thank you for standing by, and welcome to the Fortinet Fourth Quarter 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 will now turn the conference to your host, Mr. Peter Salkowski, Senior Vice President of Finance and Investor Relations. Please go ahead. Thank you, Valerie. Good afternoon, everyone. This is Peter Salkowski, Senior Vice President of Finance and Investor Relations at Fortinet. I'm pleased to welcome everyone to our call to discuss Fortinet's financial results for the full-year and fourth quarter of 2022. Speakers on today's call are Ken Xie, Fortinet's Founder, Chairman and CEO; and Keith Jensen, our Chief Financial Officer. This is a live call that will be available for replay via webcast on our Investor Relations website. Ken will begin our call today by providing a high-level perspective on our business. Keith will then review our financial and operating results for the full-year and fourth quarter of 2022 before providing guidance for the first quarter of 2023 and the full-year. We'll then open the call for questions. Before we begin, I'd like to remind everyone that on today's call, we will be making forward-looking statements, and these forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected. Please refer to our SEC filings, in particular, the risk factors in our most recent Form 10-K and Form 10-Q for more information. All forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation and specifically disclaim any obligation to update forward-looking statements. Also, all references to financial metrics that we make on today's call are non-GAAP unless stated otherwise. Our GAAP results and GAAP to non-GAAP reconciliations are located in the earnings press release and in the presentation that accompany today's remarks, both of which are posted on the Investor Relations website. Ken and Keith's prepared remarks for today's earnings call will be posted on the quarterly earnings section of our Investor Relations website immediately following the call. Lastly, all references to growth are on a year-over-year basis unless noted otherwise. Thanks, Peter, and thank you to everyone for joining today's call to review our outstanding full-year and fourth quarter 2022 results. For the full-year, revenue growth accelerated to 33%. We continue to gain market share in the service security industry with customers increasingly recognizing how Fortinet integrate and a single platform approach to security delivers along total cost of ownership and a greater return on investment than competing solutions. Product revenue growth of 42% was very strong, making Fortinet a leading product revenue company in the cybersecurity industry with total product revenue of $1.8 billion. Our SD-WAN and OT bookings together accounted for over 25% of total bookings. And our goal is to keep growing and achieve #1 market share in network firewall Secure SD-WAN and OT security market over the next couple of years. For 20 years, Fortinet has made long-term strategies and investments around the convergence of networking and security. Yesterday, we announced our fifth-generation FortiSecurity processor, the FortiSP5. This new SoC base for the ASIC has secure computing power rating for major network security functions like Firewall to support 17x to 32x greater than the average of our competitor similar price model using general purpose CPUs and doubles the ASIC chip acceleration of applications to Forti such as New Trust, SASE, 5G and our SD-Branch with much better performance and efficiency. According to the most recent IDC data on unit shipment of firewall plants, Fortinet hold the #1 unit shipped market share position and 48%, providing Fortinet with an attractive economy of scale position us well as making it difficult for competitors to develop their own ASIC technology due to high entry barrier and significant investment that is required. Fortinet is a huge security computing power advanced advantages are able for the OS to integrate more security functions and applications than our competitors with much better performance and much lower energy consumption, resulting in a much lower total cost of ownership while offering easier operations for our customers. For example, a recent Forrester report highlighted that customers deploying Fortinet Secure SD-WAN solutions achieved a 300% return on investment over three years with a payback period of only eight months. Fortinet's substantial installed base of product with reach functions enable us to offer additional secure services, and upsell, integrated and automated for the Fabric Product Solutions. We recently announced several new and advanced services that help SoC team reduce their operations cyber-risk while being more efficient and handling cybersecurity issues. As networking and security continue to converge and consolidate, we believe we are well positioned to achieve our 2025 building target of $10 billion. Before turning the call over to Keith, I would like to thank our employees, customers, partners and suppliers worldwide for their continued support and hard work. Keith? Thank you, Ken, and good afternoon, everyone. As we look back at 2022, we see the success of our strategy to lead in convergence and consolidation as well as the combined power of our ASIC technology with our integrated operating system. Combined, these efforts are driving our strong financial results. There's been an explosion of devices that must be connected to the cloud, data center and edge compute. As a result, the infrastructure has expanded to support secure connectivity via distributed firewalls, it is no longer feasible to overlay security on top of networking in the data center. They must be deployed as a converged solution. Firewalls need to work seamlessly with networking and security applications across the company's entire infrastructure. Fortinet is leading the convergence trend with a wide range of technologies, including network firewalls, Secure SD-WAN, 5G and OT security, all embedded in our single operating system delivered as hardware, software, cloud and as a service. Traditional CPU-based solutions are very inefficient as supporting both networking and security. That's why Fortinet developed proprietary ASIC technology to build an application-specific solution. Yesterday, as Ken mentioned, we announced our next-generation ASIC, the FortiSecurity processor or FortiSP5, which allows line speed convergence of networking and security at every network edge. The new seven nanometer technology combines existing NP7 technology with new content processor capabilities. Our enhanced platform suite of integrated products is delivering on customer demands for convergence, vendor consolidation, ease of management and lower operating costs. The success of this strategy is evident in our full-year 2022 results, and I'll start there. Billings passed the $5 billion mark, totaling $5.6 billion and growing 34%. While revenue totaled $4.4 billion, with growth accelerating to 32%, the fifth consecutive year of revenue growth of 20% or more. Driven by strong demand for our fabric and cloud security solutions, enhanced platform technology billings and revenue both increased over 40% to $1.8 billion and $1.5 billion, respectively. And despite a challenging global supply chain environment, product revenue growth came in at 42%, our highest annual product revenue growth rate in over 10 years. Our product revenue growth was driven by the combined -- by the continued growth of our firewall use cases and the addition of over 23,000 new customers. Service revenue was up 26% to $2.6 billion, resulting in three consecutive years of accelerating service revenue growth rates. Gross margin was strong at 76.3% and operating margin outpaced our initial expectations, increasing 110 basis points to a new Fortinet record high of 27.3%. Our GAAP operating margin of 22% is one of the highest in the industry, and we continued our streak of being GAAP profitable every year of our 14-year history as a public company. Earnings per share increased 49% to $1.19. Free cash flow was a record at $1.45 billion. Free cash flow margin was 33% and adjusted for real estate investments, the free cash flow margin came in at 37%. And for the year, we repurchased approximately 36 million shares at a cost of $2 billion. Total deferred revenue increased 34% to $4.6 billion. Short-term deferred revenue increased 32% to $2.35 billion. Quarterly contract terms throughout the year were consistent with the year earlier periods, including the fourth quarter at 28 months. Before moving on to our Q4 results, I'd like to summarize our enterprise success and highlight a few seven figure deals from 2022. We saw great success during the year with our strategy to expand further into the large enterprise segment as the number of deals over $1 million increased over 55% to a record 546 deals and billings on these deals increased by over 70%. If we look at a few of our large deals of the year, let's start with the competitive upsell deal, Fortinet displaced a 11 different vendors by consolidating the customer's network to security functions on our Security Fabric. This worldwide wholesaler previously purchased secure SD-WAN and FortiProxy. Next on the list was a centralized network security solution that could be managed and deployed to its 400 global locations. This customer chose Fortinet Security Fabric for a selectable and integrated solution across multiple scenarios, including work from anywhere, perimeter security and data center segmentation. In another upsell deal, a leading global manufacturer was spun off and had to stand up the security and networking infrastructure separately. The newly created infrastructures included remote access, SD-WAN, application delivery control, authentication, endpoint, e-mail protection and switching. Keys to our win included our Zero Trust capabilities, a cloud-first SD-WAN strategy and the ease of integration and convergence across our platform suite. Lastly, in the new logo win, a large U.S. retailer with over 500 locations were struggling with a total cost of ownership of their legacy security architecture. Keys to this win included delivering a single pane of glass versus the multiple consoles they were using and replacing the competitors' firewalls with our FortiGate's, delivering URL filtering, WiFi security, and edge router replacement, all on our unified and integrated FortiOS platform. This customer reported anticipated savings of $29 million over five years. Turning to Q4 results, both billings and revenue delivered new Fortinet records with billings of $1.7 billion and revenue of $1.3 billion. Both metrics increased over 30%. The strong fourth quarter revenue performance reflects solid customer demand across both our core and enhanced platform technologies. In the fourth quarter, we added over 6,200 new logos, another new Fortinet record reflecting the support of our channel partners, the leverage they bring and the breadth of our worldwide customer base. Taking a closer look at the fourth quarter, billings growth of 32%, was driven by a 40% increase in enhanced platform technology billings, which accounted for over one-third of total billings. Total revenue growth of 33% was driven by a strong demand for core and enhanced technology platforms, which increased 26% and 47%, respectively. Product revenue grew 43% to $540 million. Service revenue was up 27% to $743 million, driven by strong product revenue growth and strength in our security subscriptions. Short-term deferred revenue grew 32% and represents eight consecutive quarters of accelerating growth rates. Total gross margin of 77.6% was driven by a 310 basis point increase in product gross margin to 65.2%. Several factors converged to drive our record high quarterly product gross margin, including legacy pricing actions, easing supply chain cost pressures and improved discounting. Service gross margin of 86.7%, ticked down 40 basis points due to increased labor cost and our expansion in cloud services and the related hosting costs. Operating margin of 32.5%, was up 400 basis points year-over-year due to the strong gross margin performance and FX benefit. Looking to the statement of cash flow summaries on Slides 11 and 12. Free cash flow was $497 million, adjusted free cash flow, which excludes real estate investments was $510 million, representing a 40% adjusted free cash flow margin. Cash taxes were $63 million, capital expenditures were $31 million, including $13 million for real estate investments. DSO increased 14 days sequentially and year-over-year to 89 days, also impacting service revenue growth. Moving to guidance. We believe the continued innovations we made in building our platform enables our customers' digital transformation journey. And as Ken noted, customers are increasingly recognizing how Fortinet is integrated and single platform approach to security can deliver a lower total cost of ownership and a greater return on investments than competing solutions. Now I'd like to review our outlook for 2023, summarized on Slide 15, which is subject to disclaimers regarding forward-looking information that Peter provided at the beginning of the call. For the first quarter, we expect billings in the range of $1.415 billion to $1.465 billion which at the midpoint represents growth of 24%. Revenue in the range of $1.180 billion to $1.220 billion, which at the midpoint represents growth of 26%. Non-GAAP gross margin of 75% to 76%; non-GAAP operating margin of 23% to 24%, which at the midpoint represents an increase of 150 basis points. Non-GAAP earnings per share of $0.27 to $0.29, which assumes a share count of between $795 million and $805 million, capital expenditures of $80 million to $110 million, non-GAAP tax rate of 17%, cash taxes of $20 million. And should also note that first quarter guidance assumes backlog decreases slightly during the quarter. For the full-year, we expect billings in the range of $6.710 billion to $6.790 billion, which at the midpoint represents growth of 21%. Revenue in the range of $5.370 billion to $5.430 billion which at the midpoint represents growth of 22%. Total service revenue in the range of $3.335 billion to $3.365 billion, which at the midpoint represents growth of 27%, it implies a fourth consecutive year of accelerating service revenue growth. The service revenue guidance also implies product revenue growth of 15%. Non-GAAP gross margin of 75% to 76%, non-GAAP operating margin of 25% to 26%, non-GAAP earnings per share of $1.39 to $1.41, which assumes a share count of between $805 million and $815 million. Capital expenditures of $400 million to $450 million due to continued investments in clouds, data centers and facilities. Non-GAAP tax rate of 17%, cash taxes of $375 million, split somewhat evenly between the first and second half of the year. The increase in cash taxes reflects recently effective R&D capitalization and amortization requirements. The full-year estimate assumes backlog approaches historical levels by the end of the year. Cybersecurity, but not immune to economic slowdowns is expected to remain a comparatively safe harbor. And with a strong business model and history of execution, we are confident that our market share gains will continue. We remain on track to achieve our 2025 financial targets, which include billings of $10 billion, revenue of $8 billion, non-GAAP operating margin of at least 25%, and adjusted free cash flow margin in the mid to high 30% range in 2025. Great. Thank you. Good afternoon and thank you for taking the question. And congrats on some solid results and a solid guide. I guess given that we heard from one of your peers last night and they were I guess, markedly more conservative or cautious on the macro than you seem to be. Maybe for Ken and Keith, could you help us understand what you're seeing in the market from a macro perspective, how enterprises are spending. And how does any changes in the quarter relative to initial expectations pan out with regard to demand, we're seeing sales cycles. We're hearing about sales cycles elongating and budget scrutiny ongoing. What are you seeing on your side? I took a question feedback from some customer partners. Their budget is tight, but Fortinet solution has a better cost of total cost ownership and also kind of even cost saving for some like a Secure SD-WAN solution. And at the same time, we do see -- the use case of firewall expanding much broader than before, especially for this OT security, some other area, which pretty much, I'd say, network security may be the only solution to secure some of this OT area. So that's where we see the demand is still pretty strong. And so we probably -- we're keeping gaining more market share in this well fragmented market. Yes. Thanks, Ken. I spot on with that. I would also add, look, I think we're all sensitive to the overhang from the macro environment and what that may mean is [indiscernible]. But when we look at our internal numbers, whether it's pipeline growth and even if we compare what pipeline growth is today versus a year-ago, it's even up in terms of percentage growth rates. The use cases, and I think in this environment, the savings that we offer and the ROI that we provide and some of the case studies that we provided in the call there are examples of that. I think we're continuing to benefit from that, and we do see that continued opportunities for market share gains even in this environment. Got it. Maybe just for a quick follow-up then, Keith. As you think about the level of conservatism in your fiscal '23 guide, I mean, stronger than, I think some had expected. I know I'm going to get the question tomorrow how much conservatism is in there. What gives you confidence in hitting that kind of level of performance, particularly with regard to billings. And then any change to your 2025 targets as you kind of look at the strength that you're seeing in the market from here on out? Yes. I think that the approach that we take, if you will, is consistent this time around with what we've done in prior years, but with certainly added conservatism in it to reflect what's happening or what may happen with the macro environment. And first and foremost, we start with the pipeline and looking at the pipeline growth there and the kind of the timing of the pipeline and making sure that we have deals that are teed up for the middle of the year and perhaps even to the second half of the year. So there's ample opportunity there. You also want to make sure that you've got sales productivity numbers that make sense and sales capacity numbers that make sense. Yes, I think there will be some tailwind from the backlog, which I commented on in the comment that we're going to get some benefit from that as it continues to burn down. But keep in mind that we have seen some changes in cancellation rates, and I think we've added a significant amount of conservatism there around cancellation rates. Again, so I think it's really about the pipeline, it's the tailwind that we have and it take us the advantages that we're offering and total cost of ownership in this environment. Thank you. One moment please. Our next question comes from the line of Fatima Boolani of Citi. Your line is open. Hey, good afternoon. Thank you for taking my questions. Keith, for you, just with respect to the services revenue guidance at 27%. That's not a material difference from the cadence you've been running at this year. And I'm curious what sort of input embed that revenue segment for you? And I ask because we have the dynamic of some of your customers delaying their subscription registrations over the course of '22. And then we also have the dynamic of a lot of your customers not having realized the pricing increases that you've expected in the last 12 to 18 months. So I'm curious as to why with those positive inputs, you -- we wouldn't see better services growth. And what sort of things that you're being conservative about there? And then a quick follow-up, please. Yes. I think it kind of goes back to Brian's question a moment ago in terms of -- with the level of conservatism and caution that's in the guide. And I know that historically, I've often complained that I don't get much room in the services line from where the consensus is versus what I'm forecasting. At a 27% number, I think that's pretty much right on top of what the street of that for the full-year. And I think in this macro environment, I think that's a great -- a good place for us to be at this point of the year for full-year guidance. Understood. And any commentary on operating margin and operating profitability performance because we are seeing compression into next year, certainly on a quarterly basis. But anything to be mindful of there as it relates to maybe onetime items that are peeling out just perhaps why not see better follow-through in profitability? And that's it for me. Thank you. Yes. Yes, I think our guidance is pretty much in sync with where we are historically at this point in time and consistent what we always talked about the 25% margin number. But I think the -- what you may be suggesting or inferring is really, it's all about FX, if you will, when you look at 2022 compared to 2023. We had a nice benefit from FX in 2022. And I think in terms of what our assumptions are for 2023, like the rest of people, we read the economic reports from the big banks and so forth and what the dollar is expected to do. And I think we've really pulled out a lot of that benefit by the end of this year. And so you're not really going to see that in the year-over-year comparison. Thank you. One moment please. Our next question comes from the line of Saket Kalia of Barclays. Your line is open. Okay, great. Hey guys, thanks for taking my questions here. Maybe first for maybe a question for both Ken and Keith. Clearly, SD-WAN and OT are becoming a bigger part of the business and that too with higher growth rates. And so maybe the question is, how do you folks think about the growth rate or runway for growth in those two businesses either separately or together, over the next couple of years, as part of the total growth equation or part of the $10 billion goal, however you want to think about it, but really curious about that SD-WAN and OT part of the business that's been doing so well. I think there is two parts. First, I totally agree with you said that SD-WAN and the OT market growing faster than the network security average. And on the other side, we do believe our solution has huge advantage compared to other competitors. So both SD-WAN, OT market is still pretty fragmented and compared to our home growth integrated solution and leverage for the ASIC company and power. So advantage much huge compared to other competitors, quite some mostly come from acquisition. And at the same time, they don't have the ASIC help to increase speed, lower the cost and the power consumption. So that's why we feel we're keeping growing above the market, so above the market growth rate. There's a different research about how the market is growing. But I do agree it's a fast-growing market compared to the cybersecurity space and there will be a lot of potential going forward. Got it. Got it. Very helpful. Keith, maybe just a quick follow-up for you. Actually, great to see the billings duration stay roughly similar. I'm curious if you could just talk anecdotally or just specifically just around how you're thinking about billings duration here in '23? And whether that's been something that you feel like customers have pushed on given the interest rate environment that we're in? Yes. I don't think that we've really seen customers push on the term. Obviously, at 28 months -- 28 months, which is kind of been keeping where we've been historically. But I do think in the fourth quarter, we certainly had conversations with customers that were I think perhaps even more focused on cash flow, if you will, than they were on discounting in terms of extended payment terms and that sort of thing. So if I were to look at the -- what I'm hearing back from customers, it was all about cash protection. And with that, I assume if I were trying to do a lot of five-year deals or something like that, I might have felt more pressure. But given the SMB mix of our business and our partner footprint, obviously, didn't come through in the numbers really. Thank you. One moment please. Our next question comes from the line of Hamza Fodderwala of Morgan Stanley. Your line is open. Hi, guys. Thank you for taking my questions. Good evening. Keith, I wanted to clarify something you said about the cancellation rates. I think you mentioned that you're seeing some changes there. Can you maybe elaborate on that a little bit? I think like the past few quarters, it's been around 4%, 5%. Just if you could provide any more color on that comment? Yes. We did see a pickup to if we want to call it mid-single digits in Q3, we saw it tick up to high-single-digits in fourth quarter -- in the fourth quarter. And we've anticipated this, particularly as the backlog starts to shift its mix as the firewalls. There's still a significant amount of firewalls in the backlog, but it really now has tilted towards the network equipment, the switches and the access points. And so as you would expect, one last comment on that, as we see the shift in the mix in the backlog as well as the pick-up in the cancellation rates, I would also offer that as part of the guidance setting process, I think we've taken a fairly conservative approach to cancellation rates on what they -- how they may impact 2023 or said another way, we're not expecting all the backlog that exists at the beginning of the year to convert in 2023 because we think there'll be some cancellations. Got it. And just maybe a follow-up for Ken. I think SD-WAN is now nearly a $1 billion business for Fortinet which is quite remarkable because you just started selling it, I think, maybe four years ago. I'm curious as more of that base starts to come up for refresh. What are other monetization drivers do you see for SD-WAN, whether it be attaching more services or perhaps increasing the price points. I'm curious how you're thinking about that? Definitely more service, whether under the overlay service for SD-WAN because our SD-WAN has all the security function and also a lot of -- deployed case whether supporting work from core from anywhere or kind of helping enterprise reduce their total cost of networking all these things. We do see a lot of additional service they need. At the same time, we also see the service provider starting more working together with us, offer some quite additional service beyond -- that's the traditional SD-WAN. So that's also helping drive much more service going forward. Thank you. One moment please. Our next question comes from the line of Brad Zelnick of Deutsche Bank. Your line is open. Great, thank you very much and congratulations on just blow out results and guidance, a nice job. My first question is just around the new ASIC FortiSP5. Can you remind us what if any impact we might expect in terms of customer purchasing patterns and what you've seen in the past and the extent perhaps it can drive accelerated demand and/or maybe the risk of trade-down effect? And I've got a follow-up. Thanks. Probably want to take some time, I'd say, maybe one to two years to refresh the product. And that's where every quarter, we tend to release one or two products, whether leverage new ASIC or the new CPU of Smarter network chip in the industry. I don't feel it will be a significant impact up and down of the result and will be more smooth transition. Because security deployment is a kind of a -- take long time to design, evaluate, deploy and also very, very long sales cycle. At the same time, the life cycle of the product also tend to be quite long, like seven to 10 years. So that's where the ASIC each generation definitely will help in and at the same time has a huge advantage compared to using general-purpose CPU. So that's where we're keeping gaining market share. But consider the switching costs, consider the long cycle, sales cycle and deployment cycle. And also, we also need time to put ASIC into a new product, which also taken in a few months, three to six months, thus I do see it will be like a more long-term positive impact instead of short-term. Yes, Brad, I would only offer again for context. I think that -- this is what Fortinet has been 20 generation. It's a chip probably now we think content processors and network processors and systems-on-a-chip. And I think that Fortinet, Ken and Michael have actually shown the ability to transition through those generations of chips. And if you look back at the financials, I think it's a little bit difficult to find a year that for a period of time, really saw spike because of the new chip. These are much more long-term plays. And I think the approach here is to execute in a smooth fashion over a number of years. Thanks for the reminder and Keith, can you just expand on your comments around DSOs being up sequentially year-on-year and the impact of services revenue? And related to that, I recall you had a change in policy around subscription activations. Is that also impacting services revenue. Any help there would be great. Thanks. Yes, the change in activation policies started February last week, I believe, February 1. So we'll start to see that going forward. What I was referring to is the -- is really all about linearity, right? That's what it gives you insights to. And if I see my DSO go from, call it, 75 days to 89 or 90, you can kind of start doing the math there and see that's a 20% increase in DSO, and it's really driven by how linearity came through in the quarter. And when linearity starts shifting that much, we lose the opportunity to gain service revenue from sales early in the quarter that would normally activate. So we really didn't get a lift in service revenue from in-quarter deals the way that we would have expected because of linearity. Thank you. One moment please. Our next question comes from the line of Shaul Eyal of Cowen. Your line is open. Thank you. And good afternoon and congrats on the great performance and guidance. Keith, given the slightly lower-than-expected 4Q service revenue, how should we be thinking about the first quarter service revenue growth? Yes. I think that we kind of remain truthful to or faithful to the notion of providing service revenue guidance for the full-year and kind of leave the Street work out the numbers from that point going forward. I think that certainly, as we kind of look at laying out the year and with the backdrop of the macro that we're all concerned about, I don't think we really wanted to push too hard on some of the metrics that we didn't need to push on. And I think where we ended up with is pretty consistent in the quarter with our consensus when we look at our internal allocations between product and service revenue. Understood. And maybe one more. As we think about the non-GAAP operating margins and really great performance, should we be thinking of the target to be sort of an average of 25% over the period or a floor of 25% over the course of the next few years? I'm going to answer yes. Yes, you should be thinking about one of those two ways. Look, I think we're driven by being above 25% operating margin, right? I think the ones that -- the last few years have taught us is life full of surprises. And so locking into a fixed commitment is a little bit challenging sometimes. But clearly, we manage the business as if it's the floor. Thank you. One moment please. Our next question comes from the line of Adam Borg of Stifel. Your line is open. Thanks so much for taking the questions. Maybe for Ken or Keith, just on sales headcount. Obviously, you guys have been aggressively growing sales and marketing headcount in recent years, and it's nice to see the enterprise success you talked about. Just curious where we are in sales force productivity. And how we should think about sales headcount growth and even overall headcount growth in '23? And I have a follow-up. Yes, we are continuing hiring. But at the same time, we want to keeping the efficiency and is not dropping the efficiency for the sales and marketing. And at the same time, there's some long-term investment, whether in R&D, the infrastructure supporting, we will continue to need to make. So that's why we do expect the total head count will keep it increased, but probably the rate that just like the last few years will be below the top line increase. Yes. I think just building Ken's comment one of the notes that we do track tenure. We talked about it last quarter. Tenure [ph] would be people that have been here for, say, people have been here more than six months. And I commented last quarter, the tenure was up, I think, eight points. It's actually moved back to historical norms now. And tenure is kind of a key component of productivity as we see -- as we go forward. Got it. And maybe just a quick follow-up just on the FortiGate and entry mid and high. It's nice to see really strong midrange growth is interesting at the high end leased by my math was the lowest mix since 2017. Just curious if anything to comment there. Thanks so much. That sometimes depend on certain like products or backlog. I think that's probably the average still pretty similar. We don't see much, but sometimes from quarter-to-quarter, it may change a little bit. But I have to say the total mix is still pretty much the same. Yes. I think that's one of the challenges you have in the current environment and the supply chain was really doing funny things, if you will, into delivery, and we don't give you a lot of insights to orders that we were taking in, but we provide billings numbers, you get some distortion there just simply based upon what's available. Specifically, we saw a significant amount of availability of the 100F products, if you will, which are a midrange product. And you're seeing that availability came in the fourth quarter, and it shifted that mix in the way you just described it. Thank you. One moment please. Our next question comes from the line of Tal Liani of Bank of America. Your line is open. Hello. Thank you. There's going to be one day call that no one is going to butcher my name, and I'm going to be very happy. But I wanted to ask you two things. First of all, could you provide a backlog for 4Q or anything about it? I'm trying to calculate the bookings for the year and what happens to bookings? And any color on backlog would be great. And the second question, a few people asked you about the services growth for next year. I want to ask you about the product growth. The product growth is going from 42% to 15%, if my math is right, from last year to next year to this year. And on the other hand, your commentary is positive. It's -- there's more activity, there's more product sales. So can you take us through the dynamics of product growth and also the connection, the relationship between services and products. Thanks. Yes, I'll start with the last one first, if you will. I think that I think we are very excited about the opportunities in front of us in terms of how the company is executing. But we are certainly also very cognizant of the unknown of the macro environment. And I think there's just an opportunity here in terms of how we guide for the full-year to really bake in concerns around the macro and how it may manifest in the coming months -- coming quarters. So I think you're seeing that, and I kind of made a comment earlier that historically, it's been tough for me to be somewhat cautious on service revenue because it's so visible. We're looking at short-term deferred revenue and the conservatism oftentimes ends up in product revenue. I think there's still an element of that in this conversation. Yes, I think for the backlog like what I said in the last one or two quarter, it's continued shifting to the network area, network and the Wi-Fi which is more industry standard product. I'd say probably today, most of the backlog will come from the network side and the Wi-Fi side, which has a higher cancellation rate. And -- so that's where like Keith has mentioned, we take a pretty, when it's positive conservative, but that definitely pretty good estimate what will the impact for the whole year on all these -- the backlog for the product revenue. And product revenue, definitely, we see probably going forward, the benefit of the new ASIC and also some of the new products that were helping and also some of the case, the use case -- additional use case of the firewall definitely also are helping, but it will take some time. So that's where we tend to be more careful to forecast. At the same time, we do see long-term, we still have a huge advantage compared to other competitors because the investment we made in the product, in the hardware, in ASIC give us huge advantage of the total cost of ownership towards container keeping gaining market share in that space. And do you provide some numbers about the backlog or maybe how material it is to revenues as a percentage of revenues? I think it's -- since it's been a large difficult to forecast at the same time, with the change in cancellation and also most of the backlog related to networking WiFi not a core product. So that's where, since last quarter, we no longer provide detail of the backlog, we feel that could be a little bit misleading if we keep in providing that. I think we can add over some directional comments here with it. So the headlines would be that backlog was up year-over-year, quarter-over-quarter it was down. But as you start thinking through how to treat the backlog in terms of doing your own models going forward, again, we would come back and remind you of a couple of things. We expect the cancellation rates are going to increase, and that's baked into our guidance, as we look at things. And when we say return to historical norms in the commentary, I think we probably would have three years ago had backlog for professional services and training that may have been in the $30 million range. So maybe with growth now you're probably looking at a steady state that could get you over $40 million to $50 million. So just a note of caution, they'll just take all that backlog and assume it's all going to convert into billings and revenue in 2023 given those dynamics. Thank you. One moment please. Our next question comes from the line of Ittai Kidron of Oppenheimer. Your line is open. Thanks. Hey guys. Nice quarter. Keith, I was wondering if you could do a little bit of a deeper dive for us into the enhanced part of your business, if there's a way for you to kind of break it down a little bit for us by product. And perhaps rank order for us, categories which are growing above the average for the category and below the average for the category. I would just like to get a little bit more color as to the change in mix within that? Yes. I don't know that I've really seen a change in the mix, if you will. I think the -- when you look at the -- what we call the FortiManager, FortiAnalyzer. And certainly, the virtual machines are doing very, very well. And then as you start looking at the tail of the fabric products in the -- on the areas of EDR and monitor and SIM and so on and so forth, I think that they're smaller dollar totals, but sometimes very dramatic and exciting growth rates. So I want to be a little bit careful about getting -- painting anybody in too great a light in terms of their contribution because everybody is contributing. Certainly, the networking equipment part of the business has done very, very well, and this is a key component of this convergent story that we've talked about, and it remains probably about one-third of the fabric business. Got it. Excellent. And then just going back to the cancellation rate, just to make sure I understand this. How much of this is tied into supply chain, meaning of supply chain? Is it getting better availability is no longer an issue? Customers are less perhaps interested in getting too far ahead in line and waiting for product. How much of that is a factor in this? The supply chain environment definitely have some improvement for networking for the WiFi. That's where sometimes a customer, they may have a multiple order to see which vendor can deliver because a lot of networking equipment WiFi is a pretty standard product. Even for us, we do add quite some security functions in there. But at sometimes customers just cannot wait. So that's where we see a little bit higher cancellation rate with -- I think right now, the overall supply chain environment, I think is improving. Yes. I think the conversation around cancellation rates, a few things there. We said it went from mid single-digits to high single-digits. And then as we built into the guidance, it is a multiple that we built in the guidance of what we just saw in the fourth quarter. What we actually get out of it, we'll see. But the reason to be so cautious about it is what Ken is talking about. We knew that we had an advantage with firewalls and dealing with our suppliers and our vendors and we thought we'd be successful in pushing down that component of backlog first. And indeed, the mix has shown that. I think it's now something on the order of about 75%, 25% between networking equipment and firewalls still firewalls in the mix. But as Ken pointing out is there may be more risk with that networking equipment of cancellations as we go forward, and particularly its a backlog deal for those elements continue to age out a little bit as we move through this process. In terms of continuing supply chain challenges, I'm not quite sure I was making the length on that. I don't -- I guess that would have an impact on the continuing to build of backlog. But as we said in our comments, we really expect to get to a backlog number by the end of this year that's much more closely aligned with our historical norms. Thank you. One moment please. Our next question comes from the line of Andrew Nowinski of Wells Fargo. Your line is open. Okay. Thank you. Just two quick questions. First, I want to ask a question on EMEA. You've had five quarters now of accelerating growth in Europe, and that seems to defy the macro trends that we consistently hear about in Europe. Just wondering if there's something specific in your portfolio that might be driving that strong growth in Europe? I think we definitely have a pretty long tenure and a good team there. And at the same time, the case, the firewall case also expand quite well in Europe, in some countries there. And some of the service provider carrier, they are a little bit more ahead compared to some bigger service provider were the U.S. on moving some new solutions, including some 5G SD-WAN. So that's where we continue to see some good growth there. Also, we kind of surprisingly even during the recession, the SMB sector growing quite strong compared to some enterprise. Enterprise more about how to lower the cost ownership, protect some of their own kind of profit margin. But SMB, they do see the importance of cyber security, especially in retina were they are starting more targeted SMB right now. So we do see quite strong growth in SMB and so that's also helping some regions in Europe. Got it. Okay. And then I wanted to ask about gross margins. So you talked about easing cost pressures and lower discounting as some of the levers that drove that better-than-expected gross margin. I guess, number one, how sustainable do you think those factors are as we look into fiscal '23? And then when you launched new ASIC, like you did earlier today, is that a headwind to gross margin initially? Yes. I think a few things we talked about price benefits, the discounting and then some easing of the impact of the supply chain. I think the price benefit is something that will obviously stay with us in the future. And so we should still get a tailwind from that. However, discounting and supply chains, call it, savings for lack of a better term, that's what we relate to our history of price increases. And I think we kind of reached a very kind of maybe the high watermark in terms of being -- having price increases covering those costs, and that will start to settle back down to a more normalized pattern going forward. Meaning that we'll still have inflationary cost increases, but we've really slowed down the price benefits, the price increases. So net-net, price increases continue, discounting and supply chain benefits may not. Thank you. One moment please. Our next question comes from the line of Raymond McDonough of Guggenheim Partners. Your line is open. Hi, thanks. Maybe for Ken or Keith. The last time we saw product growth accelerate for two years was back in 2014 and '15, you had two really strong years of product growth, and that was followed by a pretty sharp deceleration of growth over the next two years. And I understand the business is a lot different than it was back then, but there does seem to be some similarities, at least how it relates to the macro environment and your results obviously point to you guys navigating it, the macro quite well. But you did reiterate your '25 guidance, which I believe implies mid-teens product growth. So I guess the question is, why should we think this time is different? Is it just that you have a significantly larger portfolio of solutions? Is it broader acceptance from customers willing to consolidate networking and security functionality. Any comparisons or contrast you can provide specifically as it relates to product growth versus, if you will, the previous cycle would be helpful. I think in the 2014, 2015 last the outbreak of a weather target so many case, which a lot of enterprise tried to upgrade from the traditional connection-based firewall to the next-gen firewall, which including some prevention and other things. So that's where it's more like kind of refresh more in the enterprise area. So we do see some strong growth there after the severe issue. And then by this time, we see there's a few things. One is really during the pandemic, there's a new infrastructure build supporting a homework anywhere. At the same time, the ransomware attack quite broadly hit the whole industry. And another part, we keep on seeing the convergence, which is like SD-WAN, the 5G, the WiFi and also internal segmentation. So that's a much broader used case of the firewall deployment and also including OPG, a lot of more devices being connected. So we feel this time it is really kind of a more broad firewall used case kind of apply to the whole infrastructure. That's what we kind of more emphasized the convergence is a little bit different than the last time it's like eight, nine years ago. So that's why we feel this time probably will be more smooth transition because the traditional firewall, whatever will not go away. And at the same time, that's more used case convergence into the traditional networking area, expanding to the OT some other area, we're helping keeping driving the product revenue growth and then followed by the additional service revenue. So that's the chance we're planning. That's helpful. And if I could, maybe a follow-up. You talked a little bit about the momentum in large deals and enterprise deals in '22. But given the macro environment, could you compare and contrast maybe Keith or Ken behavior you're seeing from larger customers and maybe those on the smaller end of the spectrum. Are you seeing more deal delays upmarket, more propensity to consolidate functionality at the lower end? Anything -- any more color would be helpful. Yes, it's definitely helping the customer lower the total cost of ownership, both on the management cost and also on the product service cost, which we have here an advantage over the competitors. So that's where we see a lot of a big enterprise customers. They definitely want to -- when they see the renewal, when they see all this -- need to add additional protection for the infrastructure, we do see this like how to have a better total cost of ownership and at the same time, leverage a single integrated platform, automated platform to offer better security networking together. Even there's a trend to merge the traditional network operating team and security operating team together to making the stock and not kind of combined together and also converge on the traditional networking and security together. So we do see some trends happening in the big enterprise and which we kind of developed technology and the long-term investments starting to see. I mean, stating benefit for the trend. Like everybody else, I mean, you're reading about people talking about deals taking longer to get across the finish line and more approvals and so forth. And I don't think we were immune to that by any stretch of the imagination. Keep in mind as we're going through as the world is moving through this. At the same time, Fortinet's kind of expanding from just seven figure deals. And I think we talked about 546 seven figure deals or more last year, if I remember correctly, a huge number. Now adding more and more eight figure deals. So I think we're probably seeing huge opportunities, but we're also getting exposed to how that approval process works and how we manage with our sales team, our customers through that process. Thank you. One moment please. Our next question comes from the line of Adam Tindle of Raymond James. Your line is open. Okay. Thanks. Good afternoon. Keith, I wanted to start with pricing. I think we picked up if we got this right, another pricing increase announced in January effective in February. Wondering if you could touch on the rationale and early response to that -- where are we in the elasticity of demand? And thinking forward, obviously, costs are ultimately going to normalize, hopefully, in your model. What would be the strategy for you once costs normalize, would you reduce price or capture margin? Thanks. Yes, on that part first. I mean I think we'll continue to monitor the market and make the appropriate adjustments there. I don't seeing inflation go backwards it's probably not something that's happened a lot in history, but it could happen, I guess. In terms of the most recent price increase that we talked about, it's almost a non-event to me. It's extremely low single-digits growth and after discounting, it's a fraction of an interest point. Got it. Okay. And then maybe just as a follow-up for Ken. I wanted to ask on SASE competition. When your main competitors has said they've integrated their SASE offering with SD-WAN and Secure Web Gateway in particular. They're pushing that sales motion across the entire sales force now. As we think about Fortinet, obviously, very strong in SD-WAN, but that Secure Web Gateway or proxy piece is perhaps not as prevalent or a different strategy. It's clearly not impacting your unit market share at present, but just thinking forward to competing and differentiating in SASE now that your competitor really pushing that motion across the entire sales force? Thank you. Yes, I think we -- our strategy, like [indiscernible] seeing in the last few years is; first, we want to have a SASE or integrated in the same system, the same OS, including all the SD-WAN or the SASE function. So making SASE can be more easily broader deploy and also working with service provider to leverage their infrastructure to offer a SASE. So it's a little bit different than some of the SASE players right now in the market. So we do believe this is highly integrated the single system as will be more efficient and same time will be more secure. And so that's what we're keeping building and whether the new FortiASIC [indiscernible] and also the new FortiOS reflect all this kind of development we reported into the solution. At the same time, we're keeping working closely with pretty much all the carrier service provider, even cloud provider to offer SASE together. And that's also a little bit different strategy compared to some other SASE player. So we do believe long-term leverage infrastructure, a lot of our own service provider telecom provider had will be much more efficient than the profit model compared to some of the SASE solution or player kind of losing money, which will be difficult to last long. So that's what we will keeping invest in this area. And also, we want to be a long-term player in this space and also we'll be keeping internal innovation R&D and keeping driving this space. Thank you. One moment please. Our next question comes from the line of Ben Bollin of Cleveland Research. Your line is open. Good afternoon. Thanks for taking the question. Could you share a little bit of what is happening with respect to the cloud infrastructure build-out. Tell us a little bit about what you're doing, where you are in the progress and customer response thus far? And then I had a follow-up on the networking category. Yes. We continue keeping building of the infrastructure, including the cloud. Also our strategy a little bit different than 100 players we tend to build out ourselves just like we -- you can see the investment in some of the real estate. Quite some of that also go to the -- like a data center infrastructure that give us much better cost and also more long-term benefit just like how we -- the investment made in early real estate kind of benefit our office cost, rental costs. So that's where we're using the cost saving we get from this rental keeping invest into some more long-term infrastructure real estate. We do see that we're keeping benefit the company a long time. But at the same time, like I said, also partner working with car service providers that's other strategy we have managed some of their infrastructure. So that's also make a win-win both party or benefit or will be profit. That's also the strategy we have. And within that, Ken, could you speak to, is this -- is it purely cost is latency part of the narrative? Is it being closer to your customers? What's the broader strategy within it? Not just, but also will make it easy to manage easy to scale. Even some of the SASE solution I had to be the some bigger customers, they may even do themselves. So if you can integrate a more successive function to the same or into the same system. So that's sort of the long-term strategy we have and also working with service providers is very, very important for us. And then my last one. Ken, what are your thoughts on the traditional campus networking opportunity in the WLAN market? How do you think about wallet share opportunity and the ability to displace more of the incumbent there? That's it for me. Thank you. That's kind of the thinking we have like over 20, 30 years really. There's a convergence of networking, traditional networking and network security. I think SD-WAN is a very, very good example. So the WAF solution will be more efficient, more secure, and there's a lot of additional service we can apply to secure SD-WAN, which is whether offer free or we are not kind of there yet. But same thing for a lot of other web technology. And so we feel that's a huge potential. And -- but also doing security in the networking environment not need a huge company in power, which has come from ASIC investment we made, which also will take a long time to see the return of investment, that's what we kind of comment from day one back 23 years ago. So when we start with we really need to invest and planning all these kind of long-term convergence of networking or security together. So the new ASIC is one example is the fifth generation of our SoC chip, which also including some of the investments we made in the mine generation of our content process and seven-generation network processor together with a lot of multiple CPU. So we continue to develop technology and eventually will be deployed more broadly beyond the traditional network security. Thank you, Valerie. I'd like to thank everyone for joining today's call. Fortinet will be attending investor conferences hosted by Baird and Morgan Stanley during the first quarter. A fireside webcast link will be posted on the Events & Presentations section of Fortinet's Investor Relations website for the Morgan Stanley conference. If you have any follow-up questions, please feel free to contact me. Have a great rest of your day. Thank you. Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.

EarningCall_337

Hello, and welcome to the Incyte Fourth Quarter and Full Year Financial Results Conference Call and webcast. [Operator Instructions] As a reminder, this conference is being recorded. Thank you, Kevin. Good morning, and welcome to Incyte's Fourth Quarter and Full Year 2022 Earnings Conference Call and Webcast. The slides presented today are available for download on the Investors section of our website. Joining me on the call today are Hervé, Barry, Steven and Christiana, who will deliver our prepared remarks; and Dash, who will join us for the Q&A. Before we begin, I'd like to remind you that some of the statements made during the call today are forward-looking statements, and are subject to a number of risks and uncertainties that may cause our actual results to differ materially, including those described in our reports filed with the SEC. Thank you, Christine, and good morning, everyone. 2022 was another successful year in which we delivered strong commercial performance and made significant advancements across all stages of our oncology and dermatology pipeline. Revenues from our current portfolio of commercialized products grew 18% year-over-year, both in the fourth quarter and for the full year to $764 million and $2.7 billion, respectively. Total revenues for the year, which include our royalty, grew 14% to $3.4 billion. As we look across our portfolio, the drivers of this double-digit growth are the continued commercial execution for Jakafi, net sales of which increased $275 million in the year to reach $2.4 billion and initial contributions from recently launched products and indications, including Minjuvi and Pemazyre in Europe and Japan and Opzelura in the U.S. I want to touch briefly on Opzelura, which we believe will be a significant growth driver for Incyte. Opzelura was approved in September 2021 for atopic dermatitis. And this past July, we received approval and launched Opzelura in vitiligo as the first FDA-approved therapy for repigmentation. The approval was well received by dermatologists, patients and patient advocacy group and the launch has been very successful. Strong patient demand and increasing formulary access drove net sales of $61 million in the fourth quarter and $129 million for the full year. In 2023, we expect an approval for Opzelura in vitiligo in Europe, which adds another layer of growth for the franchise. Turning now to our regulatory and R&D achievements. Our clinical development pipeline is focused on three therapeutic areas: MPN GVHD, other hematology and oncology, and dermatology. And we made significant progress across each of these three areas. In LIMBER, we presented new data from ongoing combination studies and disclosed an important new discovery asset targeting mutant CALR which has the potential to be a disease-modifying therapy for approximately 30% of patients in MF and ET. In other hematology and oncology, we presented updated data for our oral PD-L1 inhibitor 280, which shows promise both as a monotherapy and combination agent. We also progressed parsaclisib into Phase 3 for warm autoimmune hemolytic anemia, a disease in which there are no approved therapies. And in dermatology, we continue to expand our portfolio with Opzelura and povorcitinib, focusing in disease area where there is a significant unmet need. Lastly, we had two important updates relating to patents. The first is that Incyte earned pediatric exclusivity, which entitled Incyte to six months of exclusivity added to our patents for Jakafi and Opzelura. This expands our ability to enforce our Jakafi patents through December 2028. This expansion further applied to our existing Opzelura patent. In addition, late last year, we obtained an issued patent and allowed claims for the treatment of atopic dermatitis and vitiligo, respectively. We are confident in the strength of these claims permitting us to protect Opzelura out to 2040 in the U.S. Before moving into the outlook for 2023, I wanted to take a moment to look back at the growth of our product revenues as shown on Slide 6. Over the past five years, approvals for new products and indications as well as strong commercial execution of our existing portfolio, has allowed us to grow our product revenues at a CAGR of 18%. On Slide 7, looking at our historical operational performance. On the left is our revenues versus our total R&D and SG&A spend. We have delivered strong operational performance over the past five years with total revenue growing at a 17% CAGR and our operating expenses growing at a 13% CAGR. On the right, we are showing our operating leverage, excluding the impact of dermatology on revenues, and sales and marketing expenses. Here, you can see our operating performance is even more pronounced. We can expect to drive further operating leverage over time with our high-growth dermatology franchise, which is in early stages of launch and where we could see two additional approvals in the near term. Turning to Slide 8. As we look ahead for Incyte, there are four main drivers of sustainable growth, and we are already making significant progress in each of these areas and expect to continue to strong momentum throughout -- to continue the strong momentum throughout 2023. The first driver is our Jakafi franchise and LIMBER program, where we aim to expand our leadership in MPN and GVHD. In 2023, beyond the approval of ruxolitinib XR, we expect important data, including pivotal results for our parsaclisib combination in suboptimal responders to Jakafi in MF. Next is Opzelura where we are launching in AD and vitiligo and where in 2023, we will be launching in Europe. In other areas of clinical development, we expect new data from our oral PD-L1 program and povorcitinib in prurigo nodularis and vitiligo. Lastly, we will be monitoring early data from our CDK2 and mutant CALR program. Thank you, Hervé, and good morning, everyone. In the fourth quarter, Jakafi net sales grew 9% year-over-year to $647 million and grew 13% for the full year to $2.4 billion. Total patient demand rose 7% in 2022, driven by an increase in new patients across all indications. The launch of Jakafi in chronic GVHD continues to be strong with the total number of patients in Q4 growing 11% versus prior year quarter. A key driver of growth in GVHD is the duration of therapy; and based on recent data, the average duration, which includes both acute and chronic, is approximately 15 months. On Slide 11, as you can see on the left, Jakafi has grown consistently year-over-year ranging from $200 million to $250 million each year. We expect to continue strong growth in 2023 with full year net product revenues to be between $2.53 billion to $2.63 billion. Turning to Opzelura on Slide 12. We had a strong quarter for Opzelura with continued double-digit sequential growth in patient demand in atopic dermatitis and a very successful launch in vitiligo. As you can see on the chart on the right, total demand, which includes both free and paid drug, grew 34% in Q4 versus prior quarter to reach 84,700 units, driven by both new patient growth and an increasing number of refills. Paid demand, as shown by the light blue bars, grew 52% in Q4, driven by continued improvements in formulary access. As a result, net sales grew 61% versus prior quarter to $61 million. Total full year net sales for Opzelura were $129 million. Looking ahead, we expect both AD and vitiligo to be significant growth drivers for Opzelura. In AD, Opzelura is the #1 prescribed branded agent for new AD patients and its impact on itch, which remains unmatched by any other topical therapy continues to be the primary driver of prescribing. We expect the efficacy profile of Opzelura to continue to drive uptake in AD. In terms of additional near-term growth opportunities, pending the results from the Phase 3 trial, we could see an approval in pediatric AD next year for two to 11-year olds. In vitiligo, the size of the market and the potential opportunity is substantial. There are an estimated 1.5 million patients diagnosed with vitiligo in the U.S. And prior to Opzelura's approval, an estimated 150,000 to 200,000 patients were motivated to seek treatment. As you know, Opzelura is the first and only product to be approved to help patients repigment their skin and this provides us with an opportunity to activate many of the 1.3 million patients that are naive to treatment or who have stopped seeking treatment altogether. And in the next few months, we expect the approval of Opzelura in vitiligo in Europe, where there are an estimated 1.5 million diagnosed patients living with the disease. Slide 14 shows a few examples of patient advocacy and consumer activity within the vitiligo community. We are already seeing high awareness and excitement for Opzelura from patients, and we will continue to build on that momentum throughout the year, including the commencement of TV direct-to-consumer this quarter. And lastly, on Monjuvi, Minjuvi and Pemazyre. Monjuvi sales in Q4 were $24 million, up 13% year-over-year, and revenues were $89 million for the year. The launch of Minjuvi is ongoing in four markets, and we continue to gain reimbursement in other European countries. Net sales for the full year were $20 million, which includes a negative $2 million of foreign exchange impact. Pemazyre grew to $83 million in net sales in 2022 with $20 million coming from outside the U.S.; again, negatively impacted by foreign exchange by $3 million. In the U.S. Pemazyre continues to grow in total patients on therapy and is established as the standard of care for patients living with cholangiocarcinoma with FGFR2 alterations. Thank you, Barry, and good morning, everyone. We made significant progress across our clinical development portfolio in 2022. We had multiple clinical and regulatory achievements throughout the year and I would like to use the next few slides to highlight a few of the key programs. Starting with our LIMBER program on Slide 18. Key data were presented at the 2022 American Society of Hematology Annual Meeting where we had 57 abstracts accepted for presentations. Highlighting two of those presentations, starting on the left, we presented initial results of the Phase 1/2 study evaluating our ALK2 inhibitor zilurgisertib in monotherapy and in combination with ruxolitinib, which demonstrated improvement in anemia and hemoglobin responses in patients with myelofibrosis. Additionally, we disclosed our discovery of 989, a novel anti-mutant calreticulin monoclonal antibody, which has been shown to selectively inhibit the proliferation and differentiation of cells harboring mutant CALR, while not affecting wild type or normal healthy cells. On the right is a list of key updates across LIMBER that are expected this calendar year. Starting with ruxolitinib XR, we have a PDUFA date of March 23 this year, and the expected approval is an important step towards fixed-dose combinations with parsaclisib, zilurgisertib and our BET inhibitor. In terms of data, we expect pivotal Phase 3 data of ruxolitinib plus parsaclisib in suboptimal responders as well as more mature data sets of ruxolitinib with ALK2 and BET in the second half of this year. Depending on what we see with our ALK2 and BET combinations, we could potentially see the start of pivotal trials with one or both of these compounds. Early in the pipeline is our anti-mutant CALR monoclonal antibody, which will enter the clinic this year. With regards to graft versus host disease, we are expecting pivotal data midyear from AGAVE-201, a study evaluating axatilimab in third-line chronic graft versus host disease. Moving to the rest of our hematology and oncology portfolio. Key data for the small molecule oral PD-L1 program were presented at the Society of Immunotherapy of Cancer Annual Meeting. Both 280 and 318 demonstrated clinical activity with tumor shrinkage and were generally well tolerated and we expect to share more mature data set in the second half of this year. In addition, we plan to initiate combination trials of 280 with adagrasib, CTLA-4 and an oral VEGF inhibitor in the first half of this year. INCB123667, our novel potent and selective oral small molecule inhibitor of CDK2 entered Phase 1 clinical development. Yes, we could see utility in cyclin E amplified or overexpressing cancers as well as in cancers that are resistant to CDK4/6 inhibitors. Now looking at our dermatology franchise on Slide 20. In July of last year, Opzelura gained its second indication in vitiligo. This was a huge achievement for the vitiligo community and people living with the disease. As we continue to maximize the potential with ruxolitinib cream, we initiated multiple Phase 2 studies in different conditions, including lichen planus, lichen sclerosis and hidradenitis suppurativa. In each of these diseases, there are no topical or oral therapies approved. We have many important milestones in dermatology upcoming in 2023, ruxolitinib cream, the CHMP opinion in vitiligo is currently on track for the first quarter of this year, while data from the Phase 3 vitiligo maintenance and withdrawal study and the Phase 3 pediatric AD study will be available in the first and second half, respectively. Turning to povorcitinib. We expect Phase 2 data in both vitiligo and prurigo nodularis later this year. And additionally, I want to highlight that later this week at the European Hidradenitis Suppurativa Foundation we have an oral presentation of the updated 52-week data from our Phase 2 study in HS, which should provide some additional insights into the durability of response with this agent. Thank you, Steven, and good morning, everyone. Our fourth quarter results reflect continued strong revenue growth with total product revenues of $764 million, representing an increase of 18% over the fourth quarter of 2021. Total product revenues are comprised of $647 million for Jakafi, $55 million for other hematology/oncology products and $61 million for Opzelura. Net product revenue growth was primarily driven by increases in Jakafi and Opzelura net revenues. Other hematology/oncology net revenues, which include revenues from Iclusig, Pemazyre and Minjuvi were impacted by unfavorable changes in FX rates. On a constant currency basis, other hematology/oncology net product revenues grew by 23% over the prior year period. Total royalty revenues for the quarter were $132 million and are comprised of royalties from Novartis of $91 million for Jakavi and $4 million for Tabrecta and royalties from Lilly of $36 million for Olumiant. Jakavi and Olumiant royalties for the quarter were negatively impacted by FX headwinds, while Olumiant royalties were also impacted by a decrease in net product sales of Olumiant for use as a treatment for COVID-19. Excluding the impact of COVID-19 related sales and currency fluctuation, Olumiant royalties increased 23% compared to the prior year period. For the full year 2022, total net product revenues were $2.7 billion and total revenues were $3.4 billion, representing 18% and 14% year-over-year increase, respectively. Moving to Slide 25. Opzelura net product revenues for the quarter were $61 million, driven by robust demand and broadening payer access. As payers continue to add Opzelura to formularies and the share of covered claims increase, we continue to see improvement in the gross to net discount rate. The gross to net discount rate decreased from an average of 71% in the third quarter of 2022 to an average of 57% in the fourth quarter of this year, and we exited 2022 at a gross to net discount rate of 50%. While we will continue to work on reducing patient co-pay and in turn, improving gross to net, an average gross to net of 50% is a good working assumption for 2023 with a gross net discount in the first quarter of the year expected to be higher than subsequent quarters as plans reset patient deductibles at the beginning of the year. I would also like to take the opportunity to update you on the Opzelura prescriptions data provided by IQVIA. As you see on Slide 26, in Q4, we saw the gap between the actual number of total prescriptions and the number of prescriptions reported by IQVIA, narrowing. While the IQVIA data continues to overstate demand, this overstatement has been reduced to a level of 5% to 10%, which is within expectations for a newly launched product. In addition, it is important to note that IQVIA data reflects total demand, which includes both paid prescriptions and free drug. Going forward, free drug is expected to represent around 20% of total demand. When looking at IQVIA data, one would need to adjust for this overstatement as well as for free drug in order to get a better sense of paid demand. Moving on to Slide 27 and our operating expenses on a GAAP basis. Ongoing R&D expenses were $431 million for the fourth quarter and $1.5 billion for the full year 2022. Total R&D expenses, which include the upfront consideration of $70 million for our acquisition of Villaris were $501 million for the fourth quarter. For the full year 2022, total R&D expenses, which in addition to the Villaris upfront payment also include $56 million in other milestone payment, were $1.6 billion representing a 9% year-over-year increase. The increase was primarily due to the progression of our pipeline and was partially offset by lower upfront and milestone expenses in 2022. Total SG&A expenses were $273 million for the fourth quarter and $1 billion for the full year 2022. The year-over-year increase was driven by investments related to the new dermatology commercial organization in the U.S. and the related activities to support the launch of Opzelura in atopic dermatitis and vitiligo. Moving on to 2023. I will now discuss the key components of our guidance on a GAAP basis. For Jakafi, we expect net product revenues to be in the range of $2.53 billion to $2.63 billion, which at the midpoint represents an increase of approximately $170 million over 2022, driven by continued growth across all indications. We expect our gross to net adjustments for 2023 to be approximately 23%, reflecting expected continued growth in 340B volumes. As a reminder, the gross to net adjustment in the first quarter of the year is always higher relative to other quarter and previous quarter and subsequent quarters due to our share of the donut hole for Medicare participation. For other hematology/oncology products, which include Pemazyre in the U.S., EU and Japan, and Iclusig and Minjuvi in Europe, we are expecting total net product revenues to be in the range of $215 million to $225 million. Turning to operating expenses on a GAAP basis, we expect COGS in a range of 7% to 8% of net product revenues, which is in line with 2022. R&D expenses are expected to be in the range of $1.61 billion to $1.65 billion, representing 3% year-over-year growth at the midpoint. SG&A expenses are expected to be in the range of $1.05 billion to $1.15 billion, primarily reflecting continued investment in Opzelura and the full year impact of the investment in the vitiligo indication. Congratulations on the quarter. Two questions for me. One is, I recognize you do not provide Opzelura guidance for this year. But can you provide any details on duration of treatment or number of tubes per year in average for an AD patient and how it might play out in vitiligo. And are there any inventory dynamics to highlight here? The second question is on the BET and ALK2 inhibitor combinations. Can you speak to your confidence in these programs? Now given the early data, do you think that represented proof of concept? And what do you want to see on the forward to move into later-stage studies? Sure. Salveen, I'll answer the first part of the question -- or the first question and get it to Steven afterwards. So just in terms of duration of therapy for Opzelura in vitiligo, it's obviously very early in the launch. So as far as continued duration of therapy, you know what, the study had continued through 52 weeks and beyond. And the tubes per year, we've said before that the average tubes per year, we think will be about 10 for vitiligo patients. In terms of inventory at the end of the year, it's actually very low. The inventory was more like two to three weeks, just standard inventory that we would have on hand. Steven? Thanks, Salveen. I'll just separate out both programs. So I'll start with the ALK2 program. We are very excited at the end of the year to receive towards the end of the year the update in terms of ALK2 showing increases in hemoglobin. Prior to that, we had seen proof of mechanism in terms of hepcidin decreases, but we hadn't seen hemoglobin move. And then both in the monotherapy escalation and in combination with RUX, we saw a few patients with quite substantial hemoglobin increases, which gave us a lot more confidence in that program going forward. For this year, in the beginning of the year, we'll continue to dose escalate. We still had relatively low doses, particularly in combination with RUX to get towards a maximum effect. We don't expect to see much in terms of tolerability, in terms of negative side effects at all. The populations that would be in scope for pivotal studies to begin with, the obvious one would be anemic patients with transfusion dependence to convert them to independents, but then standard anemic patients with anemia from the underlying MF and then potentially all comers. And the reason is the dual effect, so both to treat the underlying anemia from myelofibrosis itself and then to ameliorate or even reverse the ruxolitinib-induced anemia, which will allow you to maintain RUX dose intensity. And we know when we do that, that we increase the efficacy of ruxolitinib. So we're extremely encouraged by what we've seen with ALK2. We'll continue to dose escalate and then we'll make pivotal decisions on what population or populations to go after with their program towards the end of this year. In terms of the BET program, again, we know that pathway epigenetically is important in myelofibrosis. We see both spleen response as well as symptom responses. We also continue to dose escalate this year, particularly in combination with ruxolitinib. We'll continue to push the BET dose from 6 milligrams to 8 milligrams to 10 milligrams. We know that the on-target toxicity with BET will be thrombocytopenia. It's across the board with BET inhibitors. We've seen it with our own program, and that will be dose-limiting. The likely population there to go after the pivotal study, at least, to begin with because of that profile would be suboptimal responders. And just to note, that the competition is doing the first-line study at the moment. So the suboptimal population, we think, is wide open to go after. And again, we'll determine that towards the end of this year. I was hoping you could unpack the Jakafi guidance a little bit more. It sounds like at the midpoint of your range, you may be expecting a little bit less contribution from both either demand growth or price growth, and it seems for our quick math that gross to net is going to be relatively stable there. So I was wondering if you could maybe talk a little bit more about some of the assumptions underlying that in terms of demand across different indications and net price that shapes this guidance and whether -- if dynamics perhaps remain as they are today, we could potentially see upside to that? Brian, it's Barry. So thanks for the question. Yes, I mean, as you know, that Jakafi is really the #1 treatment for myelofibrosis, the #1 treatment for polycythemia vera in the second-line setting and for GVHD in both the acute and chronic steroid-refractory setting. Jakafi is the #1 drug. But in terms of our guidance, the appropriateness is we think it's perfectly appropriate for right now, given the fact that we'll have actually a third competitor in the middle of the year for MF, there's two competitors for GVHD now. If you remember last year, in terms of GVHD, we had bolus of growth in the fourth quarter of 2021 as patients transitioned from our expanded access program, about more than 300 of them transferred from our expanded access program to commercial drug. So seeing that kind of growth again is not likely to happen this year, but we'll continue to see the drug grow quarter-over-quarter, year-over-year in terms of new patients, total patients in MF, PV and GVHD. But again, the guidance at this point is appropriate. Great. Looks like you hit the 50% exit rate on Opzelura gross-to-nets in the fourth quarter. Can you talk a little bit about how we should think about gross to nets in 2023 for that product and any quarter-to-quarter variability we should look out for? This is Christiana. So in terms of the gross to net in 2023, I think the 50% average rate for the year is a good working assumption. However, you will see variability during the -- between quarters and expect the rate in Q1 to be above that 50% average rate and above the rate that you will see in other quarters. And that's because, as I indicated, at the beginning of the year, you get the reset -- plan to reset deductibles for patients. And as a result, there is more for us to cover, which increases further the gross to net rate. On Opzelura, will the split between vitiligo and AD influence what your gross to net will be for this year? And then secondly, longer term, do you expect any difference in compliance rates between patients on vitiligo versus AD? So I can take the first part of the question. No, we don't expect any difference in gross to net between the two indications. So in terms of difference between compliance rates, no, we don't expect difference. As I said before, in vitiligo, we believe that the average will be about 10 tubes per year. So obviously, these patients are staying on it for a long period of time, as long as 52 weeks and beyond. And in terms of AD, patients use it until their inflammation and itch is gone, then they generally will stop for a while. If their flare comes back, their itching comes back, their inflammation comes back, then they'll start using it again. So I believe they're compliant. It's just different diseases, obviously, some needing short-term use and some like vitiligo that are going to use it probably for a long period of time. Well, seasonality during holidays. Well, in holidays, generally across the board -- for all of our products generally during holidays, like Christmas and Thanksgiving, for example, you see prescription rates go down. But in terms of summer versus winter, we don't see any difference now and don't believe that there's really any evidence that there's a difference in seasonality for AD or for vitiligo. Amongst individual patients, they may perceive the difference being -- that there's differences in the summer versus winter and so forth. The two on dermatology from our side. First, for the Phase 3 data expected later this year for RUX cream in the pediatric AD population, what would you consider a strong outcome here? And how do you size the commercial opportunity with the pediatric population versus the adult population? And then my second question is on povorcitinib. For the data expected in the first half of this year with vitiligo, again, what would you consider a good outcome? And how do you envision povorcitinib being used if it’s potentially approved versus Opzelura? Vikram, hi. It's Steven. So the pediatric atopic dermatitis study, as Barry said in his prepared remarks, addresses a population from two years of age up to 11 years of age. So outside the label currently, so -- and that it's important. That's about 2 million patients in the U.S. in terms of epidemiology and the opportunity there. Safety-wise, we expect -- so efficacy-wise, firstly, we expect it to be the same as in adults. There's no reason -- the pathophysiology of the disease is the same, and we expect the same outcomes. And then safety-wise, we don't expect anything unusual either. They separate the populations out for obvious reasons like this is a time when bone growth, et cetera, is occurring. So there are other things that are monitored from a safety perspective. But from our preclinical data and then data with oral RUX, which is at much higher exposures in pediatric patients, we don't expect anything unusual there. In povorcitinib, your second question in vitiligo, it's a different population to the RUX cream population. There is a slight overlap, but the povorcitinib indication that we go in after it is for patients with body surface area involvement of 8% or above. The current vitiligo label is 10% or below body surface area involvement, which compromises about 80% of vitiligo patients. Because of the slight overlap, it's not straight math, but the 8% or above is about 30% of vitiligo patients. And there, we think because of the more extensive vitiligo there, there will obviously be a different tolerability profile that would be accepted by patients and regulators in terms of therapeutic ratio. Every expectation of substantial efficacy, given the mechanism of action and also, we know this will be likely be treated as an oral JAK inhibitor in "inflammatory condition" from a safety perspective. And so, we’ve eyes-wide-open on that. Yes. So Steven mentioned the commercial opportunity for children that are younger than 12, about 2 million. So when we think about pediatric patients overall, the percentage of pediatric patients that have eczema or atopic dermatitis is greater than adults, but there's many, many more adults. So therefore, even at lower percentage, you end up with a higher number of patients that potentially have eczema. So we think it's an exciting opportunity. We also think it's just great for patients because we believe that Opzelura is going to improve the lives of some of these patients with eczema who are younger than 12. Thank you so much for taking my question and congrats on the quarter. I had questions regarding the survey results that you have for -- I think it's a doctor survey and they talked about patient candidacy. Is that growth in what the doctors are saying about patient candidacy being reflected in new patient starts? Or is there a lag? And also if you compare new prescriptions for atopic derm versus vitiligo, are you seeing the patients' candidacy stats being reflected? It seems like there's more enthusiasm in the vitiligo. I mean, granted, it's the only drug approved. And just -- I know you don't give Opzelura guidance, but I was just wondering if in the future, there is any plan to provide some sort of visibility or guidance for Opzelura? Sure. Kripa, this is Barry. So again, in terms of patient candidacies or surveys that we do of dermatologists, of healthcare professionals who treat these diseases, we think it does rapidly turn into increased prescription volume. For vitiligo, it just may take a little bit longer because remember, we're encouraging patients to come back because now there is a treatment for vitiligo where there never was. So to go back and see their dermatologist so that might take a little longer period of times in patients who are actively being treated for eczema but aren't getting results that they expect. So is there more enthusiasm in vitiligo? I think there's enthusiasm for patients who are suffering with atopic dermatitis to use a drug that's as effective, particularly in terms of itch and inflammation as Opzelura. And, obviously, there's people who are very excited about using Opzelura for vitiligo and potentially changing how they feel potentially about themselves. In terms of the guidance, I'll turn it over to Christiana. Sure. So Kripa, we would like to see a few more quarters of uptake before we provide any guidance on Opzelura, which would also include vitiligo and especially around vitiligo. As Barry indicated, we are looking at the inactive patient population and how quickly they will get activated and will come to seek treatment. So we would like to see that before we are in a position to provide any guidance on Opzelura. Congrats on the quarter. And thanks for taking our questions. So for Opzelura, based on the press release numbers for total units and the Q4 net sales, we calculated a gross to net of 62% to 63%. Can you maybe help us understand what may account for the discrepancy between that and your Q4 57% gross to net number? So free drug is not included in the calculation of revenues and it's not a part of the gross to net. So you need to look at paid demand and apply the net price, which would be the 2,000 -- around 2,000 gross price times the 1 minus 57% gross net discount. Okay. And are you still comfortable with the 40% to 50% long-term guidance range? It sounds like in the near term it will be closer to 50%. Can you possibly narrow that guidance now? Yes. So we'll continue to work on bringing down the co-pay, which over time, would continue to improve gross to net. Obviously, getting further improvements now is more difficult. That's why we are saying for 2023, a 50% average gross to net is a good assumption for the year. And another question on ALK. So ALK2 has the potential applications into other anemias outside of myelofibrosis. Are you interested in some of these applications? And what do you need to see from the MF program in order to open up some of these other studies perhaps? Thank you. It's a good question. Mechanistically, as I was saying in my earlier remarks, it works through hepcidin inhibition, that is the main mediator, if you will, of anemia, of inflammation and chronic inflammation, which occurs in many chronic conditions. So there's potential across the board in some of those conditions including chronic renal failure. So we're starting some early work in some of these settings to see if there's potential there. We are encouraged by recent regulatory movement in the U.S. from the FDA in improving products to treat anemia in areas like chronic renal failure, which has been difficult in the past. So that may make us look a little further. But for all those indications and the look there, it's still very early days. Thanks so much for taking my question and congrats on the progress. It's clear that there are really no supply issues for Opzelura, but maybe talk to me about kind of what the sales team is focusing on this year to accelerate growth even further? I mean, you had a good 2022. You are getting gross to net more normalized. What is your commercial organization focused on to get sales to the next level and ensure that you have the highest number of paid scripts over the year? Sure, Evan. So the sales team is actively engaged with their dermatologists on a regular basis. Fortunately, we have very good access as compared to some other therapeutic areas, perhaps. They're focused both on AD and vitiligo. It's exciting that vitiligo launched just a short period of time ago. So that's very exciting because it's the only drug used that's available for repigmentation in these patients, but there's so many millions of patients that actually could be -- could benefit from Opzelura for atopic dermatitis. So they're really focused on both. So their drive is to focus on itch and inflammation in AD and obviously, on sticking with Opzelura to treat their vitiligo. So they're concentrating on educating healthcare professionals, for example, in vitiligo that what they should see over a period of time, over eight weeks, 12 weeks, 24 weeks and so forth, so that they reinforce the compliance and the need to use the drug for a while before they see a real big impact on repigmentation. And in the same way, they're concentrating on making sure that patients do, in fact, get their refills for atopic dermatitis, so they get complete relief from their disease and know that if they have flares again, they should come back. So the sales team is very engaged and very excited about the opportunities that lay in front of them for both atopic dermatitis and vitiligo. Congrats on the quarter and thank you for the update. For the LIMBER program, can you talk about the differentiation of RUX plus parsaclisib versus RUX plus a BET inhibitor since they're both targeting suboptimal responders? And then what will you be looking for in the Phase 3 readout of RUX plus parsaclisib later this year? And how will that impact your overall strategy for the LIMBER program? Okay, it's Steven. Thank you. So the lumber program, obviously critically important to us and to patients and we really are happy with the movement, particularly towards the end of last year in our combination work. So to start off with your RUX plus parsaclisib question. Just a reminder, there are two pivotal studies ongoing there. The first one is the suboptimal study in about 212 patients which we will get a readout on this year. That's on patients who've had at least three months or longer of ruxolitinib and at least eight weeks of stable dosing and are having an adequate response in terms of spleen or symptoms. We showed the final Phase 2 data at ASH last year, both in terms of spleen response and symptom response and very encouragingly the symptom response was even -- from a quantitative point of view and magnitude was even better than the spleen response, which is really encouraging. Additionally, the safety profile in MF looks very clean thus far with quite a long-term follow-up. So it's not what's seen in lymphoma, probably because the underlying disease is different. There is no B cell suppressive therapies given long term in MF. And also additionally, used in combination with RUX may ameliorate some of the side effects. We're very encouraged by the profile there. It's a randomized study that will report out this year in suboptimal responders. If we replicate the Phase 2 data, we really think the Phase 3 will be positive and is set up to be positive there. And then it will be exactly for those patients who are being on RUX for a few months, stable doses and not having benefit and then that would be the indication there. The first-line study will take about a year longer to read out, 440 patients. And that's an all-comer first-line standard in terms of endpoints, a spleen volume response of 35% or greater and improvements in total symptom scores, you need both. You mentioned the BET program that's earlier. As I said in some comments earlier, we're continuing to dose escalate this year and push the dose as high as we can. We know we'll run into thrombocytopenia that will be dose-limiting. And that's why we think it may be best suited more to a suboptimal population. And again, it will be similarly to both improve efficacy and make sure it's tolerable in that setting. And then the populations will segment based on the data there. The rest of the ALK program, as I said earlier, we will declare towards the end of this year, what programs we're going after there. Again, very encouraged by the hemoglobin responses we’ve seen. We really have proof of mechanism and want to chase that very aggressively because we're leaders in that field. So firstly, on the covered prescription rate, you mentioned you anticipate about 20% free drug. So that would indicate you're at 70% covered at this point in time or 71%. How quickly do you expect to get to that incremental difference? And is it consistent among vitiligo and atopic dermatitis? And secondarily, can you talk a little bit about the expectations for the rollout of RUX QD and how we should think about how that will affect Jakafi? Sure. So Mara, this is Barry. So the covered rate -- actually, the commercial patients that have access to commercial drug through their insurance is about 84% right now. In terms of coverage beyond that, it's about 90%. But obviously, these numbers don't match up because there's a lag in getting utilization criteria written and so forth. But we're very happy with the coverage that has happened thus far. We're very happy with, for example, Medicaid coverage, which is covered in all 50 states. And like I said, the commercial insurance continues to get better and better. We still have some work to do and improving a variety of things, including co-pay and utilization criteria that might not be exactly where we want it to be. In terms of AD and vitiligo, the coverage is essentially the same. The commercial coverage is essentially the same. The Medicaid, VA, DoD coverage is essentially the same. The only thing about vitiligo is there's some less, but it's improving every day. The number of utilization criteria that have been written related to Opzelura and vitiligo. But I have to say, compared to when we launched atopic dermatitis, the number of issues, problems with getting vitiligo scripts filled is very, very low. In fact, we don't hear that much about it at all. In terms of RUX QD, I think we mentioned already that the PDUFA date comes in March. We plan on launching sometime after that, a few weeks after that in April. And when we announce the approval, we'll give you some more information about how we're going to roll this out, the positioning and so forth of RUX QD. But we're very excited about the upcoming launch. We think it really gives an opportunity for better convenience for patients, which could lead to better compliance for patients; and at least for some patients, better compliance could lead to better outcomes. So we're really looking forward to that. Thanks for taking the questions and congratulations on a great quarter. Just looking at the GVHD market, can you talk a little bit about the split between chronic versus acute? And how is the drug being used, especially in comparison to, let's say, ibrutinib. And I guess I'm curious, where does axa kind of fit into this program, especially after the pivotal data expected in mid '23? And if I can just squeeze one extra one. Can you just give us some thoughts on tafa and what the -- how you're thinking about the reduced expectations for 2023, at least in the U.S? Sure. This is Barry. So in terms of the split between acute and chronic, there's about 1,500 patients in steroid-refractory acute GVHD. As I said before, we're the #1 drug used there in steroid-refractory acute GVHD. But there’s much less patients and they're treated for a shorter period of time. So it might be, for example, six months for acute GVHD. For chronic GVHD, there's 14,000 patients, maybe 7,500 that are steroid-refractory. So most of the growth is coming from chronic GVHD and the persistence in chronic GVHD. Now most of the time, the claims that would come in don't really differentiate between acute and chronic. But as far as we can tell, the vast majority of scripts that are coming in now are all for chronic GVHD. And as I said, in terms of resistant population, their physician population is much, much bigger than any acute space. In terms of ibrutinib and Rezurock, for example, these drugs are used perhaps in the third line setting. As far as we can tell, ibrutinib usage is declining and Rezurock uses third line after Jakafi. But in terms of axatilimab's opportunity, we think it's a great opportunity. In fact, even the success of Rezurock in the third-line setting, I think, bodes well for the success of axatilimab in that setting. And I think it's a uniquely different drug. And when we talk to people who treat bone marrow transplant docs who treat GVHD, they're looking forward to this product very much. In terms of tafa -- in terms of tafa-len combination. It's a great combination in the second-line setting. You've seen the results in terms of overall response rate, complete response rates of 40%, a non-chemotherapy option in the second-line setting. I think the issue there is really that the second line and the whole diffuse large B-cell lymphoma marketplace has changed dramatically with increased competition, particularly with the CAR-T therapies moving into the second line setting, it becomes a challenging place for us to break through, but it's absolutely a very good product that has -- can have complete responses with long durations of response and we're continuing to try to expand the use of this drug because we think patients will really benefit from it. And it's really just the competition and the increasing competition in that particular setting in the second line plus setting, that's somewhat of a challenge. One for me on Opzelura. I know a determinant of the ultimate size of the vitiligo opportunity is going to be activation of patients who aren't currently seeking treatment. I know it's clearly early days in the launch, but just wondering if there's anything you can say about how patient activation is tracking against your expectations? Or is this not really expected to be a driver until vitiligo specific DTC is underway? And then just a separate question on the other hem/onc franchise, just that 2023 guidance range seems to imply somewhat limited growth compared to '22. So just could you expand on the growth areas for that franchise for the year? And any sort of pushes and pulls you considered in the 2023 guidance range? Okay. So I'll start, and then I'll hand off to Christiana, I guess. So in terms of patient activation for vitiligo, I think it's happening already. We haven't started linear and nonlinear TV commercials, direct-to-consumer TV commercials for vitiligo yet. That will start very soon. But patients are being activated. There's direct-to-consumer activities going on online, on social media, on Internet searches. We work very closely with the vitiligo patient advocacy community. We work with healthcare professionals and even do live programming between healthcare professionals and patients. So that is occurring now, and it will continue to a much greater degree in the future. I think you can see by our presentations, there's lots of excitement for patients who have gotten very good experience using the drug and are proud to share that. So that helps a great deal in informing patients who may actually benefit from this drug. And in terms of guidance, perhaps, I'll hand it over to Christiana. So in terms of the guidance for other hem/onc, the guidance range that we have provided is $215 million to $225 million with primary driver being Minjuvi, of the increase, yes. Barry, you cited additional competition in MF this year is a reason for the appropriateness of your guidance today. But I guess, I don't really expect those labels to directly compete with Jakafi. So I wonder if you're starting to see maybe patients who were kind of suboptimal responders switching a little earlier or now having another option to switch off of Jakafi than they would have prior. If that is kind of the impact you're talking about? Sure, Matt. Yes. No, so we don't really know necessarily, but we do think that the two drugs that are available currently fedratinib and pacritinib are used in the second-line setting almost exclusively. If there's any use in the first-line setting, it's hard for us to determine that. In terms of future, obviously, we're looking to -- momelotinib has a PDUFA date in June, and we don't know what GSK is necessarily going to do with that product. We don't know what the indication necessarily is. But we think that patients will benefit -- continue to benefit from Jakafi because of the differentiation of overall survival, unsurpassed symptom improvement and spleen volume reduction. We think that will continue, and these other drugs will be used in the second-line setting. But we're not sure exactly how this is going to play out, and that's why I think we gave the guidance that we did. Thank you. We’ve reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. Thank you all for participating in the call today and for your questions. The IR team will be available for the rest of the day for follow-up. Thank you, and goodbye. Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.

EarningCall_338

I would now like to turn the call over to Mr. James Baglanis, Senior Director of Investor Relations. Thank you. Please go ahead, sir. Thank you. Good afternoon, and welcome to Sonos First Quarter Fiscal 2023 Earnings Conference Call. I am James Baglanis. And with me today are Sonos' CEO, Patrick Spence; and CFO and Chief Legal Officer, Eddie Lazarus. For those who joined the call earlier, today's hold music is a sampling from our Say It Loud station, which is curated in collaboration with Black @ Sonos in recognition of Black History Month. Before I hand it over to Patrick, I would like to remind everyone that today's discussion will include forward-looking statements regarding future events and our future financial performance. These statements reflect our views as of today only and should not be considered as representing our views of any subsequent date. These statements are also subject to material risks and uncertainties that could cause actual results to differ materially from expectations reflected in the forward-looking statements. A discussion of these risk factors is fully detailed under the caption Risk Factors in our filings with the SEC. During this call, we will refer to certain non-GAAP financial measures. For information regarding our non-GAAP financials and a reconciliation of GAAP to non-GAAP measures, please refer to today's press release regarding our fiscal -- our first quarter fiscal 2023 results posted to the Investor Relations portion of our website. As a reminder, the press release, supplemental earnings presentation, and conference call transcript will be available on our Investor Relations website, investors.sonos.com. I would like to also note that for convenience, we have separately posted an investor presentation to our Investor Relations website, which contains certain portions of our supplemental earnings presentation. Thank you, James. And hello, everyone. Our record first quarter revenue is a testament to the strength of the Sonos brand and our category leadership. It's another performance that proves our flywheel is working. We acquire new customers through disciplined marketing efforts and through our existing customers who tell their friends and family that they should get Sonos. Our existing customers return to make additional purchases, building out their Sonos systems and growing products per household. Our team demonstrated its ability to execute amidst a challenging macroeconomic backdrop as we delivered constant currency revenue growth of 7%, a healthy adjusted EBITDA margin of 18.4% and $168 million of free cash flow. As we always take a long-term view, the most important thing to note is that these results are where we expected them to be in order to deliver on our fiscal 2023 guidance. In the context of the current market environment, these are especially outstanding numbers. Consumer spending was rather tepid, especially as the pendulum has swung away from goods and towards travel and services as the consumer enjoys some of the activities that they were deprived of during the pandemic. The consumer electronics space, in particular, continues to experience softness after 3 years of very strong growth. For this reason, despite our strong start to fiscal 2023, we are standing pat on our annual guidance. The macroeconomic environment remains challenging and consumer spending, uncertain. The dollar, while weakening some, continues to erode our top line, gross margins and adjusted EBITDA. Given everything we see right now, we are maintaining our previously issued guidance range of $1.7 billion to $1.8 billion revenue, 45% to 46% gross margins and $145 million to $180 million in adjusted EBITDA. We believe this is prudent in the face of a lot of unknowns this early in the year. In Q1, we did exceedingly well on a comparative basis. We built upon our already strong share of home theater market and saw significant gains in the U.S., U.K., Germany and the Nordics, resulting in our highest share in terms of both dollars and units in 3 years. We performed well amidst the competition in the wireless speaker category as well. There is a reason why the New York Times crossword puzzle selected Sonos as the answer to the clue, "wireless home audio company." And Michelle Obama named it her most used app recently while on the Late Show with Stephen Colbert. The Sonos brand has never been stronger. And when consumer spending picks up and the balance of goods and services expenditure stabilizes, we will be well positioned to deliver accelerating top and bottom line growth. On the last earnings call, we discussed how being in stock in our products would enable us to run our typical focused promotions for the first time in 3 years. As we expected, customers responded in force to these promotions. We saw very strong customer response to our sets' offering, resulting in our highest level of sets as a percent of direct-to-consumer orders in years. We are keenly focused on driving multiproduct starts because they have proven to have greater lifetime value than single product starts as well as a higher propensity to repurchase over time. We were pleased with the balance of sales to new households as well as the repurchase activity by our existing household base, which we believe is yet another validation of our flywheel. As a reminder, in any given period, we tend to see existing households account for 40% to 45% of our registrations, providing us with a sticky, predictable revenue stream from our installed base. Our flywheel has proven and has been remarkably consistent over our history. Even in the midst of the ongoing economic uncertainty, it continues to drive growth. We are still in the early innings of our growth as more than 14 -- as our more than 14 million households represent just 9% of the 158 million affluent households in our core markets. At the end of fiscal 2022, the average Sonos household had 2.98 products, up from 2.95 the prior year. This figure has steadily increased over the years, underscoring how the lifetime value of our customers continues to grow. And there's a lot more room for additional growth. As we noted on our last call, of our households are single-product households, whereas our average multiproduct household has 4.30 products. In other words, we are starting to get into the range we had previously discussed of 4 to 6 products for every mature Sonos household. We estimate that converting our single-product households to the average multiproduct household installed base size represents a $5 billion revenue opportunity. Of course, this will not happen overnight, but it does highlight the long runway we have to further monetize our installed base. We are investing in the systems and programs to more aggressively go after this opportunity in fiscal 2023 and beyond. One example I'm proud of is Sonos Voice Control. With Sonos Voice Control, we have created a dedicated, easy-to-use, music-focused voice service for Sonos households. Our hypothesis is that this will result in increased engagement, which will translate into additional products purchased over time, further driving lifetime value. I am pleased to report that the Net Promoter Score of Sonos Voice Control far exceeds that of the other voice assistance on our platform. SVC, as we call it, caught up to 50% of Alexa total enablements in the U.S. in just 7 months and is trending to become the #1 voice solution for Sonos in both the U.S. and France, where it only launched in December. Before I turn the call over to Eddie, I want to take a moment to address something that gets asked often, how the pandemic has affected Sonos' performance and what our path forward looks like. There can be no doubt that over the last 3 years, the pandemic created stay-at-home tailwinds, which drove strong demand for our products. These tailwinds were partially offset by the persistent supply chain disruption that we faced. This quarter was a step in the direction of normalization as these stay-at-home tailwinds subside, and we faced minimal supply disruption. But importantly, and as our record-setting Q1 revenue attests, the 5 million new homes that we added over the last 3 years are contributing to our flywheel. From everything we've seen in our data, these customers are behaving similarly to those customers who joined prior to 2020 in that they are: one, adding additional products over time; and two, they've become great advocates for Sonos, helping us attract more new customers. The last 3 years didn't just yield a temporary spike in sales nor was it a one-and-done phenomenon. It brought our business to a higher baseline from which we will grow further. As we discussed last quarter, we are making thoughtful and targeted investments to drive our medium- and long-term growth while being mindful of the continued importance of delivering profitability. Our investments are focused on driving our flywheel of new household acquisitions and existing customer repurchases. And while we are investing in these opportunities, we are simultaneously tightening our belts, reducing discretionary spend and doing some restructuring to make our teams more efficient. We are laser-focused on what we can control. So if we begin to fall short of our targets in fiscal 2023, we won't hesitate to adapt to the environment, prioritize our key initiatives and protect the profitability of our business. We are on the cusp of launching some exceptional new products, and our product roadmap continues to get more exciting. As I mentioned on the last call, we'll be announcing our entry into a new category this year, 1 of 4 that we're working on. We have a proven track record of gaining share when entering a new category, which underpins our conviction that we will continue to gain a larger and larger share of the $96 billion global audio market over time. The future is bright, and we're well-positioned to seize it. Thank you, Patrick. And hello, everyone. At the outset, I'd like to dig a little deeper into the point Patrick was making about our business, establishing a new baseline. As our Q1 results show, the pandemic did not create a high watermark for Sonos. Instead, the pandemic strengthened the underlying fundamentals of our business, and we have great confidence that we will be able to continue to grow from the new level that we have attained. I also want to call attention to another phenomenon associated with emerging from the pandemic. Our year-over-year comparisons have been and will continue to be a bit wonky. This is due to timing of backlog fulfillment, whether we were in and out of stock on key products, if we ran normal promotions and many more factors. Although we see the shape of our year normalizing somewhat in fiscal 2023, we will likely have to lap this year in order to get back to some semblance of normalcy in terms of year-over-year comparisons. Against that backdrop, I'll provide what context seems to make the most sense, and let me start with revenue. In Q1, we grew revenues 7% constant currency or 1% reported to a total of $672.6 million. Foreign exchange was a $39 million headwind to revenue and was roughly in line with our expectations for the quarter. We're very encouraged by this revenue achievement, which fit with our ambitious expectations. And we're further encouraged that we beat Q1 of FY '22, which in turn beat Q1 of FY '21, even though FY '21 was in the heart of COVID demand and saw fewer supply challenges than FY '22. Quarterly registrations grew 27% year-over-year, while products sold grew 4%. Quarterly registrations for this last quarter faced a very favorable comparison as Q1 of fiscal 2022 registration growth had declined 24% year-over-year due to product supply constraints, timing of channel fill and low holiday promotional activity in that period. Looking back a year further to Q1 of fiscal 2021 to smooth comparisons, this quarter's reported revenue was up 4%, whereas registrations and products sold are down 4% and 6%, respectively. So all told, we saw revenue up from Q1 of fiscal '21 due to price increases and channel mix, but we were down to touch on units sold compared to the height of COVID demand. On a regional basis, Americas revenues grew 6% year-over-year in reported terms and accounted for 59% of sales. EMEA revenues grew 11% constant currency but declined 2% reported to account for 36% of sales. As a reminder, the bulk of our FX exposure is to the euro and, to a lesser extent, the pound. We are pleased with our constant currency performance in the EMEA region and continue to monitor the economics landscape there closely. APAC revenues declined 15% constant currency or 21% reported to account for 5% of our sales. Gross profit dollars grew 2% on a constant currency basis but declined 10% on a reported basis. Gross margins declined 540 basis points to 42.4%. While our return to a normal holiday promotion drove the bulk of the decline in gross margin, it is also worth noting that FX was a 300-basis-point headwind to gross margins. Another point to emphasize here. This quarter's gross margin should be the low point for the year and landed roughly in line with our expectations and does not change our view that we can deliver gross margins in the range of 45% to 46% for fiscal 2023. Adjusted EBITDA declined 24% to $123.9 million, representing a margin of 18.4%. The 610 basis point year-over-year decline in adjusted EBITDA margin was driven by our lower gross margin as well as non-GAAP operating expense growth of 6%. Foreign exchange was an approximately $35 million headwind to adjusted EBITDA. Total non-GAAP operating expenses of $172.3 million grew by $11.9 million or 7% from fourth quarter fiscal '22 due to increased head count as well as the reset of our bonus accrual from last year's depressed levels. These factors result in uneven year-over-year comparisons beginning in 2Q of this year. Thus, I want to emphasize that non-GAAP operating expenses should be roughly stable in absolute dollars from this quarter's level. Free cash flow was $168 million in the quarter, largely driven by $148 million decrease in inventories. Last quarter, we discussed our plans to exit Q1 with a normal -- more normal inventory position, and that is exactly what we did. At the end of the quarter, our inventory balance was $306 million, down 33% sequentially. Within inventories, finished goods were $261 million, down 36% sequentially. Our component balance of $45 million was down 5% sequentially. We ended the quarter with $432 million of cash and no debt. The increase in our cash balance was largely due to the $148 million decrease in inventory I just outlined, partially offset by the repurchase of $15 million of our stock. Last quarter, I mentioned that we were taking actions to improve our cash conversion, and I am pleased with the team's progress in that regard. One additional call-out, changes to the internal revenue code that Congress mandated back in 2017 now require that we capitalize and amortize our R&D spend. This change resulted in a $27 million hit to our net income this quarter, which naturally affects in year-over-year comparisons. We anticipate that this change in law will result in a modest increase to our cash tax rate for the full fiscal year, and we're assessing how to mitigate the impact. As Patrick mentioned, we're leaving our fiscal 2023 guidance unchanged. We continue to believe that constant currency revenue growth of 1% to 7% for the year is representative of the underlying demand that we see and the range of outcomes that the year could yield. Significant economic uncertainty remains, and we do not believe it is prudent to adjust annual expectations based on 1 quarter of performance. We're aware that the dollar has weakened from the levels we discussed last quarter, but as I mentioned earlier, the impact we felt in Q1 was roughly in line with our expectations. I will now briefly recap our fiscal '23 guidance. We continue to expect constant currency revenue growth in the range of 1% to 7%, which bakes in a $79 million FX headwind at the rate assumptions we outlined last quarter. This translates to reported revenue in the range of $1.7 billion to $1.8 billion, down 3% at the low end, up 3% at the high in reported terms. We continue to expect the gross margin to land in the range of 45% to 46%, roughly flat year-over-year. Our FX headwind assumption translates to an approximate 240 basis point headwind to gross margin for the year. We continue to guide to adjusted EBITDA of $145 million to $180 million, representing a margin of 8.5% to 10%. As previously discussed, a significant portion of the FX headwind flows directly through and reduces adjusted EBITDA. As I also mentioned earlier, we're dealing with uneven year-over-year comparisons, and that's certainly the case in the second quarter of fiscal 2023. And while it is not our practice to provide quarterly revenue guidance, we do think, given the unusual puts and takes, that it is important to explain our expectations for the shape of fiscal 2023. In the last 5 years, we have booked an average of 57% of annual revenue in the first half of the fiscal year. Excluding certain COVID-impacted periods that are not representative of our normal-course seasonality, 38% to 40% of annual revenue is generated in Q1 with Q2 generally down 55% to 60% quarter-on-quarter to be in the 16% to 17% of annual revenue range. As our business returns to more normal seasonality, we expect this year to be no different, where Q2 is our smallest revenue quarter of the year. Q2 of fiscal '22 was a completely anomalous one due to backlog fulfillment as a result of supply constraints and timing of channel fill. Thus, the year-over-year comparison of down 25% to 30% is not, I repeat, not indicative of underlying trends in the business. As Patrick emphasized, we are pleased to be tracking to a plan that allows us to continue prudent and targeted incremental investments in the business. Our investments in our product roadmap are squarely aimed at reaccelerating top-line growth to our previously achieved levels of low double digits, with adjusted EBITDA growth in excess of that. But I also want to echo his caution that should our performance in fiscal 2023 start to fall short of our expectations, we are fully prepared to take remedial actions to prioritize our key initiatives and protect the profitability of our business. Finally, I typically give a brief update on our Google litigation, but this quarter didn't see major milestones. Right now, we are heads down as we prepare for the May trial in our Northern California case and the summer hearings in the cases Google brought at the ITC. Great. I have two questions. And then time permitting, I'll get back in the queue for a couple more. So industry-wide, you're seeing material pullback in container costs and, therefore, supply chain-related costs. So at a high level, assuming that you're also stating to benefit from that, would you let that flow through to margins? Or do you potentially reinvest some of that by taking price? Well, first, the first part of the question, I would agree that we're seeing a moderating of supply chain costs. In the first quarter, for example, last year, we had, had to airship a whole bunch of stuff. We didn't have to do that. The logistics overall are smoothing out, and that's a plus for the business. We -- but we've laid out our prudent investment path for the year at this point, and we're not going to modulate and toggle one way or the other just based on that. We evaluate price all the time. We think we deliver tremendous value to the customer, but we'll make those assessments on a quarter-by-quarter basis. Great. So then my second question is -- you talked about this, but I was hoping you could expound on it a little. Given that you had a more normalized inventory position in the December quarter, you were hoping that your promotions would enable you to increase both new customers and then your penetration for existing customers. How successful were your promotions? And how should we think about future potential promotional activity in the December quarter? Yes. Thanks, Tom. It's Patrick. I'll take that one. So it -- and we use the term normalized or becoming more normal, because we actually looked back and as well have looked at how the promos performed relative to the pre-pandemic period, and they're in line. So we feel like it worked very well in terms of both attracting new customers and as well, getting existing customers to come back and add another one. And I think the other thing that we found, you'll recall we focus a little more on sets this year. So an arc with a couple of ones or a beam with a couple of ones for home theater, even stereo pairs. And that went really, really well. So if we learned one thing from that, and we know from our data, you'll probably see us leading with more sets, particularly in DTC. But it makes us feel like, okay, back in a more normal environment where there's inventory, we know what to do and how to execute within the expectations of our gross margin and our brand and our portfolio strength. So coming off of that, I feel like we're returning to more normal, like we were pre-pandemic when it comes to promos. It's actually John Babcock. But yes, I just actually wanted to quickly follow up on that. Overall, it does seem like you're having a promotional period here ahead of the Super Bowl. Is this something you've done in past years, if you can just remind me? Yes, it is, John. This is -- it's Patrick here. The -- this is the biggest time of year for TV sales in the United States. So we tend to do something targeted around our home theater products. So that is something we typically do. Yes, Tom, I would just say I think you're going to see through the course of the year that we're going to do Back to the Future. So we're going to return to kind of a normal cadence of promotions. So the things we've done in the past, I think you'll -- when consumers are particularly focused on our markets or times when we might dip into that. But generally speaking, we're just not going to be as promotional a brand as others. Yes. And I'd just say, the one thing I'd layer on is the sets. So you'll also see us probably lead more with promos around sets given the way that helps new homes get started the right way, so. Got you. And following up, at least on a geographic breakdown, I know you provided some commentary on Americas and also EMEA in terms of what went on there. Just in terms of Asia, how much of that declined? Because it looked reasonably steep. It was driven by kind of the COVID lockdowns in China, if there were any other factors at play. So the Australian television market has been weak right now. We think it'll bounce back. It's, as you know, a relatively modest part of our overall revenue. We've got some new geographies that we've been working on in the APAC region, Japan and India, those are going well. But the Australian market had a dip. China is now reopened. That's a big part of the Australian economy. We'll see how that flows through, but we don't see any kind of long-term implications here. Okay. Great. And then I guess just my last question before I get back in the queue. Are there any updates on the ongoing litigation with Google? And also, if you can just remind us what the next key deadlines are to be mindful there, that would be helpful. Nothing from this quarter in terms of big milestones. The next big moment here is going to be May 8 when we open trial in Northern California in our first trial against Google. We're actually getting to trial in the Northern California case, and that trial will last something like 10 days. So of course, there are a lot of preliminary skirmishing before you get there, but assuming that nothing surprising happens, we'll be presenting our case to the jury. I just want to dig into the kind of product registrations versus products sold dynamic, because I know there are some kind of wild comps if we look back over the last, like, 2-year stack almost. And so I guess kind of simplistically, as we look at the metrics for the December quarter, did you ship kind of in line with demand? Was there a channel restocking? Were you able to work down some channel inventories? And maybe if you could just include in that, how customers or how channel partners are thinking about managing inventory into 2023, just because we hear from some of your peers, they're still being relatively tight. So would love to know if that's the same for how they treat your products as well, and then I have a follow-up. So inventories dropped very substantially. I mean, we were quite elevated in our finished goods inventory coming out of the last fiscal year. We had hoped and indeed predicted that we would come down to a normalized level, and we did. We dropped some $150 million or whatever it is, and that was exactly as we thought would happen. And we exited the quarter with -- I would say the channel fill with our partners is in a normal and good spot, neither heavy or light. And I think it's reflective of the share gains we had. Our products were moving through these stores. And our main partners are very, very pleased with how the holiday quarter worked out. And as long as that continues to be the case, they'll be reordering on a regular basis. But of course, it is an uncertain time. No one wants to be caught with too much in their warehouses. So yes, people are careful, but we've had a pretty regular cadence with our partners. Okay. Helpful. And then maybe as a follow-up, looking at Asia Pac. Maybe slightly different is I kind of look at Asia Pac down year-over-year. I look at the partner revenue down year-over-year. And that, to me, indicates there might be some weakness within the IKEA partnership just because I know it falls into both of those segments. So maybe just give us an update on where that partnership stands, how demand for those products is proceeding, especially in light of the December product launch. I know you came out with a floor lamp. So just kind of what's going on there? And that's it for me. Yes, Erik. It's Patrick. I'll take that. I just talked to our key person over at IKEA the other day. So we did get off -- we did get launched with a new product, but that's just starting in terms of where we are today. IKEA still is working on some in-store displays in work that they want to do to try and drive more sales as we go through. So it's not where they would have wanted it to be at this point or ourselves. I think it's a matter of, like, them getting refocused on it from an execution perspective in-store as opposed to anything else in the mix, and so we're expecting to see that through the course of fiscal 2023 and continue to work with them on future products. But I do think it's been a little bit harder for IKEA coming out of the pandemic to get the footfall back and kind of drive what they would normally see in terms of their business overall, not just with some of those products. Got it. And maybe just, again, just to double-click on that. No change to how you guys think about that channel as maybe like an entry-level channel that you can get younger demographics on and hope to upsell over time. That's still kind of a focus for you guys. Is that a fair statement to make? Really impressive top and bottom line beat, but you didn't really flow any of that beat through to the guidance for the full year. So maybe just drill in kind of what's in your thinking through that. And then also, can you -- Patrick, you mentioned a new category launch this year. Are you baking anything into the guide for that launch this year? Is that still yet to come? So I'll take the new category one. We bake everything in, Brent, in terms of what we're expecting for the year. But as we go into new categories, we go into them forever, and we don't expect an explosive start as much as we do if we're going to start in getting it right. So it's not like that is the main driver. Our portfolio continues to be our main driver. I'd also just remind everybody, we're committed to at least 2 new products every year. And we had clearly indicated that Sub Mini, even though that launched in Q1, wasn't counting against those 2 for this year. And so that hopefully helps you understand kind of our thinking in the guidance. And then I would say and just kind of reiterating what Eddie was talking about is we're watching what everybody is saying as well. Our retailers have been -- and I think it's coming out of Q1 and our category share gains, they've been remarkably supportive, I would say, and are quite excited about the products we're planning on launching together. And at the same time, we're just trying to be cautious, having come out last year of a strong Q1 and making sure that we're being prudent, given all the other signals we see, not in our own business, but really across the macroeconomic backdrop, which none of us are economists, but we're just trying to be thoughtful about the way the year plays out and not get too far ahead of ourselves. And so we think it's the right thing to do. At this point, we're not spiking the football as Eddie likes to say. At this point, we're making sure that we measure this. We get our launches off on the right foot. We continue to execute at retail as we have as we go through this year. So hopefully, that gives a little bit more color on kind of the way we're thinking about the year. Yes. No, just as a quick follow-up. Are you leaving a little more wiggle room in the guide given some of the macro concerns in terms of versus historic guide? Or is this the kind of similar guidance gains you've been giving us for years? The range is a little broader. And for just that reason, it is a very uncertain time, and we're still very early in the year. The only other thing I would say about this is that we're on our internal plan much more closely, I think, than we are on the external guide. Part of the risk, of course, we're only giving annual guidance. It's the shape of the year, it's a little bit harder to penetrate. But we expected to do well being in stock and being able to promote. We did do well. We're very pleased about that. But we think given where we are in the year and given the cloudy economic environment, the standing pat on the guidance is the right call. Great. Last 2 for me. So Patrick, I want to re-ask a question I asked last quarter now that we've had more time. I would appreciate your current thoughts on competition scaling back their hardware efforts and for Sonos. Yes. And it's a good time for that question, Tom, because we've gone through fiscal Q1, which is the height of the consumer electronics and audio season. And it was -- we've seen some of the traditional players, like, go heavy discounting in kind of, like, a traditional playbook for CE that we've always bought against and don't really believe in. And then the big tech players, we just haven't seen them active, and we haven't seen them doing anything interesting. And so it's what enabled us, I believe, with our portfolio, our brand strength, our flywheel and then competitors kind of backing off other than the traditional legacy players doing some heavy discounting, we're able to gain share and really execute on a plan we expected to. And so we never want to get overconfident in these things. But even seeing what's emerged recently from Apple, I could not be more excited or confident about the product roadmap we have and our ability to take more and more of that $96 billion. And I just -- we're scouring the earth as we go through and we look at things that are happening. And I just feel like there are others that are probably questioning their investments in this area, and we are investing in 4 new categories. We are going to raise the bar in our existing categories. I mean, we've got a lot going on. The team is doing a great job. The team that's executing in the field is doing a great job and proved that in Q1. So I really, really like where we are, right now, . And I'm not -- again, we'll focus on what we can control, but we're always paying attention to competition. But it felt like in Q1, it was not much of a factor at all. Excellent. All right. So then this is also another re-ask, I apologize. But Eddie is talking about kind of the persistent strength of the U.S. dollar and would appreciate your current thoughts on the potential for increasing price for markets outside the U.S. given the persistent strength in U.S. dollar. We don't have anything to announce at this time. And as you know, if you follow it, the currency is bouncing all over the place these days, but it's something we evaluate. From our perspective, we want to make sure we're delivering value to the customer. And given the lifetime, how long our products last, the quality they deliver, the experiences we're investing in that we deliver through our software updates, we think we deliver that value, and we do think we have pricing power at times. But that doesn't mean you always want to use it because we want to grow our household base and keep that flywheel spinning. And so it's always a balance, but we don't have anything to announce at this time. Overall, just one last question on guidance here. Just if you can just clarify, did you say you expected revenues to be down 55% to 60% from 1Q to 2Q? And then assuming that is right, is there anything in terms of inventories or timing differences that might be impacting that? It just seems like a relatively weak quarter given what we saw even back to '21, and it obviously would be weakest since 2020. There's nothing in particular about it. Timing of new product initiatives is always a key factor. It's not -- there's not a question of inventory overhang. We have thought all along, and we said this when we gave our annual guidance last call, that this is a muted consumer environment. And so we haven't changed our expectation with respect to that even as well as we did in the first quarter. But we're not looking at Q2 as weak. We think -- if you trace back far enough, our first half, and that's really how we're going to think about it, is going to be right in line with our historic percentages. And we think we have a great second half coming up. So it's just the way the wave of the year is working out. Thank you. And thanks, everybody, for joining us today. Fiscal 2023 is off to a good start. A lot of uncertainty out there, obviously, with the consumer. But at the same time, we're focusing on what we can control. We have an awesome product portfolio today. Our brand has never been stronger. We're taking market share, and we've got some exciting products coming up. So thanks, everybody, and we will talk to you soon. Take care.

EarningCall_339

Good morning and welcome everyone to the Handelsbanken Banking Presentation of the Year End Report 2022. We are going to begin by listening to Carina Åkerström, President and CEO. This is a live broadcast presentation and you will find the link on handelsbanken.com under Investor Relations in English, you can find the presentation simultaneously translated if you choose English in the menu. After the presentation, we are going to have a brief break and then we will have an open Q&A session in English. So, following the press conference and welcome Carina Åkerström. You have the floor. Thank you very much, Louise and once again, good morning, everyone and a warm welcome to this presentation of the Handelsbanken results for the Q4 quarter and for the full year 2022. Beginning with an overall summary for 2022, I’d say briefly that the bank is performing well. The interest rate situation has an impact, but in particular, the bank is performing well because we have a high level of activity. Our existing customers and new customers are basically doing more business with us. And this is partly also explained by the fact that we have excellent volume development throughout the year. Income up for the full year and for the quarter, new record levels, we reached the highest levels we have seen so far. Net fees and commission keeping up quite well. We have seen a real drop in the stock exchange as you know. But in spite of this, we continue to gradually gain important market shares in the ever important savings market. We are investing more. I’m going to get back to this in the digital meeting with our customers, improved availability. But in spite of cost being up and expenses being up, we see that the CI ratio continues to improve. Our credit losses remain at a low level. And I’d like to also say that, all-in-all our results reflect a bank with stable finances and satisfied customers. Let’s have a look at the figures for the full year 2022. We see a CI ratio, which continues to improve. It amounted to 42% which is the lowest level that we’ve seen for decades, in fact, we have a 12.5% return on equity. Income grew by 13%, and the large driver is, of course, a strong net interest income. However, that in turn is driven by a high level of activity. And we also have excellent lending, a well-balanced lending. Our customers are doing more business with us. Net fee and commission income is down somewhat, but it’s holding its ground and we remain at high levels in spite of the stock exchange situation. The underlying expenses are up by 3%. This increase can be explained in its entirety for the past 2 years of the digital development and business development efforts. Other expenses, if you exclude our development expenses are up only marginally, and you need to bear in mind, at the same time, that we are in a period of rapidly increasing inflation rates. And credit losses, as I mentioned, remain at a very low level. So to sum up the full year, operating profit wise, we’re up by 17% when we also adjust for the implementation of the €1.3 billion of risk tax, which is now part of our results. Let’s have a look at the performance for Q4, then the positive results development was kept up throughout the fourth quarter as well. CI ratio amounts to 41.8% and ROE, return on equity, amounted to 13.2%. Income is up by 9%. It’s the net interest income, which continues to contribute to that fact and it is, of course, driven by positive impact of the rising market interest rates. The net fee and commission income is quite unchanged. Expenses are up. I’m going to get back to that point. But in addition to the traditional customer seasonal effects that we see in this quarter, we have some nonrecurring items as well that contributes to expanding it. But all in all, expenses are increasing according to plan as we intended it with a full focus on digital development, as I mentioned. The credit losses remain at a low level for the quarter. And if we sum up the performance for Q4, we have an underlying operating profit, which is up by 5%. If we gaze back to and have a look at the past 3 years that we’ve outlined very clearly what we set out to do. We have done precisely what we intended to do. And we see now that income is up, costs and expenses are under control, and we have a CI ratio, which is moving in the right direction. It is continually improving. As I mentioned, by way of introduction, our customers have maintained a high level of activity. We have had more business with existing customers and good business with new customers. And we can see that this is the case for all our home markets. All-in-all, lending is up by 7% in the bank in total, and if we look at the corporate side lending, which is the right side on this slide, it is up by over 11% for the year. In Sweden, the bank was the largest player during the year, covering as much as 26% of net lending to corporates in Sweden. And it is a well-diversified lending to companies, both property-related lending and non-property-related lending. Looking at households, over the past few years, we’ve seen stable growth in our home markets. However, considering the market development from the summer onwards, this has slowed down. So we still have, I would say, a reasonably stable development. What we do see not just in Sweden, but in some of our other home markets as well, is that our customers are paying back in extra installments a lot more paying back on their mortgages more so than before they’re using existing savings, and this has something of a dampening effect on the volume increase on both deposits and mortgages. Let’s have a look at the net interest income. For the full year, it’s up by 21% NII. And it’s also gratifying to see, and I keep getting back to this, that this is, of course, a balance between a volume growth to lending. And also given the current interest rate situation, we see an impact from that component as well. Let’s then have a look at our net fee and commission income. Once again, over the past 3 years, we’ve seen excellent development in the fees and commissions in the bank. As you know, we have a large share from our excellent savings related business and capital wealth management. It is impacted, of course, by the fact that the market is looking the way it is. Markets are dropping somewhat. It even has an impact on our income when it comes to the fund-related fees and commissions, but it is still standing its ground. And what we also see in fees and commissions to counteract this is that payment-related fees are up and we’ve seen that over the past 3 years. And then our savings business, as I’ve already said, it’s holding its ground with the declining stock exchanges. We can see that in Sweden, looking at the mutual funds market, Handelsbanken as a matter of fact, is in 2022, the bank with the biggest net inflow that we see in the market with a full 53% that comes to the Handelsbanken mutual funds, which means that we are continuously moving our market share, and it goes from 12% to 12.2%. And if we then look at our expenses for the full year, they’re up at 7%, but adjusted for FX and some items affecting comparability. The underlying increase in expenses is 3%. Development costs increased our expenses were 2.6%. And as I have already said, we are stepping up the pace in our digital developments. That is where we spend resources and business development for customers we work with improving the accessibility for our customers. Underlying expenses are up with less than 1%. And here, you also have to remember that this is a year where we have rapidly rising inflation. We keep expenses under control. We spend our resources where we see that we can future-proof the bank. So it’s according to plan. And if we then look at what we are actually doing, and if I’m going to try to explain, we’re focusing on the digital developments and digital availability, accessibility for our customers. When I started as the CEO, President a few years ago, we thoroughly analyzed the entire bank. And 1 of the things that we could identify at that time was that we needed to step up the pace in our digital investments. And then it mainly had to do with the digital customer meeting where we needed to be in parallel with our customers in all our home markets. And I’m sure you remember that for 2 years, we had an additional €1 billion to do this, to step up the pace of that development so that we can enhance and improve that customer meeting. And what you see to the left shows you what we’ve been doing with the availability processes, meeting the customers in the digital environment. And it’s also about making efficiencies, managing data with the business development that we’re doing today, where we see and hear from customers that we have been successful in these digital customer meetings. The bars to the right, that is the trend. From 2020, we have successfully stepped up the pace up until 2022. We’re now at a good speed and the things are leveling out. We do have the resources that we needed to develop what we wanted to develop, focusing on business development, and this is to future-proof the bank and it is at a good level. We have increased the pace, but we’re now well placed and we will continue to develop the bank. Then looking at asset quality, looking at our portfolio, in 2022 – while, 2022 was characterized by low credit losses and of course, this reflects the excellent credit quality, and also the fact that we have good customers with a high level of resilience, with good margins and customers that keep their finances in good orders. So we see nothing dramatic in our credit portfolio. Since 2019, we have made provisions and we’re building general reserves. To the right, you see what I said. We have good asset quality and in the EBA transparency exercise and that is what you see to the right, where you have the smaller bars, what is Handelsbanken? And you see that it’s a very, very low, very low when it comes to NPL also compared to our Nordic colleagues, our Nordic peers, which tells us that the asset quality of our portfolio is very good. Then looking at our home markets, Sweden is the engine locomotive, no doubt. And we have operating profit, if we exclude the risk attacks that we have in our home markets, we are up 16% in operating profit. CI ratio continues to improve over these quarters, and we see that we have a CI ratio now that is very low to very close to 30%. We see high activities in our branches, our digital channels, which means that we have a nice growth rate in lending. And of course, that also impacts the net interest income. Then looking at the biggest change in trend in 2022, it’s the United Kingdom, where we clearly see what has happened. We have operating profit up, it’s actually doubled compared to 2021. CI ratio is down. And this doubling in operating profit, well, we see income up and of course, that is driven to a great extent by the interest market where we have a very nice lending business in the UK that we’ve had for quite some years now. Expenses are down and what is interesting is that net fee and commission income is up, but the CI ratio as you can see, going down to 56%. And I’ve mentioned about Sweden already, we see that in the UK as well. Looking at the situation with amortizations, we see that many customers amortize more than they have been doing before. Briefly, Norway and the Netherlands, we see nice developments here as well, and Norway is an example where we see that we spend additional resources on developing the digital meetings. Capital, stable finances, a very good capital situation. And this is something that has given us and continues to give us room for new business with existing customers and new customers, regardless of where we are in the business cycle. The Board proposes an ordinary dividend of €5.50 per share and an additional extra dividend of €2.50 per share, and that is the proposal for the AGM and CET1, including the dividend is 19.6%. And then we have also taken into account, well, let me put it this way. We have regulatory requirements that have been taken into account when it comes to the countercyclical buffer requirements, which means that – we have 1.2 percentage points that we will be above that interval, which means that we have a stable situation and every opportunity for good continued growth. If I am to summarize the year and the last quarter, well, I can tell you what everyone is feeling that we have had a year with a lot of uncertainties and macro level, geopolitical uncertainties, and it hasn’t been what we expected worse, I would say, than the beginning of the year. But in spite of that, the bank is doing its best result ever. We have stable finances that gives us room to meet support our customers. We continue to invest to future-proof our bank, not least when it comes to the digital, and we want to be there with our customers. And for 2022, well, I think that we can say that we see a bank with stable finances, good growth and satisfied customers. And I think I will stop there, say thank you for everyone who has been listening and there will be a 5-minute break before we continue with the Q&A session. Exactly a brief pause and then in a couple of minutes, we’ll have Peter Grabe, the Charge of Investor Relations, who will start the Q&A session, and that will be through the telephone conference services and at handelsbanken.com, you have information about how to join that conference under Investor Relations. Thank you. Thank you. [Operator Instructions] And the first question comes from the line of Magnus Andersson from ABG SC. Your line is open. Please ask your question. Yes, good. Okay. Just on costs then, first of all, a clarification or my question is on cost. Just a clarification, you talked about the – that the development costs we saw – or the cost savings towards the end of the year should be a good proxy for what we should expect for 2023. Just to be clear, is the annualized Q4 development spend then a good proxy for what we should expect for ‘23? And also, what happens beyond 2023 here? Do you see this as a temporary elevated level or will the ‘24 level be subject to whatever income growth or cost-to-income ratio, et cetera, you have? And finally, on cost, just I noted that the capitalization level is increasing again quite significantly. How you think that will look during ‘23? You’ve commented on this earlier, depending on what you have been investing in? Yes. Thanks, Magnus, for the question. Well, first of all, obviously, yes, you are correct in that one. The trend we’re or the pace we are entering or we are exiting Q4 is the pace where we are foreseeing to have during 2023. And then when it comes to the levels after 2023, as you say, we’ve been highlighting that we want to run the bank below 45% in cost-to-income level, and that’s – we don’t have any more to say on that topic. We appreciate that we are in a situation where we have ample of room for growth in all of our home markets and that’s the reason why we are investing quite a lot right now. The capitalization level, as you say, it has been very low, below 20 for quite some time now. We – the investments, especially we do in UK, in Norway, do have a bit more long-term perspective around it. And therefore, you should expect capitalization level, all else equal, to increase a bit going into 2023. But as we have been saying, that’s – the actual level in the end is from an accounting perspective. So, very little subjectivity in it, but it is more of core system development as well in UK and Norway. Thank you. Now we are going to take our next question. And the next question comes from the line of Nicolas McBeath from DNB. Your line is open. Please ask your question. Thank you. So, a question on capital, So as you mentioned, Carina, you’re well now above your target interval also if we add the announced countercyclical buffers in 2023. So I was just wondering what you are still waiting for before calibrating down your capital ratio to within your target range? So should we see that you want to keep an additional buffer on top of the buffer you’re targeting or help us understand here why you’re not being more keen to trim down your capitalization to the range you’re guiding for? I think it’s fair to say that, obviously, when we enter 2022, we didn’t foresee the year as it has passed by. And I think that holds for the future as well. We live in extremely uncertain times now where a lot of things can happen. We could actually grow quite a lot more than we used to do in the past. And we could also see, obviously, the economies running into trouble. So from that perspective, we think it’s very prudent right now to stay at elevated levels. But in the long-term, we haven’t changed anything to our target range, no. Okay. So if I may just follow-up on that. So I mean I understand there is macro uncertainty and all that, but I guess that’s why you have the buffer to start with. But I mean, with regards to growth, do you think that the growth outlook for 2023 is kind of above normalized in terms of growth opportunities or how should we think about that? We think there is a lot of volatility around the growth assumptions going into 2023. I think you can find arguments for seeing slow growth, but you could also find arguments actually for quite a lot of growth. And I think some future questions now from the audience will most likely address the growth question. So let’s leave that for that question. Thank you. And now we are going to take our next question. And the question comes from the line of Maths Liljedahl from SEB. Your line is open. Please ask your question. Yes. Hello, Maths Liljedahl here. I guess it was me, I dropped out of the call. If we ask on NII sensitivity, then going forward, we have a rate hike tomorrow? Do you think that will be more or less pushed on to clients in terms of deposit yield? And also, the UK deposit is growing very, very strong. How do you think in the UK operations? Are you still managing to charge or to keep interest rates at a low level in the coming rate hikes? Thanks. Thank you. And Peter, please fill me in here. I think, first of all, obviously, we’ve actually, during 2022, we’ve actually increased the rates on the savings accounts as much as we’ve increased the mortgage rates, and we might differ there a bit to the other banks, but we think that’s been really good to our clients to do that. Nevertheless, obviously, we’ve seen quite a lot of increase in the NII margins or the NIM. So going in now into this year, yes, we are most likely will see quite a lot of increase with the rate hikes, we will most likely follow it. But as you know, the competitive landscape has been moving around quite a lot in mortgage margins and also deposit margins. So we won’t guide on any NII sensitivity, but nevertheless, increasing rates most likely is beneficial to us. And then as well, when it comes to the – we can guide you on that we – 30% of the volumes in deposits are on transaction accounts, and they will obviously stay – 40%, sorry, 40% are in transaction accounts and they – we don’t pay any interest on these accounts. Then on the NII or the NIM in Norway, I think it’s worth to highlight that we obviously have the notice periods there. And they accumulate to the size of SEK300 million at least, and that should be a tailwind going into 2023. And then in the end, as you say, in UK, we are in a very fortunate situation in UK that we – the bank’s rating is higher than even the country as UK, their rating. So we actually attract a lot of deposit flows from solicitors and municipalities, etcetera. So yes, we’ve been in a situation where our client base is not very rate-sensitive in the UK. So we will foresee to have a higher margin increase in UK when rates are being hacked. Thank you. Now we are going to take our next question. And the next question comes from the line of Andreas Hakansson from Danske Bank. Your line is open. Please ask you question. Thank you. Good morning, everyone. Follow-up question on NII, on the mortgage side, it seems like you’ve been lagging the market in terms of how you’ve been pricing up mortgages. At the same time as your funding structure, you keep a very big portion carbon funding, so it’s relatively expensive. Could you tell us what’s happening with your mortgage margins at the moment? And if you don’t hike your list prices, how does that really impact your back book, the discount sits or compares to your list prices, right? So what’s driving the back book margins at the moment? Thanks. No, you are correct in the sense that we have been extremely – we’ve decided quite a lot when we priced the mortgages that we obviously like that market, and we want to give our clients a really good offer. So we have been competitive in the mortgage pricing definitely in the last quarter of the year. And we will keep on playing this. You know that we’ve been highlighting on all the time that the NIM consists of many buckets now and the mortgage part is one part of the NII. And obviously, the total NIM of the bank increases quite a lot, but we see actually the mortgage margins are dropping. When it comes to the pricing, yes, you are correct in the sense that when we change the list prices, we need to go through the client base because, obviously, their rate is dependent on the list price and the discount. So we have obviously both automatic support to do that, but we obviously contact our clients as well. So it’s not going automatically in changing the back book margins, but there is definitely a correlation, so we need to work with that one. Yes. Just following up on that, you said that you’ve been wanting to play in that market, but it seems like you’re losing market share. And since there is very little growth in the system overall, is it really worth lowering prices to capture that little volume growth of new lending or is the problem that you see on a gross basis that you’re losing clients? I think it’s rather fair to say that we’ve been highlighting that we have two core offerings in the bank; first, the financing part and then the savings part. In Sweden right now, we are the – we have the top position in accumulating corporate lending growth, deposit growth and also savings growth. Yes, we trail a bit on the mortgage perspective. But of all of these ones, we really want to give our clients a long-term confidence, gain the client satisfaction. So we will play this in a long-term fashion. So we won’t short term, try to optimize the NII in that perspective. And we think that’s been really helpful behind the results of this year as well. Thank you. Now we are going to take our next question. And the next question comes from the line of Maria Semikhatova from Citi. Your line is open. Please ask your question. Maria, your line is open. Hi. Yes. Hello. Thank you. I’d like to follow-up on your NII comments. You mentioned that 40% of deposits on transaction accounts, just wanted to clarify if that households only and if it relates to Sweden or the group? And if you could break down the remaining 60%, how much of that is actually on term deposits? You also mentioned that you raised rates on savings accounts as much as mortgage rates. So could you please maybe comment on deposit beta in different markets that you’ve seen by end of last year? When we talk about the deposits, there are transaction accounts, we refer to Sweden, and it’s roughly 40% of the both households as well as corporate deposits that are currently running with 0% interest rates. So those are the 40%. When it comes to deposit beta, we typically don’t give any guidance. And I think given where the expectations were ahead of the report, it seems like the market has been quite good at actually capturing the dynamics. And unfortunately, we don’t provide any specific details when it comes to the deposits in the other countries in terms of how much is on savings and transaction accounts. And in terms of the remaining 60%, those deposits are at different types of deposit accounts, but we don’t specify how much is on different specific deposit accounts – savings deposit accounts. And just maybe – I understand you don’t try the breakdown, but generally, because I believe some of the peers mentioned that they are seeing the trend of customers in Sweden switching from transaction accounts into savings and term deposits. And I think based on your previous comments, your share of transaction accounts hasn’t really moved over the quarter. Just want to confirm if you’re seeing similar trends or other reasons in your case, customers are keeping their liquidity on the account with zero interest rates? Well, you can say that in terms of Sweden, as I said, that’s where we specify the split. The amount of deposits with 0% interest rate has moved from around 50% at the end of Q3 to 40% at the end of Q4, just to give you a hunch. Thank you. Now we are going to take our next question. And the question comes from the line of Sofie Peterzens from JPMorgan. Your line is open. Please ask your question. Yes. Hi, here is Sofie from JPMorgan. Thanks for taking my questions. So I was just wondering on Slide 31 on your CRE exposure. If I look at kind of mortgage statistics, it seems that this fell on average 7% quarter-on-quarter. But if I look at your property management LTVs on the slide, there was no change in any of the loan-to-value. So I’m just wondering, for example, if you see a 20% fall in in-house prices and we already had a 7% fall in the fourth quarter, how come the LTV is exactly the same end of the third quarter? And kind of related to the asset quality and that your Stage 2 loans increased by 23% quarter-on-quarter despite kind of selling Denmark. So I was just wondering if you could kind of give some details around why kind of loan losses remain so low and why the property management slide is unchanged versus the third quarter? Thank you. When it comes to the property management side, yes, you’re correct. It’s not updated with Q4 numbers and – we will obviously wait for the year-end reports of our exposures to do a reassessment again. So in Q1, it’s probably fair to assume that this slide will be updated. When it comes to Stage 2 loans, yes, the volumes are increasing in the quarter, but it’s due to revised PD assumptions in the very, very low risk classes, meaning that the volumes technically move to Stage 2. But as you can see on the provision side, you can see that, that has not triggered any uptick in the provisions for the Stage 2 loans, i.e., suggesting that the quality of the loans that have migrated into Stage 2, obviously, is very strong. Okay. Okay. But I mean once we update the real estate exposures and the loan values, that really be fair to assume as we potentially need to see a little bit more provisions for the property management exposures. Not necessarily. But obviously, there will be more information when we get the annual reports, but not necessarily there will be updates, no. Thank you. Now we are going to take our next question. And the question comes from the line of Riccardo Rovere from Mediobanca. Please ask your question. Your line is open. Okay, sorry. Okay. I just wanted to follow-up a little bit on Sofie question. I understand you will be updating at some point, the LTV slide on Page 32. But unless starting from kind of 40% of commercial real estate and, say, 50% for residential real estate, I mean, the residual collateral is basically double or more than double the receival debt exposures. So is it fair to say that you see a material impact on your asset quality even with the collapse in the real estate prices in general? Is it fair to say? I mean, the buffer here is technically extremely large. Is that a fair assessment? And then a second thing, if I may, to Carina, you extended as a buyback request. But at the end of the day, what we see is a cash dividend plus an extraordinary dividend. Is it fair to say that you, at least at the moment, prefer cash versus buybacks? Is it fair to say? Thanks, Riccardo for the questions. Well, first of all, obviously, yes, obviously, we do like the position in the LTVs we have. And we’ve obviously run a very conservative view on credit policy. But nevertheless, obviously, if house prices drop quite a lot, and we obviously estimate that impact from – if prices were to drop 20%, obviously, our LTVs would go up a bit – a touch more than 10%. So we’re not unimpacted. But yes, we like the situation we are in the asset quality and the collateral we have in place. The second question, we obviously – it’s a board decision around it. But as we’ve been highlighting before, we obviously have the possibilities to do share buyback programs. We will definitely reconsider it, but that will obviously be a case between the equity price and the way we choose between dividend and share buybacks. Thank you. Now we are going to take our question. And the question comes from the line of Namita Samtani from Barclays. Your line is open. Please ask your question Hi. I just got a quick question on corporate deposits in Sweden. So I saw they went up quarter-on-quarter, not quite different to what we’ve seen at the other banks. So is there a reasoning for this? Thanks. Yes. In – I mean, our corporate deposits did go down on the quarter. But as you say, we – I think the reason when you compare us to other banks, it is the ratio of financial corporates vis-a-vis non-financial corporates. The non-financial corporates are more stable in their deposit behavior, but the financial ones do more massage their holdings, etcetera, over the quarterly ending. So – but I don’t think we had an increase. Thank you. Now we are going to take our next question. And the next question comes from the line of Omar Keenan from Credit Suisse. Your line is open. Please ask your question. Good morning, everybody. Thank you very much for taking the questions. So the first question I had was on mortgages and customer behavior. I was wondering if you could add some color around the accelerated amortization in mortgages. What can you see around the particular cohorts in your customers in terms of who has high levels of deposits versus high levels of mortgages where you can see that this pay-down behavior might continue for a little bit longer? So I was just wondering if you could just flush out to us a little bit how you’re thinking about the amortization trends? What were they sort of normally and where do you think they could pick up to? And my second question was just on capital and regulation. I just wanted to check in on your view – your latest view on whether there might be any impact from the IRB overhaul? What impact do you think there might be from Basel III.1 on the January 1, 2025? And then whether you think there is an impact from the output floor in 2030 and whether it’s binding? Thank you. Thank you for the question. Well, first of all, I think it’s early to say to draw conclusions from the amortization behavior. But what we can say is that we’ve seen 2 or 3x the level of amortization in the end of – in the last quarter. We, in many cases, that has actually been the really strong client base who’s been using their deposit and just paying off loans. And obviously, that’s quite rational and quite intuitive when mortgage rates are up now in the level as some of the share dividends you can see in the market. So, I think you can’t draw any more conclusions than that. But it is a strong client base who pays off right now. When it comes to the capital, we do have a few uncertainties, obviously, going forward. The IRB overhaul is obviously one, but we don’t have any more information to give you there. We don’t foresee any changes as of yet. When it comes to the future Basel IV implications, we think we will have a little impact when we move into it. So, that’s the best guidance we can give. And then as you know, we have the structural FX case as well, which we do think if anything should have a positive impact. So, I think we have some pros and cons, but not any large size in either of it. Okay. Thank you. Could I just ask a quick clarifying question? So, I think in an earlier response to one of the questions, you said that you expect the overall capitalization to increase in 2023. Could you just confirm and elaborate the comments a little bit because it sounds like you are not expecting much in terms of regulatory headwinds, and there is already an excess capital position that could fund growth. So, why do you think the capitalization should increase further? Could you just help us a little bit more with that? This might be a misunderstanding actually, when I addressed the capitalization level when we come to the IT spending, the amount of the investment we put on the balance sheet, and they will most likely increase in 2023 based on the kind of development we do in Norway and UK. I didn’t mean that we were foreseeing that the capital demand from a regulatory perspective, we think is going up 2023. Understood. And could you give a bit more color on the pay-outs then and capital ratio levels in 2023? How we should be thinking about that? I think it’s – let me say a few words then on the capital level and the profitability of the bank. You know us as a bank, and we like really to – we have a conservative view. We really do believe that being conservative, both in funding and capital and the way we treat our asset quality and the way we treat our client is the recipe for long-term success. And so – and now we live in really uncertain times and then we think it’s prudent and a good position to be in to have even higher buffers, but we haven’t changed our long-term target range. If you were to look at the absolute return on equity level, yes, there are some Swedish peers who are above us at the time being. But if you were to compare over long-term and even the last years, if you were to dig into risk-adjusted return on equity, you would see that the stability our bank is showing really puts us in a really good position when it comes to risk adjustment – risk adjusted return on equity. And therefore, I mean you as investors and analysts, you could just increase the size of the position in our bank, and then you could increase the absolute return on equity. So, I think that’s the way you should view us. We play the capital level over a longer term cycle and obviously, we haven’t seen the downturn yet. We really do believe the uncertainty – uncertain times right now favors being prudent. And we do foresee there could actually be really big position or big possibilities actually for growth as well. So, we think this is prudent to do at the time being, but we haven’t changed anything in our long-term target range. Okay. Understood. So, you would expect to run with something a bit higher than the long-run management buffer in the near-term because of the growth opportunities or certainty. But over time, it should come back within that range. I think we have answered all the questions, but please get back if there were any questions you didn’t get an answer on. Thank you. Now, we will take our next question. And the question comes from the line of Jacob Kruse from Autonomous. Your line is open. Please ask your question. Hi. Thank you. Could I just ask on the expenses for the pension claim or the reimbursement that you took this quarter? And I think you said that, that was to rebuild the consolidation ratios of the pension foundation somewhat. Are you at the level you want to be or should – would you expect to continue to treat it this way given that on a sort of net of tax base, you seem quite neutral to you or should we see this as a one-time effect in the cost line very strictly 2022? Thank you. Thank you, Jacob. You should definitely see this as a one-off because we – as we have been highlighting for some time now, we – our pension system has gone from – if you look back 2 years, 3 years to 10 years, obviously, it has created a lot of volatility to the capital situation. We have managed to reallocate the pension system on a very, very good timing. So, we sit in a really good and solvent situation when it comes to the total pension system. Then we have some technical factors how to treat when we can get the contribution from the pension foundation. And these kind of technical issues made us treating it this way during the last quarter. But we don’t foresee that to happen going forward. So, rather our message is that our pension system is in a really good situation. We didn’t need to do this to increase the solvency of the system. Thank you. Now, we are going to take our next question. And the question comes from the line of Nick Davey from Exane BNP Paribas. Your line is open. Please ask your question. Good morning everyone. A big picture question on costs, please. If we take a step back and look at this run rate of costs that you are guiding us towards into 2023, it’s obviously very substantially higher than the aspirations you originally had for the Handelsbanken cost base around the same time. Now, I appreciate inflation has been a bit of a surprise. But if we exclude that element, can you help us to better understand tangibly what has disappointed you or what has made you see the bankers in need of so much development spending versus your original plan? And as we go into sort of ‘23 and 2024, can you help us to better understand these big step-up in development spending? Do you view what you are doing as a sort of defensive spending to catch up Handelsbanken to maybe where peers are in terms of capabilities or is there some component of what you are doing that you view as really revenue positive into the future? I think we have just got into this mode of noticing costs are higher, but I am not sure within this development spending bucket, I am fully on top of what the money is being spent on and why? Thank you. Thank you, Nick and thanks for the question. I think this is a really important topic actually. I think Carina was saying in her press conference alluding to when she entered a CEO role and the analysis we were starting in the bank. And there, as you all know, we went through a phase where we thought we needed to adjust the stability of the bank. And the analysis of that one was rather that we should focus on the areas where we are really strong, we should narrow down the geographies we are present in, etcetera. We have come quite far in that journey, actually, and we have created a really profitable bank right now. So, we stand on geographies and in areas we really like, and we see ample of room for possibilities there. So, we – and in that sense, we have then gone from a stability phase into a profitable phase. And we really think we are in a good position to enter a really growth phase as well. So, what you see right now is obviously – and in that sense, we changed from obviously having an absolute cost target to rather steer the bank towards our cost-to-income target. In these cases now, we – what we do is we invest quite a lot. We have really good position. We have really good client satisfaction, and we are really profitable in the underlying business in all of our four home markets now. But we really do see possibilities for us to strengthen this position and grow even further. And in that sense, we are spending quite a lot on the digital capabilities, especially in definitely Sweden, UK and Norway. We actually really see the benefit of this to some extent. You can see that in client satisfaction, we actually increased the digital satisfaction quite a lot in a few of our home markets. So, we really view this as an offensive move. We think we run a bank with a really strong cost control in the underlying business with huge possibilities actually to grow. And so we keep coming back to the guidance that we want to run the bank below 45% in cost to income. But that should really be seen as a really efficient underlying bank, but also quite a bit higher spending rate than we have seen in the past. Okay. Thanks for the clarification. Briefly then, just to pick up on the UK and Norway spending. What kind of areas is it being spent on? And what’s the tangible outcome of the spending 2 years, 3 years from now? What will your capabilities be that they aren’t today? Yes. If we start with UK, UK, we are a small bank. We are very niche to the private banking segment. We have the highest client satisfaction with some magnitude. We already have the best combination of return on equity and cost-to-income levels vis-à-vis our peers in UK. And we foresee that difference to actually improve further. Our challenges in UK is the IT perspectives. So, we do invest actually in changing our core system there, but we also invest in the digital capabilities because we know that we have room to improve there. So, we actually – and as you know, we have been going through a few years of some tough challenges in UK, which we think will turn around quite nicely now. So, we look really, really promising in the possibilities for us to grow even further in UK in the segment we are in. In Norway, we have possibilities with a really good position vis-à-vis corporates and lending. And as we have been highlighting before, we like to balance that to more retail side and also to more savings side. So, in that sense, we are investing quite a lot in the digital capabilities of the bank to strengthen that perspective. So, that’s the key highlights of the investments in UK and Norway. Thank you. Now, we are going to take our next question. And the question comes from line of Rickard Strand from Nordea. Your line is open. Please ask your question. Hi. Good morning. A follow-up question on costs. It looks like the FTE development is currently where you are growing at a 3% year-over-year growth rate and it’s also up quarter-on-quarter. Just want to hear your view here, looking ahead, how you expect this to develop? Is it fair to assume that you will continue to grow in 2023, and if so, in what areas? And then also a short follow-up question on the one-off there related to the payroll tax, I think I missed the quantification of how big that was in Q4? Thank you. Yes. Thanks Rickard well, first of all, I mean FTEs, yes, we don’t see a structural decline anymore in FTEs. We are rather increasing, obviously, the development spend and in that sense, that requires more resources. That could be FTEs or it could be external help with consultants. So, I don’t think we can guide you on the level of the FTEs because you will most likely have an increase in development, but we could also have a shift from consultants into employees of the banks. So, we can’t guide you on the absolute level there. I think your second question was alluding to the pension one-off. And as you say, it was – the cost increase is SEK152 million, but we actually do decrease the tax line with SEK160 million. So, from a net bottom line, it is actually positive with SEK8 million, but it do increase the cost. And in that sense, obviously, we have viewed that as a one-off to the cost line. Thank you. Now, we are going to take our next question. And the question comes from line of Piers Brown from HSBC. Your line is open. Please ask your question. Yes. Sorry, I missed the operator there. Yes, Piers Brown, HSBC. Just a quick question on your risk appetite in commercial real estate at this juncture, I mean most of the fourth quarter reporting we are seeing from the property management companies in Sweden looks surprisingly good in terms of still very high occupancy rates and increasing rental values, resilient property values, etcetera. So, in the context of that, how do you assess the – your appetite for taking on further credit to these companies because the problem we are still confronting is the refinancing wall that they faced in 2024. So, if you can just talk at that point, given that you are obviously already 30% of the portfolio is for the property management sector, would you be happy to increase that percentage even further from here? Thank you, Piers. Well, as we have been highlighting many times, obviously, we don’t view our exposures from a portfolio perspective. We do like good clients and many of the clients we have, which are good is obviously in the real estate sector. As you say, yes, you can see that the fourth quarter reports are decent. But I don’t think that’s the way you should view our bank that we will – you can see the way we will behave when it comes to credit appetite has a very strong correlations with the reports they are posting. We would like – we will definitely continue to do business with the clients we deem good. And we think there is definitely both a need and a possibility for us to grow when you see the shift from bond to bank in the financing perspectives. And we definitely see that already happening. So, it is – we are in the midst of it. Thank you. Now, we are going to take our next question. And the next question comes from the line of Andreas Hakansson from Danske Bank. Your line is open. Please ask your question. Excuse me, Andreas, your line is open. Yes. Sorry for that. Just a follow-up, you – on the capital side, you opt for a new buyback mandate, which I guess you have done all years. But should we see that as an indicator that you actually want to do any buybacks? And if you would plan to do it, wouldn’t you have announced it now or is that just to have the flexibility on trading in your security stuff that – so how should we view that mandate? I think we can’t guide you anymore. It is obviously flexible. It is a mandate, as you say, we have been having it for many years. It creates flexibility for us. If we would have instigated a buyback program today, we would obviously have said it. So, you should see that there is flexibility for us going forward. Thank you. And now, we are going to take our last question. And the question comes from the line of Jacob Kruse from Autonomous. Your line is open. Please ask your question. Hi. Thank you. I guess I just wanted to ask you if you could say anything about the underlying inflation you see outside of this development spending in terms of how – any indications from wage negotiations or contract negotiations with suppliers? Just how do you think about cost growth for 2023 versus 2022 outside of the development spending? Thank you. Thanks Jacob. I think it’s fairly hard actually to tell the various components. What we can say is that if you go back and look at our other cost line and you look at the seasonality, the average seasonality for the last 15 years, that has been at the pace of 24% roughly. And in that sense, you can actually explain quite a bit of the cost increase we see in Q4. So, it is quite difficult to divide this into what is normal seasonalities, what is inflationary tendencies. What we can say is obviously that the salary negotiations in Sweden, the – we obviously do local ones, but the official ones are being held now. And I think that most guidance point that to somewhere roughly 4% or so. That – from a European perspective, that’s obviously quite low, but most likely, the agreement will also be short one. It might be a 1-year agreement, and then we have the uncertainty going into the next year. So, we don’t foresee massive inflation, but nevertheless, obviously, some inflation will go through. And in that sense, you can actually find arguments for the cost increase being fairly muted anyway vis-à-vis both seasonality and in inflationary terms. And thank you to all of you who have participated during this session. And if you have any further questions, please don’t hesitate to talk to Peter or to call during the day. So, thank you very much to all of you.

EarningCall_340

Hello, everyone, and welcome to the Yum! Brands, Inc. 2022 Fourth Quarter Earnings Conference Call. My name is Charlie and I'll be coordinating the call today. [Operator Instructions]. I will now hand over to your host, Gavin Felder, Chief Strategy Officer and Interim Head of Investor Relations, to begin. Gavin, please go ahead. Thanks, operator. Good morning, everyone, and thank you for joining us. As a reminder, I will be covering for Jodi Dyer while she is on maternity leave. On our call today are David Gibbs, our CEO; Chris Turner, our CFO; and Dave Russell, our Senior Vice President and Corporate Controller. Following remarks from David and Chris, we'll open the call to questions. Before we get started, please note that this call includes forward-looking statements that are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. All forward-looking statements are made only as of the date of this call and should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC. In addition, please refer to our earnings release and relevant sections of our filings with the SEC to find disclosures, definitions and reconciliations of non-GAAP financial measures and other metrics used on today's call. Please note that during today's call, all system sales growth and operating profit growth results exclude the impact of foreign currency. Please also note the following financial reporting treatment related to our exit from Russia. As a reminder, as of the beginning of the second quarter, we elected to remove the Russia business from key performance metrics. For the purposes of this call, all references to system sales growth and unit growth results for the quarter are adjusted to remove our Russia business from the prior year base. This negatively impacted our worldwide unit growth by 2 percentage points and our worldwide system sales growth for both the fourth quarter and the full year by 2 percentage points. These units were removed from our same-store sales calculations and thus did not impact same-store sales results for the fourth quarter or full year. All GAAP figures reported continue to include the impact of Russia operations for KFC for the full quarter and year, and for Pizza Hut prior to our transfer of that business to a local operator in the second quarter. These GAAP figures primarily include royalty revenues from continued franchise operations and G&A to support our Russia business. Additionally, our GAAP G&A includes expenses incurred relating to the transfer of ownership of the business. As a result of our decision to exit our Russia business, we have reclassed net operating profits from the operating segments in which they are earned subsequent to the start of the conflict to corporate and unallocated and reflected those net operating profits as a special item within the other income and expense line. For more information on our reporting calendar for each market, please visit the Financial Reports section of our website. We are broadcasting this conference call via our website. This call is also being recorded and will be available for playback. Looking ahead, our first quarter earnings will be released on May 3, 2023, with the conference call on the same day. Thank you, Gavin, and good morning, everyone. 2022 truly was a landmark year for Yum!. In spite of the challenges from significant spikes in commodity inflation and pockets of labor shortages, our world-class teams and franchisees partnered together to deliver another year of amazing growth. We achieved record-breaking industry development, opening 4,560 gross units that translated to nearly 3,100 net new units, beating our prior record set just last year and ending the year with over 55,000 restaurants globally. For the full year, system sales were up 8% and core operating profit was up 6%, which includes a 2-point headwind from the removal of Russia profits this year. Perhaps the most impressive performance came from Taco Bell, finishing 2022 with same-store sales growth of 8%. Taco Bell also bucked the industry trend on margins, holding company operated margins flat from last year despite elevated industry-wide cost pressure. KFC International delivered a record year, opening approximately 2,400 gross units and nearly 2,000 net new units, translating to 9% unit growth. Combined, these 2 parts of the business account for approximately 80% of our divisional operating profit. We finished the year on a high note with system sales growth of 10% in Q4, driven by 6% same-store sales growth and 6% unit growth, contributing to 22% core operating profit growth, which includes a 2-point headwind from the removal of Russia profits this year. Such incredible performance under highly challenging conditions underscores the tremendous confidence I have that even after a remarkable 25 years of growth as a public company, our best days are clearly ahead of us. Before I discuss our 2022 results in detail, I wanted to give a brief update on our planned exit from Russia. As mentioned during our Q3 call, we have a signed purchase agreement to transfer ownership of our Russian KFC restaurants, operating system and master franchise rights to an existing KFC Russia franchisee. We expect the transaction to close following satisfaction of all closing conditions. Following the closing, we will have ceased our corporate presence in Russia. I also want to acknowledge the devastating impact of the earthquake that happened earlier this week, affecting our teams in Turkey. Our people remain our #1 priority, and I want to recognize the effort from our franchisee, Ilkem Sahin, as he and his team worked to prioritize people's safety as they navigate through this tragedy. As we shared at our recent Investor Day, our strategy is guided by our Recipe for Good Growth. And today, we will discuss our 2022 results through the lens of that framework. I will talk about 2 of our growth drivers: namely our Relevant, Easy and Distinctive Brands, or R.E.D. for short; and our Unrivaled Culture and Talent. Then I'll provide an update on our efforts to drive the good agenda across our brands and our business. Chris will then share the details of our fourth quarter financial results before discussing our Bold Restaurant Development and Unmatched Operating Capabilities growth drivers. I'll start by discussing our iconic R.E.D. brands. Beginning with the KFC division, which accounts for 49% of our divisional operating profit. KFC full year 2022 system sales grew 9%, driven by 7% unit growth and 4% same-store sales growth. Q4 system sales for KFC increased 10%, thanks to 7% unit growth and 5% same-store sales growth. Results were unfavorably impacted by COVID-related challenges in China. Excluding China, our KFC business continues to grow at an unbelievable pace with same-store sales growing 9% in the quarter, driven in part by our world-class franchisees and continued impressive momentum in our emerging markets. At KFC's International business, which represents 44% of our divisional operating profit, Q4 system sales grew 11%. Several markets showed stellar results. In Japan, for example, KFC is synonymous with the Christmas holiday family meal. And this year, Japan system sales over the Christmas period grew 16% year-over-year. Africa drove double-digit same-store sales growth in the quarter and continues to benefit from several customer-facing digital initiatives. To build on that success, our South Africa team will continue to roll out kiosks with a goal of installing them in 95% of our stores by 2023. Moving on to our Taco Bell division, which represents 35% of our divisional operating profit. On a global basis, full year system sales grew 11%, driven by 8% same-store sales growth and 5% unit growth. This team continues to deliver industry-leading results, and coupled with the incredible array of talent in place and our strong franchisee partnerships, it should be no surprise that Taco Bell earned the top spot on Entrepreneur magazine's Franchise 500 Ranking for the third year running. Moving on to our fourth quarter results. Taco Bell U.S. grew system sales 14%, underpinned by an exceptional 11% same-store sales growth. The powerful momentum from previous quarters continued with the relaunch of the cult classic Mexican Pizza for which we provided early access to our loyalty members. We ended the year with around 45 million Mexican Pizzas sold, an impressive number considering they were only available for 4 months of the year. We also made encouraging progress in our breakfast layer, building on high-profile branding partnerships such as Doja Cat in Q1 and Davante Adams in Q3. Taco Bell brought in Pete Davidson to help drive consumer buzz for breakfast. This led to 9% transaction growth for the daypart. Overall, Taco Bell did a terrific job this quarter at balancing both ends of the consumer spectrum by featuring premium products that our consumers crave, such as the Grilled Cheese Burrito with sharply priced items like Nacho Fries. At Taco Bell International, Q4 system sales grew 23%, driven by 29% unit growth and 4% same-store sales growth. Q4 closed a truly breakthrough year for our international business, which has now crossed the 1,000-unit mark. To put this speed into some historical context, Taco Bell International has built 40% of its current estate within the last 2 years. It wasn't just our development engine on fire this year, many of our markets reached double-digit same-store sales growth in 2022, including some of our largest markets with India, up 33%; Thailand, up 36%; and Spain, up 20%. Next, at the Pizza Hut division, which accounts for 16% of our divisional operating profit, our full year system sales grew 3%, led by 4% unit growth and flat same-store sales growth. Pizza Hut International, which accounts for 9% of our divisional operating profit, achieved system sales growth of 4%, driven by 6% unit growth and a 1% decline in same-store sales in the fourth quarter. Results were heavily impacted by the ongoing COVID-related challenges in China. Ex-China, our same-store sales remained healthy, growing 4%. Several markets showed noticeable strength, including Japan, where same-store sales grew 10%, owing to a strong holiday performance and recent product launch of Tuscani pasta bowls that featured a local flavored twist. At Pizza Hut U.S., which accounts for 7% of our divisional operating profit, Q4 system sales grew 5%, driven by 4% same-store sales growth and flat unit growth. The strength in the quarter was driven by a combination of factors that included new advertising to highlight both premium and value offerings, growth partnerships with aggregators and the success of the new Melts product. Melts over-indexed to predinner time frames and individual occasion tickets and helped to recover the lower household income base due to its strong value proposition. Lastly, 5 distinct national marketing campaigns on Uber Eats and DoorDash helped aggregator transactions grow 30% in the quarter. Lastly, at the Habit Burger Grill, the team continues to make progress on setting up the business for long-term growth. Habit's burgeoning digital channel finished the year strong with digital mix ending at 35%, a truly impressive level after only launching in 2020. I'm pleased to share that Habit is now 18% franchised, which is up 5 points from last year. With $2 million average unit volumes and a compelling growth strategy, I'm confident in the long-term growth of our newest brand. And now on to our Unrivaled Culture and Talent Growth drivers. Our hallmark at Yum! continues to be our people first culture, which drives retention and recruitment of amazing talent. Highlights in 2022 included bringing our top 250 leaders from around the world together for a Global Leadership Summit and celebrating the important role our world-class talent has played as we marked our 25th anniversary as a publicly traded company. Internally, we continued to promote talent naming a President of the Habit Burger Grill and a new President of KFC U.S. Externally, we attracted top talent, welcoming a new Global Chief Brand Officer for Taco Bell, a new Global Chief Operating and Transformation Officer for Pizza Hut and a new Chief Corporate Affairs Officer for Yum!. When it comes to all the good we do, we released our 2021 Recipe for Good report during the year, detailing our strong progress around our 3 priority areas. With our science-based targets to decrease greenhouse gas emissions by 46% by 2030, we decreased emissions against our 2019 baseline by approximately 24% for company-owned buildings and our corporate restaurants, while our franchisees decreased emissions by 20%. Regarding better packaging, we published a new global harmonized packaging policy with a focus on eliminating unnecessary packaging, shifting to more sustainable materials and supporting better recovery and recycling systems. We increased the number of women in senior leadership globally to 42%, which keeps us on track to achieve gender parity and leadership globally by 2030 in alignment with Paradigm for Parity. We were pleased Yum! received industry-leading rankings on the carbon disclosure project and inclusion on the 2022 Dow Jones Sustainability Index North America, the 2023 Bloomberg Gender-Equality Index and Newsweek's list for America's Most Responsible Companies and America's Greatest Workplaces for Diversity. To wrap up, I'm thrilled with our 2022 performance, particularly given many of the unpredictable obstacles our team had to navigate. Our results continue to reflect a resilient, diversified business and the strength of our portfolio, led by our iconic brands. I'm confident we will continue to execute with superior performance and deliver industry-leading growth, all of which will help to maximize value to our shareholders. Thank you, David, and good morning, everyone. Today, I'll discuss our financial results, our Bold Restaurant Development and Unmatched Operating Capability growth drivers, followed by our capital strategy. As David mentioned, 2022 was a year of huge milestones for Yum!. The resilience and winning mindset shown by our teams around the world helped us open a record-breaking 4,560 gross units or 3,076 net new units on a full year basis. These development numbers put full year unit growth at 6%. System sales for the year grew 8%, driven by strong international same-store sales growth for KFC and another stellar performance from Taco Bell. Full year core operating profit grew 6%, which includes a 2-point headwind from the removal of Russia profits this year. Fourth quarter system sales growth of 10% was in line with the update we shared at our Investor Day, driven by 6% same-store sales growth and 6% unit growth. Core operating profit grew 22%, which includes a 2-point headwind from the removal of Russia profits this year. Reported operating profit included a negative $42 million foreign currency translation impact in the fourth quarter and a negative $118 million impact to the full year. Ex special general and administrative expenses came in at $357 million and approximately $1.1 billion for the full year. Taco Bell store level margins were 23%, flat year-over-year. Taco Bell paid additional discretionary bonuses to its store-level employees, given the strong performance for the year, which impacted quarterly margins by approximately 50 basis points. Taco Bell's full year store level margin was 24%, near the upper end of its 23% to 24% historical pre-COVID margin range. Fourth quarter ex special EPS was $1.31, a 29% increase versus the prior year. EPS growth was positively impacted by core operating profit growth of 22% and a lower current year tax rate. This was partially offset by the year-over-year impact of a current year mark-to-market loss on our equity investment in a franchisee in India, lapping a prior year gain as well as the aforementioned negative impact of foreign currency. The ex special tax rate in the quarter was 12%, due in large part to the release of a valuation allowance associated with deferred tax assets that we now believe we will be able to utilize. Our full year ex special tax rate was 21%, in line with our full year expectations of 21% to 23%. Now let me share greater detail on our fourth quarter unit growth in the context of our Bold Restaurant Development growth driver. This quarter, we opened 1,830 gross new units, resulting in 4,560 gross units opened for the full year or the equivalent of more than 1 new restaurant every 2 hours. Nearly 90% of new store openings in 2022 occurred outside the United States across 112 countries, proof that our diversified development engine is stronger than ever. Starting with KFC, the team opened 997 gross new units in the fourth quarter with China, India and Thailand leading the charge. The Pizza Hut division had incredible development results, opening 571 gross new units in Q4 with 5 countries contributing more than 25 units, namely India, Indonesia, Canada, China and Turkey. The Taco Bell division opened 253 gross new units in Q4 and 496 restaurants for the full year. In fact, Taco Bell U.S. opened 250 gross new units this year, the second highest annual amount ever. For 2022, Taco Bell International set a record with 246 gross new units, exceeding the prior record of 179 units set last year. I'm thrilled to report we crossed the 1,000 Taco Bell unit threshold internationally and we soon expect to have 4 countries that have over 100 units with China joining Spain, India and the U.K. Lastly, Habit added 33 gross new units in 2022, representing a year-over-year growth rate of 10%. This level of growth, which includes a significant number of company-owned units create some short-term noise in company-owned restaurant margins due to the inclusion of preopening expenses and the depressed margins that are normal during the initial months of operations before new stores reach maturity. Average margins for Habit stores opened more than a year remain much stronger than our overall reported Habit company store margin. To finish with development, as we head into 2023, we remain confident that we will maintain our strong momentum. We exited 2022 with record site registrations for new units at Taco Bell U.S., and we have over 80% of 2023 planned units at KFC and Pizza Hut outside of China committed with well-capitalized, growth-ready franchise partners. Next, I'll discuss our unmatched operating capabilities and the 3 pillars of our digital strategy: Easy Experiences, Easy Operations and Easy Insights. I'll start with an update on our Easy Experiences pillar, which focuses on delivering seamless customer experiences through proprietary technology and dedicated operational programs. In 2022, we expanded the rollout of Tictuk, our conversational commerce and e-commerce platform across our network and finished the year with Tictuk in over 3,200 stores across 49 markets. We processed millions of digital orders in 2022 with Tictuk continuing to prove it can bring in incremental customers and drive digital sales. This is evidenced by the chat ordering launch in KFC Mexico where more than 90% of users who transacted on the chat channel had previously not placed a digital order on other channels. We plan to roll out Tictuk to more than 1,000 new stores in 2023, including its white label e-commerce platform, which went live in Pizza Hut Chile and Taco Bell Canada in Q4 2022. Moving on to our Easy Operations pillar, which centers on the team member and franchise partner experience. The rollout of Dragontail is ramping up in Pizza Hut U.S. with over 450 stores onboarded by the end of 2022 and plans to reach up to 1,000 stores by the end of Q1. Globally, we expect to have Dragontail in over 7,000 stores by the end of 2023. At Pizza Hut U.S., we have completed the integration of 2 major aggregator channels into our point-of-sale system. And at Taco Bell U.S., we have fully integrated our delivery as a service partner into our store's technology system. These integrations are important in helping our team members process delivery orders with new levels of ease. Lastly, I'll cover our Easy Insights pillar, which leverages the power of data and analytics to allow our teams to make smarter decisions. I want to highlight 2 key initiatives that our Yum! decision sciences team have been working on, namely Recommended Ordering and Cook Schedule. Recommended Ordering is an artificial intelligence, machine learning module that predicts and recommends the quantity of product for a restaurant manager to order each week with the goal of reducing product waste and intra-store transfers of inventory. The product has been rolled out to 3,000 U.S. stores across Taco Bell and KFC. Cook Schedule is a similar module that helps predict the correct amount of food and timing to cook product to accurately meet demand. The team is working primarily with KFC on this initiative with plans to pilot in an international market soon. Finally, I'll provide an update on our balance sheet and liquidity position. Our net leverage ratio ended the year at 5x, including a small balance on our revolving credit facility that was used to support share repurchases in the fourth quarter. We will enter 2023 with no significant maturities until 2026 and approximately 94% of our debt fixed, excluding our revolving credit facility balance. I will reiterate that our capital priorities are guided by maximizing shareholder value. This includes investing in the business, maintaining a resilient balance sheet, offering a competitive dividend and continuously evaluating the optimal use of our excess cash. To that end, I am also pleased to announce that this week, our Board of Directors approved an increased quarterly dividend of $0.605. Our capital expenditures for the quarter, net of refranchising proceeds, were $99 million. Our net capital expenditures for the year came in at $206 million, reflecting $73 million in refranchising proceeds and roughly $279 million in gross CapEx. With regard to our share buyback program, we repurchased 4.1 million shares in the quarter at an average share price of $119 per share, totaling approximately $486 million. For the full year, we repurchased 10 million shares at an average price of $119 per share and totaling $1.2 billion. Overall, we are extremely pleased with these results given the complexities our teams faced. Navigating such challenges with industry-leading performance affirms the confidence we have to deliver our recently raised long-term growth algorithm of 5% unit growth, 7% system sales growth and at least 8% core operating profit growth. Looking to 2023, we wanted to provide a few guardrails for modeling purposes. First, we expect to deliver on our long-term growth algorithm with healthy unit growth momentum continuing into 2023. We expect Taco Bell company operated margins to be in line with full year 2022 margins, and we expect our 2023 G&A to be approximately $1.15 billion, in line with the guidance provided at Investor Day. In terms of the shape for the year, the year-over-year growth in G&A will be highest in the first half, largely owing to the timing of our G&A expense plan across the year. Based on rate expectations as of today, we expect our interest expense to be up approximately 10% year-over-year and for our leverage ratio to drift modestly lower in 2023. Finally, we expect our full year tax rate to be 21% to 23%. To close, we are extremely proud of the performance of our brands over the past year and look forward with excitement to deliver another year of compelling growth and shareholder value in 2023. My question is about the profit outlook for 2023. And I was wondering how you're thinking about the puts and takes related to potential upside or offsetting factors. And in particular, I was curious about the China business. It seems like there's potential for China to recover and be additive to your overall profit algorithm for this year. And I was curious to get your view on whether that would be an upside lever or you would think about potential offsets to that factor for this year. Yes. David, thanks. Good question. As we look forward to next year and beyond, we're still confident in the future. As we shared at Investor Day with the raised algorithm, we feel confident in the trajectory of the business and nothing has changed in that outlook as we come into 2023. As you mentioned, the China component of our sales, you heard Yum China talk last night about being cautiously optimistic. So we'll continue to work with them. But in the long run, we are very bullish on the China market as it comes out of COVID, but of course, the timing of that is uncertain as they shared on the call last night. Of course, to the extent that we have rebound in that China sales, it does come at a lower royalty rate as you factor that into the plan for the year. The other elements, I think, are in line with the -- with what we shared in the algorithm. You heard the guidance that we shared on G&A for next year. And so our focus is on driving that growth. And of course, every day, it's our mission to come in and over deliver on that algorithm if we can. Thanks, Chris, for that color on G&A for the year. Helpful. Wondering, David or Chris, if you could speak just a bit more to the strength that you're seeing from a sales momentum perspective globally and the resilience really across the brands in the current macro, and how that guides sort of how you're thinking about 2023 if consumer pressure increases. I mean strength at Taco Bell, KFC non-China, International, Pizza Hut U.S. even momentum building. Just any additional color given the last several month's momentum for how you think about '23, particularly if globally, the macro situation gets worse. Yes. Strength is a good word, Dennis, and it really was widespread, as you mentioned. We feel great about the fact that all of our brands are really on a roll right now. You saw that in the results for the quarter. And the consumer environment, much like my comments last quarter, remains a positive environment for us generally globally. Obviously, there are pockets of challenges when you have things like lockdowns in China last year, but that flips to be a more -- potentially a positive for this year. But the consumer in the U.S., on the high end, we're actually seeing more frequency from that consumer, and we're seeing possibly driven by a little trade down into our brands, which is all good. And then on the lower end, as I mentioned last quarter, consumers are starting -- there's a little bit more interest in value, which our brands are perfectly positioned to deliver on. You're seeing that with our menu offerings. Taco Bell with the Cravings Menu and $2 burritos, the new Melts product at Pizza Hut, which is screaming value. KFC just rolled out wraps as you guys are probably aware of at a great value price point. So I think the environment sets up well for us. From a consumer demand standpoint, more of the same. And then on the labor side, we're seeing an increase in applications, stores returning to their pre-COVID operating hours, which is great that we're able to staff the stores now appropriately. So when you mix it all together, we like the environment we're in. I also saw some data about grocery inflation in December being pretty high. So I think relative to alternatives, we're still a very attractive option. Great. David, a little bit of segue to my question. Can you talk about your philosophy for how you plan to balance pricing versus value for Taco Bell U.S. in 2023? If I recall from the Investor Day, you tend to take most of the price on new menu innovation as largely premium. I was wondering for way to perhaps get more aggressive on value, if you need it, while preserving the strong margins the brand has reached. And perhaps you can just remind us as well what was the level of pricing for Taco Bell U.S. in 4Q as well? As far as Taco Bell and the amazing job that they do, segmenting their consumers and providing each consumer what they want. That's what we talked about at Investor Day. And obviously, Taco Bell has some amazing value offerings that have been in their menu now for quite some time, on the Cravings Value Menu. But it doesn't -- it's targeted to a certain set of consumers and halos the entire business. So as the environment gets more competitive, we're already in the value game at Taco Bell, and we're already doing a great job. I don't see us changing anything. Well, we're connecting and we're winning because of value. That's why you saw the great numbers that we just put up in the quarter. But the brand with amazing margins, steady year-over-year, just has all the tools at its disposal to navigate any kind of environment and deliver great margins, great top line sales growth and a great proposition to consumers. Congrats on the very strong unit growth. I wonder how you're thinking about EBIT margin over time. In 2022, it was 32%. And it's been near 35% before, but business mix is always changing. I wonder though, how you think about that margin over time. Do you think you could get back to 35% or so in the next few years? And I'm thinking about certain flow through like a China license fee recovery could be very good incremental margins. And so I'm just wondering how you're thinking about the potential for that EBIT margin. Yes. Thanks, David. I think in general, we focus on delivering the algorithm and the profit growth that's embedded there. If you think about puts and takes on EBIT margin, obviously, from a core operating profit standpoint, you do have to consider the royalty rate mix. I mentioned earlier, to the extent if any of our lower royalty rate markets were to grow faster than the others, you have to take that into the account in the modeling. We did talk about at Investor Day, our philosophy on G&A and how we're going to have a lower G&A growth rate going into next year than we've had the last few years. So we're going to be managing that carefully in 2023. And then of course, when you go to reported profit -- reported operating profit, you have to take into account FX. And FX was a headwind this past year. Pretty hard to predict. Nobody has the crystal ball on that. I will share that right now, as we look to 2023, FX will continue to be a headwind for us based on our current estimates, primarily in the first half. But we think on a full year basis, our best estimate is between a $30 million to $40 million headwind going into the year. We'll continue to update that as things change. So it's our push to drive the strong profit growth implied in the algorithm, and that's where we're focused. Just two quick ones. G&A came in a bit higher than I think guidance had -- or you guys have been targeting for guidance. I just wanted to confirm, maybe there were some one-timers in there. Is there something else that might have hit that line? And then outside of that, we heard from another number of other operators that 2023 started off on some strong footing in the U.S. and frankly, across the globe. So I guess I'm asking if there's any reason to believe that Yum!'s brands wouldn't have been participating in that strength globally. Yes. First, on G&A in Q4, we had reported G&A of $1.140 billion but that included special expense. We had approximately $20 million in special expense. So we landed broadly in line with our full year plan, a little bit to the high end of our planned range. There were a number of small items, none of them major, but I'll give you 1 example. As we had to split out the Russia business to prepare for sale, we lost some of the fixed cost leverage in our European G&A. But again, going into next year, as I mentioned earlier, the philosophy that we shared at the Investor Day still holds. We are focused on having a lean G&A model while investing in the things that drive long-term growth and health and we'll have a lower G&A growth rate into 2023. In terms of how 2023 is shaping up, as I said earlier, there's nothing that we're seeing at the start of the year that dampens our confidence in delivering our long-term growth algorithm this year and beyond. I was looking for a little bit -- a more detailed color in terms of what's happening at a consumption level in some of your major markets between your dine-in or in-store type of traffic, delivery traffic. Are you actually seeing consumers trade down in your opinion to your brand? Are you seeing your core customers come more often? Is there any slippage at all on the lower income consumer? Just kind of, I guess, a little bit more color in terms of -- I know it's always hard talking about a big global business with 3 and now 4 brands, but if there's anything that you can really provide some more detail in terms of what's going on below what's obviously very good aggregated results. Yes. Thanks, John. It is hard to talk about a business where we have 290 different brand country combinations versus 290 different stores. But in general -- we obviously saw a shift to off-premise consumption during the pandemic. We've seen some of our on-premise consumption come back, but really for none of our brands is back to where we were, which isn't a bad thing given the efficiency of operating an off-premise model. Our ability with new unit development to build slightly smaller stores that are more efficient with better returns for franchisees. As far as the consumer, I've mentioned this earlier, but I'll -- it does depend -- if we're looking at the U.S. or other developed markets, the environment is still positive, just very similar to what we saw last quarter. We are seeing some increase in our higher-frequency customers -- or higher income customers coming more frequently. And some of that is no doubt due to trade down into our brands. On the lower end, we're not seeing the low-income consumer drop out of our business. What we're seeing is probably a little bit more focus on value, and that's been the trend, that's been continuing throughout 2022 into 2023. And we're there for them with our brands with perfect offerings for them. And in emerging markets, obviously, earlier in the pandemic were a challenge. They've come back now and our emerging developed markets are performing roughly similar around the world. I just want to ask about Pizza Hut U.S. I mean it seems like the business has picked up the last few quarters. And I'm curious if you're seeing share gains or increased pricing. Or just -- any thoughts on what's going on there would be helpful. Yes. I'm glad you asked about Pizza Hut U.S. We're really proud of what the team is doing and the success they had in the quarter and the momentum they're building in the business. I know the franchisees and the team are working incredibly collaboratively. And I do believe getting share gains in the category and attracting new consumers. They're doing that a couple of different ways. Number one, how they're playing aggregators with the partnerships with the aggregators and how we've integrated into our IT systems, we're seeing a significant lift in our transactions with aggregators. We started the year with about 5 transactions per store through aggregators. Now we're up to close to 50 by the end of the year. That's a massive progress and obviously, helping us access some consumers that weren't using the brand. But it's also the look tone and feel of the advertising. You'll notice that that's changed. It's a much more modern contemporary approach, which is connecting well with consumers. And then finally, it all comes down to the product. The launch of Melts has been very successful for the brand, attracting younger consumers to different occasions than would traditionally use Pizza Hut. So that all adds up to a very positive story for the Pizza Hut U.S. business. And thank you for the question. I think with that, we'll wrap it up. And I think the numbers speak for themselves. It was another incredible quarter and wrapping up a great year despite many challenges. I'll point out, we actually closed the year with over 4,500 gross new units being built. Take the 4,100 we built last year, that's 8,600 gross new units. That means 1 out of every 6 locations you see around the world was built in the last 2 years for our brands. I think that shows the momentum that we've got in the business. Our Yum China team talked about the great returns they're getting from their new unit development last year, coupled with the top line growth that we're seeing in existing stores, and there's a lot to be excited about as we head into 2023.

EarningCall_341

Okay. Everyone please standby. We are about to begin. Welcome, everyone, to AppLovin's Earnings Call for the Fourth Quarter and Year Ended December 31, 2022. I'm Ryan Gee, Head of Investor Relations. And joining me today to discuss our results are Adam Foroughi, our Co-Founder, CEO and Chairperson, and Herald Chen, our President and CFO. During today's call, we may be making forward-looking statements regarding future events, market expectations or future financial performance of the company and the strategic review of our apps portfolio. These statements are based on our current assumptions and beliefs, and we assume no obligation to update them, except as required by law. Actual results may differ materially from the results predicted. We encourage you to review the risk factors in our most recently filed Form 10-Q for the fiscal quarter ended December 30, 2022, and in our upcoming Form 10-K for the year ended December 31, 2022. We will also be discussing non-GAAP financial measures. These non-GAAP financial measures are not intended to be a substitute for, or superior to, our GAAP results. Please be sure to review the reconciliations of our GAAP and non-GAAP financial measures in our shareholder letter. This conference call is being recorded, and a replay will be available on our IR website shortly. I'd now like to turn it over to Adam for some opening remarks, and then we'll open it up for Q&A. Please go ahead, Adam. Recently, I was reflecting on our first 1.5 years as a public company. Some things are certainly much different from when we were private. A lot more people are fixated on quarterly results than our long-term plan. Every day, there's a scoreboard or a stock price, and of course, we hold these earnings calls every quarter. We did not do that when we were private. But the most important things have not changed one bit. First and foremost, the most important thing we've got here is our team and culture. Our key team continues to work very closely together to deliver on our products and our vision, and we continue to add great talent to our team while maintaining our entrepreneurial and lean culture. And second is our motivation. We're all still incredibly hungry today and working harder than ever before because the opportunities we see in front of us are bigger than anything we've ever seen in the past. The other thing that hasn't changed is the need for relevant advertising. Relevant advertising funds free digital content. As we talk about the economic slowdown and we talk about the IDFA and privacy headwinds, we sometimes lose sight of the fact that relevant advertising helps consumers discover content, and it helps the publisher monetize the content that they've developed that they're giving away for free. If any part of this equation breaks down, you're going to end up having less usage and consumption and less investment into great content, and it's just going to be a tremendous loss for consumers and businesses because of that, we know that our industry is going to be resilient. So what are the business opportunities that we hear are most focused on today? Number one, over the last several years since we released AXON, the advancements in AI technologies have been incredible. Well, now we're working on AXON 2. We're going to use some of these new technologies for release some point in 2023. We believe this new platform and upgrade to our core technology will make an immense impact on our business and for our business partners. Second, we're really excited about the Connected TV space. We're actively extending our marketing solutions today to the Connected TV device. This category of advertising is bigger than the one we operate in today, and it's much faster growing. We believe this is going to become a big part of our Software Platform in the coming years and a very fast-growing one. And third, we continue to invest in innovative products to help carriers and OEMs better monetize their users. We all know that handset device sales have slowed down as mobile market is saturated, and these constituents need better products to be able to monetize their audience with and we're going to deliver those products. As we've gone public a little over 1.5 years ago, we continue to operate the same way we did private because we know that works. We were incredibly successful for a decade before we went public, focusing on building long-term products and technologies that are innovative that when we release them into the market and have success with, we can create immense value gains for our business, our shareholders and our customers. In our last two shareholder letters, we talked about a theme of stability, which is a very nice thing to have in this current market environment. In particular, we have stability with a fantastic team, and we have stability with our business model and financial profile. That affords us the resources and time to invest wisely in our existing and leading products, new initiatives as well as invest for the future. There's a couple of other themes that we wanted to touch on today as well, two of them being simplification and focus, both internally and externally. Internally, we are focused on what we can control and spend a lot of time ensuring that our best resources are allocated to our best returning projects. An example of that has been our effort to optimize our apps portfolio, which is nearing completion. We spent the last 6 months working on headcount reductions, reformatting, earn-outs, focused on the sale and spin and closure of underperforming assets. And that's really allowed us now to get to a position where we've increased the cash flow, and management time is now focused on delivering value with our remaining portfolio. We're pleased to say we have 11 remaining studios and publishing partners that we're excited to invest to grow and ultimately maximize the value of that portfolio going forward. One note you'll see in the shareholder letter in our financials that we did is that, we did take a $128 million net loss charge for the divestiture and closure of these assets, including $100 million in the fourth quarter. Another area where we're simplifying and focusing is on the initiatives we have in hand. As Adam mentioned, we've got some amazing projects underway that we're super optimistic about. And that means the bar for our M&A program has gone up. We're certainly still in the market for assets that are attractive to us, but they would need to be highly synergistic, strategic and a great valuation. So the bar is high for M&A. And lastly, we remain focused on what we've always been focused on when we were private or public, and that's making decisions for the long term. So that while we will give the first quarterly guidance one quarter out, we're very much focused on the long-term and won't manage to near-term targets. Turning to the financials quickly, and I won't reiterate all the facts and data that's in the shareholder letter, but I will highlight a few key things. First of all, the fourth quarter came in at the high end, both on the top line and bottom-line for where we guided to in the third quarter for the fourth quarter. Included in that was Software Platform performance which grew 24% year-over-year. For the entire year '22, we came in at $2.8 billion of revenue and generated over $1 billion of EBITDA, and that equates to a 38% margin. Then for the first quarter of this coming year, we're guiding to essentially the quarter being flat to the fourth quarter in total revenue as well as total EBITDA. One note for the next quarter is we are going to change and simplify some of our KPIs that we're reporting, in particular with regard to the Software Platform side of the equation. We believe several of the metrics that we have been offering are a bit confusing and really are not indicative or helpful to understanding our business. That's because the Software Platform apps, applications and solutions have become much broader. The size of the customers are different as well. So having a singular metric like SPEC and revenue per SPEC aren't terribly helpful. So we'll be taking away those two metrics as well as the TSTV metric going forward. What we do want to focus you though are on the metrics that are meaningful. And our biggest business in Software Platform is the AppDiscovery business plus ALX. And there's a metric that we've been reporting historically, and we'll report going forward that we do think is important. And that's around our revenue per install and the number of installs. And we will continue to report those metrics going forward. In '22 over '21, that metric increased 46% in terms of revenue per install for ALX and AppDiscovery and increase in terms of the number of installs by 24%. So we would guide you to make sure you're focused on those metrics going forward. And of course, we will continue to evaluate one of the best metrics to describe our business going forward as other components of our software business grow over time. In terms of the overall financial performance of our business, we are glad that we had $1 billion of EBITDA and we have now over $1 billion of cash. We are very focused on free cash flow as well. And you'll see in our shareholder letter, we've added a new table where we've given you the 8 trillion quarters of free cash flow performance. We had 260 million of EBITDA in the fourth quarter and 132 million of free cash flow. Our definition of free cash flow is the free cash flow from operations, less CapEx and less finance leases. So we think that's a great indicator of not just EBITDA, but actual free cash flow to the bottom-line which we're proud of. Our financial position allows us to have this resiliency in our business where we can invest in what we wanted to grow as well as find new investments going forward. And that can range from M&A where there's a high bar, but also share buybacks. In terms of share buybacks, as you can see in '22, we invested over $340 million against our $750 million authorized buyback. But in the fourth quarter, we did not buy back any shares as we are continuing to assess our capital allocation policy as well as increase the amount of cash in the quarter so that we ended the year with over $1 billion of cash. We think we're well positioned today and going forward, given the financial wherewithal for our business to invest in the initiatives we are excited about as well as consider other investments, including share repurchases going forward. So in summary, we're very glad to have the stability that we have in our business as well as the financial wherewithal that we have. We think we've got an amazing team focused on the right things, and we're optimistic about the future ahead. Yes. Thank you, Herald. So we'll now begin the question-and-answer portion of the call. [Instructions]. Okay. Our first question will come from Vasily Karasyov from Cannonball Research. Vasily please go ahead. Good afternoon. Adam, in your prepared remarks, you mentioned that Connected TV is one of the growth areas. So I think investors and analysts at this point understand Connected TV pretty well to understand what you do. Can you help us connect how exactly you are going to address this market and what function you are hoping to perform there and what kind of revenue opportunities you see maybe in simple terms? I would appreciate it. Thank you. Yes, for sure. I'll speak to just the product side. We're a performance marketing business at its core. And what we've done really well in mobile over the last decade is enable advertisers to buy advertising, full-screen video ad, high definition and measure all the performance of everything that happens after the fact and be able to buy effectively as arbitrage marketers. The Connected TV device is really exciting for us because it's a television device, full screen, living room, tons of consumption per day. It's connected to the internet. But today, we're not seeing that much performance advertising happening at large scale on that platform, especially when it comes to mobile app developers. In the last couple of years, we invested in an attribution company that's one of the leaders in trying to bring attribution to Connected TV device. We invested in Wurl, effectively we've talked about a CDN for streamers for very high-profile media companies to bring their content to fast channels. I mean, we've also got our core performance platform that, we think is the leader in mobile marketing. And we're going to take that and use Wurl to bring it to market in Connected TV, and we think it can become a big opportunity. As far as revenue and numbers, this is still really early days here. We believe it will become a substantial and growing part of our Software Platform over years but we're not ready to talk numbers at this point. So essentially, will you be acting as a DSP in programmatic CTV device but with performance advertising. Is that the right way to think about it? I'd think about it as full stack. So the same way in mobile, we're an SSP and a DSP. Wurl today has a very well-performing SSP business. We at AppLovin, our biggest business is our DSP. We'll couple those pieces and have a full stack offering for Connected TV partners. Adam, in the prepared remarks, you talked about the upgrade that's coming in sometime in 2023 for AXON 2. And I think you said it could have a significant or immense impact. Maybe just a little bit more color about that? Will that be something that will phase in over time? Will it be more sort of abrupt in nature, meaning you potentially have a bigger impact in the near term? Just love a little bit more color on that, please? Yes. I mean, look, we released AXON 1, I guess, it was around 3 years ago, started working on it 4 years ago. Business grew a ton since we did it. I think we 10x-ed over the period of time from AXON 1 to today. It did build over time. I mean, that's how these technologies work. In the period of time since we built that first technology, obviously, we all know there's been huge advancements in AI technologies and we're working on bringing those to our core platform. The rollout and potential growth from it is just building more efficiency into our system, which will benefit our advertisers. They should be able to hit their goals at larger scale, creating more growth for them and in the category, and, obviously, will benefit us. We don't yet know if it's going to be a step function and continue to build over time, but we do believe that will be how it will look. Great. And just one more on the macro, if I could, please. In the letter, you talked about Q4 being soft but stable with Q3, and then Q1 being relatively stable. Maybe just kind of talk about the linearity there. Has it been, I guess, sort of stable over that period? Is it improving? Just any more color you could add on the macro, that would be great. Thank you. And so in our business, what was directly tied to our revenue, the biggest part of our revenue is performance marketing. And in particular, the largest part of our segment is game advertisers. Game advertisers, our performance marketers, they're buying on some sort of return curve. They have an LTV to CAC model that works in today's market. That's a lot more conservative than it was 1.5 years ago when interest rates were near zero. As cost of capital went up last year, advertisers got conservative in performance because you just can't afford as long a payback as before. But those values were reset with an expectation of interest rates getting to sort of today's levels. And that was done a couple of quarters ago. So what we've seen in our business might be disconnected from what we talk about in the macro economy as a whole. But in the performance marketing sector, the advertisers got conservative but they're not getting any more conservative because we're not seeing material changes in the economy today versus a couple of quarters ago. And so we've seen a lot of stability in our business and continue to do so. Hey. Thank you. Adam, I guess the logical question after that last comment would be kind of what breaks developers out of that conservative mentality? Is that kind of macro based? And then a separate question, Herald, just regarding your apps portfolio, any update on what you think is the right margin for that to run at going forward? And as you listed the sale of assets in the future as a possibility. I'm curious to know if you had any expressions of interest from strategic or financial buyers at any point? Thanks. Yes. So on the first question, the reality is performance marketing advertisers have an approach. They have an LTV to CAC and they have their own products. So if their products improve, they can spend more. If interest rates go down, they can spend more. But what's more in our control and what's going to drive this for our business and our partners are our efficiency gains in our core technologies. And that's what I'm talking about with AXON 2. As we all know that these core technologies, these AI-based implementations of technology are continuing to evolve. As they get more efficient, what ends up happening is advertisers have the same goal, but you can drive them more scale. They start growing their business. They're reinvesting more and more into it. It's all arbitrage marketing on the front end. And on the back end, the algorithm continues to perform better as the technologies evolve over time. That's a trend we've seen over the last decade. It's accelerating now and it's something that we are very excited about as we look out into our business into the future. David, thanks for the question. So on the apps side, as we mentioned, we've been in the process of optimizing that portfolio. And we do think in the first half of this coming year or this year, that we'll start to [indiscernible] in terms of the trough of revenue. And the margin has gone up, as you've noted. I'd say from there then, it really depends on our opportunity to grow the assets. So we're excited that of the 11 studios, I think all of them have opportunities for growth. Many of them have some new games that they're thinking about launching this year. And so if we have a hit, we'll invest in dollars there, and we'll bring down the margin. Right now, we're obviously in the very high teens. And that could go back to the low teens, something in that range. If we're investing in new games, it really depends on how robust that return is on those dollars. So I'd say expect the revenue side to still come down a bit in the near term, but eventually, we'll reach a steady state and then we think about how to grow the business from there. But I would say longer run rate is probably a mid-teens type of margin for that business. And then -- Yes. And just on the M&A side, look, we would take an offer if it was the right price for these assets. But as we said, we've now winded it down to these 11 studios that we really like. We're excited to work with them. The market is obviously difficult given cost of capital out there. And so we're going to manage these things as if we own them forever. And if people do show up at the right price, we'll look to optimize the portfolio as we said we would along the way. Yes. The only thing I have to add, too, is we've removed the distraction of weaker-performing studios. We're now really proud of the studios that we have. The leaders of these studios are exceptional talent. They've got great teams underneath them. The pipelines are really strong at these studios. We do look at this business unit now is something that we're excited about going forward. Thanks guys. I had a question maybe first on competitive dynamics across maybe both the sort of gaming but also broader ad market in light of, I guess, more recently sort of peer mergers, but also some of your peers talking about making progress closing the targeting gap relative to sort of pre-IDFA levels. Has that had an impact or has that showed up in sort of developer conversations? And then maybe a follow-up on the AXON update. Are you in a beta stage right now where there are clients actually sort of testing this product for you? Or could we use the baseball analogy to maybe think about how close we are or what sort of progress you maybe have made, I guess, against the formal launch versus last quarter? Thank you. We're not ready to talk about timing. We do expect it to go full scale in '23, and obviously, we always have products to come to market at large scale faster. This product is super complex. We're really excited about the prospects. It does take time to develop, and we first started talking about it a few quarters ago. All we can tell you today is, we think, it's going to make an impact in '23. And it's also not a rollout to customers. It's effectively taking the old engine and upgrading it. So it will impact the whole business once when it does go to full scale. On the first question, competition in the ecosystem with M&A or ad algorithms improving. We've been in an advertising sector for 12 years now. I've been doing this for nearly 20 years. Advertising is immensely competitive. There's a lot of players that are trying to get ad dollars from advertisers and trying to build algorithms to help those advertisers market themselves. There's never been a shortage of competition. Now what we do know about our sector is that if algorithms improve, if targeting can get back to pre-IDFA levels, the category was growing almost double digits every single year consistently for a decade. The IDFA change impaired that growth prospect. So all of us marketing companies are really in the business of improving our algorithms. And when together, the category gets to a point where it was before, the category itself will get back to growth. We sit at a leadership point in the category with a market-leading monetization solution and a market-leading growth platform with AppDiscovery. So we'll stand to benefit greatly if that does happen in the marketplace. Great. Thank you very much for taking the questions. Two for me. First, just a broad questions Adam, like, any thoughts on DOJ suing Google what that means for AppLovin? And then for Herald, anything special about the $1 billion in cash? Just wanted to follow up on the comments and no buyback in the quarter, if that kind of $1 billion cash balance is what a minimum you want to maintain on the balance sheet? Thank you. Well, look, all we can do is speak about our experience with Google. We're a large cloud customer. They launched their bidding solution onto our platform. I think it was our first large-scale external implementation of bidding. They obviously help monetize -- publish our inventory with better advertisements than any company we've ever seen before. So with us, we're great partners, and we look forward to expanding that partnership into the future. Yes. Thanks for the question. With regard to the $1 billion and the buyback, there's nothing magical about $1 billion. This is a lot of money, and we're glad to have it on our balance sheet. But the reality is, we're bullish on our business as we talked about. We need to be patient. We think we're going to be stable for the short-term here. And so we want to be careful with the cash balance and think about our capital allocation. And then, the fourth quarter as well as the third quarter, we had different projects going on. The market was changing, the financial market was also, the cost of capital was changing. But we feel really good where we are today. We think having over $1 billion of capital on the balance sheet does help. We are generating a lot of free cash flow as we highlighted. We think that will continue in the first quarter. And we are investing in all the projects internally as we can. So we will, again, as we always do with our Board, think carefully about capital allocation, and we still think our stock is a great place to put money to work. Hi, everybody. Thanks for taking the questions. There's a perception based on some of those third-party data out there about in-app purchase behavior at the level of the mobile games market that maybe things are bottoming out exiting '22 into '23. I guess you're pretty well-positioned to assess, both from your view into the market and from your own games whether or not that might be true. But maybe more importantly, whether or not the rate of change of consumer spending is bottoming out. When that does ultimately turn, like we've been through a year to really weak spending. When it turns around, is that something you expect to flow through to the in-app advertising market pretty quickly? Or is there likely to be more of a lag there? And then I have a follow-up. Thank you. So we think what drove the growth in-app purchasing over the last decade had a lot more to do with the marketing technologies and targeting than it did with the economy. Consumers need to discover content that they love to be able to go spend in it. And the IDFA change really handicapped the category and it happened abruptly. Now it's been 1.5 years, technologies are starting to adapt. We just saw this in some other earnings reports. You've seen the stability in our earnings reports. All of us marketing companies are working on improving our algorithms to be built around what today's era of privacy allows you to do. It takes time to do that. The game developers themselves also are working to create content that's different than what they would have built 1.5 years ago. Whale hunting, which is an industry term, but marketing to go buy whales for games they can monetize consumers at immense levels is just not something that's possible anymore in today's identity-free universe. And so game developers have had to go figure out how to make more casual games. That's also a cycle. The other thing that isn't widely known is that a lot of the top grossing games in the in-app purchasing category come from developed in China. When these Chinese development teams have been highly inefficient in a zero-COVID state, and that's just reversed out. So you're going to get back to more efficiency. So we think there's a lot of reasons why we're seeing stability. And we think there's also growth that will come in the future. We don't know exactly when, as the marketing platforms improve and as the game developers adapt to this new era. Great. Thank you. And then, using the new disclosure, if I read it correctly, I think that pricing grew at almost double the rate of volume in the quarter. So I'm just wondering, is that sort of a recovery off of a period of lower auction and bid density? Is that the way you should think of what happened in the quarter? And then are you expecting pricing to be a stronger driver than volume over the course of the coming quarter and year as things hopefully recover? Yes. Thanks, Matt. Just one correction for you. It wasn't the quarterly metrics there. It's actually the annual metrics from '22 over '21, I guess, the revenue per install was twice the rate of the actual installs. And that really has to do a lot with the efficacy of AXON and then the increase in the volume, both from our network side as well as our ability to bring on more publishers. So it was really the combination with the two of them. And those are metrics that we did report in our public financials historically and we'll continue to talk about those going forward. Yes. Good afternoon, everyone. Two for me today. So entering last year, you had talked about the expectation to have $10 billion transacted through your platform. Last quarter, you obviously stopped talking about it due to macro but what was the actual number for '22? And then, what was the run rate number exiting the fourth quarter? So I think the first question, you're talking about our maximization platform, how many dollars are flowing through it. We're not disclosing exact. The MAX platform, though, has a ton of reach in the industry. We actually recently asked our team to pull top apps in both app stores to see how much usage of our platform there was for the rest of the market. And about 2/3rds of those apps, top downloaded apps are monetizing using your MAX solution. So in terms of usage, there's been exactly what we expected with that platform, market leading. What's changed versus the beginning of last year and today or end of the year are CPMs, in particular from brands. As the economy became more difficult throughout the year, the dollars and the density in the ad auction, which is monetized by many companies more than us, has decayed. So that would be what threw us off of our projection. But the daily active users and the trends to MAX usage are exactly where we thought they'd be. They're performing very well. On the magnitude of the AXON investment, that's all built into our P&L. Our R&D investments, in line with what I mentioned on my talk track around our culture, are always going to be lean. We've got a core group of talent on our engineering team and we're adding really exceptional people to that team. But we're adding them in the tens, not hundreds or thousands, so you don't see a dramatic R&D expense line in our business yet, we do invest heavily into new products that can make a big impact. Can you hear me? Sorry, just took me a second to unmute there. Maybe two, if I can. One sort of bigger picture question that maybe is a little bit outside the box. Obviously, you talked earlier in the call about Connected TV. How do you think about taking the data engine you've built? And I know, obviously, the central dynamic is still around mobile gaming. But how do you think about taking the data engine and the platform and thinking about a wider array of canvases and possibly a wider array of SKU and industry verticals from the advertiser side, either through your own organic efforts and maybe through partnership around the broader advertising landscape, that would be number one. And you talked a lot on the call about how we've gotten sort of back to a level of stability, but probably not full return from a demand perspective on the advertising side. Is the way to frame up the element of how much of your margin structure is somewhat held back or depressed by a lack of return to sort of pre-IDFA or pre-pandemic normalization levels? And in which case, a full recovery could possibly be an extra layer of tailwind to the incremental margin structure? Thanks. On the first one, to answer the question simply, we're super excited about the potential to extend our marketing engine and the algorithms to other platforms. So CTV, obviously, being the first. And there's nothing that restricts us to the games category. Games is, obviously, the largest part of our AppDiscovery solution. But really the limitation, so far, has been that our advertisements almost always show up in the games. And if you're doing a contextual and behavioral advertisement that signal is very strong to match up a game advertiser and a game publisher. While Connected TV offers a completely different landscape for us, we believe what's missing from that platform is performance marketing and we can do that well. But our engine, our data is not limited to just gaming. So we think the Connected TV screen is going to allow us not only to extend game advertising to that television device but also to bring other advertising for other companies. Wurl, for instance, works very closely with a lot of high-profile streaming businesses. And advertising on a performance basis for those is a huge initiative and big opportunity. And we think as we talk about our Connected TV to business in a couple of years, we're going to be talking about a wide breadth of advertiser types. The margin side for our business, we're at a steady state and stable as we talked about. But we are excited by the fact that if we can lift, for example, our biggest business, in particular, on the AppDiscovery side with an AXON 2.0 implementation at some point, those are very high-margin dollars to flow to the bottom line, and that would be a pretty meaningful increase in EBITDA for the segment and EBITDA for the overall business. What does offset that is there is infrastructure costs that do increase, but, obviously, at a much slower rate potentially. And then we do have an incremental headcount that we're hiring. As Adam said, more in the 10s and 20s, not hundreds, to go after some of these new initiatives that are pretty big, whether it be CTV or endeavor into a business called Array, which is focused on the OEM carrier space. So that could bring down margins to some degree. But we're comfortable with the margins we run out today and we think it's more incremental on the upside, in particular, for our biggest business to the extent we can get that to grow. Hi. Thank you for taking my question. One of the large hyper-casual publishers that reported earlier this week appeared to be implying that they would be reducing advertising spend. And I was wondering, number one, how consequential is the hyper-casual market to your ad platform? And number two, are you seeing that as a kind of trend in the fourth quarter and potentially going forward? And then I have a follow-up on hyper-casual. Yes. So we've got a lot of density of advertisers. No single category makes up a huge part of our business. And as you saw in our numbers in Q4, our numbers were really stable. And in Q1, we're guiding to similar numbers to Q4, both for top-line and bottom-line, implying that our software business is really healthy right now. So yes, certain categories, especially those that are dependent on ads, might perform worse. On the flip side, when you have a super dense auction and you work with tons of advertisers across a lot of different genres and you've got a good targeting engine that doesn't create exposure for you and your business. Great. Thanks. And then, the follow-up question is that, according to industry experts, Google has begun sending rejection notices for ad exposures and formats that are not compliant with its new Better Ads Experiences policy. This policy disallows interruptive interstitial ads among other practices. And I was wondering whether this is something the industry is over already or is it something that -- is the solution to this problem within AppLovin's technology stack or is it at the kind of studio level? And again, -- have you seen any of the effects of this policy on hyper-casual? Yes. We actually don't expect any effects from the policy. We didn't see any early on. We don't expect any going forward because the best apps, the ones with a lot of users, they don't tend to show ads out of place. The policy itself was explicitly written to prevent a publisher from showing an ad when a user expected something else. So for example, you go click a Play the Game button and you get a pop-up ad. That's disruptive, and Google doesn't want that. Well, the highest quality publishers and the ones that are at scale that we work with or know personally, our bigger customers, they can never run ads like that because users usually churn out of those games. So it's certainly a policy to clean up the app store. But the Google Play App Store has millions of apps in it. The ones that are large-scale apps never engage in those types of practices. Okay. Thank you. So I guess you spent a lot of time talking about potentially expanded opportunities. And I think in the past, we've talked about the advertising opportunity outside the games vertical. And I get that this is probably a tough market to go after new business. But I was wondering if you can comment on where you may be seeing greater traction because I would love to see the games as a percentage of ad revenue de-index over time and other performance-oriented budgets starting to flow into AppLovin. Thanks. Yes. Thanks, Stephen. We're looking at expansion there on the Connected TV screen and also with the carrier OEM product. Both of these are advertisements into placement without context. But when you're selling an advertisement in a game app, it's really hard to suggest that you could go, especially as the Wurl goes to more contextual with some data in order to drive relevant advertisement, but with more of a contextual signal, it's really hard to suggest that it's a good strategy to go outside the gaming sector in that publisher set. We do believe that these other categories of advertising will become very big businesses for us over time. And we also have a gateway into that category with that just team and all of the non-gaming advertisers they work with. If you recall, when we first did that transaction, we talked about the majority of their 4,000-plus customers are non-gaming customers. And these are the types of customers that are really excited about our Connected TV offering. Sorry. Thanks. So my first question is on new games release environment. You talked about potential growth opportunity from the 11 studios where there new games. Can you maybe comment on how does new game release environment change over time versus pre-pandemic or pre-IDFA? And is there any signals that give you confidence that those new games can test well and then release on the market as you expected? Well, look, with the changes in marketing, the bar has gone way up for new games. Traditionally, you can create iterations of working concepts in the market. Now developers have to be a lot more innovative to get a new game to grow. And our studios have made the same shift. The ones that we've retained have really strong development teams and are working on games that the ones that are in soft launch will get tested longer now. We'll make sure that the data looks strong before we release it to market, that it will be something that we're confident in. And the ones that are developing are no longer developing the way they would have 1.5 years ago. They're developing in a new format. And we think this is where the whole market is going to go, you're going to take longer-term bets that are more innovative. There might be less likelihood of success to new games, so you don't expect one out of every two games to hit, maybe it's one out of every four or five. But by creating innovative new concepts, it can expand the market over time. And so that's where we're investing, and we think we have the teams to do that well. Got it. A follow-up question on games is, can you maybe comment broadly on what genres do you see a higher success rate in this market? And what type of business model within the games? Is it hybrid in-game purchase plus advertising? Advertising only? or in-game purchase? We think it's a requirement now for developers to make hybrid, just as you said. If you can't go and market to the whales. Well, you've got to monetize the whole audience. And traditionally, the IAP category, 95% of the users were unmonetized, 5% were whales. They funded this $100 billion in growing space. Now you can't go find those users as successfully as before. So you've got to monetize the 95% to subsidize the cost of acquiring the 5%. And that's actually really good for us in our MAX business and our AppDiscovery business because it brings more inventory online, and we're starting to see some of those trends. Thank you, Martin. We'll take our last question from Mark Zgutowicz with Benchmark. Mark, go ahead please. Martin, please check that you've unmuted your equipment. Oh, sorry. Thanks, guys. If we look at your software platform clients and the revenue for that client over the last four quarters, it's consistently been down sequentially. And I'm just wondering what is the sort of the driver of that trend line? And sort of why that is not, I guess, consequential to your results going forward anymore? Thank you. Sorry, Mark, I'm not sure which metrics you're referring to. Our SPEC metric went up from Q3 to Q4 from 532 accounts to 566 accounts. So the trend -- You're talking about pricing, right? It's just the composition is hugely different than it was before because we've added on Wurl. We've added on Adjust. We added on ALX, MoPub. So the composition has changed so much that those metrics aren't very comparable anymore to the past, and they're not very predictive of the business going forward and that's why we decided this quarter to remove them. Okay. What about the Software Platform enterprise client itself, that number? How important is growth in that number going forward in terms of your Software Platform revenue? Yes. Again, Mark, that number has gone up. And the actual average revenue per software client has remained steady around $1.9 million. And also the net dollar retention went up over 160%. But this is exactly the reason why we're going to remove these metrics from our reporting because they're not indicative nor to give you a better sense for how the software business is performing, which is obviously flat, essentially flat from Q3 to Q4. But as Adam said, we're excited and optimistic about the platform. We think the market is reasonably stable. We're investing a lot to improve our market-leading tools in the category. So as we're able to launch new capabilities and hopefully, the market returns to growth. We should be in a good spot for both top-line and bottom-line growth in that segment. Thank you, Mark. And that does conclude the question-and-answer session for this quarter. We thank you all for joining us today. Have a good afternoon. Thanks, everyone.

EarningCall_342

Thank you and good morning. We're here with George Holm, PFG's CEO; and Patrick Hatcher, PFG's CFO. We issued a press release regarding our 2023 Fiscal Second Quarter Results this morning which can be found in the Investor Relations section of our website at pfgc.com. During our call today, unless otherwise stated, we are comparing results to the same period in our 2022 fiscal second quarter. As a reminder, in the second quarter of fiscal 2022, we changed our operating segments to reflect how we manage the business. The results discussed on this call will include GAAP and non-GAAP results adjusted for certain items. The reconciliation of these non-GAAP measures to the corresponding GAAP measures, can be found at the back of the earnings release. As a reminder, in the fiscal first quarter of 2023, we updated our segment reporting metrics to adjusted EBITDA, from the prior EBITDA metric. Accordingly, the segment results for the second fiscal quarter of 2022 have been restated to reflect this change. Our remarks on this call and in the earnings release contain forward-looking statements and projections of future results. Please review the cautionary forward-looking statements section in today's earnings release and our SEC filings for various factors that could cause our actual results to differ materially from our forward-looking statements and projections. Thanks, Bill. Good morning, everyone and thank you for joining our call today. The momentum we saw in the fiscal first quarter carried through in the second quarter with solid top line results and larger-than-anticipated margin gains which drove a nice profit beat compared to our published expectations. We are also experiencing, very encouraging signs in the more recent weeks, with an acceleration in our case growth, particularly in the independent restaurant channel. Some of this improvement may be related to the impact from Omicron in the prior year period. However, we believe there are signs of more stable landscape to begin calendar 2023. Our business units, are also operating at a very high level, producing outstanding top line results while driving efficiencies to fuel our profit growth and margin expansion. This aligns with our 3 main objectives which include consistent profitable top line growth, adjusted EBITDA margin expansion and leverage reduction. As you can see from our fiscal second quarter results, we are making progress on all 3 of these fronts. Which we believe will drive long-term shareholder value. This morning, I will provide a few thoughts on our business results, economic factors and our vision for the future. Patrick will then review our financials and guidance assumptions. As you will hear from Patrick, we are pleased to be raising the bottom end of our fiscal 2023, adjusted EBITDA guidance range, just the month we moved from the increase we announced at the ICR Conference. We also reiterated, our 3-year outlook and believe we are very much on track to achieve these targets in fiscal 2025. In a moment, I will talk through the reasons that we feel confident in our outlook for this year and beyond. We have designed our business to be successful in a range of operating environments, with 3 distinct operating segments. Each with its own model characteristics and growth opportunities. We are already seeing the benefits from this structure and believe it makes us unique in the marketplace. A few thoughts on how each of these business units are achieving success. I will begin with our Foodservice segment. Strong operating results in Foodservice in the fiscal second quarter, were similar to trends fiscal first quarter. Our independent restaurant case growth outpaced independent industry growth yet again, offset by softer chain restaurant business. As we have described, some of the softness and changes related to business we have exited. In addition, there is softness in foot traffic, that is producing lower same-store sales for our customer base. We believe, we have struck a good balance within the national chain account business, with a focus on profit contribution and return on capital. In the independent restaurant area, our results continue to impress. Our organic independent restaurant cases grew 4.3% and in the fiscal second quarter, just below the 4.6% growth, we experienced last quarter. We have high expectations for our independent case growth and are working hard to improve upon these numbers. However, in the context of the operating landscape and the market share data we receive, we are very pleased with our performance compared to the industry trends. Once again, our growth in the independent restaurant case came from the addition of new accounts. In fact, new account growth exceeded case growth which is rare for our company. We are pleased with the pace of new account additions and believe that these customers will provide a long runway for volume, sales and profit growth in the future. Furthermore, in the month of January, independent case volume was quite strong. Which was certainly encouraging. However, we do feel our comparisons were impacted by Omicron last year. We're also seeing success in our performance brands which continue to do exceptionally well and once again achieved record levels of independent restaurant penetration. Company-owned brands have filled an important need for our customers, providing high-quality products at a good value and help with customer retention. This helps offset persistently high year-over-year inflation without sacrificing quality. We continue to expand our company-owned brands with new product offerings and new categories. Inbound and outbound fill rates for Foodservice have continued their steady march forward. By the end of fiscal second quarter, inbound fill rates were approximately 97% for Foodservice, without bound fill rates approaching 99%. We believe there is still room for improvement on the inbound side. However, we are getting increasingly close to historic levels from our supplier community. Before moving on, I wanted to speak to the inflationary environment in Foodservice. Once again, during the second fiscal quarter, inflation decelerated month by month and ended the quarter at 9.6%, for our Foodservice products. We continue to believe that inflation normalization is healthy for the market, our customers and their consumers and we are pleased to see the year-over-year inflation declining. Still, we must manage the dynamics closely, to remain competitive in the marketplace while not sacrificing profitability. We have systems in place to accomplish this goal and feel comfortable that we can remain successful in a decelerating inflationary environment. In fact, during the second fiscal quarter, our inventory holding gains were down year-over-year due to the decelerating rate of inflation. This was true in both Foodservice, Convenience and as a total company. This is to be expected and how we have modeled our full year guidance. Our ability to grow profit and margins without the same level of holding gains demonstrates our company's ability to manage through this environment and should provide confidence in our profit path in the quarters ahead. Turning to Vistar. The recovery continues in many of Vistar's channels which is reflected in another strong quarter for the segment. Total Vistar case volume was up in mid-single digits, compared to the prior year period, driven by growth in multiple channels, including office, coffee and vending. At the same time, the theater channel did not quite live up to the high expectations for December, with several blockbuster releases not generating as much office revenue as was originally expected. Again, in the high-quality sales and profit results despite a slower recovery in the theater channel, speaks volume about the execution of that organization. Another encouraging sign for Vistar is the improving inbound fill rates, while still tracking well below historic levels, fill rates have moved steadily higher throughout the first 2 quarters of the fiscal year with inbound rates now in the mid-80s with outbound rates in the high 80s. Suppliers have indicated that better access to raw materials and stability in the workforce are producing improvement in fill rate levels. There is still room to go but there is another tailwind working in Vistar's favor, that we believe will help support top line momentum. Finally, a few comments on our Convenience business. We are pleased with the direction of this segment and see significant profit growth opportunities in the years ahead. In the fiscal second quarter, Convenience did see a moderate decline in profit due to the lower inventory holding gains, that I just discussed. Excluding the inventory gains in both years Q2, Convenience segment's adjusted EBITDA would have grown nicely compared to the second quarter of 2022. I will also note that Convenience results -- Convenience results in the month of January were excellent versus January of 2022. The Margin expansion in the Convenience segment is being driven by several factors, including better top line mix and operating efficiencies. We are particularly pleased with the growth of our non-nicotine portfolio which experienced another quarter of mid-teens sales growth year-over-year. We believe, that if a significant amount of shareholder value derived from the Core-Mark transaction, will come from PFG's ability to grow food and Foodservice-related products due to the convenience channel faster than Core-Mark could have, as a stand-alone company. We are seeing this play out in the market but believe it is still early days. We have a steady pipeline of potential new business in the Convenience space which we expect to produce consistent top line growth for the segment. We're also right on track to achieve our 3-year synergy target of $40 million. We remain very pleased with how the integration of Core-Mark has proceeded and are excited for what's to come within the Convenience segment of our business. In summary, we closed calendar 2022 with good company results, beating our previously announced profit expectations through a combination of high-quality top line growth, positive product and channel mix shift and consistent productivity improvements. The operating environment has provided some challenges, though, it was steady through the quarter and we are seeing some hope signs early in calendar 2023. Our organization has done an excellent job driving efficiencies which has produced consistent top and bottom line results for the company. While there is still some uncertainty in the broader macroeconomic environment, we believe our outlook for future is bright and there remains significant opportunity to keep our growth momentum going. With that, I will turn the call over to Patrick, to review our financial results and outlook in more detail. The CFO transition from Jim to Patrick has been excellent. It is typically a challenge to enter a new role and often even more challenging to exit. Jim and Patrick accomplished a smooth transition which has been seamless for our organization. Thank you, George and good morning, everyone. Our business results in the fiscal second quarter of 2023 exceeded our announced expectations. With sales in the quarter at the top end of the outlook, we discussed on our first quarter earnings call and adjusted EBITDA nearly $30 million above the outlook we provided at that time. Our operating performance has allowed us to build upon an already strong financial position. As George mentioned, this is my first earnings call in the CFO role for PFG. I'm excited to continue to help lead the organization to new heights and have entered my new role with a strong business position. Our main strategic priorities are unchanged and we will focus on 3 areas to drive value: Sustained profitable sales growth, adjusted EBITDA margin expansion and lower leverage. I'm pleased to report, that we once again, made progress in all 3 areas during the second quarter and we are optimistic that this will continue. Before reviewing some of the financial highlights from our fiscal second quarter, I'd like to review 2 important areas: cash flow and leverage. Our organization has been diligently focused on driving strong cash flow which is an important objective in our growth strategy. Over the first 6 months of fiscal 2023, PFG generated approximately $425 million of operating cash flow, through a combination of our solid business results and improvements in working capital. This was significantly higher than our cash flow in the prior year period, despite tobacco purchases that occurred towards the end of calendar 2022. We expect these tobacco purchases to be cash generative, in the fiscal third quarter of 2023. With this operating cash flow, we invested about $98 million in CapEx during the first 6 months of fiscal 2023. These capital projects are vital to our long-term growth and are primarily focused on increasing our warehouse capacity, improving supply chain technology and streamlining our operations. Investment back into the business will remain one of our top uses of cash and sustains our long-term sales growth and margin improvement objectives. After taking capital spending into account, PFG generated about $326 million of free cash flow in the first 6 months of fiscal 2023. The vast majority of this cash flow went to reducing the outstanding balance on our ABL facility. This gets to another key priority, reducing leverage. Last quarter, we shared that we have reduced leverage to just below the top end of our 2.5 to 3.5x target range. We were pleased with this achievement, as we moved into our target range faster than we anticipated. This focus has continued to pay off and at the end of our fiscal second quarter, we achieved a 3.3x leverage ratio on a trailing 12-month basis. We believe that lower leverage, particularly in the current interest rate environment is a good value-creating use of cash flow for our investors and other stakeholders. Our balance sheet and debt position is strong. At the end of the fiscal second quarter, about 76% of our outstanding debt was at a fixed rate, including swaps we have in place against a portion of our floating rate ABL facility. While our average interest rate on the ABL facility did move higher along with the broader market, we have mitigated a significant portion of our floating rate exposure. We are well equipped to manage the interest rate moves but keep in mind, that we would expect our average interest rate to move along with the market on the portion of our ABL facility that is not hedged. With that, let's review some highlights from our fiscal second quarter. As disclosed at the ICR conference, a month ago, PFG total net sales increased 8% in the second quarter to $13.9 billion which was at the very top end of the outlook we discussed during the first quarter earnings. Total case volume increased 3% in the second quarter, driven by growth of independent restaurants as well as gains in Vistar and a smaller contribution from an acquisition. Total independent cases were up 6.6%, in the second fiscal quarter, while organic independent cases increased 4.3%. Outperformance in the independent case volume continues to reflect market share gains and new business wins in that important high-margin business. Total PFG gross profit increased 17%, compared to the prior year quarter. Gross profit per case was up about $0.81 in the second quarter compared to the prior year period. In the second quarter, PFG reported net income of $71.1 million and adjusted EBITDA increased 28% to about $309 million. Inflation continues to impact our business. And as George discussed earlier on the call, inflation continued to moderate to lower year-over-year inflation, in the Foodservice segment. Total company cost inflation was 10.3% in the quarter. This included a 9.6% increase in Foodservice. Vistar inflation remained at the mid-teen level in the quarter while Convenience experienced inflation just above 10%. Inflation for both Vistar and Convenience, were very similar to what they experienced in the fiscal first quarter. We continue to expect lower levels of inflation through the remainder of fiscal 2023 which is the assumption embedded in our outlook. Our early read on January supports this view with inflation, particularly in the Foodservice segment continuing to slow. On a consolidated basis, inventory gains were lower in the second quarter of fiscal 2023, with a notable decline in Convenience and a smaller decrease in Foodservice, partly offset by a slight increase of Vistar. We are pleased with our total company profit result which more than absorbed, the lower inventory gains compared to the prior year. We expect a similar dynamic through the rest of fiscal 2023 and into the first quarter of fiscal 2024. However, beginning in the second quarter of fiscal 2024, the comparisons eased considerably, based on our most recent results and expectations for decelerating inflation over the next 2 quarters. The company's second quarter adjusted EBITDA margins increased 33 basis points compared to the prior year period, a solid result in any operating environment. However, this margin performance was even more impressive considering the headwind from lower inventory gains. Excluding inventory gains in both periods, total company adjusted EBITDA margins would have increased even more year-over-year for the quarter. We expect net gains from worker productivity, including lower overtime and temp costs to help offset the inventory gain headwind over the next 3 quarters. Diluted earnings per share was $0.46 in the second quarter and adjusted diluted earnings per share was $0.83. As you saw in our earnings release, we have reiterated our full year 2023 revenue outlook and raised the bottom end of our full year adjusted EBITDA range. This comes just a month after increasing the adjusted EBITDA range at the ICR conference and it reflects our confidence in the underlying business momentum and consistent execution from all 3 of our businesses. In the fiscal third quarter of 2023, we anticipate $13.7 billion to $14 billion, in net sales. We also expect adjusted EBITDA in the range of $270 million to $290 million in the fiscal third quarter. Remember that the seasonality of our fiscal third quarter typically reflects lower sales and profit in the months of January and February with an acceleration in March. For the full year, we still anticipate net sales in a range of $57 billion to $59 billion. Adjusted EBITDA is now anticipated to be in a range of $1.27 billion to $1.35 billion, up from our prior $1.25 billion to $1.35 billion expectation. As George mentioned in his remarks, this keeps us on track to achieve the 3-year fiscal 2025 targets, we set at our June Investor Day. To wrap up, our company is in a great financial position which is reflected in our earnings results and financial outlook for the remainder of the fiscal year. We are making great progress on our 3 focus areas: sustained profitable sales growth, adjusted EBITDA margin expansion and lower leverage, while generating significant operating and free cash flow. Our organization is executing our strategy and we are well positioned to continue to create value for our shareholders over the long term. Thank you for your time today. We appreciate your interest in Performance Food Group. And with that, we'd be happy to take your questions. Nice quarter. I want to first, just touch on the procurement inventory gains. Just can you talk about how these gains in Q2? I know they're down year-over-year but how do they compare to what you would consider normal? And then, as you progress through the back half, what's the -- I don't know, is there possible to sort of quantify what that headwind would look like and then the timing of when the productivity gains would offset that? Yes. First of all, I would say that last quarter was fairly normal for inventory gains. Below normal for Core-Mark. We think, it makes sense for us to call these out. We have always had them. We've been very aggressive because of the inflation that's been out there and we've done a pretty good job of anticipating where these increases would come and carrying additional inventory. So, I think, we're in an unusual period for last year and for this year. And that's the only reason we call those out but they're part of, I guess, I would call it our quarterly life around here. As far as the back half of the year, the quarter that we're in now was very good last year, higher than normal for inventory gains. Q4 a little more so and then Q1 of next year was when we peaked. And as I've mentioned before, those come from sequential inflation, not really from inflation from the previous year. And the sequential deflation that we've had the last couple of quarters is what's kind of tempered that. But we still made some very good buys. And then in the Convenience area, we have one that we did last year that we recognized the profit in Q2 that we'll be recognizing the profit in Q3, this year. As far as, how those are going to affect our results, they're certainly built into the guidance that we give. And we're in a little bit of a race here that during the period of time where we had additional inventory gains above and beyond normal. We also had very high operating expenses, particularly overtime and temporary health. And those are dropping at a pretty good rate right now, unfortunately, not as fast as we would like to see it drop. So will that balance each other out? I'm not sure. But we're not expecting that in our guidance, for them to balance out. We're expecting to have couple of quarters at least, where our inventory gains are not as good as last year but I want to stress that, that is in our guidance. Great. And just a follow-up on the guidance. I mean, you've had a very nice beat in the first half of this year versus how you initially thought the year would play out. The back half, I guess, along the way, you really kind of haven't touched. I'm just kind of curious as to -- how you're thinking about the business now going forward versus sort of like what your initial expectation would have been. I thought I heard you at the beginning of the call when you talked about this acceleration in January. I thought, I heard a little bit of a tone of optimism, I guess, that moving forward. So maybe you could sort of wrap that into how you're, I guess, really feeling about the business now moving forward in the back half and then as you progress into the next fiscal year? Yes. Well, everything we hear concerning the macro can be confusing. But all in all, the industry is not doing real great right now. So we figured that we're better off to be cautious about what kind of guidance we give for the second half of the year. A little bit to do with the inventory gains, not as much. January, the thing about January in our industry and certainly in our company is we've had really good Januaries and just had average Q3s and we've had bad Januaries like last year and ended up actually with a good Q3 because about half our earnings occur in March. So yes, definitely an optimistic January, very optimistic actually in all of our businesses. The first week of February, if exclude the parts of the country that were really negatively impacted by weather, also very good. I look back at last year and it seemed to be that Valentine's week when we started to really improve and March was a fantastic month. So much more difficult comparisons. So that's it in a nutshell, Ed. We're just trying to make sure that we're giving guidance that we have a strong belief in. Mine was just on digging into the strength that you've seen in January. And just the underlying momentum of the business. I'm wondering whether you could frame that in terms of pre-COVID -- the 3 years. As I look at what you've reported for organic independent case growth, there was a slight acceleration on the independent organic growth versus '19? And so, I'm just wondering whether you can -- whether that's accelerated. I calculate roughly 20% growth. And so wondering whether it's actually accelerated in January, just so we can kind of take out the noise of Omicron. It's -- that's why we mentioned earlier that we were encouraged by January -- I mean, once again, it's January. But yes, there was an acceleration over the fiscal '19 numbers. It wasn't as extreme as the acceleration over fiscal '22 numbers. And even, our Q2 where we were slightly less than Q1 for independent growth, we were ahead of it going into those last 2 weeks of the quarter. Something that happens once every 7 years in our business is that the holidays fall on a Sunday and it wipes out Saturday night which is typically a very good night. So even though I'm sure for restaurants, the Saturday night, New Year's Eve was real good but Saturday night is good, whether it's New Year's Eve or not. So we expected that. It was probably a little bit more than normal but it's just one of those things that happens in our business. So we feel from Q1 to Q2, that we did have a slight acceleration but from Q1 to Q2 versus the share numbers we get; we had a nice acceleration. So, I think, when we look at kind of that 3-year stack, I think is what you're referring to, fiscal '19 to fiscal '23, we feel excellent about that. Great, that's really helpful. And then, I'm wondering in terms of the sales guidance for the third quarter, at the midpoint, it's a little bit down from the second quarter. I look historically, it looks like Convenience has a seasonally weaker third quarter. I'm just -- if you can frame whether that slight deceleration at the midpoint is due to more seasonal factors, or if that's reflecting some of the challenges that you're seeing in the macro basis. Trying to kind of judge whether that there's some kind of unusual deceleration there or whether it's just more seasonal? Yes. All of our businesses, the third quarter is typically the lightest revenue quarter. But if -- also a big impact too is, tobacco is really declining at a pretty heavy rate right now which, all in all, is not a bad thing. It's not a big margin producer. But it certainly has a big impact on the top line. And I would say that's probably it. Our national account growth, where I mentioned, I think it was 2 calls ago, by fiscal third quarter, we'd be running growth. I'm not so sure that's going to happen. We've played out from an account standpoint exactly. I mean, exactly as we had wanted it to go but there's some real softness in that account base. So that's probably a little bit of it too. So George, I want to start with why do you think independent case growth is less than new account growth, right? And within the context of that, your thoughts on salesperson bandwidth and capacity, right? Because they're doing a lot more volume than they did 3 years ago. Where are we on that? And do you think, you need to grow the sales force faster to see a pickup in independent case growth? Well, I think that the biggest thing in the accounts growing faster than the case as part of it may be -- we have a -- I think, we always have an emphasis on new business but we've had a little bit more of one than typically because we're finding that at the customer level, that we're doing, on average, less business than we were doing the previous year, this is on average with our customer base and independent. Yet we're selling them slightly more SKUs than we used to sell them. So that just shows that the volume down at the account level. Now January, a lot of the improvement was new accounts but we also had improvement in penetration within the accounts. We actually were positive in the month of January. And that's why I think, part of our increase has been due to the Omicron in the previous year. Then as far as salespeople, we have made big investments in the last couple of quarters. I had mentioned before that we've kind of gotten behind. Right now, our percentage increase in number of salespeople is the most we've had in several years. Okay. And maybe for Patrick. Given your closeness with Vistar, right? So Vistar profitability, at least this period was several hundred basis points above, right, where it's kind of been running. Your thoughts on the source of that? And then where do you think, right? It looked like it was settling in maybe in a 5% to 6% range which was higher than pre-COVID. Is that still sort of where we're settling at? Or maybe it's higher than that now? No, I'm going to go ahead and take that. John, just because needless to say, Pat has been very busy the last quarter. Our return on sales or our EBITDA margins in Vistar has always been more volatile than us, as a company. And I've explained this before but I think I should do it in a little bit more detail. We have parts of our business in Vistar that have very high case cost. Very low gross margin very low expense ratios and low EBITDA margins. We have parts of our business that are low case cost. They are high margin, they are high expense ratios and they are high EBITDA margins. Then we have our pick and pack business, where there's a lot of eaches out of those, particularly the 3 distribution centers totally dedicated to that. And that is high margin, high expenses, high EBITDA margins. Then we have a fulfillment business which we feel we're going to show some real growth in a couple of quarters with. But there, we do not get involved in the accounts receivable on that product. We're fulfilling those orders, most often for the manufacturer or the online site. So all we're billing is our fee. So there is extremely low case cost average and almost all of it is margin. So it has extremely high margins. And then inventory gains can change quarter-to-quarter based on what kind of job we did of anticipating increases. And so there's a lot of volatility in there and there's a lot of volatility in the EBITDA margins. But when it comes down to how we do as far as the percentage of the gross profit dollars that we put to the bottom line, is pretty stable. And John, I don't see that changing. Actually, I would like to see our fulfillment business become a much bigger part of our business. Just following up on the previous questions, that the restaurant industry traffic seemingly still subdued. I wonder, if you could talk about your incremental efforts to drive an acceleration in the new customer wins and independent business and what you're doing to drive that? It does sound like ramping the sales force a little bit more and -- maybe any comments on how you're incentivizing your sales force or other levers to drive further acceleration in that? Yes. We really -- we don't offer up promotional activities, that are national or things that we go to our people with. It's really all around growing our sales force. And we've always found that, if we're doing the right training and we're hiring the right people, that we're going to grow our business faster than we grow our sales force. And it's pretty simple but that's how we look at it. And I think that we've been able to hire some good people of late. We got some intense training going on. A lot of them have already been cut loose and we're ready to let them all cut loose. I guess, it's just no different than that. Got it. And then just on productivity and your efforts around matching your staffing levels to the volumes which have been seemingly more volatile and hard to predict. Just kind of seeing -- do you see any opportunity for improved tools or processes or anything you're working on to help drive better productivity here and hopefully, the volume trends do stabilize some more into February and March but any thoughts there? Yes, Alex, thanks for the question. So first of all, when we think about labor, we've been really pleased. It's been slow but it is improving. And when I think about what's going on in the field and our leadership in the field and how they're working, every day on the hiring and retention and training of our warehouse and drivers. Again, we're really pleased with the progress they're making. It's slow and it's slow because the one area that we want to continue to see more improvement, is on retention. But because of their success so far, we really have seen the temp labor come out of the system for the most part. And we're also seeing overtime reduced. So, as George mentioned earlier in his comments, we really think that why it may not match it perfectly but over the next several quarters, this is going to be -- it has been a headwind but it will become a tailwind, it will help offset some of the comping that we're going to have to do with these inventory gains. So, we do see this as a positive going forward and we're really pleased with the progress we've made to date. So to start, it sounds like you guys have made some really nice progress on fill rates. Presumably, on the inbound side, it's picked up a bit across the industry. Given that, have you seen any smaller competitors taking any more aggressive efforts to maybe win back some of the share that they might have given up when inbound fill rates are more challenging? Do you see that being much of a risk? Or has the new business that you've gained, really just proven to be pretty sticky? I think that nothing's really changed from the competitive landscape. There's probably a little bit more activity going on as far as short-term procuring of an account or picking up some business within account but -- we've done some of that ourselves in the past and it seems to do exactly that. It works pretty good short term and doesn't have an impact long term. So we're just kind of continuing to do business the way we do business and price the way in which we price and we really haven't seen any difference in the marketplace. Okay, great. And then as a follow-up, it sounds like overall, some nice progress on new business, good market share gains overall. How about from a category perspective? Are you still seeing strength really across the board and independents? Do any categories in particular stand out? Just what you're seeing on that front? Yes. Casual dining, obviously, the chains, I mean, a lot of them are public in big season, numbers not doing real great. But the casual dining independent seems to be doing really well and that's been good part of our growth. Pizza has definitely slowed down in the last year but we're continuing to gain share and we're very excited about that business. Hispanic seems to be doing real well, although we don't play hugely in fine dining, fine dining seems to be doing well. And center of the plate -- has been a big hit for us. I mean our margin growth has really been around our change in mix just in and mix of customers, mix within our channels but product mix has been a big contributor to that, too. Some of our highest profit per case items have been where our growth has been good. Yes. Is there any way you're able to quantify kind of the impact of some of the business that you said, you had exited? And then just kind of to the point you just made, was -- is the softness more on the casual dining side that you've seen in the most recent quarter or anything else that you would call out there? Yes, I would say, to answer your last question, I would say casual dining is where we are seeing the most slowness. As far as exited business, we are -- I think there's different ways to look at that word. It's extraordinarily rare for us to tell a customer we don't want to do business with them anymore, very, very rare. But exited, we've gone and we've had to get a higher price to be able to handle that business. And in some instances, the customer isn't willing to do that. And we've been in a position -- I've mentioned this probably, this is probably the third call but maybe too much but when you have excessive overtime and you have an excessive amount of people who are temporary, you can have business that's typically may be marginally profitable with a good return on capital that becomes unprofitable. And that's the position we were in. And we just did it pursue some business, as heavily as would in the past. We think we're getting there, where maybe we can be a little bit more aggressive. But there's still a high cost that we're dealing with and to have, I guess, to bring on business that is going to be difficult to grow if they're not growing -- that's why I've seen some real flatness or declines in our national account business. And our focus is just -- I mean we like those type of business and we like all business and we like those customers. But for us, our focus has had to be really, really heavily on independent. And I will also say that, we've also had Core-Mark growing at mid-teens in their nontobacco business and that's been a nice contributor for us for growth. Yes, it makes sense. Okay. And could you remind us where just kind of your owned brand penetration is and how that's kind of driven some of the margin performance that you've seen recently? No. That's one of the best things we have gone for us right now. We just finished a month where it was 51.9% of our independent business. And it's just not a number that, quite frankly, I expected us to get to. So it's been really good. And almost -- I mean, really close to all of our branded business goes to independent restaurateurs. So we're really focused on that. It's doing well. Customers seem to receive it well. George, you mentioned in your prepared remarks, the more stable landscape to start calendar '23. I think, you alluded to it being beyond just a favorable January compare bounce. You've also noted that the industry is not doing really well right now. So I was trying to just contextualize because it seems like most of the chains we talked to are talking about surprising resilience in the business and the consumer and whatnot. So I'm just trying to bifurcate between the more stable landscape relative to the industry not really doing well right now? And then I have 1 follow-up. Yes. What we get from third parties show that the industry is in a very, very slow. I mean talking like, not single digit, single point growth. I get the same conflicting things, Jeff. We have chains that are doing really well and are excited in -- and don't know there's a downturn going on and we have some that are really struggling. And I think it's that mixed [indiscernible]. One of the reasons that I guess, that we use the word stable, is that we're been in this period of time where we've had a single-digit loss business and that's something that we always had as a goal and could never quite get to. So that's accounts that we sold last year and don't sell this year. So they went out of business or we lost the business or something happened. And that's a stability that we haven't had in our company to that degree before; that's where that word comes from, I guess. Understood. And then just on the commodity inflation or less of it, it sounds like you're expecting continued easing. Just wondering where you think that goes, whether we'll be talking about low or mid-single-digit inflation over the next quarter or 2. And thoughts on whether or not, that could turn to the deflation. I know most have not conceded that, that was really, very likely but just wondering how you change, how you manage your business differently, if that inflation ease more quickly and actually turn to deflation? Yes. Well, where we still have fairly high inflation is in Vistar still in Core-Mark, not as much but some inflation. We don't concern ourselves with deflation there because they typically raise their price in the same pattern all the time and they fight hard to get their prices increases in. And you just don't see them back off. So I think that's stable. They may skip some price increases or something like that certainly could happen but deflation, no. In our Foodservice business, particularly our independent, that's where we really watch at the closest. And right now, we're seeing our case growth and our pricing almost converging. So -- and that's real recent. So that doesn't mean that there can't be something within our mix that we'll see as we do our inflation numbers at the end of the quarter. But I think that inflation is right now appears to be headed in our independent Foodservice business for very low single digit. And as far as inflation, I think, we're set up to handle -- I mean deflation, I think we're set up to handle that well. We didn't handle it so well when it happened back in the Great Recession but we've got some good systems in place and a more experienced sales force and we feel fine with it. George, I wanted to go back to something that you said at ICR about -- the comment about renegotiating terms with most customers, I think, almost every customer and I believe that's on the contract side. And that's pretty consistent with what we hear across the board. But I was just curious if you can help us understand the changes in the way that the contracts are structured and negotiated today, versus maybe a few years ago and how that may impact the future of the -- how the business performs in the future? And I guess, I'm particularly just curious, if there's any changes or ways that we should be modeling as we transition here from this higher inflationary environment to a possibly lower inflationary environment. I don't see, at least within our world that there's really any changes in how they're structured. We just needed to get most of that as a fee business and we needed to get a higher fee because of our expenses and we try to do a good job of making sure that we are recouping what we felt were kind of those long-term expenses. Obviously, the operating expenses that we had through the severe part of COVID is not something that you want to pass on to a customer, you're just going to cause yourself problems down the road. But we were fairly successful, I would say, very successful. We have a good customer base and where we weren't successful, we lost some business. And that's just the way it goes. But no, I just don't see a big change moving forward. And if we go through a deflationary period of time, those customers will benefit from lower costs and they'll probably in the end, be good for our business, good for our industry. Okay, that's helpful. And maybe just a follow-up on fill rates. Very helpful color there. I think you gave us for Foodservice in Vistar. Just curious if you have a sense of how you think those compare both on the inbound and outbound metrics to the rest of the industry and your competition? We don't have a good feel with that. I mean, I guess the only thing that we get is the complaints from customers around fill rates have gone down and gone down a lot. Our Foodservice were almost back to normal, very close. Core-Mark and Vista are still struggling more with inbound. And what I look at because it's hard to judge in this type of environment has been hard to judge is what our inbound rate is versus our outbound. And are we converting the inbound to a better outbound at kind of a percentage standpoint what we used to when the supply chain was normal and we've been able to do real well there. So I would say that we're probably at least at a par with the industry. I think it helps, too, that we are purchasing people at each of the distribution centers and they're really tied tight to the sales force and many of the customers, particularly the larger customers and I think that's helped us. We'll take our next question from Lauren Silberman with Credit Suisse. And it looks like they have removed themselves from the queue. We will take our next question from Andrew Wolf with CLK [ph]. I just wanted to ask you to perhaps tell us a little more about your views and outlook on labor productivity. So what I've heard from, what you've been saying, George, it sounds like labor costs are coming down. Maybe on an hourly rate as you substitute in sort of normal labor for some of the expensive labor you've had to beer. But what is the -- what are the trends looking like with labor productivity, given it sounds like you might be early on still training people. And what is the outlook for labor productivity? And where does it need to improve more? Or is it more of a -- it sounds like it might be more of a still a warehouse issue than a delivery which sounds like it's improving more rapidly. Yes. I mean it's a good question. As we talked about a little bit earlier. I mean, what I'll expand upon my previous answers, just we have some great systems in place. So once we get the people into the warehouse, once they're trained, we have great systems to allow them to be very -- have very efficient productivity. What I mentioned earlier is it's a retention thing and this is, I think, it's not a PFG issue, it's a broader industry issue but we are starting to see some really nice progress, as I mentioned earlier. So -- the team is doing an excellent job of recruiting and getting those folks into the buildings, getting them trained. And again, we think that over time, this is really going to become more of a tailwind. And sort of as everybody's until recently been using 2019 or actually still using 2019, as a metric. If you look at sales productivity, are you also doing that some kind of pre-COVID normal for labor productivity? And -- can you give us a sense of how that curve is going to look in terms of the improvement over the next year? Yes. I mean, we absolutely look at pre-COVID numbers as well, just to make sure that we're measuring to what was, what we'll call, a sense of normal back then? And then how does that compare to stay. I can't give you any indication of how quickly we'll move down that curve because, again, it's just -- there's so much uncertainty around labor but it's something we're very focused on. I can tell you that. The sequential commentary about your inventory gains over the last year and which are the toughest comps was very helpful. I was wondering if you could share the magnitude in totality of these gains on an LTM basis. Because it sounds like you think that largely, these are going to be offset with productivity savings. So trying to get a sense of what you're expecting on that? Yes, this is Patrick again. So again, just going back a little bit, we started to see these inventory gains in 3Q '22 and then they stepped up in 4Q '22 and then again, in first quarter of '23. And as George was just mentioning, in this quarter, we actually saw year-over-year gains. We were comping negative. So -- we can't really quantify with you today about what that totality of that is. But -- and as George mentioned, we're not even sure, that the productivity gains that we will see will completely timing-wise offset these inventory gains but we're both -- there's a lot of opportunity on the productivity side. And we have, in our outlook, said that we've anticipate inflation to continue to decelerate and that we will see these inventory comps get tougher. But again, all that's baked into our guidance. Okay. And then, you've been focused on debt reduction of [indiscernible]. Your leverage is now kind of within your target range. Are you at the point where you would look at additional M&A or do the higher interest rates in the current environment kind of discourage this activity? Well, yes, as you mentioned, we are within our leverage range and we're obviously very happy about that. And again, we reduced our leverage to 3.3x in the quarter. When we think about uses of cash, we're certainly, as I mentioned, focused mostly on investing in the business and building our capacity to support the growth of the business. We're always looking at strategic M&A. So I'll leave it there, unless George wants to add anything to that. Well, we've always been opportunistic acquirers. And I would say that we always will be -- so that something could happen there. We don't have anything that's actionable right now. But paying down debt, that's important to us. So is adding capacity. We would rather reduce our leverage by having more earnings as opposed to reducing anything for that matter. We want to grow. And fiscal capacity, I would say that's probably the most important thing to us today but we'll always be an opportunistic acquirer. Curious if we can talk about, just the overall strength of the supply chain. It seems like things would be improving. You mentioned a couple of times different improvements in fill rates overall. But just curious if you could contextualize just the overall string business supply chain. And then when we specifically talk about some of those fill rate comments, how do you think about that? Are we -- although the fill rate percentage is up -- what does that look like in terms of the number of items or kind of the assortment versus kind of pre-pandemic? And is that even an important point kind of in the current environment? That's a good question. I think the supply chain is strengthening pretty quickly right now. I think, we learned a lot going through COVID. It was a fine-tuned supply chain, particularly when you got to perishable product. And when something that, that's that fine-tuned gets disrupted, it gets disrupted overnight and it takes a long time to correct. And as I said, our Foodservice is getting pretty close to normal. One of the issues with our fill rate in Vistar and Convenience, is that many items just weren't produced any longer. And the customer continues to order it and we're seeing many of those items come back online. We're also seeing that suppliers that were in both the retail and the Foodservice business and maybe bigger in retail and they had all they could due to pack the product, really discontinued many Foodservice items and didn't have the level of attention to it. And as a percentage of the food being eaten is swung back greater and greater towards Foodservice, we're seeing those people come back online. I will say it's hard to go running back when you've had to find other sources but they are coming back. So I would call the supply chain is something that's not there yet but we're seeing really good improvement. And number of items -- by the way, that's something that we follow real close by distribution centers, the number of items that they sell on a weekly basis. And most of our companies are still selling less items to availability but it's improving at a pretty quick rate. That's helpful. And maybe bigger picture, when we think about just contextualizing the holistic strength of the business, in terms of case growth new company -- new customer wins and adds, it's impressive. I imagine there's also a good bit of investment that happens behind the scenes in terms of capacity warehouse, not just on the sales force side. Can you talk about that and maybe where -- how you feel like you're positioned to sustain or support continued growth at these levels going forward? That's a good question. And as we talked about just in the last 6 months, we've invested $98 million in CapEx. And when we talk about our priorities, that's really the number 1 priority is to continue to invest in the capacity of the business to help it grow. As we just mentioned, another priority is to also reduce leverage. But the number 1 use of our cash, is going to be continuing to invest in the business and given the results of the 3 segments and their strength, we're going to continue to do that because they're doing some really nice job of generating some really solid growth. It's Carla Casella from JPMorgan. You made some good progress paying down revolver this quarter. I'm just wondering if there's any -- I mean, contemplated in your kind of leverage and targets going forward. Is there any thought that you could be out of that facility by year-end or a target of when you want to be out of that facility kind of given the high cost of rates today? Thank you for asking it because there's a couple of things I wanted to share. As we mentioned in our comments, because we use interest rate swaps, there is a portion of the ABL that is floating but because we've swapped 76% of our total debt is fixed and the ABL is at a very attractive rate of LIBOR plus 125 bps. So yes, interest rates are certainly going up and we're watching that very closely and the portion of our ABL that is floating does move up accordingly. But we've done a really good job of managing that interest expense -- so there is no expectation at this time that we would be looking to retire that facility and we'll just continue to manage the interest rate environment the best we can with those swaps. I want to come back to the conversation on the Foodservice and the restaurant space. George, you mentioned that pizza has slowed in the past year, yet fine dining is still doing pretty well. Do you feel like this is the lower-income consumer kind of pulling back? Just any -- there's been a lot of conversation and concern around that in the industry. Just wondering your thoughts on the consumer in that environment. That's a hard one. QSR appears to be doing quite well. We do very little of it but it appears to be doing quite well. I think with pizza, I think that as there's been more options for the consumer. They've consumed less pizza. I think there was -- or the term pizza fatigue but there was -- they did so well through the COVID period of time. So I probably don't have a real good answer for you on that. I guess, the way to put it is lower end consumer, we do a lot of value store business out of Vistar and that business is doing well and we'd probably be doing a lot better, if there was more product availability. So that is a sign that people are kind of going down the chain a little bit. So I would guess, I would call it mixed. Appreciate that. And just a housekeeping question here. I think you mentioned Foodservice inflation was about 9.6%. And -- can you give us that number, what it was last year at this time and maybe on a 3-year basis, that would be helpful. Yes. We don't have that number. We can get it and have Bill get that to you. But I would want to comment that, that was what we did last quarter and that we have seen a pretty significant deceleration in the last 5 weeks since the end of that quarter in food service. I just wanted to come back to some of the cost benefits that you guys highlighted from the lower temporary workers. And over time, if we go back and look at some of the prior disclosures that you've provided about some of those onetime costs. Were those numbers only the temporary labor force or was that the combination of the temp labor force and the higher over time? Yes. Thanks, Fred. This is Patrick. Those comments, those prior comments are really around the temp labor force and we were just highlighting because they're unusual. Okay. And then as we just think about the sequencing of those potential benefits going forward. If we look in 4Q of last year, you guys have started highlighting year-over-year benefits from lower temp workers. So how does that sort of piece together with the ability for some of these lower costs to offset some of those inventory gains or the headwinds from lower inventory gains that you're facing here for the rest of the year? Yes. I think the best way to think about it is, I think we have said that a lot of that temp labor has come out of the system. What we're focusing mostly now on is the overtime, that we still have in the system which is, again, just a function of us being able to hire enough workers and retain those workers. The productivity improvement that we're still really looking to see the biggest benefit from is the efficiency that you gain once you had an employee in their role for a little bit of time and they really start to generate some good efficiencies in that role. So that's the next step and that's what we're looking towards. Perfect. And then just lastly, you touched on the private label penetration and independent specifically but what is the outlook for that penetration, just given easing inflation and then also some of the higher fill rates that you're seeing from your vendors? Do you think that will hold steady? Can it continue to grow? Or maybe you guys are not penetrating that because of costs? Like what is driving that, I guess? Yes. That's the good question but a hard question. We have a handful of OpCos, who are in the 60% or over 60%, low 60s. So I guess I could say that that's a possibility but I will admit that I didn't see us being at 51.9% now. One of the things that has definitely helped us -- we keep track of our inbound fill rate for our brands and our total inbound fill rate and our inbound fill rate was significantly better, all the way through COVID on our brands, our suppliers really stepped up. So as the other suppliers have better fill rates, will that affect it. And I got to tell you, I really don't know. I think what I would say to you is that I'm really pleased with the percentage of our business that's our brand. We certainly like selling product that isn't our brand as well and that can be quite profitable for us. You kind of develop a better sense of loyalty but it's a customer that matters. But when they provide you much better inbound service than, I guess, the other guy, I think it's going to continue to grow for us. I don't know that we'll have kind of the outsized growth that we've had the last few years. Just a follow-up on the Foodservice inflation as a different way. Is your total cost basis staying relatively steady, while year-over-year is moderating? Or are you seeing that total cost basis declining as well? Okay, got it. And then just a follow-up on the independent customers. So under the new customer acquisition is really the focus area. I mean how much -- how important is new restaurant openings for your customer acquisition goals? Is there really enough opportunity and large enough addressable market in relationships that you don't have currently that year-over-year positive unit growth in the restaurant space isn't as important. Yes. We don't track that, unfortunately, probably should. I think it's probably been new customers has probably been more important in the last year, certainly as you think about these buildings there, for the most part, single-purpose buildings. And if somebody went out of business, it would be rare to see somebody other than another restaurant come into that building. So I would say, it's probably been more important in the last year. But the rate at which you really need to grow your new customers to put the growth out that you need, you have to get existing restaurants on board. I think that's really important. I wish, I had better numbers for you but we just don't track it separately. It appears that we have no further questions at this time. I will now turn the program back over to Bill Marshall for any additional or closing remarks.

EarningCall_343

At this time, I'd like to turn the call over to Lydia Kopylova, Head of Investor Relations for Minerals Technologies. Please go ahead, Ms. Kopylova. Today's call will be led by Chairman and Chief Executive Officer, Doug Dietrich; and Chief Financial Officer, Erik Aldag. Following Doug and Erik's prepared remarks, we'll open it up to questions. As a reminder, some of the statements made during this call may constitute forward-looking statements within the meaning of the federal securities laws. Please note, the cautionary language about forward-looking statements contained in our earnings release and on this slide. Our SEC filings disclose certain risks and uncertainties, which may cause our actual results to differ materially from the forward-looking statements. Please also note that some of our comments today refer to non-GAAP financial measures, a reconciliation of GAAP financial measures can be found in our earnings release, which is posted on the website. First off, I'd like to welcome and congratulate both Lydia Kopylova and Erik Aldag on their new roles. Lydia is Vice President of Investor Relations and Erik is Senior Vice President, Finance and our Chief Financial Officer. Many of you have met Erik over the past few years, and I know Lydia looks forward to meeting our investors and coverage analysts in the coming months. Okay. Got quite a bit to go over today, so let's get started. Quick outline for today's call. I'll begin by giving you some context on the fourth quarter and then review the highlights of our full year. Erik will take you through the details of our financial results by segment and give you a look into the first quarter. As you saw from our press release, we'll be reporting on new segments and product lines starting in the first quarter. I'd like to take you through this change and how this structure better defines the Minerals Technologies of today. After that, I'll give you some perspectives on the year ahead and open it up for questions. Let's start with the quarter. As you saw in our press release, this was a challenging one, with several acute factors that impacted our results. On the positive side, sales levels remained healthy in most of our end markets, and compared to last year, sales increased 13% on a constant currency basis. We saw continued strong sales in Metalcasting and PCC, driven primarily by strength in North America foundry and paper markets. We also saw continued growth across our consumer-oriented product areas. These areas of strong demand were offset by a few markets that slowed through the quarter. You'll recall, we saw signs of weakness at the end of the third quarter in our construction and steel end markets, plus generally slow economic conditions in China and Europe. The slowing trend continued through the fourth quarter, and in the case of China, deteriorated further in December. As the quarter progressed, we also began to see orders in a few other businesses begin pushing into January. Our customers' inventory levels are healthier now than they were last year, which gives them more flexibility to manage the timing of their orders to us and we believe they exercised some of this flexibility in December. In addition to these market changes and the dynamics taking place in our order book, the most significant impact on our quarter came from three other areas. First, the cold weather experienced in the U.S. in December impacted our mining and processing plant operations and shipments, leading to increased costs and delayed sales. Our operations managed through these issues and have since recovered, but we still have some catching up to do on mining. Bottleneck of rail transportation that was created is now beginning to return to normal. Second, was the rapid increase in COVID infections in China in December. COVID swept through our facilities and our customers' operations, which slowed demand and created significant operating and shipment challenges. Thankfully, our employees in China have all recovered, persevering through a challenging few weeks. At this point, we've not yet seen volumes recover in China, and our outlook is for market conditions to remain weak for most of Q1 and to see more meaningful recovery to begin late in March or early in the second quarter. Third, we experienced a significant increase in energy and sea freight costs in Europe. The level of these increases was higher than expected and we absorbed them in the quarter, and are adjusting pricing to recapture them. Despite these challenges, our teams around the world did an amazing job, swiftly navigating these issues to keep our plants operating safely and our customer supplied. This quarter was an unusual one for MTI as we faced some unique challenges. Except for the continued slow conditions in China, these issues were isolated in the quarter. We've made the necessary adjustments and demand remains relatively healthy across most of our markets. As a result, we see a significantly improved first quarter, which Erik will take you through in a moment. Outside of the fourth quarter, 2022 was an otherwise strong year for MTI. We posted three record quarters and our teams around the world demonstrated their agility, perseverance and focus on our priorities through 2022. We continue to execute on our growth strategy, positioning our businesses in faster growing markets and geographies, accelerating the development of new products and technologies, acquiring companies that fit our core markets and which position us in higher growth markets. This year was somewhat a tale of two halves. First half started with extremely robust demand across each of our businesses, customer orders hitting record levels. Second half of the year, demand began to moderate in a few of our end markets and inflation pressures became a bigger weight. It was a robust sales year for MTI with growth of 14%, it was 20% on a constant currency basis. We saw continued organic growth in our consumer-driven product lines, like cat litter, edible oil purification and health and beauty products. Expanded our core positions in growing geographies, securing two satellite contracts in China, one is a traditional PCC filler satellite and the other for a GCC packaging application. Metalcasting business continued to grow in India and we've established ourselves as the green sand bond technology leader there. Refractories business secured $100 million dollars in sales over the next five years to deploy our new SCANTROL refractory application technology. Our Environmental Products business continued to grow through several large settlement capping projects and the continued trial and commercialization of our FLUORO-SORB, our unique PFAS water remediation technology. New product development continues to have a larger impact on our sales growth. We commercialized 63 new products this year and sales of new products commercialized over the past five years increased 42% to over $300 million. We completed the integration of Normerica, establishing ourselves as the largest private label cat litter manufacturer in North America. We acquired Concept Pet, establishing ourselves as a leader in Europe. As I mentioned, inflation was a major factor this year and it will continue to be through the first half of 2023. We absorbed $190 million of inflationary increases in 2022. We worked diligently to offset them with $210 million of price increases. Margins were impacted as a result, but higher margins will return as inflation flattens and lagging contractual price adjustments kick in. Our ability to change prices reflects the value that we deliver to our customers every day and is a testament to having the right technologies and applications to enhance our customers' products and help them generate higher value in their markets. In addition, as we always do, we continued our focus on maintaining the highest level of productivity and on diligent cost and expense control. As an organization, we gained a lot of speed and agility this past year. Our teams overcame several challenges and reacted decisively to maintain strong momentum. This momentum will serve us well as we go into 2023. Thanks, Doug, and good morning, everyone. I'll review our financial results for the fourth quarter and full year 2022, and I'll also provide an outlook for the first quarter. Following my remarks, I'll hand the call back over to Doug to discuss our newly announced reorganization and give some additional perspective on how we're viewing the year ahead. Now, let's turn to our financial results. As Doug mentioned, we had a challenging finish to an otherwise strong year. Fourth quarter sales were $508 million, 6% above last year and 13% higher on a constant currency basis, primarily driven by $63 million of higher pricing. Our sales volumes were relatively flat overall as strength across our consumer-oriented end markets was offset by weakness in Europe and China, as well as production and shipping limitations from severe cold weather in the Western U.S. We also experienced some late quarter inventory destocking by our specialty PCC and processed minerals customers in the U.S. Fourth quarter operating income was lower than our expectation going into the quarter, primarily due to the sales volume pressures I noted, as well as higher freight, energy and production costs. The operating income bridge on the bottom left shows we absorbed $60 million of inflation in the quarter, which was the highest level we experienced all year. While we offset the entire inflationary cost increase with $63 million of higher pricing, we expected a more favorable price versus cost benefit this quarter. We have further pricing actions to recover the additional costs that we absorbed in the quarter and we expect our price versus cost benefit to expand over the coming quarters. The unfavorable other costs in the bridge is associated with higher mining and production costs due to the severe weather in the U.S., as well as COVID-related production shutdowns in China. As you'll see in the full year operating income bridge, these fourth quarter events had a significant impact on our full year other cost category as well. Continuing on the right side of the slide, full year sales were $2.1 billion, a record level for MTI. Despite $100 million of foreign exchange headwind, total sales grew 14%, driven by continued execution on our strategic growth initiatives and pricing actions totaling $210 million. Full year operating income grew 5% to $253 million. Our pricing actions exceeded inflationary costs by $20 million for the full year. Recall that in 2021, our pricing was approximately $20 million behind the inflation that we absorbed that year. So, while our pricing actions caught up on a dollar margin basis in 2022, this two-year pass-through of higher costs into our revenue line has resulted in a percentage margin dilution of 150 basis points. We have sufficient pricing actions in place for the first half of the year to catch up on a percentage margin basis by the second half, and that timeline could accelerate depending on the pace of inflation. From an earnings per share perspective, our full year operating income growth was worth approximately $0.28 of EPS improvement. However, full year EPS ended up at $4.88 compared to $5.02 in the prior year due to $0.42 of unfavorable below the line items, primarily driven by foreign exchange and higher interest expense. Now let's review the segments in more detail, beginning with Performance Materials. Fourth quarter sales were $266 million, 4% above prior year. Sales in Household, Personal Care and Specialty Products grew 8%, driven by the acquisition of Concept Pet and growth in personal care and edible oil purification. Metalcasting sales were 5% lower. We continue to experience strong demand in North America, where sales in our green sand bonds business grew 13% compared to last year. This growth was more than offset by lower sales in China, where volumes were impacted by COVID-related restrictions and shutdowns. Operating income for the segment was $19 million, which was significantly below last year and our expectations for a few discrete reasons. First, severe weather in the Western U.S. forced us to pause mining activities for several weeks and implements cold weather safety protocols at our processing facilities, which reduced production and shipping volumes. The weather also resulted in congestion on the rails, and we incurred significant costs shipping our products via truck instead of rail. Heading into the quarter, we had also expected a slight rebound in China. However, our volumes ended up lower on a sequential basis due to COVID-related restrictions and shutdowns at our facilities as well as some of our customers. Finally, volatile energy costs in Turkey and bulk sea freight on the Black Sea resulted in significantly higher [landed] (ph) raw material costs for our European pet care business. We are increasing prices to cover these higher costs. However, pricing changes in this business typically have a 90-day contractual lag. The good news is that shipping rates on the Black Sea have moderated, and we have sold through most of this higher cost inventory. Therefore, we do not expect the same magnitude of cost in the first quarter, and margins will further benefit when our pricing actions take effect in the second quarter. Moving to the full year. Segment sales grew 16% to $1.1 billion. Household, Personal Care and Specialty Product sales were 22% higher, driven by acquisitions, higher selling prices and continued strong demand for consumer-oriented products. Metalcasting sales increased 5%, as strong demand in North America and higher selling prices offset slow volumes in China. And sales in our Environmental Products business rose 28% on higher levels of project activity. Operating income for the full year was $131 million, 4% higher than the prior year. It's worth noting that this segment offset $84 million of inflationary cost impacts with pricing actions during the year. Looking ahead to the first quarter, we expect significant improvement given the isolated impacts we experienced in the fourth quarter. We expect similar market conditions overall with improvement for our China Metalcasting business beginning later in the first quarter, and our mining and processing facilities have now returned to normal operations. Meanwhile, new pricing actions will take effect through the first quarter and into the second, and we are seeing moderation in the inflationary cost elements that impacted us in the fourth. Overall, we expect operating income for this segment to increase by $8 million sequentially, approximately 40% higher than the fourth quarter. Next, I'll review the Specialty Minerals segment. Fourth quarter sales for Specialty Minerals increased 10% versus the prior year to $155 million. PCC sales grew 13% on the ramp up of new satellites and higher selling prices. Operating income grew 17% versus the prior year to $16.9 million, as contractual price adjustments in this business are starting to catch up with inflationary cost increases. Turning to the full year, sales increased 12% to $648 million, primarily driven by new satellites, higher selling prices across all product lines and continued strong demand for our specialty mineral additives across a wide range of consumer and industrial markets in North America. Full year operating income of $72 million was 2% lower than the prior year, as this segment incurred significant raw material and energy inflation throughout the year. This is also the segment with most of our contractual price mechanisms, which will further catch up and improve margins as the pace of inflation slows. Looking to the first quarter, we expect demand in Europe and China as well as residential construction activity in the U.S. to continue at relatively lower levels. Despite similar market conditions, we expect operating income will improve due to price adjustments that went into effect in January. And while there is potential for energy volatility in the winter months, this segment could see additional margin recovery in the first part of the year if natural gas and electricity rates stay around the levels they are today in Europe and the U.S. Overall, we expect operating income for this segment to increase by $300 million sequentially, approximately 20% higher than the fourth quarter. Now let's turn to the Refractories segment. Fourth quarter sales increased 10% over the prior year to $87 million, driven by higher selling prices and higher laser equipment sales. Operating income was up 1%, reflecting solid execution amid softer steel market conditions and higher raw material and energy costs. Full year sales were $349 million, 15% higher than 2021. Steel market conditions in the first half of the year were strong, with utilization rates in North America around 80%. Although market conditions softened in the second half with utilization rates closer to 70%, this business delivered a strong performance, driven by execution on new contracts, higher selling prices and increased laser equipment sales. All the above resulted in operating income increasing 17% to $58 million, a record level for this business. Turning to the first quarter, we have additional laser equipment sales as well as pricing adjustments that should improve operating income sequentially, and we expect market conditions to remain similar. Overall, we expect operating income for this segment to increase by $200 million sequentially. Now, I'll review balance sheet -- now, I'll review our balance sheet and capital deployment highlights. We finished the year with total liquidity of $432 million and net leverage of 2.4x EBITDA. In 2022, our capital deployment priorities were balanced across sustaining our operations, investing in high return growth and cost savings initiatives and returning cash to shareholders. Looking to 2023, we expect higher cash from operations, as the inflationary impact on our working capital begins to release. Our first and best use of cash flow will continue to be investing in ourselves to maintain and sustain our high-performance operations. We will also use a portion of cash flow to strengthen our balance sheet and return to our target net leverage of around 2x EBITDA. And we will continue to invest in high-return opportunities, both organic and inorganic. We always stress test our market assumptions for growth capital across multiple economic scenarios. And in times of increased economic uncertainty, this stress testing provides a key governor to ensure prudent deployment of capital. Overall, for the full year 2023, we expect free cash flow to return to a more normalized level of approximately $150 million, assuming capital expenditures in the $80 million to $90 million range. Now let me summarize our outlook for the first quarter. Overall, for MTI, we see a much-improved performance in the first quarter, as we move beyond some acute issues. Specifically, our mining and processing operations in the U.S. are back to normal operating conditions, and they are catching up on production. And the logistics disruptions on the rails have mostly unwound. We've had several pricing actions and contractual pricing adjustments take effect through January, and we have more to come through the first half of the year. And while we expect inflationary cost pressures to persist, the most severe inflationary costs from the fourth quarter have eased, namely sea freight and energy rates in Europe. In addition, we expect modest improvement from our China business late in the first quarter. We are entering 2023 facing softer market conditions than we experienced at the beginning of last year. And we expect construction and steel markets to remain soft through the first quarter at least. Nevertheless, our more balanced portfolio is proving its resilience and strength as demand for our consumer-oriented products and specialty additives is holding up well. We see most of our end markets remaining strong through the first quarter with a few areas of uncertainty. As a result, we expect first quarter operating income to increase significantly to a range between $55 million and $60 million, which would be up 25% to 35% from the fourth quarter. Now, I'll pass it back over to Doug to share how our reorganization provides a better view of who we are today and enables higher levels of performance going forward. Doug? Over the last 18 months, you've heard me speak about how we've transformed MTI's portfolio of businesses. I've been highlighting how we've built a larger portion of our portfolio directed toward consumer-oriented products and how we've been developing new technologies for more specialized, higher-margin and sustainable products. As a result, MTI is much different now. We're a more balanced, faster-growing technology-advanced company and our organization and reporting structure should better reflect who we are today. With that in mind, we felt that this was the time to present ourselves differently. Beginning in the first quarter, we'll be reporting in two new segments; one named Consumer & Specialties and the other Engineered Solutions. The Consumer & Specialty segment, which generates of 53% of our sales combines all of our businesses that directly serve consumer-driven end markets and our mineral based solutions and technologies that become a functional part of our customers' products. The two product lines that we will report on within this segment are: Household & Personal Care, our mineral-to-shelf products; and Specialty Additives, the products which will become a functional additive in a variety of consumer and industrial goods. This business group is being led by D.J. Monagle. The Engineered Solutions segment, 47% of our sales, combines all of our engineered systems, mineral blends and technologies that do not become part of our customers' products but rather are engineered to aid in their manufacture. The two product lines that we will report on within this segment are: High-Temperature Technologies, combining all of our mineral-based blends, technologies and systems serving the foundry, steel, glass, aluminum and other high-temperature processing industries; and Environmental & Infrastructure, which contains all of our environmental and remediation solutions such as geosynthetic clay lining systems, water remediation technologies, as well as our drilling, commercial building and infrastructure-related products. This business group is being led by Brett Argirakis. This new organization moves us away from our past legacy-oriented structure into one where we are organized around common technologies and applications expertise, as well as common market and customer characteristics. It will streamline our reporting structure, speed up decision making in the organization and enable stronger collaboration. It also enables us to drive synergies through the alignment of our technologies with customer needs, accelerate innovation and further drive operational efficiencies. Our first quarter 2023 results will be reported along these new segments and product lines and we'll be sharing further details over the next couple of months. Following our earnings call in April, we plan to hold an Investor Day where we can provide an in-depth view of each of these product lines, their associated technologies, strategies and resulting synergies. Please stay tuned for more details on that as well. Before we close the presentation, let's talk about our focus areas for 2023 and what we are seeing in our end markets as we start the year. In general, demand in the U.S. remains relatively healthy. Cat litter, Metalcasting, paper, automotive and environmental products remain strong. Residential construction as well as the steel market are slower than last year and similar to the fourth quarter levels. Outside of the U.S., Europe demand remained strong in cat litter and specialty consumer products, but relatively slow in our industrial markets. We expect China to remain slow for the majority of the first quarter, but indications from our customers are that activity and demand will likely pick up in the second. Further out, the second half of the year is harder to see right now. Our order books typically strengthen in March and April in our more seasonal construction and environmental markets and we are watching automotive build rates. Early spring will be a telling period for these businesses on the strength of market demand going into the second half of the year. For our consumer-oriented businesses, we expect demand to remain resilient and for them to continue on their growth trend throughout the year. Internally, we have a clear set of priorities for 2023, focused on three pillars: financial performance; organization and people; and continued execution of our growth strategy. Our focus is on recapturing margins through both cost improvements and pricing actions. Contractual pricing will catch up and margins will further improve as we make other necessary adjustments and take advantage of lower input costs. We'll maintain a strong balance sheet and improve cash flows. As inflation plains over, we'll see the release of the working capital that is built over more than a year. We will continue our balanced approach to capital deployment, funding high-return internal projects with a priority this year on debt repayment. We have a very global organization, which is now better aligned with our customers and markets through common technologies and applications know-how. Reorganization of our businesses and segments improves alignment and creates more speed. We'll continue to drive growth, expanding our positions in our core markets and geographies, focusing on the development of sustainable solutions for the markets we serve, investing in product development and evaluating inorganic growth opportunities. These initiatives have transformed MTI and we see more opportunities ahead. MTI is a less cyclical and more resilient company than in the past. Regardless of what the markets bring us this year, our balanced and higher growth portfolio of businesses enables us to deliver more stable sales and earnings growth. I'd be remiss if I didn't tie all this together and mention the foundation that supports everything we do; our dedicated employees and the MTI culture built on operational excellence and an unwavering adherence to our values. It's the foundation that sets MTI apart from others. 2022 marked our 30th year as a public company and 2023 will be a pivotal year as we move into a new era. Looking back, we note the dedication and commitment of all MTI employees for the past 30 years who helped form who we are today. As we now turn and look forward to the next 30, we see many more exciting chapters to write for our company. Let me start with -- you gave a lot of good -- a lot of color, which is greatly appreciated on the various challenges that impacted margins and the results in Q4. Is the order in which you sort of presented those three challenges, weather first, COVID and China second, energy inflation and Europe third, is it the right way to think about it from an order of magnitude perspective? Or were they sort of relatively even across the three? Yes. Thanks, Dan. I can take that for you. So, I mean, as you know, heading into the quarter, we said we do around $60 million of operating income. And so, we missed that by about $16 million. And so, I can put that into some buckets for you. About a third of that impact was associated with lower volumes, so sales, related to sales, so about $5 million or $6 million. And that was really from three areas: the China COVID situation impacted our volumes; the production and logistics challenges that we were facing in North America impacted volumes. and we did see some softness in the steel and residential construction markets that we mentioned. I'll note, we've moved through those production issues in North America. From a China perspective, we do expect improvement there. The timing of that improvement is still a little bit of a question mark, but we expect that to improve. The one aspect we don't see changing at least in the near term is the softness in the steel and construction markets. So that is the sales side of things. The larger piece of the impact was on the cost side, so both manufacturing costs and inflation costs. So, let me give you a little color on the inflation that we experienced, that was more than we were expecting heading into the quarter. So, most of this was specific to our European pet care business, as we mentioned. And first of all, so the bentonite that we use in that business comes from Turkey. And we've got mining and processing facilities there. And as an example, energy rates in Turkey have been very volatile. In September, we got hit with a 50% increase on natural gas. Electricity rates have been up over 200%. And then, sea freight also on the Black Sea has been very volatile. So, we've had to deal with price spikes up to €90 per ton when we're used to dealing with sea freight costs from the €25 to €50 range. So, this all contributed to this wave of inflation that we've described, absorbing in the fourth quarter. Now, we've adjusted prices. We adjusted pricing in the fourth quarter to pass this through. And as I mentioned, this business has a 90-day lag in terms of pricing adjustments typically. And we're going to be adjusting prices again in the first quarter. The good thing is that these costs have moderated since these spikes in the fourth quarter, and that's going to help our margins going forward as well. Just one note on the higher manufacturing costs. These are related to the challenges we had in December, mainly related to the weather, the severe cold weather at West, and much of that was around the lower fixed cost absorption at our plants. The production challenges in China also had a cost element to them there, but that was the manufacturing side of things. Got it. Sorry, excuse me. Just -- that's helpful. Based on the pricing actions you've taken so far in '22, or you took in '22, as well as expected, so for Q1 of '23, what would be kind of incremental revenue look like for full year '23 if volumes were flat year-over-year? Yes. So, I mean what we have line of sight to right now is probably mid-single digit impact on our revenue from pricing in 2023. We expect inflation to persist in 2023, but we do expect it at a much lower rate than we experienced last year, probably half of the inflation. We're expecting around half of the inflation that we experienced in 2022. And a lot of that's going to be front-end loaded. Some of the things that we've seen moderating are energy and energy derivative raw materials, like packaging. We do see inflation. The types of things we see continuing are around labor, transportation, particularly around rail, in certain of our raw material purchases, but it should be at a much lower rate than we experienced in '22. And we have the -- we have pricing in place. I mentioned the 150 basis points of margin dilution that all of this inflation and pass-through of costs has impacted us by over the last two years, we plan to get that back at least in 2023 and we have line of sight to more than that as well. Really helpful, Erik. That just leads to my next question, which is making sure we're working off the right base. So, you mentioned 150 bps of margin impact over the last two years. So, are we looking at 2021 in terms of margins as getting back to those levels? Is that the way to think about it? Yes. So, I would just say for the full year 2022, we did just under 12% operating income margins. And so, the pricing that we have in place and what we see today from an inflation perspective should get us 150 basis points on that in 2023. So, we're looking at 13.5% to 14% margins by the second half on a run rate basis for this company. Perfect. That's exactly the -- just wanted to make sure we're working on the same page. I will jump back in the queue with a few follow-ups. Thank you very much. In terms of the European sea freight issues, I'm just trying to understand -- and maybe throw the natural gas in there as well, I'm just trying to understand a little bit more about the timing of when you saw that. Obviously, the China COVID impact was something that happened in December. The winter weather in the U.S. was something that happened in December. But natural gas and power costs in Europe were pretty well-known quantity and there was a lot of concern. We discussed it on calls. So, I'm just trying to understand why that caught you guys by surprise and maybe a little bit more about the timing of when those became a much bigger issue relative to your expectations? Yes, Mike, let me take that one. I think there's a piece of it that was absolutely known. It's been volatile all year, energy in Europe and Turkey, in particular, it's gone up almost 200% over what we experienced at the beginning of the year and about three different government mandated jumps. That latest one happened kind of late in September. We did have that in our forecast and we had some pricing adjustments to cover it. I would say the bigger surprise is some of the freight, the shipping costs that were more spot based for us that kind of increased significantly as a result of that as well. I'm not going to say though that I'd look back in hindsight 2020, we probably could have been a lot faster with our pricing increases at least in that business. We probably could have been more aggressive. And so, I think when we look back on the same, what did we see, what didn't we see, I think part of it was known and we made some pricing adjustments, part of it was surprise to us. We probably should have been quicker and more aggressive on our pricing adjustments in the fourth quarter. Those adjustments have been made. We're moving through the first quarter. We have some catch up to do. But again, as Erik mentioned, we have 90-day kind of notification periods. And so being very aggressive and very timely with our going-forward pricing is where we are now. So, I'd say that's the hindsight 2020 kind of look. We probably could have been a little bit faster on that pricing. All right. And I guess just given the significance of the shortfall relative to the $1.20 in EPS that you guys were guiding in the quarter, did you consider making a preannouncement to call out these unexpected headwinds that you were seeing? Or, I guess, help us understand the thought process there? Yes, I guess, look, we -- as we evaluated, a lot of these things continued through December. And let me start with -- we don't see anything really structural changing in our markets. The business fundamentals that we have, the operations, our cost positions, there's not a lot of real mark, other than, I guess, China, but that's kind of well known, market positions are relatively stable in what we saw in the third quarter. December was a very challenging time for the company in terms of the things we were dealing with in our plants in the United States and in China. And so, a lot of them have been kind of late in the month. I guess, we felt that these acute issues that we don't see repeating were in the quarter and isolated that quarter and not something that was of a structural nature or a significant change to our go-forward forecast from a market perspective or kind of our operations perspective. I think that was our thought process, Mike. All right. And then, a couple of quick ones on the PCC business. First of all, in terms of the new Asia satellite ramp ups, it's good to see that flowing in. Can you give us maybe an update on how much additional volume has come on as of the end of the year? And maybe how much additional volume is still to come? Yes. Hi, Mike. So, right as we closed the quarter, we brought two new satellites on that are roughly 70,000 tons of PCC business. And then, going into through the course of next year, we've got, mostly in the second half, several satellites coming on. Two of those are PCC satellites, little over 100,000 tons there. And then, we had announced some time ago, and Doug had highlighted it, the penetration into GCC and that is a couple hundred thousand tons as well. So, as we come out of next year, you'll see something in the neighborhood of 400,000 tons, that sort of a run rate going forward. All right. And then, in terms of the pricing in the PCC business, obviously, you've called out that most of that is contractual pass-through. Maybe help us understand what you've seen going on with lime and other raw material costs? Are they stabilizing? Are they starting to come lower? Maybe just help us understand kind of where we are in that lag in the contracts catching up to your input costs? Certainly, glad to share that with you. So, what we are seeing is, lime is mitigating, so it's starting to plateau and our pricing is catching up on that. So, we'll see some incremental increases as we go into next year, but they're not nearly the rate that we saw in the prior periods. So, I would say that our contractual mechanisms seem to be holding through this process and it's something that still provides a very collaborative relationship with our customers as we work through these things together. Further, I would say that the value equation of our PCC in these markets stand strong, as our customers are experiencing energy increases. For instance, part of the value contribution we bring is reduced energy consumption in their paper making process. So, it's getting better. Contracts are working, and we seem to be holding up our value pretty well. I think, Mike, the only thing I'd add to that is just kind of energy, we do -- we're supplied a lot of electricity from our customers on our -- as we reside on their facilities. So, major inputs this year have been lime cost, which is kind of a derivative of energy and the energy that goes into making it, and then also the direct electricity and energy from our customers. As that energy has plained over -- as you've seen through the first half of the year, we have that lag, and as that plains over, you'll see us catch up pretty quickly. I think that's what you saw happen in SMI in the fourth quarter. That margin expansion is starting to happen. Again, we have to see energy continue to plain over. And if it starts to decline, you'll see that margin improvement accelerate. Hi, good morning, Doug, Erik. Just wanted to follow-up some of the other questions. In terms of the way you're laying out 2023 and then your guidance for Q1, it sounds like China certainly -- knowing what we know now, China gets a lot better as 2023 goes along. Inflationary pressures ease -- I'm just [looking at] (ph) your market conditions for guidance, inflationary pressures ease, you get more of the lagging price effect. All things considered, would you knowing what you know now say that Q1 would mark the significant low point for the year in terms of EPS? Yes, Q1 is going to be probably a slow quarter for us, and seasonally Q2 and Q3 are always our strongest, right? So, I see of the next three, the Q1 probably being the lowest. And as you see us continue to catch up on price, as Erik mentioned, driving those margins toward 13% or 14% at a run rate basis. We have a number of new satellites in PCC coming online later in the year, which are going to add. And in our consumer businesses, as they continue to grow in their upper -- mid upper single digit kind of range, we see a top-line growth going through the year, again, a little caution on how these construction and steel markets and what happens in the back half of the year, but we see half the business continuing on its growth trend. The other half looks very strong for at least the first half, and we'll see on the back half of the year what happens with the U.S. economy. But as we see inflation, if it planes over and our pricing actions catch up and what we already have implemented, we see that margin improvement. So, that top-line growth and that margin improvement bodes for a pretty strong year. Now, I've given you a lot that says a lot's got to have to happen to deliver that right with inflation and there's some uncertainty in terms of demand in the economies. But as we see at least in the first half of the year, I think we have at least a strong look, and the first quarter being the lowest. I'm going on -- a little on a limb there, but I think you're about right there, Steve. Okay. Thanks, Doug. Just help me out on that, because I'm looking at the household and personal care results for 4Q versus even 3Q, and some of this tough to sort of pick through. I know you lapped the Normerica acquisition by the end of 2Q. When I look at the growth 4Q versus 3Q annually, it looks lower on both the percentage and dollar terms. If you can help me through that. I think some of that was some of the shipment challenges we had in North America. And so, we had -- a couple of our facilities in pet care are in Canada. With cold weather, we had a very challenging month in December in terms of shipments out of those plants. So, I think some of that has just been delayed. Those moved into the first quarter. We haven't lost those orders, so you'll see those pick up. The only other thing I would add is that it's kind of opposite seasonal. It's a -- there's a higher seasonal demand sometimes in fourth quarter and the first than it is in the summer. And so, you might see some of that impact as well. But I think more of this quarter was much more some of the shipment delays we saw in North America in late -- late in December. So, you're feeling as we go into 2023 in a slowing economy, a lot of your bigger acquisitions in that [seg] (ph) area were just generally not that cyclical. Your expectation is demand is there and with new products, you still can get reasonable growth even in this environment. Yes. And so, we're going to highlight that to you in that Consumer & Specialty segment. I guess I go back to the last semi or small cycle we had in 2020. That pet care business, which was a little bit smaller at that point, grew at almost 8%. Now the dynamics of going through the pandemic were a little bit different, but I will tell you in terms of cat litter products, fabric care, edible oil purification, these products, they're consumer driven. They're a little less discretionary in some specs, right? Folks are going to continue to purchase them through economic times and we're the largest private label cat litter manufacturer globally. And so therefore, that positions us well in a downturn to be the more economical choice. And so, I think, the exact level of demand is going to be hard to predict, but the fundamentals of this business that we've built should withstand to be really resilient and continue to grow as we've seen with kind of GDP plus cat litter and pet ownership around the world. Other things that we are working on, we've got some online channels that we're now selling through and some new business developments in Asia, as we start to build out our presence in that region. So, pretty bullish on that consumer business and its growth. And as we see margins expand, we think it becomes a really big earner for the company. Several questions. I think I'll start with this one. So, Doug, you talked about a lot of things regarding the fourth quarter. There was one thing I didn't really hear that I have heard from every other industrial company that's reported to date. And that would be inventory destocking on the customer side. So, in some of your slides, I could see that the volume change year-over-year 4Q versus 4Q was roughly flat. And I could kind of point to some of the pluses and minuses within the individual product lines. But just broadly speaking, how much did inventory destocking, typically your customers, impact the fourth quarter, and might we see more of that come through in the first quarter? Thank you. Yes. Thanks, David. We did see some destocking, I think Erik mentioned it in his comments, largely in the process minerals business, and then some in mine. I recall last year where inventory levels for customers were quite low and orders were just continuing to move through our plants even in low seasonal periods like December and January. This year a little bit different, because our customers we see especially in that construction market higher levels of inventory. We did see some orders removed out of December and placed into January. So, we think some of that destocking or at least managing inventories happened, similar impact in our steel businesses. And so, we did see some of that destocking, but we saw those orders move over into January and we'll see that -- we're going to see that pick up. That was part of -- Erik tried to mention about a third of our impact in the quarter was some destocking in process minerals and it was the impact on sales both in transportation, logistics and China was about $6 million in the quarter. So, yes, some destocking. Okay. My apologies for missing that. I wanted to follow-up with D.J. You laid out the new satellite plant startup timeline very well. I was wondering if you could also just maybe reflect on the new project or the new opportunity funnel that you see. And in the past, you've been very good about not just the number of projects, but maybe which innovation or which technology they're relying on. So, in the last couple of years, packaging grades have been introduced, the deinking technologies and I guess the PCC, GCC project. But if you could just talk about the outlook for the new project funnel as you see it here? And in particular, is there a particular new or expanding innovation that seems to be gaining more traction with potential customers? Thank you. Gladly, David. Thank you for the question. So, I mentioned the ones that are starting online and -- coming online in 2023, but the commercial activity remains very robust and it's spread around the world, but most of the opportunities remain in Asia. On top of that, the standard PCC still continues to be a pull for us. But as I'm looking at the pipeline now where before we would be, say, 90% pursuit of growth in printing and writing grades, now we're closer to 50-50 printing and writing versus packaging. Of note, in the fourth quarter, we made some considerable progress with full scale trials of two new products in brown grades. One of those was with a major brown box manufacture in the United States. The other one -- and that is our new product that I've alluded to that's [targeting brown] (ph). The other product that we are excited about is we began experimenting it with some time ago, but it was NewYield, which is -- that product that repurposes a papermaking waste stream. We have designed it for printing and writing grades and we were optimistic that we could modify for packaging grades and we've run some good trials in packaging grades in Asia. So, both of those hold promise for us for what, I would say, some near-term activity. So, we're pretty excited about that. And then, on top of that, still there's a great pull for the standard PCC products, if anyone is considering an upgrade for their quality of their paper. And if anyone's considering putting in a new machine, we are one of the first calls they make and because of the strength of the brand. Great. Thank you for the color there. Appreciate it. Last question. I did want to ask about the CapEx budget. So, I think it was bracketed at $80 million to $90 million as we start the year. And I would ask Erik if he could just focus on the discretionary portion of that $80 million to $90 million? And whether you could call out what are the top couple of priorities in there? What's getting the most discretionary capital out of your original budget for 2023? Thank you. Yes. Thanks, Dave. So, I'd say that every year $30 million to $40 million of our CapEx spend is on sustaining our operations, improving our facilities. And that's the amount that is less or non discretionary. So, we will likely spend that $30 million to $40 million in 2023 on sustaining and maintaining our operations. The rest of that, that we typically budget for, is growth, it's cost savings projects. But as I mentioned, we're going to be taking a really close look at market assumptions that we're using for justifying those projects. And as far as -- if there's a discretionary bucket, that's it. And if economic condition is changed, that's where we'll flex. Thank you again. Just thinking about revenue for the next quarter or two, obviously, pricing a bit of a tailwind, but FX continues to be a significant top-line headwind. Do you expect a similar impact in Q1? Or, based on today's kind of exchange rates, how does that taper off over the next couple of quarters? Yes. So, Dan, I would say, in 2022, FX was a significant headwind for us. We said $100 million on revenue for the full year. If you look at sort of current rate now versus what we had in 2022, it's still, I would say, moderately unfavorable on a full year basis, '23 versus '22, but not to the extent that we experienced in last year. So, we see -- FX is probably going to be a similar impact, negative impact on us in the first quarter. So, we still see both [Multiple Speakers] yes, but though we still see there's that pricing lift that will happen. And we see volumes improving from the fourth quarter. So, in total, we see our revenue up in the first quarter and we think that growth at least in our consumer-oriented businesses continue through the year. Industrial piece is a little bit early to tell how that's going to play out in the back half, but we see a pretty strong first half of the year nonetheless. Yes. Hi. Thank you. So, I have kind of a question that was not covered directly in the comments today. But in doing some reading in related industries, I came across the whole series -- and I'm sorry, the topic here is remediation and in particular the momentum behind PFAS removal. So, in doing some research, I mean, I came across a whole range of articles about efforts to accelerate or to implement new restrictions on PFAS. I mean, one in particular, the State of California is moving to remove all PFAS from personal care products within a few years. There was another one at the federal level, I think, amping up penalties and whatnot for -- amping up the responsibilities for the producers of PFAS. Anyway, not exhaustive by any case, but I'm just wondering if from your particular perspective whether you think the business case or the long-term growth or customer interest in your remediation strategies has qualitatively or meaningfully improved in recent months in response to some or any of the new legislative and regulatory proposals I've been reading about, is anything especially relevant to your particular remediation strategies and targets? Thank you. Sure. Well, let me take that in pieces. I guess PFAS is only one part of our remediation capabilities. So, we have an industrial wastewater and slurry wall cleanup, groundwater cleanup systems. We have contaminant removals from in the oil and gas industry as well. So, we have a wide range of water remediation technologies and systems. PFAS, our FLUORO-SORB is one of the medias that we have developed targeted at obviously PFAS removal. Look, first, I think it's good to see that the regulations have stemmed the use of it. But I will also say that the amount of it that exists and the fact that it is forever around is going to create a number of opportunities for us that have only just started. I think we have spent -- had some really good trials. We've continued to commercialize it over this year, gaining more traction in terms of efficacy and proof of ours versus other media, ours being a very economical workhorse to remove significant amounts of PFAS from water. The real catalyst though is not on stemming the flow of PFAS, it will be in the regulation of cleanup and cleanup levels. I think there's a lot of opportunity out there in terms of cleanup of water, groundwater, drinking water systems. But I think until there's a level of cleanup kind of regulation to what level needs to be cleaned up, I think that will be the real catalyst. Once people know where they have to go, they'll know the system. They want to employ. And I think that's going to develop a significant amount of opportunity for us. In the meantime, there are acute areas around the United States and in the world that we're seeing and that we're being pulled into project-related cleanups. But I think long-term, with the amount of the chemicals that's there and with it being there forever, our technology being able to bind it forever, is going to be a real good system once people start to use it more, I guess, from a regulations standpoint. So, hopefully that helps you. It's one piece of it, David, but it's not everything with remediation, water remediation for us. Okay. So, no landmark legislative or regulatory development in the last few months. No, that's great. Thank you for that help. Thanks. Sorry about that. I was looking for an update on the talc litigation. I know there will be something in your filing, but presumably that won't be out for a little while. Any update on the number of cases relative to the last time you reported? And do you expect to have to add to the reserve at any point during 2023? I noticed there was not a special charge related to the litigation in the fourth quarter. No, Steve, there hasn't been -- I'm sorry, Mike, there hasn't been any change. The level of case is stable. There has been no change in terms of the litigation and the reserve that we took, it continues to be adequate to cover what we saw back in the third quarter as the liability for that caseload. So, no change. All right. And then, just a quick one on the Refractories business. You mentioned that kind of second half utilization rates were lower and things were stronger in the first half. But as I look at kind of the year-on-year change, I know this is sales, not volume, but the revenue number, at least, looks pretty consistent first half and second half. So, maybe just help us understand, is there something that's changed that your Refractories business is maybe less sensitive to utilization rates than it had been in the past? I think in the past, we used to think of 80% as utilization as a number where your business would really be performing well, and if it was lower than that, that would be a headwind. But it doesn't seem like that has been the case more recently. Yes, Mike. Thanks for that question. This business is very different than it used to be. And so, you referenced having to be at 80% this to be a profitable business and we're generating higher profits at even 70%. So, directly the market is down from where it was last year. But this business is able to generate income due to a number of different things. I'm going to turn it over to Brett to let you know, but the technologies that it's been developed, the systems it's developed, the new refractory formulations, all of that is combined to change the real profile, the profit profile of this business. Sure. Thanks, Mike. I appreciate that question and glad it's noticeable. This is a business that we've been working on for a long time, especially in my 36-year career. We have changed and started to change going back to 2009 when that big market dropped and it really hurt us. We resized the business. We reorganized the business. And every so many years, we just took a look at it and did that even further. It's a combination of our steel mill service groups that are embedded into our steel plants, our customers. But those people, although they've been there for many, many years, we're increasing that technology of what we do and increasing their ability to operate more higher tech equipment. We've also moved into different product lines where we're driving similar cost or, in some cases, could be lower cost where we can work with our customers on pricing, but it's all about value. And our value is driving the lowest cost opportunity on an installed basis for our customers, so that they can run their steel plants more efficiently and more effectively. The other thing that we've done is really driving that automation of our application equipment and signing in five-year deal contracts. We have now, over the last couple of years, about 13 new automated application units. A couple of those are in Europe and the majority right now are in North America. We're really happy about that, excited. Those are all going to be rolling out. The other thing is, you see the utilization rates going down. As they're coming down, we have five new steel plant customers that are expanding in 2023. So, we're riding with them and we're helping them in their expansion. So, as Doug said, it truly has evolved to a much different higher tech business than it has been looking back in the past. So, we're really proud of that. And it appears there are no further telephone questions. I'd like to turn the conference back over to Mr. Dietrich for any additional or closing comments. Thanks everybody for joining the call today. Again, please look out for some more information on our new segments that we'll be reporting on, and we look forward to reporting under it in our first quarter and then further to an Investor Day, probably scheduled in May. So, stay tuned for that as well. Thanks for joining today.

EarningCall_344

Good day, and thank you for standing by. Welcome to Idorsia, Full Year 2022 Financial Results Webcast. 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, Hyde. Good morning, good afternoon everyone and welcome to our webcast to discuss the full year publication of your results. The press release went out this morning at 7:00 a.m. Central European Time. With me on this call are our CEO, Jean-Paul Clozel; our CFO, André Muller; and our Chief Commercial Officer, Simon Jose. Next slide, please. Just to reminder you, we will be making forward-looking statements in this call. So please be attentive to the disclaimer. You therefore have been adequately warned about the risks and benefits of owning Idorsia's stock. Next slide please. So, yesterday we have seen that we have informed the market that the REACT study did not meet the primary end point and of course we are very disappointed and very sad I have to say. But it should really hide the achievement – next side – that happened in 2022, which provide momentum for 2023. Next slide. A lot has been achieved in 2022. First, QUVIVIQ was approved in the U S., PIVLAZ was approved in Japan, and launched in Japan. QUVIVIQ was launched in the U S., QUVIVIQ was approved in Europe, and we got the result of aprocitentan showing a very significant blood pressure reduction. And then we got the results of Daridorexant in insomnia in Japan, and QUVIVIQ at the end of the year was launched in Germany and Italy, and cenerimod mode Phase III in the lucerastat was initiated. And finally, just before the end of the year aprocitentan was filed for U S. the NDA, aprocitentan was filed in the U.S. Thank you, Jean-Paul, and good morning and good afternoon everyone. 2022 was indeed a transformative year. We obviously launched our first two products and I believe we built a very strong foundation for future growth, and obviously today I’m pleased to be able to share with you the positive momentum by saying about the launches of QUVIVIQ in the U.S. and Europe, and of course PIVLAZ in Japan. Next slide please. So I'll start with QUVIVIQ, which as you all know it was launched in the U.S. in May and in the first two European markets in November as Jean-Paul said in Italy and Germany. In 2022, net sales totaled CHF 6.5 million. Obviously, as I've mentioned before, net sales in the U.S. don't reflect demand or prescriptions dispensed. To enable early patient access to QUVIVIQ, we continue to offer our strong copay program, including a free first 30-day prescription, and of course demonstrating demand is critical to support our ongoing negotiations to expand payer coverage, and I'll provide an update on our progress there in a few minutes. Next slide please. So turning now to the prescription volume for QUVIVIQ in the U.S., you've seen this slide in prior earnings calls showing the TRx volume by strength on the left. And the split by retail dispenses, which you see reported by IQVIA and those dispensed by VitaCare, our pharmacy services provider on the right. And obviously, we've updated these last three months since you saw this chart in October for the Q3 call. I'm pleased to be able to share that TRx volume continues to grow with almost 15,000 prescriptions dispensed in December, despite the usual dampening impact of the holidays, which is as you can see, was the case of VitaCare who were closed for the public holidays during the Christmas to New Year period. And we continue to be pleased at the 70/30 split of the 50 milligram and the 25 milligram strengths as you can see being maintained. Next slide please. You can also see the same positive trajectory in QUVIVIQ Writers, which continued to grow month-over-month, and although we continue to expect to see our Writer base growing as we move into 2023, our clear focus is now going to be on increasing the number of prescriptions from each Writer, turning the current breadth of prescribing into greater depth of use. And on the right hand side you see the split by prescriptions with 65% of prescriptions now coming from Primary Care Physicians and 21% coming from Psychiatrists and this is broadly in line with the structure of the insomnia market. Next slide, please. Encouragingly, we continue to see the source of business for QUVIVIQ coming from either new patients or were switched from the older, widely used sleep medicines such as Z Drugs, Benzos and Trazodone. Only a small number of patients on QUVIVIQ are coming from the other DORA’s; around 6% of switches and only 3.5% of all patients. This is critically important to us, as to achieve our long term goals we need to dramatically grow the DORA class, in addition of course to making QUVIVIQ the leading DORA. Next slide please. And here's the effect on prescriptions. You can see that QUVIVIQ volume has essentially been addictive to that of Belsomra and Dayvigo, expanding the DORA class as a whole. And naturally, QUVIVIQ is taking share within the class as it grows. The chart on the right shows that after just eight months on the market QUVIVIQ has achieved 41% share of the DORA class in NBRx, surpassing Dayvigo and in quarter four the approach is Belsomra, and during that same period, the DORA class has grown 67%. Next slide please. Taking a closer look now at how our NBRx’s are tracking in recent weeks, you can see here that QUVIVIQ is now neck-and-neck with Belsomra, and we expect to become the leading DORA in NBRx's any week, now that we are through the holidays and payer coverage is increasingly. Of course, refills and continuing prescriptions are just as important as acquiring new patients, arguably more so in the long run. The chart on the right shows the continued growth and acceleration in CBRx or continuing prescriptions, indicative of the patient satisfaction with QUVIVIQ we generally hear in the markets. The NBRx performance versus Belsomra is particularly impressive when you consider that Belsomra generates over 50% of its prescriptions from Medicare Part D, where QUVIVIQ is yet to be covered. Next slide, please. So although it's clear we would have passed Belsomra NBRx’s in the commercial segment, we actually can't get NBRx by channel, so I can't show you that and construct a graph to sub-prove it. But we are able to do this with TRx’s and as you can see here, in the commercial segment only where we can compete equally, QUVIVIQ has bypassed Dayvigo TRx share and is on a trajectory that will pass Belsomra in the next few months. This is probably the most appropriate head-to-head comparison of performance, where we continue to expand our excess and before we have Part D coverage. Next slide, please. And of course speaking of coverage, I'm pleased that we have made some real progress in the beginning of this year. As many of you will now know, QUVIVIQ was added to the Express Scripts National Preferred Formulary from January 15, gaining parity access with the other DORA’s in their approximately 22 million lives covered, representing about 13% of the commercial market. Now there a further 30 million lives, about another 19% of the commercial segment in the downstream plans that can now take the ESI rate that we've agreed with them. We're also on formula in the TRICARE, which covers 9 million U.S. military service members and their families, another further 5.4% of the commercial segment. So as you can imagine, we are now actively pulling this expanded coverage through via the sales team and other promotional activities, and of course we're in discussion with all the ESI downstream accounts to secure coverage there, too, and we continue to have active discussions with the other commercial payers and the Par D plans. Next slide please. So I want to just conclude the U.S. by briefly touching on our branded direct consumer advertising featuring QUVIVIQ patient ambassadors Lindsey Vonn and Taye Diggs. These initiatives have demonstrated a very significant increase in all our key metrics, including traffic to QUVIVIQ.com, where we now have exceeded 1.7 million visitors, paid and organic search, copay card downloads and utilization and ultimately doctor conversations and QUVIVIQ NBRx and continuing scripts. Next slide, please. In looking beyond the U.S. QUVIVIQ is on track to become a global brand. In November last year we achieved our first European launches in Germany and Italy, and I'll speak more about our progress there in a moment. We've also completed our Phase 3 study in Japan and are preparing to file the marketing authorization application in the second half of this year with our local partner, Mochida. We also announced the licensing agreement with Simcere in November 2022 to develop and commercialize daridorexant in the Chinese market. Next slide, please. Now in Europe, QUVIVIQ is the first and only DORA available to patients, and I really see great potential here given the high unmet need and dissatisfaction with existing treatments in the region. In Germany, we launched QUVIVIQ in Mid-November, and as I'll show you in a minute, it's got off to a great start. As I have mentioned before, in the German market there is a full week prescription limitation for all hypnotic and sedating agents known as Anlage III. The G-BA issued a draft resolution last year to exempt QUVIVIQ from Anlage III, which if approved would mean QUVIVIQ would be the only sleep medicine reimbursed for long term use in Germany for adults. We also launched in Italy last November into the private market and some of the products there are not reimbursed. At launch, prescribing of QUVIVIQ is limited to specialists. It's not uncommon for that to be the case with new CNS products and the feedback to date has been extremely positive. And launch preparations are underway in Switzerland with launch planned in mid-23 in the private market. This is where our reimbursement dossier is under review. And in the U.K. we plan to launch in the second half of this year following final NICE guidance. We submitted our dossier to NICE last summer and we'll have an advisory committee in March. And lastly, launch preparations are also underway in Spain and France. Next slide, please. So I turned to Germany briefly. Whilst its early days, QUVIVIQ has got off to a strong start in Germany. This chart shows the weekly sales units from wholesalers to pharmacists and you can see the very positive momentum in the initial weeks post launch, which has continued now after the debt during the holiday period. There were a significant number of German sites in the pivotal trial programs of QUVIVIQ and we're seeing a great deal of interest among the German medical experts and GPs in the new mechanism of action and differentiated efficacy and safety profile of the product. Next slide please. And here we see the initial uptake in Italy. This weekly data is projected by IQVIA from the panel of pharmacies around 20% across Italy, so we should treat it with some caution. Nevertheless, we see a positive initial trajectory, especially when considering that we are launching in a private pay market, with specialist prescribing only at this stage. We recently had a launch event with key opinion leaders who showed a lot of excitement about the product and shared their positive initial experience with QUVIVIQ, and I look forward to sharing more progress in Europe over the next months. Next slide, please. So just to finish up with, turning to PIVLAZ in Japan. We launched PIVLAZ in April last year, to prevent vasospasm following an aneurysmal subarachnoid hemorrhage. This has a two into three times higher incidents in Japan than we have in the western markets. Next slide please. And again, you've seen this chart, and it's now been updated with the end of the year numbers. We continue to see very positive trajectory since launch. We generated net sales of CHF 44 million since April against the currency headwind I hasten to add, with over 95% of target hospital accounts ordering. Medical experts and neurosurgeons are supporting the inclusion of PIVLAZ in aSAH treatment protocols. And at the end of last year, in December, approximately 25% of aSAH patients received PIVLAZ based on the incidence of aSAH in Japan and we expect adoption to continue to grow this year. So in summary, I think 2022 was a transformative year, where we put our commercial plans into action, and we launched our first two products. QUVIVIQ is building momentum with very positive feedback from physicians and patients alike. In the U.S., we expect this momentum to increase and start translating into net sales as we expand payer access. And in Europe, although it’s early days, QUVIVIQ is off to a strong start in Germany and Italy, and we're preparing for additional launches later this year. I’m confident the strong foundation we've built in 2022 sets us up for a year of strong growth and additional launches in 2023. Thank you, Simon. To our next slide please. And let's go directly to a Slide 23 and how the U.S. GAAP net result came about. I would like to start with CHF 757 million non-GAAP operating loss of 2022. You may recall that we have not changed the guidance from the full year result 2021. So in February ‘22, we see Q3 results published in October 2022, maintaining net operating, non-GAAP operating results of minus CHF 785 million. So you see actually a difference of CHF 28 million and this CHF 28 million is actually the contract revenue on Simcere CHF 30 million upfront. So what I want to emphasize here is that, yes, clearly sales well lower than expected, but it also means that we closely monitor our OpEx to remain committed to this guides. We're now coming with a few comments on net revenues. CHF 97 million on top left consists in CHF 50 million sales as Simon said, PIVLAZ in Japan, CHF 44 million that’s impacted by FX rate with weakening of Japanese yen and roughly CHF 6 million with daridorexant or in U.S. accounting for CHF 5.5 million and then Germany for almost CHF 1 million. On the contractor revenue, so we see a remaining CHF 47 million. As Jean said, Simcere accounted for CHF 28 million. We had CHF 2 million from Ponvory, revenue sharing from Janssen. CHF 3 million from Neurocrine with an extension of research collaboration and CHF 14 million deferred contract revenues from the previous collaboration, including J&J regarding our [inaudible] patent. So with this, into the next slide we’ll comment on the non-GAAP operating expenses of CHF 854 million, but there are DNA and there are sub-base compensation in line with the previous years at respectively CHF 20 million and CHF 26 million. So leading to a U.S. GAAP operating results of minus CHF 803 million and below that its – you see this CHF 25 million, which is mainly interests around CHF 16 million. That's a couple of 2.1, 25% paid on the 600 million convertible bonds, so for approximately CHF 12.2 million, coupled with 200 million convertible bonds, so 0.75 for 1.5 million and you may recall I explained it in a Q3 results sales and leaseback transaction is according to the U.S. GAAP treatment, treating as a debt, and to the extent we have also relating funding cost of CHF 1.6 million. On top of the interest of CHF 16 million, you have also a tax of CHF 8 million. CHF 2.5 million with full impacts on the upfront from Simcere. We had also CHF 4 million of foreign taxes, mainly in Japan and the U.S. given our tax organization with our commercial affiliates being what we call limited risk distributors, and we have CHF 1.5 million deferred tax. So this leads us to U.S. GAAP net results of minus CHF 828 million. Let's move to see our next slide, 24. Speaking of non-GAAP operating expenses here. Cost of sale is mainly consisting on the right sector, we pay on the Clazosentan so its CHF 4 million real cost of goods and is really a low on sales, so for the remaining 2 million it's more distribution and warehousing. As you can see, a research with CHF 117 million is almost flat or I would say flat since you take into account CPI. And you see that development is slightly below last year at CHF 240 million. In CHF 240 million, you have roughly CHF 100 million, which are functional expenses, which will fix the cost base of our development organization; clinical, but also pharmaceutical and chemistry. And so remainder, so approximately CHF 140 million, so that’s really see a study cost. Here we have three main drivers. First, Selatogrel. You know well we are enrolling with SOS-AMI, and to this extent we have spent more, significantly more than in 2021 with CHF 41 million for Selatogrel. CHF 28 million in clinical is remaining in order to get this autoinjector in connection with mainly [inaudible]. The other main driver are Daridorexant and Cenerimod. So Cenerimod, we are now, as you've seen, we have finished Phase II. This was main Phase 2b we are starting Phase 3 this was main driver for the expenses, study expenses around CHF 26 million. And the other big driver is Daridorexant we’re still CHF 26 million, not so much in a global clinical and which is around CHF 8 million, notably with the initiation of the pediatric, but also we see a Japanese trial, and a sample set, and now we got see our results, Japanese pivotal trial, accounted for CHF 9 million and that’s our share, because Mochida our partner, took also 50% of the local development costs. Well these are your main drivers. As you can imagine, Aprocitentan comes to an end, Clazosentan will, also will come to end, especially moving forward in 2023 and lucerastat still spending, because we have an open label extensions. But these amounts are relatively small compared to Selatogrel, Cenerimod and Daridorexant. On SG&A, so CHF 492 million. The main cost is really driven by a commercial, with marketing and selling expenses, around CHF 400 million of which a significant amount is spending in the U.S. around CHF 300 million. And Simon explain you that here we need to have a sales force detailing PCP’s. We need also – now you’ve seen the impact of DTC, digital and TV ads. So we're – this was a significant effort not fully reflected in the net sales, but we need first to grow our demand and continue on this positive trajectory to convert a demand to volumes into net sales, now that we get commercial coverage and soon hopefully as a Simon said, also but if its 2024 with Medicare Part D. With this we end up with CHF 854 million non-GAAP operating expenses. So a significant jump compared to a 2021, mainly driven by the launch activities in the U.S., and current preparation in Europe and Canada and also we see a launch in Japan. Next slide, please. Cash flow, so you recall that we started here with a stronger balance sheet CHF 1,188 billon, liquidity. As I said, the non-GAAP operating results of CHF 757 million we just explained it. CapEx around CHF 27 million. Significant working capital requirements with CHF 65 million, with an inventory built, notably with registered starting material for the like fund, but also a significant increase in trade receivables. Of course, we saw Japan sales. You have roughly 100 days of sales outstanding, but also with the U.S. because of the U.S. sales funnel. You know we sell to the wholesaler at watch or gross, or net or gross selling price, and we get a 60 day payment term, which is wholesaler, but all gross to net. So all the rebates are at our paid at 15 days. So of course, this generates, because we have demand, because gross sales are going up, we have with this higher working capital refunds. Sale and leaseback, this was already in Q3, 162 million, and the other items are actually what we already mentioned below EBIT interest expense, tax expense and a small adjustment to our reconciled with non-GAAP operating results. So by the end of December 2022, we end up with a liquidity of CHF 466 million. Next slide please. Here you see the structure of this liquidity by year end 2022. CHF 336 million in the right chart in Swiss Franc and $116 million in U.S., because that's a natural hedging, notably accounting for the sales, the OpEx, notably with U.S. commercial organization. Next slide please. I will finish with the financial guidance for 2023. You see here, net revenue of CHF 230 million, operating expenses of CHF 880 million, these are non-GAAP measures, leading to a non-GAAP EBIT of CHF 650 million. As last year we can be reassured that we are committed to manage this EBIT target at CHF 650 million. If you take U.S. GAAP you see delta between the operating expense of CHF 65 million, which is mainly driven by stock base compensation, with a significant increase. The reason for it is that we, in order to preserve our cache, 70% of next year or 2023 bonus to employees, across the organization will be paid in shares, account for roughly 20 million. And if you look, if you had time to read the Governance Report, you've seen that we launched in 2022 a plan called Ambition 2027, with granting to most employees an incentive plan, split evenly between restricted share units and performance share units that will have some metrics in ’25, ’26 and ‘27. But you still have to account next year or see a full year impact in the U. S GAAP of this ambition of 2027. New initiatives to retain the employees at Idorsia. And lastly, we are growing in terms of organization, so you can have also a higher impact of the organization in 2023 compared to the previous years. With this, we believe that U.S. GAAP operating loss would be around $735 million. Next slide, please. You may have seen already, this profitability, a target which we issued at the JP Morgan Health Care Conference. We remain committed to reach sustainable profitability in 2025 with global revenue above $1 billion, and here again, we only account what we know, i.e., the first of two visits. The sale of PIVLAZ in Japan only and [inaudible] and so we are entitled to with Janssen regarding our position there. Thank you, Andre. So you have seen that – next slide, we are continuing to advance our pipeline and you have heard about – next slide, PIVLAZ and unfortunately it’s a react, but also the Japan commercial success to be big, which is basically to an end of the clinical development plan, and the opposite end times which is fine. We are going to during the year have a discussion with regulatory authorities for the lucerastat and we are in the Phase III recruiting for selatogrel and cenerimod. I will concentrate on these Phase III products. We have many of the products coming in Phase I and II. Most of them, we are looking for partners because they come to areas where we are not focused and we are in discussion for several of this product with potential partners. Next slide. So last year we announced the results of aprocitentan and I really like to show this data, which are really very impressive. You see how the two doses of aprocitentan could decrease the pressure and maintain the blood pressure reduction during the year, which during eight months which was asked to be done by the FDA and whereas withdrawal shows the real effect of the drug, because it's really after clinic treatment. It's at the end of the treatment that you see how the blood pressure is maintained under aprocitentan comes back with placebo. Next slide. If we looked at ambulatory blood pressure, where there is a much lower placebo effect, because it's a much more precise, it’s done at home, there is no influence of the white-coat effect, and you see that especially during the night there is a very significant effect of aprocitentan, and you must not forget that these patients were basically Twittered at least by three [inaudible] medication, but more than 60% where it was four medications and some patients were under five or six aprocitentan drug. Next slide. So aprocitentan has been filed with the FDA and the PEDUFA date is in December this year, and young said we’ll be responsible for commercialization of this product, so that's rare. Next time. Selatogrel is really a very innovative product. It's a very short active and fast active, because it's also given subcutaneously with an auto injector. It's a [inaudible] which can be given by the patients him selves. We can auto administrators. And this should change the approach of the myocardial inflation – next slide – because today, patients with such a pen, with rescue pen need to call the emergency unit, the ambulance and it takes an average three to four hours before the patient is treated. Here, just a few minutes after the pain the patient has been trained to inject himself, then call the emergency unit, and then you save three or four hours of progression of the myocardial infarction and we know that these are the essential errors which are going to define, and this in our mind is the future of this patient. Next side, we have also started the case study which is a study of cenerimod in lupus, with one dose, two which has been defined by the Phase II and show the really very significant and meaningful improvement of disease activity with an effect which increases time and which has been very well characterized, especially which has been shown to be much higher. The treatment effect is much higher in patients with a high IFN-1 gene signature. And of course, we could define the safety and the good safety profile of cenerimod at this dose and this has allowed us to start the Phase III program – next slide – where the OPUS program, which consists of two tries of each 420 patients, 210 in placebo, 210 in cenerimod. We have agreed for the design of this study with the FDA. Next slide. So as I have described, we are continuing to build the momentum in 2023 and we are going to have a higher and broader coverage in the U.S. This is a priority for us, for QUVIVIQ. The aprocitentan has been submitted already in Europe, and we are waiting for the QUVIVIQ regulatory decisions for QUVIVIQ in Canada and as mentioned, lucerastat is going to be discussed with regulatory authorities and QUVIVIQ will be launched in Switzerland and UK and the NDA of QUVIVIQ will be submitted in Japan at the end of the year, and we’ll have also the decision for opposite end time at the end of the year. So I hope I have described the really very eventful, I think 2023 which we will have. Thank you very much. Thank you, Jean-Paul. With that we have come to the end of our prepared remarks and are ready to take your questions. First, a few housekeeping rules please. May you refer your questions to one only and then jump back into the queue. Operator, please populate the lines. Thank you. [Operator Instructions] Please stand by while we compile the Q&A roster. We will take our first question, and the question comes from the line of James Gordon from J P Morgan. Please go ahead, your line is open. Hello! James Gordon from JP Morgan, thanks for taking the question. One question, which would be a funding. So what near term options are you weighing? Are you potentially considering an equity raise and then to tide you over until late in the year, or are you still optimistic that we could see a partial divestment on our current economics. And if the latter, what is the trigger that is needed to get it over the line? Why you have to wait for apro to be approved or the filing accepted. Maybe but a discreet in the classification of a question, which is there was talk about higher stock option expense. Does that explain why there’s a bigger difference between core and reported OpEx this year? Should we assume there’s something like a $40 million step-up in option expense? I follow your rule Andrew, so I’ll only take the second question, which is easier. No, the first question on the funding. Well first, we have always been a transparent, but we're not funded at breakeven. With the guidance we gave at $650 million compared to $466 million cash by the end of 2022, obviously we need to raise cash and relatively in the next few – in the short term, next few months. We are looking at several possibilities to a fancier company. Non-equity dilutive; we may now prefer the option. I will not tell you where we are in the discussions with the potential right monetization investments. Jean-Paul also alluded to a discussion on the potential out licensing deals. It will feed off, your two main avenues for non-equity dilutive funding. But saying it's a preferred option does not include – exclude, sorry, equity dilutive, and here it would be equity because I think that the convertible bond would be highly unlikely in the current market condition. So we're – at the end we really want to remain nimble and will remain pragmatic to enter the business continuity at Idosia. Your second question regarding the overseas stock base compensation, the impact this year, it is valid for 2023 what I described you. So the impact this year is really limited and the rules were [inaudible], except for the executive team are paid in cash, so we're set it for 2022. But for 2023, as I said we changed the rules, where 70% of the abundance across the organization will be paid in shares and again there is fight for talent, especially in Switzerland, but also in CIUS [ph] and this is expense we believe that retaining people, we see some mission 2027. Again, looking at the government's report will help us. But that's not the cash, that's only P&L impact, and that's why we have it as a reconciliation item between non-GAAP and the U.S. GAAP. Thank you. We will take our next question. And the question comes from the line of Harry Sephton from Credit Suisse. Please go ahead, your line is opening. Brilliant! Thank you for taking my question. So it's on net pricing for QUVIVIQ. Based on the report itself and scripts for Belsomra, it has a net price of about $150 a month. Is that a good benchmark that we can use for QUVIVIQ given your reimbursement negotiation to BSI. And what proportion of employers have currently opted in for QUVIVIQ coverage. Thank you. So Harry, yes we're not going to give net price guidance. I mean clearly right now we have a lot of drug given away free because of vitaCare as we generate demand and generate coverage. But I will say of course that we priced QUVIVIQ at a premium at the WACC level because of the premium profile that we believe the drug has, and it's important for us to continue to try to sort of flow that down as we go through the various difference of rebate discussions and net conversations that we have. Right now, it's difficult to give you an exact number on coverage in the commercial space, because obviously you've got a number of downstream plans that we're working through. We have a number, already in. Because I think I've mentioned to you before, when you launch usually and that was something in the order of 20% open coverage for plans that either are not that well controlled or where they give you sort of a conditional access whilst you are negotiating. But I think our broad estimate right now is that we're probably somewhere in the sort of mid-40s in terms of commercial coverage, and that we would expect to start to move it up into the 50s as we start to bring through the downstreams I referenced with ASI, when we were getting to sort of quarter two. Thank you. We will take our next question. Our next question comes from the line of Rosie Turner from Jefferies. Please go ahead your line is open. Hi, and thank you for taking my question and I'll jump back in the queue after this one. But yes, so just when you service that long term extension study, did I hear just towards the end of the call that that is being discussed with authorities. I think we saw on the FDA website, it's been extended out further. So is there something going on there? Is it something that could kind of – we should potentially be thinking about adding back into numbers? Thank you. No, I think we have been waiting really to get two years data on the renal effect of lucerastat, which are in my mind quite impressive. We have also measured subgroup, some very specific subgroup of patients. I do not want to give competitive information, so. But you know, we need to discuss with both Europe and U.S. in order to really see where we can go. It's very clear that the drug is active, but this is a regulatory issue. Thank you, Jean-Paul. Just very quickly, Rosie. So yes, that observation is correct. The open-label extension was extended from 48 months out to six years, given that the first patients were actually reaching that four year mark. Thank you. We will take our next question. Our next question comes from the line of Thibault Boutherin from Morgan Stanley. Please go ahead, your line is open. Yes, thank you for taking my questions. So on QUVIVIQ sales expectations for this year, when we look at your guidance, it looks like you're expecting roughly CHF 100 million for QUVIVIQ globally. So if you could just help us understand the split that you expect broadly between U.S. and ex-U.S? And then second, I mean follow-up on this in the U.S. dynamics for QUVIVIQ. Right now there are some highs and you are raising around $80 million a year in the U.S. So if you could help us understand the dynamics for QUVIVIQ in the U.S. in terms of, I guess one side is prescription growth, the other side is transition to paying prescriptions? So if you could help us how we should – how you're kind of thinking about this for the year, and basically does this mean that the vast majority of sales for QUVIVIQ this year should be kind of back-end loaded towards the end of the year? Thank you very much. I can take the most part. Thibault I would like to help you, but I'm not sure we will be able to do or trust for the latter, for your second question. Yes, it's more skewed to the end of the year because here, as Simon said, we believe that it will drive higher volumes, week after week and that we see a pace and coverage. These volumes will convert into net sales. So yes, clearly there is a higher amount in Q4 and in Q3 compared to Q2 of Q1, that's one. On the other side, having a breakdown of net revenue, i.e., sales and contract revenue, the only thing I can tell you is that in the contract revenue, we do not speculate on new out-licensing deals, and we have a few above since the year, but it's like M&A. You need to be too, so we have not factored here any additional contract revenue. So, you can reasonably expect that it's mainly driven CHF 230 million, mainly driven by sales, PIVLAZ you have seen a trajectory quarter-over-quarter. So PIVLAZ has a significant amount, but the biggest one is QUVIVIQ in the U.S. Okay. Thank you, Andre. Before handing over to Simon to give some clarifying points on how his views are on Belsomra, we're not guiding on product specific. The consensus right now that resides on our website calls for CHF 110 million of QUVIVIQ sales and CHF 95 PIVLAZ sales and I feel comfortable with those numbers being out there in current consensus. Simon, do you want to make some comments on the Belsomra and where that stands right now in terms of its numbers and how did that compare? Yes. I mean, I think as I showed in the presentation, we're close to being through on NBRxs, I think we'll be on TRXs in the next few months. So, we'll be in a position where we're driving more volume in Belsomra in the next few months, I'm sure. And then as André said, it's really now about putting the payer coverage through to convert that volume into net sales. I mean I think really you end up with several benefits of payer coverage. You end up obviously converting free scripts to paid scripts and that generates net sales. But it also removes the NDC block that are in place when payers are blocking you, and that allows currently written scripts to start to move. And also we know from our research that the lack of coverage is certainly a disincentive for doctors to write more. So I think that obviously with our sales force activity, and now that we've got the coverage, we will expect to see demand grow as a result of this. I think that the payer access for sure has a net sales benefit obviously, but it also plays an important role in demand generation as well, and I think we would expect both of those things to collectively play through the next year, and as André said, that we'll build over time, which means that we're more back end loaded than front end. That's very clear. Thank you very much. Just on the second part quickly. So from your answer, we can infer that the vast majority of QUVIVIQ sales you're expecting having to be in the U.S. in 2023. Thank you. [Operator Instructions]. And we will take our next question. The question comes from the line of Rajan Sharma from Goldman Sachs. Please go ahead, your line is open. Hi! Thanks for the question. Just had one on PIVLAZ. So I think you talked about penetration at 25% in December, which looks flat compared to November as you updated in January. So, can you just talk about how you see penetration evolving from here given that you're at 95% of target accounts? Thanks. Yes, sure. I mean, I think I've said in previous calls that we absolutely expected a pretty rapid ramp and then it's going to start to - that curve is going to start to slow down. I mean I think you often see that with specialty drugs, but we're certainly seeing it with PIVLAZ, because what we've seen is the trial sites and the investigators jump in very quickly, which is what's given us this sort of rather rapid uptake as we've seen in the first sort of eight to nine months. And I think you'll now start to see that the increase will be more modest each time we come through quarter-on-quarter. So I expect it to grow. I just don't - we shouldn't expect to sort off – I think I said this at Q3, we shouldn't expect it to linier. We're going to be at 100% market share by the summary if we go on at that rate. So we really are expecting to continue to see growth, but I think it'll become now more modest as we move into the rest of the market and people who have less exponents with the drug and will perhaps move a little bit more slowly than the investigation. Yes we do. One moment please. Please standby. Apologies for the delay, one moment, please. And your question comes from the line of Sushila Hernandez [ph]. Please ask your question. Hello! Thank you for taking my question. I just have a question on your early-stage pipeline. You already briefly touched upon it. What is your strategy here? And what is your priority here? Thank you. The early-stage pipeline, we have discovered you know. We have profited of many projects, which really has come to breakthrough and we are really focusing only on specialty products, you know very, very – because these are our choice. We now have that, the possibility to do research on a very selective topic. So first is specialty products, very limited orphan drugs and high medical need, most first in class, sometimes best-in-class, but I would say, nearly 90% first in class and with very significant breakthrough. But as you know, these are compounds in Phase 1, in Phase 2, and there is always not 100% sure that they will make it to the end and this is why we look for partners like we have done with Neurocrine where you know, these are - working with our SMT channel because they are rally CNS, very specialized company, and we try to do the same for many of these early projects. Thank you. One moment please. We will take our next question. And the question comes from the line of Jo Walton from Credit Suisse. Please ask your question. I just wonder if you could tell us a little bit more about your response to the ReACT study. When you'll make a final decision, how long it should take, and is there any write-off at all if you decide not to take the product outside of Japan? And please just confirm the, you will be taking that data to Japan to the regulators, but presumably, you are confident that there will be no change in the trajectory of PIVLAZ adoption in Japan post the ex-U.S. - sorry, the ex-Japan data? Yes, it is true. This is, as I mentioned, different doses, different conditions, different administration mode. So, I think this is really a very different story. Of course, we are analyzing the data, but with a negative primary end point, you can assume that we will not file neither in Europe or U.S. I think it's better now to really concentrate on Japan and concentrate on other projects. That's unfortunately the end of Clazosentan for U.S. and Europe. No, no financial consequences. As I said, we only plan for what we know. So to this extent, I was not planning anything regarding REACT filing in U.S. or Europe or additional costs in connection with the prelaunch activities. So no change in the guidance that we gave and because there's no impact of beyond the ongoing commercial execution in Japan. Okay. Thank you, André. We have come to the top of the hour. Operator, do we still have any question in the roster. Okay. Well, thank you very much, Heidi. So, we've come to the end of our webcast. Thank you very much for your ongoing support of Idorsia. Operator, please close the lines.

EarningCall_345

Thank you, operator. Good morning, everyone, and welcome to Xylem's Fourth Quarter and Full Year 2022 Earnings Call. With me today are Chief Executive Officer, Patrick Decker; Chief Financial Officer, Sandy Rowland; and Chief Operating Officer, Matthew Pine. They will provide their perspective on Xylem's fourth quarter and full year 2022 results and discuss our outlook and guidance for 2023. Following our prepared remarks, we will address questions related to the information covered on the call. [Operator Instructions] As a reminder, this call and our webcast are accompanied by a slide presentation available in the Investors section of our website, www.xylem.com. A replay of today's call will be available until midnight, February 14. Please note the replay number +1 (800) 388-6509 or +1 (402) 220-1111. Additionally, the call will be available for playback via the Investors section of our website under the heading Investor Events. Please turn to Slide 2. We'll make some forward-looking statements on today's call, including references to future events or developments that we anticipate will or may occur in the future. These statements are subject to future risks and uncertainties, such as those factors described in Xylem's most recent annual report on Form 10-K and subsequent reports filed with the SEC. Please note that the company undertakes no obligation to update any forward-looking statements publicly to reflect subsequent events or circumstances, and actual events or results could differ materially from those anticipated. Please turn to Slide 3. We have provided you with a summary of our key performance metrics, including both GAAP and non-GAAP metrics. For purposes of today's call, all references will be on an organic and adjusted basis, unless otherwise indicated. And non-GAAP financials have been reconciled for you and are included in the Appendix section of the presentation. Thanks, Andrea, and good morning, everyone. As we indicated in our press release, the team delivered a very strong operational performance in the fourth quarter, exceeding our expectations across each segment and region. Resilient demand and strong backlog execution delivered 20% revenue growth for the quarter and healthy EBITDA margin expansion. That performance continued and built upon the team's solid delivery through the year, fueling healthy momentum coming into 2023. On a full year basis, revenue grew 11% and earnings per share grew 14%. Water Infrastructure grew 15% in the quarter on robust utilities and industrial demand in the U.S. and Western Europe, and the segment was up 12% for the full year. M&CS posted very strong fourth quarter performance. This segment was up 35% in the quarter on backlog execution from improved chip supply and continued strong demand, bringing full year growth to 8%. Applied Water grew 17% in the quarter and finished 2022 with 14% growth for the full year. Overall, higher volumes and positive price cost performance drove significant EBITDA margin expansion in the quarter, up 250 basis points versus the same period a year ago. The team delivered that growth and margin performance on continuing resilient demand globally. We saw healthy orders growth sequentially. And for the full year, orders were up 4%, demonstrating the durability of our business. I am so proud of the team's performance in serving our customers and of their commitment to our purpose, solving water. The global trends driving investment in water systems continue to intensify. And as today's results demonstrate, we are already very strongly positioned to address them. That said, our recent agreement to acquire Evoqua announced 2 weeks ago, will create a powerful platform to address the world's most critical water challenges with greater capability, depth and scale. We've begun the important work of integration planning to set the combined company up for success and are well into the process of seeking the necessary approvals. Until the deal closes, which we anticipate will be midyear, we remain focused on delivering results to the stakeholders we serve today. On that stand-alone basis, we see continuing resilient demand in our largest end markets, particularly utilities, despite the possibility of macroeconomic softness, Execution of our backlogs with ongoing price cost discipline, further supply chain improvements and a return to 100% free cash flow conversion. We expect that this will allow us to deliver 2023 organic revenue growth in the mid-single digits with solid EBITDA margin expansion, resulting in earnings per share between $3 and $3.25, up 10% versus last year at the midpoint of the range. We'll give more color on the outlook and guide in a moment, but first, I'll hand it over to Sandy to dig in briefly on the quarter's results before we look ahead at 2023. Thanks, Patrick. Please turn to Slide 5, and I'll cover our fourth quarter results. As Patrick highlighted, the team closed out a strong 2022 with another quarter of robust growth and margin expansion. Revenue grew 20% year-over-year, led by 26% growth in the U.S. and mid-teen growth in Western Europe and the emerging markets. In a moment, I'll give you a detailed performance by segment. But in short, utilities was up 24%, with strength in the U.S. driven by chip supply improvements in M&CS, and robust OpEx demand in Water Infrastructure. Industrial grew 15% on particularly strong demand in Western Europe and emerging markets and sustained strength in the U.S. Commercial was up 24%, mainly due to continued backlog execution in the U.S. and Western Europe. And residential was up 17%, driven by strength in emerging markets, partially offset by softness in the U.S. Compared to prior year, orders were down 3% in the quarter versus up 23% in the same period last year, but underlying demand remains resilient and in line sequentially. Water Infrastructure orders were up 13%, AWS down 6% and M&CS down 19%, following exceptionally high orders last year. However, M&CS orders were in line with the last quarter with a book-to-bill ratio of 1.1x. EBITDA margin was 18.7%, up 250 basis points from the prior year and up 40 basis points sequentially on strong volume and price, which more than offset inflation. Our EPS in the quarter was $0.92, up 46% year-over-year. Please turn to Slide 6, and I'll review the quarter's segment performance in a bit more detail. Water Infrastructure outperformed expectations with revenues up 15% in the quarter. Growth was robust across the portfolio, led by our wastewater utility business in the U.S. and industrial strength in emerging markets on continued dewatering demand. Geographically, the U.S. was up 26% with solid price realization on strong utilities OpEx demand and continued improvements in the supply chain. Foster Europe grew low double digits, driven by healthy industrial activity and emerging markets was also up low double digits, driven by dewatering demand in Latin America and Africa. Orders in the fourth quarter were up 13% with solid dewatering demand in emerging markets and continued utility strength in the U.S. EBITDA margin for the segment was up 80 basis points as price, net of inflation and volume conversion more than offset strategic investments. Please turn to Page 7. The Applied Water segment also exceeded expectations with fourth quarter revenues up 17% on strong price realization and backlog execution. Geographically, Western Europe was up over 20%, led by supply chain improvements and strong industrial and commercial demand. Emerging Markets was up mid-double digits on strong residential demand in the Middle East and India. The U.S. was up low double digits as supply chain improvements and price realization were partially offset by moderating residential volumes. Orders were down 6% in the quarter, with healthy industrial demand in the U.S. and Western Europe, offset by slowing U.S. residential orders. Segment EBITDA margin was up 270 basis points in the quarter. Margin expansion was driven by continued strong price realization, more than offsetting inflation and further supplemented by productivity savings. And now let's turn to Slide 8, and I'll cover our Measurement & Control Solutions business. M&CS revenue was up 35%, driven by recoveries in chip supply year-over-year and strong project execution in our test and measurement and pipeline assessment services businesses. Geographically, all regions were up more than 20%, led by U.S. growth of over 40%. M&CS orders were down 19% in the quarter, lapping a prior year compare of 28% orders growth during the peak of supply chain constraints. Demand for our AMI offering remains strong and our $2.1 billion backlog in M&CS is up 14% versus prior year. EBITDA margin for the segment was up 800 basis points versus the prior year and importantly, 130 basis points quarter sequentially. Strong volume conversion, coupled with price realization offsetting inflation, drove the expansion. And now let's turn to Slide 9 for an overview of cash flows and the company's financial position. In the fourth quarter, we generated free cash flow of $302 million. The team did a great job driving down working capital to hit our previous outlook of 80% free cash flow conversion for the year. While inventory remains elevated versus where we targeted to be longer term, as there still are pockets of the supply chain that necessitate the extra safety stock that we are carrying, our performance in Q4 gives us confidence in our path to return to 100% conversion in 2023. Our financial position remains robust as we exit the year with over $900 million in cash and available liquidity of $1.7 billion. And this is after paying down over $500 million of debt in December. Net debt-to-EBITDA leverage is 1.0x. Please turn to Slide 10, and I'll hand back to Patrick to look forward at 2023. Thanks, Sandy. The team did an excellent job delivering for our customers and communities in 2022. Their commitment and performance stood out during a tumultuous year of global economic and geopolitical uncertainty; lingering pandemic effects, especially in China; and a challenging supply chain environment. I'm very proud of everything the team achieved, and they are already carrying all that commercial momentum, operational discipline and resilience into 2023. As we look forward, we see continued healthy demand in our major markets despite the possibility of macroeconomic softness in certain sectors of the global economy. We expect that the essential nature of our solutions and the secular trends in water will continue to underpin demand in the attractive, stable end markets that we serve. And we expect to be even better able to serve that demand as supply chain friction continues to ease, and we can progressively work down our $3.6 billion backlogs. Looking ahead, we are advancing our strategic delivery of solutions to the acquisition of Evoqua. As I mentioned earlier, and as you would expect, until the deal closes, we are only providing organic guidance for Xylem on a stand-alone basis. But there's no doubt that the combination of Xylem's global utility scale and Evoqua's strength in attractive industrial end markets creates a powerful platform for growth. We expect significant revenue synergies in areas such as cross-selling of our respective utility and industrial portfolios in North America, and growing Evoqua's international exposure via Xylem's global channels and customer relationships. Now those are just 2 of the areas where we see tremendous potential to add to the growth of the combined companies and expand our value to customers globally, especially in a number of the most attractive water end markets. But it's not the only inorganic move we're making to give customers more of what they need most. We've also taken a big step forward in helping them adopt the digital solutions they need to increase the resilience of communities essential water infrastructure. In the shadow of our big announcement with Evoqua, another important partnership flew under the radar, one which will accelerate and enhance our ability to deliver more digital solutions to the utility customers around the world. Last quarter, we signed an exclusive commercial partnership with Idrica to make adoption of digital technologies easier, faster and more affordable for our utility customers. Headquartered in Valentia, Spain, Idrica is a leader in data management and analytics for water utilities. Idrica's GoAigua platform simplifies deployment and operation of new digital capabilities in any water utilities operations. It gives them one secure integrated interface that brings together data capture, analytics and asset and process management onto 1 platform. Having been born out of a utility operator itself, the platform has the advantage of having been built by utility for utilities, and it's already been deployed by over 300 customers around the world. Under the partnership, we will take a minority stake in Idrica and become the exclusive global distributor of their technology. Together, we will enable more utilities to harness the power of connected solutions. We're very excited about it, and we look forward to sharing more as the partnership progresses. We made one other important announcement recently. This one was just before the end of the year, appointing Matthew Pine as Chief Operating Officer. The move ensures that we have continuing focus on operational excellence from an enterprise perspective across all our business segments and regions to continue delivering on our commitment to faster-than-market revenue growth and margin expansion. At the same time, it's also freed up some of my capacity to deliver on Xylem's strategic evolution and capital deployment. In a moment, we'll turn the call back to Sandy for more detail on our guide. But first, I want to invite Matthew to say a few words on his key areas of focus in the new role and provide some color on our end market outlook. Matthew? Thanks, Patrick. We are very strongly positioned on intensifying trends with technology leadership in a large and growing installed base in attractive end markets. My focus as Chief Operating Officer is to further accelerate profitable growth and maximize the value we deliver to customers and communities around the world. Across the business, we continue to remove complexity, increase our local agility and unlock further scale efficiencies. This is all aimed, of course, at better serving our customers at the same time we deliver continuing margin expansion. We're driving this margin focus across the enterprise, taking particular aim at even more enhanced productivity and customer satisfaction. For example, in the M&CS segment, improvements in chip supply enabled us to build momentum, delivering the accretive backlog, we deploy resources back to productivity as well as new product introductions from innovation. Secondly, we continue to enhance our digital portfolio, as Patrick covered. Our customers need simple, integrated digital technologies that solve their problems cost effectively. Our portfolio increasingly meets that demand with attractive growth and margin profiles. Lastly, our customers depend on Xylem as a trusted partner to deliver ongoing support. So our third operational focus is in standardizing our solutions and creating new offerings. This will take us deeper into our installed base with aftermarket sales and services. New offerings such as outcome-based solutions and condition-based maintenance will enable us to capture demand, address customers' needs and expand reoccurring revenues. It's no accident that there's a theme running through all 3 of these priorities. Each is about growing revenues and improving our margins by serving our customers better, more thoroughly and more simply, making it even easier for them to do business with us and solve more of their challenges. When we talk about being in a privileged position, that's not mentally to refer to our strategic or market positioning. It also reflects our view that we are fortunate to work alongside the kind of customers that we do, partner with them to solve their critical water challenges they face. It's a privilege and also a great opportunity for continuing value creation from our shareholders, communities and all stakeholders. Now let's turn to Slide 11, and I'll walk you through our end market outlook. We expect underlying demand and most of our end markets will continue to be healthy through 2023. We've taken a balanced view based on the strength of our backlog, critical nature of our largest end markets, and the continued value proposition of our differentiated products. We anticipate our utility business overall, which is our largest end market, will grow high single digits in 2023. On the wastewater side, we expect mid-single-digit growth as we see a continuation of steady global demand. We anticipate resilient OpEx demand in developed markets due to the critical nature of our offerings as well as the benefit of continued CapEx spend in emerging markets. The outlook for longer-term capital project spending and bid activity remains robust. On the clean water side, we anticipate revenues being up low teens. This growth is driven by continued robust demand for our AMI solutions and expected improvements in ship supply through 2023, allowing for significant large deal deployments already secured in our backlog. We foresee healthy momentum in our test and measurement and our pipeline assessment service businesses due to increased focus on infrastructure and climate challenges. Looking at the industrial end market, we expect to go low to mid-single digits on steady demand for our solutions globally. We continue to see strong growth in dewatering due to mining demand in emerging markets and the benefits of our strategic investments in our U.S. and European dewatering business. The commercial end market should deliver low single-digit growth on solid replacement business and backlog execution, partially offset by moderation in new construction. In residential, our smallest end market, we are expecting low single-digit decline due to normalizing demand in the U.S., partially offset by continued strength in emerging markets. In both commercial and residential, we would expect moderation to emerge in the second half results as we continue to work through the backlog in the first half of 2023. Thank you, Matthew. Turning to Slide 12. As mentioned, we expect Evoqua to join us in mid-2023. We Until then, our full year guidance is on an organic basis and excludes the combination of the 2 companies. For Xylem overall, we foresee full year 2023 revenue growth in the range of 4% to 6%. This breaks down by segment as follows: mid-single-digit growth in Water Infrastructure with solid growth in both wastewater utilities and industrial; low single-digit growth in Applied Water from growth in industrial and commercial, partially offset by residential; We expect Measurement & Control Solutions to be up low teens. For 2023, we expect EBITDA to be in the range of 17.5% to 18%. This represents a 50 to 100 basis point margin expansion versus prior year. And this yields an EPS range of $3 to $3.25, up 10% at the midpoint over the prior year. Free cash flow conversion is expected to be 100% of net income. In addition, today, we announced an increase in our annual dividend of 10%, aligned with our capital allocation framework to grow dividends in line with earnings. We've also provided you with a number of other full year assumptions in the slide to supplement your models. We're assuming a euro-to-dollar conversion rate of 1.08 and a foreign exchange can be volatile, our FX sensitivity table is included in the appendix. And now drilling down on the first quarter, we anticipate total company revenues will be in the range of 7% to 9% growth. By segment, we expect high single-digit growth in Water Infrastructure, low single digits in Applied Water and high teens growth for M&CS. We expect first quarter EBITDA margin to be approximately 16%, driven by higher volumes and more favorable price cost dynamics. Thanks, Sandy. We're coming into 2023, very strongly positioned. Our end markets continue to show resilient underlying demand. We're confident in delivering mid-single-digit revenue growth and strong margin expansion and the team continues to outperform on strong operational and commercial execution. Beyond 2023, we remain well on track to deliver our longer-term strategic and financial milestones. We are very excited about all of the combination of Xylem and Evoqua will offer towards the creation of a more water secure, resilient and sustainable world, while driving value for our shareholders by accelerating growth and scale. The integration team met last week at our headquarters in D.C. The first of many meetings to set us up for success on day 1. And last week, I traveled with Ron Keating, Evoqua's CEO, to a number of their key sites to spend time with their incredibly talented people. Those visits only heighten my appreciation of the potential opportunities ahead and confirm the strong strategic and cultural fit of our 2 companies. We've also taken the next step in the regulatory process, having submitted the required filings here in the U.S. and progressing toward filings in the relevant international jurisdictions. We continue to anticipate the deal closing midyear A great deal of opportunity will open up when we bring our 2 companies together. During our next earnings call, we will provide an update on our progress. Meanwhile, our business remains squarely focused on delivering on our 2023 financial commitments and continuing our commercial momentum and execution. Strong finish to the year, both revenues and margins. And I just want to say congrats again on finally getting to the altar on Evoqua. This has made strategic sense for so long. And have a midyear target closing is lightning fast in our view. I know that there's a lot of heavy lifting. So best of luck. Can we start with M&CS margins? It sounds like the 2 drivers here, the chip supply improving, and this has been kind of a steady story for the past couple of quarters. How much have you worked through that backlog? And how much of the chip supply improvement contributed to the margin improvement in the segment? And then I've seen a nice shutout for pipeline assessment. Is this all pure and what's driving that? Yes, Deane, thanks for the question. Let me start, and Matt can add some color here. So we are very pleased with our Q4 performance in M&CS. The year has unfolded very much like we thought it would with continuing improvement in chip supply. The story in Q4 is actually a twofold story. We saw some upside compared to what we had forecast, and half of that upside came from some better chip supply. And the other half of the upside came from some of our other businesses in the portfolio that we don't talk as much about. So our pipeline assessment services business, a lot of projects were completed in Q4, really good results in our test and measurement business. And all of -- the entire portfolio across M&CS has good margin potential and good leverage. And so as we've got the top line going again, we're really encouraged that you're seeing that drop to the bottom line. Yes. I think the only thing I would add, Deane, is that we did pivot in Q4 to a more continuous improvement as we started to roll off of our product redesigns. So we saw a really good lift in Q4 and continuous improvement. And if you look at the price cost and the exit rate in Q4, it was really solid building momentum. This was -- if you recall, this was the last segment to really be impacted by inflation and really overcoming that in Q4, which also led to the margin improvement. All sounds good. And just as a follow-up, I was hoping to get some more color on this announcement of the software platform investment at Idrica. If you listen to all of the trade shows and conferences, the biggest pain point for utilities is they get so much data, but none of it is connected, and it's all different formats. So this sounds really promising if it's one platform that then is able to integrate all of this. So some color on the pricing. Is this a SaaS business? Is it on-prem? Is it licensed? How will it fit in terms of the revenue stream? And you've got 300 customers now. What's the pipeline for new customers, new logos? Sure. So Deane, I'll just make a few comments, and I'll have Matthew go a little deeper because Matthew was part of the team that was integral to this courtship over the course of the past year or more. So he's well versed along with other team members on the opportunity here. But you're right, you said it best. It's the amalgamation of data coming from different data sources that we refer to as the power babble, with different languages, different code, and it makes it very difficult for the utility to optimize their overall network. So that's really what Idrica is getting at. They got a great platform already around the world, and our channels to utilities is really the big opportunity for them. But overlaying this solution to where effectively the way I described it, it's almost as they built the interoperable operating software on which our operating technologies will sit along with other apps that make it easier for the utility user to interface. Yes. So from a pricing point of view, Deane, really there's an implementation cost, obviously, to go implement the platform, which is a fee. And then it's really, to your point, a Software-as-a-Service. It's a subscription fee that's ongoing in some term is really the model that we've built. And just really amplifying your point, again, one of the biggest pain points we hear and we believe really this partnership will translate into really the digital adoption rates in the water sector. We see this as really being an aggregator in terms of bringing all these disparate systems together that Patrick mentioned. And our teams are engaged in building commercial momentum. We've implemented a few pilots that are starting to see great results from our collaboration already. But as we ramp through the year and build backlog, that will start to really unpack in Q4 and into '24. And I would clarify, Deane, that when we say pilots in this case, these are actual commercial arrangements that are revenue generating. It's not a pilot where we're going and testing something. So we've already had some very impressive potential wins there that we'll talk about in the, hopefully, the next quarter. So I just want to follow up on that Idrica stuff real quick and then move on. But is that something that utilities would put in, like, on top of what they already have? Or would it like more likely go like something that they would decide to move forward with like if they're putting in a new deployment? A lot of utilities don't have anything like this. So it's really on top of what they have, Joe, and it's integrating all their disparate systems, their SCADA systems, their PLC systems, their ERPs. Anything that's bringing data into their ecosystem gets consolidated into the platform with 1 dashboard and 1 interface. And if you think about a lot of the challenges of our utility customers and lots of different industrial customers in general, is they've got multiple applications, multiple passwords, all the information is siloed and they don't have a way to aggregate it. So this would come on as a layer to do that aggregation and give them a way to, as people say, democratize the data, be able to get the data to a user to make sense of all the information coming in. And Joe, just to add, what -- when we say it's built by utility for, utilities is that there are many other solutions that are out there, but they can tend to be quite complex and overly sophisticated. And this really allows them to design a solution that meets the utility where they are on the journey. Not every utility is of the same space or the same place in the journey as to how sophisticated the system needs to be. And so it could be tailored in that regard, but it's also a highly standardized platform. And that's part of the efficiency of their rollout is how easy it is to maintain. And then you guys were spending like a decent amount of resources kind of thinking about developing something like this internally at Xylem, if I'm correct. So now that you've made this decision here, which looks like it's already kind of packaged and ready to go for you, how do you reallocate the resources and what kind of impact does that have of not spending money trying to develop this internally? Yes. So I think that's a great question, Joe. There are certainly some overlaps between what we're spending money on from an R&D perspective. Just to remind you, the structure of the transaction is that it's a commercial agreement, which allows us to take the product and sell it on a global basis. And on top of that, we have a minority investment. And so there are certain things that we're going to keep going on our end. And then there are certain things that we're going to be able to leverage between the 2 companies. But there are certainly some synergies there. But really, this is a growth play. Okay. Just wanted to move to the 1Q guide here. Can you kind of talk a little bit about a bridge from maybe where we're exiting to where we are in 1Q? I'm trying to discern how much of this is being conservative versus how much is -- I guess it's early in the year and it's an uncertain year. Like if I look at, let's say, applied for example, or even M&CS. You're guiding applies basically up low single digits for the quarter and for the year. I would have thought that just given what's happening in resi, maybe it starts the year well above that and then finishes maybe flattish. So now you're kind of anticipating similar growth all year. Maybe talk us through that and M&CS, the guidance there kind of was what we expected heading in. But after the 4Q suggests like a 1Q step down off the 4Q run rate on revenue. So maybe talk us through that. Yes. Joe, I mean, there's a few things to unpack there. Let me start and the team here will remind me what else you asked. So look, there is some seasonality in our business. And if you look at it from a revenue perspective, we'll have a step down in revenue between Q4 and Q1. We always do. The biggest step down is actually in Water Infrastructure that has a big Q4. M&CS, there will be a little bit of a step down to. It's not so much in the metrology business, but some of the other businesses that we highlighted earlier on the call, our pipeline assessment services business, our test business, there's some seasonality there. So I think it's somewhere between $150 million and $200 million step down, Q4 to Q1. And that aligns with sort of our historical patterns. As we think about the year and the seasonality in the year, different businesses look a little bit different. Certainly, you touched on AWS, which is our most cyclical business when it comes to macro. And from an AWS perspective, we're entering the year with a very, very strong backlog. And so as we've modeled that business, we have modeled a stronger first half versus a stronger second half. The other businesses don't have quite as much seasonality built into the plan, other than in M&CS, we have been calling for a bigger ramp-up in the second half when some of the redesign work comes online and that coincide with better chip supply. So I would just add a couple of things, from a historical perspective, just to amplify what Sandy had said here. We are reflecting in our guide that backlog in AWS carries into the first half of the year, but we are forecasting softness in the second half. So obviously, that remains to be seen. Hopefully, things recover faster, and we kind of glide through this and don't get impacted by that. But right now, we're embedding our guide that there is softness that hits us in terms of conversion in the second half. Historically, Water Infrastructure has a bigger Q4 and slows down in Q1 because we're serving the wastewater side of utilities and they spend out their capital and OpEx budgets through the end of the fourth quarter and then they ramp up again in the following year. So just to give some context for those of you that may be new to the story. So just following up on that last little bit there. Patrick, you gave some context on the applied backlog. It seems like you're expecting normalization as you work through the year that it makes sense and it's a short-cycle business. Maybe some thoughts on how you're thinking about the backlog tracking for the other 2 segments? And if you think that there's a chance for normalization either of those as we move towards the end of the year towards a more consistent run rate or more consistent balance between how you think about orders and backlog and revenue conversion. Yes, Mike. I think we are already starting to see some normalization. If you look at the orders rate that we've had in the second half of the year, as -- particularly as the pockets where the supply chain has stabilized, we're seeing some of our customers there return to normal behaviors. I'd say Water Infrastructure is a great example of that. We've had a more stable supply chain there. And so that's where we've seen more normal order patterns, and we don't see a backlog that has been as elevated. We still have quite a bit of our backlog that's past due in M&CS, and we do expect to start eating into some of that in 2023. And I think that's a good thing because that means our projects are getting deployed. Yes. I was just going to build on the M&CS comment. We still have 30% of the backlog past due coming into the year. And so we'll still continue to monitor that as the chip supply continues sequentially to improve. That's something where we're looking at. But orders sequentially are good in that business, and we see good momentum going forward commercially. Makes sense. And then on the kind of order side in the quoting pipeline side of things, obviously, orders taking the quarter not a surprise, given the comps, given some balancing out here. How do you think that the sequentials will work out through the year on the order side? What are the expectations there? And maybe any comments on how you're looking at the bidding pipeline as we sit here today in the areas where that's relevant? Yes. From a bidding pipeline standpoint, I would say, look, industrial remains really strong globally. We primarily play in the general industry. there, and that's been pretty resilient. So that continues strong. Commercial is a bit of -- it's showing strength, however, expected to be slow in the back half, primarily due to new construction moderating. We track the ABI Index, the architectural billing index, that's been less than 50 in the past 3 months. And so looking for a little bit of a slowdown in the bid activity for new construction for commercial. And we talked resi, that's primarily a replacement for us. the orders are slowing down, largely due to the improved supply chain. It's probably the biggest area that we've seen the supply chain improve and also from pandemic investments. And so that's really what's impacted that. And then a strong pipeline in M&CS, plus water infrastructure, especially treatment. We're starting to see treatment really ramp up and the net backlog also continues to build, and we have a strong funnel. I think I'm going to go to questions and if I can get any answers around revenue synergies from the combination of Xylem and Evoqua. I mean this is clearly a growth-enabling deal, and Patrick, you highlighted a couple of avenues for that. Investors have been very hungry for information on what kind of value that might add. So is there any color on kind of what your targets are going to be in terms of the expected growth for the combined businesses, how you're going to approach it? Are you going to have specific growth teams assigned to these kinds of projects? Any color and more color you can give us around those kinds of things? Sure, sure. Yes. So as you've said, Nate, I mean -- so first of all, I mean, the economic returns of this combination are justified on the cost synergies alone. And I don't want to look past those because I want to make sure that our investors understand that we've got strong conviction around the $140 million of cost synergies within 3 years. Going forward, we will lay out exactly what the -- not only the 3 buckets are that we've talked about, and I can reiterate those if we need to, but specific delivery time frames, ownership, et cetera. So strong conviction around that cost synergy. Then beyond that, clearly, this combination is about growth. It really is taking a long-term view, not on the realization of synergies, but a long-term view on what the world needs right now in terms of a water company at scale and depth, and there are so many things that we can do together that we could not do as separate companies. Now on the revenue synergies I'm not going to give you a specific number as of yet. We clearly will do that, and I can talk a little bit about process. But clearly, we expect that there's going to be an accelerated growth rate of the combined company. And we will put a specific target out there as we get closer to finalization of this. In terms of the process, there is going to be a clear ownership within our integration work that's already kicked off. We have teams that have been assigned to go after each one of the several areas of gross synergy. Obviously, we have a view on that before we got the deal approved by both boards, but we're looking to see where there might even be other opportunities beyond that as we go forward. I laid out in my prepared remarks what some of those areas are. A few others that we did not highlight in my comments were around the combination of digital enablement in both companies. Evoqua is already doing a fair amount in digital enablement of their services, really focused on productivity and growth, and we continue to progress quite nicely in our digital enablement of more on the product side and the aftermarket service side. Last area is, we believe between Ron and I and the team that there is tremendous opportunity in the area of joint R&D, innovation and portfolio enhancement, whether that be organic or inorganic, given the complementary nature of the businesses. So that's what I can share with you right now, Nate. Obviously, we're as excited as you all are at being in a position to come out and share numbers around this, but we -- right now, we're focusing on getting the deal closed. I have one follow-up question on a specific avenue of revenue synergies. Xylem historically been a product company and Evoqua developed this service-based model. Is there -- do you see the opportunity for you to implement new kinds of service-based business models on the legacy Xylem portfolio leveraging their service footprint? Yes, we certainly do. I mean it will take some time. That will not be a day 1 synergy and likely not even a year 1 synergy. But absolutely, we see bringing some elements of their best-in-breed service offerings. And quite frankly, just their -- the whole cultural model around services, we believe is going to be an enhancement to our more legacy traditional product-oriented aftermarket services that are out there. Two, they've already done a terrific work, and I realized that Ron would say they're still on that journey. And I certainly appreciated that last week whenever I spent a few days with him at multiple sites is that they're very much focused on outcome-based solutions. And so I think there's an opportunity there to enhance our business models and offerings whether that be both on the utility side but also on the industrial. There's -- as you know, Nate, there's a fair amount of complementary nature of pulling through there. They've got some terrific products within their APT business on the treatment side that complement what we do and vice versa, our treatment portfolio, enhancing what they can deliver in their industrial services offering. Yes, it seems to be a lot of avenues for growth there. So I look forward to hearing more about it over the next few months and few quarters. Every -- just a couple -- one kind of point of clarification then a real question. But are you still raising price here and now that we're into '23 or the price increases you did in '22 pretty much enough to offset your inflation. Yes. We did -- Scott, we did the last round of price increases back in November of 2022. So really, the price increase, in essence would be for '23 kind of heading into this year. So obviously, we're continuing to watch the marketplace and understand not only the inflationary environment and how that continues on. It really -- it's moderated some, but it's still up and also just also make sure we're monitoring our win-loss rate in the marketplace and making sure that we're appropriately priced accordingly in the market. All right. Helpful. And then I think about 2022, so much of the year, not just you guys, but most companies were held hostage by the chip makers. And how -- where do you guys see yourselves going forward and kind of redundancy or flexibility or whatever other words that we want to use to kind of describe it just to make sure that this chip issue doesn't come back every time there's some sort of dislocation that design is more perspective in the future? Sure. Scott, this is Patrick. So I'd say, first of all, we, by no means, are out of the woods on this yet, even though we've seen sequential improvement. I would say that the health, all the discussions that we have with both the chip suppliers themselves and our intermediaries all have stabilized and strengthened. Clearly, I know people are looking at auto right now and hearing about weakness there and wondering whether or not all of a sudden, we're going to get a boat load of chips that show up. It just doesn't work that way in terms of the allocation. We continue -- the substitutes aren't easy in this space. And so the main thing we did, as Matthew alluded to earlier, was we spent a lot of time and energy and quite frankly, money this past year, redesigning our offerings to get to the next generation. So we could be best in line. I do think that as other sectors perhaps show slowness that will simply further strengthen the recovery for us, but we're not counting on that right now or baking that into our outlook for the year. That’s helpful, Patrick. Just to be clear, so when you talk about redesigning, are you talking about going to a chip design that’s more ubiquitous and more commonly used in consumer electronics? Or is there some sort of level in between where you’re at from that next-gen chip? It’s just really getting to next-gen chips, where the capacity is being allocated are being built so we have more capacity for the future, yes, because we’re on legacy designs that they’re bringing down the capacity on those chips. Patrick or Matt, I know you've talked about forecasting a slower second half in Applied Water, especially as new construction potentially sows in commercial. But have you begun to see any evidence of channel destocking or other customer behavior that concerns you in commercial markets? And then separately, have you put in any contingency in your guide for China reopening related noise? It looks like China was still strong for you in Q4? Yes. So Andy, on the first one on channel inventory. We have really good visibility into the inventory given our relationship with our channel partners. The teams we meet monthly and actually quarterly with counsel meetings in addition to weekly sales calls in contact. So we have really good insight into the inventory. The levels are healthy and normalizing and they're not sitting on any excess inventory, which is reported back to us. There are some pockets that have not fully recovered. Commercial is not back to kind of prepandemic levels in terms of inventory. But resi, I would say, is normalized due to the improved supply chain and softening from the pandemic investments. On the industrial front, that's really more of an engineer-to-order product. There's not a lot of build to stock. And so that's where I'd leave it on the channel inventory there. Andy, let me take the China part of your question. So China was tough for us this year. We were down in China about 20% in the first half of the year. We saw a moderation in the second half -- and as we -- a little bit stronger Q3 than Q4 given the outbreak of COVID in Q4. And I think we've taken a measured approach to China and our guide for 2023. We do expect more of a recovery in the second half of the year in China. The slowdown has been more acute more on the utility side of the business, and we've seen stronger performance on the industrial side. And so our focus for our team is building orders momentum again. And we remain very bullish long term on China. We're just working through some of the dynamics there now. Appreciate that, Sandy. And then it seems like industrial dewatering continues to hold up well as it does tend to be more historically cyclical, but could the business be much less cyclical during the current cycle given the amount of activity that's out there. I know you mentioned mining. Maybe you could comment on the support you're getting from your strategic growth investments as well, what exactly you're doing there? Yes. We made a constant effort back a few years ago to be a bit more balanced in our segmentation of that business, especially shifting more to the muni side, which is a bit more stable. And we've seen that part of the portfolio grow and also just making investments in our fleet and upgrading our technology. We are digitizing those assets and making those remotely connectable so we can improve the productivity for our customers. So it's a mixed bag of really, I'd say, some innovation as well as being thoughtful about being more balanced in the segmentation of the business. It appears that we have no further questions at this time. I will now turn the program back over to Patrick Decker for any additional or closing remarks. Thank you. So again, thanks, everybody, for your time today. I know you're all very, very busy at this time of the year. Really appreciate your ongoing continued interest in Xylem. I very much look forward to providing you updates on our progress around the Evoqua transaction. And between now and then, safe travels, everyone and all the very best. Thank you. Thank you. This concludes today's Xylem fourth quarter and full year 2022 earnings conference call. Please disconnect your lines at this time, and have a wonderful day.

EarningCall_346

Thank you and welcome to the Tobii 2022 Year-End Financial Report. With me are Magdalena Rodell Andersson, our CFO; as well as Henrik Mawby, the Head of Investor Relations for Tobii. Now, we will be taking questions right after this presentation. So, if you have any questions, please feel free to start posting them now. We are changing the format of our earnings call a little bit. We are going to spend a little bit less time on the introduction and get to the quarterly results more quickly. If you have questions about or need more information about Tobii in general, please feel free to visit our Investor Relations website or reach out to Henrik Mawby. He can certainly share those details with you. So, let me first start by providing a quick overview of Tobii. Tobii is a Swedish company. We've been listed on the Stockholm Nasdaq since 2015 with the majority of our employees here in Sweden. Over the last two decades, our company has established ourself as the world leader in eye tracking, and our mission has expanded in the recent years to deliver technology that will improve the world by understanding human attention and intent. We call this new emerging field attention computing and hopefully the video that you saw gave you a better sense of the vast potential that we see in front of us. Tobii is on a journey to build from our leadership position in eye tracking to become the world leader in attention computing as well. So, let's jump now into the Q4 business results. I'm very happy with the results that we've delivered for the quarter. We delivered our first EBIT profitable quarter since our IPO in 2015. And we have done this despite the fact that not all of our business has actually been hitting on all cylinders. This milestone has been reached because we have driven a focus on improving profitability and improved profitability on a year-on-year basis for the last several years. And I'm super pleased to achieve this breakthrough in EBIT profitability in Q4 2022. The results for the quarter are a clear demonstration of the benefit of the diverse portfolio that Tobii has and the fact that we have very healthy operating leverage in our business models. We believe that the combination of this and the clear focus on profitability has helped us deliver this result today. For the quarter, we delivered an organic growth of 19% and once again, this was led very much with a strong performance in the integration segment. We see very strong license revenue in the VR market. And we also see that we are building long-term traction in both customer engagements in VR, as well as customer engagements on the automotive side. When we look at the design wins for the quarter. We received two design wins this quarter. One, for a VR solution that is going to detect intoxication. And the second for a vision skills assessment and improvement tool using our Eye Tracker 5 platform. Now, on to products and solutions. What we've seen on the products and solutions side is that we've seen improvement from a weak Q3 to a 2% growth organically for the quarter. This was led with a pretty strong gaming peripheral performance, our Eye Tracker 5 peripheral, which is a direct-to-consumer product, but we also saw a quite strong finish to the quarter in the Chinese market for our research solutions. Now, the strong finish in China is a very encouraging piece of news for us, but it is a little bit early to see if this is a trend or something that is a pent-up demand that we were able to enjoy in Q4. We continue to see some signs of lingering weakness in other geographies. And so, as we look forward into the year, we see potential upside in markets like China, but some uncertainty still in the macro environment. Now, if we think about significant events for the quarter, it starts, of course, with the PSVR 2. We shared this as well in our previous earnings call that the PSVR 2 started pre-orders on November 15, 2022, and the headset is expected to launch in February 22 of this year. This is a huge milestone event for Tobii as we see the adoption of our technology now showcased for millions of users this year. We think the impact of the Sony launch isn't going to be limit it to VR alone, but we think the awareness that this device will bring will help us actually grow all parts of our business. In 2022, we've also put a strong focus in maturing as a more sustainable organization. And in Q4 specifically, we saw a significant set of achievements that I wanted to highlight to you today. First of all, we were recognized as a top ranking company in Allbright´s gender equality report. We're one of the few tech companies in Sweden to be rated this high. And this report, of course, looks at gender equality in management. We've also seen the focus we've delivered on sustainability show up in our external ratings with MSCI improving our rating from BBB to A, and our focus on improved governance has delivered us ISO 27001 certification during the quarter. We exit 2022 with a much stronger cash balance, and Magdalena will talk about that a little bit more, but specifically in the quarter, we received SEK166 million of additional COVID tax relief that puts us in a strong financial footing as we execute the rest of our organic business. Thank you, Anand. Yes. It's always a pleasure to present what we have achieved each quarter, but I must admit that this quarter I'm especially pleased to present the results. The high revenue of 262 million in this quarter equals an organic growth of 90%. We had some growth within the Products and Solutions segment and a really high growth within the Integration segment. And I will get back to the segments in more detail on the next page. Gross margin was 78% in the quarter, 1 percentage point higher than last year, very positive effect from shift in product mix was somewhat offset by currency effects. Finally, EBIT was SEK9 million in the quarter with an EBIT margin of 3%. This is an improvement with SEK40 million versus Q4 2021, equaling an EBIT margin improvement of 19 percentage points. Here is where we can see the quick positive effect from incremental revenue and also in combination with [prudent cost control] [ph]. It is of course very encouraging to deliver a profitable quarter. However, as we have communicated before, we do not expect to stay on this positive side in the short-run. Year-to-date, the organic growth was 14%, mainly driven by the Integration segment and the gross margin was 76% for the full-year, an improvement with 4 percentage points where the positive net effect was driven by a product mix. And then for the whole of 2022, EBIT was minus 122 million, compared to minus 186 million last year, which is an improvement of 64 million. We acknowledge that the macroeconomic situation did affect us negatively in our running business during the year. Despite this, we managed to achieve this improvement while at the same time being able to invest in future business opportunities. We're now entering 2023. We remain confident and committed to reaching our financial goal of being EBIT profitable in Q4 2023. And then looking into our segments. Products and Solutions had an organic growth of 2%. The Gaming peripheral Eye Tracker 5 showed continued growth, and from a regional perspective, we closed the quarter on a strong note in China after the release of COVID restrictions. And ending of the bad debt year for universities, while the other regions had a softer Q4. Gross margin in the quarter was 72%, compared to 78% last year. The deviation between quarters was related to product mix shift and currency effects. And then looking into our integration segments. The organic growth was 59%. The revenue growth was driven by a combination of license revenues and development projects. As we have mentioned before, depending on milestone payments and larger payments of license revenues, it is to be expected that this segment will exhibit large fluctuations in growth rates in its early days. Gross margin for the Integration segment was 88% in the quarter versus 76 last year. The improvement was derived from the product mix shift towards more software license and development project revenues. And then looking year to date, the organic growth for Products and Solutions was 3%, compared to 70% in 2021. The growth drivers in 2022 were the gaming peripheral Eye Tracker 5 and the strong growth in China for our behavioral studies and research solutions, while the growth was hampered by contraction in Japan and in North America. Year-to-date, the gross margin was 69%, compared to 75% last year were higher components and freight costs in combination with the product mix shift has put a pressure on the margin during 2022, compared to 2021. In integration, the organic growth was 42% for the whole year over 2022, compared to minus 2% in 2021. And year to date, the integrations gross margin was 89%, compared to 63% last year, which was an improvement related to mix shift from hardware to software licenses. And so, over to our balance sheet and cash flow. We have an equity of 754 million and an equity ratio of 62%. Our free cash flow during this quarter was 147 million. This cash flow was positively affected by 166 million in temporary COVID-related tax release from the Swedish tax authorities. If you take that out, the free cash flow would otherwise have been minus 19%. These tax release were originally due in February 2023, but after closing of the quarter, 161 million of these reliefs have been prolonged to February 2024. And with that, we ended the quarter with 402 million in cash and cash equivalents. Thank you, Magdalena. So, now let's talk a little bit about the full-year because I firmly believe that because of the lumpiness in our business, the right way for us to assess Tobii's progress is to consider full-year results not just quarterly alone. On a full-year basis, you could see from a segment perspective, from a full-year basis overall, we delivered 14% organic growth, as Magdalena stated before. And from a segment perspective, we delivered 42% growth in the Integration segment and 3% growth in Products and Solutions. We see good momentum on the gross margin side as we've increased 4 percentage points on an annual basis from 72% to 76%. And we see of course that our profitability over the course of the year continues to increase. In this case an improvement of 14 percentage points to minus 16%. If you look at the underlying trends, one of the things that we have consistently stated is that we see a mix shift from hardware to software. And if you consider the mix of revenue that we've seen through the full-year, you can clearly see a 15 percentage point improvement in the mix of software as part of our revenue. And this largely comes from an equivalent decline in the mix of hardware based revenue for the company. If you step back and then consider what trends does this full-year picture show us, I believe it highlights three major trends. The first one is that on an annual basis, integrations is delivering very strong organic growth. The second is that we continue to see the business fundamentals driving high operating leverage. And this is driven by both the product mix shift, but specifically also the move towards more software revenue. And both of these things are pretty apparent on the chart on the right. Finally, we also have made significant progress this year in driving to the mass market adoption of our technologies. In 2022, Tobii Technologies were deployed in 1 million devices in the year, that's a substantial achievement for us. And of course, looking forward into 2023, we expect that this number will increase with the launch of the Sony PlayStation VR 2. Now, let's talk about one other highlight for Q4, at least one other spotlight that I would like to put in this quarter, which is, our focus on automotive. I think for us to understand where we are in automotive DMS, it's good to put the current state relative to the overall development we've made in this particular area. Tobii started investing in an automotive DMS product in early 2019. And the focus from the very early stages of our investment was to focus on what we call DMS core signals, signals like gaze or head pose. In August of 2021, we announced that we'd acquired a company called Phasya, and they gave us additional signals, feature level signals that allowed us to deliver new capabilities like drowsiness. The combination of Tobii's initial investment and focus from an engineering perspective, plus Phasya meant that we could deliver to OEMs all of the signals required to meet EU legislation, but it wasn't until Q1 of 2022, that we were finally able to get into what we call the demo and evaluation phase of our product. The first time that customers were able to actually see Tobii DMS in action, either in a lab, physically, or in a car environment. We've continued to expand the availability of these showcases both in public demonstrations that we made in Q3 of 2022 with showcasing of our DMS at the in-cabin event in Brussels, but we've also started to take our solutions out on the road to showcase the customers. Now, if you think about the development phase of our product or the demonstration and evaluation phase of our product, we think this is an ongoing effort. We know that as more and more regions adopt driver monitoring systems, the requirements change, and we're going to have to continue to develop new capabilities to address them. For example, in regions like the United States or China. Similarly, in the evaluation phase, we hope of course that customers will be able to go and test Tobii's solutions in their own labs across the world that all customers and all Tier 1 companies can test them, and this is an ongoing effort for us to go drive. Where we are now is that starting in early 2022, as customers were able to evaluate our solutions, we started to enter into this RFQ phase where customers with positive evaluations of our technologies started to include us into RFQs for OEM DMS design win opportunities. And we exit the year with a significant amount of traction with several global Tier 1s to participate in these DMS RFQs. I'm very happy with where we are at the end of 2022, even though we haven't reached our stated goal of getting to one automotive design win by the end of the year. I think where we are now with this solid traction we built with these Tier 1s, we believe that we are quite close to achieving that goal, and in 2023, we hope to close multiple design wins. So, let's summarize now how the quarter has been for us overall. Q4 2022 was a strong finish to the year, and of course a significant quarter for Tobii to demonstrate the progress that we've made from a profitability perspective being the first EBIT profitable quarter for us since our IPO in 2015. Our full-year performance continues to show clear progress from a growth perspective, as well as an improvement in profitability. We have strengthened the underlying business fundamentals of Tobii, both with our engagements in areas like XR or upcoming focus in the automotive DMS space, but also, as you could see, the product mix shift towards software, which allows us to continue to drive improvements in profitability going forward. We enter 2023 now with strong optimism, despite the fact that there are still some uncertainties in the macroeconomic environment. And we are confident and committed to hitting our financial goals, which is to be profitable, EBIT profitable once again in Q4 of 2023. Thank you, Anand. So, it's time for Q&A. Please let me remind you that for listeners on the webcast, you have a Q&A function available in your web client. So, please post questions there. Let me remind you that there is a bit of a time lag in the system, so post them sooner rather than later. Analysts, please indicate in the chat or in the Q&A if you wish to ask a question or questions verbally. I will kick-off this with a few questions from Daniel Djurberg with Handelsbanken. His first question is, how would you position your IPR portfolio on a global comparison, i.e. with key peers such as Apple, Meta, Microsoft, Alphabet, etcetera? And also, would you say that there are areas you can collaborate in also with these large vendors? Okay. So, let me take that question. So, again, we believe that in the field of eye tracking, we have a very strong IPR portfolio. This is part of the reason that large customers choose to do business with us. And so from that perspective, we think that we are quite strong. We, of course, understand that many of these companies that were listed in the question, they have very strong research and development organizations as well, and they’ve also filed IP in the spaces that we are active in. Now, when we talk about collaborations with those kinds of companies, we've been quite open with the fact that even though we see some of these companies specifically in the virtual reality and augmented reality space, having eye tracking capabilities of their own, we don't view these companies as competitors of Tobii. We think of them as potential customers. And you should expect that we are working with all of the major XR players in the world and engage with them for them to evaluate our solutions. We believe that our solutions are world-class. And in many cases, we expect that these companies will over time look at us as a potential complementary solution to what they have in-house. And in some cases, they may choose to use us instead of what they have at their companies. So, we're continuing to engage with all of them. Thank you, Anand. And another question from Daniel Djurberg. Looking ahead, will you continue to develop your own purpose built ASIC or will it be possible to start to use COTS, perhaps they are good enough? If so, what would the implication be also from a competitive point of view? Yeah. If you think about sort of how our solutions are delivered today, it actually in many cases already is running off of off-the-shelf silicon. So, for example, if you think about the design wins we've announced in the past, like the [Pico Neo 3 Eye] [ph], we had our algorithms running on a Qualcomm piece of silicon. We do believe that there is a role to play for ASICs depending on the system design for eye tracking, but for a lot of our business, we continue to see the potential to run our algorithms on silicon that is already available. This is the case, for example, in automotive. This is the case also in the extended and virtual reality space. Now, the second part of the question, what does that mean from a competitive perspective? We believe, of course that when you deliver attention computing or eye tracking, there are two parts to the solution. One is the system design or the specific hardware that enables these signals. And we believe that even when we don't deliver all of this on our own proprietary solutions, whether it's our sensor or our compute silicon, we believe the knowledge we have in optimizing the system design is a unique capability that customers value. The second aspect, of course, is the algorithm itself. The algorithms in these spaces need to improve to go and deliver the performance needed for the user experience, but we also see the algorithm needing to change, whether it's because the geometry of a headset changes as VR goes to thinner headsets or if it is to reduce the overall power of the algorithm to enable future form factors like augmented reality. We think that the lead that we have here in algo development, our expertise in bringing it to mass market and dealing with large populations, those are unique capabilities for Tobii or at least very highly differentiated offerings from Tobii, and we continue to believe that puts us in a strong position. Thank you, Anand. And last question from Daniel Djurberg. In Driver Monitoring Systems, you were quite explicit that you expected a Tier 1 design win during the autumn of 2022, did you lose this one or has it been postponed? So, I would say that we are participating in RFQs. In some cases, of course, we see some of our partners lose designs. In some cases, we've also not been ready to win at this point in time. But again, the engagement continues to increase, and we believe that the more RFQs that we participate in, the higher the chances that we are going to be successful, and we think that we're pretty close to that now. Thank you, Anand. And with that, we have a few questions from analysts online as well. Erik Larsson, are you – you may go ahead, please. Yes. Thank you. I hope you can hear me, and that you're all good. So, I have a question on costs because in Q3, you mentioned that you will address your cost base a bit, and from my understanding, you expect a slight decline in OpEx in 2023. And I'm just curious how this is progressing and whether we've seen any effects from this in Q4? Yes. Just to clarify, we have been clear on that we are controlling costs. We have not stated that we specifically will reduce them immensely, but we are taking down the pace on how we before increase them rather. And yes, we are following our plan. Okay. Great. And then just a question on the revenue splits, you showed a bit there, but if you can sort of specify the share of project milestone revenue in Integrations would be great? Yes, that would be great, but we will not share that specifically. So, we're more talking about it in the broader sense, but we will not share the details. Okay. Excellent. So, first one related to Sony, when you announced the deal, you said that it should contribute to 10% of group sales in 2022, can you follow up where did we end on that figure, please? And then secondly, can you something on how much you expect Sony revenues to contribute to 2023 sales? Yes. Again, I think the forward-looking number, we're going to be very careful about, Daniel. We don't talk about specific customer expected revenue. And of course, in this case, we are quite dependent on the success of the product. That's very common for us in the Integrations business. Now, when we announced the deal, we talked about the fact that part of what we had structured the deal as was some level of inventory build and prepurchase of licenses as Sony was going to build the inventory for their launch of PSVR2. And we believe that the revenue from that, which was a little bit more deterministic, would be about 10% of the overall revenue for Tobii as a whole, and we ended a little bit higher than that, but in the same range. Okay. Excellent. So, the inventory, yes, okay. I understand the inventory buildup was around what you expected at least, which was on slight line in terms of. Okay. Fair enough. Then secondly, on Integrations, the gross margins seem to have reached a new level around 90%. Is this a level we can continue to see sustainably during 2023. I guess that the answer is yes, given the new product mix, but just to confirm it. That's a – it's a sort of a – be very clear because just as we said that the revenue will be lumpy, we cannot sort of be really – it's not that stable still. So, it will vary also going forward. But of course, we are going towards a more strong margin. That's for sure. And I would say that that's sort of where the commentary is on looking at the full-year picture. I think that the trend you see where we see more and more software revenue, this is definitely the case in areas like Integrations. So, if you look at it on a higher or a longer period, I think it's quite a fair statement that you make about this is, sort of the kind of levels that we need to expect because we expect that things like VR, where we will be running on off-the-shelf silicon or automotive over time will grow and become a significant portion of the Integration business as they are right now. But on a quarter-to-quarter basis, there are variations here, and we still continue to have hardware revenue as part of that mix. And so if you have a particularly strong quarter in one area like, let's say, health care, then you could see some of that changes materialize. And that's why I think the lumpiness in Integrations, it definitely shows up on a revenue basis. It has some impact on the gross margins, but I think the global trend is that we should expect strong gross margin as the product mix shifts towards software. Okay. Good morning. Yes, I have a few questions. And I would like to start in China. And if you can say how much China generated of Products & Solutions revenue in 2022 or in Q4? We are not breaking down the revenue in that detail, but of course, we have a balance over the world from our different regions, which we also – that we show within our annual report where you see Europe, U.S., and Asia, that's how we split it. What we would say, of course, and I think Magdalena spoke to this in the comments we made here is, the China growth, our strength was very much at the back half of Q4, very much tied to, sort of the reverse in the Zero COVID Policy. So, we saw a pretty strong response after that. We have seen weakness in the other markets still on the Products & Solutions side, if you think about the research business. On the gaming peripheral, of course, that's a worldwide business, where most of the revenue is coming from markets like the United States and Europe. Yes. At this point, we're not breaking the segments down, down to the regional level. We provide regional guidance on – or regional at least revenue on the overall Tobii number. Yes. I think in previous reports, a few years ago and when you were combined with Dynavox, you mentioned this from time-to-time that China is actually in a substantial part of Tobii Pro. And this must be the case still, I guess. Yes, it wouldn't fundamentally have changed. And you get a sense a little bit when we break up, sort of the U.S. revenue and European revenue and the rest of world revenue. The rest of the world revenue is a significant contributor for the overall Tobii number. Okay. Yes. So, let me see. Yes. And another one is that service revenue increased significantly in Q4, compared to Q3. What was the reason for this? So, I think the service revenue, we talked a little bit about sort of the project revenue on the Integrations side. So that shows up from a services perspective. We also have on the Products & Solutions side consulting services that make up that number, but we saw a pronounced strength on the project revenue side for Integrations showing up in Q4. Okay. And you also commented in report that you expect EBIT to be better in 2023 than 2024. That's kind of a broad statement, and you mentioned the cost run rate that you will not increase it as much. Can you elaborate a bit on what you mean with this statement about EBIT being a bit better? Can you be a bit more precise, please? Again, I think that we've sort of provided financial targets, so we'll reiterate that, but I think it's important to maybe put this in the context of how we've been operating the business. If you look at our EBIT profitability over the last couple of years, 2021, 2022, we've continued to improve profitability on an annual basis. And so that is something that we continue to drive towards. And so, I think it's pretty safe to say that, that improvement is something that we will expect and execute to in 2023 with a combination of increased revenue and of course, the focus on cost. When we look at more granular specific targets, the target that we've taken and we continue to be committed to is that we will be EBIT profitable once again in Q4 2023, but over the other quarters, we've said that we expect to not be at that level by definition since the target is Q4 2023 to be EBIT profitable. And we expect that, again, there will be some variation quarter-on-quarter in terms of annual performance depending on the macroeconomic environment and, sort of how the Integration revenue materializes. You can see over the course of 2022 that we've had variations in Integration performance, whether it's Q1 to Q2 or Q4, there have been big changes there. And even our Products & Solutions business, of course, has had quite different performance if you look from Q1 to Q4. We think that in the current macro environment, we expect that's a similar kind of outcome. So, the right way for us to go and forecast the business is more on an annual basis, but we believe that in Q4, which is our strongest quarter, we will once again be EBIT profitable. Okay. Good. Got it. Anand, it would be great if you can also please summarize the key revenue drivers for the Integration segments in 2023 and maybe say something about the backlog, what type of design wins you have going from, sort of early phase to more mature phase and actually generating revenue? Yes. I mean when we think about, sort of where is the revenue coming from in 2023. Again, from the Integration side, we've talked about the strength that we see in virtual reality. And so with the Sony launch, we expect again that Sony will be a major contributor to our overall revenue for the year. We expect to see continued engagement with multiple customers in the space. Some of that will start out in things like project revenue, which are on the path to potentially design wins in the future. And then we have, of course, a broad customer base in different parts of our business, whether that's in health care, where we see small companies starting to get FDA approval and we'll start scaling. We see them also in other parts of our business like our PC business, we talked about multiple design wins in – at the end of Q3, and these products are now starting to launch. So, we think that it's actually fairly broad-based, but the standout in terms of growth will still be in virtual reality. Yes, that's helpful. And my final is on the DMS side, if you can – you talked about it, of course, in your presentation, but can you elaborate a bit more on the outlook as revenue potential in 2024, 2025 and the cash flow profile of this type of product area in 2023 and also need for working capital maybe over time? Sure. So, let me take the revenue outlook and then maybe Magdalena and I can both comment a little bit on the, sort of the expectation on cash flow. So, as we've said, in our targets that we had before, we were very much looking at start of production in 2025 and start of production 2026 type of design wins. That is still the current expectation for the RFQs that we see coming in. We believe that as we get more and more evaluation from global Tier 1s, the stages we see is that the global Tier 1s go and evaluate us, they want to see performance in their labs, in their hands to really characterize the performance and capabilities of the solution. As they get quite confident with that, they start inviting us into RFQs, which, of course, we're jointly then participating in. It's us in combination with the Tier 1. And for us to win, of course, the Tier 1 also has to win and they are typically putting in the entire system. In this case, the hardware subsystem and of course, we are the Tier 2 providing the algorithm for DMS, and there may be other software that's part of it. So, for us to win, we need the Tier 1 to win and, of course, the Tier 1 to have chosen Tobii. And what we see right now is that we are participating in more and more of these RFQs and more Tier 1s are giving us very good evaluations on our technology as we're able to deliver these systems to them and demonstrate the capabilities of what we're offering. So, that's sort of where we are today. So, I think the first outcome of this is that we, of course, have to win our first DMS design win. And we acknowledge that, this is a space where there are strong incumbents. And so, we're going to have to go and demonstrate that we are somebody that people can bet on. We believe that after we win the first one, the next set of design wins should become easier because we will be more of a known player in the space. And so, we are very much laser-focused on the first design win, but we think in this year, we should hopefully close multiple of them. From a revenue perspective, we expect that these things will play out as maybe small NRE revenue, maybe even in 2023 or 2024, depending on the projects we engage in. But the real revenue, of course, comes in when license revenues show up after start of production of a particular vehicle. Now, from an investment perspective, we have been in an investment mode in automotive since 2019, investing in developing the solution. And we expect to continue to be in that mode all the way through 2025 and beyond as we start to see license revenue scale up, and of course, pay us back for the investment that we've made. We're not breaking out actually the specific investment that we make in the automotive side, but I don't know if you had any other comments that you wanted to make? No, but it's just as to say, of course, right now, it's a cash flow negative vertical for us. We are investing. We don't have any revenue, but we intend to change that. Good. Thank you. We have two more questions from the chat that we're going to do, and then we will have to round off this call. Starting with [Sergio Alegre] [ph]. Do you think that the slowdown in the gaming sector with fewer games published, profit warnings, et cetera, will delay your goals for 2023 in terms of revenue for the AR/VR segments? Again, I think that the major driver for us here is going to be success of the Sony PSVR2 headset. So, from that perspective again, it's not very strange in the Integration segment. When our technology is embedded into somebody else's solution, the revenue that we receive depends on the volumes that they're going to ship. One of the special things, of course, of Sony is that they are an ecosystem builder. They have spent a lot of time in curating games for the PSVR2. They've had tremendous success with the PS5 console so far. They announced as recently at CES that some of the marquee titles which they have in-house are coming to the PlayStation VR2 platform, games like Gran Turismo 7. They have 30 launch titles at this point. And so, at least from our perspective, if you look at the reviews that you see from the technical press, we've had a chance to try out the headset, we see very positive indications both from the experience that's delivered, as well as the benefits of eye tracking. I think that's very positive for us as a company. Of course, that has to translate into success for the headset selling, and that's very much in Sony's hands. I don't think that necessarily the broader gaming slowdown, which I think is actually something that would be indicative of PC sales or e-sports or things like that would necessarily have an impact yet in this market. I think more – this is a new category with a new experience, and that's maybe the bigger variable here. Thank you. And lastly, will the current cash position stay positive until Tobii becomes cash flow positive over time without the need for a new share issue? No. Once again, thank you very, very much and very happy with the quarter and looking forward for 2023. Thank you all.

EarningCall_347

Ladies and gentlemen, good morning and welcome to the CVS Health Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the call over to Tom Cowhey, Senior Vice President of Capital Markets for CVS Health. Please go ahead. Good morning and welcome to the CVS Health fourth quarter and full year 2022 earnings call and webcast. I am Tom Cowhey, Senior Vice President of Capital Markets for CVS Health. I am joined this morning by Karen Lynch, President and Chief Executive Officer of CVS; Shawn Guertin, Executive Vice President and Chief Financial Officer of CVS; and Mike Pykosz, Chairman, CEO and Co-Founder of Oak Street Health. Following our prepared remarks, we will host a question-and-answer session that will include additional members of the CVS management team: Daniel Finke, President, Healthcare Benefits; Michelle Peluso, Chief Customer Officer and Retail Co-President; Prem Shah, Chief Pharmacy Officer and Retail Co-President; David Joiner, new President, Pharmacy Services; and Dr. Alan Lotvin, outgoing President Pharmacy Services. Our earnings and Oak Street acquisition press releases and slide presentations have been posted to our website along with our Form 10-K and our Form 8-K that we filed this morning with the SEC. Today’s call is also being broadcast on our website where it will be archived for 1 year. During this call, we will make certain forward-looking statements reflecting current views related to our future financial performance, future events, industry and market conditions, including impacts related to the ongoing COVID-19 pandemic as well as the expected consumer benefits of our products and services and our financial projections and the benefits of the pending acquisitions of Signify Health and Oak Street Health and the associated integration plans, expected synergies and revenue opportunities. All forward-looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from currently projected results, including with respect to the ongoing COVID-19 pandemic and the pending acquisition and integration of Signify Health. We strongly encourage you to review the reports we file with the SEC regarding these risks and uncertainties, in particular, those that are described in the cautionary statement concerning forward-looking statements and the Risk Factors section in this morning’s earnings press release, Oak Street Health acquisition press release and included in our Form 10-K and the Form 8-K we filed this morning. During this call, we will use non-GAAP measures when talking about the company’s performance and financial condition and you can find a reconciliation of these non-GAAP measures in this morning’s press release and the reconciliation document posted to the Investor Relations portion of our website. Thank you, Tom and good morning, everyone and thanks for joining our call today. This morning, we are going to discuss our 2022 results, our 2023 guidance and our announcement that we entered into a definitive agreement to acquire Oak Street Health. Mike Pykosz, Chairman, CEO and Co-Founder of Oak Street Health will join Shawn and me during the call to discuss this important transaction. But first, 2022 was a year of progress for CVS Health. We delivered strong financial results, we made meaningful progress on our strategy and we brought a greater value to the people that we serve. This morning, we announced that we exceeded our adjusted EPS expectations for the fourth quarter in a row, delivering fourth quarter 2022 adjusted EPS of $1.99 and full year 2022 adjusted EPS of $8.69. This result represents nearly 10% growth over our 2021 baseline. For 2023, we continue to expect adjusted EPS in the range of $8.70 to $8.90, which at the midpoint represents high single-digit growth off of our 2022 baseline of approximately $8.25. In 2022, CVS Health surpassed the $300 billion mark in total revenue, growing full year revenues by more than 10% to $322 billion. We delivered adjusted operating income of $17.5 billion and generated adjusted EPS of $8.69. Our ability to generate cash flow from operations was robust at nearly $16.2 million for the full year. Each of our foundational businesses generated excellent results. Starting with the Health Care Benefits segment, we grew revenues by more than 11% for the year and delivered adjusted operating income of $6 billion. Our medical benefit ratio of 84% improved by 100 basis points versus the prior year and was consistent with our full year expectations after adjusting for the impact of elevated flow in the fourth quarter. I want to highlight a few areas within the HCB segment. Although our individual Medicare Advantage growth was below our expectations, Medicare Advantage remains a key strategic growth area for CVS Health. We remain focused on delivering superior service to our Medicare Advantage members while advancing our efforts to improve our Star ratings. We are executing on the actions we identified to address our CAP survey scores and are making the necessary investments to drive our Stars Improvement initiatives. We also made progress in the last 90 days in advancing our efforts to diversify our national PPO contract and have obtained the necessary regulatory approvals to move forward. This will enable us to more effectively manage our Medicare business in the future. As we will discuss shortly, adding both Signify Health and Oak Street Health to our value-based care delivery platform will deepen our focus on this important business. In our individual exchange business, we now expect to end 2023 with between 900,000 and 1 million individual members. This significant growth in membership is driven by our provider network, market growth, marketplace disruptions and our co-branded integrated benefit offerings. We anticipate a positive, sustainable contribution from this membership in future years. Our Pharmacy Services segment grew full year revenues by 11% with adjusted operating income of $7.4 billion. Performance in our specialty pharmacy was again outstanding. Revenue grew more than 19% year-over-year, driven by our industry-leading digital and specialty pharmacy capabilities. As we enter 2023, the first wave of new biosimilars will be coming to market, starting with competitors for HUMIRA. We recently announced that Amjevita will be added to coverage within our commercial formularies alongside HUMIRA and other branded products. Our approach to biosimilars reflects our commitment to drive the lowest net cost for our clients while providing members coverage of clinically safe, effective medications and ensuring continuity of care. Retail delivered another strong year, outperforming our initial guidance and long-term targets. Revenues for the year grew by more than 6% versus the prior year and we generated $6.7 billion of adjusted operating income. We finished 2022 with another quarter of strong performance in both the pharmacy and the front store. Pharmacy revenue increased by nearly 8% versus the prior year and delivered another quarter of year-over-year market share gains. Front store revenues grew by nearly 7% driven by demand for consumer health and cough, cold and flu products. We are making significant progress advancing our strategy, which includes expanding our care delivery and health services capabilities in primary care, home health and provider enablement. Last year, we announced the pending acquisition of Signify Health, which represented an important step forward in our value-based care strategy. Signify will strengthen our presence in the home and enhance our provider enablement capabilities. We now project that this transaction will close in the second quarter of 2023. At our Investor Day in 2021, we shared our vision to deliver a superior health experience for consumers. Central to our strategy is advancing our value-based care platform of capabilities that drive consumer engagement. This morning, we announced that we have entered into a definitive agreement to acquire Oak Street Health outstanding shares for $39 per share in cash, representing a total transaction value of approximately $10.6 billion. The acquisition of Oak Street Health will broaden our value-based care platform into primary care and accelerate our long-term growth. Primary care drives patient engagement and positive clinical outcomes. Although it is a very small proportion of total health spend, just about 10% nationally, it will significant influence over healthcare utilization. Individuals who seek routine primary care services report fewer serious medical diagnoses, lower mortality rates and a 33% lower annual healthcare expense. Oak Street Health has a proven senior-focused primary care model that is scalable at a national level. Their innovative care model goes beyond typical primary care to provide patients with comprehensive preventative care to support overall health and well-being. With 169 medical centers across 21 states today, we see a significant opportunity to expand in the next 2 years and provide superior care to many more patients. Oak Street has a committed and experienced leadership team with extensive care delivery expertise and a best-in-class fully integrated technology solution. Oak Street’s model focuses on providing more coordinated, holistic and connected care. Oak Street physicians spend 3x longer on average with their 159,000 at-risk patients and drive markedly better outcomes. Their approximately 600 providers and 6,000 team members have a proven ability to improve patient outcomes and experiences. At a time when consumers are increasingly frustrated with their experience in the healthcare system, Oak Street’s approach delivers a truly specialized care experience that drives a net promoter score of 90. The quality of this experience is evidenced by the fact that Oak Street was selected to be the trusted primary care partner of AARP and is the only primary care provider to carry the AARP name across all their sites. As part of CVS Health, we believe Oak Street’s value-based care model will have a far greater impact on patients. Our unparalleled consumer touch points will expand Oak Street’s reach and will allow them to engage with more consumers more frequently and more conveniently. The combination of CVS Health’s foundational businesses with Oak Street and Signify Health creates one of the premier multi-payer Medicare value-based care platforms in the marketplace today. But our ambition does not stop there. These Medicare-focused assets complement our established care delivery assets, including our over 1,100 retail health MinuteClinics in a number of ways: creating convenient access and additional clinical capacity for Oak Street with preventive care and chronic care services for seniors; enhancing access to our broad nurse practitioner workforce; and providing wraparound services tailored to seniors and those with complex conditions such as medication reconciliation and post-discharge follow-ups. The potential across CVS Health’s base of assets is powerful. Together, we will transform the experience for consumers across the country. The Oak Street transaction is financially attractive and enhances our ability to accelerate our sustainable long-term growth. Shawn will provide more details on the financials of the transaction and will discuss the growth and profitability prospects of the Oak Street assets. At the close of the transaction, Mike Pykosz will continue to lead Oak Street within CVS Health. Mike, we are so excited to welcome you and your team to CVS Health at the close of this transaction. Thank you, Karen and good morning everyone. Our mission at Oak Street Health is to rebuild healthcare as it should be. When we started Oak Street, we set out to address the root causes of high-cost, low-quality care and poor experiences for Medicare patients. 10 years in that journey, as we continue to drive our national expansion and look to impact more patients and communities, we could not have found a partner more aligned to our mission than CVS Health. At Oak Street Health, we operated a network of primary care centers to specialize in care for older adults. We focus on areas with large concentrations with Medicare-eligible patients with incomes below 300% of the federal poverty line, areas where we can make the biggest impact. We create our innovative models from the ground up and focus on ensuring our patients receive the right care upfront, improving their experiences and keeping them healthy and out of the hospital. This proven and naturally scalable model benefit patients, providers, and payers, while improving health outcomes, lowering medical costs and delivering a better patient experience. This focus has generated meaningful results for our patients, including reducing hospital admissions by over 50% and lowering 30-day readmissions by 42%. By providing coordinated holistic care, we can close care gaps and address social terms of health, delivering 5-star performance. Our track record shows that we have been able to deliver consistent performance across different populations and geographies. And while our primary focus is Medicare managed at-risk patients, we have also demonstrated our care model can work outside of Med. For example, in 2021, we participated in the Medicare direct contracting program, where we took on full risk on traditional Medicare patients. Among all the participants in the program, we generated savings that were 2x higher than any other multistage direct contract candidate and we were ranked number one in [indiscernible]. These results show that even amongst the most innovative groups of this new program, our capabilities and results stood out. By joining CVS Health’s ecosystem, we will accelerate our journey to improve patient outcomes and experiences while continuing to invest in both our innovative care model and invest in what we believe is the best team in healthcare. The expansive consumer touch points of CVS Health virtually and in the community, including the trusted CVS pharmacists, will broaden and deepen our connections with the patients under our care. At Oak Street, we have talked about the massive market opportunity for companies that can address the huge challenges in healthcare. CVS Health is in a unique position to deliver market-leading health solutions. The breadth of their offerings and proven ability to scale assets will significantly enhance our ability to tackle these challenges. We believe this transaction is a great outcome for all of our stakeholders, including our patients, all of our payer partners, our team of Oakees and our shareholders. Thank you, Mike. CVS Health delivered strong financial results in 2022 and we are entering 2023 with tremendous momentum. We continue to make progress on our strategy and will enhance the capabilities of our value-based care platform through the Oak Street Health and Signify Health acquisition. We are excited about the opportunities ahead of us. I will now turn it over to Shawn for a deeper look into our results, our 2023 outlook and the Oak Street transaction. Shawn? Thank you, Karen and good morning everyone. I will first take some time to detail our results and 2023 guidance before discussing this morning’s announcement of the Oak Street transaction. Our fourth quarter results reflect the continuation of our excellent performance from each of our core business segments as we exceeded our expectations for revenue, cash flow generation and adjusted earnings per share. A few highlights regarding total company performance. Total fourth quarter revenues of $83.8 billion increased by 9.5% year-over-year, reflecting growth at or above internal expectations for each of our foundational businesses. We reported fourth quarter adjusted operating income of $4 billion and adjusted EPS of $1.99. For full year 2022, we reported total revenue of $322.5 billion, an increase of 10.4%, with solid growth across each of our foundational businesses. This led to a full year adjusted EPS of $8.69, representing an increase of 9.7% off our 2021 adjusted EPS baseline of $7.92. And importantly, CVS Health’s ability to generate cash remains strong. For full year 2022, we generated $16.2 billion in cash flow from operations. Looking at performance by business segment, Health Care Benefits delivered strong revenue and adjusted operating income growth versus the prior year. Fourth quarter revenue of $23 billion increased by 11.3% year-over-year. We grew membership by 548,000 lives in 2022, driven by strong growth in our commercial and Medicare businesses, offsetting the divestiture of a portion of our Aetna International business earlier this year and a decline in Medicaid membership due to a previously disclosed contract loss. Our medical benefit ratio of 86% improved 100 basis points year-over-year. Adjusted operating income of $858 million grew 68.2% year-over-year. Both of these measures were driven by the net favorable impact of COVID-19 compared to the prior year and strong underlying performance, partially offset by the unfavorable impact of the flu. Outside of an elevated flu season, medical costs remain in line with expectations as has been the case throughout 2022. Consolidated days claims payable at the end of the quarter was 52.5, up 3.4 days versus the prior year. Overall, we remain confident in the adequacy of our reserves. In the Pharmacy Services business, our ability to deliver industry leading drug trend for our clients, our specialty management capabilities and excellent customer service levels continue to drive growth. During the fourth quarter, revenue of $43.7 billion increased by 11.2% year-over-year, driven by increased pharmacy claims volume, growth in specialty pharmacy and brand inflation, partially offset by continued client price improvements. Total pharmacy claims processed increased by 3.1% above the prior year and 4.6% when excluding COVID-19 vaccinations, primarily attributable to net new business, increased utilization and the impact of an elevated cough, cold and flu season. Adjusted operating income of $2 billion grew 9% year-over-year driven by improved purchasing economics, including increased contributions from the products and services of the company’s group purchasing organization, partially offset by continued client price improvements. In our Retail/Long-Term Care segment, we delivered strong revenue growth despite mixed COVID-related trends and continued economic uncertainty. Specifically, during the fourth quarter, revenue of $28.2 billion grew 4%, reflecting increased prescription and front store volume, including the impact of an elevated cough, cold and flu season, pharmacy drug mix and brand inflation. These items were partially offset by decreased COVID-19 vaccinations and diagnostic testing, the impact of recent generic introductions and continued pharmacy reimbursement pressure. Adjusted operating income of $1.8 billion declined 25.1% versus prior year, but was largely in line with internal expectations, driven by decreased COVID-19 vaccinations and diagnostic testing, continued pharmacy reimbursement pressure and increased investments in the segment’s operations and capabilities, including the vast majority of a discretionary bonus payment to frontline colleagues. These decreases were partially offset by increased prescription volume and improved generic drug purchasing. Pharmacy prescription volume grew 0.8% year-over-year, reflecting increased utilization and the impact of an elevated cough, cold and flu season, partially offset by decreases in COVID-19 vaccinations. Excluding the impact of COVID-19 vaccinations, pharmacy prescription volume increased by 4% year-over-year. Turning to the balance sheet. Our liquidity and capital position remained excellent. We ended the year with approximately $5.4 billion of cash at the parent or unrestricted subsidiaries and an adjusted net debt to EBITDA of about 2.9x. Excluding the adjustment for cash at the parent or unrestricted subsidiaries, our adjusted debt-to-EBITDA is approximately 3.1x. Through our quarterly dividend, we returned $719 million to shareholders and repurchased $1.5 billion of our common stock in the fourth quarter. We also entered into a $2 billion fixed-dollar accelerated share repurchase transaction, which became effective on January 3, 2023. A few other items worth highlighting for investors. We continue to experience the impact of market volatility on our investment portfolio and recorded net realized capital losses of approximately $37 million in the quarter. We recorded $117 million of office real estate optimization charges in the quarter related to the reduction of corporate office real estate space in response to our new flexible work arrangement. We also recognized a $250 million gain related to the sale of our bswift business in November. And we recorded $99 million of incremental charges related to opioid litigation to address the final terms and other implications of the global settlement executed in December. Shifting to our outlook for 2023. We expect revenue growth of 3% to 5%, and we are reaffirming our full year adjusted earnings per share guidance range of $8.70 to $8.90. We believe this range is prudent at this stage in the year and reflects approximately 5% to 8% growth versus our 2022 adjusted EPS baseline of $8.25. We detailed the adjustments reflected in our 2022 baseline in the earnings materials posted on our IR website. I want to point out three things on our 2023 adjusted EPS guidance. First, consistent with past practice, our projections do not assume the recurrence of prior year reserve development. Second, these projections do not include a specific provision for our pending Signify transaction, which is expected to close in the second quarter of this year, but which we project will have a small impact on 2023 adjusted EPS. And third, I want to remind everyone that beginning this year, we are shifting to our reporting convention that excludes net realized capital gains and losses from adjusted operating income. Now let’s turn to some of the segment details. In our Health Care Benefits segment, we expect to see membership growth of 2% to 4% with increased membership in both Medicare and Commercial, partially offset by declines in Medicaid due to the impact of redeterminations in 2023. Overall, we expect to generate revenue growth of 11% to 13%. Our projected medical benefit ratio for 2023 is 84.7%, plus or minus 50 basis points. As I just noted, we do not assume prior year reserve development in our projections. We are providing a cautious outlook for HCB adjusted operating income, expecting growth in a range of about 2% to 4% and reflecting a prudent assumption regarding the performance of our individual exchange business, lower individual MA enrollment and investments in our Stars Improvement initiatives. Moving to our Pharmacy Services segment. We expect revenue in a range from 1% to 2% growth, driven by a successful 2023 selling season and strong retention, partially offset by lower Medicaid volume. For the full year 2023, we expect pharmacy claims to range from flat to growth of 1%. Overall, we expect these results to generate adjusted operating income growth of 4% to 5%. Finally, shifting to our Retail/LTC segment. As we discussed previously, this segment will be burdened by the lower contribution from COVID as we transition into the endemic stage as well as continued reimbursement pressure in the pharmacy. We expect revenue growth of 1% to 3% and prescription growth of 2% to 4% despite continuing decreases of COVID-19 vaccines. Overall, for the Retail/LTC segment, we expect 2023 adjusted operating income to decline from 2022 to between $5.95 billion and $6.05 billion. For items below adjusted operating income, we expect our interest expense for 2023 to be approximately $2.23 billion. Our tax rate is expected to be approximately 25.5%. I want to make a few comments as you think about the cadence of our earnings throughout the year as Retail returns to earnings seasonality more aligned to pre-pandemic patterns. We are currently projecting the lowest contribution to earnings in the first quarter of the year. The remaining three quarters will be relatively consistent with slightly more than half of our earnings coming in the second half of the year. Shifting to shares. We expect our diluted weighted average share count to be approximately $1.298 billion, reflecting the impact of both our fourth quarter 2022 repurchase activity as well as the accelerated share repurchase that is currently underway. We anticipate another strong year of cash generation. We expect cash flow from operations of $12.5 billion to $13.5 billion. Capital expenditures are expected to be in the range of $2.8 billion to $3 billion. Turning to the Oak Street transaction. We committed to investors that we would be diligent when deploying our capital, seeking assets with the best technology, capabilities and cultural alignment to our vision. After a thorough and robust review of the market, Oak Street was the primary care asset that proved to be the most strategically and financially compelling. Oak Street will operate as a payer-agnostic business within CVS Health, focused on improving outcomes and experiences for the Medicare population it serves. CVS Health has a strong and proven track record of helping its payer clients succeed, and we will continue to prioritize that success after this transaction. What we saw when we looked into Oak Street’s portfolio of clinics was a remarkably consistent path to clinic profitability. This trend was true across diverse geographies, populations and payers. As Oak Street drives strong patient experiences and engagement, their patient panels grow. And as Oak Street’s providers engage with those patients, they improve outcomes and increase patient contributions over time. These two factors combine to drive clinics to maturity, achieving profitability within the first 3 years and unlocking annual adjusted EBITDA potential of approximately $7 million per clinic using Oak Street’s definition of adjusted EBITDA. Within the 169 clinics Oak Street has today, we have high visibility into embedded adjusted EBITDA of over $1 billion. We also recognize the tremendous opportunity to scale Oak Street’s clinics to reach more seniors across the nation. At their current rate of expansion, we expect Oak Street to have over 300 clinics by 2026, at which point we project they will have more than $2 billion of embedded Oak Street adjusted EBITDA. Shifting to synergies. We envisioned five main opportunities to realize more than $500 million of value over time: one, accelerating Oak Street patient growth through CVS Health channels; two, improving Oak Street’s economics through integration with our broad portfolio of assets; three, improving the retention of our Aetna MA members through the improved outcomes and experience provided at Oak Street clinics; four, driving greater utilization of CVS Pharmacy and Caremark capabilities; and five, capturing modest savings from external public company and lease costs. We project that our investment in Oak Street will drive double-digit returns on invested capital over time as clinics mature and synergies are realized. We are committed to exploring additional avenues to further accelerate growth, synergy realization and returns from this transaction while balancing further near-term dilution to our EPS trajectory. As stated in our press release, this transaction will be funded with available resources and existing financing capacity, and we remain committed to maintaining our current investment-grade rating. The transaction is subject to approval by Oak Street’s shareholders, regulatory approvals and other customary closing conditions. We expect this transaction to close in 2023. We are now targeting 2024 adjusted EPS of approximately $9, growing to approximately $10 in 2025 with the potential for upside in 2025 based on the successful resolution of our Medicare Star Ratings mitigation efforts. The 2024 and 2025 adjusted EPS trajectories reflect the impact of the previously disclosed 2024 Medicare Star Ratings headwinds in Centene contract loss, closing of the Oak Street Health transaction in 2023 as well as projected contributions from the Signify Health transaction in 2024 and beyond. Consistent with past practice, CVS Health expects to exclude integration and transaction costs from its adjusted EPS presentation. With the close of these transactions, we expect that our adjusted debt-to-EBITDA will peak in the mid-3x level in 2024, well within leverage ranges aligned to our current investment grade rating. Our current projections assume modest discretionary repurchase activity in 2024. This is consistent with our 2021 Investor Day projections, which contemplated 1% to 2% adjusted EPS growth from repurchases in addition to offsetting dilution. As leverage begins to subside in 2025, we will have potential for additional repurchases. In summary, we are excited to announce the acquisition of Oak Street and to incorporate them into our expanding portfolio of capabilities. Oak Street’s best-in-class clinics will serve as the focal point of high-quality care for seniors across America. The strategic rationale for this combination is sound and the growth opportunity is vast. Together, CVS Health’s foundational businesses signifies home assessment and provider enablement capabilities and Oak Street’s clinics and care model create the premier multi-payer Medicare value-based care platform. We could not be more pleased to join with Oak Street as we take the next step in our journey to build a differentiated health services organization and transform how care is delivered. To conclude, we delivered excellent performance in 2022, creating strong momentum as we continue to execute our strategy in 2023. We are building on our achievements, expanding our portfolio of capabilities and continuing on our path to become the leading health care solution company. Thanks very much and congratulations on the transaction, and congratulations on the strategy overall. I know every quarter I’ve asked about this strategy around value-based care and what you’re going to do in this area. So I’m happy that you finally have done this. So really just two things I want to better understand. One, following Oak Street, they did slow the growth of the number of centers they were opening last year due to cash constraints. Shawn, it sounds like you’re laying out that you’re going to keep that strategy the same at roughly 35 centers per year. One, is there a reason why you wouldn’t reaccelerate that growth when we think about Oak Street? And then secondly, as we think about some of the changes that have come with RADV, the MA rates that have come out, can you maybe just talk about the impact, not just on the MA side but also on the provider side? And did you take that into account when you were thinking about buying a primary care asset? Lisa, I’ll turn it to Shawn in a second, but I just wanted to acknowledge your point about we did lay out a variable vision at December 2021 to really expand into health services. And I really believe this transaction is a clear win for both patients and provides, and as we said in our prepared remarks this really does create the premier multi-payer Medicare value-based platform and I talked lot about value-based care and not just being a contract but being platform where we really drive engagement and connect patients to care. And this transaction, combined with Signify Health, really does demonstrate that we are executing on our long-term strategy to drive long-term growth for the company. Let me turn it over to Shawn to answer your specific questions. Hi, Lisa. So on the first one about kind of clinic expansion. To be clear, the numbers we cited today in our model are premised on maintaining a trajectory of 35 to 40 clinics a year expansion. As I mentioned in my prepared remarks, one of the things that we will be doing over the coming months is exploring alternative avenues of accelerating synergy realization but potentially looking at the growth aspect of that, and in particular, avenues that would help us manage sort of greater clinic growth but also sort of manage kind of inside the dilution framework that we’ve talked about with this transaction. And we will be looking at those avenues because it’s a very important point because when you look at the long-term returns of this model, that accelerated growth has some real long-term kind of return benefits to doing that. So again, that will be something that we continue to work on and explore the best way to do that within the framework that we’ve discussed with you today. On your second question, it was important to us to both understand the positioning on RADV and at least be able to see the MA advance rate notice for ‘24 and frankly, work in conjunction with Oak on what we thought that meant to them. And we’ve had the ability to do that, and obviously, as you all know, much of that still leaves many questions to be answered in the future. It does provide a little bit more clarity than we had in the past. But I think we do understand the dynamics and some of the mitigation efforts that we could put in place if certain things stand or certain things get modified. In many ways, though, what I would say is what we saw come out of those notices, I think, is exactly why you want high-quality Medicare Advantage value-based care assets. In its most – simplest sense, when you have a year, for example, when reimbursements get squeezed, what’s one of the things you want to do, you want to look at your cost control levers. And certainly, Oak is a demonstrable asset that has proven to improve outcomes and reduce costs. And so I think as we think about navigating the future of Medicare Advantage and maybe even a broader opportunity in Medicare value-based care in the fee-for-service population, I think both Signify and Oak are exactly the kind of assets that you would like to have at your side as you do that. And Lisa, just adding to that point, I think we all recognize the importance of Medicare Advantage and the popularity, and we are very encouraged by the political statements that were made last night to support Medicare. And this fits really nicely into that picture as well. Good morning. Thanks for taking the question. Congratulations on the deal. I’m sure there are going to be a number of other questions there, so I want to hone in on Health Care Benefits and particularly the work you’re doing around Stars. I know last month, Karen, you outlined the waiver and the requirements to push forward on the ‘24 mitigation plans. Can you just give us a sense of where you stand on the various different work streams tied to achieving the ‘25 mitigation and the planned throughput you have in order to get there and reestablish your Stars presence? Yes, Mike, thanks for the question. And you’re right. We did make progress on our regulatory approvals to move our contracts forward. And we are continuing to make investments in Stars so that we can mitigate the risk. As you might remember, we narrowly missed in our CAPS scores, and the team has been working very diligently over the course of the last couple of months to make sure that we are improving our results. I’m going to ask Dan to talk about the specifics Yes. Thanks, Karen. So in 2022, we really took a look at the opportunity around CAPS and member experience, and we launched some additional campaigns related to that, that frankly are still ongoing, things like assisting our members to understand their benefits, expanding our concierge services to really maximize the member experience overall. We also have the opportunity to impact other domains as well, our patient safety domain that worked really hard with our retail colleagues on in the fourth quarter related to patient medication adherence. And then, of course, on the HEDIS front, closing as many gaps and care as possible in the fourth quarter and now currently focused on really optimizing our record collection during the hybrid season. So we’re committed to improve our Stars ratings. We believe we are the right actions and the right team to really improve the ratings overall. Hi, everybody. Congratulations on the transaction as well. I wondered, since we had Mike on the call, the – obviously, this has played out a little bit in the public domain. So there is been speculation that someone might be up with Oak Street for a while. I wonder if he could comment on what kind of feedback he’s gotten from his doctors, how do they – how are they reacting to this. And I wonder, do they have to approve in any way this transaction? Is there anything in their agreements that require approval? And then lots of questions around the deal, but I might just ask, Shawn, Karen, you’re thinking you’re going to close this at the end of the year and/or sometime this year. I know the regulatory process is a little less certain than it was a few years ago, I guess, the way to describe it. If it were to slip into some point in ‘24, would you – would that materially change your $9 and $10 target? Or are you – does that have some flexibility around the timing of the deal? Hi, A.J., we do – we’re – we do expect to have this transaction close, I’ll let Shawn comment on the financials, but I don’t think that we have material changes in those numbers. I am going to turn it over to Mike. Mike, can you just respond to A.J.’s question around the clinicians? Yes, happy to. So, on the second point, no, we don’t require any separate approvals. We just need more of the standard shareholder approvals. On the first question you are asking, I think is the most important one. At Oak Street Health, our mission is to rebuild healthcare as it should be. And I think the physicians I have talked to and opinion leaders and team members across Oak Street that I have talked to so far. I think there is a huge amount of excitement that this is kind of the next stage of our journey. And we are really proud of what we have built over the first 10 years of Oak Street. But we really believe there is an order of magnitude of more growth out there for us. We can go to more communities and impact more older adults. And I think that CVS Health brings just a huge amount of resources that we can partner with and leverage to help us provide higher quality care for patients, to help us provide a better patient experience and to help continue to make Oak Street the best place to work in healthcare. So, I think from our physicians and the rest of our team members’ perspective, I think this is a huge positive to continue to help us execute on our mission. And A.J., I am not sure if you had a question about more global kind of deal returns, but specifically to your question about the timing of close, the answer is no, it would not change those. And arguably, it actually adds a little bit of lift because, if you remember, there is an operating loss that’s going on for a little bit of time and you are picking that up a little bit deeper into the cycle of moving from kind of loss to breakeven to gain. So, it actually would not kind of change the $9 to $10 at all, certainly not in a negative way. Thanks. Good morning. Wanted to shift back to health benefits for a minute. I wanted to ask you to walk us through your expectations on membership growth across the businesses in detail. So, where do you expect to grow in MA, shrinking tape, commercial and the exchanges. And then your MLR looks like it’s up about 100 basis points year-over-year, maybe a little less. Just hopeful you could frame how much of that comes from the PYD roll off that you are not assuming and what other drivers might be impacting that? Appreciate it. Hi Justin, it’s Karen. Let me just comment on the growth. So, first of all, in our commercial book, we do expect to grow in our commercial book. And our value proposition is truly resonating in the marketplace. We announced last month that we closed the state of North Carolina, which will bring us about 570,000 members on 1/1/25. So, I think that’s a good demonstration of the strong value proposition that we have in our commercial business. I mentioned our significant growth in individual exchanges, 900,000 to 1 million members next year. And then in Medicare, as you know, Justin, we are disappointed in our individual Medicare Advantage growth, but we are growing our D-SNP business and our group MA business. So, I will let Dan specifically give you a little bit more details on growth, but I am going to turn it to Shawn to answer your MBR question. Yes. So, Justin, the MBR, I think the guidance midpoint is up about 70 basis points year-over-year. There is a number of pieces that are leading to that. The first, to the point of your question, is the removal of prior year favorable reserves development is about 20 basis points there. Second, the provision we are making for the exchange business and the provision for any adverse deviation there is also worth about 20 basis points. About 10 basis points is driven by Medicaid redeterminations and what we think the MBR impact will be there. The divestiture of our international business in 2022, that was lower MBR, so that’s adding about 10%. So, it’s three or four items that are building that up. I would say more broadly behind this that when you looked at the fourth quarter and you looked behind the impacts of flu and respiratory illness, utilization continued to perform very consistent with what we expected to see. And we still feel the pricing environment is very sound and rational going into 2023. Yes. And Karen, I would just add two comments to your remarks. I mean first on the Medicare front, a couple of bright spots during AEP, where our growth in the duals population as well as our group MA products, and so we expect continued growth in those products through the remainder of the year. And clearly, the team is also focused on our individual MA enrollment as it relates to OEP and our lock-in period. Some of the investments we made at the end of AEP showed some signs of growth that we are looking forward, let’s say for the remainder of the year. And then the last comment would just be on Medicaid. We do expect some modest growth in that book of business through the first quarter. But as anticipated, at the end of the first quarter, we do expect some of the re-determined members to fall off the roster. And so we are working closely with the states around our opportunities to regain that membership. Thank you. Eric Percher and Josh Raskin here at Nephron. A question with respect to the approach to M&A, how important was geographic diversification in your process or as you are examining assets and making this decision? And then conversely, how important was how much you need the model that Oak Street has built? And maybe lastly, how do you think about how this and Signify come together with respect to physician enablement? I can have Karen talk about that as well at the end, but what I would say is, as we talked about our factors here, Eric. We have conducted a very thorough evaluation over the last 15 months and are confident this is the best asset in the space that really satisfied all of our criteria talented and capable leadership, a leading integrated technology platform, a clear ability, to the point of your question, to scale and reproduce the model and the results across both geography and for different payers. It also has, as Mike mentioned, the demonstrable capability to improve clinical outcomes and lower costs and I think a very clear path around the unit economics required for profitability. I would be remiss if I didn’t also mention that it has a fundamentally differentiated patient experience as evidenced by their 90 NPS and their exclusive AARP endorsement. So, this asset, really, we have talked about the list of criteria, we really hit it. And I think to your point, the geography was important. We are a big company. We are going to need a big footprint over time, and being in 21 states was important in and of itself. But it’s actually, in my mind, the scalability element was the ability to demonstrate the model worked in different geographies. And to the point of your second question about having, I will call it, the homogeneity of the model, it was the ability to reproduce it and then make changes to it. I think that was very, very important, and frankly, very distinct and what we looked at in the market. I think the second part of your question, I think, is important, too, because there is a lot of interplay potentially down the road between these two assets. One of, I think the benefits that we have, and I think we have built in a modest synergy when we talk about the ability to accelerate growth, is the ability of Signify when they are doing a home visit to recognize that here is a member that needs to be returned or connected to care. And that doesn’t have to be obviously through Oak, but it can be and can be our MinuteClinics as well. So, the interconnectivity of actually getting these members the care they need, when they need it and where they need it, and to Mike’s point, the way it should be provided, I think these two things over time, we will be able to work powerfully together. Yes. And Eric, just to add to that, I think it’s really important to think about community and community-based care as we have talked a lot strategically being in the community and really having kind of all these assets work together. Shawn made a good example of Signify and Oak, but then you think about our MinuteClinics, and we can kind of leverage those MinuteClinics for additional capacity. We can leverage our nurse practitioners as well and then we can have wraparound services. So, we can have a very much of a holistic approach to care in the community. I would also add that it is really critically important for us to be a multi-payer agnostic provider and make sure that we are connecting care for all the patients that we are interacting within the community. Hi. Thanks. I appreciate all the color on the Oak Street acquisition. I was hoping you could help us think a little bit about the timing you would expect to be required to realize both the greater than $2 billion of earnings power itself and also the $500 million of synergies and also maybe any insight into where both those figures might be on a reported basis over the next couple of years, would be great? Thank you. Yes. So, let me talk kind of about this in sort of a financial terms and try to get at some of those points. As I mentioned, right, this is a – we do think this is a deal that has an attractive long-term return on capital. And – but it also has the potential to move the needle from an earnings perspective in a company of this size and scale. Our strategy has been and will continue to be to deploy capital to improve the sustainable earnings growth rate of this company as a whole. When you look at this asset in concert with Signify, we project this could improve our overall long-term earnings company growth rate by at least 100 basis points a year as these investments mature. It’s important as you think about this, that the dilution, especially the dilution from financing, is temporal in short-term, but these sustainable improvements in growth rate are not. From a return on capital standpoint, we think it earns double-digit returns on capital in year seven. And very importantly, because of the embedded value in that clinic infrastructure, that return on capital continues to grow on the order of 200 basis points a year thereafter. And I have mentioned in my remarks that at the current rate of expansion, we would expect to have 300 clinics by – in 2026 or by the end of 2026. And using the Oak Street convention around adjusted EBITDA at $7 million per clinic, we think the embedded EBITDA could cross the $2 billion threshold in the 2026 year. So, that’s an important sort of data point. But I think it’s important to recognize that the way that embedded EBITDA really manifests itself can be in these ongoing returns on capital. I would comment that while the return profile might be longer than other deals you have seen in the past, I don’t think it’s atypical of deals that meaningfully improve your strategic positioning as a company. And I do think it’s important – in fact, I think being overly slavish to deals that only satisfy short-term returns are exactly what can lead to long-term growth problems. And I think we are – this is something that has a lot of long-term growth earnings power. And finally, you had asked about the synergies and some of the kind of accretion dilution. The synergies are powerful here, and I think it’s one of the things that we are uniquely positioned to deliver on. I have often – when I have talked to all of these companies, they have often said to me like, if I say what do you need to grow faster, and they say members and capital. Well, that’s something we can bring to bear here. But most of the synergies, probably about 70% of what we talked about, are tied up really in that accelerated growth and the improved retention of MA members. And so when you think about the model here, the J-curve, if you will, this is about moving them along that curve faster. And in that trajectory, that generally gets closer to breakeven and positive in that year two to year three timeframe. So, that it’s after that, that a lot of these synergies mature. The way we see that playing out is, I think this would be roughly EPS-neutral probably in like year four of our ownership, thereabouts, and begin to be accretive on an EPS line for year five. But make no mistake, it is improving each year, which is going to help our growth rate between then and now. And you are building substantial embedded long-term value in that footprint. Hi. Good morning. Maybe we can shift to retail, our guidance for OP of $5.95 billion to $6 billion. Can you just let us know how much endemic COVID you have in that guidance? And for 2024 and 2025 expectations, are you assuming that stays flat, or is there any growth in that base business? No. So, Ann, for 2023, we have about $500 million to $600 million of what I will call the endemic COVID contribution from the three categories we have been talking about vaccines, diagnostic testing and over-the-counter testing. It’s important to recognize that, that is significantly down from the contribution that we experienced in 2022, nearly $1 billion down from that. So, we are targeting producing the $6 billion again despite kind of that headwind. In our forecasting, the general – I would tell you the general targeting as we continue to expect retail to be able to maintain flat. And it’s – we have a declining COVID contribution, and our thinking behind that, that obviously, there is other initiatives. And I am going to let Michelle and Prem maybe talk about some of the other things that are going on in both the front of the store and the back of the store that are helping the business broadly, but also helping us sort of manage through the decline in COVID contribution. Hi Ann, it’s Michelle. So, while it’s easy to see we had a really strong financial year and gaining share in both front store and pharmacy, there is a lot of underlying trends that I think are driving the momentum even if COVID slows. So, if you think about 2022, we grew consumers, we experienced stronger household penetration, and we actually grew service levels and Net Promoter Scores to historically high levels. And so the foundation and momentum has been strong in the front door. This is coming about because of things like our investments in omnichannel, modernizing our store fleet, improving our merch mix, improving service and even our pricing and promotional strategy. So, this is a kind of underlying momentum and foundation that we think will help us continue our growth trajectory. But at the same time, we absolutely recognize there is also opportunity to invest in cost structure and productivity improvements. So, we are investing in supply chain, for instance, to optimize, modernize and selectively automate. We believe that will bear a significant return. We are also finding lots of other opportunities to improve inventory turns and reduce overall product loss. So, it’s this combination of growth on site productivity improvements that we think will continue to fuel our performance not just in 2023, but beyond. So, let me turn it over to Prem. Yes. Just a couple of other points. Our Q4 market share in pharmacy is now approximately 27%. We grew share another 12 basis points, and we are about 117 basis points higher than the pre-pandemic share. And then secondly, I would say there is two areas we are really focused. One is on our digital approach and our pharmacies and how we continue to be the most convenient retail destinations for our patients and consumers and really connecting that with our digital strategies. And the second is really around our clinical programs. We are seeing continued strong adoption of those clinical programs that drive further adherence and retention for our patients. And we are starting to see new therapies also rise. So, continued strong momentum in retail from a pharmacy perspective, we continue to have extremely strong service levels in our business as well to drive the business forward. Hi. Good morning. Thanks for taking the questions. Oak Street’s cohort data paints a pretty compelling path just in terms of the embedded EBITDA that is in the centers. I guess what do you see as the key variables to kind of achieving that kind of J-curve that they have laid out? And you have talked about some of this, but what can CVS do to potentially accelerate that? And then just as a quick follow-up, Shawn, I was wondering if you could just talk a little bit more – in more detail about capital deployment plans in ‘24 and ‘25. I think you said some modest level of share repurchases in ‘24 and more in ‘25. Can you also talk about maybe what you see as sort of deleveraging our debt pay-down across those years as well? Thank you. Yes. So, as you mentioned, I think and I can certainly – I think Mike can comment as well, right. Really, the variable, and it’s remarkably consistent, right, over time is the ability to drive membership growth sort of along, to your point, along that sort of J-curve of cohort financials. And today, I think Oak has done a great job being successful as that and what this deal really opens up, is a lot of new potential pools for members. And I think that will take a lot of different forms, right. There are certainly – well, it’s very much going to be a multi-payer asset. There is obviously things we can do for plan design offerings to highlight the Oak network or the Oak clinics. We can do that with the Aetna members. I mentioned Signify before as a potential sort of source of members. But when you just think about the vast array of members that we interact with and the vast array of seniors that we interact with every year across this company, this is a much wider catch basin, if you will, for potential growth. I also think we can strengthen the value of the offering with our other fulfillment assets around pharmacy and MinuteClinics. And frankly, I think that will make that offering not only more attractive than the most, but all of the payers who contract with Oak, they will all benefit from what we bring to bear with our retail health strategy and our pharmacy strategy. And I think that is sort of – that is an opportunity there. On capital deployment, I think as I mentioned, what we expect for this to play out is that over the next couple of years, we will likely be in the mid-3s from a debt-to-EBITDA ratio, and that’s obviously a range is consistent with our current investment-grade ratings, and that is important to us to maintain that rating profile. Having said that, I still think we have an ample amount of financial flexibility over the next 2 years to 3 years after this transaction. We would – our current projections are – or let me step back, as you mentioned, we have a modest amount of share repurchase in the ‘24, ‘25. Think about that as maybe one point or two points above dilution. That’s very consistent with what we told you on Investor Day. So, when we think about the flexibility we have, I would say that we would have probably between $4 billion and $8 billion of flexibility over the ‘23, ‘24 window and then that grows more to like the $10 billion to $15 billion of flexibility in the ‘24, ‘25 window. Timing, obviously still to be determined. But I think that gives us ample flexibility because this is the capital that we could continue to use to return value to shareholders via the dividend, obviously, incremental share repurchases, deleveraging, to your point, or it could be used for other corporate purposes. So, before we conclude, I want to take this opportunity to thank our CVS Health colleagues for their extraordinary work, bringing our vision to life, improving the health of our customers and delivering on our financial objectives. As you heard today, CVS Health delivered strong results, and we are advancing our strategic initiatives. We entered 2023 with great momentum, and we are well positioned for growth in our foundational businesses, and we are making continued progress against our strategy. We are so excited about the opportunities ahead of us, including both the Signify and Oak Street Health acquisitions, and we look forward to keeping you updated throughout the year. Thank you. Ladies and gentlemen, this does conclude today’s CVS Health fourth quarter and full year 2022 earnings call and webcast. You may disconnect your line at this time, and have a wonderful day.

EarningCall_348

Good morning, everyone. Nice to have you online and on the call this morning for Ambu’s Q1 Results Meeting. Together with you on the call, I am Britt Meelby Jensen, the CEO of Ambu and with me today I have Thomas Frederik Schmidt, our CFO. Lets start the meeting by reminding ourselves about Ambu’s purpose, something that is very close to our heart and our every day work at Ambu. We help healthcare systems and healthcare professionals, both improve save lives and improve patient care in the hospitals. The agenda we have for today, I’ll start by going through our business update for the quarter, and then I’ll hand over to Thomas to go through the financials. And then, at the end, we will wrap with a Q&A session. Also, I’d like to remind you that we have today opened registration for our Capital Market Day, which will – which we’ll host in our head office in Ballerup on the 21st of March outside Copenhagen. So, let’s dive straight into the results. So, in Q1, we delivered organic growth of 4% corresponding to reported growth of 10%. The growth came from our Endoscopy Solutions business that grew 3% and our Anesthesia and Patient Monitoring, which grew 6%. Looking at the EBIT margin, we had a 6% growth in the quarter over last year, where we had 3.9%. So, overall, I believe it’s a good start to the year. I am very excited as we embark on the next quarters and the opportunities we have ahead of us. Let me update you on some of the key events that we had in the quarter and the progress on our ZOOM-IN strategy. So mid-November, we launched our new strategy and we are well underway rolling that out in the organization. When it comes to innovative solutions, we had a couple of product approvals in the period in this quarter. First of all, we had regulatory clearance in Europe of our Ambu aView2 Advance, our endoscopy, newest endoscopy system. Also in the U.S., we had FDA clearance of our aScope5, Broncho HD Sampler Set, also a very important solution together with our aScope5. And then, as one of the first meta companies, we are very proud that we now have 100% of our portfolio fulfilling the new MDR regulation requirements in Europe. When it then comes to execution, this is a key focus in our strategy and a key focus in Ambu, every day. So we launched a transformation program together with a strategy, which I’ll update on in a minute. At the same time, we are continuing to ramp up our production in Mexico and also selling to customers and more and more customers from this side. And then lastly, when it comes to commercialization, the two big launches we had of aScope5 and aScope Gastro in the last year we are continuing to roll that out, something that I’ll also update you on later. Sustainability is a very important virtue for Ambu and we are fully dedicated and working on making plans to be more focused on sustainability, identifying key initiatives that we are going to roll out in the years to come. At the same time, something I will come back to us while we saw the launch of a results in a new study comparing reusable to single-use and actually showing that it's more environmental-friendly to use a single use endoscope cystoscope. I'll come back to that. And then, when it comes to the organization, we have worked a lot internally on rolling out the strategy making sure that it's clear to each and every employee, how they contribute not only to customers and better patient care, but also how they fit into the strategy and that rollout is going also as planned and very well. Then let's take a look at our transformation program. So we launched the transformation program mid-November with a clear focus to sustainably increase both growth and profitability in the years to come and we have a much better balance between achieving maximum growth and profitability than we have had in the past. This is a program that I'm personally very close to and where we are fully on track in identifying initiatives that will deliver on these ambitions. It’s also a program that is taking time. We expect to gradually, both in this fiscal year, but also next fiscal year to see improvements from this program. It's something that takes time and we are very focused on making sure that the improvements that we are making are improvements that are sustained in the organization and fully anchored. So we already in November identified a couple of areas that are very important and that's the full areas that you see here. It's about a focused go-to-market approach. It's about making sure that we drive even more commercial best practices, improving our gross margin is a major focus for us as well, and then it's about strengthening our operating model. So I am going to update you on the progress of this program in the quarters as we move forward, but overall, off to a strong start but also a program that is reaching out in the next many quarters. Let’s get back to the business results. So going forward, we will report on our endoscopy business on two main categories. One is Pulmonology, which is our biggest segment and the second is our Endoscopy Solutions excluding Pulmonology. So the latter category comprises of urology, ENT, GI and our Endoscopy Systems and I'm very excited to report that compared to Q1 last year, this segment has grown 47%. It now make up 44% of our total Endoscopy Solutions. When it comes to Pulmonology, that remains the largest Endoscopy segment. And there we had in line with expectations a decline of 17%. This is due to the high comparables that we had from last year due to COVID. But the numbers are also positively impacted by the flu, which we saw peaking earlier than we've seen in previous years. Despite this negative growth, which we expect to continue into Q2 that we are in the middle of now, I'm very excited about this segment when I look both due to our aScope5 launch and due to our increased focus on this segment, as we have allocated more resources some months ago, and then we all have a couple of other new launches coming up the slim versions of our aScope5 Broncho. We have VivaSight2 relaunch coming up and then we have our Video Laryngoscope that we are working on bringing to the market. So if we look at the flu just to make sure that we all look at the same picture, what you see on the graph here is influenza like illness where you see the red curve and this is U.S. data peaking at high peak compared to previous years and also peaking much earlier, which is exactly what I referred to before that we benefit from in particular in the U.S. in the Q1 of this year in terms of higher revenue. It’s also clear from this graph as you see that the sales is – are the flu, I am sorry, is declining and that means that basically what we had anticipated to get of benefits from the flu in Q2 came in Q1, so slightly earlier than we anticipated. If we look at the flu pattern in Europe, it’s somewhat a similar pattern that we see as we see in the U.S. with a slightly lower peak, but also on its way down again here in Q2. So let's look at some of the other drivers of the attractiveness of the single-use segment. So that continues to be stronger and stronger evidence that shows both the cost benefits and sustainability benefits and patient benefits of using single-use Endoscopy Solutions. What we have on this picture here is three new studies that have come out. The first not being published yet that shows benefits and attractiveness of using single-use Endoscope Systems. So if we look at the first one, it's a study done in the UK with our ENT study comparing a single-use ENT scope with a reusable scope and it shows that the average cost per procedure using a single use scope is declined or it’s 35% lower than with a reusable scope. So there are clear cost benefits of using single use Endoscope Solutions. The second study looks at the patient outcomes, patient safety. This is a retrospective study that is done in the US in over 800,000 patients using Medicare claims where it basically looks at the at the infection rates following and ESEP procedure using single use scope versus a reusable scope. And what this study shows is that there is 60% fewer infections when patients are being treated a single-use scope compared to reusable scope. The last study is the sustainability that I referred to earlier. This is in urology with a Cystoscope using our Cystoscope compared to a reusable scope that basically shows that the impact on the environment measured as CO2 impact is reduced by one-third when using a single use endoscope compared to a reusable scope. So these results are in line with some of the feedback that we hear from our customers every day. On top of what we illustrate here from the studies, we also hear clear efficiency and workflow benefits being more and more in focus in with our customers, a lot of that driven by the fact that we do see significant staff issues in hospitals both around Europe and in the US. If we look at our two new launches, it’s the aScope5 Bronco and the Gastroscope. We are also progressing in Q1 as planned in line with expectations with these two launches. So to remind you that aScope5 Broncho expands the total addressable market by two million procedures, so from three million to five million procedures. We have launched this product in US, Europe and Australia. In the recent months we have seen a major US GPOs adopting the product. We see continuous very strong feedback from our customers also when it comes to the workflow benefits, but more importantly also the clinical performance. It's a product that we continue to focus on and we have now major hospitals, in particular in the US using the product and when we look ahead, there's no doubt that the Pulmonology segment remains a very important area for us. And with the launch of aScope5 combined with the new launches of our Video Laryngoscope, slimmer versions of aScope5 and the relaunch of VivaSight2, we are very excited about the future position that Ambu has in this segment which we were the first to enter. When it comes to our aScope Gastro, we are also seeing strong progress with this product, which we have also launched both in US, Europe and Australia. We do see GPOs also adopting this product. We see initial success in – with our customers. A lot of this been outside the GI suite where we are focusing initially on customers that benefit the most from the workflow benefits and the performance that we see with our product. So GI remains a focus area for Ambu and as we said in connection with our two main strategy in mid-November it’s also an area that we are addressing niche-by-niche. So we are balancing the resources in this area relative to the return as we continue to gain traction. So I'd like to finish off with an overview of our portfolio in Endoscopy. Both the products that we have on the markets and those that you see in the boxes those that we have in development. So it's very clear that as the only company being present in the four major endoscopy segments, we continue to focus in these segments both on strengthening the position of the products we have in the market, but also of bringing new products to the market that has clear benefits for our customers and for patients. And we are well on track with some of the products, new products that we have in development after we late summer refocused and rebalanced our portfolio. And we continue to drive the progress on this in line with also additional features on our Endoscopy Systems that supports the full portfolio that we have. So this concludes my part of the presentation and I’d like to hand over now to Thomas to go through the financials. Thank you, Britt and also a warm welcome from my side. I am glad to present the key financial figures for the first quarter of our financial year 2022 to 2023. It’s been a good start to the financial year as we, for the first quarter delivered 4% organic revenue growth and in reported – and reported revenue growth of 10% positively impacted by the appreciation of the U.S. dollar versus the Danish Crown. Looking at our business areas, the combined Endoscopy Solutions business excluding Pulmonary had posted very strong growth rates of 47% growth in the first quarter. The growth rate has however and as expected been offset by a 17% decline in our Pulmonology business which means the organic growth for the Endoscopy Solutions business for the quarter was 3%. Our Anesthesia and Patient Monitoring business for the quarter was positively impacted by increasing pent-up demand and recovery post-COVID and continued reduction of our backlog orders. In terms of organic growth, Anesthesia posted 4% growth and Patient Monitoring posted 6% growth for the quarter. From a geographical perspective, the Q1 was characterized by some significant differences across our regions. Our biggest region, North America has delivered strong growth of 9%, driven by Endoscopy Solutions. However, Europe saw negative growth of 4% due to high COVID comparables from Q1 last year. Rest of the world delivered 14% growth also strong growth within Endoscopy Solutions and Patient Monitoring business. With 4% revenue growth, our EBIT margin ended at 6% for the quarter, compared to 3.9% quarter last year. The increase in EBIT margin has been driven by revenue growth, operational efficiencies in our sales and marketing organization, tight cost management and positive impact from our cost reduction program. The selling and distribution as a percent of revenue have improved by 5.3 percentage points, compared to last year. So a good achievement. This has however been partly offset by a decline in gross margin compared to Q1 last year were the main reasons for that decline related to change in sales mix, as sales growth have been higher in Anesthesia and Patient Monitoring business than for our Endoscopy Solutions business. Secondly, we have seen higher input prices and higher distribution costs due to high inflation and higher costs for sea and road transportation. And last but not least, we also have higher ramp up cost related to our Mexico production site. We ended the quarter with a negative cash flow of DKK174 million and a gearing ratio of 3.9 times EBITDA. The main reasons for the negative cash flow relates to our net working capital. We are yet to see benefits from reduction of our inventories. And we’ve seen in Q1 cash outflow related to non-recurring cash items such as severance costs. It’s important to say that this is in line with our expectation. However, improving our gearing ratio and cash flow over the coming quarters remains a key focus of ours. And we have a plan to improve the free cash flow in a range of DKK350 million to DKK450 million DKK for the full year and we are addressing net working capital, our cash conversion, cost containment and profitable revenue growth. Within net working capital, we have a clear plan of how we will reduce and normalize our inventory levels. In Q1 we started to see initial and early inventory reduction. However, we will, over the coming quarters accelerate that reduction and we will be reducing both our finished goods and our raw material inventories. Initial benefits have also been seen from our cost reduction program and tight cost management in Q1. And this has helped improve our EBITDA and this has helped improve our CapEx ratio to sales and we will continue to have full focus on this throughout the year. Finally, but and, last but not least, we will drive profitable growth and accelerated revenue growth is expected and planned for the quarter-over-quarter and we will therefore improve cash flow from operating activities, especially in the second half of this year. This brings us to our financial guidance for the financial year 2022/2023. We maintain our guidance for the year and it’s also at the same time important to stretch that this year is still a transition year for Ambu. Our guidance for the organic revenue growth is maintained at 5% to 8%. As we’ve earlier mentioned, the growth is expected to accelerate quarter-over-quarter with higher growth expected in the second half of the year. Our guidance for the EBIT margin before special items is maintained at 3% to 5% of revenue. Gross margin is expected to decline for the year by approximately two percentage points and this is due to higher production costs, continued Mexico ramp up and also product mix for the entire year. My last slide is as Britt has mentioned earlier, we really – she has highlighted focus and execution in our strategy. This also means that we will be more focused in our capital allocation where we aim to have high return on invested capital and as a result create value for our investors. We will drive strong profitable growth and we have an aspiration to be a company that delivers long-term sustainable double-digit revenue growth and a company that has an EBIT margin that is continuously trending upward to industry levels. Thank you, Thomas. And I’d like to conclude the session again by inviting you and putting attention on our Capital Market Day that we host the 21st of March at our headquarter outside Copenhagen. It’s from 10:00 to 3:00 PM CET followed by a product demonstration. The meeting can be followed online, but the product demonstration session from 3:00 to 4:00 will only be for people that are there live. So, we hope to see as many of you in person for this day. Yes, good morning and thank you for taking my questions. I have, two please. So, first one is on the outlook for the gross margin. So, Thomas, you kindly restated that that you still expect these two percentage points lower gross margin for the full year. And how should we expect that to come through during the year? So, here in the first quarter, you bit, of course, come out better than the gross margin you delivered last year. That's the first question. And then the second question is to the pulmonology business and maybe a bit of a split question. The first has any comments are you can make to watch how the pulmonology business developed in the U.S. relative to where it was in Q4? And then more broadly, how we should think about the facing for the pulmonology business over the year. You already alluded a bit to this with the flu season, but any additional commentary would be helpful. Thank you very much. Thank you, Chris. And I think Thomas can start with the first question and then I will take the second question. Yeah, very well. Thank you, Christian. So, yes, so the gross margin, we do expect as Also earlier communicated that for the full year that we have a reduction versus last year of two percentage points, and this will be driven by product mix throughout the coming quarters and also our production cost including the input prices that we have seen and that we are expecting. On top of that, we also see of course, cost coming in and our production. As we also are reducing inventories over the coming period that will obviously also increase our production cost based on production variances. But the mix is an important factor to mention. As we also over the coming months, will continue to increase our newly launched products that has an impact on our gross margins. Thank you Thomas and maybe I'll comment on the pulmonology revenue and the pulmonology segment. And you asked specifically also about US. I'd say overall. if we look at the at pulmonology, it's very clear that we have high compares - comparables from H1 last year. This is also why we are very clear that we are expecting a continuous in this quarter and on Q2 decrease versus last year. What we do see is not only Omicron, but we also see as we have talked about before competitive pressures in the US and we see some of that in the UK and to a minor extent in the rest of Europe and that continues, you can say. If we if we look at the overall, we do expect that we return to growth in the second half of this year. And then, again our product Pipeline with aScope5 launch progressing Video Laryngoscope, Go VivaSight makes us very confident that we have a strong position in this segment. Commenting is specifically on the US, it's clear that in the U.S. we had also a fairly good quarter in Q4 and that continued in Q1 very much driven by also positive flu impact. You can say, if we if we look at the overall business in the US and where we are late summer, we put more sales focus on the pulmonology sales, on the pulmonology segment. We are also training our people much more as we are - as we have different competitive dynamics. We used to be alone in this segment as the first with very limited compared competition from single-use. Now those Dynamics are changing and that's of course are also one of the drivers behind our stronger focus in the sales and we do see results from that kicking in and it will continue to remain a big focus where in all fairness when we were very focused on GI last year that had taken our foot a bit off the pedal in pulmonology in the US. But that's where we are coming back and we do see an impact from that, which makes me very optimistic. But again, the competitive dynamics are, of course, bigger than what we saw in the past. Right. Good morning and thank you for taking my questions. So, first of all, on the positive impact from the flu season. Could you could you perhaps quantify that a bit more both in terms of top-line, but also perhaps on a gross margin basis. Obviously pulmonology segment typically brings in a higher gross margin profile. So that's the first one. Thank you. And I can maybe comment on that. So, we do not quantify specifically, the - I mean the actual impact from the flu. What happens with the flu just to clarify for everyone is that, in some markets in particular the US and also some markets in Europe and elsewhere, when you have the flu, these countries tend to use bronchoscopes for more patients where we see that to a lesser extent in other markets. So that's where there are some differences across the markets. Having said that, I mean, U.S. is a market where the bronchoscope is used a lot in compared to in connection with the flu. So that's, of course, the impact that we have seen. That's also where, again, I'll repeat what we said before, because the flu season peaked earlier than what we expected. It means that we still expect Q2 pulmonology sales to be negative and the effect that we had baked in for Q2 we saw more of that coming in Q1 than anticipated. On the gross margin, it’s right, what you say, Rickard that our gross margin for our aScope4. So the product used for - in connection with the flu is high. So that also, I mean, has a positive impact on our gross margin, which is still by what Thomas alluded to as our full year guidance being, our full year expectation being slightly lower than what we, what we have in Q1, again, driven by that product mix and then, of course also to some extent increasing raw material prices. Right, thank you. That's very helpful. And a final one for me. So you mentioned in the report that the aScope5, Broncho enabled two has been on par with previous launches in the first month of sales. Can you help add some flavor, is that on par with previous pulmonology launches or in a broader endoscopy launches or just add some flavor would be super helpful. Thank you. Yeah, so and this is a very good, very good – a very good and relevant question, because obviously what we do is that we come, I mean the products that we launched are not directly comparable. What we do see and we, of course, track the launch curves that we have, because the big uncertainty is when you bring in a new product in an area that used to use a reusable, which is the case with aScope5 where we are addressing the bronchoscopy suite and the more advanced procedures that we did not address before. It's very difficult to see or to predict how fast they will adopt. We are still early in the commercial launch. We are seeing an increasing number of re-buying customers. We are seeing positive clinical feedback and also from some of, as I mentioned, from some of the major hospitals in the US as an example. So, I think that makes us very confident and this is one of the most important parameters for us, that the product actually works. We had a forecast which we built on previous launches for Q1 that we delivered on and then we have of course built in an increasing forecast over the year. But again, since we are still early in the year, we are following this closely as we are still too early to make predictions. But I think I am over all very confident also that this product addresses the needs in the advanced procedures, which no single-use endoscope has done before. So, I think that's definitely promising for the years to come. And with the launch of the slimmer versions that I referred to, maybe just to clarify that, I think there are customers that are reluctant to switch to a product before they have the full range that can be used for the different patients. So having the smaller sizes is also beneficial that we expect to gradually see a benefit from. Good morning. Thank you. Firstly, Thomas, I'll just ask about the restructuring you've highlighted again today. Could you just give us some color on what the contribution in terms of cost savings were in the first quarter to the margin improvement? And also if you could remind me of the expectation you have for the contribution from efficiencies for the full year and also any related costs? That would be my first question. And secondly, a follow-up on the pulmonary competition. We have had a discussion of price cuts in the market. Could you give us some color on the pricing in your pulmonary number in this quarter? That would be helpful. Thank you. Yes. So I think I'll let Thomas comment on number one. Maybe I can start with number two. So, basically, I mean, it's pricing pressure, when you see more players, additional competition, then, I mean, that tends also to bean increased focus on price. We were – we had, as we have previously indicated, we had a more volume-based ready in the past, meaning that we also went out ourselves with aggressive pricing in some cases, very much in the way of rebates and that's what we ended, I mean, some months ago was also communicated. But it's very clear that, I mean, overall, we do not see – if we look at the ASPs, we do not see any decline or any change. So that remains unchanged. We are, of course, in a market that is expanding, as you know, with competition coming in. And I think it's very encouraging for us to look at the fact that both we can keep the ASP that we have right now, but also that we have been able to achieve a premium of 30% to 50% for aScope 5, reflecting the added value and quality of that product. So, I am not so concerned as such about the price pressure and the discounting, but we, of course, follow that closely and then we clearly benefit from our expertise and our 15 years in the market. And then our own strategy has slightly changed by being more focused on the right price and rebating less than we did in the past. Thomas? Yes, and then your other question was related to restructuring cost and the impact that we see – the benefits that we see from the restructuring program. And obviously, as mentioned and also shown in my slide earlier, within the sales and marketing – sales and distribution, I should say, of our cost, we do see quite an improvement that boils down into our EBIT ratio. And, of course, a part of this, as I also mentioned is very specifically coming from our cost reduction program. If you remember, we also communicated earlier that we had targeted a cost reduction for a full year equivalent of DKK250 million that we have actually achieved, but a third of that roughly, as also earlier communicated is what we see benefiting our OpEx side of things. The other benefits we see within more the CapEx side of things. But it is a good mix of cost reduction program, tight management – cost management, but also efficiencies that we are pulling out of the sales and marketing organization throughout. And that correlates into this 5.3 percentage point improvement in our EBIT margin in Q1. So it's a mix of things, of course, in that bag. But definitely, our cost reduction program is impacting and positively impacting our profitability. Again, that's helpful. Just a quick follow-up on that. In terms of the sort of the phasing of those cost savings as you say, you've previously guided to, but should we effectively assume a bigger contribution in the second half? No, I think most of that we have been quick to realize. Of course, we will continue to look to see how do we optimize, how do we pull out more efficiencies within our cost structure. But most of what we've achieved from a cost reduction program we have realized also in Q1 already. Yeah, and maybe to add to that. So it's – I mean, to add to what Thomas says, I mean, this was the Phase I with the cost reduction program we did in this summer. The Phase II is more – I mean, is the transformation program that we launched where we will quarter-over-quarter both this fiscal year, but also into next fiscal year, I mean, this is a more long-term thing to improve our profitability towards the industry level, as we have talked about. And that is going to take some time, but that is what we work very diligently with different initiatives that I shared earlier in order to make sure that we should steadily improve our margins and our profitability while, of course, balancing that with growing the business and the revenue. And maybe just one last comment. Just to be a clear reminder, OpEx – so we, of course, will starting OpEx-wise also salary increases in our Q2. So since we – the first quarter was in the latter part of the calendar year, you should expect slight increases in our OpEx spend also. But we will work diligently in terms of managing our cost base throughout the year. Good morning and thank you for taking my questions. So, in order to understand your gross margin development, I guess, we need to pay attention to your inventory changes, as well. Could you talk about what proportion of your inventory value, which would consist of indirect production costs, which obviously affects the gross margin? And my second question would be on your freight costs. You mentioned on Page 11 that you still have some headwinds from higher freight costs. Could you talk about what – how much would be the tailwind from lower freight cost given the current freight rates that you're seeing during the second half of this year? Yes. Yes, thank you, Niels. So on the – first and foremost, on – if I take your first question around in direct production cost, it is clear that when we will reduce now over the coming quarters, our inventory, of course, some of the indirect production cost will rather come in and hit over the P&L. That's also what impacts our gross margin in the coming quarters and that also relates back into the 2% lower margin that we expect that we have calculated and planned with a reduction in inventories and therefore, also higher indirect production cost over our P&L side of things. So that's included in the 2% guidance or outlook for the remaining part of the year. Freight costs, as we do have higher inventories, it takes us a little bit longer to actually benefit from the lower freight costs that we are seeing. It will come in, but it will come in only once we really also lower the inventories and therefore, channel that through in the whole system. So that takes a little bit longer time and will rather be expected in the second half of this year. Previously, you quantified the headwinds from higher freight costs as compared to before the pandemic, I think to, three percentage points or so. Is this still a fair estimation? And then, when it comes to the indirect production costs, is it fair to estimate that indirect production cost makes up around 20% of your inventory value? So, we've not commented on the level of indirect production cost. So that I will not comment on, but the absolute number of that, but it will, of course, impact as we lower our inventories, the P&L. Okay guys. Thanks for the question. So sorry, I may have missed it, but I am just wondering if you have any more specific updates on the timing of the laryngoscope launch and how important that was to turn around the bronchoscope sales in total? Sort of following on from that, Verathon also recently quite vocal about getting to #1 market share in the U.S. for broncho. Do you think the combination of laryngoscope and aScope 5 can prevent that? And then thirdly, just a housekeeping one, I don't think there is any disclosure on the number of scopes sold in the quarter. Is that something that we're not going to see going forward? Thanks. Yes, thanks, David, and I'll comment on those. So, starting from the last question. So going forward, just to clarify that, we have decided not to report a number of scopes anymore. The reason being that, we find it's a bit of comparing apples and pears, because the value of the different scopes is very different. So I think we have had a lot of questions relating to the inconsistency between number of scopes in the past and growth in that versus revenue growth. So that's why we decided instead that we think it's more transparent and meaningful to report on the categories of the segments, so pulmonology and then we pull the other segments together as one. So that's how we'll report going forward and not on number of scopes. Then in terms of the U.S. dynamics, the laryngoscope – Video Laryngoscope launch, we have not commented on when we will launch the video laryngoscope. But I would like to clarify that we still have a very strong position in the U.S. We expect to return to positive year-over-year growth in the second half of this year. We continue to ramp up our aScope 5, which is clearly superior to any other single-use scope out there. And then pulmonology remains a high priority area where we have also put more commercial focus on in recent months. Both the VivaSight and the Video Laryngoscope 2.0 will give us a position as a leader where we see the most competition in the U.S. and is basically from a company that has both the Video Laryngoscope together with a bronchoscope and we believe our offering that we have in development is clearly a very high-quality and will be a very high-quality winning solution with our customers. And they are definitely looking forward to us having also a video laryngoscope on the market. But for competitive reasons, we do not comment on the timing. Okay. Perfect. And then, maybe just a follow-up on the rest of the business. I was just wondering if you're able to quantify the contribution to growth from pent-up demand and clearing the backlog for both Anaesthesia and Patient Monitoring and whether if you thought that backlog wasn't pretty cleared and the impact obviously in same through backlog is really quite help with your gross margin. Again, just wondering if the impact of any and getting gross margin in the first quarter. Thanks. Yes, so I think overall, I mean, we see nice contributions from these two segments, as you see. And there is clearly a contribution from clearing the backlog. So I think – I mean, we have – I mean, our backlog down to a very minimum levels. So I think our supply situation is working very well. So that is – I mean, that is a big driver of some of the increase this month of the 5% in Q1, where we have – if we look at the three year CAGR, we are looking at a number that is, we expect to be slightly lower and more in the range of 2%. What we do see is that, we continue to see, as I alluded to, health systems being challenged and they're working through all their challenges in terms of both strikes, staff shortages and then on top of that, their own backlogs, if you will. Hey, it's Yiwei from SEB. Thank you for taking my question. Most questions have been answered, but I have two left here and first, a question on gross margin. You have not talked about the margin dilution from the new products as you did in the last quarter. Could you maybe elaborate a bit here what has happened in Q1? And I'll do a second question afterwards. Okay. I can – thank you, Yiwei, and I can speak to that. What we've mentioned also, it's been a little bit covered within the question around our gross margin for the remaining quarters and for the full year, where we do expect that we come down two percentage points versus last year. And this is, amongst other things also driven by lower margin on the newer launched products. So that's included in our expectations around the reduction – a further reduction of the two percentage points for the full year on our margins. And as we continue to grow those two products, of course, that will be more and more dominant. Great. And can I just follow up here? So if you're looking at the gross margin for aScope 5 and Gastro, compared to last quarter, have you seen an improvement already on the contribution margin or gross margin? I can comment on that. So, I think what we have also said before is that, on these products, I mean, we do expect, because they have a lower gross margin compared to our other scopes. We do expect a dilution impact over the quarters as these products ramp up and that's, of course, something that we are fully focused on improving, but that doesn't happen from one day to the other. But it will happen medium term, both as we have more focus on it and also as we ramp up the scale of these products. Great. That’s very helpful. And my next question is probably in the coming quarter. Now we see China is opened and then there's a lot of hospitality, a lot of patients, ICU patients. We have seen some other medtech companies talk about increased demand for the ICU medical device. And so, should we expect any COVID-related demand for your bronchoscope and the resuscitators driven by the China demand in Q2? Yes, so a very good question. So it's very clear that when it comes to China, I mean, and I want to clarify also, we don't reveal specific revenue for China, but it is – China remains a small part for us. But what we clearly see in China is that, access to hospitals is starting to improve. So that's a very good indicator for us. Also, we see that China is, I mean, it's still early days, but we do see a slow improvement. We have also seen a positive impact with our scopes from COVID and we remain, I mean, focused on China, but again, as a smaller part of our business, but it's definitely, I mean, we see the improved access to hospitals being a good sign. Okay. Sorry, yes, we have – sorry, if that was not clear. Yes, we did see COVID demand, both on our bronchoscopes and on the resuscitators. We have seen that. But again, because China is still a relatively small part, it's relatively modest in the global picture. But we see the increase as the hospitals are opening up and have opened up, that has definitely given us some tailwind. Thank you. It's Martin Brenoe from Nordea. I just have two brief questions. Just first of all, on the aScope Gastro. Can you – I know it's super early stage, but can you maybe help us understand if you have had any actual orders yet or maybe even some reordering of the Gastro that would be very helpful to understand sort of the dynamic when you say you have positive customer feedback? Secondly, I would like to understand a little bit better perhaps how we should understand the phasing of the cash flow for the year. I think that it's clear that you still have sort of the cash flow improvement for the full year, but how should we think about the next quarter coming in? And I think that the most important part here is the net working capital. So should we already from Q2, expect that inventory is going down? And is there anything sort of -- like this quarter, anything in terms of payables or receivables that we should be aware of when we do our models? Thank you. Thanks, Martin. I'll take the first question and hand over to Thomas. So, I mean, we definitely have both customers that are buying and we also have rebuying customers and that number is continuing to increase. Also, I mean, we do see increased positive feedback among customers. We have some larger hospitals that are both ordering and reordering. So, from that perspective, it's actually, I mean, very encouraging. It is very clear and also to put in perspective to some of our previous launches like the duodenoscope in GI, I mean, this is a very different product. It's addressing very different and much simpler processes or procedures than the ERCP procedure. So that's also where you can say, I mean, the use of our product is much more smooth and we can see that it's working. It's addressing some clear unmet needs with our customers. So I think we are very encouraged with that development. And then again, we do take a slightly different approach than we did with the duodenoscope on more – and niche-by-niche segment as we ramp up the sales here. But definitely, I mean, it is out there with both buying and rebuying customers. Yes, and to the question, Martin, relating to net working capital and cash flow. We did also in the beginning of the year, communicated that you should expect our cash flow to improve over the years – over the quarters of the year, which also means that Q2 should be expected to be negative. That we have commented also earlier and it's still also in line with our expectations for Q2. We are, as I mentioned, also focusing on very much so on our inventories and you should expect to see reduction of inventories also in Q2. It takes us maybe a little bit longer than most other companies, because we also have a quite good strong and long agreements also with some of our suppliers. But we are working very hard and diligently on reducing our inventories and that you should expect to see in Q2, further in Q3 and also further in Q4. So every quarter, you should expect to see a reduction in our inventories as we move forward. We have no further questions in queue at this time. I'd like to turn the program back over to our speakers for any additional or closing remarks. Thank you very much, and thanks to everyone who participated in the call and online this morning. Thanks for great questions. Wishing you a very nice day. And then, I hope to see as many as possible live face-to-face for our Capital Markets Day. So thank you very much.

EarningCall_349

Good day, and thank you for standing by. Welcome to the Carlyle Group Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Daniel Harris, Head of Investor Relations. Please go ahead. Thank you, Kevin. Good morning, and welcome to Carlyle's Fourth Quarter 2022 Earnings Call. With me on the call this morning is our Interim Chief Executive Officer and Co-Founder, Bill Conway; and our Chief Financial Officer, Curt Buser. This call is being webcast, and a replay will be available on our website. We will refer to certain non-GAAP financial measures during today's call. These measures should not be considered in isolation from, or as a substitute for, measures prepared in accordance with generally accepted accounting principles. We have provided reconciliation of these measures to GAAP in our earnings release to the extent reasonably available. Any forward-looking statements made today do not guarantee future performance, and undue reliance should not be placed on them. These statements are based on current management expectations and involve inherent risks and uncertainties including those identified in the Risk Factors section of our annual report on Form 10-K that could cause actual results to differ materially from those indicated. Carlyle assumes no obligation to update any forward-looking statements at any time. Earlier this morning, we issued a press release and a detailed earnings presentation, which is also available on our Investor Relations website. I'm going to begin with a quick discussion of our results, and then hand the call over to Bill. For the fourth quarter, we generated $202 million in fee-related earnings and $433 million in distributable earnings or $1.01 per share. Fee-related earnings for the full year 2022 of $834 million increased 40% compared to 2021 and FRE margin expanded to 37% from 33% last year. Strong organic growth and several strategic transactions combined to deliver another year of substantial growth. We generated $1.9 billion in distributable earnings in 2022 or $4.34 per share with a good balance of earnings from FRE, net realized performance revenue and realized investment income. We entered 2023 in a strong capital position. We have $1.4 billion in cash, $2.4 billion in firm investments and $4 billion of net accrued carry on our balance sheet, in total, over $20 per share. We have nothing drawn against our $1 billion revolver, and our debt ratings from both S&P and Fitch improved to A minus ratings. The strength of our balance sheet gives us confidence that we can continue to pursue growth strategies, both organic and inorganic, to help continue to deliver additional FRE growth. We delivered a quarterly dividend of $0.325 per common share. The combination of our balance sheet strength and sustainable growth in FRE allowed our Board of Directors to approve another increase in our fixed dividend to $1.40 per share per year, an increase of 8% year-over-year and up 40% over the past 2 years. This higher dividend will begin with Q1. Thank you, Dan. Good morning, everyone, and thank you for joining us today. I am pleased to be on the call to discuss Carlyle's Fourth Quarter and Full Year Results. As you've heard, Carlyle delivered strong results to our stakeholders despite the challenging market environment. The firm is operating well, and I have tremendous confidence in our ability to capture investment opportunities and to continue to grow our platform in 2023. I want to talk about 3 topics this morning: the outcome of our CEO selection, the strong financial performance of Carlyle in 2022 and some general thoughts on our outlook. First, we are incredibly pleased that Harvey Schwartz will join Carlyle as the new CEO on February 15. As you all know, this was an incredibly important decision for Carlyle. And the search committee of the Board, on which I serve, drove a robust and exhaustive search for a new CEO. Following a thorough and competitive process, Harvey was unanimously chosen by the Board as the right leader to move Carlyle forward in its next phase of growth. Harvey is a widely respected business builder with significant leadership experience in a high-performing, highly competitive global financial institution. He is a seasoned operator with a proven record of leading and developing a wide range of businesses and a demonstrated ability to invest in and develop the talent and organizational structure to manage and support these businesses. As we look to the future, there is tremendous opportunity to grow and to continue to perform Carlyle, to transform Carlyle and deliver sustainable results over the long term. Harvey brings the experience and skill set to fully capture this opportunity. As CEO, he will set and execute a strategy that advances and accelerates the diversification plan the firm has successfully pursued as well as identify new investment opportunities to further scale the business, drive performance and deliver growth. I am confident in Harvey's leadership and look forward to introducing him to you in the very near future. Moving on, I'd like to discuss our 2022 results. Curt will dive into our results in more detail, but I wanted to touch on a few notable points. As Dan mentioned, we generated record fee-related earnings of $834 million in 2022, an increase of 40% over 2021, which demonstrates that our strategic focus to grow FRE and diversify our earnings mix is paying off, and we earned $1.9 billion in distributable earnings despite a volatile exit environment. We delivered investment returns that were attractive across our portfolio. Our aggregate carry fund portfolio appreciated 11% in the year, while the public markets were down about 20%. And as I said last quarter, portfolio construction and risk management matter, and we believe that this is the key differentiator that positions our investment teams to deliver superior relative performance across market cycles. Turning to our outlook. As we enter 2023, we are confident in the strong foundation of the firm and believe that we are well positioned to capture new growth opportunities, and Harvey will focus on building off this strong foundation. At its core, our business involves raising money and investing money and then making money that we've invested worth more. Let me begin with some thoughts on fundraising. No doubt the backdrop for raising new capital remains challenging with headwinds more pronounced in certain areas than others. However, today's environment is different from what we faced entering 2022. Early last year, an unexpected and sharp change in market sentiment had investors on their back foot for most of the year. With rapidly deteriorating public equity and debt prices, the denominator effect greatly reduced LP interest and ability to make new commitments. Over the past few months, at least until last week, we've seen a gradual reduction in market volatility. Investors still believe that they have a better handle on the magnitude of further interest rate changes. In addition, Carlyle's longstanding relationships with the largest and most sophisticated investors around the globe is a benefit, and we continue to see strong demand for many of our investment strategies across our 3 global segments. Our platform has continued to diversify, and it's important to note that roughly 2/3 of our fundraising last year came from areas such as Global Credit, Global Investment Solutions, natural resources and real estate. While corporate private equity may continue to face headwinds, we see significant capital raising opportunities across our platform. We will have more strategies raising capital in 2023 than we did in 2022, including our next vintage flagship funds and credit opportunities, secondaries, co-investments and buyout funds across the globe. We anticipate that our overall dollar volume of fundraising in 2023 will be higher than the $30 billion we raised in 2022. Over the past few months, I've been around the world speaking with our teams and investors and feel confident in the power of our platform. Our investors value our partnership, our global reach and our ability to construct diverse portfolios that perform across market cycles. Now that Harvey is here, it has also taken away some uncertainty about our path forward as a firm, and we think that will also have a positive impact on fundraising. Regarding capital development, today's market conditions create new opportunities to invest capital across all of our global businesses. Recently, there's been a wider-than-average spread in pricing expectations between buyers and sellers, which has impacted capital development. The spread is across most asset classes that has been more pronounced in private equity than other strategies, and we are -- but we are starting to see evidence of this spread narrowing. As debt and equity capital markets continue to reopen, the pace of deal activity is poised to accelerate. We deployed a record $35 billion in capital in 2022 with a good balance across equity, credit and solution strategies. And we are well positioned for further investment with $72 billion in dry powder to capitalize on an improving environment. We expect to find ample opportunities to make new investments in 2023 and beyond on behalf of our fund investors. In addition, the improving deal environment presents an opportunity for our global credit business to provide unique capital solutions to the marketplace. In 2022, we underwrote $3.9 billion of new loan activity in our direct lending strategy, and our CLO team issued 9 new CLOs while also trading $30 billion across their portfolios to better position the CLOs for the expected economic environment. And as fund investors' need for liquidity persists, we are well positioned to capitalize on this need to our secondaries and co-investments business. Overall, 2022 was a solid year across most financial metrics for Carlyle, and we entered 2023 with strength and momentum. With Harvey as our new CEO alongside our strong leadership team, Carlyle is well positioned and we're confident that he will build on this momentum to bolster the firm's position and create value for all our investors and shareholders. With that, let me hand the call over to our Chief Financial Officer, Curt Buser, to discuss our financial results in more detail. Thanks, Bill, and good morning, everyone. I want to start by reiterating many things Bill mentioned that emphasize the strong position Carlyle finds itself in as we begin this year. We believe our investment portfolios are in good shape and are well positioned to weather economic volatility. And we expect to deliver long-term attractive performance for all of our stakeholders. We produced a robust $4.34 per share in distributable earnings in 2022, displaying the significant cash earnings power of our firm. We've now earned over $9 in DE per share in just the past 2 years. We remain focused on growing fee-related earnings, and it grew by 40% in 2022. And over the past 5 years, our FRE CAGR has been a robust 34%. Our overall earnings mix continues to diversify as we have grown our credit, insurance, capital markets and solutions capabilities. Our strong growth in fee-related earnings is not driven by a single fund or strategy. Rather, our performance led us to driving broad-based top line fee growth across our global platform. Top line fee revenue growth was 25% in 2022 and was driven by the following: first, raising capital for and growing our traditional high-performing investment strategies across each segment -- each of our 3 global segments. Second, organically building out new fee-generating businesses like opportunistic credit, insurance, capital markets and infrastructure credit, to name just a few, each of which added significantly to our growing fee revenue pool throughout the year. And third, we have been actively adding new inorganic streams of earnings, such as our transactions to further scale our CLO business with CBAM, and our advisory agreement with Fortitude. These efforts have scaled our platform and helped drop more of our top line revenues to the bottom line as we expanded our full year FRE margin to 37% in 2022, an increase of nearly 400 basis points compared to 2021. FRE margin has more than doubled over the past 5 years. We have done this while concurrently investing in new product development and enhanced distribution capabilities, notably across the private wealth channel. We expect to continue to grow FRE in 2023. FRE in the first quarter will likely be similar to Q4 of 2022 before increasing in the second half of the year. In addition, we remain highly confident in our ability to grow FRE well into the double-digit range over the mid- to longer term, in line or better than the market trends across the private capital industry. Consistent growth in fee-related earnings is supported by the attractive investment returns we produce for our fund investors. Our investment teams again delivered appreciation that outperformed public benchmarks even with increasingly higher discount and cap rate assumptions in our valuation models and elevated concerns about global recession. While only 6% of our carry fund portfolio was publicly traded at year-end, public market comparables are an important input to our valuation methodology and generally were a downward driver of valuations across our private assets during the year. Of course, the most important valuation driver of any investment is underlying asset level performance, which, in general, continued to reflect growth in revenues and earnings, though this growth generally slowed in the second half of 2022. Our strong performance also owes to our focus on deploying capital in the sectors where we have deep industry expertise and experience. Our real estate funds appreciated 16% during 2022. Our Infrastructure & Natural Resource funds appreciated a very strong 48%, and Corporate Private Equity funds were up 6%. We realized $34 billion in proceeds for the year, which produced another year with $1 billion in net realized performance revenue. About what I previously indicated would be a good target in most years. Looking forward, net accrued carry increased 2% year-over-year to $4 billion. A solid portfolio appreciation more than offset strong carry realizations. And we ended the year with $138 billion in fair value in our carry funds, up more than 10% compared to year-end 2021. In general, we continue to expect to generate on average $1 billion in annual net realized carry. Though depending on the year, realized performance income could be elevated as it was in 2021 when market factors were favorable or lower in years where uncertainty diminishes capital markets activity. Industry-wide activity rates slowed considerably in the past few months as buyers and sellers continue to search for evaluation middle ground, and funding markets while available are less amenable than they were just a year ago. For Carlyle specifically, new investment and realization activity has also been slower. And so we expect a muted start to 2023 for both deployment and realizations. Thus, transaction revenue and realized performance income will be lower over the next quarter or 2. If our activity rates across the industry improve over the next few months, then our expectations for higher performance and transaction revenues will also increase. Let me now turn to some quick thoughts on each of the business segments. Global Private Equity had another strong year with fee-related earnings up 34%. Strong appreciation across Real Estate, Infrastructure and Natural Resources helped net accrued carry increase to $3.5 billion after more than $900 million of net carry realizations. $20 billion of invested capital was generally similar to $23 billion of realized proceeds, which positions global private equity to continue to deliver attractive levels of distributable earnings in future periods. Global Credit remains our fastest-growing segment, and it benefited from both organic growth activity as well as the positive impact from strategic transactions. Top line fee revenues grew 46% in 2022, resulted in fee-related earnings more than doubling to $225 million, and fee-related earnings margins increasing by nearly 1,000 basis points to 37%. Strong investment performance across various strategies produced $70 million of net realized performance revenue. Our credit interval fund delivered attractive performance with a 10% dividend yield, while continued net inflows grew managed assets to more than $2 billion. We raised $15 billion in new capital across 11 strategies in Global Credit in 2022, and we expect to have an active year fundraising for additional strategies in 2023, which should position Global Credit for further growth. In addition, we remain focused on helping Fortitude evaluate new growth opportunities, which would help us benefit from incremental advisory revenues. And in Global Investment Solutions, we are well positioned to see growth in this segment as we begin fundraising for our flagship products, including next vintages in our co-investment and secondary strategies. Fee-related earnings of $69 million in 2022 was lower than 2021, but we expect to see growth later in 2023, as these strategies attract new capital. In addition, with $374 million in net accrued carry and very strong fund performance, performance-related revenues are well positioned to increase over time. In sum, we delivered strong performance for our stakeholders in 2022 and are well positioned for what will likely be a more attractive investment environment in 2023. We see tremendous opportunity to deploy capital into what we think will be a great investment for our portfolio and fund investors. So maybe for Bill, first. Look, I think a lot of investors have been getting on board the direction of travel for Carlyle for the last couple of years, FRE growth, margin expansion, diversification. So we had a pause for 6 or 7 months. We found Harvey. Maybe talk a little bit more about why Harvey and then, most importantly, what's he here to do relative to the strategy that all these investors are on board? And I want to know, like, is that strategy important to you and the co-founders because the process we went through is what it is? So just curious if you could talk to that. Sure. And thank you for the question, Glenn. First of all, I am very excited that Harvey is going to join us. He was our first choice, and he is -- and I think it should be pretty obvious why. We were looking for somebody who had a really proven track record. We were looking for somebody who had experience building businesses. We were looking for somebody who had a record of managing and recruiting and training and developing talent and working in the collaborative environment. We were looking for somebody who could relate to people like you in Wall Street and tell our story, a wide range of skills. And frankly, there aren't a lot of people who have all those skills. In Harvey, I think we found that person. He is really fantastic. Yesterday, he and I were walking around our New York office. We went on all the floors, we were talking to people, and he was happy to see them, and they were happy to see him. And it was really not so much they want to get rid of me, but rather they were excited to see him there. We obviously have a lot of people who used to work for Goldman, and they were happy to see him; and people who just had heard about him and his track record and his skill set. So I think why Harvey and who he is and what his track record is, that was pretty clear to me that we couldn't get anybody any better than Harvey. He was -- he's fantastic. Now what's he here to do? I think in some ways, the path that we have is set. We want to -- first of all, we want to increase the stock price. Even though we are -- we've got a great investment track record that doesn't show up in our stock price, we have -- how is he going to do that? Well, we have to grow our business, we have to grow our business, we have to grow our business. Particularly the fee-related earnings, but other parts of the business as well that assets and the like, he's got a great set of experiences. Remember, he was at Goldman during the time of a financial crisis and talking about having to deal with situations that were risky and yet had great opportunity. So I don't see dramatic changes in the basic strategy, but it will be up to Harvey. He's going to be the CEO of the company. And I'm going to do everything I can to help him be successful and -- including staying out of his way, if that's the right part of the solution. I can't tell you how happy I am that he's here. Well, long track record with him, so I totally agree with that. Maybe just one numbers question. I'm interested in your comments about the improving bid-ask dynamic. You have $11 or so in net accrued performance revenue, which is a lot relative to your stock price, like you said. So you realized $1 billion in performance revenue, but you picked up another $1 billion basically on the back of Infrastructure and Natural Resources. So could you expand a little bit more on what you talked about the improving bid dynamic -- bid-ask dynamic? Is that like a near-term-ish thing? Or is that a hopefully second half thing? Just curious on what you think it takes to get the wheels moving again. That is -- that the real question is. And of course, what we're talking about there is that sellers think their businesses were worth what they were worth a year or 2 ago. And buyers say, "Well, I don't want to pay those prices anymore." And so there's been a gap. I've mentioned in my remarks that it's been both in the prices of equities, we see it kind of on the value of the companies that you own, but it also applies to credit. For example, there was a deal recently and we looked at where the credit spread or all in price of the credit a year ago might have been 6% or 6.5%, and now it's double digits. So there are still certainly some disparities in valuation. However, it is getting better, Glenn. And I'd say it's getting better slowly. It's not rapidly. This is not going to be something that I think it -- someone is going to ring the buzz and we're going to know that it's where it should be. Private equity has the advantage and private debt too as well of being able to evolve and able to function in lots of different kinds of environments and to adjust to those environments. And I see that in the types of deals that we do now. We're not doing deals that are giant deals that require billions -- $10 billion of equity and $10 billion of credit. Those deals will be almost impossible to do today. But the market is gradually healing. Buyers and sellers gradually coming together. And I think it's on both sides. I think buyers are dropping the prices down and I think -- price what they're willing to pay. And the sellers are saying, well, maybe we're going to have to just be able to settle for a lower price than we thought. And I think that's across the board. It's not going to be just in private equity, it's not going to be just in Americas, it's everywhere. More in the second half probably than the first. Congrats on adding Mr. Schwartz. So a question for you, guys. You mentioned that you think that asset gathering can be better in '23 than in 2022. I was wondering if you could unpack that a little bit and maybe bifurcate between where you stand on sort of the free flagship corporate private equity portfolios versus the rest of the business with some emphasis on the solutions business? Bill, it's Curt. Thanks for your question. I'll start and then Bill might add in. So I'm really proud of what we did in 2022 from a deployment standpoint. We deployed $35 billion across the portfolio. It was actually our most deployment in any year. And between '22 and '23, it was noticeably better than what it had been in all prior years. Bill talked about some of the challenges here recently, and we think that, that's going to pick back up. The diversification across the platform and deployment I was really proud of because what you saw in '23 was much more coming out of Global Credit and other aspects of even private equity outside of corporate private equity. And so all of that was really good. So the deployment piece was really good. That leads us into a good place from a fundraising perspective and sets us up well for fundraising. And so because it's the first and foremost thing, I think, is kind of how the portfolios are performing and then how you think about fundraising. So from a fundraising standpoint, a couple of high-level things for you to keep in mind. Our portfolios are performing really well. And this, I think, sets us up nicely to go as we seek to raise more capital. Second, as Bill said, we expect to raise more in 2023 than we did in 2022, and we'll have more products in the market to support this. The third thing from a number standpoint, I want you to keep in mind is, in 2021, at the beginning of the year, we said we would raise $130-plus billion over 4 years. So 2 years in, we've raised $80 billion, $50 billion last year, $30 billion this year. And we added $65 billion through strategic transactions. So that's $145 billion of new fee-earning AUM in just 2 years. And you see that in our fee-related earnings, up 40%, 30-plus CAGR over the last 5 years. And so that's done really well. And we've seen a lot of that growth really in credit and in our solutions business. Now in the buyout funds, we still have, obviously, some congestion in that space, but there's a number of reasons to have optimism there. First, as Bill said, I think there's less uncertainty about the global markets today than it was a year ago. Second, public markets seem to be improving here in early days of the year, but it's still early. Third, we're in '23. So that's a new set of allocations for investors. And last, with the appointment of Harvey Schwartz, we have a lot of reason to be excited. And we hope that, that carries forward to our investors and taking away some uncertainty that may linger there in certain situations. But look, I'll reiterate that I think that our buyout funds will be similar in size to their previous vintages. And so I'm confident in that and very excited about kind of our overall growth in the firm. And I think that this will be a better year from a fundraising perspective than it was in 2022 and, again, helping us in our focus on driving fee-related earnings. Okay. And just a follow-up, maybe stick with you, Curt. So just sort of triangulating the notion of FRE up in '23 over '22, just sort of wondering how you might be able to ring-fence that. And then just given the sort of yet to be determined incremental strategy with Mr. Schwartz, how should we think about margins? Because I hear a lot of grow the business, grow the business, grow the business. Can you drive FRE up and FRE margins up if you still need to grow the business? Bill, look, I said that we're confident we're going to grow fee-related earnings in '23. I think the first quarter will be a little flat, as I said in my remarks. But thereafter, I think things are really set up nicely. There's -- this is a challenging environment, and we are continuing to invest and that's why I think this might be a little lower rate of total growth than, say, in the past, but feeling really good about our ability to grow fee-related earnings. I think with Harvey coming on, his past experience in helping companies and helping situations improve profitability will be a good addition to the team, will bring new thoughts to this. But I also want to be careful and give him the opportunity to put his imprint on things. And so I want to be a little cautious in terms of how much specificity I give in guidance, but we're really well set up to begin '23. Maybe just to follow up the prior discussion from Bill's question. It sounds like you guys still feel pretty confident about the overall fundraising targets that you laid out couple of years ago, but the mix might be slightly different. Obviously, you highlighted the private equity business is a little bit slower. Can you expand on that a little bit? And as you think about the ramp that you're talking about into 2023 from FRE growth, what are some of the key products and strategies that you expect to be kind of the biggest contributors to that ramp? Alex, it's Curt. Let me start and then Bill can add. So look, credit did about $15 billion this past year. It's going to have more product in the market than last, feeling really good about how that continues. Our opportunistic credit fund is out there raising money. Our CLO business will probably start the year a little slower because of all the reasons we've talked about. But I think it's always a heavy weight in the room. And then in the solutions business, we've got our co-investment products and our secondaries products and a couple of new things that we'll bring to market this year. And so again, more products in that space. Think of the solutions business as really being a nice way to kind of really increase from where they were in 2022. And then in private equity, look, we're going to have more product in the market in private equity. So a number of buyout funds, U.S., Europe, Asia, will either begin or will be in the market from a fundraising perspective. There's other products in private equity that will be in the market. And so that, too, I think, is well positioned to do better. I don't know, Bill, if you have anything to add. Yes. I think solution is going to be a big growing fund and the funds of solutions are going to be a pretty big growing area this year. I also -- I don't want to confine Harvey in any way. I don't want my comments in any way to limit his ability to imagine a different future or a different way that things could be done better. So I'm a little hesitant to get too specific on this. But I do think that the noncorporate private equity funds, the demand is there, too. I used that credit example before when I was answering a prior question. Sometimes when it's a little tougher to raise the equity, raising the credit funds is a little easier because the opportunity is great, the spreads are wider and more money can be made by the investors in those funds. But I don't want to confine my answer in any way that will limit Harvey and his ability to do a great job. Okay. Good. I just -- I didn't know whether or not another Goldman Sachs person might weigh in and what a great guy he is. My quick follow-up for you guys was around Fortitude. That's something you mentioned in your prepared remarks as well. And I think, Curt, you highlighted some new growth initiatives within that, that can kind of help expedite some of the growth as well. Can you expand on that a bit as well? Sure, Alex. So look, Fortitude has got $50 billion, $51 billion of AUM. The way we've set up the services arrangement, we fee off of all of that. In addition, they've invested about 9 -- or I should say, committed about $9 billion into our funds. So all of that has been working as planned. They also have about $3.5 billion to $4.5 billion of excess capital, which positions them nicely to continue to grow, very active pipeline, working really hard on that. We've said before that we fully expect that to be -- for them to be able to double in size because of that and fully expect that, that will occur. And when we have more to be able to say on those fronts, we'll be sure to mention that to you. But we remain very optimistic about kind of how Fortitude can continue to benefit Carlyle. I'd also tell you that Fortitude has -- we have 4 or 5 institutional partners who are in that business and are fellow shareholders with us in Fortitude. And they have been fabulous partners helping us grow that business. For us, it still is -- we got a lot of capital invested, but we have less than we otherwise would, thanks to those great partners we have. And as Curt said, we do expect to double that business over the next few years at least. I wanted to get a little bit more on the CP -- this PE fundraising issues. Could you maybe update us -- I know it's early in the year, but update us on the tone of the conversations with LPs? Are you starting to see people kind of step back into PE more broadly? And thoughts on maybe a more specific time line for when we can see some more chunky closings in those large flagship funds? And then maybe through the lens of all that, is it fair to say 4Q is about as bad as you think it could get in that line? Patrick, let me start on this, but I'm always sensitive about trying to read into the minds of others or really try to figure this out in detail. Look, we have great relations with our LP investors. I think they're pleased with what we're doing. A lot of our portfolio performance has been just fantastic and well constructed. And as I already went through a litany of things in terms of what we've done well, $145 billion of capital formation in the past 2 years, I think that we can continue to do that in terms of growing and looking, we'll continue to look at organic things. So look, I think the tone is good, but it's still difficult in different places. And tone, you got to be specific related to kind of individual situations in the given fund and the like. And there's a lot of reasons to be optimistic as we start '23. So Bill, I don't know if you have anything to add to that? Maybe first, private markets investing in energy. As you start to come back to market with more of these funds, how does the better environment in energy mesh with pension fund community that seems more reluctant to invest further in traditional energy? And what does this mean for your ability to grow your energy franchise in what seems like a more constructive energy environment? Ken, well said. I mean, I do think that we're optimistic on the energy platforms. Our partners and colleagues at NGP are excited about their opportunities. They've got a fund in the market now. I don't want to comment specifically on that, but expecting good things out of that. Our renewables platform, our power business, our international energy platform all give us a number of products, but they're not all in the market. But you're right. Right now, there's a lot of good opportunity in energy, but different LPs based on their constituencies have different perspectives. The limited experience that we have is that generally, we're seeing a nice uptick from the existing investors in existing product, which is different than kind of going after new or different, but it's a good opportunity at the present time. And I think its returns are pretty uncorrelated with all the other returns available in the market, too, and that appeals to a certain group of investors as well. Okay. So do you -- are you -- do you think the business can grow? Or does it just sort of stay here as those 2 trends offset each other? Look, the needs are really significant. I think a lot of that has played out. And so it's too early, Ken, to really call that definitively. But look, I feel a whole heck of a lot better about that whole sector than say, 2 years ago where it felt a lot more difficult. Right now, everything, performance and the chance forward on a lot of those different aspects, I think, are really, really good. And then equity comp fell a bunch during the quarter. What drove it? And I assume we see that sort of snap back next year? Yes. That's -- look, like a lot of things in this business, looking at any individual quarter is a mistake. You got to look at it over a longer period of time. The fourth quarter had some unusual things in it. Essentially, our fourth quarter is always a little bit light because you've completed a vesting of a big tranche in the third quarter. And you haven't granted anything new that occurs in February. So the fourth quarter is naturally a low quarter, plus we had some performance units for some senior folks that didn't fully there that had been accrued prior in the year. So the fourth quarter was a little bit light. I do think you're going to see a significant uptick in our equity-based comp next year in 2023, both -- we've made some big grants in February, just a number of our key people and to ensure retention and make sure to reward people that have performed really well and then also bringing on Harvey, and that will also have an increase in our equity-based comp in 2023. Great. So realizations have been pretty resilient despite the tough backdrop I'm curious what parts of your portfolio are you most active monetizing today? And then it might be tough to answer, but what's the base case expectation for realizations in 2023, assuming no material shift in the backdrop? Do you think you can get back to that $1 billion level again? So Brian, it's a great question. And I always like policy my crystal ball to fine-tune this as best I can. A year ago, in the fourth quarter of 2021, we earned about $700 million in net realized carry off of a very strong realization period. And that was like not only impossible to forecast and predict until kind of as it was happening, it also shows the power of what can occur in a single quarter. So we're sitting here today with $4 billion of net accrued carry on the balance sheet. Our underlying portfolio of $138 billion of fair value is up 10% from a year ago. So the portfolio is incredibly well positioned to continue to drive significant realizations for our LPs and carried interest for us. Now exact timing of that, look, it's going to be second half of the year. Now good news is there's some smaller, midsized transactions occurring as we speak that gives me a lot of confidence. But the big stuff that will really drive it will be more in the back half of the year. And keep in mind, you actually sign up a transaction, and it takes often a couple of quarters to actually close the transaction. And so the level of announced transaction is far lower today than say, a year ago. And so therefore, it's going to be the back half of the year. Helpful. And then just with respect to CP VII, gross returns of the fund total 14% or 8% on a net basis. So how are you thinking about returns for this fund as it continues to mature over time? And then if you look back historically, what's the average markup on realized investments relative to the prior unrealized marks? So I would be very careful in terms of -- we have funds that are in fundraising. To talking about specifics and forward stuff is complicated on a call like this. But let me give you some high-level thinking. First, our current generation of buyout funds are generally in the same position as their predecessor funds, which all did exceptionally well. And really, I'm optimistic in terms of where this fund and the similar vintage funds will continue to perform and do, just as I said, with respect to carry. So I think we're well set up for this. And keep in mind, our portfolio construction, whether it's in private equity or real estate or credit, is very diversified. And we tend to invest in good assets where we have deep industry experience and knowledge, where we understand the macro environment where they're operating in. And most of our value creation comes from driving revenue and driving earnings. It's generally not, hey, we figure out how to buy low sell high. It's generally not kind of -- boy, we can turn this business around because we're smarter than everybody else. We bring tools to add to revenue, add to profitability, and that's what it turns in the success. I wanted to come back to some of the comments you made around the FRE growth trajectory. I guess could you give us a better sense of when you anticipate getting into the double-digit growth rate you mentioned in the prepared remarks. And do you think you can get to double digits organically? Or is that dependent on inorganic growth? Rufus, thanks. Look, we can definitely get double-digit organically where -- the business is growing fast and it's very possible that we'll get there in '23, but I would say, it's on the lower side of that, and it really depends upon activity levels. Transaction fees can be a big help. Transaction fees, essentially, if you look on detail while 2022 was up over '21 and was our best year ever on transaction fee revenues. And from Q2, it kind of peaked and came down in Q3 and came down in Q4, which put a downward pressure on fee-related earnings. I think they're -- it's going to remain like in the first quarter or so. And then as they pick back up, that will be a big help. In addition, there's a number of things that we think will also turn on later in the year. And keep in mind, our credit business generally generates fees off of invested capital. So as we raise capital in that business and raised a lot of money in 2022, as it deploys, we get the benefit of that. And so there's a built-in lag between fundraising and fee generation, in particular, in that business. So hopefully, that gives you some color. And I would just add, Rufus, as we said during our remarks, we continue to invest in new product development and distribution. And that's across the platform and we noted that, that's in the private wealth channel as well. So those are things that should help us drive organic new growth over time in addition to, of course, inorganic opportunities that show up and all the things that Curt just mentioned. So we wanted to start with an update on fundraising for the flagship PE funds starting with CPA. I think there are a number of large LPs that wanted to wait until 2023 when their annual deployment allocations were reset before they committed to 8. I just want to see how this is playing out now that we're more than a month into 2023? Craig, it's really too early and I really don't like to talk about details on a given fund, but remain optimistic in terms of where all of our fundraising can turn out. And as we said, I think we're going to raise more money this year than we did last year. Got it. And just as my follow-up. A big question for us is the long-term growth trajectory. And I know there's not a ton you can say on this, but when you wrap up your fundraising super cycle with Asia 6 and Europe 6 this year and start to exit the cycle, can you talk about the potential for FRE growth to decelerate and help us kind of with this risk really framing into '24? And I think it really comes down to the dynamic of can you raise enough capital in insurance solutions and credit to offset the net realizations that your private business will generate? So Craig, I am very optimistic. Let's just start with solutions. Solutions pre '21 or so was -- for 5 years, was averaging about $30 million or so in fee-related earnings, had a very successful fundraise and growth in that business and stair-stepped up essentially doubled initially to $80 million. We're now in the $70 million or $69 million in '22 for fee-related earnings. It does everything that I'm expecting it to do. I see it doubling again. It won't double in '23, but I think, in '24, that business can double. We're very bullish on what our credit business can do. And we think with both product that we can really drive, hopefully, another doubling of that business won't be again in '23. It's going to take us some time. But we really kind of think that we can kind of make some real progress there. And that's off the back of continuing to build out our capital markets business, which, by the way, I had zero exposure on my balance sheet in terms of hung deals or bad things. So really, really proud of our team and capital markets in terms of how they've operated and operated in a very smart way. We talked about Fortitude and what it can do. And look, just the strength across the rest of the structured credit as well as a number of new products. And don't forget our opportunistic credit business, which is very bullish and is going strong. So there's a lot of great things in credit and in private equity. Look -- still remain interested in kind of what we can do outside of traditional buyout, which -- look, I actually think our buyout business is amongst one of the best. And with a little bit of good news in some places, we'll be right back to kind of doing what it's always done and think that we're well set up for real progress there. And then you just think real estate has just a phenomenal track record. It can add to the picture and see much further growth in real estate. It's too early to really call out kind of what can happen in energy. And -- but I think in infrastructure, you got a nice upside lift kind of there. It will take some time, but it's a nice upside lift. And so I think across the platform, lots of great things and looking forward to what we can collectively do as a team going forward. Craig, I think as you referenced the term super cycle, as we've continued to pursue this diversification strategy we've been on for quite some time, that term has less and less meaning for us. Yes, we raised closed-end funds. But if you look at the number of significantly large funds across our platform in every different business, we're going to raise significant amounts of capital in every year. And then you add on all the things that Curt mentioned outside of what we had several years ago, whether that's Fortitude or opportunistic credit or open-ended products. And we see opportunities to raise a lot of capital, which gives us conviction and confidence that we're going to be able to grow FRE in a very substantial way over time. And just to reiterate what we said during our prepared remarks, we've grown FRE at 34% CAGR over the past 5 years, and that's not an accident. It's because of this process. And as we look forward, we're very hopeful, and we have a lot of confidence that we're going to be able to deliver great results too. Maybe just circling back to some of the fundraising commentary just as you guys are out on the road meeting with LPs. I was hoping you might be able to comment on pricing trends. To what extent have fees and pricing come up in your discussions with LPs? How are overall economics evolving on the newer slate of funds relative to the predecessor funds? When you look across management fees, discounts for size, recycling provisions, step-downs, reimbursement for expenses, all of those sort of pieces, what sort of changes, if any, are you seeing in the marketplace? Michael, it's Curt. I don't think that we're seeing anything significant one way or the other as we are on the road talking to people. It's -- the stuff that was always kind of the case still remains the case, which is access to co-investment and the like. And so that's really where more of the discussions really go as we're talking to LPs and fundraising. And maybe just a follow-up to that, maybe more on the portfolio company side, just around performance, revenue, EBITDA growth trends. Maybe you can just give a little bit of commentary there. What are you seeing, margin trends, inflationary pressures, tight labor conditions? How is the portfolio adapting to the sort of backdrop? And if you're able to quantify any of that, that would be helpful, too. Look, the portfolio grew really nicely first half of the year, in particular. The rate of growth decreased second half of the year but was still growing. So over '22 EBITDA was growing, I want to say, on average about 10%, particularly over the Corporate Private Equity, broadly speaking, portfolio. And so optimistic around kind of what that can continue to do. Across many of the businesses, we saw continued pricing power that enabled that to occur, to be seen in terms of how strong that pricing power continues and kind of inflationary pressure and how that works against us. And then -- but the good news is, I will say that the way we've constructed the portfolios, we're generally in good shape. So again, cash flowing businesses, real estate is not in the bad areas. So almost nothing in office or hotel or retail. So again, very good construction across both our private equity, inclusive of real estate. We've covered a fair amount of ground here this morning. But maybe just kind of touching base on the expense side and clearly saw a pretty meaningful step-up in G&A year-over-year. Obviously, a lot of growth initiatives going on investing in the business. But perhaps, Curt, if you could give us a little sense of how to think about that as we look to the next 12 to 24 months? Thanks, Gerry, for the question, and good to hear from you. Look, in a year where I can grow FRE 40% over the prior year, I'll take it however I can get it. And if that means investing in the business, that's a great outcome to generate 40% FRE margin. With respect to cash and with respect to G&A, if you look at it on a quarterly basis, Q4 versus Q4, pretty much flat. Yes, on an annual basis up. But I actually think that we're very focused on -- I know that we're very focused on managing costs and managing where we deploy our excess expenditures, and it's really around investing in new product development, in distribution and investing for the future. There are clearly things that we're making investments in that will benefit us '24, '25, '26 to enable long-term growth, and things like retail and private wealth really matter for that, less so in terms of what it does to '23 FRE. Most of my questions have been asked and answered as well. But I just want to come back to the -- actually to Investor Day targets that you laid out in '21. You're tracking ahead of those targets already with the exception of FRE, which I guess you're on the way towards given its 40% target for 2024. But just wanted to get your conviction around reaching that level? Or is that going to be more of a Harvey decision in terms of potential new investments that you might be making and rather -- you'd rather just focus, like you said, on FRE growth? Brian, good question. And look, I'm incredibly proud of what Carlyle and the entire team has achieved '21, '22 because we set out a target of $1.6 billion for '24, $800 million of FRE, $800 million of carry for $1.6 billion of pretax fee. We've swapped that from an outcome perspective already in '21 and in '22. So FRE at $834 million this past year, 40% up, I care much more about FRE dollars and growth in FRE dollars than I care about margins. Look, margin is a tool to generate FRE dollars. And so whatever we can do to create more dollars, one tool is creating -- is by margin. But however, I can get it, I'm going to get it. And you're right, we set a target of 40% of FRE margin by 2024. '23, I think, will probably be more on the flattish size to '22, which will then cause pressure for '24 to get to that number. I still think we can do it. Look, we grew from 33% to 37%, '21 to '22. So there's no reason we can't do that in '23 to '24, but time will tell. And look, again, it's about growing FRE dollars. And so if I can get the FRE dollars going in the right way, that's what I'm going to do. That's loud and clear. And then maybe just one last one. Just I guess you talked a lot about fundraising and the headwinds obviously on the private equity side. Maybe if you could just characterize what you're hearing from LPs and other investors in terms of -- now having Harvey on Board and how much of a ballast that is to confidence in the franchise? Or was that not so much of a headwind anyway, it was really just the headwinds in the overall industry and less related to your -- to the leadership? This is Bill. In my discussions with the investors, and I was in Europe and I was in Asia and Japan. I would say, that I didn't see anybody who didn't invest with us because I was the Interim CEO, and we didn't have a permanent CEO, and Harvey hadn't been named at that time. There were perhaps some people who delayed and want to think about the decision and wanted to know who it's going to be before they committed. But I don't think there was any -- I couldn't point to any investors said they didn't do it because we didn't have the CEO. I think they may have -- they didn't do it now because we didn't have the CEO, and we'll see what happens when the CEO is named. I do think a far bigger factor than the CEO is the market. And the CEO is -- most of the fund investors, they care much, much more about the performance of their fund and the individual deals than they care about who the CEO is. So although I'm very excited about Harvey, and I think he's going to be fabulous, the market, I think, is a more important factor in terms of growth in the PE fundraising. Just one question. It's got 3 parts about the fundraising environment, not necessarily fund specific, but just kind of what you're seeing. Number one, you mentioned LP liquidity needs. So I'm curious what's driving those, whether it's slower monetization or tighter financing or something else? Number two, big theme last year was denominator effect. How far along are LPs in terms of realigning around that and kind of getting past that? And number three is the reopening of LP budgets with the New Year, is it similar to what you've seen in past years or better or worse? Adam, it's Curt. I'll start and then Bill can add in. Look, it's always difficult to generalize these types of questions across all the different investor classes and everyone. So everyone just take that caveat very seriously as I attempt to address some of this. LP liquidity needs in general were really due to the fact that a number of funds invested and deployed capital very quickly across the industry and have come back for greater needs faster than expectations. And then with the slowing down of the equity capital markets in particular, just as we're talking about buyout in general, that has put some liquidity needs on some investors, not necessarily all. I mean, there are parts of the world, Middle East, in particular, where I don't think that those needs are as apparent as in other places. On the denominator effect, look, there were some green shoots early in the year in terms of potential changes with that, some resetting. I think that, that will get better over the course of the year. But again, it comes back to each individual investor type and how they're viewing it. And so I think that, that will play out. And also, again, all investors are going to be seeking yield. And I think alternative assets is a great place to seek yield. This industry has proven well and it's just generally done better. And so it's more about getting them all access to this. And then the new year, yes, that has an impact on, again, certain LPs in their allocations and how they work with their own investment committees. And yes, it is an impact for some. But again, in terms of quantifying on a broader basis, really tough to kind of do. So I don't know if Bill is going to add anything? Well, I would say, I can't break it down by category in terms of what the impact is going to be. I think it's going to be better than it was last year. I do think that the LP liquidity creates an opportunity for Carlyle. We have a big solutions business of about $70 billion. And both in secondaries, primaries, co-investment, I think there's going to be a lot of opportunity there, perhaps in some ways, offsetting some of the primary opportunity as LPs either reposition their portfolio or need liquidity for some reason, as Curt pointed out, not so much in some parts of the world, but in others. And I'm not showing any further questions at this time. I'd like to turn the call back over to Daniel Harris for ready for closing remarks. Thank you all for your time and interest this morning. We look forward to talking with you again next quarter. Should you have any follow-up questions after the call, feel free to reach out to Investor Relations at any time. Thank you.

EarningCall_350

Let us begin. Please allow me to take off my mask. Thank you very much for joining us today in the venue and online for this meeting presenting the results of SBI Holdings for the nine-months of the fiscal year ending at March 2023. My name is Katachick [Ph] incharge of financial and accounting. The presentation will last for about 30 minutes followed by Q&A session. Starting with the other consolidated results over the nine months until the end of the third quarter. And we are going to round up some of the other figures. The revenue JPY68 billion or 30% up year-on-year and the pretax profit JPY48.1 billion minus 86.9% year-on-year quarterly profit JPY36 billion minus 89.4% year-on-year profit attributable to owners of the company JPY8 billion and minus 97.8% last year, when the Shinsei Bank was consolidated there was negative, the goodwill which was close to JPY200 billion had a quite a big impact. Without that one of element, the results will be those numbers in parenthesis. First, the consolidated results our study or the revenue, the financial services, earnings grew significantly. So the all-in-all 30% plus as to financial services business because of the negative goodwill down 58.4% at JPY113.6. This negative goodwill with the other consolidation of the other Shinsei Bank, and the result of that impact up 46.1% year-on-year that's the result of the profit for financial services business. The other negative factors are as follows; first, negative goodwill and another thing is in the investment business. In some other names there were some variation losses, especially the TP Bank listed in Vietnam and some other overseas listed names. There were some evaluation losses of about JPY46 billion, and in December, the BOJ changed its policy partially and the Yen appreciated. And because of that, about JPY15.7 billion effects losses incurred for the overseas private names. In the Yen basis, there was losses, not so much for the other regional local currencies. And as to the crypto assets, the mining business about JPY9 billion, versus and the B2C2 because of the hedge funds or they are business partner some of them went under. And because of that JPY17.3 billion losses. And the profit attributable to owners of the impairment down 97.8%, JPY8 billion, those names incurring losses. Because we had direct investment in them, so the impact was rather big. And this is performance by segment. Financial Services business with a negative at the goodwill minus 58.4%, but without it plus 46.1% [Ph] and the asset management business revenue increased but the profit decreased the investment business. The both revenue and profit decreased and the crypto-asset to business the sudden decrease in the profit. As to investment, the business a fair value decline was significant and there was no cost there. So minus JPY2.6 billion was hit for the revenue itself and as to investment the business JPY33.2 billion minus for profit before income tax expense but that is around the same time last year, about JPY100 billion of profit existed. So it's not the collapse of portfolio, but partly it is the reaction from the previous years. As to crypto-asset the business as I mentioned earlier, the stagnant market and the bankruptcies all of the exchanges resulted in minus JPY17.3 billion. And this is the quarterly segment wise results. The financial services business and asset management business, first, second and the third quarter, the revenue increased. While the investment business and crypto-asset business struggling, they fluctuated greatly. The pretax income as you can see for financial services business and asset management business, it has been good and for investment business, crypto-asset business the deal were fluctuations and struggling. On a consolidated basis results before talking about consolidated results let me talk about the current status, present status factors contributing to full year results. There are two of them; first of all January 27 the Morningstar disclosed this information. Morningstar has decided to return the brand Morningstar to U.S. Morningstar Inc. and we are going to receive about JPY80 billion in this fiscal year from Morningstar Inc. There is no original cost the for the other return. So, the JPY8 billion itself will be the gain and the second factor is TP Bank, fluctuating greatly and we are going to make it to equity method company, the stake of 19.9% was increased to 20% up by 0.1%. In the first quarter and onwards, TP Bank that will be equity method company incorporated into financial business segment. So, the timing raising 20% at that point JPY4.7 million of gains that will be booked and fixed and so, that the fluctuation factors will be alleviated to produce in a very similar manner. Second, current status factor. The dividends from subsidiaries, it is rather considerable amount and I'd like to explain about that SBI Sumishin Net Bank, SBI Savings Bank, TD Bank, Morningstar Japan, SBI Insurance Group about 10 years have passed since the inception of an investment in those entities and we receive a considerable amount of dividends from those entities. As to this table, as to SBI Sumishin Net Bank JPY30 billion in total of the benefit of actually the dividend was paid. And SBI has 50% of it. So, the JPY15 billion that is received. SBI Shinsei Bank and other key [Ph] that we acquired recently and we also expect dividends paid by those entities as well. In addition, IPO of subsidiaries, currently Rheos Capital Works and SBI Sumishin Net Bank, they filed for the listing at TSE last year, and SBI Biotech and SBI other – are preparing for the listing. So, it all depends on markets. But once they are ready, the other public companies then there will be some capital gains expected some recovery of the other investment. Last year and onward, last two years M&A results and we are going to remain aggressive for M&A. The recovery of be invested money and also the money coming from outside will be combined for aggressive M&A activities. The shareholder returns and its basic policy. It remains unchanged, the total amount that will be approximately 30% of pretax profit in the financial services business. Year-end dividend is yet to be decided but the financial services business is going very well. As to shareholder benefits, we will continue to implement them, you can choose ALA or XRP, for ALA or XRP. Business overview of core businesses starting with financial services business, revenue increased and profit decreased without that one-off element of the donated goodwill, the plus 46.1% and that is where the profit and the securities business, there are two things first SBI SECURITIES results and the other new securities initiative. SBI SECURITIES Consolidated results, I'm not going to read numbers, please look at those numbers. As the sum increased in revenue and profit decreased. That is for J-GAAP basis, some comparison with other major securities companies. Year-on-year basis compared to major securities firms, operating income and profit attributable to owners of the company SBI SECURITIES number one. And other securities firms decreasing their profit by two digit double digit, but our decline is limited. Next, we compare here against online securities and second tier and mid-tier securities. And the same trend can be applied. Other companies are struggling whilst we're doing well. Here we show SBI SECURITIES, breakdown of consolidated operating revenue. We use this as a way of measuring diversification and on an on-going basis the breakdown is well balanced that is the way we view it. And for online stock trading and our dependence, it went down even more. When it comes to online domestic stock transactions it went down to 11.7%. And we believe the Neo-securities initiative are working well, as for our market share. For individual stock trading and individual more Gen trading, we have been able to maintain 45% or more. And for the number of accounts, we have the most in the industry at 9.5 million plus. And ever since COVID, especially growth of the number of accounts have been accelerating. For Neo-securities initiative, we expect our accounts to increase even more. And also for NISA, on an on-going basis, the number of accounts are growing, other companies are stagnant, but SBI SECURITIES still sees growth. And for new customers as well as beginner investors, the proportion is very high at 74%. So you could see we are attracting more, so with this as an entry point, we would like to expand our customer base so that it will lead to future business opportunities. That is our stance. For iDeCo, once again, the number of customers on a cumulative basis is top in the industry and diversification of our revenue base. One of them is we're showing here a foreign stock trading volume and revenue. It has recorded record highs whether it be trading value, or high levels of revenue as well. And we also began offering a substitute security service on top of U.S. dollars and by starting this service, we are striving to increase our services. We hope this will turn into another burning source going forward. So for the FX business, our trading revenue has been growing because of the strengthening of the FX business for trading revenue. For crypto-assets, it has been gone due to the reorganization of the group, about FX related revenue as well as foreign currency bond related revenue has been growing. So numbers continue to be good. So for FX related businesses, the dollar market since April last year until October last year, the Yen depreciated substantially. And then from December onwards, the Yen strengthened, so volatility became extremely high. We were impacted by that and SBI liquidity market was able to see operating revenue reach record highs. And FX trade which is in that is under the umbrella it also did well. And looking at this comparison chart, whether it be size or growth relative to other companies, we have been showing overwhelming strength in our business. And here we show Investment Trust Balance. The stock market has been relatively weak, but when it comes to Investment Trust Balance we were able to reach record highs, which is shown on the left hand side. On the right hand side, we show the trends of Investment Trusts Fees. Basically, SBI SECURITIES show -- saw a steady Investment Trust Fee growth because of our higher investment trust balance. And this page shows our alliance with Sumitomo Mitsui Card, which is a Trust Accumulation Service. And we also saw the transfer AUM for SBI Wrap. For accumulated funds we started this a year and a half ago. After one and a half years, as of January, we have seen the funds exceed JPY16 billion. And the number of accounts have exceeded 450,000 accounts. And for SBI Wrap, it's only seven months since we were able to start the service but we have been seeing it exceed 20 billion in assets under management already. For regarding the tie up with Sumitomo Mitsui Financial Group, last year in July, we received an investment from them, and SMFG became a shareholder. But for personal digital services, we have been strengthening the services we offer. Specifically, with SMBC and SMCC, they offer a online security's function called Olive and SBI SECURITIES will be offering the online securities function. And we will provide highly convenient securities related services for SMBC and SMCC apps. And going forward in five years, we would like to reach 2 million accounts in three years. We would like to reach set card savings of JPY50 billion in three years. And we would like to strengthen our alliances in doing so. Here we show our wholesale business for POs and corporate bond underwriting. So we have been seeing steady expansion from April until December last year, there were 76 listings, except for one, we were able to be involved in 75 of them. And also for underwritings, we were able to see 11 companies as lead manager. Here, in diversifying or earning space, this is something new that we're doing, which is to strengthen the real estate finance business. On January the 31st, we announced the capital and business alliance with CREAL which is a company with strengths in asset management focused on real estate investment. It's a crowdfunding business and we acquired approximately 20%. And by doing so, and we can expect a very good the effect. The development and origination and sales of real estate, though will be provided as services at one stop. New securities initiative and one of the initiatives that we are taking it is not only about the revenue sources diversification, but the very strong systems is needed. That's why we went into the capital business and agreement with Simplex Holdings. We are going to set up a joint venture with them and the outline of that entity is to develop and other operating systems for SBI Group including SBI SECURITIES. We already have business relationship with Simplex and the SBIs customer base that is expected to expand further and more and Simplex delivery trustworthy partner we decided to go all [Ph] with them. Financial Services Business, Banking Business. First there were three banks. The first one, SBI Shinsei Bank and it’s results. Today SBI Shinsei Bank is announcing its results, and it is on J-GAAP basis. Each department is doing well, especially wholesale business expanded, increased greatly, so both revenue and profit increased. And the profit attributable to owners of the company is JPY40.4 billion exceeding JPY35 billion per year forecast for FY 2022. And the contribution to IFRS basis by SBI is the same, JPY44.7 billion is the other contribution. So not only on J-GAAP basis, but on IFRS basis, SBI Shinsei Bank is playing a very important role. And this is its customer basis, the number of retail accounts and the deposit amount. Up until becoming a member, number of accounts was on the decline. But once they become a member of the group, it hit the bottom and it's now increasing and as to the amount of the deposit after the consolidation it increased by more than JPY3.3 trillion reaching JPY9.7 trillion as of the end of December. Collaboration between SBI Group and SBI Shinsei Bank is progressing. One example is SBI Wrap. In October, we launched the service and as of the end of December JPY3.3 billion of the deal value. SBI MONEY Plaza after Ikebukuro and Umeda, the Ginza branch started its operation on February 01, 2023 reinforcing the services for net worth, high net worth customers. In the wholesale area, and collaboration there the wholesale itself has a big momentum at SBI Shinsei and the collaboration with SBI Group is also progressing and we are looking at a very good results as well. The other loans originated that SBI Shinsei Bank amounted to JPY270 billion at sales to other financial institutions, that is the other nine months cumulative basis and the JPY99.billion with 43 deals this is two offer the loan the services and ARUHI that the we acquired in November last year, they are also collaborating with the bank. The ARUHI, the Flat 35 is the other major product, but the longer term interest rate is on the rise. So they are facing with some tough situation. But in 42 prefectures, they had 140 shops. So they have a very strong sales channel. SBI Shinsei Bank Group, they have a very competitive products, but the sales channel is limited. So, by collaborating with our APLUS [Ph] we expect at a good cycle, good synergy. Next, SBI Sumishin Net Bank. This is on J-GAAP basis. The housing loan business increased, lending increased. Ordinary revenue, ordinary profit increased. As I mentioned earlier, that we optimize the capital level and at the same time we would like to improve ROE. That's why in January, we had the dividend of JPY30 billion and SBI received 50% of it. And SBI Sumishin Net Bank on IFRS based result because of the interest rates situation fair values are on the decline. So year-on-year basis, down 73.1% to JPY1690 million. And the major driver there is as follows; because of the change in fair value we are currently considering in discussing with SBI Sumishin Net Bank and the other audit company to come up with some measures to deal with the other impact of the fair value changes and their number of accounts and deposits are increasing and their housing loan is increasing steadily and now exceeding JPY8.5 trillion of accumulative housing loans. Thirdly SBI Savings Bank on the IFRS basis and on the CAGR basis, the profit decreased. The reason there are two reasons. The other in Korea last year, central bank in South Korea increased its, the interest rate pushing down interest margin. And also in that circumstances, the interest rate burden on the other borrower increased delinquencies increased, and the value of collateralized real estate went down and the other loan-write-offs increased pushing down profit. But there's some good news as well. With the other fiscal year 2022, the cumulative losses in the past were written off, and the other profits are being accumulated to pay out JPY9.9 billion of dividend. So 10, exactly 10 years have passed since this the savings bank in Korea became a member of the group, it not only profit, but also on the other investments basis, they are on the different chain -- the transition phase. So here are some KPIs where Savings Bank, so for assets, it is on an increasing trend. However, at the end of the year, we had been slightly conservative in our lending attitude. So because of the brakes, we stepped on, the balance went down slightly. Delinquency rates are slightly up. It used to be 1.44% as of September, but in December, it was at 2%. However, compared to the past, is sufficiently at a controllable level. That is our view. Next is the third financial services business, which is the insurance business. For this business, here’s the consolidated performance of the Insurance Group. In two days on the ninth, it is -- results are going to be announced. So today it's a flash report, but both ordinary revenue and ordinary profit went up so both items went up. As for In-force contracts, we've been seeing a steady increase. The next segment is the Asset Management Business. For this business, we saw an increase in revenue. But due to bonds as well as the deterioration of the stock market, we saw a decline in income. As I mentioned at the beginning, for Morningstar Japan, because of the brand return, we are expecting to recognize approximately JPY8 billion in profits, as of Q4, and the name of the company is going to change its name to SBI Global Asset Management. And in conjunction with the return of the brand, we're not going to transfer the business it's just going to be a return of the brand meaning, we're not going to be able to no longer use the name Morningstar and in return we'll be receiving JPY8 billion. Currently for the valuation business, the current financial services business including investment trust evaluation, it will continue as Wealth Advisors, and also Shinsei Investment Management plans to dissolve through an absorption type merger with SBI Asset Management as the surviving company. So by we will be converting our resources so that we could reduce excess cost. So for assets under management, we continue to see a steady increase. Shinsei Investment Management has been added. That's one reason why but overall, the AUM has now reached 4.5 trillion. So for the PE and Okasan Asset Management, and Rheos Capital, the other businesses if you add them all together, group assets under management has now exceeded JPY7.5 trillion yen. Therefore the AUM of JPY7.5 trillion, we would like to exceed JPY10 trillion by fiscal 2024 that is our target which is unchanged. Next is the investment business. For this business like I mentioned at the beginning it is minus JPY33.2 billion because of the changes in fair value in profit and loss. JPY46 billion minus are due to TP Bank and others and 15.7 billion are due to FX So at the revenue level, it was down by JPY2.6 billion and PBT was also down as well. For TP Bank, the market in Vietnam, it went down by more than 20% from the beginning of the year. But when you look at the performance of TP Bank, as you can see on the right hand side, revenue and profits both have been going up so it's not bad, it's actually doing well. However, it the market tends to weigh on stock prices, and therefore stock prices were weak. And we used to own 19.9% in TP Bank, but from out we would like we raised it to 20% so that we could treat it as an equity method affiliate. And also for the first time, dividends will be paid. So it's not just profit contribution, but it will be able to contribute from a funding point of view as well that is our expectation. For the number of IPOs and M&As, last year, it was 22 companies and for this fiscal year, although we are in a weak market, we are expecting 25 companies to either go through IPOs or M&A. So for the CVC fund on a cumulative basis 133 billion is the commitment amount. And fund number two has been established as well. And we continue to see steady growth. For crypto-asset business, for this business, once again for Q1 and Q3 due to bankruptcies of our counterparties, B2C2 recorded a loss of JPY5 billion as of the third quarter. And for the mining business because of sluggish crypto-asset prices, loss of JPY9 billion was recognized. And also we have completed the withdrawal from the mining business in Russia and for B2C2 and current trends, we are seeing an improving trend. And we're not sure whether this trend is going to continue from Q4 onwards, that is hard to assume. And this is about the business. It's not just major currencies but also minor currencies as well. SBIVC Trade and BITPOINT has been increasing what they carry. And for the non-financial business, which is the last segment. Last fiscal year there was minus JPY8.7 billion due to some extraordinary factors. The losses were great, but this fiscal year rather reflects our underlying business. And for the bio related business, we have SPI Biotech first of all, and cumulative basis in Q3 we were -- we recognized the loss however, R&D has been progressing steadily and for 5-ALA-related business in COVID-19 sales expansion has run its course, but we continue to see it operating in the black. And with that, in ALApromo, we are continuing to prepare for an IPO. Our final slide is an example of business for the Web3 Era. SBI Traceability is an entity that uses the blockchain platform and whether it be products. It is a company that engages in traceability and lately Japanese SAKE to determine whether they are authentic or not. There are needs for technology therefore at famous breweries; they have decided to implement this technology. So we would like to put in for [Indiscernible] all the new business opportunities and we are caught on a group wide basis. That concludes my explanation. Thank you very much.

EarningCall_351

Good morning, and welcome to the Zurn Elkay Water Solutions Corporation Fourth Quarter 2022 Earnings Results Conference Call, with Todd Adams, Chairman and Chief Executive Officer; Mark Peterson, Senior Vice President, and Chief Financial Officer. and Dave Pauli, Vice President of Investor Relations for Zurn Elkay Water Solutions. This call is being recorded and will be available for one week. The phone numbers for the replay can be found in the earnings release the Company filed in an 8-K with the SEC yesterday February 7. Good morning, everyone, and thanks for joining us on the call today. Before we begin, I would like to remind everyone that this call contains certain forward-looking statements that are subject to the Safe Harbor language contained in the press release that we issued yesterday afternoon as well as in our filings with the SEC. In addition, some comparisons will refer to non-GAAP measures. Our earnings release and SEC filings contain additional information about these non-GAAP measures, why we use them, and why we believe they're helpful to investors. And contain certain reconciliations to the corresponding GAAP information. Consistent with prior quarters, we will speak to certain non-GAAP metrics as we feel they provide a better understanding of our operating results. These measures are not a substitute for GAAP and we encourage you to review the GAAP information in our earnings release and in our SEC filings. This is what we hope is a relatively straightforward call. We'll take everyone through what we saw in the fourth quarter along with some even more recent trends will also lay out what we believe next year could look like which is broadly reflected in the current consensus and then we'll get back to work and execute to maximize what we are actually holding ourselves accountable to. After a couple of years of big transformative transactions to completely change our business to a premier pure-play water business, this upcoming year is simply about executing on what's right in front of us and we really like our hand. It's also not lost on us. The noise of the past few quarters is not what investors expect of us, and realize the only way to do something about it is to execute at a high level, and so, that's what we are going to go do. There were a lot of facets to 2022, including some real challenges and some more perception based. The good news is that over the past six months, we've acted quickly got to the core of what the new Zurn Elkay is and can be. And the overall cadence at which we've operated historically is fully embedded across the new Zurn Elkay to start 2023 just six months after the close of the deal. The third-party rep changes 80-20 simplification decisions, integration planning, supply chain constraints and extended lead times are largely all behind us and now it's about leveraging the Zurn Elkay Business System to drive performance and build upon our competitive advantages. As Mark will discuss the fourth quarter was impacted by some near-end macro issues, including a weaker residential market and some wholesale inventory destocking that is also now essentially behind us. And what's been a pretty eventful last three years, I think it's important to highlight the strength of the legacy Zurn business, which has grown the top line at a compounded annual growth rate of 14% since 2019. If you could turn to Page 4, we've just taken our Board through our three-year strategic plan, and with that as a backdrop, we decided to take the opportunity to formalize a more comprehensive and balanced capital allocation strategy as we start 2023. It's grounded in the resilience of our business, strong balance sheet, and consistently high free cash flow profile we see over the next several years. And our commitment to delivering exceptional shareholder value. Our view of the intrinsic value of the company is materially higher than it sits today. And as a result, we are integrating a significant share repurchase plan into our near to medium-term capital allocation strategy. Our current dividend yield of $0.28 on an annual basis represents a current dividend yield of about 1.3%. We're committed to continuing the dividend and we'll look to review any increases to that annually, given the fact that we just increased the dividend in our third quarter this is something we'll look at over the course of the year and then obviously moving forward. The $500 million buyback represents about 13% of our current market cap in a size and concert with maintaining a leverage profile between 1 time to 2 times while also accommodating macro-driven risks in the economy over the next couple of years. For 2023, the minimum repurchase will be $100 million, and it's something that will be both programmatic and opportunistic about. Finally, M&A has historically been important to us to fill in product categories and enhance our competitive advantages within our portfolio as a bolt-on tuck-in level. The Elkay transaction was transformational and provides us multiple levers to enhance our core growth over time while we continue to cultivate other opportunities. For this year, think of us as singularly focused on delivering the value we see and saw in the combination with Elkay. The punchline is we believe this formalized comprehensive approach provides even more levers to drive shareholder value, and as you see in the release, we've already been executing on it across all fronts with 25 million of shares repurchased in the fourth quarter. I'll move on to Page 5. I touched on our strategic plan just a minute ago, which is our 15th plan since the original Zurn acquisition in 2007. What started as a carve-out diversification play for a private equity-owned multi-industry business and part of the prior Rexnord has now become our core business. And we've taken it a step further with the Elkay transaction last year. As we developed the now Zurn Elkay Business System, one of the significant pieces of learning and change over time has been the benefit of pure focus. And when I say focus, what I really mean is an 80:20 focus. In our opinion, spending time, effort, and resources on pieces of our business, whether it's product customers, channels where we don't see real strategic upside it's pure waste and it comes at the expense of what really matters. It's that learning that led us to make the decisions on portions of the Elkay residential sink business since closing. With that behind us, our teams have gone out and executed an integration plan that puts us in a position to deliver at least $50 million of synergies over '23 and '24 and that's before we capture the growth benefits of what the new Zurn Elkay can deliver. The second significant thing to point out in our strategic planning process is the concept of deploying breakthroughs. In this three-year plan, we're over-indexing our strategy deployment process around drinking water, actually safe drinking water. Focused on K-12 our students and schools, which we believe is worth hundreds of millions of dollars of growth moving forward as the States and legislation are now beginning to take meaningful action to solve the issue. The business model framework we leveraged over time has gone through some modifications. But the critical piece of leveraging ZEBS is unchanged. We start 2023 in a spot that places are premium on execution and I can't thank our team enough for all their hard work this past year. And I know we're going to do great things in the coming years, as we execute, like, we can. If you turn to Page 6. I'll spend just a minute on our drinking water strategy. The reality is in this country over half the population, drink water from lead service lines. The most vulnerable are our kids. With the impact felt, not only in places that you've heard of like Flint. But very, very likely in the schools where you live, your kids, your neighbors, nieces, nephews or grandchildren go to school. With over 131,000 K-12 schools in the U.S. over 13 million kids went to school last year with elevated lead levels. There is however a growing awareness and legislation that's beginning to take shape, and we're investing to make sure that we are the go-to solution to address this incredibly solvable problem. It starts with having a leading market share and the largest installed base of point-of-use drinking water solutions in Elkay. And if you turn to Page 7, the inherent competitive advantage we have is starting point is so important. The competitive moat is large and growing and one that's been built by Elkay over time. Now it's time to take it to another level in our approach to not only grow the category but ensuring that the follow-on filtration business model is locked in. The category has changed over time from drinking fountains to now bottle fillers, that was the initial evolution. Largely a way to improve hygiene and eliminate plastic waste. We believe the next evolution will be ensuring safe drinking water in public and private spaces with the devices and ensuring that through filtration. By improving the attachment rate and continuing to grow the installed base, we're confident that filtration can be $100 million of high-margin recurring revenue in the coming years, as we expand accessibility to provide subscriptions and embed and proprietary technology to ensure that we're getting the replacement event. Finally, both the funding and awareness is there whether it's asset funding, Filter First legislation or simply parents teachers community members taking some accountability to solve, but again is a very solvable problem. This will be our why? Walking to talk not only and being recognized for being in an ESG compliant company but to actually be an ESG company, which is a nice segue to Page 8. To give everyone a sense of the progress we've made in bringing these two businesses together to truly operate as one beginning in 2023, we've already fully aligned Zurn Elkay under a comprehensive and uniform ESG strategy and we'll issue our first combined report later this month. As a combined organization we made solid progress in '22 and are firmly on track with the initial set of ESG targets we announced in our 2021 report. In fact, the combination did not require us to step back from our targets. Instead, we'll be announcing seven new ESG targets in our upcoming report that are aimed at improving supplier diversity, air emissions, waste, plastic bottle elimination, engineering, and research and development stand. These new targets provide additional transparency and accountability. For the first time, we're aligning our reporting framework with the task force on climate-related financial disclosure framework to guide our climate-related risk strategy and targets. We've leveraged Zurn Elkay Business System and applied our core values of continuous improvement to advance our sustainability efforts. We continue to reduce our greenhouse gas emissions by completing several electricity and natural gas reduction projects in 2022. We also launched energy audits of key facilities, which will identify significant energy reduction opportunities in our 2024 target. And finally on Page 9, here you'll see just a few of the highlights and statistics of the progress we've made over the last several years. Our customers care about the sustainability of their buildings and retrofit products, that's why we will soon complete our first product lifecycle analysis, the document, end-to-end environmental impact of our Elkay stainless steel sinks with plans to do more. Creating LCA's alongside environmental product declaration gives our customers additional confidence that Zurn Elkay products will help them achieve their own sustainability goals and earn sustainability certifications like WELL 2.0 and LEAD. We simply believe that doing the right thing and we're proud of our sustainability efforts continue to be recognized. For the third consecutive year, Newsweek has named Zurn Elkay one of America's most responsible companies. We're continuing to build on all the work we've done and including embedding ESG into our strategic planning process efforts and hope that you will take care of a look at our report later this month. Please turn to Slide number 10. On a year-over-year basis, our fourth-quarter sales increased 46% to $340 million. The recently completed merger with Elkay contributed 50% year-over-year growth while foreign currency translation reduced sales by 100 basis points from the prior year and core sales declined 300 basis points sales to our residential end markets down 30% and sales to our non-residential end markets expanding low single-digits versus the prior year fourth quarter. Our Fourth quarter sales were impacted by two things. During the quarter our lead times continue to improve and are back to historical normal levels. At improvement -- at a near-term impact on order patterns from our channel partners in the quarter as reacted to our improved lead times. In addition, our residential end markets were approximately 10 points tougher than we had anticipated heading into the quarter. With respect to Elkay in the quarter, I'll provide some color on the fourth quarter, update on demand trends in 80:20 product line exits. Our non-residential business, which is comprised of drinking water and commercial sinks continuing to experience low double-digit demand growth on a year-over-year basis. As Todd discussed earlier, we are aggressively investing in our growth initiatives to further accelerate demand for safe drinking water. With respect to residential sinks, we continue to execute on our 80.20 simplification actions in the quarter to exit certain residential commodity private label and OEM sink SKUs and remain on track to our targeted SKU reduction and related profitability improvement. Our cadence of exits is unchanged from our last earnings call, but just as a reminder, we exited in our $20 million in the fourth quarter, bringing the total for the second half of 2022 to $25 million or $100 million on an annualized basis. We will be completing the balance of the exits in the first quarter of 2023, bringing total exits to the annualized $115 million. And as you'll see in the next slide, these exits will have a year-over-year sales impact of $90 million for calendar year 2023 and a $28 million year-over-year sales impact in the first quarter of 2023. Turning to profitability. Our adjusted EBITDA totaled $65 million in the quarter and our adjusted EBITDA margin was 19% compared to $45 million and 19.4% in the prior year fourth quarter. The benefits of price realization and our productivity initiatives on our fourth-quarter margin was more than offset by the sell-through of higher-cost inventory purchased earlier in the year, investments in our growth and supply chain initiatives, as well as the impact of the Elkay merger. Please turn to Slide 11. And I'll touch on some balance sheet and leverage highlights. With respect to our net debt leverage, we ended the quarter with leverage at an all-time low of 1.4 times inclusive of approximately $25 million of cash used to repurchase common stock in the quarter. As Todd highlighted earlier, we intend to utilize a minimum of $100 million of free cash flow in 2023 to continue to execute our share repurchase plan while targeting a net debt leverage ratio in the 1 time to 2 times range over time. Please turn to Slide 12, and I'll cover some of the highlights of our outlook for fiscal year 2023 as well as the first quarter of the year. To help a better understand the growth trends in the business in 2023, we have presented Zurn Elkay pro forma 2022 sales for the year and first quarter, which takes reported sales for 2022 plus Elkay sales for the first and second quarters of 2022. Let's say year-over-year impact of the 80:20 product line exits we have executed. As you see on the slide that results in a pro forma calendar year 2020 to jump off point of $1.49 billion and that is a number we will be working off of to discuss pro forma core growth and the combined business in 2023. For 2023, we're taking a view on our external outlook that encompasses a broader range of volatility than we have the past couple of years. For the full year, we are projecting consolidated Zurn Elkay sales in the range of $1.5 billion to $1.55 billion and our consolidated adjusted EBITDA to range from $325 million to $345 million resulting in a year-over-year margin expansion of at least 110 basis points up to 170 basis points. On the slide, you can see our assumptions where the sales trends for our non-residential, and residential product groups at the low and the high end of the range. In the first quarter of 2023, we are projecting sales arrangement of $340 million to $355 million and our adjusted EBITDA margin range of 19% to 19.5%. With respect to our sales outlook, you can see on the page our assumptions for growth trends in our non-residential, and residential product groups which also incorporates a more cautious approach to buying patterns in the channel given the recent improvement in our lead times. Turning to profitability. Our first quarter margin will be temporarily impacted by the sell-through of higher cost inventory purchase in 2022 as well as some accelerated investments primarily related to our safe drinking water growth initiatives Todd covered earlier in the call. Partially offset by the benefit of our synergy savings related to the Elkay merger, which is on track to deliver $25 million in 2023. With respect to margin progression over the course of the year, and starting at the second quarter, we will begin to benefit from lower material and transportation costs, as well as a sequential step down in the growth investments, resulting in an improving margin profile as the year progresses. Before opening the call for questions, I'll touch on a few additional outlook items on Page 13. We anticipate our interest expense to be approximately $11 million in the first quarter and approximately $44 million for the full year. Our non-cash stock comp expense to be about $12 million in the first quarter and approximately $47 million for the full year. Depreciation and amortization will come in around $23 million in the first quarter and approximately $90 million for the full year. Our tax rate on adjusted pretax earnings will be in the range of 27% to 28% in the first quarter and a range of 28% to 29% for the full year. And finally, diluted shares outstanding will be approximately 180 million in the quarter and for the full year before the impact of share repurchases. I was hoping you could offer a little more color on the impact of destocking in Q4 and perhaps offer your views on channel position in Q1 where we know that the resi remains on a downward trajectory for the time being that's unsurprising. More so curious the trends and then any insight you can offer on the non-res side and how we should think about Q1 impact and then going into the seasonally stronger quarters? Yes. Bryan, it's Todd. I'll start and then Mark will sort of fill in some of the blanks. Fundamentally, the order patterns really sort of in the back half of November into December. We're sort of unprecedented in terms of how weak they were and a lot of it materially driven by wholesale inventory destocking as our lead times came down. And so, when we crossed over the year and have gotten through January and sort of most of the first couple of weeks of February or at least first week of February, it's sort of much better than it has been and I would say obviously there is not a lot of inventory where non-res products in the channel. So, what we saw was maybe a lot less inventory destocking and also a combination of our lead times coming in and being sort of back to normal. And so, our order patterns really through the first five or six weeks here have been, I would say very much in line with what we would expect to see at this time a year, and then obviously ramps heading into the busier parts of the middle of the year for us. Yes, I think just to put some numbers in the first part of your question. Bryan if you think about the outlook that we had and let's use the midpoint as a simple starting point. We fair to say if you look at the delta from there to $340 million mid to high single-digit millions will be coming from the residential decline and the balance that are really coming from that Todd talked about from the order pattern. So, that's just kind of put some numbers to what Todd was discussing. Okay. Appreciate the color. And if we think of your core non-res outlook growth in the mid-single-digit range. How are -- as your team contemplating the growth trajectory for your key verticals you discussed education, specifically any context of the Elkay opportunity, but that is your largest end market and there are even broader opportunities beyond what was presented their funding backdrop seems quite good. Any incremental color you can offer in education and then of course healthcare matters quite a bit as well? Yes. Again, I think half of our non-res is -- are those two verticals, which as you pointed out, continue to be quite good. I think the initial framework that we've laid out certainly the hedges, all of that growth to get to the range that we're sort of talking about in that mid-single-digit range. I think we're going to take an intentionally cautious view to start 2023. But I think qualitatively from an end market standpoint, those two are actually still quite good and obviously, with the drinking water opportunity we see in schools and the way we're investing, we certainly hope to do better than that. So, I would characterize it as sort of a cautious way to start the year and with a variety of outcomes that are going to play themselves out over the next 11 months. But I think we feel really good about those two verticals in particular. That makes sense. One last one if I may. Thinking about 2023 EBITDA guidance. Maybe walk us through the bridge starting with $265 million in '22. How to think about a year-on-year contribution from core Zurn the full year of Elkay contribution and then layering on deal synergies and within to that perhaps how you think of the potential risk to the framework and well also upside to that range? Sure. I think if you were to pro forma '22 to include sort of a more full year of Elkay, you really start the year closer to $300 million. Obviously, we've got $25 million of synergies. And then if we get some of the growth we expect you find your way to the higher end of the range. Obviously, as Mark pointed out, we're chewing through some of that high-cost inventory to start the year. And so, I think the framework around guidance really puts a premium on just executing at a high level to start the year worked through that high-cost inventory and then obviously get the synergies from the Elkay transaction that we're highly confident in, and we're starting the year with the range of $325 million to $345 million. I think we're optimistic that if we execute well and the world sort of hangs together. We've got a chance to clearly end up inside that range at the end of the year. Throughout a variety of different scenarios rather than try to walk it for you Bryan, I think that's more the context of how we're thinking about it. So, just wanted to go back to the margin ramp. One, can you just talk about how much of this accelerated investment falls into Q1? And then just maybe talk through a little bit more of the higher cost materials because it seems like you guys have been pushing price and staying ahead and now it seems like you're kind of maybe having a price cost issue in 1Q. And then just the cadence of the synergies? Thanks. Yes. Jeff to start with the high-cost inventory I think it's been headroom we fought over the course of the year, and this is really expected the same phenomenon with the fact that price, yes, it's discovering the higher inventory cost but its adversely impacting margins as we're not been generating a normal incremental margin on those price dollars. So, I think it kind of came to ahead in the fourth quarter into the first quarter and I think we're at the point where we're still covering the cost, but the margin pressure is just peak at this point in time. So, I think, as Todd mentioned, look we feel good about working through that. During the second quarter is also part of the margin progression. Over the balance of the year is that finding is a way to more of a -- let's say a normalized incremental margin on the price and then getting some benefit in the back half of the year as the price we put in place last year fixed is and you start getting all the full benefit of improved transportation costs and in the commodity environment. As far as investment goes, again H1 weighted given some things we're trying to get in front of around safe drinking water, marketing campaigns getting pretty aggressive with that early in the year. So, think about that is something that we're going to be again weighted heavier in the first half and in Q1 probably being the heaviest overweight quarter of all of them. And that will slowly reduce as the year progresses. And Elkay synergies, think about relatively flat over the course or I should say consistent -- with the course about $25 million, let's start with that $6 plus million in Q1, a couple of things got to get done in this quarter, but then kind of getting back to that little over $6 million cadence over the balance of the year to equal of the $25 million. So, I think a long-winded answer to your question, but hopefully I covered, and then you're trying to touch on. No. That's very helpful. And then just on some of the non-operating items, just can you walk through what's driving the higher tax rate and the interest rate looks hardly high for $540 million of debt? So, just maybe hit those two items? Yes, interesting, we've just kind of use the forward curve assume interest rates stay high for the balance of the year. So, we were hopefully, a little sooner than that. But we're assuming that they stay elevated over the balance of the year using the forward curve for 2023. Tax rate, tax is really a functional some timing of compensation that ties in this [161] adjustment as effectively a fixed tax item that this year just increases for us for numerous reasons. So, it's not a variable element to deal with. I'll also say too, Jeff and our tax rate, we don't assume any equity exercises of the year to the extent that our equity exercises that would drive the rate down, people exercise any form of equity. So, we assume that doesn't happen in our base rate. So hopefully, there's a chance to do a little bit better than that over the course of the year. I just want to make sure I understand the dynamic and how you're thinking about the cadence or the growth cadencing through the year on the non-res, it seems like the first quarter is simply sellout still strong but selling a little softer as the order patterns normalize. But beyond the first quarter, the expectation is to have sell-out sell-in be more aligned. And therefore the commentary on the end market strength coming through more fully in your numbers, right? I mean it's just as simple as that. Good. So, Mark touched on some of the growth initiatives, talking about some of the promotional activities. Maybe just highlight some of the other things you guys are working on the growth side of things, on the Elkay piece that you think you're going to gain traction as we work through the area? Well, I mean again I think we are leading with safe drinking water and obviously, adjacent that filtration. And so, I would say the thrust of what you're going to hear us talk about what we're focused on are really those two things. Obviously, we've got some other opportunities, particularly around building upgrades at MRO now that we have the entire package between all the hygienic products that we had historically and now pairing that with drinking water in sinks. So, the way to think about what we're focused on is really that drinking water piece, but also the leverage we're getting out of having this broad portfolio that we have sort of unrivaled the ability to specify that spec it -- pull it through it's an advantage for building owners, it's been a hit with the wholesale community and we're really excited about that first turn of traction we're getting with our newly instituted third-party rep network. But as relationships and in territories where we went through a lot of change over the course of the last year. But now six to six months in, we're really starting to see the traction of driving change and preference in share opportunities with the new fully constituted portfolio. And then -- thanks for that. And then the last one if I may. So, the share buyback commentary makes a lot of sense. And I just wanted to clarify something from your prepared remarks, it sounds like you feel comfortable that given the cash flow situation and the leverage levels on the balance sheet that you'd be able to do a complement of buyback as well as strategic M&A. And then just flex the buyback piece if the M&A opportunities ramp. Is that a fair thought process? Yes. I think the way to think about it, really, over the course of the -- at least as we start the year here is we said a minimum of $100 million. If you think about the earnings sort of range that we've provided, and then the $200 million of cash flow you can see that you end up in a leverage scenario that is frankly below where we are today at the end of next year. And so we do have room to do more on the buyback, and we also have room to continue to cultivate some of the bolt-on tuck-in activity that we historically do. And so, I think that this framework at least initially accommodates sort of a very balanced view of the world with the opportunity to do more on the buyback than clearly the $100 million. My first question is just on the residential side. So, now that you are exiting the residential sink business on Elkay. Can you help us understand how much residential exposure is left in Elkay? And then on the Zurn side given the demand for residential is lower this year, help us understand how you're managing factories throughput in this demand environment? Sure. Vivek, really I have just one company. And so, we're not going to talk about it as Zurn or Elkay. It's one company. The residential exposure of the entire company is probably in the 12% range of total sales, maybe 13% today. So, all that sort of non-Elkay branded home center, private label business is the stuff that we've decided to walk away from. And if you were to look at how are we managing the production of that portion of our business, we're managing it very much like we manage the rest of our business. We have a combination of third-party suppliers. We do some assembly and test, we do some late point modification. And so, just like we manage the rest of our business we're flexing those product categories, those cells to meet what we see as the current demand. So, nothing different and frankly just sort of one business in aggregate. That's helpful, thanks. And then maybe just zooming in within the non-residential vertical, how much office exposure do you guys have? And the demand for days like in the office vertical days lower build rate and occupancy. So, any concerns on demand this year on the office side? Yes. I mean, I don't think there is a specific call out there. I mean if half of the business is institutional. There is a sliver of office and I don't think that there's anything that I could sort of give you qualitatively that makes me excited one way or the other. It's not been a big part of our business for really at any point in time, and obviously, the somatic no one's ever going to work again. So that part is dead, it's sort of played itself through. So, I'm not sure exactly how to characterize what you're trying to zoom in on there, but I wouldn't think of it as a significant headwind or frankly tailwind to our business whatsoever. Good morning, everyone. I'd like to go back to this safe drinking water for students' slide that's up there and specifically the $2.9 billion TAM that you've put up there. Elkay obviously has a very large market share of what that TAM would be. Can you talk about what kind of time period you would be looking to address that opportunity. How much of that you'd think will actually be realized? I mean $2.9 billion with Elkay's market share would be extremely needle-moving for the company. So, just any more color you can give us around that? Well, Nathan, I think it's the reality of having a large aged infrastructure in this country. And I think we've been fortunate to develop products that are beginning to replace some of that large age infrastructure, but it's been done at a product level as opposed to these devices is actually provide safe drinking water and in many cases in schools for kids. And so, I think where we're headed with this is to begin to again as Mark said begin to help shape the narrative around what the opportunity is. There is some broader awareness and then obviously book and that with providing the right kind of filtration to ensure that when you drink out of these things, you know that the water is actually safe. And so, I think we've taken a cut at it three years out, and as we talked about measured in the hundreds of millions of dollars. And so, we're just going to continue to sort of go back to work and begin to build this thing out. Bolt-on, the conversion strategy as well as the filtration strategy, but I would say that we would see it in the hundreds of millions of dollars over the next call it three years. So, that $2.9 billion would be the opportunity if we kind of rated the 131,000 K-12 schools. And we got somebody to pay for it all? [technical difficulty] as a country and really, really sort of had a timeline. Yes. And that's a conversion that's over I wouldn't even big to guess the number of years, but it's 10 plus years, but it's a big number. Yes. It should continually be refreshed over time. So, it's a TAM, it's going to continue to grow as we install more units. But that's a big number for sure. Got it. That makes sense. Okay. So, I'm going go back 12 months to the announcement of this Zurn Elkay deal. The deal deck that they had 2023 EBITDA target of $425 million to $450 million. Obviously, a lot has changed over the last 12 months. High rates, versus resi you've got -- this year, you've got some price cost stock in the first quarter. Can you talk about the things that need to happen to get back on to a path to that kind of number, whether they are recovering end markets, things that you guys need to do internally, or whatever else the contributing factors are to get us back onto a path to that kind of target that was laid out a year ago? Sure. I think the biggest is obviously the embedded run rate. In 2002, for Elkay frankly was behind the curve, and I think it's been a well-traveled story really since we announced the deal. The combination of the change in the rep network, in the lead times coming down and a lot of different things created a little bit of a hangover in '22 that we're going to think about '23 is a really strong down payment on getting that back on track. And I can tell you that we feel very good about that. The residential piece of both our business and the combined business, we certainly didn't have that dialed into what we thought '23, '24 could look like back in February of '22. So that's obviously a piece, but I would say the vast majority of things to get us on that trajectory are in our control. There's nothing structural, there's nothing permanently off track. The $50 million of synergies are on track. Obviously, we had a double-digit top-line growth plan for Zurn at that point in time we don't have that today is what talked about, we've got a more conservative growth rate. And so, I would think about '23 is sort of a strong down payment on getting back on that kind of trajectory and obviously, a lot of it has to do with the macro side of life that is out of our control. And that will conclude today's question and answer session. At this time, I'd now like to turn the call back over to Dave Pauli for closing remarks. Thanks, everyone, for joining us on the call today. We appreciate your interest in Zurn Elkay and we look forward to providing our next update when we announce our March quarter results in late April. Have a good day everyone.

EarningCall_352

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to TTM Technologies Fourth Quarter and Fiscal 2022 Financial Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions] As a reminder, this conference is being recorded to get today February 8th, 2023. I would now like to hand the call over to Samir Desai, TTM's Vice President of Corporate Development and Investor Relations to review TTM's disclosure statement. Please go ahead, sir. Thank you, Sherry. Before we get started. I would like to remind everyone that today's call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements related to TTM's future business outlook. Actual results could differ materially from these forward-looking statements due to one or more risks and uncertainties, including the factors explained in our more recent annual report on Form 10-K and other filings with the Securities and Exchange Commission. These forward-looking statements are based on management's expectations and assumptions as of the date of this presentation. TTM does not undertake any obligation to publicly update or revise any of these statements, whether as a result of new information, future events, or other circumstances, except as required by law. Please refer to disclosures regarding the risks that may affect TTM, which may be found in the other reports on Forms 10-K, 10-Q, 8-K, the registration statement on Form S-4, and the other company's SEC filings. We will also discuss on this call certain non-GAAP financial measures such as adjusted EBITDA. Such measures should not be considered as a substitute for measures prepared and presented in accordance with GAAP, and we will direct you to the reconciliation of non-GAAP to GAAP measures included in the company's press release, which was filed with the SEC and is available on TTM's website at www.ttm.com. We've also posted on the website a slide deck that we'll refer to during the call. Thank you, Sameer. Good afternoon and thank you for joining us for our fourth quarter and fiscal year 2022 conference call. I'll begin with a review of our business highlights from the quarter and a discussion of our fourth quarter results, followed by a summary of our business strategy. Todd Schull, our CFO will follow with an overview of our Q4 2022 financial performance and our Q1 2023 guidance. We will then open the call to your questions. The quarter's highlights are also shown on slide three of the investor presentation posted on TTM's website. In the fourth quarter of 2022, TTM delivered solid results in a difficult business environment, while revenue softened, non-GAAP EPS was above the midpoint of guidance despite a challenging supply chain and the labor environment and the continued impact that COVID-19 is having on our business. Demand in our Aerospace and Defense market remained strong with record bookings and backlog, offset by weaker demand and bookings in our commercial end markets. We also saw improvement in our profit margins year-on-year in Q4. I am proud of our employees for delivering solid results this quarter in a tough environment. As we look into Q1, production inefficiencies in our Asia-Pacific facilities due to Chinese New Year, inventory adjustments, and weaker demand from some of our commercial end markets, are causing revenue and margin declines, but we will continue to see strong demand in our A&D market, which now represents 40% of our revenues. For the full year of 2022, excluding the acquisition of Telephonics, TTM grew revenue 5.4% with improved year-on-year profitability despite the challenges I previously mentioned. Full year cash flow from operations was $272.9 million, enabling us to purchase Telephonics and strengthen our balance sheet, while returning capital to shareholders. In addition, we repaid $50 million of our Term Loan B on January 3rd, 2023. I am proud of what our employees have accomplished in the face of these challenges despite one of the most difficult manufacturing environments that we have ever experienced. I would now like to provide a strategic update. TTM is on a journey to transform our business to be less cyclical and more differentiated. Over the past several years, TTM has consistently emphasized that a key part of our strategy is to add value to the product solutions that we deliver to our customers, particularly in the Aerospace and Defense market. In 2018, we acquired Anaren, which broadened TTM's product portfolio into highly engineered RF components and sub-assemblies, as well as adding critical RF engineering capability and resources. In 2022, we acquired Telephonics, which builds on Anaren and TTM's customer-driven culture and disciplined approach to engineering and manufacturing. The addition of Telephonics expands TTM's Aerospace and Defense product offering vertically into higher level engineered system solutions and horizontally into the surveillance and communications market, while strengthening our position in radar systems. As a result of these strategic moves, over 50% of A&D revenues are from engineered and integrated electronic products, with PCBs being less than 50% of the overall contribution. An example of how this strategy is strengthening our business is our recent announcement of the multiyear agreement with Raytheon Technologies for the SPY-6 family of radars. This is an agreement to provide radiofrequency assemblies, electronic hardware, and printed circuit boards for the SPY-6 family of [Indiscernible] radars. The agreement has the potential to reach $500 million over five years. The SPY-6 radar will be on 40 ships of seven different classes by 2030. TTM designs and manufactures the beamforming network, along with PCBs and specialized assemblies for these radars. This type of multiyear commitment for supply allows TTM to increase value to our end customer. Another important element of our differentiation strategy is the current construction of a new state-of-the-art highly automated PCB manufacturing facility in Penang, Malaysia. The decision to build this new factory is a direct response to our customers' increasing concerns about supply chain resiliency and regional diversity diversification. And in particular, the need for advanced multi-layer PCB sourcing options in locations outside of China. The new facility in Malaysia will assist customers in our commercial markets, such as networking, data center computing, and medical, industrial, and instrumentation. We made great progress on the Malaysian facility this past quarter as we completed the pilings required for the building, laid the majority of the foundation, completed the power substation, and the roof. We also received multiple deposits from customers with whom he has signed long-term agreements, which provide a business base for over 70% of the planned capacity in this new building. Finally, I'd like to discuss today's announcement regarding the consolidation of our manufacturing footprint. After the market closed today, we issued a press release announcing that we plan to close three small manufacturing facilities in order to improve total plant utilization, operational performance, customer focus, and profitability. PCB manufacturing operations in Anaheim and Santa Clara, California and Hong Kong will be closed and consolidated into TTM's remaining facilities. The planned closures are expected to improve both facility and talent utilization across our footprint, resulting in improved profitability. TTM is offering customers of the affected PCB plants continued support at our remaining manufacturing sites. We plan to close the Hong Kong facility by the end of our second quarter and the two North America facilities by the end of the year in order to allow for necessary customer approvals at other facilities. We expect the actions we are announcing today will allow us to better serve our customers with more focused operations as well as a more efficient cost structure. We will be working with our employees to transfer them into other facilities and where that is not possible to treat all of these employees with the respect that they are due for their dedication to TTM. Todd will later discuss the financial impact. Now, I'd like to review our end markets which are referenced on page four and five of the earnings presentation on our website. The Aerospace and Defense end market represented 40% of total fourth quarter sales compared to 30% of Q4 2021 sales and 38% of sales in Q3 2022. The majority of the year-on-year growth was due to the inclusion of Telephonics. Excluding that impact, our Q4 A&D revenues grew 3.4% year-on-year organically. We continue to experience a positive defense climate with our A&D program backlog at $1.36 billion, including Telephonics. Excluding Telephonics, program backlog was $1 billion compared to $768 million a year ago. This solid backlog was driven by a second quarter of record bookings of $464 million, including Telephonics. The solid demand in the defense market is a result of a positive tailwind in defense budgets, our strong strategic program alignment, and key bookings for ongoing franchise programs. During the quarter, we saw significant bookings for key programs, including the SPY-6 radar and MH-60R program. We expect sales in Q1 from this end market to represent about 43% of our total sales. For the full year, Aerospace and Defense revenues grew 1.2% excluding Telephonics. Our revenue growth was limited by labor, supply chain, and production challenges. In the US, we are encouraged by the continued strong support for national security, including overwhelming bipartisan support for a 10% spending increase in the fiscal year 2023 defense budget that was passed in December. In 2023, we expect end market growth to be above market projections of 3% to 5% driven by the defense side of our business. We also recently announced that pending confirmation by the Defense Counter Intelligence and Security Agency or DCSA, the TTM Board of Directors has adopted a Special Board Resolution or SBR, replacing the Special Security Agreement, or SSA, that the company had entered into with the DCSA in 2010. The replacement of the SSA with the SBR is a result of the significantly reduced foreign ownership of TTM. The company plans to maintain much of the robust infrastructure developed during the adoption of and compliance with the SSA to continue to serve our customers and to maintain our focus on the national security of the United States in our Aerospace and Defense sector as one of the top 40 US-based defense companies. The medical industrial instrumentation end market contributed 17% of our total sales in the fourth quarter compared to 19% in the year ago quarter and 19% in the third quarter of 2022. A number of our customers have been reducing inventory as well as quick turn business. In addition, the instrumentation segment is weighted toward automated test equipment for the semiconductor capital equipment market, which is seeing weaker demand. For the first quarter, we expect MI&I to be 18% of revenues. For the full year, MI&I grew 16.7% following 11.5% growth in 2021 and 12.4% growth in 2020, well above industry forecasts three years in a row as we took advantage of mega trends and faster growing subsegments of this end market. In 2023, we expect growth to be below the 2% to 4% industry forecast, as these segments feed moderated demand following the extraordinary strength of the past three years. Automotive sales represented 16% of total sales during the fourth quarter of 2022 compared to 19% in the year ago quarter and 15% during the third quarter of 2022. We saw stable trends sequentially for automotive PCBs despite the combined impact of supply chain and demand disruptions caused by COVID, the Ukraine-Russia conflict, and semiconductor shortages that had been impacting automotive OEM production. We expect our automotive business to contribute 17% of total sales in Q1, a slight decline from Q4 resulting from a reduced number of working days in Q1 due to Chinese New Year. For the full year, automotive increased 4.2%. In 2022, advanced technology was 31% of our automotive end market compared to 24% in 2021, due to strong growth in our HDI and radar product areas. In 2022, we won new designs with a lifetime value of $530 million, with a record $279 million in wins in the fourth quarter. This compares to $532 million in 2021. Designs that we are winning this year will contribute to revenues in future years. We expect this market in 2023 to be below longer term forecasts of 6% to 8% after the strong post-COVID recovery. Sales in the data center computing end market represented 14% of total sales in the fourth quarter compared to 15% in Q4 of 2021 and 14% in the third quarter of 2022. We expect revenues in this end market to represent approximately 12% of first quarter sales due to a slowdown in the data center market, coupled with ongoing weakness in the semiconductor market. For the full year, data center computing grew 16.7% as we saw continued solid growth across our data center customers following 25% growth in 2021 and 9.1% growth in 2020. In 2023, we expect to be below the forecasted end market growth of 9% to 12%, driven primarily by inventory digestion in the data center market. In regards to our networking communications end market, we have renamed it networking, given the focus on networking customers. Networking accounted for 13% of revenue during the fourth quarter of 2022. This compares to 16% in the fourth quarter of 2021 and 14% of revenue in the third quarter of 2022. In Q1, we expect this end market to be 10% of revenue as customers manage their inventory levels and some customers see weak demand. For the full year, networking declined 4.4% with declines in telecom customers, partially offset by growth in networking customers. We expected this market to be below the longer term forecasts of 3% to 6% growth in 2023 due to the anticipated soft start to the year. Next, I'll cover some details from the fourth quarter. This information is also available on page five of our earnings presentation. During the quarter, our Advanced Technology and Engineered Products business, which includes HDI, rigid flex, RF subsystems, and components and engineered systems, accounted for approximately 39% of our revenue. This compares to approximately 31% in the year ago quarter and 41% in Q3. We are continuing to pursue new business opportunities and increase customer design engagement activities that will leverage our advanced technology and engineered products capabilities and can new programs and new markets. PCB capacity utilization in Asia-Pacific was 75% in Q4 compared to 88% in the year ago quarter, and 78% in Q3. Our overall PCB capacity utilization in North America was 40% in Q4 compared to 50% in the year ago quarter and 45% in Q3. The lower rate in Asia-Pacific was caused by a decline in production volumes, while the lower year-over-year rate in North America was due to additional plating capacity added earlier in the year and direct labor shortages in certain regions. Our top five customers contributed 37% of total sales in the fourth quarter of 2022 compared to 33% in the third quarter of 2022. We had one customer over 10% in the quarter. At the end of Q4, our 90-day backlog not including Telephonics, which is subject to cancellations was $546.7 million compared to $615 million at the end of the fourth quarter last year. Including Telephonics, our backlog at year end was $603.1 million. Our book-to-bill ratio including Telephonics was 1.05 for the three months ended January 2nd, reflecting a stronger Aerospace and Defense book-to-bill, offset by a weaker commercial book-to-bill. Our A&D bookings also shipped over a longer period of time compared to our commercial bookings. As we looked into Q1, we are seeing our commercial market soften. As a result, we are taking extraordinary actions, including consolidating our facilities as I already explained, setting down for the full Chinese New Year holiday season, freezing new hires except with special approvals, reducing discretionary spending, and putting travel restrictions in place. We also continue to focus on managing supply chain bottlenecks, particularly in our A&D business, which has limited our ability to deliver on several key A&D programs and will constrain revenue in the first half of the year. I am confident that with the effort of our employees, we will be able to overcome these challenges as we work our way through 2023. In the meantime, I wish to thank our employees for continuing to contribute to TTM and our critical mission of inspiring innovation for our customers. Thanks Tom and good afternoon, everyone. I will be reviewing our financial results for the fourth quarter that were included in the press release distributed today as well as on slide seven of our earnings presentation that is posted on our website. For the fourth quarter, net sales were $617.2 million compared to $598.1 million in the fourth quarter of 2021. The year-over-year increase in revenue was due to the inclusion of Telephonics as well as organic growth in our Aerospace and Defense end market, partially offset by declines in our commercial markets. For the full year, revenues grew 5.4% excluding Telephonics, driven by our medical, industrial and instrumentation, data center computing, automotive, and A&D end markets. For all of 2022, revenue was $2.5 billion. This compares to $2.2 billion in 2021. GAAP operating income for the fourth quarter of 2022 was $97.6 million and includes a gain of $51.8 million in December 2022 from the sale of the property occupied by our former Shanghai EMS entity. This compares to $33.1 million in the fourth quarter of 2021. On a GAAP basis, net income in the fourth quarter of 2022 was $6 million or a $0.06 per diluted share. Our fourth quarter 2022 results include a tax reserve of $51.7 million to establish the valuation allowance for certain US deferred tax items, and $14.7 million associated with the gain on the sale of the property noted earlier. This compares to GAAP net income of $8.4 million or $0.08 per diluted share in the fourth quarter of last year. The remainder of my comments will focus on our non-GAAP financial performance. Our non-GAAP performance excludes M&A related costs, restructuring costs, certain non-cash expense items such as amortization of intangibles and stock compensation, gains on the sale of property, and other unusual or infrequent items, such as the tax valuation reserve I mentioned earlier. We present non-GAAP financial information to enable investors to see the company through the eyes of management and to facilitate comparisons with expectations in prior periods. Gross margin in the fourth quarter was 19.8% and compares to 16.7% in the fourth quarter of 2021. The year-on-year increase was due to the addition of Telephonics, better product mix, favorable foreign exchange, and lower material costs, partially offset by higher year-on-year labor costs, particularly in North America as we raise wages this year to be more competitive, and lower revenue in our commercial markets. Selling and marketing expense was $18.8 million in the fourth quarter or 3% of net sales compared to $15.6 million or 2.6% of net sales a year ago. Fourth quarter G&A expense was $37.4 million or 6.1% of net sales compared to $30.4 million or 5.1% of net sales in the same quarter a year ago. The inclusion of Telephonics added $2.5 million and $4.1 million to sales and marketing and G&A respectively. In the fourth quarter, R&D expense was $6.4 million or 1% of revenues compared to $4.8 million or 0.8% in the year ago quarter. $1.5 million of the increase was due to the inclusion of Telephonics. Our operating margin in Q4 was 9.7%, a solid result given the macro challenges we've been facing. This compares to 8.2% in the same quarter last year. For the full year, 2022 operating margin was 9.4% compared to 8.4% in 2021. Interest expense was $12 million in the fourth quarter compared to $11.2 million in the same quarter last year. During the quarter, there was a negative $3.2 million foreign exchange impact below the operating line. Government incentives and interest income decreased this to $1.9 million or a $0.02 negative impact to our EPS. This compares to a loss of $1.1 million or $0.01 impact on EPS in Q4 last year. Our effective tax rate was 6.5% in the fourth quarter, resulting in tax expense of $2.9 million. This compares to a rate of 1.6% or tax expense of $0.6 million in the prior year. For the full year, our effective tax rate was 13.1%. Fourth quarter net income was $42.7 million or $0.41 per diluted share. This compares to fourth quarter 2021 net income of $36.2 million or $0.34 per diluted share. For the full year, net income was $181.2 million or $1.74 per diluted share compared to $138 million or $1.28 per diluted share in 2021. Adjusted EBITDA for the fourth quarter was $81.6 million or 13.2% of revenue compared with fourth quarter 2021 adjusted EBITDA of $70.4 million or 11.8% of revenue. For the full year, adjusted EBITDA was $343.1 million or 13.8% of revenue. Depreciation for the quarter was $24 million. Net capital spending for the quarter was $20.8 million. Cash flow from operations was very strong at $77.6 million or 12.6% of revenue, exceeding our target of 10%. Free cash flow was also very good at $56.8 million or 9.2% of revenue. For the full year, cash flow from operations was $272.9 million or 10.9% of revenue. Free cash flow for the full year was $176 million or 7.1% of revenue. Cash and cash equivalents at the end of the fourth quarter of 2022 were $402.7 million and our net debt divided by last 12 months EBITDA was 1.5 times, at the bottom of our targeted range of 1.5 times to 2 times. Following the end of the fiscal year, we repaid $50 million of our Term Loan B. Before I discuss first quarter guidance, I'd like to discuss the financial impact of today's facilities consolidation announcements. The company expects to record between $22 million and $28 million in separation, asset impairment, and disposal costs related to this restructuring, primarily between now and the end of 2023. Approximately 80% of these costs are expected to be in the form of cash expenditures and the rest in the form of non-cash charges. Today's actions are expected to yield an annual operating profit increase of approximately $22 million to $27million, after the facilities are closed and the transferred business is fully assimilated within our remaining footprint. Now, I'd like to turn to guidance for the first quarter. As Tom mentioned earlier, we expect a sequential decline in revenues due to weaker booking trends in our commercial end markets, resulting from inventory adjustments, weak end market demand, and the Chinese New Year holiday. We expect a sequential decline in margins due to lower revenues, the inefficiencies associated with the Chinese New Year holiday, higher material costs, and unfavorable mix. Given these factors, we project total revenue for the first quarter of 2023 to be in the range of $550 million to $590 million, a non-GAAP earnings to be in the range of $0.16 to $0.22 per diluted share. The EPS forecast is based on a diluted share count of approximately 104.6 million shares, which includes dilutive securities such as options and RSUs. We expect that SG&A expense will be about 9.5% of revenue in the first quarter and R&D will be about 1.2% of revenue. We expect interest expense to total approximately $11.9 million. Finally, we estimate our effective tax rate to be between 13% and 17%. To assist you in developing your financial models, we offer the following additional information. During the first quarter, we expect to record amortization of intangibles of about $11.7 million, stock-based compensation expense of about $5.9 million, non-cash interest expense of approximately $0.7 million dollars. And we estimate depreciation expense will be approximately $24.5 million. Additionally, as you're building your financial models for 2023, I'd like to call your attention to three items. First, interest rates have risen and may rise further in 2020 to our average borrowing rate on our term loan, which is a variable rate debt was 1.7% plus a margin of 250 basis points. Today, we are already incurring a rate of 4.6% plus our margin. Second, in 2022, we realized favorable foreign exchange below the operating line of $12.7 million. We cannot predict how the Chinese; US exchange ratio will move in 2023. Consequently, we do not forecast this item. And third, we are investing in a new plant in Penang, Malaysia, we expect to start production in the second half of the year and begin ramping towards full volume production. During the 2023 startup phase, we expect to incur a negative impact to our margins of between 30 and 50 basis points. We estimate that approximately 75% of that impact will be weighted towards the second half of 2023. Finally, I'd like to announce that we'll be participating in the Cowen Aerospace, Defense and Industrials Conference on February 16. The JP Morgan High Yield and Leveraged Finance Conference on March 7 and the JP Morgan Industrials Conference on March 16. That concludes our prepared remarks. Thank you. [Operator Instructions] And today's first question will come from the line of James Ricchiuti with Needham & Co. Your line is open, sir. Hi. Thank you. Good afternoon. So, maybe putting aside the aerospace and defense where you have pretty good line of sight, which are the commercial markets as you look at him today, do you believe perhaps the most uncertainty attached to them and you're clearly seeing weakness in several of them? Yes, I think -- to two areas, Jim, in terms of, areas of weakness and we saw during the course of the quarter, a pronounced weakness in data center. And so, that was that affects our computing and data center computing and market which two-thirds of that is really data center and the third is semiconductor both, both now really, really showing signs of weakness and in the case of data center, a lot of discussion around inventory control and digestion. But I think a market that that certainly in the first half I think will continue to be weak. Networking is the second similar, similar in nature, right, I think the networking by and large by the inventory control, discussion around softening, demand environment, spending environment and a lot of discussion around the first half of the year telecom. Really, everyone holding their breath for India investment, which is coming, but it's coming slowly. And, frankly, that's a pretty small part of that networking end market for us. So those are the two markets. From a challenging standpoint, I'd say our, our there was a softening demand. And just to finish the discussion MII, Medical Industrial Instrumentation, it's really the instrumentation side that is showing the pronounced weakness, medical and industrial relatively better, though, a lot of discussion around inventory control. But I think that shorter term in nature, automotive, continuing to really hold up pretty well. We are taking the Chinese New Year time off in our facilities there. And so our revenues will be down in Q1. But if you do the quick calculation, and you add back that that week and a half to two weeks of production that we lose, you'd be right back on top of the Q4 numbers on automotive. So holding up pretty well. Got it. Follow-up question I have, as you may have -- made some reference to this in the opening remarks, but to the announcement today with respect to the manufacturing footprint, does that in any way change the investment plans? Or timing for Malaysia? No, no, absolutely not. And we -- yes, that that really, for us. And, we look at our footprint, regularly, these small -- smaller facilities in Hong Kong, and the two facilities in California, really been struggling in terms of profitability and their plant charter. And that that's been the struggle. And as we looked into our forecasts, they also don't look much better for the long term. So difficult actions to take but necessary, and we will continue the investment in Malaysia to our customer base is counting on this, it's a critical investment for TPM to make in terms of supply chain resiliency, automated highway account, efficient production volume production capability. So, we're moving proceeding there as scheduled and holding to our schedule at this point. Thank you One moment for our next question, will come from the line of Mike Crawford with B. Riley Securities. Your line is open. Thank you, I heard from your remarks that you basically have 70% of your capacity, generally sold with customers for the Malaysia plant that's opening? Is that a case where you're hoping to run that facility at what 80% plus utilization? Or what -- where -- is that going to be the same maybe type of metrics that you had for your China facilities? Or is it going to be slightly different? So the goal, the goal will be to run it north of that. I mean, ideally, you'd love to be in between that 80% and 90% utilization rate, but you're absolutely right, Mike. It's very similar in terms with our China facilities in terms of volume capabilities, and the need to, to leverage your manufacturing foot footprint and keep that utilization at a high level. And these will be volume requirements for these customers. And, we'll obviously, we won't we won't hit that about 80%. Right away, we've got it, we've got a good ramp that'll carry -- begin the end of this year, and then carry us through next year to get there. But again, yes, it's a very strong backdrop for us to have those customers lined up and willing to, to sort of with their deposits to help us with as we invest in this critical capability. Okay. Thank you. And then my second question switches to a CSO what is potential upside for, a, more ships being included onto that program, perhaps as a result of the forthcoming budget and budget requests we'll see in a few weeks? And secondly, for potential for military sales to allies? So I can't it's always hard to speak for our customer. I would say that that. There certainly is upside there. And you're right, there's possibility of foreign military sales as well. The we have to stick to their announcement I think I think even that is a very strong base for us. And we've continue to see, of course, a number of other radar systems and programs, move to ESA that are that are really allowing us to grow strongly in that market. So not relying solely on that program, but it is a -- it's a program that has potential upside for sure. And our focus will be on servicing the customer, making sure that that we ramp here successfully through the course of this year for our aerospace and defense market. And critical to that is that we solve supply chain bottlenecks in that market. And that's a big area of focus for us as we ramp. It's great to be to have a program backlog as strong as we have at the beginning of the year, allows our operations to really focus on getting the job done. Thank you. [Operator Instructions] One moment for our next question. That will come from the line of Matt Sheerin with Stifel. Your line is open. Yes, thanks and good afternoon, everyone. Just question on the outlook for the automotive sector. Sounds like you're looking below the market growth there. And I know you're starting out down, I guess mid-teens year over year. In Q1, most of the suppliers sound more optimistic. Some are seeing a little bit of inventory, but most expect some production growth this year, and content growth. Do you expect auto to grow for the year, even though you're going to be down significantly in the first half? So the answer is yes, the impact if you start to look sequentially, and that's probably the best way to look at this, you'll see the Chinese New Year impact. And so you can -- and that's really what this is. But last year, we ran full out Chinese New Year. We ran we were -- we -- and the interesting thing last year that was a bit different than other years is that, we had COVID out there, the government was encouraging employees to just sit -- stay in place. So we had our full complement of labor, as well. So we ran as hard as we could in Q1. And that's the difference you're seeing is that Chinese New Year difference. Now demand environment, overall, a little bit off from where we were and Q1 last year, but not substantially. So the market is holding up well. We think it will -- it looks to hold up well through the first half. So, yes, as we go, again, difficult to predict the back half of the year, and that's mainly because there still are critical shortages out there and parts. But what we see in the first half is a good strong demand environment. And yes, we would expect to be able to grow in automotive this year. Okay. Thanks for that. And I know someone just asked about, the commercial markets being weak, in terms of the cloud as a computing, inventory correction you're seeing and same thing in the related semiconductor markets. Are you getting seeing signs that all of that bottoming in the next quarter or two, or will it get worse before stabilizes? Yes, I think we're looking at -- I think the key there's a quarter or two, because I think this is really a -- the indications we have are for the first half. Now we'll see how demand that -- what shifts there in terms of demand as we go into the second half of the year. But most of the commentary we've had from customers around is related to the first half and digestion. Digestion as they put it, that is necessary in the first half. And it's due to substantial inventory buildup and bringing those inventories down before they can start to see again true levels of demand impacting the supply chain. Okay. Thank you. And then Todd had a couple of modeling questions. I don't remember you or you may have talked about the OpEx guidance for the quarter, did you give that number out? What I -- what we would think kind of give you in terms of insight into Q1. We're expecting SG&A expense to be about 9.5% of revenue, and then R&D to be an additional 1.2% of revenue in Q1. Okay, so 10.7% total. Okay. Okay. Great. And so that implies your gross margin is actually still up year-over-year. Is that primarily due to the mix with the acquisition? Or I know you're difficult, obviously, a tough year had some issues, I know in Q1 of last year, I was just trying to figure out, given the big revenue decline, how margins can actually be up? Well, okay, so that's good discussion. I think, when we're looking at Q1 and comparing that to Q1 last year, okay, year-over-year. Revenue was only down slightly, but there's a big mix shift, right, we added Telephonics. So when we look at year-over-year Q1 a year ago at the midpoint of guidance, our revenues are down about $11 million. But aerospace and defense is up almost $75 million. If you take all the guide that's given. So that implies the commercial markets are down substantially… Right. But when you look at the margin impact, okay, so you have some mix shifting, we added Telephonics, we lose commercial PCB business, they have different economic profiles. The PCB business at that kind of volume is pretty lucrative and Telephonics is we brought that on there. We're working with synergies to improve their profit profile, but it's not yet quite dollar-for-dollar exchange in terms of profitability. We're also going to see year-over-year some pricing challenges, but we've got some favorable effects up in our cost structure. Exchange rates are -- that the Chinese currency is a little weaker in this quarter we're seeing compared to a year ago, and so that gives us a little bit of tailwind. So kind of works off better mix, a little FX help. And that's offsetting some of the challenges that you see in our annual kind of pricing and less premium revenue this year compared to last year. And it all kind of breaks either right margins stay relatively consistent, maybe up slightly. But even though there's a big mix, there's a lot going on underneath the covers. Thank you. And speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Todd -- Tom Edman for any closing remarks. Thank you. Yes, I just like to close by summarizing some of the points that I made earlier. First, we delivered non-GAAP EPS above the midpoint of guidance, and saw good year-over-year improvement on margins. Second, we announced the consolidation of our manufacturing footprint to streamline our operations to better serve our customers and lower our cost structure. And third, we generated strong cash flow, resulting in a net leverage of 1.5 times at the low end of our target range of 1.5 to 2 times. And forth, really despite weakness in our in our commercial markets, we are seeing very strong demand in our aerospace and defense market. In closing, I'd like to thank our employees, our customers and our investors for your continued support, as we navigate the challenges to our business. We’ll continue our long-term strategic focus on diversification, differentiation and discipline. With that, I'd like to thank you again. Goodbye, everyone.

EarningCall_353

Thank you for standing by, and welcome to the TransDigm Group's 2023 First Quarter Results Call. [Operator Instructions]. I would now like to hand the call over to Jaimie Stemen, Director of Investor Relations. Please go ahead. Thank you, and welcome to TransDigm's Fiscal 2023 First Quarter Earnings Conference Call. Presenting on the call this morning are TransDigm's President and Chief Executive Officer, Kevin Stein; Chief Operating Officer, Jorge Valladares; and Chief Financial Officer, Mike Lisman. Please visit our website at transdigm.com to obtain a supplemental slide deck and call replay information. Before we begin, the company would like to remind you that statements made during this call, which are not historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC available through the Investors section of our website or at sec.gov. The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings call for a presentation of the most directly comparable GAAP measures and applicable reconciliations. I will now turn the call over to Kevin. Good morning. Thanks for calling in today. First, I'll start off with the usual quick overview of our strategy, a few comments about the quarter and discuss our fiscal '23 outlook. Then Jorge and Mike will give additional color on the quarter. To reiterate, we are unique in the industry in both the consistency of our strategy in good times and bad as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins and over any extended period have typically provided relative stability in the downturns. We follow a consistent long-term strategy specifically. We own and operate proprietary aerospace businesses with significant aftermarket content. We utilize a simple, well-proven, value-based operating methodology. We have a decentralized organizational structure and a unique compensation system closely aligned with shareholders. We acquire businesses that fit this strategy and where we see a clear path to PE-like returns. And lastly, our capital structure and allocations are a key part of our value creation methodology. Our long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we stay focused on both the details of value creation as well as careful allocation of our capital. As you saw from our earnings release, we had a good start to fiscal '23 and increased our guidance for the year. We continue to see recovery in the commercial aerospace market. Our Q1 results show positive growth in comparison to the same prior year period. We are encouraged by the progression of the commercial aerospace market recovery to date, and trends in the commercial aerospace market remain favorable as demand for travel remains robust. International air traffic is closing in on the domestic travel recovery and China reopened its air travel in January with the lifting of its pandemic restrictions. However, there is still progress to be made for the industry as our results to continue to be adversely affected in comparison to pre-pandemic levels since the demand for air travel is still depressed. In our business, we saw another quarter of very healthy growth in our total commercial revenues and bookings. Bookings also outpaced revenues in all 3 of our major market channels, commercial OEM, commercial aftermarket and defense. We also attained an EBITDA as defined margin of 50% in the quarter. Contributing to the strong margin is the continued recovery in our commercial aftermarket revenues, along with diligent focus on our operating strategy. Additionally, we had strong operating cash flow generation in Q1 of almost $380 million and ended the quarter with close to $3.3 billion of cash. We expect to steadily generate significant additional cash throughout the remainder of 2023. Next, an update on our capital allocation activities and priorities. The capital allocation priorities at TransDigm are unchanged. Our first priority is to reinvest in our businesses; second, to do accretive M&A; and third, return capital to our shareholders via share buybacks or dividends. A fourth option paying down debt seems unlikely at this time, though we do still take this into consideration. We are continually evaluating all of our capital allocation options. As mentioned earlier, we ended the quarter with a sizable cash balance of close to $3.3 billion, which leaves us with significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future. Regarding the current M&A pipeline, we are actively looking for M&A opportunities that fit our model. Acquisition opportunity activity continues and we have a decent pipeline of possibilities as usual, mostly in the small and midsize range. I cannot predict or comment on possible closings, but we remain confident that there is a long runway for acquisitions that fit our portfolio. Both the M&A and capital markets are always difficult to predict, but especially so in these times. Now moving to our outlook for fiscal 2023. As noted in our earnings release, we are increasing our full fiscal year '23 sales and EBITDA as defined guidance, both by $65 million to reflect our strong first quarter results and current expectations for the remainder of the year. The guidance assumes the continued recovery in our primary commercial end markets through fiscal '23 and no additional acquisitions or divestitures. Our current year guidance is as follows and can also be found on Slide 6 in the presentation. The midpoint of our revenue guidance is now $6.155 billion or up approximately 13%. In regards to the market channel growth rate assumptions that this revenue guidance is based on, for the commercial aftermarket, we are updating the full year growth rate assumptions as a result of our strong first quarter results and current expectations for the remainder of the year. We now expect commercial aftermarket revenue growth in the high teens percentage range, which is an increase from our previous guidance of mid-teens percentage range. At this time, we are not updating the full year market channel growth rate assumptions for commercial OEM and defense as underlying market fundamentals have not meaningfully changed. Commercial OEM and defense revenue guidance is still based on our previously issued market channel growth rate assumptions where we expect commercial OEM revenue growth in the mid-teens percentage range and defense revenue growth in the low to mid-single-digit percentage range. The midpoint of our EBITDA as defined guidance is now $3.11 billion or up approximately 18% with an expected margin of around 50.5%. This guidance includes about 50 basis points of margin dilution from our recent DART Aerospace acquisition. We anticipate EBITDA margins will continue to move up throughout the remainder of the year. The midpoint of our adjusted EPS is increasing primarily due to the higher EBITDA as defined guidance and is now anticipated to be $22.17 or up approximately 29%. Mike will discuss in more detail shortly some other fiscal '23 financial assumptions and updates. As our fiscal '23 progresses, should the favorable trends in the commercial aerospace market recovery continue, including the expansion of flight activity in China, we could see further upward revisions to our guidance. We believe we are well positioned for the remainder of fiscal 2023. We'll continue to closely watch how the aerospace and capital markets continue to develop and react accordingly. On the organization side, I wanted to announce the retirement of Halle Martin, our General Counsel, Chief Compliance Officer and Secretary. Halle has been an integral part of our team since 2012 and long before as outside counsel. Jes Warren has been promoted from her position as Associate General Counsel to fill this critical role as part of our robust succession planning process. Thank you, Halle, for all of your great counsel and dedication to TransDigm. Let me conclude by stating that I'm very pleased with the company's performance this quarter and throughout the recovery of the commercial aerospace industry. We remain focused on our value drivers, cost structure and operational excellence. Let me hand it over to Jorge to review our current -- our recent performance and a few other items. Thanks, Kevin, and good morning, everyone. I'll start with our typical review of results by key market category. For the balance of the call, I'll provide commentary on a pro forma basis compared to the prior year period in 2022. That is, assuming we own the same mix of businesses in both periods. The market discussion includes the May 2022 acquisition of DART Aerospace in both periods. DART has been included in this market analysis discussion since the third quarter of fiscal '22. In the commercial market, which typically makes up close to 65% of our revenue, we'll split our discussion into OEM and aftermarket. Our total commercial OEM revenue increased approximately 20% in Q1 compared with the prior year period. Bookings in the quarter were strong compared to the same prior year period and solidly outpaced sales. Sequentially, the bookings improved almost 15% compared to Q4. We continue to be encouraged by build rates steadily progressing at the commercial OEMs and the strong demand for new aircraft. However, ongoing labor instability and supply chain challenges across the broader aerospace sector present risks to achieving OEM production rates. Now moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 31% in Q1 when compared with the prior year period. Growth in commercial aftermarket revenue was primarily driven by continued strength in our passenger submarket, which is our largest submarket, although all of our commercial aftermarket submarkets were up significantly compared to prior year Q1. Sequentially, total commercial aftermarket revenues grew by approximately 7% and bookings grew more than 25%. Commercial aftermarket bookings were robust this quarter compared to the same prior year period and Q1 bookings significantly outpaced sales. Turning to broader market dynamics. Global revenue passenger miles remained lower than pre-pandemic levels, but have continued to steadily trend upwards over the past few months. Airline passenger demand remained strong throughout the fall and holiday season. IATA currently forecast calendar year '23 air traffic will be within about 15% of pre-pandemic. The recovery in domestic travel continues to be stronger than international travel, although international traffic is catching up. In the most recently reported IATA traffic data for December, global domestic air traffic was only down 20% compared to pre-pandemic. For the U.S., domestic travel in December was within 10% of pre-pandemic levels. Domestic travel in China continued to lag other major air traffic regions and was down about 55% compared to pre-pandemic. However, the lifting of COVID restrictions and the reopening of China to international travelers bodes well for air traffic growth. Roughly a year ago, international travel globally was depressed about 60%, but in the most recently reported IATA traffic data for December, international travel was only down about 25% compared to pre-pandemic levels. International traffic in North America and Europe were within 5% and 15% of pre-pandemic, respectively. Asia Pacific International travel was still down about 50%, but should improve subsequent to the January reopening of China. Global air cargo demand has continued to pull back over the past few months. As of IATA's most recent data, December was another month in which air cargo volumes showed year-over-year decline and were below pre-pandemic levels. The recent easing of pandemic-related restrictions in China could be favorable for air cargo in '23, but it's too early to determine. Business jet utilization has come down from pandemic highs and has continued to temper over the past handful of months. However, activity is still above pre-pandemic levels and business jet OEMs and operators forecast strong demand in the near term. Time will tell how this plays out as there is softening optimism for the business jet market due to the uncertainty within the current macro and financial environment. Shifting to our defense market, which traditionally is at or below 35% of our total revenue, the defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 3% in Q1 when compared with the prior year period. Defense bookings are up significantly this quarter compared to the same prior year period and Q1 bookings strongly outpaced sales, which bodes well for future defense order activity. Impacting our defense market revenues are the ongoing delays in the U.S. government defense spend outlays. While these delays appear to be slowly improving, they do remain longer than historical average levels. Our teams are steadily making progress with the supply chain, but continue to face challenges. The lack of electronic component availability continues to be the primary focus for our teams. As Kevin mentioned earlier, we continue to expect low to mid-single-digit percent range growth this year for our defense market revenues. Lastly, I'd like to wrap up by stating how pleased I am by our operational performance in this first quarter of fiscal '23. We remain focused on our value drivers in meeting increased customer demand for our products. With that, I'd like to turn it over to our Chief Financial Officer, Mike Lisman. Good morning, everyone. I'm going to quickly hit on a few additional financial matters for the quarter and then expectations for the full fiscal year. First, on organic growth and liquidity. In the first quarter, our organic growth rate was 15%, driven by the continued rebound in our commercial OEM and aftermarket end markets. On cash and liquidity, free cash flow which we traditionally define as EBITDA, less cash interest payments, CapEx and cash taxes was roughly $400 million for the quarter. We ended the quarter with approximately $3.3 billion of cash on the balance sheet, and our net debt-to-EBITDA ratio was exactly 6x, down from 6.4x at the end of last quarter. On a net debt-to-EBITDA basis, this puts us right at the 5-year pre-COVID average level. Additionally, our cash interest coverage ratios, such as EBITDA to interest expense are currently in line with where we've historically operated the business. We feel comfortable here given the benefit of our interest rate hedges and fixed rate debt instruments that were entered into in a lower interest rate environment. As always, we continue to watch the rising interest rate environment in the current state of the debt markets very closely. During the first quarter, we completed an extension of our nearest maturity term loan pushing the maturity date from mid-2024 out into 2027. Pro forma for this refinancing, our nearest term maturity is now 2025. As a result of this refi, our interest expense estimate for FY '23 ticked up very slightly, as you can see in today's updated interest expense guidance. Over 75% of our total $20 billion gross debt balance is at a fixed rate through a combination of fixed rate notes and interest rate caps and swaps through 2025. This provides us adequate cushion against any rise in rates at least in the immediate term. Going forward, we expect to continue both proactively and prudently managing our debt maturity stacks. Practically for us, this means pushing out any near-term maturities well in advance of the final maturity date and then also utilizing hedging instruments where we can in order to lock in the cash interest costs. As we sit here today from an overall cash liquidity and balance sheet standpoint, we think we remain in good position with adequate flexibility to pursue M&A or return cash to our shareholders via share buybacks or dividends during fiscal '23. With that, I'll turn it back to the operator to kick off the Q&A. I would expect much like flight activity that it should keep trending upwards. That's our expectation. We'll see if that plays out. We've historically not given book-to-bills across the end markets, Noah, but I think it's pretty healthy growth that supports the revised guidance on revenue for today. So we feel good about hitting that healthy growth and healthy outperformance and really positive book-to-bill ratios across the end markets. Okay. And just last one. The EBITDA guidance revision is the same as revenue at the midpoint. So it implies a 100% incremental on the additional revenue. I know it's not that simple. But can you just walk me through how the EBITDA is able to be the same as the revenue in the guidance revision? Yes. I think, Noah, what you're seeing there is just the upsides mainly in the commercial aftermarket space, which is our most profitable end market of the 3. And then separately, some better cost performance, right? You're not typically getting 100% drop to your point, but we are doing slightly better on the cost than we expected, but that's what you're seeing there. Kevin, you mentioned that the M&A pipeline is still looking pretty active. I was wondering if you're seeing any sign of these higher interest rates starting to impact the appetite of financial buyers? Yes. I think we've seen some impact over the last 6 months or so. I think you see that in a general lack of activity, although we've been busy evaluating different targets. I think we see that changing, though, as there seems to be some important properties coming to market in the next 6 months or so, I think this should change. So we remain relatively optimistic as always. But I think that gives you some indication of what we're looking at in the future. And one for Mike in related topic actually. You mentioned there's some debt due in 2025. If you were to refinance that today, what sort of interest rate would you expect to pay on that? It's hard to say, something like what we got on the December refi, we just did a month or 2 ago. The interest rate ticked up by about 1.0% from LIBOR plus 225 to SOFR plus 325, and debt markets are a little bit better given what's come out on inflation and the Fed rate move since that December rate. So maybe you do a little bit better than that, but it's hard to say that's just a guess. Kevin, I wanted to get your thoughts on M&A outside of A&D. Is that something you'd ever do? And if you were to do something outside of A&D, should we expect you to start small? Or could we see you start with something bigger? Well, we don't like to speculate on that. We have studied what it would look like to acquire something outside of M&A -- of A&D, but we think it's best to stay focused on aerospace. There are still so many great opportunities and a number of them coming up. Like I said, in the next 6 months that keep us very focused on the pure-play aerospace and defense. For intellectual reasons and also because we may have to do one day in the distant future, we do look at other areas, but none of them have appeared interesting enough to overshadow our desire to keep growing in aerospace and defense. Great. That's really helpful. And then for Mike, you showed some really good leverage on SG&A this quarter. I think your sales were up 17%, but SG&A was actually down. So curious if you could outline a bit what the cost mitigation efforts are that you're running there and then how SG&A might trend as we move throughout the year? Yes. We really look at the EBITDA line historically. We've not gone back and looked and commented specifically on gross profit versus SG&A trends just because of the accounting puts and takes there. And as we think about forecasting for the year, we really look at EBITDA as defined ratio and feel good about hitting the 50.5% or maybe slightly better than we gave the guidance for today. And it's hard to comment specifically where SG&A could go for the balance of the year on a quarterly basis. Yes. I would just add, I think, in general, as we've had and we've performed in past downturns in the uptick. We did a lot of heavy lifting with restructuring as a result of the COVID pandemic and the teams have done a nice job managing to the lower cost structure and supporting the additional demand. And I think we'll continue to do so throughout the year. This is Josh Corn on for David. Working capital was fairly neutral in Q1. Do you still see the $150 million drag for the year? We do. I mean, as we come back to pre-COVID levels, that's going to go in over the course of the year. It's kind of lumpy in how it happens and the progression and forecasting is tough, but we do expect that amount to go back in. And it looks like overall aftermarket revenues were back pretty much to pre-pandemic levels. Can you give us a sense of where volumes are? I think we're still 20% to maybe 30% off in volumes. There is still a lot of regions, as Jorge reviewed, that have not fully come back. Nice results, and I'm sorry if you missed your opening remarks, but just on China, just kind of assumptions around what you expect there just as we get the reopening traffic picking up pretty materially, hopefully, wide-body activity comes back. Just remind us kind of the mix that we should be thinking about with China and just how you kind of incorporated that in your forecast? Sure. I'll take that one. From our perspective, we're still in the early innings of China opening up, obviously, this past month. Our teams, as they always do, do a bottoms-up analysis and planning process as we enter any fiscal year. And there was some recovery expected baked into our forecast and our plan. We'll see how it plays out. Generally, we don't have and we don't track specific regions. We think we're fleet weighted. And obviously, it's a big market. So hopefully, that will be helpful as we progress throughout the year. I guess just a follow-up quickly. On just the wide-body activity, could you make a comment, Jorge, just on what you're seeing regarding some of the airlines behavior on the wide-body? Yes. I don't think we've seen much shift. Again, the opening for China international travel is pretty new. You would logically expect the wide-body usage to improve given those types of routes. But we're still, again, in the early innings of this. In the past, you've sometimes given color on discretionary versus nondiscretionary aftermarket demand. Any color there or by channel distribution versus direct? Yes. I think most of our revenues are on direct sales. In general, we're seeing good strength and good recovery across all of the individual submarkets. And on the discretionary versus nondiscretionary point, we think consistent with what we've said in the past, we're mostly nondiscretionary when it comes to the commercial aftermarket bucket. Okay. And just curious what you're seeing in terms of inflation this year from your suppliers? What if -- do you have a dollar value you could give to us and how -- what you're doing to offset it with pricing? Yes. I don't have a specific dollar value to give you. In general, we really focus on productivity. We are seeing inflationary pressures from the supply chains. We've got all of our teams have individual decentralized procurement organizations that are doing a nice job working with the supply chain, trying to minimize the level of inflation, and we continue to work the productivity to offset that, and you're seeing that flow through in terms of the lower cost structures. I wonder if you could elaborate the comment, you could see a further upward revision in the guidance as we go through the year. How much of that kind of uncertainty, is China versus kind of OE build rates or sort of -- I don't know if you can kind of quantify what the biggest buckets of that uncertainty could be? I think it's probably a big piece from China. But clearly, OEM is not performing where it was prior to the COVID outbreak. So there is room really in all of the market segments for improvement. Okay. Got it. And then I guess on your cash balance, it's kind of come down from where it was during COVID, but still higher than what we saw a few years ago. How much higher should we expect you to kind of leave that just so you have kind of the optionality in case a deal comes through or something like that? Yes. We're -- obviously, we're sitting on more than we've had historically to your point. We feel good about the M&A pipeline, as Kevin said, and what's coming, we do have far more than we need to operationally run the business, but it's something we think about quite a bit just in terms of the capital allocation priorities that Kevin provided and want to make sure we have enough firepower for potential M&A in the current environment. This is Rocco Barbara on for Seth. Now that leverage is in the 6x range that has been stated in the past to be the general ballpark range for the company, how do you think about new acquisitions and/or capital deployment moving forward? Also where would you consider returning cash again? Yes. It's hard to say exactly. Like I just mentioned, we're always looking at the capital deployment options, right? We're doing that today. We do it quite a bit, obviously, monthly, and we want to be strategic with our capital and make sure we have enough at all times for M&A if it comes. And then also, it's the shareholders' capital. So we want to be efficient with it. And if we don't find a use for it, give it back. With regard to the leverage ratio, we are at about 6x which is historically where we were in a lower interest rate environment. I think we're -- as I mentioned, we feel comfortable where we are today at the 6x level and given the benefit of the hedges. It's hard to say if we tick up from here if we went and found a good acquisition candidate and use a little bit of debt, you could always do that, though you'd then be adding EBITDA. So I think it's safe to say going forward, given that we have the hedges and also that our interest rate hasn't moved much because of those, it's probably likely that we stay sort of at the 6x ballpark with some movement this way or that way, consistent with the last 5 years of history or so. But no real material change with the approach to leverage is expected. Great. Then as a quick follow-up. You had mentioned earlier that you expect EBITDA as defined margin to kind of expand as we go through this year. Should we be expecting that expansion to continue in the out years? Or are we approaching a range where the margin will begin to plateau? We are still navigating 2023. We'll give guidance on '24 and beyond when it's appropriate. But obviously, our model is to keep, keep expanding, keep improving our business. I kind of wanted to take a look back at the supply chain. Obviously, there's a lot of financial stress in the lower tiers. Do you guys see that as a room for opportunity when it comes to M&A? Just kind of wanted to gauge your outlook on that. Not really. We don't look to vertically integrate. We look to acquire phenomenal aerospace and defense businesses that we can further improve. Buying parts of the supply chain vertically integrating usually doesn't meet our criteria for highly engineered, unique aerospace components with aftermarket content, and we like to stay very disciplined in that approach. That's been the secret to our success, I think, in our M&A culture. Just wanted to ask, how are you managing through the current labor market environment? Has attrition been manageable? Do you need additional hires to meet the growth you're anticipating this year? Or have there been any challenges related to productivity? Yes, I'll take that. I think generally, the teams have done a really nice job. We continue to focus on CapEx and productivity. Over the last couple of years, we've been able to invest in the business, and find different automation opportunities to take labor out of the process here and there. I think in general, the labor market conditions have been improving over the last couple of months. Most teams have plans in place to support potential OE production rate increases as we're all hoping will occur. So I don't see any significant issues. And I'd say, in general terms, it's probably improved a little bit the last couple of months. Thank you all for joining us today. This concludes today's call. We appreciate your time and have a good rest of your day.

EarningCall_354

Thank you, operator. Good afternoon. And thank you for joining us today for ASGN's fourth quarter and full year 2022 conference call. With me are Ted Hanson, Chief Executive Officer; Rand Blazer, President; and Marie Perry, Chief Financial Officer. Before we get started, I would like to remind everyone that our commentary contains forward-looking statements. Although we believe these statements are reasonable, they are subject to risks and uncertainties. And as such, our actual results could differ materially from those statements. Certain of these risks and uncertainties are described in today's press release and in our SEC filings. We do not assume any obligation to update statements made on this call. For your convenience, our prepared remarks and supplemental materials can be found in the Investor Relations section of our Web site at investors.asgn.com. Please also note that on this call, we will be referencing certain non-GAAP measures, such as adjusted EBITDA, adjusted net income and free cash flow. These non-GAAP measures are intended to supplement the comparable GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in today's press release. Thank you, Kimberly, and thank you for joining ASGN's fourth quarter 2022 earnings call. As we kick off 2023, I'm pleased to report that the past year represented another top line record for ASGN. Our results for the fourth quarter and full year 2022 are indicative of the continued demand for IT services and solutions in the commercial and government end markets we serve. I want to sincerely thank our entire team for your continued efforts, which are the reason ASGN is the leader we are today. We embarked upon the new year positioned exactly where we want to be, with a great team in place, strong balance sheet and proven operational strategy. After a strong fourth quarter that surpassed our revenue expectations, full year revenues of approximately $4.6 billion were up 14.3% year-over-year and represented a new company record. Included in the annual revenues were $2.1 billion from Commercial and Federal IT consulting. On an organic basis, revenues improved 10.3% versus the prior 12 months. The Commercial segment, our largest segment, represented $3.4 billion or 75% of total revenues for 2022, while the Federal Government segment comprised the remaining $1.1 billion or 25% of revenues. From a profitability perspective, adjusted EBITDA for the year improved 15.8% as compared to 2021 at a margin of 12.2%. These results put us on track to achieve our three year financial targets laid out in September of 2021. As will be apparent in our segment commentary today, ASGN's business has hit a positive inflection point, with IT consulting services revenues representing 49% of total revenues in Q4. We are now quickly approaching 50% of our total revenues derived from high end, higher margin consulting work. This movement up the pyramid will remain our focus. With that as a background, let's review Q4. Our Commercial segment, which predominantly services large enterprises and Fortune 1000 companies had another solid quarter driven largely by growth in consulting revenues. Segment revenues increased 7.8% over Q4 of last year on a difficult comparison. Apex Systems, our largest division, accounted for 84.9% of the Commercial segment's revenues with top and retail accounts, both achieving double digit growth rates for the quarter. As expected, creative digital marketing and permanent placement revenues experienced year-over-year declines compared with their high growth rates in the prior year period. From an industry perspective, three out of our five commercial segment industry verticals achieved double digit revenue growth year-over-year, including the technology, media and telecom industry, consumer and industrial industries and the healthcare industry. The financial services industry vertical achieved mid single digit growth year-over-year while business and government services declined low single digits. Growth in technology, media and telecommunications or TMT industry was again led by double digit growth across telecommunications as well as media and entertainment accounts. Progress in our commercial and industrial accounts reflected growth across all sectors as compared to the fourth quarter of 2021 with the exception of materials. In particular, we achieved double digit year-over-year growth in energy and consumer staples. The healthcare industry revenues also grew double digits, driven by provider accounts. Financial Services had solid performance in banking with the largest growth year-over-year amongst our fintech and wealth management accounts. Finally, our business and government services vertical saw a slight decline for the quarter year-over-year. Within this vertical, we achieved mid single digit growth in aerospace and defense accounts, which was offset by a decline amongst our business services accounts. Our consulting offerings also remain an important source of the value we provide clients and for the fourth quarter, commercial consulting revenues increased 37.8% year-over-year and up 25.7% organically. Bookings, which totaled $299.8 million also increased and were up 33.3% year-over-year. This translates into a book-to-bill of roughly 1.2:1 on a trailing 12 month basis. ASGN continues to be favored by our clients in the consulting space due to our intimate relationships, which span decades, our solutions portfolio, which continues to expand and our solutions delivery model, which enables us to meet our clients' demands with the necessary skilled workforce at economical price points. We continue to solidify our role as a go to player for commercial IT consulting services and in 2022, increased our Fortune 1000 customer count by 44% year-over-year within Apex Systems as we actively engage long term IT staffing customers into consulting customers as well. Let's speak about some of our commercial consulting wins during the quarter, beginning with our work in ServiceNow through our GlideFast acquisition. In the first six months, as part of ASGN, GlideFast has driven 23 net new wins for Apex Systems, while at the same time, continues to actively service its existing client base. As an additional benefit, GlideFast customers are beginning to embrace Apex Systems’ other solution strength as well. Our clients remain pleased with the work the GlideFast team has been providing. And at the end of January, GlideFast was recognized as the 2023 ServiceNow Americas Elite Segment Partner of the Year for achieving overall excellence in certification and revenue growth. Reviewing our broader consulting work, during the fourth quarter, we won two data and analytics contracts. The first contract was with a large national banking institution for whom Apex Systems has been expanding its scope of work for the past three years. Now as a part of our new contract, we will help our clients accelerate its growth through process improvements and the development of security and architecture frameworks surrounding their co-branded credit card operations. In addition, we won a second data and analytics contract with a large energy company, a new customer with whom Apex Systems is partnering to assist in the migration and modernization of its data analytics platform in the cloud. This project will enable our clients to have more reliability in their processes as well as to optimize their database. Also, along the lines of cloud implementations, we were very pleased to win a consulting contract with a large regional healthcare provider during the fourth quarter. This healthcare company will be conducting a cloud ERP implementation in 2023 that covers its finance, supply chain, human resources and payroll departments. Let's now turn to our Federal Government segment, which provides mission critical solutions to the Department of Defense, the intelligence community and federal civilian agencies. Federal segment revenues for the quarter were up 13.3% compared to the fourth quarter of 2021, driven by a combination of organic growth, license revenues and the impact of our recent Iron Vine acquisition. New contract awards for the quarter were approximately $172 million, which translates to a book-to-bill of 0.9:1 on a trailing 12 month basis. Contract backlog was $3.3 billion at the end of the fourth quarter, or a healthy coverage ratio of 2.9 times, the segment's trailing 12 month revenues. Our pipeline of opportunities is at an all time high, an indication that our government segment is well positioned to benefit from the government's new budget priorities. The recently passed federal omnibus bill for 2023 is 10% higher than that of 2022, including an additional 16% allocated toward the Department of Defense, an incremental 6% allocated toward the Department of Homeland Security and a 20% increase in budget for the Department of Veteran Affairs as compared to the prior year budget. These three agencies are a few of the governmental agencies in which ECS continues to win contracts. So let me provide some examples of work won during the past quarter. In the fourth quarter, we secured a new contract providing the Air Force with open source intelligence or [OSINT] analytic tools and training. ECS provides analysts, operators and commercially available [OSINT] tools to the Air Force, which are integrated specifically to meet the department's mission. ECS also began to execute on a sizable amount of new funding for innovative cloud technology applications that help accelerate AI/ML activities and smart sensor work for the Department of Defense in the US and overseas. Speaking of the DoD, in the fourth quarter, ECS won a new contract with the Defense Manpower datacenter to provide full enterprise deployment of ServiceNow. This contract is an example of our ServiceNow capabilities in our federal government segment, which we gained through the 2020 acquisition of ISM. Lastly, our acquisition of Iron Vine is progressing as planned. The Iron Vine team of cybersecurity experts is now fully integrated into ECS and actively pitching new business together. Over the past three months, Iron Vine and ECS have begun to pursue multiple large scale cybersecurity deals leveraging the full capabilities of both teams. With that, I will turn the call over to Marie Perry, our CFO, to discuss the fourth quarter results and our first quarter 2023 guidance. Thanks, Ted. It's great to speak with everyone again. For the fourth quarter, revenues were $1.2 billion, up 9.2% year-over-year on an as reported basis. Excluding $47.3 million from businesses acquired in the past 12 months and on a same billable day basis, revenue growth was 6.4%. Revenues for the quarter were above the high end of our guidance estimates with both segments contributing to the overperformance and included $7.7 million in license revenues on a federal contract that were not included in our estimates. Now let's turn to the segments. Revenue from our Commercial segment were $852.2 million, up 7.8% as reported and 4.9% organically on difficult year-over-year comparisons. Revenues from commercial consulting, the largest of our high margin revenue streams, were $264.1 million, up 37.8% year-over-year. Excluding the contribution of $23.2 million from GlideFast, consulting services revenue improved 25.7% year-over-year. Revenues from our Federal Government segment were $298.2 million, up 13.3% year-over-year. Excluding the contribution from Iron Vine of $24.1 million, revenues for the segment increased 4.1%. Moving on to margins. On a consolidated basis, gross margin was 29.6%, down 20 basis points over the fourth quarter of last year. The slight compression in gross margin was mainly related to business mix, including a slightly higher mix of Federal revenues, which carry lower gross margin than Commercial revenues and the expected decline in the mix of permanent placement revenues, which declined 90 basis points as a percentage of total revenues year-over-year. Gross margin from the Commercial segment was 32.2%, down 30 basis points year-over-year due to less contribution from permanent placement work as noted. By contrast, gross margin for the Federal Government segment was 22.1%, up 50 basis points year-over-year, primarily due to the contribution from Iron Vine. SG&A expenses for the fourth quarter of 2022 were $229.9 million, up 13.6% year-over-year. This increase in expense is commensurate with the growth in the business and also reflects investment in headcount and technology to support future growth. SG&A expenses also included $1.5 million in acquisition, integration and strategic planning expenses that we do not include in our guidance estimates. Excluding these expenses, SG&A is within our guidance estimates for the fourth quarter. As expected, interest expense increased related to rising interest rates, which impact roughly half of our debt outstanding. Amortization of intangible assets was higher due to our recent acquisitions. Income from continuing operations was $55.6 million and adjusted EBITDA margin was 11.5%, both are within our guidance estimates for the quarter. At quarter end, cash and cash equivalents were $70.3 million and we had $31.5 million outstanding on our $460 million revolver, which was increased during the quarter from its previous commitment level of $250 million. Free cash flow for the year totaled $270.3 million, an improvement of 9.5% over 2021. We also deployed $53.8 million on repurchases of approximately 621,000 shares of the company's common stock during the fourth quarter. For the full year, we repurchased 2.8 million shares for a total of $281.4 million. Approximately $313.9 million remained available at year end for the repurchases of shares under the Board's prior authorization. Turning to guidance. Our financial estimates for the first quarter of 2023 are set forth in the earnings release and supplemental materials. These estimates are based on our current production trends, assume 63 billable days in the first quarter, which is three days more than the fourth quarter of 2022 but consistent with our Q1 2022, and include an estimated revenue contribution of $54 million from acquisitions made after Q4 of 2021. It is also important to keep in mind that the first quarter faces a tough comparison to the first quarter of 2022, in which both revenues and margins outperformed their traditional seasonality. In addition, the payroll tax reset occurs at the beginning of every year, absent the first quarter of 2022, when the impact of the payroll tax on margins was masked by the outperformance of permanent placement revenues and lower T&E expense coming out of the pandemic. Historically, ASGN's adjusted EBITDA margin has declined each year when moving from the fourth quarter to the first quarter due to the payroll tax reset. With that background, for the first quarter, we are estimating revenues of $1.140 billion to $1.160 billion, an implied revenue growth rate of 4.5% to 6.3% on a same number of billable days and a difficult comparable. We are estimating net income of $51.2 million to $54.8 million and adjusted EBITDA of $128.5 million to $133.5 million. We are expecting growth and adjusted EBITDA margins to decline sequentially from the fourth quarter of 2022 to the first quarter of 2023, primarily due to previously mentioned payroll tax reset. We do, however, expect to benefit from improved operating leverage over time. Thanks, Marie. 2022 was another record year of performance for ASGN. Our fourth quarter and full year results are an indication that demand across the commercial and government end markets remain solid. On the commercial side, with a trailing 12 month book to bill of over 1.2:1 portends well for the current year. Nevertheless, commercial market demand did moderate somewhat from the third to the fourth quarter. In the government space, the new federal budget, combined with our strong pipeline of work, which remains at an all time high, opens up an abundance of opportunities. We remain aware of the developing market conditions. And should macro conditions worsen and we find ourselves in a more difficult position than we are experiencing today, I am very confident that our business is well prepared to continue to succeed. Importantly, we have a number of automatic stabilizers in place, a strong and diversified US focused customer base, countercyclical federal government work and a variable cost structure that supports our continued strong free cash flow generation and margins. Macroeconomic conditions are naturally outside of our control. What is in our control, however, is the quality of service we provide, the high end talent we source, the solutions we offer and the strategic positioning we maintain. When it comes to those factors, ASGN is in control. After a record year performance that has us quickly approaching the inflection point of 50% IT consulting revenues, our company's future is bright. We are projecting another year of growth and are tracking in the right direction to achieve our three year targets. Operator? It's great to hear that you're progressing well towards the three year targets. It does feel like I think it was maybe September of 2021 feels like a long time ago at this point. So my question is, do you feel like there was perhaps some buffer included when you laid out those expectations for a changing economy, or how are you considering that as you kind of look to finish out that three year time line that you put out there? If you think about that November -- I think it was September of '21 time frame when we put the targets out there, I think they were responsible targets, we finished that year stronger and so we were naturally ahead just a bit when we came into the first year of the plan. I think the second thing is, obviously, we've gotten better organic growth in 2022 than we programmed into the model, and we're about on pace as it relates to M&A for the first year. So I think we'll figure out what we get in this particular year. But I think being well ahead on an organic basis and also being on pace from an M&A standpoint here, I think we feel like we're still tracking towards the targets that we put out there. One thing I'll add too -- Maggie, one thing I'll add on the margin side, which is an important thing here. I mean, kind of leading up into this, we continue to see kind of incremental improvements in margin just based on the mix of business where consulting services and commercial brings us much higher margin than the legacy part of our business. And so that's a proof point here that, that continues to work. And I know, Marie, you had mentioned maybe some operating leverage that you're expecting to materialize. I think you referred to it in maybe the near term. Can you kind of talk about the extent of that, that you expect to materialize maybe over the course of the next year and the cadence over this year and then out into the future as well? I think what we wanted to really highlight there was -- and it was really related to the SG&A expenses. And so when you look at SG&A, the noncash SG&A, we ended as a percent of revenue at 18.1%, 18% in Q1. And when you look at the guidance for the midpoint, it's around the same as well. And so the idea that these SG&A expenses are really to support future growth. And so the idea is, as we kind of go throughout the year, those expenses would help with the operating leverage. And I would say coming into the -- through the second half of the year, the market demand and opportunity was there, and we stayed invested in terms of headcount and we'll have to monitor that going forward, but we certainly have some productivity to ring out of what we've invested in here in the second half of 2022. And again, that's just a part of who we are. We're always each year gaining in productivity, whether it's in the IT staffing or the solutions part of our business. And then you have the mix of consulting working together with that to continue to lever up our margins. And I think that's why we're in a good place here as we move towards the targets that we laid out 18 months ago. I was hoping you could talk a little bit of the moderation in demand on the Commercial side between 3Q and 4Q and what you're hearing from customers and kind of how that factors into your outlook for 2023 for the full year as well as your first quarter guide? Well, I think you can see that we're back to the typical seasonality of the business. And so coming from the third quarter to the fourth quarter this year, as we saw in the pre-COVID years, you begin to kind of level off partway through the fourth quarter and then you have the holidays and everything kind of set in. So it's natural for us to kind of moderate down just a bit though. So the one thing I'd like to point out is we're back to that, if you will. The COVID of the years of '20 into '21 and '22, where we were up, up and up every quarter, and I think is part of what we're speaking to there in terms of the sequential moderation. And then, Rand, do you want to talk about it in terms of marketplace and customers. I mean, that's the $60 million question, right? And we say every quarter that we read the newspapers like our clients do, and we hear a lot about what's going on in the economy. But Gartner put out a report today that said overall IT spending was up in '22 over the previous year and CIO responses have been that they expect to continue to invest in IT. And so when we look at our consulting unit and the bookings and when we look at our relationships in the staffing side and even in the government side, we see a lot of people focused on trying to get IT projects underway and completed in order to improve multiple things, worker productivity, big part of it. You can see a lot of work still around the cloud. You can see that with Microsoft and Amazon and their sales. ServiceNow, we believe, has been a big transformational tool to help with our commercial clients. When you -- Ted pointed out, we grew in three of the five industries we report double digit as we go forward. One of the strengths we have inside of ASGN is there's always going to be a sector, if you will, that's not performing, but there are other sectors that are. So as you can expect, our energy, and as Ted pointed out, energy, transportation, airlines, consumer material, all that's still growing pretty strongly. We watch information technology clients, our technology clients. Obviously, big banks have better revenue opportunity with higher interest rates. So they continue to grow and spend. So I think we're watching all the parts of the economy to see what's up, what's down. And I think for the most part, we see what you can see in the press that there are parts of the economy they're doing very well. And there are parts that are a little bit more tenuous in terms of our solution offerings, highly in cloud, highly in cybersecurity, highly in digital transformation, it's kind of the right place to be in support of our clients. So I don't know if that gave you enough of a flavor there. And as a follow-up [perm] was down mid to high single this quarter. How much of that do you think is a reflection of the economy and potentially a tougher 2023 environment versus normalization given that with the labor market kind of where it is. Can you help us kind of think about that? I think that one part of that is just incredibly difficult comps from the fourth quarter of last year. I mean on a commercial basis, we were up 24% year-over-year in the fourth quarter of '21, and those parts of our business that you mentioned were up even more. So I think that, that right now is the main thing. And then I think, naturally, you have, as Rand pointed out, you have clients being cautious. So they're watching, they've slowed down some of those activities on permanent placement that's natural that happens first. We called that out in our guidance as we built our guidance for the fourth quarter. So I just think it's a little bit of getting that cautiousness in the world and it's a little bit what you said, which is in the labor market that's how, how these things react as you get into a difficult business cycle. In the commercial consulting, IT consulting area, how has your ability to make acquisitions and then based on the customer kind of proximity and relationship accelerate growth? And if you could just kind of maybe give us a sense for your recent acquisitions and the experience versus your acquisition two or three years ago when everything was very vibrant and growth rates were even higher? Tobey, I'm going to let Rand answer this one. But if I understood you right, I think you're talking about the synergy part of this, which is Apex and GlideFast playing together versus some of our prior acquisitions. Rand? I think Ted did in his remarks, feature three of our acquisitions, the GlideFast, the Iron Vine and then the healthcare ERP job, which is an Infor technology, which is another acquisition we did just prior to GlideFast. So I'd say our acquisitions are doing very well. From what he showed you in both GlideFast and Iron Vine, the ability to bring the Apex client to the table for GlideFast support in ServiceNow technology has been better than we could have even expected. We've only had them for six months, so I guess, when we finished the fourth quarter. And they achieved their numbers with their client base, but we've generated an awful lot of bookings and pipeline out of the Apex client base. So Tobey, that's going very well. Iron Vine same thing. We're in joint bids. I think Ted also featured another one of the federal acquisitions we made, that also has a ServiceNow capability, which we've been winning work in ECS with them to some of the ECS client base. So we expected that we're going to do that, that's part of, I think, the strength of having an account base that we do, that we can bring them to the table. And the results are, I think, very featured in the words that Ted used previously. And I think, Rand -- I mean, Tobey, that's exactly right. And as Rand said, the GlideFast has certainly had a pace here in terms of what we would have thought from a revenue synergy basis, together with Apex, which is good to see. Is this a playbook that you're comfortable repeating this year in a potentially softer environment where new project starts may not be occurring at the same pace? Or is it something where you'd feel more comfortable pausing for a bit to get on more solid footing with even stronger visibility before replicating? Both of these businesses as well as all of our other acquisitions are fully integrated. So I think readiness is not an issue. It's more situational around watching areas of the demand here and are there M&A opportunities that support that and then just where our things. So it's a little tough to look for Tobey and say we would or we wouldn't. I think we're open minded. We're working pipeline. We're looking, We're thinking. Are people going to spend more on cybersecurity this year than I did last? Absolutely. Are there going to be more services on moving things to the cloud and continuing the march to get all your applications into the cloud? Absolutely. Are there certain enterprise software solutions that are needed in the digital transformation game, and this is not about one quarter or one year, it's a multiyear kind of effort, and our clients are still investing? Absolutely. So I think we have to watch those things and then have a an opportunity, if you will, to find the right partner. I mean, as Rand said, very eloquently many times, it took us two years to kind of identify the opportunity, not in ServiceNow, we knew that, but to find GlideFast. And good thing we waited. We really found the right partner in that. So we'll have to play it as it comes. Ted, could I add to that -- and Tobey, you'll anticipate what I'm going to say. But we're very positive about this play in our playbook, right? You can see that from the results. And so as Ted said, there's other ways to also unfold things, but this one has worked and is working again and again for us. So it's obviously part of our playbook. And if I could ask one last question about ECS. The trailing book to bill 0.9. Are you comfortable -- is that indicative of growth? Because you seem to be growing and maybe getting things midstream or drawing down on a backlog? Kind of help us square that sub 1 book to bill and whatever sort of growth outlook or momentum you see in the government side of the business. I think it's a little bit of a squirrelly 2022 for us at ECS and together with other peers in the GovCon space. I mean we had two quarters where -- well, two quarters where you saw it coming, but you just couldn't get the procurement wheels running fast enough to get stuff out on the Street. Finally, in the third quarter, we saw a nice push of awards at the end of the third quarter and then hoping to get some more in the fourth. But I think what we're seeing in the fourth quarter and is just, again, a little bit of stickiness here. So there's a lot of focus in the GovCon industry around procurement, the cycle, encouraging things to move a little bit faster. And so I think that's what's mostly behind this, Tobey. I would say our burn rates on our backlog are there's not anything abnormal there. We are picking stuff up as we go, that's not abnormal. It's just getting back to the kind of more normal pace of getting the budget dollars out there distributed and available for us to book and create revenues. I wanted to start on the commercial consulting side. The numbers you've been putting up have been really strong, a lot stronger than a lot of the other IT services companies out there. Are you seeing any kind of slowdown, are clients taking longer to make decisions. Some of the other companies have been talking about that. I think that's fair, Jeff. I mean, I think when we say that the pace of growth moderating from the third into the fourth, part of that is behind it. We're definitely finding tough comps. So I always point that out. I mean that's a thing right now. But I think, yes, clients are -- I mean, look, on the commercial consulting side, we booked $300 million of new opportunity in the last quarter. Some of that is extensions of current work and some of that is numeric one, a balance always. But I think that's just indicative here. The clients are sticking with it, if you will. And we'll have to see where that goes. And I think as it relates to January, our bookings in that area were as we would expect for the quarter and for the guide that we put out there. So I think, again, that's just another data point that tells us that clients are watching. They're wary, but they need to get things done. They're not going to pull something off the shelf here across the board, if you will. And so that gives us confidence that there's going to -- that it's going to be a marketplace we can continue to work in. And then if I can just shift gears, can we talk about your internal headcount plans by the three major lines of businesses, Simon Consulting and Federal Government for this year? Well, I think -- look, you're always investing where you see there's opportunity, right? And so naturally, we see opportunity in the IT commercial consulting and so we're investing into that. We did in the second half of the year and we continue to do that. We have an improving market in the federal space. And so we're continuing to invest into that opportunity. And then as it relates to the legacy part of the business, the IT staffing part of the business, it's an industry by industry and an account by account kind of analysis. And so we've got kind of always kind of watch where we're allocating headcount in. But again, I think if you just look at our SG&A, there's opportunity through the second half in the fourth quarter, and so we stuck with it. And here we are sticking with it because we see the same thing, and we'll have to monitor it as we go. I'd like to start with a question about the consulting business. Can you maybe talk about the level of penetration that you have in terms of overlap with the staffing clients at this point? And in terms of some of the new project wins or the accelerated growth rates that you've seen over the past couple of years to where you are at this point. Is there any cannibalism occurring, or how should we think about that dynamic with the staffing business? Well, first of all, I think, Ted, in your comments, you commented that we're growing with greater penetration of our staffing clients into consulting. So I think we reported in the past, we were in a like a 20% penetration of staffing accounts for consulting services, that number continues to go up. And we focused on the Fortune 1000 now as opposed to the 500, we've expanded out and we are definitely getting more penetration into that client base, that staffing client base. In terms of cannibalization, Surinder, I understand the way you're asking the question. I don't think that's what's going on. I think clients are getting smarter at how they buy things. So do I need a body or do I need a work product? Do I -- what's the best way for me to get this particular problem solved. And Jeff, on the previous call, had asked about workforce. We don't have a staffing workforce and a consulting workforce. We have a group of account managers that service all of our accounts, be it staffing or consultative services. And they're supported by the technical muscle that we have in our consulting unit and supported by all of our recruiters. So when we're approaching a client, we're approaching the client from the point of view of, what are you trying to accomplish, how can we best accomplish that? And that will end up with a work package, it could be a staffing work package or could be a consultative work package. And it's really the best way to solve the client's ultimate problem and gives the client credit, they're sitting back saying, what is the best way for me to get results out of this piece of work. So I see it as a maturing of the industry and the maturing of our role in this industry. We're not a 100 year old consulting business like we were a KPMG or Accenture is that sort of thing. So we're 10 years into it, we're getting smarter with the client, and we're having them sit down. And that's why we always kind of know what they're thinking about and what they're trying to accomplish. So does that answer your question, does that give you a feel for… Yes, I think that's helpful. Just as a point of clarification, just following up on the 20% penetration comment. Is the idea that is there a number that maybe given you have clients of all sorts of different sizes, consulting, I assume, tends to be bigger projects. So is there -- maybe you can get to a 50% penetration rate? Or if that was kind of the context of where we are in that journey, I realize there's still a long road ahead, but just some sort of idea of what the current… Ted, if I want, I think 20% was the number we put out many, many quarters ago. And I will tell you, we're north of that number now. And I think the goal is why would we stop at 50%, right? Why wouldn't we keep driving? I mean every client, I'm sure there are services we can provide, value we can provide our clients, every one of them. Surinder, you know the procurement process is such with these large enterprise accounts that they have an IT staffing approved vendor opportunity or list and then they have a professional services or consulting. And sometimes as they're knitted together more tightly, sometimes they're dramatically separate, and we're pursuing both. We've been on the IT staffing side, pursuing that vendor opportunity for -- I have lost count of the years, 28 years now or whatever the number is. It only like [indiscernible] for the last 10, are we pursuing this other and we're winning pretty well and there's no reason to stop at a certain number. It's a wide open opportunity. We just have to keep at it. There's clearly room to grow. And by the way, by growing this kind of work, we're improving and increasing the value we bring to the client, helping our own margins, giving our people career opportunities and career path, and our people are trained to think more widespread than just the staffing component, if you will, although, that's still important as well to many of our clients. We want to make sure we pay attention to that as well. And then in terms of a related question here. Any color on maybe the scale at which you're comfortable taking on projects within the consulting business, or are there any revenue concentration elements that we should be aware of? I think, Surinder, we've said in the past, there's this pyramid of services and on the top is architecture. And then below that, you begin to get into applications and the data formats and the datasets and that sort of thing and the implementations. I would say a complicated architecture for a Fortune 500 company, we need to be a little careful, okay? Let Accenture do that, but we can certainly implement, help implement that architecture. And look, most clients have an architecture and they have a path forward. We had our own ideas on digital transformation of different industries. We've shared that with the clients. So I think we have to be careful we don't get over our skis, if you will, in a piece of work or in a technology that we're not familiar with. But we can also ramp up pretty quickly, because we have a recruiting force second to none, right, in which we can find talent and build that talent base for the client industry specific. But I think we're also mindful of the risks. So Surinder, the issue, the only thing would keep us is the big risk can we really deliver on that and maybe the architecture level is the area that we would certainly ask ourselves a lot of questions first. And I think it depends on the type of work too, obviously, in ServiceNow, we have that capability. And so we're very comfortable in that area around digital, creating that digital enterprise layer, as an example and really good on architecture in that. In the Federal business, we're really good on architecture in certain areas, cyber, cloud, our work in AI, machine learning. And so those are areas we're very comfortable. There are others that are just not our sweet spot, and so I think Rand put that exactly right. I put myself back in the queue with just one other follow-up. So last year, you guys gave some framework for full year in terms of margin and sales. And you didn't do it on this call, but I just wanted to ask if there is any sort of I guess, higher level framework you can provide for how you're thinking about the year, or just kind of any help with that. The one thing that we will say around the full year is that we are tracking toward our three year target. And so it's just a great tool to have these three year targets to know kind of where you're going. And so as Ted mentioned earlier, we started out 2022, we ended 2021 stronger, started out 2022 with more organic growth. And so we feel very comfortable with where we're tracking. And so we haven't really changed those three year targets. And we have reached the end of the question-and-answer session. And I'll turn the call back over to Ted Hanson for closing remarks. Thank you. Well, I appreciate everyone's time this evening and interest in ASGN, and we look forward to speaking with you after our first quarter comes to an end and we announce results shortly thereafter. Have a great evening.

EarningCall_355

Ladies and gentlemen, thank you for standing by. Welcome to the SS&C Technologies Fourth Quarter 2022 Earnings Conference Call. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Hi, everyone. Welcome and thank you for joining us for our fourth quarter 2020 earnings call. I am Justine Stone, Investor Relations for SS&C Technologies. With me today is Bill Stone, Chairman and Chief Executive Officer; Rahul Kanwar, President and Chief Operating Officer; and Patrick Pedonti, our Chief Financial Officer. Before we get started, we need to review the safe harbor statement. Please note the various remarks we make today about future expectations, plans and prospects including the financial outlook we provide, constitute forward-looking statements provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of most of our most recent annual report on Form 10-K, which is on file with the SEC and can also be accessed on our website. These forward-looking statements represent our expectations only as of today, February 7, 2023. While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. During today’s call, we will be referring to certain non-GAAP financial measures. A reconciliation of these non-GAAP financial to comparable GAAP financial measures is included in today’s earnings release, which is located in the Investor Relations section of our website at www.ssctech.com. Thanks, Justine, and thanks everyone for joining. Our results for the fourth quarter of $1.339 million in adjusted revenue, up 3.3% and our adjusted diluted earnings per share were $1.16, down 4 -- 9.4%. Adjusted consolidated EBITDA was $518.6 million, third highest in our history, and our EBITDA margin was 38.7%. Our fourth quarter adjusted organic revenue was flat in line with our expectations. For the year, total organic growth was 2%, while our Financial Services organic growth, which is 94% of our revenue was 3.7%. 2022 was a challenging operating environment for SS&C, but we are pleased that with the revenue performance from our software businesses, including Advent, Investment and Institutional Management and as -- and the resiliency of our Alternative Fund Administration and Intralinks business. In 2022, SS&C generated net cash from operating activities of $1.134 billion, including $67 million in deal related expenses. We paid down $166 million in debt in Q4, bringing our consolidated net leverage ratio to 3.4 times and our net secured leverage ratio to 2.4 times, sorry, 2.4 times consolidated EBITDA. This past January, as we were in our quarterly blackout three of our stock buybacks, we paid down debt an additional $101 million. In Q4, we bought back 1.8 million shares from $90.7 million at an average price of $50.14. For the year, we had stock buybacks of $476 million, for purchases of 7.8 million shares at an average price of $61.01. We will continue to allocate about 50% of our cash flow to stock buybacks and about 50% to debt pay down. In December, we acquired Complete Financial Ops, a specialized Colorado-based fund administrator that focuses on private equity and family offices. CFO Fund Services will augment SS&C’s capabilities in servicing venture capital and family office funds and CFO clients will enjoy the same outstanding service backed by SS&C size, scale and comprehensive solutions. We remain methodically opportunistic in our acquisition strategy, valuations have come down more in line with our disciplined strategy and we are evaluating several opportunities. We remain very bullish on our Blue Prism acquisition and we are wrapping our digital workers deployment throughout our business. Thanks, Bill. Q4 results demonstrate the strength of our business amidst a challenging operating environment and highlight our ability to drive margins despite inflationary pressures. We exited 2022 with 38.7% EBITDA margin, up 330 basis points from the low point in Q2. Cost controls, facilities reduction and productivity improvements enabled this quick turnaround. While labor markets remain volatile, we believe Blue Prism’s intelligent automation technology will be an important means to harnessing the productivity of our workforce in 2023 and beyond. As a business unit, Blue Prism continues to grow nicely and exited 2022 with 20% EBITDA margins. We continue to see opportunity in the private credit market, where we are investing in a highly scalable offering combining the strengths of Advent Software products and GlobeOp Services capabilities. A key component will be the build-out of a robust data platform that integrates multiple SS&C technologies, including Geneva, TNR, Precision LM and others. Private credit represents the latest example of SS&C developing technology, expertise and services to address the needs of a very specialized and complex set of fund managers. This is a strategy we have employed effectively and repeatedly as we have built the world’s largest alternatives administration business. I will mention some key deals for Q4. Three existing SS&C clients upgraded to our newest platform, Aloha. We currently have over 30 clients live on Aloha. A $13 billion asset manager partnered with SS&C for fund accounting and reporting functions on their real assets portfolio, this partnership includes lifting out 60 employees in Texas. One of DST’s largest clients expanded their relationship to include more transfer agency operations. A Canadian alternative asset manager chose SS&C for a suite of private equity administration services, including regulatory reporting, treasury services and investor vision citing their need for Canadian and international expertise, as well as scale for future growth. A $75 billion hedge fund chose Geneva for its superior functionality around loan processing and accounting. A Hong Kong-based asset manager chose EMS/OMS as they needed greater asset class coverage, flexibility, third-party integration and compliance functionality. Mine Super managing $12 billion in assets on behalf of 55,000 members became SS&C’s first Australian superannuation client. The partnership will deliver superior digital experiences for members, driving greater member engagement and stronger retirement outcomes. Thanks. The results for the fourth quarter 2022 were GAAP revenues of $1.338 billion, GAAP net income of $207.5 million and diluted EPS of $0.81. Adjusted revenues were $1.391 billion. Adjusted revenue was up 3.3% and adjusted operating income decreased 1.1% and adjusted diluted EPS was $1.16, a 9.4% decrease from Q4 2021. Overall, adjusted revenue increased $42.9 million or 3.3% from Q4 2021. Our acquisitions contributed $72.5 million. Foreign exchange had an unfavorable impact of $28.7 million or 2.2% in the quarter. Adjusted organic revenue was flat on a constant currency basis. We had strength in several product lines, including Alternatives, Institutional and Investment Management and the Intralinks business. That strength was impacted by weakness in our GIDS transfer agency business and Healthcare businesses. Adjusted operating income in the fourth quarter was $502.1 million, a decrease of $5.4 million or 1.1% from Q4 2021. Adjusted operating margins were 37.5% in the fourth quarter of 2022, compared to $39.2 million in the fourth quarter of 2021. Excluding acquisitions, expenses increased 2.6% on a constant currency basis. Acquisitions added $56.7 million in expenses and foreign currency decreased cost by $27.9 million. Our cost structure has been impacted by wage inflation and higher staffing to support our business. Adjusted consolidated EBITDA defined in note three of our earnings release, was $518.6 million or 38.7% of adjusted revenue, a decrease of $4.3 million or 0.8% from Q4 2021. Net interest expense for the quarter was $104.9 million and includes $3.7 million of non-cash amortized financing costs and OID. The average interest rate in the quarter for our amended credit facility including the senior notes was 5.64%, compared to 3.09% in the fourth quarter of 2021. Adjusted net income was $296.6 million and adjusted EPS of $1.16, and the effective tax rate used for adjusted net income was 26%. Diluted shares decreased to $256.4 million from $260.9 million in Q3. Share repurchases and the lower average stock price during the quarter led to the decrease. Fourth quarter -- in the fourth quarter of 2022, we reported GAAP fair value, unrealized gains totaling $68.8 million for investments we made in 2020 and 2021. These gains are excluded from our adjusted financial results. On the balance sheet, we ended the quarter with $440 million of cash and cash equivalents, and $7.1 billion of gross debt. SS&C net debt, which excludes the cash of $134 million at DomaniRx was $6.8 billion as of December 31st. Operating cash flow for the 12 months ended December 2022 was $1.134 billion. It includes the impact of $67 million of Blue Prism post-acquisition transaction costs. Adjusted for the transaction costs, cash flow was $1.21 billion or a decrease of $227 million or 15.9% compared to 2021. Cash flow was impacted by higher interest rates, lower EBITDA, and an increase in receivables, DSO. During the three months ended December 31st, we paid down $166 million of debt and purchased $90.7 million of stock buyback. Highlights for 12 months on the cash flow, we paid $1.36 billion for acquisitions, including Blue Prism, Hubwise, MineralWare, O’Shares and Tier1 and Complete Financial Ops net of cash acquired. Treasury stock buybacks totaled $476 million. We purchase a 7.8 million shares at an average price of $61.01, compared to $487.9 million of treasury stock buyback in 2021. In July, the Board authorized the new stock purchase program up to $1 billion. Program to-date, stock buybacks totaled $305 million for purchases of 5.5 million shares at an average price of $55.78. For the year, we declared and paid dividends of $203 million, compared to $174 million last year, an increase of 16.7%. In 2022, we paid interest of $298 million, compared to $192.5 million in 2021. Income taxes paid this year totaled $281 million, compared to $310 million in 2021. Our accounts receivable DSO was 52.3 days as of December 2022 and that compares to $51.8 million as of September 2022 and 49.5% as of December 2021. Capital expenditures and capitalized software totaled $208 million or 3.9% of adjusted revenue, compared to approximately $137 million in 2021. The spending is predominantly for capitalized software and IT infrastructure. Our LTM consolidated EBITDA, which we use for covenant compliance was $2.010 billion as of December 2022. And based on the net debt of $6.8 billion, our total leverage was 3.4 times and our secured leverage was 2.4 times as of December 31st. On outlook for 2023, I will cover a few assumptions first. We will continue to focus on client services, and we expect our retention rates to continue a range of most recent results. We have assumed foreign currency exchange at the year end 2022 levels. As a result, adjusted organic growth for the year will be between 2% and 6%, and adjusted organic growth for Q1 will be in the range of negative 0.5% and to positive 2.5%. We have assumed interest rates will average approximately 6.35% for the year for our credit facility and senior notes. We expect staff productivity to improve by approximately 5% and we will manage expenses during this period by controlling variable costs to improve our operating margins in the rate of 50 basis points to 150 basis points compared to 2022. We will continue investing in our business long-term in the areas of capital expenditures, product development and sales and marketing. And we will continue allocating free cash flow to both to pay down debt and buy back stock and we have assumed that the tax rate will be approximately 26%. So for the first quarter of 2023, we expect revenue in the range of $1.332 billion to $1.372 billion, adjusted net income in the range of $282 million to $299 million and diluted shares in the range of $156 million to $157 million. For the full year 2023, we expect revenue in the range of $5.45 billion $5.655 billion, adjusted net income in the range of $1.190 billion to $1.285 billion and diluted shares in the range of $455 million to $258.5 million. And for the full year, we expect cash from operating activities to be in the range of $1.275 billion to $1.375 billion. Thanks, Patrick. 2023’s improved operating environment will present more of our growth opportunities for SS&C. We look forward to capitalizing on these opportunities and delivering superior results to our shareholders. Thank you. I’d like to start with a question or two around productivity. Can you maybe talk a little bit about just the digital workers and kind of the efficiencies that you are seeing there? So when you give metrics such as there’s 180 digital workers, does that replace a certain amount of employee hours or how should we think about that and maybe just the kind of the targets that you have for the full year that you laid out relative to last quarter? Yeah. We expect on average conservatively that a digital worker will probably save us $50,000 per digital worker deployed. We are not replacing personnel on a one-for-one basis with digital workers. What we are doing is allowing ourselves to hire less and get more productivity through the deployment of digital workers and then also perhaps not to have -- to hire for some of the attrition. So we look at this as a win-win for our employees, the digital worker tends to take over repetitive tasks, which gives our employees a more interesting job. And then it also is obviously a cost savings and efficiency process for us and we would hope to deploy, I believe, somewhere around 1,500 to -- I think, 1,350 to 2,700 digital workers in 2023. Got it. And then in terms of just what that means for the expense line item, the comment around a 5% improvement in productivity. Also -- so in terms of when we think about the revenue guide, does that mean expenses should be relatively flat year-over-year, just in absolute terms? I think I guess what it implies, and I think, obviously, we have to manage and we are subject to every other just as every other company depending on what inflation is and what’s happening in the labor markets. But other than that, the productivity we expect out of the deployment of digital workers should offset some of the expenses that we would paid for higher salaries and other expenses. Got it. And then just one quick follow-up, in terms of the commentary around the M&A, any additional color that you can provide there in terms of the types of opportunities you are looking at or the scale of opportunities, any color there would be helpful? Yeah. We see a number of dislocations in the fintech space. So there’s going to be opportunities both large and small. And as always, SS&C is a disciplined acquirer, we are also somewhat of a reasonably voracious acquirer when prices are in our disciplined strategy and that’s not 10 times revenue. So we think that the market is moving to where we are, we think that we have lots of productivity opportunities and we think we will be a good home for different types of ops companies we could acquire. Okay. Good evening. Yeah. Hey. Good evening, everyone. Just to follow up on the, I guess, cost and margin question. I think Patrick specifically said 50-basis-point to 150-basis-point margin expansion. Maybe I didn’t hear that right, but if that’s the case. I guess --yeah. So I think it gets you in EBITDA terms to around 39% at the midpoint. Is the cadence of that and I guess we came back into the first quarter, but can you maybe just lay out any sort of seasonality or also if you are taking measures still this year? Is that a glide higher with revenue growth or how should we be thinking about the cadence of margins if you think about the four quarters? Yeah. I think we will have had Blue Prism for a year in the middle of March and we are rapidly deploying digital workers. But the ramp up will be obviously higher as each quarter goes and the savings that we will incur will be heavily weighted probably to Q3 and Q4, just as the use of those digital workers will be full time in those quarters and less so as much in Q1. Okay. Fair enough. And then flipping to the revenue side, I think, 2% to 6% organic, that’s an acceleration clearly from where we were in 2022. So, I mean, anything to point out, any puts and takes, but in particular, I mean, Healthcare obviously, was a big detractor in 2022. So is this now all in the run rate or is it actually a little bit more bleeding or should that business actually start growing again? And then since you just mentioned Blue Prism, I think, last quarter you actually gave the growth rates and now that it’s flipping organic, it would be very helpful to see how the business is doing on an external perspective. So any other comments on organic would be helpful? Thanks. Well, just to answer a few of your questions. I think, Blue Prism turns organic in mid-March, right, of 2023. But if you calculate the revenue growth this past year organically, I think, they have averaged in the mid-teens, maybe a little bit higher and they were about 13% in Q4 and we expect them to be around mid-teens in 2023. I think the -- on the Healthcare side, there will be a little bit of reduction in the revenue reduce. So I think they were down about 20% in 2022 and might be down about 10% in 2023, especially in the first half of the year with the comparables. Okay. So is that still new client losses and should we just expect that, that business doesn’t really grow organically until DomaniRx really kicks in or is it just a holding pattern that clients are in or how are you thinking about Healthcare in general, what’s going on under the hood? …in Healthcare and I think that we have a lot of opportunity. The question is, obviously, is you have to hit those Healthcare systems on renewal dates. So we are cautiously optimistic that Domani is progressing well and we have some talented people working on that and I think that there is not gigantic optimism for 2023, but we think there’s a pretty good ramp we can get to in 2024. Hi. Thank you. Alternative organic growth is holding up fairly well, 4.5% in the quarter. But it looks like private market is growing in the high-teens. So I presume the hedge fund business is it negative growth and maybe if you could speak to the disparity in growth in those two businesses. Sure. I actually think the hedge fund business is slightly positive. You are correct that it’s not -- it’s nowhere near the private markets growth. But we are probably assuming in 2023 and our plan, 2% to 3% growth in the hedge fund side of it and mid-teens or higher in the private markets and that’s what kind of makes the sum of the two. I would say in commentary and specific on the hedge fund side is our sales performance continues to be strong. I think we have continued to see demand for middle office services and some of the additional modules and things that we have rolled out, including GoCentral. We are obviously not benefiting from a ton of inflows in hedge funds now. But as that turns around, we think we will be well positioned because we are taking market share, and in the meantime, the private markets and private credit businesses continue to become bigger parts of this, and so move the growth algorithm higher. Okay. And then a question on the Healthcare business, it seems like it’s the medical business that is sort of you are downsizing and I think that’s a lower margin business relative to the pharmacy. But I guess my question is, with that sort of going down, is it big enough, is it having a positive impact on overall margins or how big is the margin disparity there I guess? But I think Healthcare runs in the high 20s and the rest of the business is running in the high 30s. Is that about right, Rahul? So and it’s about -- I guess about $280 million, $90 million business. So it’s still a substantial business with substantial opportunity and I just think it’s execution and attention, and I think we are putting execution and attention into that space. Hey. Good evening. I had just a couple of follow-ups. There were a couple of larger customers that we talked about through last year. Can you talk about when you expect them to go live this year and then in terms of the couple of lift outs, you talked about the one in Texas, make sure if you talk about the others. But when we should see some of the bigger customers in the conversion backlog hitting and starting to contribute to organic? Yeah. A number of them we think are in the first quarter at the end, I think, primarily in March. Then we have a number of other ones that we would expect to be in the second quarter, and then hopefully, we will be able to with everything that started off and had been signed and closed in 2022 that we would be able to pretty much have them live by the end of the third quarter. So there’s still substantial amount of sold revenue that we have not recognized yet. And I don’t know, Rahul, if you have any more comment on that. No. Bill, I think, that’s exactly right. It’s throughout the course of the year, some in Q1 and Q2, and we get pretty close to full towards the latter half of the year. Okay. And then I think you covered it in part, but I guess, how would you characterize the environment for new business in the fourth quarter, was it basically in line with your expectations, better or worse? And then how do you find customers kind of decision making, their willingness to make decisions here in the first half of 2023, given some of the uncertainties? Well, I think, Pete, that’s right on, right? I mean it’s -- I think there’s people that need to get efficiency. As Rahul said earlier, there’s an awful lot of opportunities in middle office and I think there’s a lot of pressure on our customers to get more efficient. And I think they are finding that maintaining software systems and large staffs of operations and accounting people is not necessarily their core competencies and that’s really our opportunity. And we think we are taking advantage of it and we believe we have the best sales force and that they are executing at a pretty high level. Hey, guys. Good evening. Thanks for taking my questions. It kind of just drill down on organic growth. This has been asked a few different ways. But if you could just talk about your visibility in terms of the acceleration in growth as your progresses, part of it is obviously Blue Prism coming to the mix and then some of it is go-lives, which you have a pretty good sense, perhaps even a better sense now that implementation resources are a little bit more stable. But maybe talk through if there’s any other drivers we should think about in terms of your confidence for achieving the organic growth outlook for this year? And then anything about just embedded macro assumptions goes back to other questions that have been asked, but any other color there would be helpful? Thank you. Yeah. We have been implementing price increases over the last couple of years and that’s beginning to bring fruition to us and we would hope that those price increases start to approach 2% overall for the whole business and so that gives us some confidence and some lift. And we continue to bring out new systems and new services and successful new products like Aloha and Singularity and GoCentral are all positive things that drive the business forward and packages of products of ours that we sell like our trust system, combined with our wealth management product Diamond has been pretty effective and we think it will continue to be. Got it. That’s helpful. And then, last year, obviously, the labor pressure, there were some pressure on implementation time lines and things like that. Has that now stabilized in terms of client implementation time frames and where you are seeing the retention with the implementation workforce, anything to call out there? Thanks a lot. Well, we all work here. So we are focusing on it and we have talented people that have hired more talented people and that group of people is focused on it and we are executing in an increasingly higher level. But these are big complex implementations and you have -- still have some work from home issues and other things that cause collaboration to be a little bit more difficult and stretch out some time lines. But I would say that we are optimistic that we are getting increasingly better, and then hopefully, those results will start showing up in our quarterly financials. Great. Thanks so much. Hey. So again nice acceleration on the organic growth in 2023. Beyond Blue Prism, is there any way to disaggregate kind of the components that get to the 2% to 6% in terms of some of that Blue Prism, some of that’s pricing, some of its retention, is there any way to maybe just ring fence those numbers a little bit? Well, I think we have talked about it. I think you got to allocate it probably to four buckets and you can put 1% to 2% to 3% in each one of the buckets. But I think it is price increases, it’s new business sold, it’s clearing the backlog and its new products and services that we are bringing to the market. So we are saying 2% to 6% and we would love to guide you to just 6%, but we want to be cautiously optimistic. And there’s still a lot of things happening in the world, whether it’s the war in Ukraine, it’s inflation in the United States, it’s labor issues here in the United States, there’s weakness in Europe and in the U.K. and so you heard a lot of things and we are trying to give you as much color as we can without trying to act like we have a crystal ball because we do not. That’s helpful, Bill. And then maybe just -- it sounds like Blue Prism, you exited 2022 at 20% EBITDA, any sense of how that should scale over the course of 2023? I think we have said over the last year that we would expect Blue Prism to increase their margins in the 500 basis points to 1,000 basis points in 2023. And I will ask Rahul to add more color than that… No. I agree with that, Bill. I think the goal for us at the end of 2023 would be to exit about a 30% margin. So that’s the, obviously, the upper end of what Bill just said. Yeah. Thanks for taking the question. I guess the first one, Patrick, for you in terms of, I was trying to write this information on -- at a fast pace, but I may have missed some of it. The 3.7% organic growth for Financial Services, was that 4Q or the full year? I have so -- I’d have to look it up. Let me look it up if you have got another question. I do. Okay. Thanks for that. Hey, Bill. Nice to talk to you again. I was curious about the private credit opportunity. You all called that out in the prepared remarks. Is there anything you could share with us in terms of important technology milestones in 2023 and what about selling? And could this start to become a monetizable setting in a meaningful way in 2023 and just what’s that market like… Welcome the Truist. And I would just say that, private credit is really -- you look around the world and you have companies like Apollo that has $550 billion under management and they also own the fee with another $330 billion. And you know the other large scale private equity firms and the deal is getting done like the -- I think the recent deal out of Emerson Electric or somebody where Blackstone did completely private spin out of a big division and I just think the private markets are becoming to rival the public market. So there’s a lot of stuff that we have done and Rahul talked about it in his remarks about signing a bunch of our pieces of technology together and really distancing ourselves from our competitors with what our capabilities are. And I think that’s why you see that growing as nicely as it is and I think that there’s a number of funds better pivoting towards private credit and other private fund type investments, and I think, that’s going to continue. Does that help. Great. Thank you so much. You guys -- Bill you mentioned that you are seeing -- you want to be acquisitive and you are seeing some dislocations in the fintech space. I am wondering if you can talk about a little how you are thinking about potential structure of those deals financially, especially since the cost of capital now is obviously higher than has been at least pre-pandemic, et cetera. Just wondering if that changes the way that you have to approach those deals, what kind of companies you can look for and what would be a targeted structure for you there? Yeah. I think I -- I think that there’s still money to be had out there and I don’t think that you have to get to cute with the structures and we like to have a capital structure that is pretty easy to understand. And we have operated under quite a bit higher interest rates than what we are seeing today, even though interest rates today are quite a bit higher than they have been for the last five years to 10 years. And so I don’t think that we would structure them very different. We might have a partner or we might have a large scale private fund or large scale pension be a big supplier of credit to us or even some equity. We give it at the right price, which was not… Got it. Okay. That’s really helpful. And then you mentioned that you felt like you were taking some share in the hedge fund space. Is this as, and I guess, kind of what I am looking at is one of your primary competitors, at least in the hedge fund launches has been going through some management transitions. How much of an opportunity is that presented and has that been chance for Eze Eclipse to grab some share in business? Well, we think we have very stuck pipelines. The question is, is obviously closing them, and as you well know, right, when the markets are as choppy as they have been for the last couple of quarters, you don’t have nearly as many fund launches as you have had in the past. So we are cautiously optimistic that we can ramp our Eclipse product and then also tie in even with our fund administration capabilities. And so, yeah, we are optimistic about that, and yeah, that’s just one other fintech company that has a few challenges. Yeah. We really appreciate everybody getting on the call today. I would like to recommend that you recognize that the $518 million in adjusted EBITDA is the third largest in our history, which is 36 years. So we are pretty proud of that, we think we are doing the right things, we are thinking that we are keeping our nose the grindstone and getting stuff done, and I appreciate people that work with us and make things happen. And we are optimistic that when we talk to you at the end of Q1 that hopefully we have a positive story to tell. Thanks again.

EarningCall_356

Good morning ladies and gentlemen. Thank you for standing by and welcome to the Tempur Sealy’s Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker host for today, Lauren Avritt, Investor Relations Manager. Please go ahead. Thank you, operator. Good morning everyone, and thank you for participating in today's call. My name is Lauren Avritt, the Investor Relations Manager. Before getting started, we want to extend our congratulations and best wishes to Aubrey, who is currently on maternity leave. Joining me today are Scott Thompson, Chairman, President and CEO; and Bhaskar Rao, Executive Vice President and Chief Financial Officer. After prepared remarks, we will open the call for Q&A. This call includes forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve uncertainties and actual results may differ materially, due to a variety of factors that could adversely affect the company's business. These factors are discussed in the company's SEC filings, including its annual reports on Form 10-K and quarterly reports on Form 10-Q under the heading Special Note Regarding Forward-Looking Statements and Risk Factors. Any forward-looking statement speaks only as of the date on which it is made. The company undertakes no obligation to update any forward-looking statements. This morning's commentary will also include non-GAAP financial information. Reconciliations of this non-GAAP financial information can be found in the accompanying press release, which has been posted on the company's investor website at investor.tempursealy.com and filed with the SEC. Our comments will supplement the detailed information provided in the release. Thank you, Lauren. Good morning, everyone, and thank you for joining us on our 2022 fourth quarter and full earnings call. I'll begin with some highlights from our fourth quarter, and then I will turn to discuss how we delivered on our long-term initiatives. Then Bhaskar will review our fourth quarter financial performance in more detail and discuss our 2022 guidance. Finally, I'll close with a few comments on how we view the current market environment, then we will open the call up for Q&A. In the fourth quarter of 2022, net sales were approximately 1.2 billion and adjusted EPS was $0.54. This represents a 36% growth in sales and a 59% growth in adjusted EPS as compared to the fourth quarter of 2019, a pre-COVID period. Compared to the same period last year, this represents a 13% decline in sales and a 39% decline in adjusted EPS as we navigated a weak overall market and experienced robust inflation. However, we continue to outperform the broader industry by a good bit and enhanced our competitive position. Consistent with our previous quarter, we observed a slight increase in resilience of our premium customers with sales of value focused customers a bit more subdued. I'd like to begin by highlighting some of the key wins for the quarter. First, as we discussed last quarter, we successfully kicked-off the North America launch of our new collection of Stearns & Foster products, which is designed to further distinguish our high-end traditional Innerspring brand from the numerous mid-market Innerspring brands in marketplace. Our third-party retail partners have demonstrated their enthusiasm for both the new Stearns & Foster product portfolio and our commitment to supporting the line-up through compelling national brand marketing. This excitement for the new product is reflected in robust year-over-year order trends. In order to ensure the new product meets our stringent quality requirements, we have extended the launch window in response to a slight component delay. We expect to complete the rollout by Memorial Day holiday selling period. Overall, we remain on track to expand Stearns retail slot by more than 20%. Turning to our second highlight, our U.S. e-commerce channel performance performed well in the quarter delivering approximately double-digit growth. Our new Stearns & Foster and Sealy e-commerce sites have exceeded our expectation, the greater mix into the more premium SKU assortments resulting in unexpectedly high ASP across both brands. Our Tempur e-commerce business also delivered solid growth in the quarter, which is especially notable considering a difficult prior year compare. With the recent launch of our new Sealy website, we now have operation to direct-to-consumer websites to the U.S. at each of our leading brands. Our expanded e-commerce presence is a powerful tool that enables us to be closer to the customer, drive [share of voice] [ph] and build on our omnichannel strategy. For the last five years, we've developed a direct relationship with millions of customers, gaining valuable consumer insights and furthering our direct marketing capability. This helps build our long-term customer relationships and drives marketing efficiencies. Moving to ESG, we further our commitment to protect and improve our communities and the environment. We recently published our 2023 corporate social value report, which is available on our IR website. We are proud of the progress we've made in our ESG goals. In the fourth quarter, we achieved our goal of 100% landfill diversion from our U.S. and European manufacturing operations. We also made progress towards our goal of carbon neutrality for our global operations reporting a decrease in emissions per unit. Before turning the call over to Bhaskar, I want to take a moment to step back and review the progress we've made on our long-term initiatives during 2022. Though the year was fluid from a macroeconomic standpoint, we remained focused on positioning the business for long-term success. Starting with our first key initiative, which is to develop the highest quality products in all the markets we serve. When it comes to product development, our Number 1 objective is to anticipate and react to consumers evolving suite preferences. In early 2022, we made continued progress against this objective through various product launches. As part of the refresh of our U.S. Sealy Posturepedic portfolio, we launched a new line of premium and hybrid Sealy mattresses featuring improved comfort, superior support, innovative cooling technology. This lineup has truly resonated with our Sealy targeted consumer base. We leveraged our Sealy brand to tap into new market segments as well. We launched our new Sealy Natural Collection in the second half of the year, constructive or ecofriendly sustainable source material. This collection appeals to environmentally conscious consumers and continues to broaden our customer base. We also launched our Sealy FlexGrid mattress line, which features pressure relieving grid, gel grid, it represents the evolution of the technology in the market today. With a unique scalable manufacturing approach, we're able to offer these products at a mid-market retail price. In addition to supporting our 2022 launches, we set the innovation pipeline for 2023 and beyond. Later this quarter in the U.S. we'll launch an upgraded line of TEMPUR-breeze products and smart adjustable basis. Then later in the year, we expect to expand the distribution of our TEMPUR ACTIVEbreeze cooling system into select wholesale doors. We expect these launches to further strengthen Tempur’s appeal to the premium wellness minded consumer and drive improved attach rates and strong ASP. Turning to our International group. Beginning this quarter, we'll undertake the largest international product roll-out in the company's history, reaching more than 90 markets worldwide. This new lineup of mattresses, pillows, and bed basis has been strategically designed to drive addressable market expansion of Tempur products. The launch is phased over multiple quarters to allow for the customization by region. Finally, I would point out that our investment in Silicon Valley sleep tech started bright, our partnership with Sleep Data Company, full power technology, and our industry leading R&D team will ensure Tempur Sealy remains at the forefront of sleep innovation. As evidence of our commitment to product quality innovation, our leading brands received a number of recognitions throughout the year. Notably, Tempur-Pedic ranked Number 1 in customer satisfaction among mattress brands in the J.D. Power 2022 Report for the fourth year in a row for retail mattress category. And for the second year in a row, ranked Number 1 in the online mattress category. A true testament to the customers' trust of our brand and products. Turning to our second initiative, which is to promote our brands with compelling marketing worldwide. We supported our brand and products with a record marketing investment of approximately $450 million this year. In addition to generating strong near-term returns and driving outperformance relative to the broader bedding market, these investments also serve to seed the market for our 2023 product launches. Sealy and Tempur continue to be the Number 1 and Number 2 best-selling mattress brands in America and among the most highly recommended, recognized, and desirable brands in the industry with 95% of shoppers aware of at least one of the TSI brands. In 2022, we leaned into the untapped potential of our Stearns & Foster brand by doubling our presence on national television. In addition to contributing to growth and awareness and consideration for Stearns, these marketing investments grew our retail support, which combined with the new product lineup is reflected in a significant increase in placements. Our investments in product, brand, and channel successfully drove Stearns & Foster’s website traffic and sales growth in 2022, making clear progress to our goals to make Stearns & Foster our third billion dollar brand. Last year, we also ceded the market for upcoming international launch with strategic marketing investments in store sales programs and e-commerce initiatives worldwide. Our third initiative is to optimize our powerful omni distribution platform. Evolved, our global omnichannel present in-step with consumer preferences to be wherever they wanted to shop. The largest pillar in our omnichannel distribution strategy is our more than 26,000 third-party retail doors. This broad footprint ensures that consumers can easily find and experience our products in person. Now, we're well represented in third-party retailers in the U.S. today. There are opportunities both to increase our balance this year with existing retail partners and to sell to certain retailers who do not currently retail Tempur Sealy products. Turning to our OEM operations. While we entered the space only a few years ago in 2020, we made significant progress in growing our operations, both within our Sherwood private label Innerspring business and our foam-pouring business. In 2022, we delivered significant growth in our OEM operations as we continued, to charge towards our target of 600 million in OEM sales. Note that OEM sales growth will decrease the cost per unit for all of our branded products as we spread our fixed cost and drive more advantageous supply agreements on the enhanced volume. In addition to growing our wholesale and OEM business, we are now running in excess of [$1 billion] [ph] in annual sales in our global direct-to-consumer business with a robust five-year compound annual growth rate of over 40%. Regarding our direct retail store operations, we opened 50 retail stores in 2022 and currently operate over 700 brick-and-mortar storefronts around the world. Our retail network is comprised of both wholly-owned and joint venture locations led by over 200 Tempur retail and multi-branded fleet outfitter stores in the U.S., and are more than 200 Dreams locations in the UK. In total, including the e-commerce sales they facilitate, our company-owned stores generate an average sale of $2 million per location with the U.S.-based Tempur retail stores averaging a robust $4 million for sales per location. Finally, I should note that in aggregate our U.S. web has grown at a compounded annual growth rate of over 25% since 2017. Our fourth and final key initiative is to drive increased EPS through operational execution and prudent capital deployment. In 2022, we generated full-year adjusted EPS of $2.66. This represents a five-year compound annual growth rate of 26%. We executed on our balanced capital allocation strategy to return value to shareholders. We allocated approximately $1 billion in capital. First, we reinvested over 300 million in operations. This includes a one-time investment to stand-up our new foam-pouring plant in Crawfordsville, Indiana which is expected to commence operation in 2023, enhancing our ability to service our customers by ensuring product availability to meet increase demand in the premium sector, creating shorter lead times, and reduced per unit logistics cost in the Northeast market. Second, we invested 10 million in Bright, a technology based mattress company with differentiated new product offering targeted at a different premium customer than we currently serve today. Third, we invested over 665 million in share repurchase to buy back approximately 10% of our shares outstanding at an average price of $33 a share. And finally, we paid $70 million in cash dividend. I should note we announced today a 10% increase in our quarterly dividend bringing it to $0.11 per share. I'd be remiss if I didn't mention our ERP transition, which will play a critical part in our ability to deliver on all of our long-term objectives. In 2022, we completed the multi-year journey of transitioning more than 50 of our global subsidiaries from using five different ERP systems into one common system. This investment in consolidating our operations expected to drive long-term efficiencies across our global operations, enhance cyber security, facilitate customer communications regarding order status, and improve our direct-to-consumer capabilities. Thank you, Scott. In the fourth quarter of 2022, consolidated sales were approximately $1.2 billion and adjusted earnings per share was $0.54. We had $10 million of pro forma adjustments this quarter, all of which are consistent with the terms of our senior credit facility. Turning to North American results. Net sales decreased 12% in the fourth quarter. On a reported basis, the wholesale channel decreased 13% and the direct channel decreased 5%. Early indications are that we outperformed the market. When looking at our sales growth, please note our fourth quarter of 2021 was significantly benefited by a Tempur-Pedic backlog reduction of $100 million. North American adjusted gross profit margin declined to 37.9%, primarily driven by operational headwinds and mix related to the prior year Tempur-Pedic backlog reduction, partially offset by pricing actions. The backlog reduction in the prior year accounted for approximately half of the margin decline. North American adjusted operating margin declined to 15.1%, driven by the decline in gross margin and operating expense deleverage. Now, turning to international. Net sales decreased 14% on a reported basis. On a constant currency basis, international sales decreased only 2% as we experienced a $36 million headwind in the quarter from unfavorable foreign exchange rates. Foreign currency remains volatile. Though we have seen favorable trends since the fourth quarter, our current expectation for 2023 contemplates a modest FX headwind to both sales and adjusted EBITDA. As compared to the prior year, our international gross margin improved to 55.2%, driven by pricing actions to offset commodity inflation, partially offset by mix. Our international adjusted operating margin improved to 20.7%, driven by the improvement in gross margin and operating expense leverage, partially offset by the impact of COVID on our joint venture operations in Asia. Turning to commodities, which we think about as inclusive of raw material inputs, logistic costs, and labor all of which have been highly inflationary across the global bedding industry for more than two years. In the fourth quarter, global commodity prices largely trended in-line with our expectations. Some commodities have gravitated off their peaks, though others remain pressured. We anticipate that prices could continue to ease throughout the year, although we expect commodity prices in 2023 will continue to trend significantly ahead of 2020 levels. Now to global operations. We are taking actions to fully support our customers, while managing through an evolving global supply chain and a tight labor market, which resulted in $10 million of incremental expense in the fourth quarter. As the global supply chain continues to stabilize, and as our new ERP system drives productivity, we expect improvement throughout 2023 and beyond. Now, moving to the balance sheet and cash flow items. In the fourth quarter, we had operating cash flow of $95 million. In response to the global supply chain volatility, we took actions in 2022 to reinforce our safety stock of raw materials and finished goods. We believe this focus on providing our customers with the best possible product quality and customer service was one of the key drivers of our outperformance relative to the broader industry last year. Our inventory days improved in the back half of 2022 as we began to normalize our safety stock. We anticipate inventory levels will continue to normalize throughout 2023 as the supply chain further stabilizing driving cash cycle improvements. Our new foam-pouring plant in Crawfordsville, Indiana is on track to begin its phased opening in the second quarter. In order to optimize production in this new facility, we will phase bringing the plant online to ensure the highest level of quality while we grow into the incremental capacity. This plant's location complements the existing manufacturing footprint and enhances our ability to service our East Coast customers. We expect our CapEx to decrease significantly in 2023 and return to a more normalized level of spend thereafter. We think of annualized CapEx as approximately $150 million, driven by maintenance spend of approximately $110 million, and growth spend of approximately $40 million. At the end of the fourth quarter, consolidated debt less cash was $2.8 billion and our leverage ratio under our credit facility was 3.1x, slightly ahead of our target range of 2x to 3x. We anticipate returning to our target leverage range in 2023. Now, turning to 2023 guidance. We expect adjusted EPS to be in the range of $2.60 to $2.80. This considers sales growth of mid-single-digits, primarily driven by the execution of our key initiatives and also benefited by the [selling] [ph] of discounted four models and the wraparound impact of pricing. Sales and marketing investments of $20 million to support product launches and record advertising spend of over $500 million as we continue to support our leading brands and new products, resulting in EBITDA of approximately $980 million at the midpoint of the range. As I think about 2023 phasing, the first quarter will be our last pre-war comp. That combined with front loaded product launch and advertising cost will result in a difficult year-over-year compare in the first quarter. We expect to outperform the market. The consolidated first quarter sales are consistent to prior year and adjusted EPS that represents 19% of 2023 EPS expectations. Our guidance also considers the following allocations of capital in 2023. CapEx of approximately $200 million, which includes 90 million of growth CapEx, primarily to fund the completion of our Crawfordsville facility, a quarterly dividend of $0.11, representing an increase of 10%, relative to [2022] [ph], and the repurchase of at least 5% of our outstanding shares funded through free cash flow, which is generated in the back half of the year. Lastly, I would like to flag a few modeling items. For the full-year 2023, we expect D&A of about $200 million to $210 million, interest expense of about $135 million to $140 million on a tax rate of 24% to 25%, and a diluted share count of 178 million. Thank you, Bhaskar. Nice job. Before opening the call up for Q&A, I take a moment and share some thoughts about our expectations for the macroeconomic backdrop in 2023. In the U.S., we’ve aligned our outlook with a consensus GDP forecast of economists at major banks. And we're assuming that we'll encounter a mild recessionary operating backdrop in 2023. We see growth opportunities in Asia this year, led by less volatile environment in China. In Europe, although we see consumers exhibiting resilience in the phase of the ongoing war in the Ukraine and elevated inflation, we expect a mild recession. Turning specifically to our U.S. bedding industry expectations. Last year, the U.S. bedding industry experienced its [indiscernible] decline in history. We do not have complete information yet, but we would expect U.S. produced units were down an unprecedented 20% to 25%, compared to 2021. Our 2023 guidance is grounded in a stable U.S. bedding environment with units consistent to the prior year with the back half stronger than the first half. We are currently thinking the U.S. bedding industry units will return to growth in 2024. Overall, our 2023 outlook targets growth on both the top and bottom line. This contemplates our continued outperformance across the bedding industry worldwide, driven by our new products, strong brands, and omnichannel initiatives. Our strong competitive position continues to provide us with significant long-term growth opportunities. Thank you. [Operator Instructions] And our first question coming from the line of Susan Maklari from Goldman Sachs. Your line is open. My question is around, you know thinking about the state of the consumer, you gave a lot of good details on how you're thinking about the various product lines and the brands and how they're performing. As you [look out] [ph], how are you thinking about the pushes in the polls on the different income segments and the ways that the consumer may respond this year to the macro? Sure. Thanks for your question. I'm going to focus on the U.S. That's obviously our biggest segment and to go around the world would take the entire call. So, focusing on the U.S. consumer, couple of observations. One, we're seeing high-end consumer continuing to hang in there. Low-end consumer has been where a lot of the deterioration has been. I think when we look at it, call the units down 20%, 25% this year, that is well down from where we historically have been. And is very close to actually [trough] [ph] unit production in North America. We're probably 5% or 6% off the trough and that would be 2009-ish. [That's right] [ph]. I think – I mean, [Bhaskar] [ph], so, clearly, we've taken a downturn, but store traffic continues to be a little bit soft. I think it’s what the retailers would tell you, but people show up [buy] [ph]. We're seeing, I guess, a little bit fewer people financing it. I think it's, I would say from a consumer standpoint. So, you heard our outlook. We're basically looking for 2023 to be stable, which again is almost a trough unit production in the U.S. And assume that by 2024 the unit growth will come back to the industry. Thank you. One moment for our next question. And our next question coming from the line of Seth Basham with Wedbush. Your line is open. Thanks a lot and good morning. Please give us a little bit more color on the bridge to your margin guide for 2023. You talked about a few components, but of those launch costs, advertising, etcetera, can you tell us what you think that the biggest drivers of pressure are? And then, as it relates to commodities, again, how much do you expect to benefit there? Absolutely. So, when I think about EBITDA margins and as I go into 2023, we are anticipating some improvement on a year-over-year basis. To put together those building blocks, the way I think about it in no particular order, is I would think of operations. We've made some investments in 2022. Our expectation is that as that supply chain continues to stabilize, is that will turn into a tailwind for us in 2023 as the year plays out. In addition to that, as we have pricing actions, the last action we put in place is in June of 2022. We will get the wraparound benefit of that in 2023. As you mentioned, we do have [4 miles] [ph], very excited about what we have going on. We have the Breeze coming out in the second quarter. We're wrapping up Stearns in the first quarter. We have [Cube] [ph] that's happening – sorry, the international launch that's happening all throughout 2023. However, the cost associated with that will be the floor model discount, let's call that principally in the second quarter as Breeze gets out there. And then finally, all throughout the year, we will be investing in advertising as we mentioned on the call over $500 million. You add all those [indiscernible] and then fundamentally is that we have initiatives that are going to grow the top line. So, of our mid-single-digit growth is that half will come from those initiatives and with the balance coming from four models, as well as a bit of the pricing actions. Thank you. And our next question coming from the line of Curtis Nagle with Bank of America. Your line is open. Good morning. Thanks very much. Kind of my last question in terms of just breaking out the sales guidance. I think we're a little better than expected, so that's good. Maybe just dig a little more into the U.S., Scott over the past, I don't know, 3 months or 4 months, we've been talking about stabilization, right, in the U.S. which sort of started in 4Q. Through where we are right now has that continued? Could we talk a little bit in terms of just how the U.S. is trending at the moment and how you're feeling about that? Well, I mean, as of 8:00 A.M., I can tell you how we're doing. Look, it's very stable. I mean, it feels like from a trend standpoint we're getting off, we'll call the COVID trend of people shopping more during the week than they used to and less on the weekend. It's moved back to more traditional shopping with more shopping on the weekend than during the week. One of the other trends that we saw during COVID was that the holiday periods were not quite as robust and the business was steadier through the calendar. And now we're going back to what I think is more of the historical pattern where the trough is a real trough and the peaks are real peaks, i.e. the holiday periods become critical for the industry. But all that would be, what I would call normal, getting back stable. And look, I think our volumes – we haven't seen anything since year-end that would make us think the industry is anything, but at least stable. And I'll add that I haven't seen anything that makes me think that we won't continue to take a reasonable amount of share in 2023. Good morning, guys. Thank you for taking my questions. Scott, in your prepared remarks, you talked a little bit about an opportunity to sell some products maybe or some retailers that don't have as much share, I think you guys do have a test going on with Sam's with maybe some potential to launch that in store. So, can you maybe update us on how that initial rollout is going and some of the timing around that? And is anything assumed in the guidance for picking up some new swap placements there? Yes, we are in Sam's online. You can see us online. And we're working very closely with Sam's and other customers to fill their needs. I don't really have an update for you and we generally don’t talk a lot about specific individual customers, but I would say our relationship with Sam’s is good and expanding. Do we have anything specific in our guidance? No. I would say that we have lots of opportunities and sales team have goals, but we certainly don't start putting that, kind of step in a forecast until we would have a firm deal. Good morning. Thanks a lot for taking my question and thanks for all the great color on the call. Starting, Bhaskar, a question on the sales guidance. So, up 5% or rather up mid-single-digits, if there were a scenario wherein sales were to fall short, say, sales were flattish or low single digits, do you have enough cushion in the P&L to maybe pair back on expenses which still achieve the EPS guidance of [260 to 280] [ph]? Well, there's really – there's embedded quite a bit in that question. When you know our variable cost structure, which we have, Bhaskar and the variable cost structure… [70/30] [ph]. So, we have the ability to call it right-size the organization relatively quickly if there's a downturn. I think the real issue though is, would you pull all those levers, you certainly would pull levers if you thought you were headed towards several quarters of recessionary activity. You may or may not pull the levers though, if you think you've got a very short-term downturn in business because within the organization around is complicated and you might take as an opportunity not to pull those levers. So, I can't guarantee what we would do. I think it might be interesting to know that as an example in 2022, if you look at our advertising expenses, our advertising expenses in North America on a dollar basis is up and obviously as a percentage because our sales are down is up. And you might wonder why didn't we pull that lever? We could have pulled the lever and pulled back on advertising in the latter part of 2022. It had a higher EPS number and maybe make somebody happy on the street. I don't know, but we run the business for the long-term. And we've taken the opportunity to continue to support our brands. So, it's a great business model, so we have the flexibility to deal with those situations. But right now, we're in a pretty strong competitive position. And my guess is, we're talking about short-term little bit of [indiscernible] in the overall macro market. I suspect we'll continue to be aggressive, take share, and support our brands. This is [Matt Edgar] [ph] on for Peter. Thank for taking my question. Sorry, if I missed it, but can you just walk us through the puts and takes of your input costs this year? I know you said it's expected to be down, but just can you go through maybe on, kind of individual basis, how you're expecting [numbers] [ph] 2019 and what's embedded in the guidance? Thanks. Yes, absolutely. So, when I think about commodities, as I mentioned on the call, I think about everything from ocean cargo to raw material to labor. So, broadly speaking, we've seen unprecedented increases in commodities over the last few years. So, the way I think about 2023 and what we saw in the fourth quarter 2022 a bit, is that they have come off their peaks and the peaks being earlier in the year. But what I would say is that we are expecting, let's call it, a modest tailwind into 2023, however, by no means are they at the pre-pandemic level. Thank you. One moment for our next question. And our next question coming from the line of Jonathan Matuszewski from Jefferies. Your line is open. Great. Thanks so much for taking my question. I had a question on the competitive landscape. Your largest competitor recently filed for bankruptcy a couple of weeks ago. Just curious if you could give us a sense of how conversations with your retail partners have looked since this news broke and how are conversations progressing regarding potential slot gains for the TSI brand? Thanks so much. Yes. Thanks for the question. Look, I don't think that particular news was shocking to the industry, I think it was well telegraphed and expected. So, I don't think it's fundamentally changed the discussions with our retailers. What the retailers care about is quality products, support with advertising and those kind of items. I think our chief competitor has strong brands and is a hard, tough competitor. But we continue to work aggressively with our retailers. So, I don't think the actual filing changed very much in most retailers mines, as long as they provide quality products and service in the marketplace. Thank you. [Operator Instructions] And our next question coming from the line of Brad Thomas with Keybanc. Your line is open. Hi, thanks. Scott, I was hoping to ask about the international product changes that are underway. Obviously, the potential will be really, really substantial for the company. I was hoping you could share a little bit more detail on perhaps how much this expands the addressable market for Tempur and how you think about what the financial impact could be once this is rolled out? Thanks. Yes. I'll start, and I'll let Bhaskar probably clean me up. As you said, look this is a significant launch internationally, bigger than a normal Tempur launch as we're repositioning the brand and we're changing some of the manufacturing procedures as to how we make temper so that we can hit some lower price points and serve our customers better. Early on, we're in the middle of it. Early indications are good. And I'd say, what's the addressable market expansion do you think, is it 20% 30%, 20%, 30% absolutely from an addressable market standpoint, of course, we have to perform. You can't just put that and say, okay, that's going to increase Tempur sales that much, but we're working very hard on the area, but I do think it unlocks a growth potential for the international operations. From a sales standpoint, we should start seeing that in the second quarter of this year. Because of the launch cost and stuff, you'll see the benefits of EBITDA probably starting in 2024 and the full benefit of it. But I think long-term over the next two or three years will be very important from our growth standpoint. Thanks for taking our question this morning. It's on the, kind of inputs to the guide for mid-single-digit growth this year. Does the industry need to recover in the back half and actually be positive in the back half in your view for you to hit that estimate? Yes, probably so. I mean, you're talking about crystal ball stuff. So, give me a little bit of heads words on this. But look, I suspect – let's say, as we said in the fourth quarter, units were down 20%, 25%. We think we don't have all the final data yet, but that's probably certainly in the ZIP code. So, I think going into the first quarter, I suspect that units will be down in the first quarter. That is a very tough compare for the industry. It is the last pre-war compare. So, in the first quarter, we'll call it projected to be down, and I feel pretty confident that the units would be down in the first quarter. By definition, you've got to have some units go the other way. And so, you'd end 2023 with growth in, call it, the third and fourth quarter. Thank you. One moment for our next question. And our next question coming from the line of Carla Casella with JPMorgan. Your line is open. Hi, thank you. I just want to ask, given kind of the turbulence in the market, that you guys seem to be navigating very well. Is it opening up more M&A opportunities or is there – are there thoughts set for you to continue to grow your OEM and expand the business that you need M&A, as well as organic growth? Yes. It's interesting. As we've always said, it's something in the world is in the bedding industry, and there's an opportunity we want to look at it. And we do when we look at quite a few opportunities every year. Historically, we've done one or two transactions a year. I think we've done like nine since I've been here. But the whole strategy is really based on purely opportunistic purchases and where we can find a win-win. And so, having said all that, what that means is, look, we look at stuff, sometimes we price stuff. Sometimes the price works and something happens. Sometimes, the price – we're miles apart and nothing happens. And then sometimes the price is pretty close, and we stay close to that particular company for a number of years using the example of Dreams as it is probably the classic one, is, I think we effectively negotiated with them for five years until we both felt like we had a win-win transaction, which I think actually was a win-win transaction for both companies now that we've had them for a year. Some transactions happen very quickly, and the one that comes to mind is Sherwood. I think from start to finish, that might have been more like 30 days, if we were aligned very quickly with that team to what the future look like. So that was a very quick transaction. So, with the market, it had some – it was a difficult year, you know when you look back at it, whether you talk about the unexpected war in Europe, the inflation, the rapid unit decline, FX, COVID over in Asia. So, yes, it's certainly a colorful year. So, are there more opportunities? There probably are. I mean there are more opportunities. Whether or not we ever get aligned on anything, I don't know. But we continue to talk to people and really look for transactions that are good for both parties, good for our customers, good for the industry, and we'll continue to talk to people. Thank you. And we have one last question in queue coming from the line of Atul Maheswari with UBS. Your line is open. Hi, thanks for sliding me in, again. I just had a quick question, Bhaskar, on the first quarter guidance. It seems like you're guiding to a 20% to 25% EPS decline. Could you provide some incremental color on the building blocks that gets you there in terms of revenues, gross margin, and cost? Yes. Before he does that, let me – we felt like we needed to give you a little more color on the first quarter. We normally wouldn't give that much, kind of color on a quarter, but we really want to make sure everybody realizes that's the last tough comp for the bedding industry and not be surprised if it last pre-war. Atul, that's a good question. Let me answer it this way. Year-over-year, when you look at Q1 to Q1, there is a lot of things that are happening, whether it be FX, whether it be the war, the macro, the inflation, et cetera. So, let me do it this way. Let me go from Q4 to Q1. I think it's a much more straightforward way to think about it. So, what we've implied for Q1 off of Q4 is that we would expect some slight revenue growth, from a seasonal standpoint, that would make sense. Then what you – obviously, from that incremental revenue, we'd expect some flow-through associated with that. And then what we have is that we have two items that are unique to the quarter when you think about it versus Q4. And that is the launch of our international products, as well as the ramp-up of our Stearns & Foster. So, the way I think about that is – and brand advertising to support those launches. So again, relative to Q4 to Q1, what I would expect is a bit of revenue and the investments associated with those products, let's call that brand advertising, as well as the investments for the launch in OpEx. Thank you, operator. To over our 12,000 employees around the world, thank you for what you do every day to make the company successful. To our retail partners, thank you for your outstanding representation of our brands. To our shareholders and lenders, thank you for your confidence in Tempur Sealy’s leadership team and Board of Directors. That ends our call today, operator. Thank you.

EarningCall_357

Good day, everyone, and welcome to today's Neurocrine Biosciences Reports Fourth Quarter and Year-End Results. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer period. [Operator Instructions]. Please note this call may be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the call over to Todd Tushla, Vice President of Investor Relations. Please go ahead. Thank you, and a good Monday morning to everyone. Welcome to Neurocrine's fourth quarter and full year 2022 earnings call. I’m joined by Kevin Gorman, our Chief Executive Officer; Matt Abernethy, our Chief Financial Officer; Eiry Roberts, our Chief Medical Officer; Eric Benevich, our Chief Commercial Officer; and Kyle Gano, our Chief Business Development and Strategy Officer. During this call, we will be making forward-looking statements. These statements are subject to certain risks and uncertainties, and our actual results may differ materially. I encourage you to review the risk factors discussed in our latest SEC filings. We will be jumping into Q&A after prepared remarks and as is customary, we will do our best to get to all of your questions. Thank you, Todd, and good morning. Over the last several years, we have launched a number of initiatives to bring INGREZZA to TD patients and relieve their suffering. Now many of those initiatives have been very successful as evidenced most recently by the growth of INGREZZA in 2022 as we announced this morning. We’re going to continue to build on those efforts and anticipate continued meaningful growth in 2023 out into the foreseeable future. Now the initiatives that are most obvious to you are the expansion of our sales force and our direct-to-consumer advertising. What is less obvious but very important are all the other teams within the company that are force multipliers in making sure TD sufferers are appropriately treated. Many of these efforts are aimed at educating healthcare professionals, their staff, payers and their medical advisers and importantly, for the first time, patients have groups advocating for the disease and their care. Again, these efforts have yielded significant results for sufferers of TD to date, and we will continue that momentum because the vast majority remains undiagnosed and untreated. Switching gears, we have a deep and diversified portfolio of mid and late-stage medicines that will have important readouts this year and into 2024. We've invested meaningfully in our research and development such that multiple new molecules will enter the clinic each year on a consistent basis to ensure a product flow into the future. Thank you, Kevin. Good morning. Good to see many of you over the past month. With INGREZZA sales growth of over $350 million in 2022, a record number of TD patients helped and in advancing pipeline, Neurocrine is in an excellent position for years to come. On the clinical side, CAH enrollment accelerated during the fourth quarter, enabling us to provide top line data in the second half of this year. On the financial front, our balance sheet strengthened in 2022, ending the year with over $1.2 billion in cash while using $280 million to retire a large portion of our convertible debt. For 2023, we expect another strong growth year for INGREZZA, with sales of between $1.67 billion to $1.77 billion, reflecting an underdeveloped TD market, supported by an expanded sales force and ongoing marketing initiatives. For SG&A and R&D expenses, we intend to invest just over $1.4 billion in 2023, reflecting an overall increase in R&D spending, primarily related to advancing our 12 mid-to late-stage clinical programs, including our muscarinic franchise, as well as expanded preclinical research efforts. Specific to 2023 SG&A expense, while our investment in INGREZZA will increase to support continued TD growth in the hopeful indication in Huntington, we do expect to show SG&A leverage of around 300 basis points. I look forward to your questions later in the call. Thanks, Matt. INGREZZA's strong performance in 2022 was exemplified by four quarters in a row with year-over-year growth exceeding 30%. Our commercial and medical affairs teams really executed well to help more tardive dyskinesia patients get treated than ever before, and we carry this momentum into 2023, yet much work remains ahead of us. Seven out of 10 of the approximately 600,000 people in the U.S. living with TD still have not been diagnosed. And half the time, those that receive a diagnosis aren't offered first-line standard of care treatment with a VMAT2 inhibitor. So the opportunity for organic growth for INGREZZA remains significant. Our 2023 revenue guidance range of $1.67 billion to $1.77 billion assumes approximately 20% year-over-year growth at the midpoint. The low end is a conservative estimate and contemplates precessionary pressure in the U.S., while the high end reflects less macro headwinds and accelerated new patient growth. You should anticipate the majority of growth in 2023 to be driven by our psychiatry and neurology business segments, which are the relatively more developed segments of our business. Long-term care is a completely new site of care for INGREZZA, and we are just getting off the ground there. Our long-term care team has been making great strides getting up to speed on the unique and complex operational dynamics within LTC and how that impacts TD care. While we estimate somewhere in the range of 10% to 15% of TD patients are in an LTC setting, it will likely take a few more quarters before we see a tangible impact to overall sales given the relatively smaller size and higher complexity of that business environment. On the patient activation front, last year's direct-to-consumer campaign exceeded our expected internal metrics. So we will continue with that investment in 2023. Our newest DTC campaign, which we refer to as impressions, is now on the air via broadcast, streaming and digital channels. The campaign highlights INGREZZA as the simple choice with proven efficacy and it's the number one prescribed treatment for tardive dyskinesia. All in all, we're well poised for growth in 2023 and beyond. With that, I will turn the call over now to my colleague, Dr. Eiry Roberts, to discuss our clinical progress. Eiry? Thank you, Eric, and good morning to everyone on the call. 2023 promises to be an important year for the Neurocrine pipeline with a number of milestones and data readouts, including the August 20 PDUFA date for valbenazine as a potential treatment option for patients with chorea associated with Huntington's disease. We were very pleased with the safety and efficacy results from the KINECT-HD study and with data from the subsequent six-month follow up, which formed the basis of our supplemental New Drug Application that was accepted by the FDA in December of 2022. On the clinical front, I'm pleased to announce that enrollment is complete in both the adult and pediatric registrational studies of crinecerfont as the treatment of congenital adrenal hyperplasia. These trials were designed with input from all key stakeholders, including clinical experts in the field, patients, advocacy groups and regulatory agencies in the U.S. and Europe. I'd like to congratulate everyone involved in the crinecerfont program for all their hard work in getting us to where we are today. This program will provide the largest trial data set ever generated in patients with CAH. And we look forward to sharing top line results from both studies in the second half of this year. In addition to crinecerfont, we anticipate reporting studies from two Phase 2 proof-of-concept studies, NBI-352 for the treatment of focal onset seizure in adults and NBI-846 as a treatment for anhedonia associated with major depressive disorder. Both these top line data sets are expected in the second half of 2023. Turning to our growing muscarinic portfolio, the team continues to make very good progress with enrollments in the Phase 2 study of NBI-568, a selective M4 agonist for the treatment of schizophrenia. We also remain on track to initiate the Phase 1 study of a dual M1/M4 agonist from this platform, NBI-570, later this year. To complement this robust pipeline in Phase 2 and 3, we plan to continue the growth of our early-stage pipeline by advancing additional new chemical entities into Phase 1 this year. I'm very pleased with the current robustness of our clinical pipeline and look forward to further strengthening this pipeline in partnership with our Chief Scientific Officer, Jude Onyia. Under Jude's leadership of research and preclinical development, we're investing in a range of modalities, including small molecules, peptides, proteins and gene therapy to deliver on the goal of providing symptomatic disease modifying and curative treatments for patients living with serious diseases in the field of neuroscience. As I reflect on where we are as an R&D organization, the foundation and the opportunity for our pipeline has never been stronger. Hi. Thanks so much and congrats on the quarter. I just wanted to ask about the assumptions embedded in your guidance this year. By our back of the envelope math, it seems like the high end of guidance could be met with fewer net patient adds on INGREZZA in 2022. Is that accurate? And maybe you can comment on that? And then just a quick aside, what does your guidance assume for your expectations for 1Q seasonality relative to prior years? Thanks so much. Yes. On the new patient front, we do expect to have a very great year here in 2023, over $300 million of year-over-year growth. And I'd say the top end of the guidance range does reflect acceleration in new patients, however, with a bigger base of patients. Keeping at a similar attrition rate, you do have a little bit of pressure on what the net new patient adds are. But we overall expect very strong growth year here in 2023. And as it relates to Q1, Q1 is always Q1. Patients delay their first fill as they go through the reauthorization process, and we typically have a higher gross to net. Our main mission is to make sure patients stay on medicine, and we've been very successful at that over the past five years. And I think that what you see is a little bit slower Q1, a nice recovery in Q2, and that's going to lead to a great year here in 2023. Hi, guys. Thanks for taking my questions. So just another question on INGREZZA. For 4Q, I think backing into the gross to net discount based off of the growth metrics that you provided on volume for the quarter, it seems like the net price per script was a little bit higher than I think what you had guided to. So I'm getting somewhere in the mid 5,600 per script range. Can you just verify if that's correct? And then also how we should think about the net price in 2023, if we should still expect about 5,600 a script? Thanks. Yes. Net revenue per script in Q4 was in the 5,400 range, and you should expect that to be fairly consistent sequentially when you think about Q1. But year-over-year, as it relates to 2023, you should expect a net price increase of between 3% to 4%. That puts you at a place of $5,600 net revenue per script. So that's correct, Neena. Hi, guys. Good morning. Thanks for taking my questions. Just one from me on I guess President Biden declaring that COVID is officially over May 11. How does that, if in any way, affect the way that I guess like psychiatrist has been getting paid with regards to telemedicine? And then maybe just a quick follow-up after that. Thanks. Hi, Tazeen. Good morning. Actually, with the -- what we do know already is that the telemedicine mandates that are in from the emergency health order are going to last for two years post the emergency health orders expiration. And I think the emergency health order is supposed to expire in May. And so you can bet that it's been kicked down the road for about two years post May. So we don't see any changes certainly in '23. And hopefully, we'll know more as we go into '24. Okay. Without that, if it does go back to in-office, would that provide you with more certainty on the upside if doctors have to go back into the office? Our upside did not take into account any changes in the number of physicians back into the office or any changes that have to do with the emergency health order in telemedicine. Hi. Good morning, everyone. Thank you for taking my question. I was hoping maybe you could walk through some of your internal assumptions around the market opportunity in CAH, given the Phase 3 data reading out the latter half of this year. I know a number of years ago, you did a Commercial Day discussing this market when you had an earlier iteration of programs. It does seem like investor expectations around commercial here are somewhat muted compared to your neuro program. So just hoping to kind of get a light out of how you currently think about what the commercial can look like here? Yes. Good morning. So let me preface this by saying that, of course, we still have crinecerfont in the clinic. It's an investigational medicine not approved yet for the treatment of CAH. But certainly, we're excited about the opportunity that it presents. Just taking a step back, in the U.S. there is somewhere between 20,000 and 30,000 people living with congenital adrenal hyperplasia, a similar number in Europe as well. Standard of care today is essentially glucocorticoids that are required to essentially replace the missing cortisol for these patients. What crinecerfont is intended to do and what we hope to see in the clinical trial is not only improvement of day-to-day control of the patient's androgens, but also the opportunity to potentially reduce the dose of the steroids that they're taking for their entire lives. And so we certainly see this as a significant game changer in terms of the standard of care. And there are no new treatments for CAH for decades. So really what it bodes down to is let's see what the data look like. We're excited about the opportunity, and there's a significant unmet need in terms of being able to help these patients, improve their day-to-day disease management and overall reduce the potential for long-term issues from treatment with steroids. Eiry, do you have anything to add? No, I think the only thing I'd add is, obviously, if you think about the unmet need in -- for patients in CAH, as Eric mentioned, there's been no new treatments that were non-steroidal in nature ever actually in this disease area. And given that our program includes both a pediatric study and adult study, it gives us an opportunity to really understand how to serve this patient population right through from early years of childhood through adulthood. And I think we're really excited about that opportunity and look forward to reading out the data later this year. Good morning and thanks for taking our question. It's a follow-on to Brian's about the CAH trials. The primary endpoint in the adult trial is change in glucocorticoid dose while the primary in the pediatrics is change in serum A4. Can you remind us why you chose two different endpoints for the two different studies? And then also what the powering of the two trials are and what would be considered clinically meaningful changes in those endpoints? Thank you. Yes. Thanks very much. It's Eiry here. So both of those endpoints that you alluded to, both the androgen reduction itself and the steroid dose, are very important to patients with CAH. And so both of the data sets will be important as we read out the information from both the pediatric and adult trials. And so we will be looking at the data holistically across all of the information. And we'll be interested as well in clinical outcomes that are embedded as important secondaries into the trials. The reason for choosing the difference is in the endpoints and having the androgen level predominantly being the primary for the pediatric study is really based on how pediatric patients are managed in terms of their care and also the significant variability that you see in pediatric patients associated with some of the physiologic changes that are happening in that patient population anyway such as growth development and other important things. And so in terms -- also then getting to the second part of your question around powering and steroid reduction for each of the trials, if you take the pediatric trial first, from our adolescent and adult proof-of-concept study, we saw a significant reduction in androgen levels after just 14 days of treatment with crinecerfont. And so given the 81-patient trial that we have in pediatrics, we're significantly overpowered to see a change in the androgen levels as a primary for that study. And so the number of patients in the trial is more to address safety, tolerability and also to give us a better insight into the steroid reduction secondary. The same is actually true for the adult study. 165 patients in the adult study we believe is highly powered to address the steroid reduction endpoint. And if you remember, the steroid reduction endpoint is a change from baseline in the GC dose comparing the treated to placebo. We know from a lot of our discussions with key stakeholders that long-term steroid treatment, particularly at super physiologic levels, is detrimental for patients. And so any reduction in steroids that we see during the program we believe will be important for patients in the long run. Thank you. Good morning. For the schizophrenia targeted indications that you have different mechanisms of complicated disease, can you talk about how you're feeling about the portfolio? And Eiry, if you could perhaps share where you think there might be some edge of positioning or probability of success with your pipeline assets? Yes, happy to do that, Chris. So we have three main assets in clinical development right now for the treatment of schizophrenia, and they all actually focus on several different aspects of schizophrenia as a disorder. If you take the furthest along, our Phase 3 program for valbenazine as an adjunctive treatment for schizophrenia, we have two studies going on as registration studies addressing that disorder right now. We're very interested in that area because schizophrenia, obviously, is one of the major disabling neuropsychiatric disorders around the world and 3.5 million people at least in the U.S. impacted. And what we know about schizophrenia is it's a neurodevelopmental disorder that happens and starts early in life and the majority of patients do not receive full benefit from currently available therapies such as the antipsychotics. What we've seen from valbenazine in the tardive dyskinesia space is that the combination of antipsychotics and valbenazine is very safe and well tolerated in patients with schizophrenia. And coupling that with some preclinical information that showed synergy of effect in this patient population and also anecdotal data from the field that made us confident to go into a program that would allow us to understand whether patients with schizophrenia who are failing to get maximum response from their current treatment could actually benefit further in terms of both their positive and potentially negative symptoms by the addition of valbenazine. The second therapy that we have is luvadaxistat, which is in Phase 2 development. That is a DAAO inhibitor, comes from our Takeda collaboration, and that seeks to address the important cognitive deficit that is seen in patients with schizophrenia, particularly younger patients, given that this is a developmental disorder. And so from that perspective, luvadaxistat, we had a signal in our Phase 2 study that was intriguing to us in terms of the impact on the Braxton [ph] scores measures. And so we believe that there is opportunity there that we want to further progress and further explore in Phase 2. And so we have a replicate study going on right now. And then the third and most recent addition to our pipeline is the M4 selective agonist 568, and we're very excited about this opportunity to treat patients with acute psychosis. And we started a Phase 2 study with this mechanism late last year, and that is really enrolling very well. And as you know, this is now a validated mechanism for the treatment of acute psychosis through recent trials that have read out in Phase 2 and Phase 3. So across the board, we think there's a space for all of these different approaches since they each address a different aspect of schizophrenia. And given that this is a lifelong disorder for individuals from a young age right through their life, we do believe that there's opportunity for these things to coexist if we're successful in the clinical trials. Good morning. Thank you for taking the questions. And I appreciate all the color on the long-term care segment. Maybe just to follow up there, can you maybe just give a little bit more detail on some of these operational hurdles and kind of Neurocrine's efforts to kind of help the centers on that front? And just sort of what gives you confidence that's surmountable in the next couple of quarters as you alluded to? Thank you. Yes. As I mentioned on my initial commentary, LTC is a new segment for INGREZZA. However, it's an opportunity that we've been looking at really since before we launched back in 2017. So we're excited to be in a position where we've actually put a team in place to really explore that opportunity in LTC. We estimate that 10% to 15% of all TD patients are in an LTC setting. And I mentioned in my commentary that it is a more complex environment. And what I mean by that is that many of these care centers function on a day-to-day basis being run by nursing staff and the prescribers, whether it's the medical directors, the consultant psychiatrists or nurse practitioner, they rotate through. So they're not there on a 24/7 basis. They're coming through maybe every other week or every third week. And so really what that requires is for our folks to work closely with the staff in these facilities to educate them on tardive dyskinesia, help them to recognize the abnormal movements, potentially distinguish them from other drug-induced movement disorders and importantly, identify and flag residents that need further evaluation from the MD or from the nurse practitioner. And so ultimately, it takes a team approach in long-term care, and you really need to understand that environment not only in terms of the dynamics within the facility and who their prescribers are, also the role of the LTC pharmacy. And so we've been building our understanding of where the opportunity is. We've been narrowing the focus in terms of where we need to spend our time. And we're seeing good I think initial results. And so we're very pleased with the progress that we're making in long-term care. But I do think that in the end, it's still a new space for us and not as far along in terms of level of education and awareness of TD is what we're seeing in psychiatry and neurology. But we're excited about the opportunity, and we're going to continue to make progress in 2023. Hi. Just back on the catalyst trial, the adult one specifically, just wondering whether these patients are well controlled in terms of their A4 levels on their current glucocorticoid dose, just curious about that given your expectations that you would see additional A4 reductions there. And if those patients are already controlled, how much emphasis we should put on that secondary endpoint? Thanks. Thanks, Myles. I think in general, patients with CAH are not well controlled. Intermittently, they have some degree of androgen control. But certainly, what we wanted was our trial to reflect the real world situation. And so it's a requirement in the trial that patients not only have excess steroid dosing but also a lack of control of androgen. So I think there's a real opportunity for us to demonstrate a benefit for patients in the context of these trials, both from an androgen control point of view, which is the direct action of crinecerfont and then from the ability to reduce the steroid dosing. Hi. Good morning. Thanks for taking my question and congrats on another nice quarter. I have a question on the balance of sales growth versus investment. So you guys are guiding for roughly 300 million in year-over-year growth in INGREZZA at the midpoint, but only half of that or less in additional SG&A investment year-over-year. So I guess I'm wondering, is this the right way to be thinking about leverage going forward as you continue the successful direct-to-consumer campaign and push into long-term care facilities, or are there other factors to consider that could enable perhaps even greater operating leverage on INGREZZA commercial franchise going forward over time? Thanks. Yes. So I'd say first and foremost, we expect a tremendous amount of growth in INGREZZA here into the future. Seven out of 10 patients still have not been diagnosed, two have tardive dyskinesia. So you have to have a growing product to, of course, drive SG&A leverage. The second piece of investment this year is also preparing for the Huntington's disease launch. So we do have investment associated with that. That is going to be leveraged in particular as you think about 2024 when the growth will more holistically kick in. So I don't want to set up an exact algorithm for you in terms of how do you think about SG&A leverage, but our expectation is this year 300 basis points of leverage and we would continue to expect leverage as you look into even next year. Thank you for the update and congrats on all the progress. Can you talk about the leadership role that Neurocrine played in the small biotech exception that was built into the IRA provision for Medicare price negotiations and the implications for INGREZZA as we think about a long-term life cycle management? Thank you. Yes, Jay, thank you. I think Neurocrine work really effectively with a number of partners, including bio and other organizations. And so while we think there's a lot more work that needs to be done with the legislation that passes, the fact that the small manufacturer and small biotech exemptions in there are extremely helpful to companies like Neurocrine, and we're going to continue our work along with others in order to work with CMS and to work with legislatures over the years as this is rolled out. Yes. Good morning. Kevin and team, congrats on a great quarter and thanks for taking our questions. I had two brief ones. One is valbenazine in Huntington's chorea. I guess I'm wondering if you could remind us as to not really pricing but the pharmacoeconomic value of valbenazine versus Austedo. And what is, call it, target product profile that differentiates it, perhaps even relative in schizophrenia? And my second question is development. That is regarding 846, I'm wondering if you see that as an adjunctive treatment in depression or a monotherapy. Good morning, Charles. It's Erik. I'll maybe just take the first part of your question. With regards to the value prop for valbenazine in Huntington's chorea, obviously we're excited about the opportunity there and we're excited about the data that were generated in the HD study. We're under review at the FDA, so it's not approved for that use. As we mentioned earlier, we are preparing for the opportunity once we get the approval to promote this into the HD chorea population. And we're well positioned for that given the fact that we already have extensive footprint in neurology, especially with movement disorder specialists. And so if you think about the HD chorea population, only about 20% of patients living with chorea formed movements are currently getting treated with the VMAT2 inhibitor. And there are reasons for this. Obviously, some folks are turned off or not willing to accept complicated titration regimens or concerned about tolerability issues. And so we think that we've got a differentiated profile. We're excited and looking forward to bringing valbenazine forward once we do get the green light from the FDA. Eiry? Yes. Thanks, Eric. So the only thing I'd add to what Eric said is that some of same differentiating characteristics that we see for valbenazine versus deutetrabenazine in tardive dyskinesia also hold true for Huntington's disease and maybe even more importance there in terms of the simple lack of complex titration, the lack of food effect and the ability to not have some of the challenges of splitting [ph] capsules in patients with dysphagia. So I think there's several differentiators there from an importance point of view for patients we're very encouraged by. With respect to 846, we have a Phase 2 proof-of-concept study in anhedonia and depression going on right now, which we anticipate will read out at the end of this year. Anhedonia is a really important symptom in depressed patients that is not addressed by currently available antidepressant therapies. And so there's a huge opportunity there for patients to get treatment for their anhedonia element. It's a bit early to tell whether this would be an adjunctive treatment or could have the possibility to be used as a treatment as a monotherapy. In the Phase 2 study, we are looking at the anhedonia scales in patients on current antidepressant treatment. But in addition, we will be looking as to whether there's any direct antidepressant effect on normal depression scales, the MADRS as well. And so I think once we read out the data from this study, we'll have a better understanding of the potential path forward. Good morning. Thanks for taking the question. Just a quick one with respect to the diagnosed TD population that you're estimating. Approximately 30% of TD patients are now diagnosed. I'm wondering if you could speak to the typical duration of treatment that you're seeing among the diagnosed patients, how long are TD patients remaining on a VMAT2 inhibitor once they start? And just out of curiosity, how frequently are patients coming back to treatment? And just wondering what drivers might be contributing there? Thank you. Going into this launch, certainly, we expected that compliance with INGREZZA would be similar to other medicines that these patients are taking for their underlying psychiatric illnesses, consistent with what you see, for example, with antidepressants or with antipsychotics. We've actually been very pleased with the persistency that we've seen subsequent to the launch better than what we expected. So certainly, that's an important driver of growth and has been really since the early days of the launch and has continued all the way through Q4 of 2022. And so we don't see any reason why that would change. It's better than what we expected to see and certainly better than what we see with the psychiatric meds, but we haven't given specific numbers in terms of what the actual persistency is with INGREZZA. And then with regards to the overall patient population, we estimate it to be around 600,000 in the U.S. There are other estimates that are out there that are larger. However, if you look at the progress that we've made over the last five plus years since the launch, we started with an extremely under-diagnosed, under-coded patient population, only low single digit percent of people living with TD had actually been given the diagnosis that was in their medical record. Now we estimate that's around 30%. So we feel good about the progress that we've made. However, there's still a lot of work to do. Still seven out of 10 roughly patients living with TD have yet to be given the diagnosis or really any explanation for their abnormal movements. And about half the time when patients are diagnosed, they're not offered treatment with a VMAT2 inhibitor, which is the new standard of care. So we see a lot of opportunity for improvement and frankly, a lot of opportunity for organic growth with INGREZZA in the TD patient population. We feel good about the progress we've made, but we recognize that there's a lot of work ahead of us. Thanks. Hi. Thanks for the question. This is actually [indiscernible] on for Anupam. You had previously mentioned sales force pull-through expected around 3Q. What metrics are you seeing or tracking to best understand that? Thank you. Hi. What we look at is both leading and lagging indicators. And in our expansion of 2022, we hired experienced salespeople in neuroscience, both in psychiatry and in neurology. And so they come in with a lot of experience and relationships. What they don't have is a direct experience in the TD market. And so that takes a little bit of time to learn. This kind of sales job I think is different than maybe selling an antidepressant or an antipsychotic, for example, in the sense that there's a lot of disease education that occurs really across all these care settings. And we help our customers recognize TD, we educate them on the diagnostic criteria, we use a lot of videos to help them recognize different presentations of TD across different patient types. And not only do they have to help our customers with the diagnostic process but certainly to appreciate the differences between treatment options and why INGREZZA is the most preferred treatment. Ultimately, we also have a fair bit of lift in terms of reimbursement support on the back end since this is a specialty product. And so what we've seen in the past when we've expanded our team is that it took a few quarters for the new salespeople to get up to the same level of proficiency as the legacy team, and we saw that this time around as well. Certainly, we believe that the expansion of our field organization contributed to the strong growth that we saw in 2022. However, we do believe that there's still upside from that expansion that we're going to see going forward. Good morning. Eiry, can you talk about the epilepsy data that's coming in the second half of the year and how you look at this product as a potential differentiator in the epilepsy market? And then, Matt, can you maybe help us just a little with expenses, just maybe anything unusual how they'll be spread throughout the year and just update us on tax rate and how you're thinking about that this year and the next couple of years? Thanks. Okay. Thanks, Marc. So the epilepsy study that we have ongoing right now in Phase 2 for our molecule 352, which is a selective Nav1.6 channel antagonist, it's a focal onset seizure study. Focal onset seizures are the most common seizures seen across the kind of different types of epilepsy. This is an adjunctive trial in that patients are already being treated with somewhere between one and four antiepileptic agents, but still have a baseline seizure frequency that shows a lack of control from their current treatment. The endpoint for the study is the 100 patients. The endpoint is a change from baseline in the seizure frequency measured over kind of a month's baseline period and then compared to the last month of treatment and the overall treatment period is up to 13 weeks. In terms of the differentiation, if we think about the 352 as a selective Nav1.6 antagonist, the majority of currently available antiepileptic therapies have broad pharmacology associated with somewhat unfavorable benefit risk profile. And so the -- our intent here is to understand whether antagonizing what is probably the most important of the sodium channels in epilepsy and doing that alone gives us the efficacy at a lower and appropriate dose without some of the tolerability and side effects that are seen with currently available treatments. Obviously, this is a Phase 2 study. We're on track to read out the data in the second half of this year. And based on what we see there, we'll be considering next steps if we're successful. So real quick on the spending front. The only item that I would call out from a timing or seasonality perspective is we've historically seen a big step up in spending in the first quarter, and that's just associated with specific items that we incur during the first quarter of each year. So I'd encourage you to look back and see what the step ups have been. Historically, a much larger concentration of spending will occur during the first quarter. From a tax perspective this year, I'm expecting an effective tax rate of between 24% and 25%. On the cash tax side, we burned through all of our NOLs in 2022 as a result of the tax legislation associated with capitalized R&D. And so as a result of that, we will be a federal cash tax payer here in 2023. Still holding out some level of hope that that might be put on hold in terms of the capitalized R&D tax legislation. But for now, what I would guide you to is that we would be expecting to be a full federal cash taxpayer this year. Hi. Thanks for taking my question. Congrats on the quarter. So for the 568 muscarinic Phase 2 trial that you have, you previously said that it's a dose finding study. Can you share if it's a once-daily or twice-daily molecule? And from your perspective, how much would dosing frequency matter for competitive differentiation? Yes, I think -- thanks for the question, Ash. We haven't shared very much information in detail about our program. You're correct. It is a dose finding study. It's an adaptive study of up to 200 patients which started towards the end of last year in patients with acute schizophrenia -- acute psychosis. The enrollment in that program is going extremely well right now, and we're looking forward very much to seeing both the impact of this M4 selective agonist on the symptoms of psychosis and also obviously importantly this safety and tolerability profile. Thanks. So on the muscarinic portfolio, you're building the selective M4. 568 is offering the potential for an improved safety profile. So I guess with that in mind, I'm wondering if you could better articulate how you're thinking of the value proposition of the dual M1/M4 and what kind of role that would play as you think about pipeline and from a competitive perspective? And then secondly, as you think of the portfolio here, what's your view on the potential beyond schizophrenia, particularly for the muscarinic and mood disorders, say, bipolar mania and how are you thinking about development there? Thank you. There's a lot of questions in there. Thank you. So we are very excited about the portfolio of assets that came to us from the collaboration with Sosei Heptares. And I think that's one of the real strengths of this collaboration in our mind. Clearly, the M4 agonism is a validated mechanism in the treatment of acute psychosis. I think that's been confirmed both in Phase 3 and Phase 2 clinical trials now. But through mechanisms different from direct agonism, you have obviously the pan agonist as a normal [indiscernible] combination and then you also have the positive allosteric modulator, which requires the presence of acetal cooling to be effective. And so in the context of the M4 selective agonist, it's really early to be able to make a statement around differentiation around safety. Our trial in Phase 2 is designed to give us an initial estimate of benefit risk and the safety and tolerability. And so I think when we read the data from that study, we'll be able to have a much better understanding of how we might differentiate from a tolerability and safety point of view. And then in terms of the broader activity with the M1/M4 dual agonist, beyond schizophrenia, we believe there is a significant degree of opportunity for this platform in diseases impacting cognition all the way through from Alzheimer's to neuropsychiatric disorders that are impacted with deficits in cognition. And in addition, I think your commentary around bipolar also makes sense in terms of the mechanism of action here. And so the only thing I would add is that we have been in -- had a very deep research program in the muscarinics all of them for the last several years. And with that, coupled with our collaboration with Sosei Heptares, positions us uniquely out there in the muscarinic world in that we can test the hypothesis in man with a number of specific compounds, an M4 specific agonist, an M1/M4 and an M1. And so we'll be able to tease out and elucidate exactly the pathways that are involved here and be able to choose the right compound, the right mechanism for the right disease. Hi, guys. Thank you for taking my question. I would love to know some of the puts and takes of tardive dyskinesia in the long-term care setting. This could be a significant driver just given population dynamics. I guess kind of, one, what is the plan for reaching these patients to providers or patients, assuming that DTC is probably not in the question here -- or out of the question here? Thank you. Thanks for your question. And certainly, I agree that this is an exciting opportunity for us that we've been looking forward to really for years. So how do you create leverage within LTC? As I mentioned before, these are facilities that are essentially run by nursing staff 24/7 with providers that rotate through, whether it's the medical directors, the consultant psychiatrists, the nurse practitioner, the consultant pharmacists. And our team really has worked to understand what are the dynamics locally in terms of these facilities, who are the facilities that the providers are rotating through, what's the relationship with the LTC pharmacies? And this kind of building what I would call an outside-in account management approach so that you can work with a number of providers, but really affect a much larger number of facilities. Obviously, we do a lot of education. We go in and do in-service programs for the nursing staff and for the entire care team really in those facilities to help them to recognize TD movements, flag those residents, and bring them to the attention of the providers so they can do a full differential diagnosis. And so it's a team approach. It's a more complicated environment than what you see in most outpatient clinics. And in some ways, it's more similar to what you might see, for example, in a hospital environment in terms of how you need to sort of manage those accounts. So we're excited about the opportunity. We are seeing good progress there. It's not nearly as developed, as I mentioned earlier, as the psychiatry and neurology business segments. And that's because essentially, this is just getting off the ground for us with INGREZZA. And so in some ways, 2023 in LTC is akin to 2017 for what our launch was like in psychiatry and neurology. So we feel good about the progress we're making, and you'll hear more about that as we move through the year. Hi. Good morning. Thanks for taking my question. Can you talk a little bit about the Huntington's disease chorea? With the awareness that physicians have with INGREZZA in TD, how do we think about the ramp of the launch in that indication, if you could talk about that? And in CAH, separately, can you talk about kind of where the patients are treated? And if there are differences then, how and where patients are treated in Europe as opposed to the U.S.? Thank you. I'll take the second one first, Ami. Thank you for that. I think it's pretty consistent in how patients with CAH are treated. It's usually in our experience in expert endocrinology clinics. These clinicians know their patients well. We certainly don't have an issue of diagnosis here. And I think we have seen a lot of similarity as we've run these global trials. Yes. With regards to the first part of your question about the dynamics within the Huntington's community, I'll start off by saying that we're excited about the data that we've generated and certainly look forward to getting the labeling from the FDA later this year. We have complete coverage of the movement disorder neurology community with our existing neurology sales force. And obviously, we need to introduce the data and the label to those neurologists that are treating these Huntington's patients. But this doesn't require any kind of significant lift or change to our commercial footprint. So this is really another opportunity to create leverage with our existing infrastructure, and we're excited to bring what we think will be a differentiated product to a population in need. Hi, guys. Thank you for taking my question, a two-part question. First is, you have three major catalysts this year. You have the focal onset, CAH data and then the anhedonia and MDD data. Can you maybe articulate for us how you are thinking about these three distinct catalysts? Is there one where you have higher probability of success, especially on the focal onset and CAH where there is sort of more mechanistic rationale? And then if you can also talk about anhedonia, why do you think [indiscernible] agonist might be more sensitive in these patients? And what should we anticipate on the endpoint that you are evaluating the endpoint that you are looking at in Phase 2? Thank you. Yatin, you asked a few dozen questions in there. We could probably spend the better part of the hour of this call in going through that. What I'm looking forward to is, as the year goes on, to be able to talk about each of these programs in greater depth. And as we get closer to data, obviously, we're going to be speaking about them. So I'd like to basically put your questions on hold until we have a better forum where we can hit each one of them in detail. Good morning. Thanks for taking my question, which is in effect an expense management one. Given the timing of your recent new gene therapy collaboration with Voyager, are you thinking about your stake in Voyager as a longer term strategic one? Or does the timing of your transaction allow for some tactical moves that could allow you to defray some SG&A expense related to the -- R&D expense related to GBA1-associated program in the near to midterm, especially if Novartis opts into its collaboration with Voyager in the current quarter? Yes. So from an expense management perspective, this wasn't done for any type of expense management. There will be not a ton of burn here in 2023, but it really puts us in a position to have an expansive gene therapy preclinical portfolio that's going to put us in a position to be able to -- hopefully be able to have both disease-modifying curative medicines for patients when you look back 10 years from now. So very strategic in terms of what we've done here. And also on the financial front, we have plenty of financial flexibility here even post the upfront payment that we'll be making. And so it allows us strategically to continue to make larger or different investments even outside of gene therapy as we look forward. Thank you. Great. Thank you for squeezing me in. I have another question on crinecerfont. So when we talk to doctors, they all are excited about the profile of the drug and everything. But they said payers are going to be a little bit of a challenge. To that end, how do you foresee potential challenges there given that glucocorticosteroids are cheap, what can you do to help payers understand the profile of the drug? And is there a bar in terms of clinical efficacy that would basically move them over? Thank you. Yes. So I'll just comment quickly on the payer front. This is a disease area where we're going to have to educate payers, similar to what we did with tardive dyskinesia. The thing that we'll be emphasizing with payers is that these patients are often very poorly managed. The steroids are an important treatment that keep them alive. But most patients are either at any given point in time, either over treated or undertreated with their steroids. And therefore, their disease is not well controlled. And that's really where the value story for crinecerfont comes in to improve that disease control and what we hope to demonstrate is to reduce the steroid burden. So we're excited about the opportunity. Obviously, we need to see the data. But we've got a plan, and the plan is not only to educate the provider and patient communities but also to work carefully with the payers so that they understand the value proposition of crinecerfont and where it fits in, in terms of the overall treatment landscape. I want to thank you all for your questions. I have just a couple of final remarks here. First and foremost, we're looking forward to a very strong 2023, which is evidenced by the guidance that we gave you for INGREZZA and looking forward to the potential of adding the HD, Huntington's disease, to our label in August, which is our PDUFA date. The other thing is that, as you know, we've talked a lot over the years. And the goal of the company is to become the leading neuroscience company in the world. And we broadly talk about neuroscience as being neuroendocrinology, neurology and neuropsychiatry. It's interesting if you look at the three data readouts that we have this year, CAH, FOS and anhedonia, they cover all three of those areas of neuroscience. And with that, again, I'd like to thank you for all the questions you had and look forward to getting together with you in the coming months. Take care.

EarningCall_358

Good afternoon, and thank you for attending today's Paycom Software Fourth Quarter and Full Year 2022 Results Conference Call. My name is Daniel, and I will be your moderator for today's call. [Operator Instructions]. It is now my pleasure to hand the conference over to our host, James Samford, Head of Investor Relations. James, the floor is yours. Thank you, and welcome to Paycom's earnings conference call for the fourth quarter and full year 2022. Certain statements made on this call that are not historical facts, including those related to our future plans, objectives and expected performance, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this conference call. While we believe any forward-looking statements made on this call are reasonable, actual results may differ materially because the statements are based on our current expectations and subject to risks and uncertainties. These risks and uncertainties are discussed in our filings with the SEC, including our most recent annual report on Form 10-K. You should refer to and consider these factors when relying on such forward-looking information. Any forward-looking statement made speaks only as of the date on which it is made, and we do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Also, during today's call, we will refer to certain non-GAAP financial measures, including adjusted EBITDA, non-GAAP net income, adjusted gross profit, adjusted gross margin and certain adjusted expenses. We use these non-GAAP financial measures to review and assess our performance and for planning purposes. A reconciliation schedule showing GAAP versus non-GAAP results is included in the press release that we issued after the close of the market today, and is available on our website at investors.paycom.com. Thanks, James, and thank you to everyone joining our call today. We ended 2022 with very strong results, and I'd like to thank all of our employees for the consistent hard work and execution that drove 4 consecutive quarters of revenue growth of 30% or more over the respective prior year periods. I'll spend a few minutes on the highlights of our fourth quarter and our full year 2022 results and high-level expectations for 2023. Following that, Craig will review our financials and our guidance, and then we will take questions. Our 2022 fourth quarter revenue of approximately $371 million came in very strong, up 30% year-over-year, bringing our full year 2022 revenue to $1.375 billion, also up 30% year-over-year. Fourth quarter adjusted EBITDA also came in very strong at $164 million, representing an adjusted EBITDA margin of 44% bringing our full year 2022 adjusted EBITDA to $580 million, representing an adjusted EBITDA margin of 42%. The sum of our 2022 revenue growth rate and adjusted EBITDA margin resulted in us hitting the Rule of 72. With our full year 2023 guidance, we are once again starting the year strong with outlook for a solid Rule of 65. As a reminder, we guide to what we can see based on our existing recurring revenue, new business sales and anticipated new starts in the near term. I'm pleased with the momentum we are carrying into the new year. On the product front, 2022 was a very strong year for Paycom benefiting from our first full year of rolling out Beti, our differentiated employee self-service payroll solution. We are seeing strong demand trends that position us to deliver another year of rapid profitable growth in 2023. We are leading an industry transformation by making payroll and HCM processes more efficient for both employees and businesses by eliminating manual tasks, improving accuracy and reducing liability exposure caused when payroll and HCM is done in accurately. With Beti, employees are doing their own payroll by interfacing directly with their data and a self-service, easy-to-use software. A recent study conducted by Ernst & Young found that the average organization has a 20% in accuracy rate when it comes to payrolls, which results in lost revenue, hours wasted correcting errors and increased exposure to potential lawsuits and fines. Each of these mistakes cost an average of $291 and could cost upwards of $705 for unentered nonproductive time errors. So you can see how costly these errors become over time. In fact, over the course of the year, a 1,000-employee company could potentially incur almost $1 million in unnecessary costs, correcting common payroll mistakes. Beti automates the payroll processes to deliver perfect payroll and employees are empowered to identify and correct errors ahead of time so that everybody wins. Our marketing plan in 2022 continued to perform well, delivering strong demo leads throughout the year as we spend aggressively on advertising. At the same time, our deliberate investments in marketing are delivering high-margin revenues and we saw improving operating leverage in the sales and marketing throughout 2022. We continue to be pulled upmarket in 2022 with the fastest-growing revenue segment of our business coming from clients with greater than 2,000 employees. We are seeing increasing demand from larger organizations that are recognizing the opportunity to simplify their HCM needs. And Paycom is well positioned to benefit from this trend. With only approximately 5% of the TAM today, there's still plenty of runway ahead for us to expand our market share. Paycom received national recognition from several organizations in 2022. As a workplace, we were named One of America's Most Trusted Companies, as well as Best Company for Women, and we received a Top Workplace in Oklahoma award for a tenth consecutive year. These awards are a testament to our hard work, our thriving corporate culture and our client focus. As of December 31, 2022, our headcount stood at over 6,300 employees, up 18% and year-over-year as we continue to have great success attracting and retaining high-quality talent to further bolster our future growth. Additionally, I want to congratulate the 2022 Paycom Jim Thorpe Award winner, Travis Hodges Tomlinson from Texas Christian University. This award recognizes the most outstanding defensive back in college football and memorializes Jim Thorpe, who is one of the greatest all-around athletes in history. Jim Thorpe also happened to be an Oklahoman. To sum up, our focus on the employee experience and client ROI continue to fuel our strong results and we are executing well. I'm very excited about the long list of new innovative opportunities we will be pursuing in 2023 and beyond. I'd like to thank our employees for helping to make 2022 such a strong year and we are set up for another great year in 2023. Before I review our fourth quarter and full year results for 2022 and our outlook for the first quarter and full year 2023, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. We ended the year with very strong results with full year 2022 revenue of $1.375 billion, up 30.3% compared to 2021. Fourth quarter results were excellent, with total revenues of $370.6 million, representing growth of 30% over the comparable prior year period. Our revenue growth was driven by strong demand, new business wins and adoption of recent new product offerings. Within total revenues, recurring revenue was $364 million for the fourth quarter of 2022 representing 98% of total revenues for the quarter and growing 30% from the comparable prior year period. We ended 2022 with approximately 36,600 clients, representing a growth rate of 8% compared to 2021. On a parent company grouping basis, we ended the year with roughly 19,100 clients, also up 8% compared to 2021. Total number of employee records increased 14% year-over-year in 2022 to 6.5 million. Paycom's annual revenue retention rate in 2022 was 93%, which was consistent with our recent 4-year average of 93% and up more than 200 basis points from the prior 4-year period average of 91%. Total adjusted gross profit for the fourth quarter was $312.5 million, representing an adjusted gross margin of 84.3%. For the full year 2022, our adjusted gross margin was 84.9%. Adjusted sales and marketing expense for the fourth quarter of 2022 was $87.3 million or 23.5% of revenues. Our marketing strategy in 2022 has been very effective at driving high-quality demo leads with the revenue generated from prior period investments, we saw a 100 basis point improvement in adjusted sales and marketing expense as a percentage of revenues for the year. We plan to continue to invest in marketing in Q1 and throughout 2023. Adjusted R&D expense was $36.6 million in the fourth quarter of 2022 or 9.9% of total revenues. Adjusted total R&D costs, including the capitalized portion, were $51.8 million in the fourth quarter of 2022 compared to $44 million in the prior year period. We have a very strong pipeline of product development opportunities in 2023 that we believe will create tremendous value for our clients and for Paycom. Adjusted EBITDA was $163.9 million in the fourth quarter of 2022 or 44.2% of total revenues compared to $109.6 million in the fourth quarter of 2021 or 38.4% and of total revenues. For the full year 2022, adjusted EBITDA was $579.7 million or 42.2% of total revenues compared to $419.3 million or 39.7% of total revenues in 2021, representing over 240 basis points of margin expansion. Our GAAP net income for the fourth quarter was $80 million or $1.38 per diluted share versus $48.7 million or $0.84 per diluted share in the prior year period based on approximately 58 million shares in both periods. For the full year 2022, our GAAP net income was $281.4 million, or $4.84 per diluted share, up 44% year-over-year. Non-GAAP net income for the fourth quarter of 2022 was $100.2 million or $1.73 per diluted share versus $64.4 million or $1.11 per diluted share in the prior year period. For the full year 2022, our non-GAAP net income was $357.2 million or $6.14 per diluted share versus $260.4 million or $4.48 per diluted share in the prior year period, up 37% year-over-year. For Q1 and full year 2023, we anticipate our effective income tax rate to be approximately 28% on a GAAP basis and approximately 26% on a non-GAAP basis. Turning to the balance sheet. We ended the year with a very strong balance sheet, including cash and cash equivalents of $401 million and total debt of $29 million. During 2022, we repurchased approximately 365,000 shares for a total of nearly $100 million. Through December 31, 2022, Paycom has repurchased nearly 4.7 million shares since 2016 for a total of nearly $590 million, and we currently have $1.1 billion remaining in our buyback program. Cash from operations was $365 million in 2022, representing an increase of 14.3%. The new requirement in 2022 to capitalize instead of expense R&D costs resulted in approximately $27 million in additional income tax payments that would have been deferred under previous law. This impacted both our operating cash flow and free cash flow as compared to 2021. The average daily balance of funds held on behalf of clients was approximately $2.1 billion in the fourth quarter of 2022. For 2023, we anticipate stock compensation to be approximately $120 million. On the capital expenditure front, we're in full construction of our fifth building in Oklahoma City, and we now estimate total CapEx as a percent of revenues to be approximately 12% in 2023. Now let me turn to guidance. For fiscal 2023, we expect revenue in the range of $1.7 billion to $1.702 billion or approximately 24% year-over-year growth at the midpoint of the range. We expect adjusted EBITDA in the range of $700 million to $702 million, representing an adjusted EBITDA margin of approximately 41% at the midpoint of the range. Once again, we are starting the year's guidance at the Rule of 65. For the first quarter of 2023, we expect total revenues in the range of $443 million to $445 million, representing a growth rate over the comparable prior year period of approximately 26% at the midpoint of the range. We expect adjusted EBITDA for the first quarter in the range of $210 million to $212 million, representing an adjusted EBITDA margin of approximately 48% at the midpoint of the range. 2022 was a very strong year for Paycom, reflecting the strength of prior year investments and consistent execution. We will continue to invest in talent, marketing, innovation, customer service and geographic expansion to meet the strong demands we are experiencing. Two questions. Chad, can you talk a little bit about what you're seeing on there in terms of end demand, obviously, the markets are nervous, the kind of data points about SMB coming in that they might be weaker on some of the players in the other segments of the software market. So just talk a little bit about what you're seeing. We're also looking at the numbers, your renewals came in at 93 versus 94. Just kind of just paint a picture for us a little bit there. And then one for Craig, if you think about the new year and investments, like how do you think balance that kind of seeing other guys be nervous about the economy and your investment approach for the year? Just talk a little bit about the flexibility there. Yes, I'll start off. I mean our go-to-market remains very strong. We continue to have very strong book sales, and we've been selling Beti across the board. New clients that come in have about 50% of their employees doing their own payroll within the first 2 months of using Beti. And so that continues to be successful. From 2015 to 2018, we had a retention rate of anywhere from 91% to 92%, was 91% for 3 of those years and 92% for 1 of those years. For the last 4 years, from 2019 through 2022, we've had a retention rate of 93% for 3 of the years and 94% of one of those years. There's often rounding at play as you look through that. But what I will also say is with clients who have Beti, we have a much, much higher retention rate across our base. And I would expect retention to continue to rise as a larger percent of our current client base deploys Beti. Yes, Raimo on the plan for 2023, we've given our guidance on our adjusted EBITDA. And it's still a very strong guide on that as we're looking at 41%. So we -- as I mentioned in the prepared remarks, we're going to continue to spend on the marketing side, the R&D side and then in the service side as well. And really, the marketing is the one area where we can pull leverage. We don't have any long-term commitments out there. So that is an area where we could pull levers if we needed to. Great. I guess first one, Chad, did I hear you say -- I think you said you had just north of 6,300 employees. I think that's high teens growth over the prior year. I'm just curious how we should think about the hiring in context of it's slightly slower than it was in 2021. I'm just curious, is it that we're -- should you expect just productivity to increase? Maybe what the exit rate on that growth rate is and just how we think about the hiring trends for Paycom itself? Yes. I mean, we hired what we look to hire last year. I believe our growth was around 18% in hiring. We definitely have a more efficient client. I've been talking about for quite some time, who we kind of have the haves and the have-nots when you look across our client base with those clients that have already deployed Beti and are getting strong usage out of it. We're just -- we're having to do less for them. I mean we're having to fix less things. We're having to do less adjustments, and so they're just much more efficient. And so we don't need as many people when people are using Beti. That said, we had a very healthy growth in our employment last year. And so I believe we had success with that. Great. And then maybe if I just think about -- we've almost fully lapped the new office expansions by a year. I know it usually takes a little bit over a year for them to become fully productive, but just how are those progressing? And how should we think about -- are there any new planned offices that you're assuming in the 2023 guidance that you just gave? We always guide to what we can see. I mean, first, I'll answer those office questions. We did open up 5 offices over the course of about 3 months. One of those, I believe, was in December of 2021. The others were in the first quarter of 2022. All of those continue to progress. They wouldn't be at full staffing yet, but they would achieve that throughout this year as well as with the full backline pipeline. And then next year, in the year of 2024, they would all be on the same quota as our mature offices are. As far as what we anticipate to do this year from office openings, as we all know, that you followed us for a while, office openings that we would anticipate to expand into this year would have very little impact on this year but would have more of an impact on both 2024 as well as 2025. One question. Craig, you mentioned you've got $2.1 billion held for cash, held for clients in the fourth quarter. What sort of effective yield are you getting on that? And what is the expectation with regards to the float balance growing over the course of the coming year? And how we should think about an effective yield on that? Yes. So Mark, on the balance, if you look at it this quarter, it grew about -- it's grown at different rates throughout 2022. So it's typically going to grow at a rate lower than what our expected revenue growth rate is going to be. Part of that is as we continue to move upmarket, that those funds are held for a less period of time. We have to make those payments much quicker. So that move up market, we'd keep that from growing at the same rate as our growth rate. In terms of the yield, we haven't really given the exact yield but what we do say is that as the rates move up for every 25 basis points, we would expect to get about $5 million. But it layers in over time. And as we're continuing to look for longer-term investments on our portfolio, some of those are at a little lower rate. And we've actually started to layer in some of those. You can see that from some of our earlier filings. So we're not going to get -- and also the banks are a little slower to give you those 25 basis points. So it takes a couple of quarters to get those layered in. So it would be something lower than the Fed funds rate. Okay. Would the rule of thumb, 70% to 80% of Fed funds with a delay be kind of a good rule of thumb to think of? Congratulations on a real nice job with the business in 4Q. I just wanted to ask you a question about either the business activity or the pipeline momentum by customer size. Are you seeing any differences in terms of the demand or the behavior of the larger organizations that are flowing through the pipeline versus, say, the smaller companies? Well, we've definitely continued to creep up as we have done even since IPO as we've continued to increase our target market. In fact, last year, revenue was up 60% with clients that had 2,000 employees or more. So we are definitely seeing a demand continuing to be pulled higher, especially as businesses are looking to deploy Beti so that their employees can actually do their own favorable. And then one follow-up just for Craig real quickly. Did you buy back any stock in the quarter? And can you just remind me again how much authorization you've left for buybacks? Yes. So I don't think -- we didn't buy back any this quarter. For the full year, we bought back about $100 million worth. And I think we have a $1.1 billion left on our buyback. If you look at the growth expectations for 2023 here, how do you think about the mix of growth from new customers versus existing? As we know existing customers, while smaller historically in net new bookings, their growth has increased in the last couple of years. And we're seeing some different trends with different software vendors. Yes. We're -- ours is going to primarily come from new logo ads when you just look at the size of revenue that we need to grow by in order to continue to hit our objectives. And so first price is going to be new logo adds. We don't really have a lot to call out on pace per control growth from that perspective. But new logo ads is going to be primary for us. We've always had a healthy upsell to current clients. It's just been at a much smaller level than what new logo ads are. And it's been consistent, our upsells to current clients as a percentage has been consistent each year with the exception of the year we had ACA. Got it. That's helpful. And then as we look to Q1 here, how should we think about the impact from W2 revenue? Remember, last year, that was impacted on a year-over-year basis because of the turnover in 2020 due to COVID. Are the trends going to normalize here in this March quarter given what happened in '22 with hiring or anything to highlight there? Yes. I feel like they are more normal. I think it's important to understand that the -- our year-end services as far as what we provide to a client. That hasn't changed a lot in the last 15 years as far as you added 10 99s at one point, but you have W2s, W3s 10 99. Meanwhile, the growth of our other revenue as we've added all these other products has been somewhat substantial. And so it's just the percentage or amount that our year-end services has on the overall client base is much lower now than what it was in the past just because it's not growing at the same rate. I would say, yes. I mean I would say, yes, from a normalization. I think you saw normal hiring and business patterns more so last year than what you had in year's past -- in a couple of years past. So from a normalization of year in forms filing, yes, I would say that we were there. I guess I just want to dig into a little bit more on the outlook for next year and particularly on the margin side. I think you talked about in the past that if we think about float income flowing through that, that some of that would flow down to the bottom line. So just trying to think about how you're thinking about that layering in for '23 and kind of where are the biggest areas of incremental investments are coming and that's lead into the EBITDA, slight guide down from where we were in '22. Yes. Primarily, we've continued to invest in sales and marketing, and that's what we said on the prepared remarks. We're going to continue to invest there and assuming it's going to continue to work. So that's really the area where we're going to continue to invest. Also in the R&D, I mean, we have a lot of projects in the works, and we'll continue to hire aggressively in the R&D side as well. Okay. And I guess on the marketing spend that you're putting out there, I know it's been a more recent initiative for you all, I guess, what's kind of been the ROI on those dollars that you have seen? And how has that kind of changed the top of funnel activity or conversion rates that you've seen as kind of the brand awareness campaigns have gotten out there more? Yes. I mean marketing, we started in 2020. That was also the year that we added 4 inside sales teams. And then in 2021, we added another 6 inside sales teams. I believe one of those years, our unit count went up about 17% with 72% growth. Marketing drove that as we do our marketing and spend money on advertising we have clients of all size call us. And so marketing is directly responsible for any business that's coming in below 50 employees. And you have some direct responsibility for it above 50 employees, but it provides more support at that level as our go-to-market's different, above 50 employees than what we experience below. Growth first prize, as Craig has talked about. And as we look at guidance into this year, we expect to spend healthy marketing. But also, we expect for it to work, which would return itself with highly profitable revenue, which we did see throughout 2022, which produced a healthy adjusted EBITDA margins. Chad, if I look at your clients' growth in 2022, 8%, that's kind of slowing down versus pre-COVID level, which used to be more in teens. I'm sure there's a factor of like you're moving up markets or client size, but is there anything else we should -- anything that impact it? And how should we think about the client growth rate going forward? Yes, I would say the comp had a little bit to do with it. Prior to 2020, we had 5 sales reps that sold inside sales. In 2020, we added 40. And then in 2022, we added roughly another 50, 60. So we started selling small business, emerging business in a much stronger way as the advertising was working. So -- and I don't want to say that our unit count was inflated prior, but it was different because we did add a lot of small business units and it contributed to a 17% growth in units. I think we've had -- and again, it did that in the year where we did 25% revenue growth. So I think as we look last year, you could deduct that we had a lot of success selling in midrange and above midrange in clients. And I would say our small business adds were somewhat more normalized because we didn't really add any small business teams last year like we had in 2020 and 2021. And then as a follow-up, into your guidance, what sort of conservatism have you baked into your guidance. I know this is definitely going to help floating come this year, but what sort of macro environment you're factored in into your guidance? Yes. I mean, we continue to guide in the $2 million range. So we have quite a bit of visibility as we go quarter-to-quarter. I will say that in -- we started our guide last year for 2022, we started it at 25%, and we were comping over a year where we had done 25% growth. This year, we're starting our guide at 24% comping over a year where we had done 30% growth. And so we haven't changed our approach to guidance. We guide what we can see and achievement matters throughout the year. And so that's what we're focused on as we move throughout the year. And so I'm trying to answer your conservatism. I mean, we guide to what we can see each time, and we look to unload the musket throughout the quarter. I wanted to follow up on retention first. So I heard the comments about Beti clients being higher and the relative stability from prior years. But just as we think about the year-on-year downtick here, can you talk about -- is this larger client churn? Or is it a lot of turn among smaller clients? Just trying to understand that dynamic. Well, we're definitely -- from a smaller client perspective, and of course, they contribute smaller revenue amounts. But from a smaller client perspective, I do think that you're sending more -- you're seeing more of a trend -- like maybe what you saw more pre-pandemic, I mean there's less prop up for them in the market. For most new businesses, I believe, about 75% of them fell within the first 3 years. So all that's at play when you're working with smaller business. As I just mentioned, we started adding -- really started adding those small business units in 2020 and then continue throughout 2021 and even added more obviously in 2022. And so that definitely plays into it. I would also say that it's a revenue retention number. So you have a dividing number that you start with. I've been talking for quite some time about the efficiencies that clients are using Beti and what they're gaining. In fact, we're just -- we're not having the same hiccups with them that we would often charge them for at a lower margin and then have to fix. And now those are really being prevented with Beti. So you've got a couple of things at play. And then also, you've got some rounding at play, but all that's to say is 93% from what I've seen still up there an industry-leading number. And I do expect, again, with clients that have Beti, I mean we're running at a 99% type retention rate with them. So it's a little bit different there. And as we continue to convert our current client base over to Beti, we expect to have some gains in that. I will mention that we always have some uncontrolled losses, your bot sold merge type businesses. So getting to 100% isn't achievable. But I believe that we continue to have an opportunity to bump up retention, and that's going to come through usage -- appropriate usage of our product. Okay. Understood. And then a follow-up on margin here. So Craig, I may have missed it, but did you say where you expect gross margin to land in 2023? And I hear your message on increased efficiency in sales and marketing, and you've also mentioned increased, I guess, new product development. Should we expect that the explanation around EBITDA downtick year-on-year, more about R&D ramping? Or is it both R&D and S&M? Yes. I would say it's both R&D and sales and marketing. And as we're looking for our plans for 2023. We didn't really talk about the adjusted EBITDA, but we've been doing a pretty narrow range for the last several years. Yes, gross margin for the last several years. Maybe, Chad, you've been pretty vocal about opportunities in automated payroll and broader HR -- when we think about generative AI, I feel like this is up your alley. I mean, what excites you most about the technology if you've looked into it? And what could it mean for Paycom and HR as a whole? Well, I mean, we are solving problems for the client and processes that I believe can be automated and hadn't been until really Beti came into play, which somewhat forces appropriate usage within our software for employees so that they can get paid correctly. I do believe that there's more automation that we can be doing. But you've got to start with, you've got to have the client and the employees using the product correctly, which I will say that about 50% of our client base, that is the case. And last year was our first full year of selling Beti and bringing it to the market. And so we're having a lot of success for that. I believe AI for the sake of AI isn't really valuable to the client. But I believe that if you can do something consistently and you can use something like AI to do that, I think that's a good thing. So I don't expect we would see it as a wide platform within our industry this year type thing with that, but I think you'll have more and more businesses looking for that machine learning and other types of automation that could be used to automate problems experienced by our clients right now. Okay. No, that's fair. And then just, Craig, maybe a quick one. I think the beat in the quarter, $18 million, 6% beat toward the higher end of what we've typically seen over the last 4 years. Anything to note on the strength, expense management, anything on timing of some investments? I mean there are really 3 or 4 buckets that really helped drive that EBITDA beat. One, your marketing spend was a little higher fourth quarter, and some of that is just when we are doing those marketing things that we had planned. A little higher capitalization rate on the development, and that's focused on new initiatives. Beti clients generate higher-quality revenue. So we saw a little bit of that. And then in the quarter, we had a net insurance proceeds of about $4.8 million for expenses that were incurred both current and prior year quarters. So that's really what drove the adjusted EBITDA beat. I just wanted to ask a question. How should we think about growth from existing clients who are expanding their own client base? Not any different than what we've experienced in the past. I mean, again, I'm removing the COVID year out of that, but not any different than what we've experienced in the past. In any given year, you have some clients grow, you have some clients not. You have some clients buy business. You have some clients sell business. And so I believe that's always somewhat worked itself out. Maybe we win some. Maybe we lose some. But really, the growth for us is driven by new logo adds. I mean, Holly has booked sales numbers that drive our revenue growth, and that's how we're going to hit our targets. I think that we expect stability within our current client base as we look to guide, we do have an assumption of stability. We don't really make assumptions of growth and/or downsizing within those -- within our current part -- across a 30,000-plus client base seems -- it tends to have averaged out over the last 25 years that I've done this with the exception of the 2020 -- some in 2021 time period. Terrific. And if you can just kind of help me to reconcile the 8% growth in new logos versus 14% employee expansion? How should I interpret those two numbers? Well, I mean, that would tell you that the client size is growing as well there. We -- I've been continuing to call out that we're having success continuing to be pulled further and further up market. A couple of years or about 6 years ago, we went from 2,000 to 5,000. A couple of years ago, I mentioned that we're going up to 10,000. I talked about how we're continuing to go up even further. And so that's going to get you a larger employee count with potential for less of a unit count. But I would also say, I don't want to overlook the fact that we've had a lot of success on the small business unit. And when you're looking at unit count growth, they're all created equal. I mean everything is -- whether you're a 1 employee unit or whether you're a 10,000-employee unit, you're created equal on that report from a unit count percentage. But it's just been a trend to larger clients with the exception of the 2 years where we decided we're going to add our small business, emerging business units, our groups, of which now we have 10 teams and that really hasn't grown. The teams haven't grown. Of course, we continue to add small business units. Chad, I know we touched on this a bit earlier in the call, but are you seeing anything as it relates to changes in the pipeline generation or sales cycles over the past few months? Maybe even reasons why customers are maybe looking to switch and selecting take up. I mean we continue to have strong product demonstration leads, but that's oftentimes a function of our marketing and advertising, and we pay for those leads. I can say for us, it's been business as usual. We've been back in the field since September last year, meaning actually back on site on every single call, where before we were doing more of a hybrid some were virtual, some were in person. So I would say, if anything, we're having less calls with the client to get to close. I can't necessarily say that's speeding up the process, but I think we're having better conversations as we go through the process. So really nothing to call out there. Other than today, when a client calls Paycom and looks to have a product demonstration, it's about Beti. And I would say, in times past, it could be about whatever thorn had in their paw that we'd be looking to pull out. So it's a little different today in the type of lead we are generating. Got it. And just a follow-up, how do you think about the par opportunity in 2023 relative to some of the growth that you saw in 2022? Any specific areas of modules that are -- Well, Beti definitely drives PEPM, because you definitely have to have a certain product set for us -- from us purchased and being used -- so I would say that the clients that we are selling in 2022 have a better, stronger product mix than those clients we would have been selling in 2018 in or 2019. We still do have an opportunity with current clients. We do have to really work at their pace to get them over to Beti and really to get them to achieve the value that it can deliver, and we continue to look at that. And there's still opportunities obviously, within our current client base to deliver more PEPM as well as on new business sales. Great. Just on that comment about Beti, Chad, can you update us what percentage of the base has Beti at year-end? We're around 50%. It's about where we were when we reported in November, as clients go through year-end, there's different objectives for both them and us as we're onboarding clients. Beti does require a conversion of process on the side of the client as it is going to change how their employees utilize the system. There's a detailed conversion type plan that we go through with every current client as they choose how and when to deploy. But we're continuing to meet out there with our clients. I would also say that your larger clients are deploying it a lot quicker. Current clients are deploying it a lot quicker than what your smaller clients -- current clients might be deploying it as a point that I would mention once more all businesses of any size, whether they're small or large since July of 2021 have been sold and converted into Beti. So we're really talking about our current client base that we had prior to that. Great. And then just lastly, and you touched on this a couple of times about sort of the upmarket success and opportunities. As I think about sort of how you're investing to attack those opportunities. Is this strategic, i.e., that you're devoting more resources specifically because you think there's more opportunity upmarket? Or is this tactical in which kind of year in and year out, you're deploying resources and maybe 1 year, you see more opportunities smaller and down market and another you're seeing more opportunity in the upmarket, so you can be sort of tactical with those sales investments. Yes, I'd say it's a little bit of both. And one thing I've been saying for quite some time now, our industry shifted. It shifted to leverage employee usage to help the client. When employees use the product correctly, the client has less exposure and liability around this process, which paying employees, providing them benefits and everything else. I mean that carries some exposure, even how you have an employee applies for a job. And so I believe that all these -- the self-service technology has really been helping the client. The reason I say that is this, when it comes to an employee, Jan Smith, whether Jan Smith works at a 30 employee or whether Jan Smith works for a 10,000 employee in regards to how they work with HCM and payroll products it's substantially the same as far as the needs that Jan has. So what I would say is we've stayed very focused on the employee and an employees and employee regardless of which company they work for. Are there some things that a larger company we just know we're going to run into that's going to be different than what we would run into in a company that might have 150 employees? Absolutely, there's some changes in that. And I would say that's where more strategy comes into play as well as making tactical moves to make sure that we're able to provide the back-end experience that they're looking for. But I will say the more that we're doing at the employee level, the less you're having to do on the back end because a lot of the things you're doing on the back end is to make sure you're not having issues with the employee data and/or if you do, you're having to fix it. And so you get a lot of points for prevention these days. And large companies, they don't want to do a lot of extra work either. Thank you. And with that, we will conclude our time of question and answer. I would now like to hand the conference back over to Chad Richison for closing remarks. Well, I want to thank everyone for joining the call today, and I want to send a special thank you to our employees for contributing to our continued success. The 2022 is a great year for Paycom, and we're set up for another great year in 2023. We'll be hosting meetings in New York at the Wolfe March Madness Software Conference in February. We'll also be participating in the KeyBanc Emerging Tech Conference and the Morgan Stanley TMT Conference in San Francisco in March. We look forward to catching up with many of you soon. And operator, you may disconnect. Thank you.

EarningCall_359

Good morning. Thank you for participating today and we will begin our SK hynix 2022 Fourth Quarter Earnings Release Conference Call. After the presentation by SK hynix, we will be having a Q&A session. [Operator Instructions] Our earnings release today will be interpreted simultaneously, while our Q&A session as consecutive. Good morning and good afternoon and evening to those calling from abroad. This is Park Seong Hwan, Head of IR at SK hynix. Welcome to the SK hynix 2022 fourth quarter earnings release conference call. Before starting the conference call, allow me to introduce the executives present here today. First CFO, Kim Woo-Hyun, who will be presenting today; Park Myoung-Soo, Head of DRAM Marketing; and Park Chan-Dong Head of NAND Marketing. A reminder that all earnings results and outlooks presented by the company today are subject to change, depending on the macroeconomics and market circumstances. With that, we will now begin SK hynix's earnings release conference call for the fourth quarter as well as full year of 2022. Good morning, everyone. This is CFO Kim Woo-Hyun. Let me begin today's presentation with the company's performance for the fourth quarter of 2022. The fourth quarter saw ongoing uncertainties in the macroeconomic environment due to high inflation and elevated interest rates. The rapid decline in consumer sentiment has driven down IT demand and customers' effort to adjust inventory and to cut costs have continued to weigh negatively on memory demand. Amidst a difficult market environment, SK hynix has tried to maximize sales across all end applications, with high inventory levels and escalating price competitions have led to steep decline in DRAM and NAND prices. And accordingly, our fourth quarter revenue was recorded at KRW 7.70 trillion, down 30% Q-on-Q and 38% Y-on-Y. For DRAM, bit shipment growth was flat sequentially in line with our guidance on back of greater sales centered on new products. NAND shipment growth was higher than guidance, growing by high single digits sequentially, supported by demand for new mobile products and greater sales of data center SSDs. Prices are declining at a pace that has not been seen since fourth quarter of 2008, leading to a sequential decline in revenue. Fourth quarter operating loss stood at KRW 1.7 trillion and operating margin of negative 22%, owing to sales reduction and further inventory valuation loss as a result of rapid price drop. Depreciation and amortization in Q4 was KRW 3.69 trillion, increasing marginally Q-on-Q and EBITDA was KRW 1.98 trillion, while EBITDA margin was 26%. There was non-operating loss of KRW 2.52 trillion. This includes net interest expense of KRW 0.16 trillion, net foreign currency-related loss of KRW 0.21 trillion, valuation loss of KRW 0.62 trillion on financial assets, including Kioxia investment; and impairment loss on NAND-related intangible assets of KRW 1.55 trillion. Accordingly, net pretax loss was KRW 4.22 trillion, while net loss was KRW 3.52 trillion, with KRW 0.7 trillion of reverse corporate tax expense, as the company turned into loss in Q4. Therefore, net profit margin recorded negative 46% for the period. I will now report, on the company's financial performance for 2022. Despite an unprecedentedly uncertain market condition in 2022, SK hynix recorded consolidated revenue of KRW44.6 trillion, KRW1.7 trillion higher amounts, than that of 2021. For DRAM, we have proactively ramped up sales of high-density products for PCs and servers. Also we have strengthened our sales and validation activities of products for high-growth areas such as DDR5 and HBM, in response to rising demand for premium products following advancements in computing environments like AI and cloud. In particular, our next-generation strategic products HBM has maintained unmatched market share, drawing on its industry-leading product quality. For NAND, cost competitiveness has improved on back of quick ramp-up of our leading 176-layer products, while sales of eSSD has increased by fourfold Y-on-Y, driven by stronger product competitiveness and expanded customer base. Operating profits for the year was KRW7.0 trillion, a decrease by 44% Y-on-Y due to the rapid decline in demand for memory products during the second half of the year. The company's cash and short-term investments stood at KRW6.4 trillion at the end of 2022, a decrease by KRW2.3 trillion from a year ago, while interest-bearing debt was KRW23.0 trillion, up KRW5.4 trillion compared to that of a year ago. Therefore, debt-to-equity ratio and net debt-to-equity ratio at the end of 2022 was 36% and 26% respectively. While operating profit declined Y-on-Y in 2022, annual spending in equipment and infrastructure has risen and therefore, the company's free cash flow which is cash flow from operating activities, less acquisition of PPE was negative KRW4.2 trillion for the year. Accordingly, dividend for the fourth quarter will be KRW300 per share, while accumulated dividend per share for 2022 will be KRW1200. I will now move on to the company's market outlook and future plans. In 2022, global supply chain disruptions marked by pandemic and geopolitical tensions along with deteriorating macroeconomic environment, due to interest rate hikes to address inflation have led to a stark decline in memory demand since the second half of the year. In response, suppliers have started CapEx reduction as well as utilization rate cuts. But as there is a time lag for the effects to materialize, the imbalance between supply and demand of memory semiconductors had aggravated and led to hikes in inventory levels. Although the decisive factor behind demand recovery will be macroeconomic conditions, demand growth momentum this year is expected to be stronger than that of last year with rising memory usage on back of price elasticity as memory prices have already declined more than 50%, since peak levels. While the inventory levels across the industry are expected to peak during the first quarter, the effects of suppliers' response towards market condition will start to materialize from the first quarter which then will gradually bring inventory level lower and eventually improve supply and demand conditions towards the second half. Looking at demand by application. PC shipment is expected to decline again this year but DRAM content per PC is expected to grow by over 10%, driven by lower sales of Chromebook and higher sales of high-spec laptops and gaming PCs. In addition, demand for client SSD is expected to grow at low 20% level on back of lower cost pressures and rising content from greater supply of PCIe Gen 4. The mobile market saw shipment decline by more than 10% on the heels of weak smartphone demand, especially in the Greater China region. The ongoing bearish consumer sentiment curbs expectations on this year's shipment growth, but we expect demand recovery from second half, as digestion of inventory in certain channels is underway and as impacts of Chinese reopening and economic stimulus measures unfold. The smartphone market will remain polarized this year in terms of memory content. Performance-oriented flagship models will continue to see increasing density, driven by greater adoption of LPDDR5X and UFS 4.0 and competition over market share. In contrast, low to mid-end models will see slower content growth and continuing trend of adopting more discrete NAND over MCPs. Server market is projected to see slowing demand growth due to tightened corporate IT investments spurred by concerns of economic contraction and inventory adjustments by CSPs. However, the launch of a long-awaited CPU will bump up demand of high-spec servers adopting DDR5 in the second half of the year. In addition, increased content from falling memory prices will lead to this year's demand for server DRAM to grow by high teen percent and eSSD by high 30%. All-in-all, demand growth in terms of system build is expected to be low teen percent for DRAM and low 20% for NAND. In terms of DRAM and NAND shipments, we will respond with flexibility to meet the demand growth level as we have sufficient inventory. Due to low seasonality in the first quarter and with elevated level of inventory across the industry, demand is expected to contract more than the usual seasonality. Therefore, we are planning a double-digit percent Q-on-Q decline in DRAM bit growth and high single-digit percent Q-on-Q decline for NAND in the first quarter. With memory prices falling steeply and profitability quickly deteriorating, suppliers are taking actions to bring balance in the demand and supply situation. Taking such market conditions in consideration, the company will reduce this year's capital spending by more than 50% from the KRW 19 trillion of CapEx last year. Meanwhile, in order to be ready for the coming upturn, we will be continuing critical investments to ramp up our new products, such as DDR5 and LPDDR5 and HBM3, that will be the demand drivers as well as investments in R&D and infrastructure to prepare for the future growth. In addition, by maximizing equipment efficiency, we will strive to maintain even enough turns the CapEx efficiency that we have obtained in this downturn. In order to normalize the inventory level and bring forward the balance of demand and supply, we have lowered our wafer input in some of the legacy and lower profitable products in the fourth quarter. In addition, considering the natural wafer loss from the technology migration, our wafer production in DRAM and NAND will be reduced compared to that of last year. Together with slower tech migration, we expect negative bit production growth for DRAM and minimal growth for NAND this year. Once the industry's efforts to lower production growth takes effect from the first quarter and production capabilities are reduced following the CapEx costs, we expect that not only will inventory levels normalize this year, but also a better than expected upturn may come next year. Therefore, despite the current challenges in the market, we will remain dedicated to developing our technology and products, which will form the foundation of our long-term growth and further solidify our position as an industry leader. As of 2022 year-end, shares of our main products of 1A-nanometer DRAM and 176-layer NAND, reached 20% and 60% of the total production respectively. Several of our 1A-nanometer and 176-layer products have already reached mature yield levels and even new products have reached stable yield rates enabling us to increase mass production once demand improves. Although a production proportion expansion of 1A-nanometer and 176-layer products are expected to be limited this year due to reduced CapEx, we will maintain industry-leading product competitiveness by securing readiness for next-generation 1B-nanometer and 238-layer mass production by mid-2023. Growth of DDR5 market, where we have competitive advantage, is expected to accelerate in 2023. The company will advance its place in the DDR5 market with a full lineup of industry's first Intel-validated 1A-nanometer base DDR5 products, including high-density 16-gigabit and 24-gigabit products. Furthermore, the company has developed and provided samples of world's fastest LPDDR5 turbo, which are to be adopted in smartphone flagship models and is planning to start mass production in the second half based on 1A-nanometer node. This product operates at a data rate of 9.6 gigabits per second faster than the previous maximum speed of 8.5 gigabits per second. In combination with its ultra-low power consumption, it will enable a differentiated performance for customer products. Last but not least will be the company's ESG management activities. The company has established the sustainability reporting system, which provides comprehensive ESG-related data. More than 500 types of digitized visualized ESG data, that has been accumulated over four years, are made available on our company's website. We have also added to the accessibility of our sustainability report as it can now be downloaded as per selected key sections. SK hynix will continue to respond in advance to the increasing ESG needs of our stakeholders and to fulfilling our reporting responsibilities. In efforts to achieve net zero by 2050, the company is strengthening joint efforts across the industry. In this regard, we have joined as a founding member of the Semiconductor Climate Consortium, newly established by Semiconductor Equipment and Materials International last November. SCC is the first global consultative body focusing on reducing GHG emissions across the semiconductor value chain and is joined by major global ICT companies representing various sectors of the ecosystem. SK hynix will continue to remain committed to joint effort in reducing GHG emissions and will annually report our performance with transparency as part of our efforts to strengthen our ESG management. Since the second half of last year, the memory market has been going through unprecedented and challenging conditions. The company will strive to further strengthen our position in mobile and cloud memory markets, as well as finding new growth drivers by securing automotive and AI customers. Taking from our experiences of advancing further by overcoming repeated challenges, we will aim to firmly establish our position as a global leading semiconductor company. [Foreign Language] Now Q&A session will begin. [Operator Instructions] [Foreign Language] The first question will be provided by Hyun-woo Doh from NH Securities. Please go ahead with your question. [Foreign Language] Good morning. I have two questions. The first one is, if we look back in the past, we would say that since 2012, it would have been the company's consistent logic that industry consolidation has allowed through cycle profitability over the years, and we also have agreed with that logic in the past. However, in this present downturn, we wonder if that logic still held true, whether this downturn would have proven to be so severe as we are seeing at present. So in the company's viewpoint, what would be some of the major factors that may have contributed to aggravating this downturn as we see it? And the second question is about EUV. So the company plans to deploy EUV in full scale since the one beta or 1B nanometer. Then compared to your competitor which has been deploying EUV since the 16-nanometer node, do you see any significant tech gap between your EUV process technologies and the competitors? And then if so how much time do you expect to take to catch up on the EUV learning curve to your competitor? [Foreign Language] Let me first take your question. First question on industry consolidation and the relation to the down cycle. [Foreign Language] To cite the most recent down cycle after industry consolidation has been established, we can refer to the 2019 down cycle, which happened after the significant cloud boom, as you may recall in the years past. Back then, we would ascribe that downturn as a function of memory supply side volatility. But if you look at the present downturn, it is not a function of only volatility in the memory side, but rather a more broad and persistent volatility that is present in the macro environment, which is compounded by the geopolitical issues that we see in the landscape today. So we would say, that the present downturn is rather a broader down cycle that is affecting the overall IT industry and ecosystems, not just the memory industry. So while the duration of this down cycle is indeed an important matter for the company as well, the direction going forward is where we have our greater focus on. So as you would know, the demand until today has been driven mostly by hardware devices including, PCs and smartphones. But into the future, we expect more to come from data-driven growth that is growth that comes from the increasing proliferation of tech and the platforms. And we believe that there will be sustained momentum from such data, tech and platform-driven growth. Meanwhile, on the supply side, there is a clear trend of deceleration in the overall supply capacity and scaling up. So, that would mean beyond the medium term, we continue to believe that the industry consolidation will continue to contribute to returning supply and demand to a greater balance over the years. First, I would like to say thank you for the question. And now I will take your second one on EUV deployment. First, I would like to note that it's different for each DRAM player in terms of the -- their technology considerations, as well as their product development roadmaps and production strategy. Those factors will play a part in determining the different timing of EUV deployment for each and every DRAM player. So I would say, that it is difficult naturally to determine, which is the exact and correct timing for EUV deployment, and that is indeed the reality that is playing out. The company in consideration of the very high investment required of EUV machinery as well as the maturing of related technologies has focused to this time on maximizing the efficiency we can gain from EUV processes. And as a result we have now achieved industry-leading productivity in terms of EUV use. As part of this approach, the company has taken one process on the 1A nanometer node that would have the most significant cost-down effects from using EUV and went on to deploy EUV machines on that single process. As a result we have seen a reduction in the required process steps compared to when we use traditional DUV. And as a result of further deployment in mass production as well as yield stabilization we have been able to achieve with EUV cost downs that are equivalent to what we saw on the prior node. While it is difficult to say for certain the extent to which we will be deploying EUV on a full scale, we can say at this moment that on the following 1B and 1C nanometers we will begin to gradually expand the processes that do apply and use EUV. We also remain focused on the optimization of the EUV equipment deployment for -- necessary for process transitions and also in continued efficiency gains. [Foreign Language] The following question will be presented by SK Kim from Daiwa Capital Markets. Please go ahead with your question. Thank you for taking my question. I have two on demand. So, first, we are now seeing inventory correction happening across customer applications, which is causing concern in the market. So, that brings me to my first question which is as China's economy is reopening we are also hearing news that Chinese mobile brands are close to completing their inventory adjustments. So, in light of these developments does the company see any particular signals that are signing towards a true recovery in Chinese mobile demand? And the second question is we want to know your view on overall data center demand. So, both questions would be directed at the demand picture that you're seeing at the moment as well as your outlook on how it will evolve going into the future. Thank you for the question. To answer your question on the mobile side, I have touched upon this briefly in my last response, but we want to note that the demand predictions for the current year would have significant volatility. They may be subject to significant change because of the macroeconomic uncertainties that we are seeing in the landscape, especially for smartphones. If you look at the global situation and if you just look at China, we are projecting currently flat smartphone shipment growth for the year. But depending on how macro factors evolve, we believe there is room for change to these current projections. The situation is similar for the server side due to high uncertainty, as well as concerns for an economic slowdown, even the big tech firms are reducing or cutting their spending and prioritizing inventory adjustment first and foremost. Still we do see some opportunity factors present. Some potential upside could be for example on the Chinese mobile side after China's economy truly reopens. If there are any policy changes for example any new subsidies given out to new smartphones, we believe that will have an upside effect on the new smartphone models that are to launch in the second half this year, specifically for our side in terms of a boost for the high-density PoP component. And you would be well aware of the development on the server side that is the launch of the new CPUs which are clearly set to be an opportunity for the market in that that will serve to boost demand for high-density DDR5 products. And then if you look at the buildup trends and the refresh cycle on the data center side, we believe that given that the time frame between this year and the next between 2023 and '24 would be the time when data centers begin to launch their new refresh cycle for the existing servers they have on site. So we believe all in all, this presents a new opportunity for existing product lineups and that will be all the more reinforced by the launch of the new CPUs which are again a clear market opportunity. Even our customer feedback leads us to understand that our customers are also cautious and conservative on the first half outlook. But on the second half of the year, our customers are also saying, they are seeing stronger demand momentum compared to the year prior. So we believe that a bulk of our customers' demand will be focused and concentrated on the second half of the year and believe this is an opportunity truly that the company has to capture on. [Foreign Language] Thank you. I have two questions. First, the company has announced a close to 50% reduction in CapEx for this year. Do you see any further downside revision risk to that number? That is, do you have any intent to make further CapEx cuts? And the second question is, I have recognized that the company has reported an over KRW 1.5 trillion in impairment losses related to NAND-related intangible assets. I found those numbers in the PPT and they were recorded as not operating losses, but instead as part of the non-operating expenses. So on these impairment charges on the NAND intangible assets, could you offer some more detail perhaps? [Foreign Language] Thanks for the question. I'll take the first one on whether the company plans any further CapEx cuts beyond what has been announced. As was said in the Q3 2022 earnings call and I wish to reiterate the message from that call today that, the announced CapEx cuts already result in a more than 50% reduction to our investment year-on-year for 2023. Given that the CapEx spending after our announced cuts arrive at a significantly smaller level if we consider the fab scale and the critical infrastructure that we need to maintain and invest in, so the CapEx spending for this year will already be significantly down a record low. So that means, given that at the present moment the company is not considering further CapEx cuts beyond what has been already announced. So the basic factors or basis for our decisions on any revisions to CapEx plans would be, of course, market developments. But at the moment we are not seeing any significant market change on that and that would merit a change to our direction on CapEx. So at the moment, given what we know right now, we are not considering any further CapEx cuts. While we are going to execute the significantly large CapEx cut announced for this year, we will continue to make investments into our products such as the DDR5 and HBM3 DRAM, which are set to rise in demand from this year onwards and also our products built on the 1A-nanometer and 176-layer processes which are our competitive -- cost competitive offerings. So on the investment side, we will ensure that we can secure full readiness to truly deploy these products to scale. Then about your second question, on the NAND-related impairment charges. In the second half of 2022, memory demand slowed down significantly and sharply bringing down prices with them and this truly deteriorated NAND profit margins. In reflection of these market developments as well as higher interest rates, the company proceeded to reevaluate its assets on its balance sheet at the year-end. And as a result, of that asset revaluation, we incurred nonrecurring costs in the fourth quarter. The one-off costs related to NAND, were incurred in our Kioxia investments as well as in relation to Solidigm. For our Kioxia investments, the company conducted a fair value measurement of our Kioxia investments at the year-end, and as a result incurred and recognized close to KRW 600 billion, in losses from valuation. And then the rest of the nonrecurring costs, as a result of the asset value revaluation, would include the write-off of the goodwill that we assigned to Solidigm, at the time of acquisition, as well as other NAND intangible assets that belong to Solidigm. So, because of the write-off, of these intangible assets in value, in line with the deterioration in the NAND market, we arrived at the nonrecurring costs that we saw in the first quarter. [Foreign Language] The following question will be presented by Simon Woo from Bank of America. Please go ahead with your question. Thank you for the opportunity to ask my question. I am Dong-je Woo or Simon Woo of Bank of America. And thank you indeed for providing us insight into the company's strategy, despite these difficult market circumstances. So I want to know, as you go ahead with your more than 50% in CapEx cuts, I wonder because CapEx is an important leading indicator of how the company will build out its competitiveness for the ensuing years including, the next one. So my concern is by going ahead with this CapEx cut, wouldn't this be affecting your future competitiveness and potential? So what would be your strategy for the medium to long-term to potentially prepare yourself even amidst such CapEx reduction? I would like to first and foremost note my gratitude towards your interest and concern of course for the company and would like to take your question on the effect of CapEx cuts on our long-term technical – technological competitiveness. Already the company's main products built on the 1A nanometer and 176-layer processes so the main products in our portfolio have already reached mature yield while the new products that we are introducing on these same nodes are also exhibiting stable yield levels. The CapEx cuts this year will not have a material effect on altering the advanced node portion of our tech mix but rather have some effect in containing the production growth. At the same time, we will continue to execute the CapEx spending necessary for our next-generation process technologies including the 1B nanometer and 238-layer nodes. So we will continue to spend on the development of these process technologies as well as ensure that mass production can proceed early. So to say that again, we will ensure that we do spend to ensure that pilot runs to ensure mass production readiness can proceed on track for these next-generation technologies so as to prepare ourselves for the market to come in 2024. The 1B nanometer process exhibits more than 40% net die efficiency gains compared to our prior 1A nanometer node. So it goes to show 1B nanometer's cost competitiveness. On top of that our 238-layer process already has had the core products developed. And within this year we plan to introduce a 1-terabit device on 238-layer stack that will yield close to 50% in mid-die efficiency gains. Going forward, the company will continue to prepare ourselves by continuing to enhance our investment efficiency as well as preparation for future core competitiveness building so as to prepare ourselves truly well for the next upturn. [Foreign Language] Thanks for taking my two questions both on the inventory side. Well, inventory we would say is the most critical factor in determining short-term and near-term memory pricing. Given that fact, I want to know the company's view, what's your visibility? What are you seeing on the customer side? So across key applications and across customers, what was the exiting inventory level coming out of Q4 2022? And how did Q4 inventory levels change compared to the prior Q3? And the second question is, as we expect the effect of your production cuts to materialize going forward, which applications does the company see as going to be the first to see inventory levels meaningfully come down? [Foreign Language] So you've asked a question on the inventory side for both the industry inventories and the customer side, and I will try to answer that in a single response. As noted earlier, our customer inventories are close to levels that we observed during the 2019 down cycle. And supplier inventories combined that would bring the overall industry inventory level at a record high. To break it down by application, I would say, the mobile including smartphone side to have relatively low inventory levels compared to other applications relatively speaking, and the next would be PC in terms of the inventory correction progress that we are observing across applications. But then it's a slightly different picture for server, because if you consider the nature of the server and data center industry, their inventory is currently relatively high compared to the more consumer-oriented segment. So, given all the news that we're hearing and this is not just an outlook coming from the company, it merits close attention to really closely monitor and look deeper into the situation in terms of inventory on the server side because of the sheer size that we're currently seeing. As was noted earlier, the key driving factors of momentum in 2H '23 would be the new CPU introductions as well as DDR5. But if we take DDR5, currently the industry does not have enough inventory of DDR5. Inventory levels are quite low. And we are at the stage where the industry has to build up DDR5 inventory. And in relation to that, we expect that from Q2 this year onwards, the DDR5 equipping servers, that shipment build will also begin to grow, so related DDR5 server build will grow from Q2 onwards. And if you look at the server DRAM inventory, most of it is focused on the DDR4 technology at the present moment, while for DDR5, we are in a situation where we have to begin building up the inventory. So we would say that the DDR5 for server inventory is not at concerning levels. Rather on the contrary suppliers have to begin building up the DDR5 inventory for the industry. So in light of that the company's strategy in terms of product mix is to gradually reduce the share of DDR4 in our server DRAM mix, while closely engaging with our customers to gradually expand the DDR5 mix. So to sum up, if we are to see all the drivers that we mentioned in this response really transpire that is, if we do see the slight demand momentum returning in the second half of the year year-over-year basis and also on the supply side, if we do see the effects of the CapEx adjustments as well as a more efficient mixing of our DRAM product modes through engagement with customers, if these do transpire successfully we believe that towards the second half of the year, inventory will become much healthier on both sides for both the customer and the supplier side. [Foreign Language] The following question will be presented by Myung Sup Song from HI Investment & Securities. Please go ahead with your question. [Foreign Language] Thanks for taking my two questions. So first is, I wonder that in light of your announcement that you will be reducing CapEx by a significant margin this year, while we are also seeing that you exited the year with negative free cash flow as well as significantly higher borrowings. Given these financial developments, I wonder if the company is considering any possibility of a change to your dividend policy your broader shareholder return policy. And of course, I understand that this would depend on how your finances evolve going into the future, how your cash balance evolves. So it might be difficult to see at this point, but there is a real concern in the market that if this year's results also turn out to be much worse than expectations, the company might have to consider conducting equity capital raisings. So given that that is a real concern being raised in the market, I want to know what the company's view and plans are on this side. And the second question is about your Q1 bit growth projection. You have projected that both for DRAM and NAND, there would be significant declines in bit growth for the first quarter, but your competitor has announced that for the Q1 both DRAM and NAND bit growth would still be at the low single-digit. So whereas the company has had higher bit growth than the competitor in the fourth quarter of last year, although of course, you were lower in Q3, I wonder what could explain this significant bit growth projection gap between you and the competitor for the first quarter? [Foreign Language] Let me answer your first question about any changes to our shareholder return policy and any potential for equity capital raisings. As you would also be aware what we saw last year was that compared to our expectations early in the year, the market unexpectedly deteriorated very sharply resulting in us exiting the year with negative free cash flow. And this speaks to the persistent volatility in the memory industry that we are of course continuing to see today. While we are seeing the external uncertainty further heightened this year and the difficult market conditions also persisting, the company is responding to these circumstances by making ambitious CapEx cuts as well as reduction to our expenses overall. And with these efforts, we will continue to strive to create a positive free cash flow going into the future. Currently, we are not planning any changes to our shareholder return policy. Given that for the near term there are persisting macro and memory industry related uncertainties, the company's policy on our overall cash stock is to carry a more stable level of a safety cash balance for the near term to navigate these elevated uncertainties. For the long-term, we will continue to be disciplined in our CapEx spending so as to bring free cash flow back to positive territory and also at the same time gradually reduce the size of our borrowings. As for equity capital raisings we are currently not considering equity capital raising as a financing instrument or tool at the moment. [Foreign Language] I'll take your second question on the difference in the bit growth estimate for the Q1. I don't think I would have to really split this into a discussion for DRAM and NAND separately. But for all of DRAM and NAND, we have projected a very conservative estimate for the bit growth outlook for Q1, because, that is based on what we're hearing from the customers in our talks. So this bit growth estimate is modeled closely to the true or natural demand that we are sensing from our customers out in the field. And on top of that it is also aligned with the Q1 demand outlook that the company currently has. Our market share with strategic customers has not changed for the first quarter of the year. And we believe this would be a more important indicator rather than the slight changes to the bit growth estimates, so overall market share remains unchanged. To go into a little more detail there would be two potential reasons that can explain the difference in the estimates for bit growth. The first would be the fact that for each supplier the customer portfolio is different. And if we were to also factor in the different market share that each supplier has amongst this different base of customers then, that would be material enough to really change or alter the bit growth estimates as we are seeing in the Q1. For example, if you consider a supplier that not just provides memory but also smartphones, then the smartphone business would help to get the supplier stronger demand in the Q1, helped by the smartphone business and that would of course contribute to a higher bit growth estimate on their end, whereas in contrast SK hynix is not on that case. To add a bit more detail on the company's practice. Well, SK hynix of course engages with our strategic customers and yearly negotiations on the yearly volume and pricing deals. So at the -- for each year we plan out the business with our customers and execute according to the terms of our yearly negotiations. But of course there is some flexibility when it comes to the quarterly actual implementation depending on the market circumstances then. And of course the overarching aim would be of course to maintain our market share with these strategic customers. And since it is difficult for us to predict the market situation for the first quarter we are sticking to that broader aim of maintaining our market share with our strategic customers and flexibly adjusting as the market evolves. Thanks for taking my questions. Since there were many good questions asked about the company, I would like to pose one question about Solidigm. So, I believe that the revenue and results impact for the company were in part a function of Solidigm's performance also worsening. So, I would like to ask you for more color on Solidigm's Q4 2022 financial results as well as your outlook for the full year 2023 revenues and profitability. And if possible could you provide perhaps a timing that you expect Solidigm to be able to return to turning normal levels of profit? Thank you for your question. I will be answering your question on Solidigm's performance and our potential expected timing for Solidigm returning to be able to turn normal profit levels. Solidigm was not exempt from the unprecedented slowdown in memory demand that the company experienced. And from the 2H, the second half of 2022, Solidigm also began to see the top line declining at a similar pace with the company. And as you would know 2022 was the first year of the Solidigm acquisition, which entailed various standup costs as well as costs incurred as a result of acquisition accounting such as the purchase price allocation at the time of acquisition. So, as a result these non-recurring costs were incurred and also further impacted Solidigm's performance. For the near-term, at least, we believe impact and headwinds would be inevitable on Solidigm's revenue and profitability given that the NAND market downturn is continuing. But we have to note that for the full year 2022, we saw Solidigm's existing and current solution capabilities allowed the company and Solidigm, to boost our overall product competitiveness in the market. And thanks to Solidigm, the wider customer base allowed us to really see a Solidigm data center SSD sales, and revenue grow by a significant margin for the year. Given the many external uncertainties that remain, the integration going forward will not be an easy process, but we will continue on this journey. If the company can under its original vision in acquiring Solidigm continue to pursue our integration with the end of achieving economy of scale, and also in line with our original intent improve further our data center SSD capabilities, we believe that this could be a factor that helps us achieve, a faster recovery than would have been possible in a usual NAND market downturn. Thank you. I have two questions. First, we saw that inventory write-down charges grew significantly in the fourth quarter. So could you provide an exact number, on the Q4 charges related to inventory write-downs as well as your estimate for Q1? And then, one about demand. On the demand side, there is a lot of market interest going into recent AI technologies such as, the ChatGPT, chatbot. How would this affect memory demand exactly going into the future? Thank you. I will answer your first question, about our inventory valuation loss or write-down charges. In Q4, we observed that inventory levels grew while ASPs fell down compared to the prior quarter, which resulted in the company recognizing between KRW 600 billion to KRW 700 billion, in inventory write-down charges. While we do believe that further inventory write-downs may be possible in Q1, should ASPs fall further, it is difficult to provide you an estimate at this time, because the exact amount would depend on the inventory levels then, as well as the actual extent of the price fall. However, since we do not expect the price declines in Q1 to be as substantial as in Q4, we cautiously project that the size of inventory write-downs, if any, would be smaller in Q1. [Foreign Language] Okay. Now I'll take your second question about ChatGPT. So there is indeed a lot of market talk about this ChatGPT system, which basically ties into the AI application. So ChatGPT uses a large language model and its scalability as well as its commercialization and targeting of the mass public. Its usability for the mass public is what gives ChatGPT and similar algorithms such disruptive potential. We believe that if we combine potential use cases for ChatGPT such generative AI technologies with existing search engine technology on top of that we can also expect further broader evolution such as the advent of Web 3.0. This would all combine to bring about a significant change and also offer scalability to many different use cases and the demand upside as well for not just the memory industry, but for the broader IT industry and ecosystem. Since the training of these models would involve not just text data, but also all the forms of data that exist in the world, including image, video and biometric data, would be utilized in the training of these multi-model models or networks, we believe that the investments into servers that are needed for the training and the inference stages would only continue to grow. There would be two factors relevant to memory in light of these developments. One would be speed and the second would be memory capacity. And speed would be the more essential factor in this case. In order to support the higher computational speeds required of these models, we would have to support parallel processing by developing and marketing more high-performance DRAM as well as storage that has computation functions. Already, we are seeing HBM that is memory with high bandwidth already in use for such AI and compute intensive applications. And then for the existing server memory offerings, we are particularly seeing strong demand growth in the 128 gigabyte and higher density server memory modules. And then we believe potentially the timing for the bit crossover of server memory modules from the 64-gigabyte config to the 128-gigabyte configuration can be pulled in. It could happen earlier with this development. On the NAND side since a faster performance and stronger performance would need to be supported beyond what current storage medium offers in order to support that compute capability, we believe this development could potentially be one that pulls in and really primes the stage for deployment of QLC based SSDs that are capable of parallel processing. So with these technical developments, we believe that ultimately this will lead to the creation of the memory-centric architecture, which involves aforementioned technologies such as CXL, Compute Express Link, as well as Processing In Memory that is PIM and the computational storage devices and also memory pooling and systems. So in the medium to long-term, we are certain that this would serve as a growth engine for the memory side. And even in the near-term we are already seeing some of our customers asking for more 128 gigabyte or larger size of server memory modules compared to the prior year. We believe this development is also not irrelevant to the current development. I believe these circles back to your earlier question about our CapEx reduction potentially affecting future technological competitiveness. Well, capacity would, of course, be one factor in determining our competitiveness, but we believe that in light of future trends such as ChatGPT and the developments that we have described what would be most critical -- more critical even would be the portfolio that we have as well as the tech and product leadership that the company enjoys. And in that aspect SK Hynix indeed is leading the industry on both DRAM and NAND fronts in terms of our technology readiness for the future. For DDR5 as an example, we are already completely prepared to begin shipping the DDR5 -- begin marketing the DDR5. We're selling it into the new server CPUs as can be seen from the fact that we have achieved validation from the CPU maker. You can see that we are currently leading in terms of the validation progress from this CPU maker. And then for our high-bandwidth memory HBM, we are currently maintaining an absolute lead over the market over other competitors. Then we have the LPDDR5, the low-power memory for which we have recently launched a turbo version or specification. And LPDDR5T, which is it’s name delivers more than 30% gains in the performance for power. So with DDR5, HBM and LPDDR5T we have now established a full lineup to really respond to the future market. And then we have the graphics memory GDDR. We have long supported GDDR6 to the market, but now we are accelerating the transition to GDDR7 in order to maintain our leadership on this front. And we can also mention that in the automotive market we are really focusing on our LPDDR5 offerings to ensure fast and certain growth on this segment as well. So overall regardless of what our short-term policy is on -- is for CapEx, we can certainly say with confidence that we are doing all the preparations necessary to ensure our leadership into -- to capture future technology trends.

EarningCall_360

Welcome to the Viking Therapeutics Fourth Quarter and Full-year 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will hold a question and answer session. [Operator Instructions] As a reminder, this conference call is being recorded today, February 8, 2023. Hello and thank you all for participating in today’s call. Joining me today is Brian Lian, Viking’s President and CEO; and Greg Zante, Viking’s CFO. Before we begin, I would like to caution that comments made during this conference call today, February 8, 2023, will contain Forward-Looking Statements under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including statements about Viking’s expectations regarding its development activities, time lines and milestones. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially and adversely and reported results should not be considered as an indication of future performance. These forward-looking statements speak only as of today’s date, and the Company undertakes no obligation to revise or update any statement made today. I encourage you to review all of the Company’s filings with the Securities and Exchange Commission concerning these and other matters. Thanks, Stephanie, and good afternoon to everyone dialed in by phone or listening on the webcast. Today, we will review our financial results for the fourth quarter and full-year 2022 and provide an update on recent progress with our clinical programs and operations. 2022 was an exciting year for Viking as we expanded our development pipeline and advanced each of our three clinical programs. With respect to VK2809, our lead drug candidate for the treatment of NASH and fibrosis, we recently announced completion of enrollment in our Phase IIb VOYAGE trial, and we expect to announce top line data from this study in the second quarter of 2023. In addition, the Phase I trial evaluating our newest program, the dual GLP-1 and GIP receptor agonist VK2735 for the potential treatment of metabolic disorders is continuing. We expect to report the initial data from this trial later this quarter. And finally, the Phase Ib clinical trial evaluating VK0214 for the treatment of X-linked adrenoleukodystrophy also continues to enroll and we expect to complete this study later this year. Our clinical advancements have significantly strengthened Viking’s position as a leader in the development of novel class-leading therapeutics for the treatment of metabolic disorders, and we look forward to reporting data from each of these three clinical programs this year. I will provide further details on our operations and development activities after we review our fourth quarter and full-year 2022 financial results. Thanks, Brian. In conjunction with my comments, I would like to recommend that participants refer to Viking’s Form 10-K filing with the Securities and Exchange Commission, which we expect to file shortly. I will now go over our results for the fourth quarter and full-year ended December 31, 2022, beginning with the results for the quarter. Our research and development expenses for the three months ended December 31, 2022, were $16.2 million compared to $9.8 million for the same period in 2021. The increase was primarily due to increased expenses related to preclinical studies, manufacturing for the Company’s drug candidates, clinical studies, stock-based compensation and salaries and benefits, partially offset by decreased expenses related to third-party consultants. Our general and administrative expenses for the three months ended December 31, 2022, were $4.1 million compared to $2.7 million for the same period in 2021. The increase was primarily due to increased expenses related to legal services, stock-based compensation and salaries and benefits partially offset by decreased expenses related to third-party consultants. For the three months ended December 31, 2022, Viking reported a net loss of $19.6 million or $0.26 per share compared to a net loss of $12.4 million or $0.16 per share in the corresponding period in 2021. The increase in net loss and net loss per share for the three months ended December 31, 2022, was primarily due to the increase in research and development and general and administrative expenses noted previously compared to the same period of 2021. I will now go over results for the 2022 full fiscal year. Our research and development expenses for the year ending December 31, 2022, were $54.2 million compared to $45 million for the same period in 2021. The increase was primarily due to increased expenses related to manufacturing for the Company’s drug candidates, preclinical studies, salaries and benefits and stock-based compensation, partially offset by decreased expenses related to third-party consultants and clinical studies. Our general and administrative expenses for the year ending December 31, 2022, were $16.1 million compared to $10.7 million for the same period in 2021. The increase was primarily due to increased expenses related to legal services, stock-based compensation, salaries and benefits and insurance partially offset by decreased expenses related to professional services and third-party consultants. For the year ending December 31, 2022, Viking reported a net loss of $68.9 million or $0.90 per share compared to a net loss of $55 million or $0.71 per share in the corresponding period in 2021. The increase in net loss and net loss per share for the year ended December 31, 2022, was primarily due to the increase in research and development and general administrative expenses, as noted previously. Turning to the balance sheet. At December 31, 2022, Viking held cash, cash equivalents and short-term investments totaling $155 million compared to $202 million as of December 31, 2021. Thanks, Greg. 2022 was an exciting year for Viking as we expanded our development footprint and made continued progress with our existing clinical programs. Over the past 12-months, Viking not only advanced its two existing clinical programs, but building on our expertise in metabolic disorders, we announced the addition of a new internally developed clinical program with VK2735. I will now provide an overview of our progress with each of these three programs, beginning with our lead compound, VK2809, for NASH and fibrosis. VK2809 is an orally available small molecule agonist of the thyroid hormone receptor that is selected for liver tissue as well as the beta isoform of the receptor. We believe activation of the thyroid hormone beta receptor provides unique therapeutic benefits for patients with NASH and that the data to date point to VK2809 as a best-in-class therapeutic for this indication. Data from the Company’s prior 12-week Phase IIa trial in patients with hypercholesterolemia and nonalcoholic fatty liver disease, support the promise of VK2809. This trial successfully achieved both its primary and secondary endpoints and demonstrating significant reductions in liver fat and plasma lipids. Further, the trial demonstrated that cohorts treated with VK2809 experienced up to 60% mean relative reductions in liver fat content and that 88% of patients receiving VK2809 experienced at least a 30% relative reduction of liver fat content. Importantly, the reductions in liver fat were durable with the majority of patients remaining responders four-weeks after completion of dosing. This study also demonstrated the promising safety and tolerability profile of VK2809. No serious adverse events were reported and the rate of GI disturbances such as nausea and diarrhea was lower among VK2809-treated patients when compared to patients treated with placebo. Perhaps one of the most distinguishing features of VK2809 is its unique effect on plasma lipids, including LDL cholesterol, triglycerides and atherogenic proteins, all of which have been correlated with cardiovascular risk. Various studies evaluating other NASH development programs have demonstrated elevation of these lipids following treatment. By comparison, patients in Viking’s 12-week Phase IIa study experienced robust reductions in these plasma lipids, suggesting that VK2809 may offer a cardioprotective benefit. For all of these reasons, we believe VK2809’s broad lipid-lowering properties combined with its safety, excellent tolerability and significant liver fat reduction and oral route of administration, establish it as a leading drug candidate for the treatment of NASH. Following successful completion of our Phase IIa trial, Viking initiated the VOYAGE study. A Phase IIb trial designed to evaluate VK2809 in patients with biopsy-confirmed NASH and fibrosis. VOYAGE is a randomized, double-blind, placebo-controlled, multicenter international trial designed to assess the efficacy, safety and tolerability of VK2809 in patients with biopsy-confirmed NASH and fibrosis. The target population includes patients with at least 8% liver fat content as measured by magnetic resins imaging proton density fat fraction as well as F2 and F3 fibrosis. Up to 25% of patients may have F1 fibrosis provided that they also possess at least one additional risk factor. The primary endpoint of the VOYAGE study will evaluate the change in liver fat content from baseline to week 12 in patients treated with VK2809 as compared to patients receiving placebo. Secondary objectives include the evaluation of histologic changes by hepatic biopsy after 52 weeks of treatment. Earlier this quarter, we announced completion of enrollment in VOYAGE, and we look forward to sharing top line results, including the trial’s primary endpoint during the second quarter of this year. I will now provide an update on our newest clinical candidate, VK2735 for the potential treatment of various metabolic disorders, such as obesity, NASH and certain rare diseases. VK2735 arose from our internal research, leveraging our in-house metabolic expertise to design and evaluate new compounds with promising therapeutic potential. This compound is a dual agonist of the glucagon like peptide-1, or GLP-1 receptor and the glucose-dependent insulin atrophic polypeptide, or GIP receptor. Initial data from this program presented at the Annual Meeting of the Obesity Society in 2021 demonstrated that GIP receptor activity improved upon the metabolic effects achieved through activation of the GLP-1 receptor alone. Specific findings included improvements observed in weight loss, glucose control and insulin sensitivity among diet-induced obese mice following treatment with Viking compounds as compared to a GLP-1 monoagoist when administered at the same dose for the same period of time. In addition, the observed reductions in liver fat content were generally larger among animals treated with our compounds relative to the liver fat reductions observed among animals treated with a GLP-1 monoaconist. In 2022, Viking announced the initiation of a Phase I clinical trial of VK2735. This trial is a randomized, double-blind, placebo-controlled, single ascending and multiple ascending dose study. The single ascending dose portion of the study is designed to enroll healthy adults while the multiple ascending dose portion is designed to enroll healthy adults with a minimum body mass index of 30 kilograms per meter square. Primary objectives of the study include an evaluation of safety and tolerability of single and multiple doses of VK2735 delivered subcutaneously as well as the identification of doses suitable for further clinical development. The trial will also evaluate the pharmacokinetics of VK2735 following single and multiple doses. Exploratory pharmacodynamic assessments include evaluations of changes in body weight and liver fat content after four weeks of once weekly administration. This study is ongoing, and we expect to report initial results later this quarter. Our third clinical candidate is VK0214, which is currently being evaluated in a Phase Ib clinical trial in patients with X-linked adrenoleukodystrophy or X-ALD. VK0214 is Viking’s second orally available small molecule thyroid hormone receptor beta agonist in clinical development. X-ALD is a rare and often fatal metabolic disorder caused by genetic mutations that impact the function of peroxisomal transporter of very long chain fatty acids. As a result of the mutations, transporter function is impaired and patients are unable to efficiently metabolize very long chain fatty acids. The resulting accumulation of these compounds is believed to contribute to the onset and progression of clinical signs and symptoms in patients with X-ALD. In a prior 14-day Phase I study in more than 100 healthy volunteers, VK0214 demonstrated dose-dependent exposures, no evidence of accumulation and a half-life consistent with anticipated once-daily dosing. Subjects who received VK0214 experienced reductions in LDL cholesterol, triglycerides, apolipoprotein B and lipoprotein A. This study also demonstrated VK0214’s encouraging safety and tolerability. No serious adverse events were reported, and no treatment or dose-related signals were observed for GI side effects, vital signs or cardiovascular measures. Following completion of the Phase I study, Viking initiated the Phase Ib study of VK0214 in patients with the adrenomyeloneuropathy or AMN form of X-ALD. AMN is the most common form of X-ALD affecting approximately 50% of those with the disease. The Phase Ib trial is a randomized, double-blind, placebo-controlled multicenter study in adult male patients with AMN. The primary objectives of the study are to evaluate the safety and tolerability of VK0214 administered orally once daily for 28-days. The study also includes an evaluation of the pharmacokinetics of VK0214 in AMN patients as well as an exploratory assessment of changes in plasma levels of very long-chain fatty acids. Pending a blinded review of preliminary data, additional dosing cohorts may be pursued. This study continues to enroll, and we expect to report the initial results later this year. Turning to financials. Our balance sheet remains strong. And as Greg discussed, we completed the year with approximately $155 million in cash. We currently anticipate that our overall R&D expenses in 2023 will be approximately in line with our 2022 R&D expenses. We believe our current cash resources provide sufficient runway to advance each of our clinical programs into later-stage development. In closing, I wish to emphasize the significant transformation that has taken place at Viking over the past couple of years, which accelerated in 2022. Building on our initial success with our lead program, VK2809, Viking has evolved from a company with a single clinical program to a company advancing three distinct clinical candidates for a range of metabolic indications. In 2023, we expect to report clinical data from each of these three programs. With respect to VK2809 for the treatment of NASH and fibrosis, we have now completed enrollment in our Phase IIb VOYAGE trial, and we expect to report initial data in the second quarter. Our Phase I study evaluating the dual GLP-1 GIP agonist VK2735 is ongoing, and we expect to report the initial data from this study later this quarter. And our Phase Ib trial evaluating VK0214 in X-ALD patients continues to enroll, and we expect to report data from this trial later this year. This concludes our prepared comments for today. Thanks again for joining us, and we will now open the call for questions. Operator. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Joon Lee of Truist. Please go ahead. Thanks for taking our questions and for the updates. According to clinicaltrials.gov, the target enrollment for the healthy volunteer study for 2735 is 80 subjects across six-cohorts in Part A and five-cohorts in Part B. Have you now exceeded your target enrollment and/or maybe add more cohorts? I’m just asking because the estimated completion date is stated as December. Thank you. Hey Joon, thanks for the question. No, we haven’t added any additional cohorts. It is just a little slower than we would like, but there is nothing. We didn’t - we haven’t prolonged anything. We haven’t said - what we have said is we will have the results this quarter. But you got to keep in mind that the trial is 28-days of treatment, and then there is a, I believe, a 60-day follow-up window. So it is a long window there. Okay and one last question. Are you enrolling both male and female for the multi-dose portion or is it just men? Good afternoon, thanks a lot for taking the questions, Just wanted to ask a couple, first on 2735. So the decisions on dose escalation based on the SRC meetings, it is - I guess they are looking at safety and laboratory data. I just wanted to confirm, is that laboratory data that goes into the dose escalation decision, just all safety or would it include something like serum triglycerides to assess pharmacodynamic activity. No, it is pretty much a safety-driven determination. They have PK as well, but it is pretty much safety and not really any pharmacodynamic measures on efficacy. Okay. And just to parlay of question. So did you end up fully enrolling five cohorts in the MAD portion or was it less than five cohorts ultimately? Well, we haven’t said exactly how many have been. It is ongoing now. So yes, we just haven’t disclosed that, Steve. Okay. Maybe on the pharmacology of that molecule, I’m curious, there is a lot of folks digging in, including us on relative activity across these two receptor targets. Can you comment on - if you look at the GLP-1 activity in isolation, and compare that to native GLP-1 activity. Are you more or less or equipotent versus the native peptide specifically on GLP-1? I’m just trying to isolate that variables. Yes. That is a good question. I think most of these compounds, not just ours, but most of them are less potent on GLP-1. I think the one we looked most at on that receptor was semaglutide, and we are pretty similar to semaglutide. I don’t recall the numbers off the top of my head, but we are pretty darn close on that. Okay. Yes. And to hepatitis as well. So that is interesting. Okay. And then just on TR Beta, obviously, lots of focus on that mechanism these days. We have been getting questions again lately on just the dose selection in the VOYAGE study. So I was hoping you could just articulate what key aspects or aspects of the therapeutic window for this mechanism. Are you trying to optimize by testing a series of doses, including lower doses than in the prior Phase IIa study? Yes, yes. So the prior 12-week Phase II study, when we looked at the - all of the data, the efficacy data, the changes in lipids, those kinds of things. There were three cohorts, five-mg a day, 10-mgs every other day and 10-mg daily. And we looked at all the data, they all look pretty similar. And so it suggested that we were sort of on the far right of the dose response curve. Maybe that is incorrect, but that is certainly what it looked like to us. And so we felt that we had room to come down in dose. And we know that the FDA always likes to have a handle on what the minimally effective dose is. And so we looked back at prior studies and what looked like was that one-milligram dose when you look at the Phase I data it starts to look like it is affecting lipids. And so we thought that, that would probably be the minimally effective dose. And we then dosed up from there to include a top dose of 10-mg every other day, which was overlapping with the 12-week study. And we thought that was largely equal to the five-mg daily and the 10-mg daily. And we just spread it out between those, but that was kind of the rationale. Hey guys, good afternoon, thanks for taking the question. Brian, I don’t think it is too early to ask this question, but as you look towards a potential Phase III for 2809, obviously, the clinical trial community has been gaining in their understanding and traction with TR beta on two different fronts with two different assets. So I guess with the other asset being a little more mature, how would you consider or what kinds of things are you considering to handle regarding, say, competition for patients to enroll into your pivotal study? Well, I think that there are enough patients out there to enroll Phase III studies even if there is an approved agent with the same mechanism. And we have seen that in the diabetes space in the past with multiple approved GLP-1s, there are still trials enrolling GLP-1 agonists and plenty of other indications that share those characteristics. So I mean NASH is hard to enroll under any circumstances, but I don’t think competition will be a significant problem there. It is just a hard - the hard side to enroll anyway. Hey this is [indiscernible] on the line for Jay. Congrats on the progress. Maybe a couple from us. First on 2809. I think in the Phase IIa study, you showed the toxicity or GI adverse events were actually lower in the treatment of groups. So can you maybe just remind us if this is something related to the liver targeting property of 2809 and how should we expect the GI tolerability to play out in the AD study and maybe related to that, do you see a path forward to combine to 2809 with maybe all GLP-1 in the future? And I have a follow-up for 735. Yes, to answer the second question first. Yes, I think the 2809 could be combined with a variety of different compounds and oral GLP-1s could be one of those. With respect to the GI tolerability, we just haven’t seen anything like that in any of the prior studies. And I don’t know that it is necessarily because it is liver-targeted just something we haven’t seen. Okay, thanks and for 2735, maybe just following a previous question, I know there was like a few dose cohorts were initiated maybe in the second half of last year. So just wondering, for the upcoming readout, should we expect to see data from all cohorts or only some of the cohorts? Thanks. Yes. We hope to have the data from all of the cohorts. It has been - I know it is been slower than everybody would like, including us, the holidays kind of broke that up a little bit as well. And then we had a couple of cohorts that got split. And since it is a Phase I unit, is not necessarily available to have patients come in the next day if they miss a day. So that has just dragged out some of the cohorts. But we do believe we will have the data this quarter from all the cohorts. Thanks for taking our question. So obviously, there is a lot of movement in the NASH space recently. Just curious about your thinking in terms of the correlation between liver fat reduction or the magnitude of that and leading to fibrosis from a histological perspective? Yes. Thanks, Andy. I think it is fairly well-established correlation between reduction in liver fats and improvement in overall histology, including fibrosis, and that has been shown in pharmacological studies but also in weight loss studies. But there are exceptions. There are some mechanisms that have been shown to reduce liver fat and haven’t resulted in other histologic improvements. And I don’t know why that is. But most of them would appear to show the - that when you reduce liver fat, particularly above 30% relative reduction, you have higher odds of success on NASH resolution and fibrosis improvement. Got it. That is helpful. Going on to the 2735 program, maybe as a whole, looking at your in-house compounds, as you anticipate the readout from the Phase I SAD/MAD study and also indication selection. I’m just curious about kind of the potential to advance other assets, right? There is - I forgot, maybe like half a dozen or so development candidates that you presented. And I’m curious if there is any sort of special unique characteristics that might be good for a specific indication, same thing for 2735, anything that you saw there that would position you well for potentially rare disease versus other bigger metabolic diseases? Yes. That is a good question, Andy. We have looked at a whole bunch of these, and we continue to explore different peptides. And we have sort of a scoring system that we have used and that has helped guide us to make some decisions on which compounds to prioritize. And that kind of that is kind of the early part of the discovery work. And then we look at the in-vivo data, PK and efficacy models to help prioritize. As far as the indications to select, I think just globally, when you look at the opportunities for the mechanism, it is NASH, diabetes obesity and then a couple of smaller indications. And we would like to view the opportunities kind of like we look at with the thyroid beta agonist where we have got 2809 and a bigger opportunity, NASH and then VK0214 in the orphan indication. I think if we were able to parallel that with the dual agonist, and we had something in large indication and a different molecule in a smaller indication, that would be ideal. And I think we will be pursuing that as we move forward. Good afternoon and thanks for taking the questions. In terms of 2735, we understand that, obviously, after the data release, you will make some additional decisions and pending on that outcome. But nevertheless, would you give me a top sort of view what you and possibly anticipate to do after the data release in this quarter? Thank you. Yes. Thanks, Yale. Well, we would hope to pursue an IND in the U.S. following completion of this study. And so we would hope to pursue that sometime by around the midyear time point and then proceed from there. And we will have more information and details around the plans for Phase II once we release the Phase I data. Thank you and good afternoon. Just a couple of questions. First, spending in the quarter was a little higher than earlier in the year. How should we think about spending in 2023 relative to 2022? And perhaps the cadence throughout the year as far as the quarters? Hey Scott, I think we did make the comment, Brian, did in the earlier comments that our R&D expenses will be pretty consistent. We expect in 2023 versus 2022 in total for the year. So I think those drive most of our spending, the R&D expenses do. So I guess we could think about our spending lining up pretty closely with our R&D expenditure. So if we are - we look at that pretty consistently, I think. No, I would say pretty evenly throughout the year, just looking at the plans ahead. So yes, I would say pretty evenly. Okay. Great. That is helpful. And Brian, sort of a big-picture question. Clearly, the valuation of the company has changed over the last months. Does that impact your strategy with some of these assets going forward just in terms of development, perhaps how long you keep them and the options that are available to you? Scott, well, not really. We have always said that when we look at some of these large indications like NASH it would be preferable to have a larger party involved in Phase III and beyond. And that is still our preference. I think as the market cap changes, you might have more opportunities to do things yourselves. But that doesn’t change our preference to have a partner involved in later-stage studies. Okay. Great and final question, just with regards to 2735, obviously, obesity is a very hot indication right now in significant market. Is there anything in your safety profile or your expected safety profile that would make it better or worse than similar agents out there? I mean, diabetes is certainly a more straightforward market, but obesity. Just wondering how it compares to other similar class agents. Yes, I think on tolerability, it is a challenge to differentiate. If you modulate the GLP-1 receptor because it is hard to extricate efficacy from nausea with that mechanism and so I think the plus is that clinicians and patients both are aware of that titration seems to help, and it is generally transient. It happens early. And if you can get through the first month or two of dosing, then you are probably past most of those tolerability issues. And I think there is receptivity to - or at least acceptance of tolerability issues if you are confident that you are going to lose weight, and that is the big differentiating feature of these agents is they just induce profound weight loss. So I think it is hard to separate on tolerability when you have this mechanism, but I think it is okay given the familiarity and most patients will accept it if they know they are going to lose weight. Hey guys thanks for taking the question and congrats on the progress. I will add a question on 2735. So obviously, you are going to be looking at safety, tolerability, PKA and PD here. Do you think that you will be able to see some signs of efficacy in four weeks here or do you think you will probably need to look at a longer time period on drug to start seeing some weight loss? Hey Justin, that is a great question. I think 28-days is really hard to see weight loss in. So we are going to be looking most at tolerability, PK informing us for what sort of regimen we take forward into a Phase II study. When we look at the potential pharmacodynamic measures, body weight is of the greatest interest of people. And I think the hurdle we are really looking at there is if we can show efficacy that looks similar to a GLP-1 monoagonist, I think that would be pretty exciting. And generally, that is in the sub-2% range, 1% to 2% over 28-days. We feel that, that would be exciting because we know that we are hitting GIP and we know in the animals, we see a clear separation from GLP-1 monoagonist, and we believe that, that is going to augment the activity of GLP-1, but we just don’t know whether or not that is going to be fully observed or observable in a treatment course is short as 28-days. So we are trying to be pretty conservative on the expectations for efficacy there since it is such a short study. Hi guys, thanks for taking my question. And I had a few, but I will focus on 0214 kind of shifting a little bit. What the data expected later this year, could you just kind of walk us through what you are sort of hoping to see in the study or what you are looking for? Yes. With this study, we are going to be looking - it is a Phase Ib study. So we will look at safety and tolerability and PK in the patient population. We saw really encouraging tolerability and pharmacodynamic effects in shorter study in healthy volunteers, but they didn’t have adrenoleukodystrophy. So we will look at PK and see if there are any differences. And on the pharmacodynamic side, we will look at changes in very long chain fatty acids, which are believed to contribute to the course of disease in these patients. Those will be the main areas of focus. Yes. I think very long chain fatty as would be the key tie marker we would be looking at there. Yes. Okay. Got it. On the study line, could you also remind us if you plan on enrolling the third cohort in the study? Oh, the third dosing cohort. Well, we have three cohorts now. It is a placebo and then 20 and 40. And when we have enough data to make a decision, we may or may not add a higher dose cohort. Got it. And when you release the data, are you going to release the data from the cohort separately or are you just going to wait until you have data from all three core or lease ones? This concludes our question-and-answer session. I would like to turn the conference back over to Stephanie Diaz for any closing remarks. Thank you again for your participation and continued support of Viking Therapeutics. We look forward to updating you again in the coming months. Have a great afternoon.

EarningCall_361

Ladies and gentlemen, thank you for standing by. Welcome to this morning's Belden Reports Fourth Quarter and Full Year 2022 Results Conference Call. [Operator Instructions] Thank you, Jess. Good morning everyone and thank you for joining us for today's Belden's fourth quarter 2022 earnings conference call. With me today are Belden's President and CEO Roel Vestjens; and Senior Vice President and CFO, Jeremy Parks. Roel will provide a strategic overview of our business, and then Jeremy will provide a detailed review of our financial and operating results, followed by Q&A. We issued our earnings release earlier this morning, and we have prepared a slide presentation that we will reference on this call. The press release, presentation, and transcript of these prepared remarks are currently available online at investor.belden.com. Turning to Slide 2 in the presentation. During this call, management will make certain forward-looking statements. For more information, please review today's press release and our most recent annual report on Form 10-K. Additionally, during today’s call management will reference adjusted or non-GAAP financial information. In accordance with Regulation G, the appendix to our presentation and the Investor Relations section of our website contain a reconciliation of the most closely associated GAAP financial information to the non-GAAP financial information we communicate. As a reminder, I'll be referring to adjusted results today. Now please turn to Slide 3 for a summary of the major accomplishments we achieved in 2022. First, we delivered another outstanding quarter, with total revenues and EPS that exceeded expectations for the 11th straight quarter. For the full year 2022, we delivered record revenues of over $2.6 billion and record EPS of $6.41. I would like to thank our global teams for their strong execution in navigating a complex and challenging environment while supporting the needs of our customers with innovative solutions. Revenues for the year increased by 16% organically, with double-digit organic growth in both segments. On top of record revenues and EPS, we also expanded our EBITDA margins to 17.0%, up 90 basis points for the year, driven by strong leverage on our organic growth. Our strength in 2022 was broad-based across our businesses as we continue to transition from a supplier of trusted products to a value-added partner in the design and implementation of network infrastructure solutions. We are very excited about our progress, which is reflected in our strong financial performance. Second, our capital allocation strategy continues to be balanced and disciplined to drive long-term shareholder value. As we grew EBITDA and generated $220 million of free cash flow in 2022, net leverage declined to 1x at the end of the fourth quarter, down from 2.1x at the end of the prior year. This level of net leverage provides us with significant flexibility to execute our strategic plans, while pursuing organic growth opportunities, M&A, and returning capital to shareholders, all while staying below our target of 1.5x net leverage. Third, we remain focused on deploying capital towards high return opportunities. Our top priorities include investments in new product innovation and our solution selling capabilities, strategic bolt on M&A opportunities, of which we completed three in 2022, and finally returning capital to shareholders through our share repurchase program, under which we repurchased 2.6 million shares for $150 million in 2022. Fourth and finally, at our 2022 Investor Day last June, we set forth a target of $8 EPS by 2025. I am happy to report that with our strong performance in 2022, we are ahead of our internal plan in reaching that goal. In summary, this was another excellent quarter for Belden which concluded another record year. Now please turn to Slide 4, and I will provide an example of our strategy in action with details around how product innovation in fiber is leading to exciting customer wins. Over the years, in our Broadband & 5G business, we have strategically invested in fiber optic technology and solution building. Our solutions focus on reducing our customers' operating expenditures and deployment time. Over the last three years, we have grown our fiber business within Broadband & 5G meaningfully. Our fiber specific revenues increased 59% organically in 2022 with a three-year organic revenue CAGR of 29%. Further in 2019 fiber represented 16% of the total Broadband & 5G business, and as of 2022 fiber now accounts for 37% of the total. Such growth highlights the success of the investments we have made to ensure Belden is in the right markets with industry-leading solutions. On that note, I am happy to report that we received a meaningful win in the fourth quarter for our fiber cabinet solutions from a large telecommunications company based in the Netherlands. The commitment of approximately 8,000 fiber cabinets will provide the business with a total of approximately $50 million over the next four years. Our fiber cabinets offer an easy to configure solution, reducing cost and deployment time, both critical decision points for our customers. This is the largest single fiber commitment for our business and highlights the growth we have made in the marketplace as well as the future opportunity ahead. Looking forward we see multiple favorable trends benefiting our Broadband and 5G market. I outlined many of these in our recent Investor Day but let me spend a minute reviewing the key themes. First, rural broadband has become a major focus with meaningful federal investments in recently passed legislation. We see combined broadband investment totaling $85 billion in the United States which will provide meaningful growth opportunities for Belden. Second, to meet the increasing bandwidth demand, MSOs are reinvesting in the networks to preserve the current customer base amongst increased competition. Our portfolio of solutions positions us to support these multiyear upgrade cycles. And third, major 5G rollouts will dominate wireless carrier spend over the next five plus years. This will include macro cell upgrades and new small cell construction. As 5G cell sites need both fiber as well as power, this will allow Belden to participate in multiple ways. So to summarize, we continue to see strong demand from network operators for our fiber connectivity products. We offer easy-to-use fiber solutions which allow customers to install fiber connections quickly and reliably. We see favorable long-term trends driven by the ever-increasing demand for high-speed broadband and the resulting investments required to upgrade networks. I will start my comments with results for the fourth quarter and full year, followed by a review of our segment results and a discussion of the balance sheet and cash flow performance. As a reminder, I will be referencing adjusted results today. Now please turn to Slide 5 in our presentation for a review of our fourth quarter results. We delivered meaningful growth and margin expansion again this quarter. Fourth quarter revenue increased 8% year-over-year and 12% organically to $659 million, exceeding our guidance range of $635 to $650 million. We had another impressive quarter in Industrial Automation with revenues increasing 18% organically. We continue to see compelling longer-term demand drivers for automation solutions as industrial customers respond to labor shortages, capacity requirements, and reshoring of production. Enterprise Solutions revenue increased 6% year-over-year on an organic basis, with solid mid-single digit growth in both Broadband and 5G and Smart Buildings. As expected, we ended the year with over $800 million in backlog which was up 20% year-over-year. As the supply chain continues to stabilize, we expect our backlog to decrease to a more normalized level. We ended the quarter with a book-to-bill of 0.91 which was down modestly from 0.95 in the prior quarter. From a full year perspective, we ended 2022 with a book to bill of 1.04, with similar performance in both segments. Gross profit margins in the quarter were a robust 37.8%, increasing 280 basis points compared to 35.0% in the year-ago period. Gross profit margins benefited from better than normal product mix combined with leverage on higher volume levels and the impact of price increases enacted earlier in the year. EBITDA in the fourth quarter increased 14% year-over-year to $115 million. EBITDA margins expanded 90 basis points, from 16.5% in the year ago period to 17.4%. Net income in the quarter was $76 million, up 28% from $60 million in the prior-year period. And EPS increased 35% year-over-year to $1.75, compared to $1.30 in the year-ago period and exceeded our guidance range of $1.60 to $1.70. Now please turn to Slide 6 for a review of the full year 2022 results. Belden achieved both record revenues and record EPS in 2022. Both segments grew double digits organically, and at the same time we expanded margins. To quickly highlight our performance, revenues increased 13% versus the prior year and 16% organically to a record $2.6 billion. Our revenue performance was strong in both segments with Industrial Automation Solutions growing 19% organically and Enterprise Solutions growing 13% organically. EBITDA increased 19% to nearly $444 million. EBITDA margins expanded 90 basis points, from 16.1% in the year-ago period to 17%. Net interest expense was $44 million for the year, down from $63 million in the prior year, benefiting from the early debt repayment that we completed in the first quarter as well as favorable foreign exchange rates. At current foreign exchange rates, we expect net interest expense to be flat at approximately $44 million for the full year 2023. Our effective tax rate was 19% in 2022. We expect an effective tax rate of approximately 20% for the full year 2023. EPS increased 35% for the year to a record $6.41, compared to $4.75 in the year ago period. We were very pleased to deliver such robust growth and margin expansion once again. Turning now to Slide 7 in the presentation for a review of our business segment results. I will begin with our Industrial Automation Solutions segment. As a reminder, our industrial solutions allow customers to transmit and secure audio, video, and data in harsh industrial environments. Our key markets include discrete manufacturing, process facilities, energy, and mass transit. The Industrial Automation Solutions segment generated revenues of $1.4 billion, increasing 15% from $1.2 billion in the prior year. As mentioned previously, Industrial Automation revenues increased 19% on an organic basis, with double-digit growth in each of our primary market verticals. Industrial Automation segment EBITDA margins for the year were 19.7%, increasing 150 basis points compared to 18.2% in the prior year, due to solid operating leverage on volume growth and favorable pricing. Turning now to our Enterprise segment. Our enterprise solutions allow customers to transmit and secure audio, video, and data across complex enterprise networks. Our key markets include broadband and 5G and smart buildings. The Enterprise Solutions segment generated revenues of $1.2 billion, increasing 12% from $1.1 billion in the prior year. As mentioned previously, segment revenues increased 13% organically. Revenues in Broadband and 5G increased 15% on an organic basis due to solid execution and strong demand for our fiber connectivity products. As Roel mentioned, the trends for this business remain strong, and we are encouraged by the early impacts of government funding for network upgrades. Revenues in the Smart Buildings market increased 10% on an organic basis. Our continued focus on growth verticals, particularly healthcare, governments, and data centers, contributed to the solid revenue performance. Finally, Enterprise Solutions segment EBITDA margins were 13.5% compared to 13.4% in the prior year. We saw the benefits of leverage on higher volumes and favorable pricing, offset by a temporary cost increase to expedite materials in the first quarter, and a one-time bad debt expense in the fourth quarter. That being said, I am very encouraged with how the segment ended the year with fourth quarter EBITDA margins of 14.1%, up 60 basis points compared to 13.5% in the prior year period. If you will please turn to Slide 8 for our balance sheet highlights. Our cash and cash equivalents balance at the end of the fourth quarter was $688 million compared to $548 million in the third quarter and $642 million in the fourth quarter of 2021. Days sales outstanding of 60 days, compared to 56 days in the prior year and 59 days in the prior quarter. Inventory turns were 4.8x, compared to 4.7x in the prior year and 4.9x in the prior quarter. Our financial leverage was 1.0x net debt to EBITDA at the end of the fourth quarter, compared to 1.1x in the third quarter and 2.1x a year ago. As we communicated in our 2022 Investor Day, we intend to maintain net leverage of approximately 1.5x going forward. For the full year, we repurchased 2.6 million shares for $150 million, at an average price of approximately $58 per share. Going forward our capital allocation priorities will be balanced, emphasizing organic growth initiatives while also considering strategic M&A and additional share repurchases. Please turn to Slide 9 for a few cash flow highlights. Total cash flow from operations for the fourth quarter was $202 million, up 19% compared to the prior year. Capital expenditures were $55 million in the quarter, up from $35 million from the prior year. For the fourth quarter, we achieved free cash flow of $148 million, down from $162 million in the prior year. As a reminder, in the fourth quarter of 2021, our free cash flow realized a combined $54 million benefit from the sale of a note receivable related to the Grass Valley divestiture as well as a sale leaseback transaction for a facility in Germany. For the full year, we achieved free cash flow of $220 million, up from $211 million in the prior year. That concludes my prepared remarks. I would now like to turn the call back to our President and CEO, Roel Vestjens, for the outlook. Please turn to Slide 10 for our outlook. While macro conditions remain uncertain as we enter 2023, our portfolio is designed to deliver organic growth in excess of GDP. We are confident in our ability to execute our strategy and generate sustainable, long-term shareholder value. Our transformed portfolio aligns Belden with key long-term secular trends that have lengthy investment cycles. Investments in automation, reshoring, increased connectivity, increasing bandwidth usage, and network upgrades all bode well for Belden to produce sustainable earnings growth. For the full year 2023, we expect revenues of $2.67 billion to $2.72 billion. This represents consolidated organic growth of 3% to 5%. And when we dig deeper, we see Industrial Automation growing organically in the mid to high-single digits, and Broadband and 5G growing organically in the mid-single digits. In Smart Buildings, we anticipate slightly lower growth in 2023 compared to our long-term expectations. We see Smart Buildings being more impacted by recent macro uncertainty and are currently expecting a flat year of organic growth. Now that being said, our long-term view of the Smart Buildings market remains unchanged. We expect full year 2023 EPS to be $6.60 to $7, representing EPS growth of approximately 3% to 9%. For the first quarter, we expect revenues of $615 million to $630 million, with organic growth between 3% to 6%. We expect first quarter EPS to be $1.50 to $1.60. Now please turn to Slide 11 to review our value creation framework and a quick reflection on the progress we have made in 2022 and over the last three years. First, I would like to reiterate our value creation framework. Our commitment is to drive EPS to $8 or more by 2025 through organic growth in excess of GDP, healthy margins, robust cash flow, and disciplined capital allocation. When we set the $8 goal at our Investor Day last June, we were targeting 2022 EPS of $5.70 and as discussed previously, we substantially beat our initial goal with actual EPS of $6.41. Looking forward, with our new EPS guidance range for 2023 at $6.60 to $7 we are well ahead of internal plans to achieve our 2025 target. Next, I would like to take a moment and recognize the significant progress our team has made at transforming Belden over the last three years. If you recall I was appointed CEO of Belden in May of 2020, a very interesting time for sure. And reflecting on what we have accomplished since, I am incredibly proud of the team and the efforts we took to reshape Belden’s future. First, we made the decision to divest slow growing businesses that required excessive amounts of capital. Second, we refocused our investments towards core businesses with attractive growth dynamics. And third, we reshaped the balance sheet to significantly reduce our leverage and increase our financial flexibility. The outcomes of our efforts have been impressive. On a pro-forma basis we have grown considerably, with an organic revenue CAGR of 7%, an EPS CAGR of 17%, and we achieved a return on invested capital of 18.5% in 2022 compared to 9.2% in 2020, up 930 basis points. Finally, we also reshaped the balance sheet and decreased our net leverage considerably to 1.0x at the end of 2022. Our streamlined business with a focus on product innovation and solution-based sales provides the framework to capitalize on key growth trends. We see meaningful long-term opportunity in our markets and will continue to invest accordingly. Now to conclude, I would like to recognize the hard work from our global teams as the business encountered significant challenges these past few years. From supply chain disruptions to inflationary pressures, we have successfully navigated the operating environment and delivered record results. I guess just start in your outlook for this year, maybe if you could just talk about the underlying economic assumptions embedded in that range. And I guess how sensitive your business is to slowdown in the [technical difficulty] economy. I know you have some things going that can kind of -- maybe insulate you from that, but if you could give us a little more detail there would be great. Yes. First of all, I appreciate the nice words Reuben. Secondly, we are humble enough to recognize that it's very hard for us to predict the future even within the same year that we live in. So we feel good and we think the -- based on our strong guidance and we feel good that the macro or the secular trends that our businesses favor from will prevail. So there is a case to be made that if we start with industrial automation that higher cost of capital will only increase the need for automation at factories. There is a strong case to be made that is deglobalization trends that we're seeing is going to continue, and hence the reshoring activities that we're already seeing that we're already starting to benefit from will continue. In Broadband and 5G because of the tremendous stimulus that the United State government decided is required, I think that business will prevail well, and is not really tied to higher interest rates or macroeconomic conditions because of this stimulus. And as we recognize, smart buildings that will be a little bit tougher this year, we did very, very well in 2022. Strong growth in the high-growth verticals double digits even in Q4 as we predicted in data centers, the government and health care facilities, but that business will be a little bit tougher this year and hence we re-lowered expectations to flat. Is there any way to -- I know you referenced the $85 billion in the Broadband and 5G, any way to reference, what kind of benefit you're getting from the federal stimulus and kind of what kind of visibility it gives you over the next couple of few years. It's obviously hard to express that in terms of dollars, because we're not, we cannot control to what extent at which pace the funds are being distributed, but we're seeing it now we saw it in the fourth quarter and we're seeing the deployments occurring. So we expect, it's obviously a massive amount we expected to take five plus years as we highlighted in our prepared remarks. And since we have such a broad product portfolio within that segment that within that business we benefit in multiple ways from network upgrades. So it's hard to quantify that in terms of dollar terms, but we will significantly benefit. Okay. I'm going to sneak one more in, if I could. So, you referenced in your margin outlook, I think you referenced something about the supply chain normalizing in backlog normalizing. Is there any risk to the pricing in the industry and for you guys that you had just as things normalize and it's easier to get products, is that something that you've accounted for in your margin outlook for this year. Our pricing expectations for 2023 it's pretty similar to our exit rate of 2022. We don't expect further prices to increase if they will, then obviously we will adjust. We've been -- I think it's fair to say successful in passing on these quite significant price increases. These inflationary pressures that we felt. As we pointed out throughout the last two years. So I'm not worried about it. If prices were to drop significantly, then we were to adjust our pricing as well, because we've always been straight and honest when it comes to setting expectations and in passing on what we perceive as input costs. I guess kind of digging in very strong outlook for '23, I think that caught my eye the most is though if I look at kind of the assumption for Broadband and 5G growth a little bit more modest than I would have assumed, I guess given the fact that you've got a heck of an organic comp there. Is it just an assumption that hey, we've got high hill decline and then some of the stimulus money is probably going to be flowing through more fully in 2025. Just help understand, how conservative or just me size that mid-single digit organic assumption in broadband for us. Yes, there's, I guess, two comments that I'd like to make. First, we obviously feel confident about our guidance because otherwise that's not the guidance we would have issued. We don't expect to miss it. But secondly, please understand that that business is a global business and the stimulus obviously applies to the United States. So in other parts of the world depending on how macro conditions manifest themselves, that might be -- that growth might slow down. So we thought it was prudent at this point in time to spell out mid-single digits. Got it. That makes complete sense. And then again, we've been having some noise and the impact of raw materials and copper. Maybe just you could highlight kind of what that impact was on gross margin in the quarter and kind of what you're assuming for 2023 from raw materials? Yes. So I'll start with the 2023 assumption, Chris. So we're not expecting any material change in copper on a year-over-year basis. And with respect to other materials, they sort of net out to not very much. A little bit of inflation in compounds and resins, offset by some cost reductions in logistics. So everything sort of nets out to not a very material impact. In terms of Q4, the copper was actually down a little bit at a year-over-year basis. Call it roughly $15 million. And other materials were up kind of in the same ballpark or were up maybe $10 million a year-over-year basis. Hope, that's helpful. Hi, good morning, guys. Thanks for taking my questions. I was hoping to ask broadly about channel exposure. We've heard from some other suppliers that are seeing some pockets of destocking. So could you talk about demand from your distribution partners and how you're thinking about channel visibility into 2023? Yes, sure. So I appreciate the question. So we have pretty good visibility and the inventory levels of our channel partners. Throughout decades, we built up and continuously improved that visibility and important sale information that we received from our channel partners. So the inventory turns at our channel partners, right? That's how we measure the levels that they have, whether they're appropriate or not are unchanged. They're pretty much unchanged and they are where we need them to be. So when business -- bonus sales goes up, then obviously they carry a little bit more inventory. When it comes down, they carry a little bit less inventory. But we have not seen nor are worried about massive destocking at our channel partners. Okay, got it. That's helpful. And maybe shifting gears just in light of the $1 billion free cash target through 2025 cumulative. Can you talk about the free cash conversion set up into 2023? And if there are any kind of one-off factors we should be thinking about modeling here? Yes. Hi, David. This is Jeremy. So I think we had a pretty good year in 2022 in terms of conversion to net income, we are about 77% I think. I would expect that to improve gradually over the next few years. And probably in 2025, we'll be closer to 100%. So our plan is to invest first in organic growth, which means we are spending a bit in CapEx ahead of depreciation. So I would plan maybe 80% conversion in 2023 and then ramping up over the next couple of years. Hi, thanks. And again congrats on the strong 2022. I was hoping you could just dig a level -- can go level deeper into some of your growth assumptions for specifically industrial for 2023, any notable growth or outliers in terms of how you're thinking about the various verticals, discrete process energy, etcetera? And then maybe within that, you could touch on how you're thinking about the growth outlook for your software and data solutions? Thank you. Thank you, Noelle. Thank you for the question and thank you for the kind words. So the assumptions per vertical in the industrial automation solution space don't differ that much from each other, but positive outliers are discrete. So we see discrete automation within that food and beverage. We see -- we expect above average growth and energy. Our energy vertical we feel very, very good about as we see this transition all over the world and with the current energy "crisis", the solutions that we provide for our customers there. So those are positive outliers that we see even in the industrial automation space. And as far as the software is concerned, we only launched that solution in June as you know. I think we called out our first order last call. So it's kind of pointless to talk about percentage growth because the base is so small. But we feel very good about the traction that we have. We feel extremely good about the level of interest. And it might be interesting to point out that we don't typically -- we don't market that product as a standalone product, it's part of a solution. It enables a solution for our machine builders, for our industrial customers. Great. Okay, great. And then maybe kind of a similar line of questioning on the enterprise solutions side. I mean, when you look at 5G, there's been -- I think you're going to see kind of mix trends in terms of the carriers next year and how much they're spending on 5G. I guess, any thoughts on, I guess, the cadence of that spend next year? And then in broadband, I guess any notable trends in terms of what you're seeing from cable versus telcos and how much is rural coming into play? And I guess anything -- how are you thinking about outside the home versus inside the home? Thanks. All right. So first of all on the 5G spend, it's obviously a little bit hard to predict. And I do think that, that element of the business globally, it will be a little bit tied to macro conditions So in our growth assumptions, that growth is still is very modest. The lion's share of our growth will come from our MSOs. And from our MSOs and from international. So that's one. Two is cable versus telcos. Yes, we see that telcos expand their broadband offerings. So -- and as you know, we play on both sides. It doesn't really matter for us. So yes, that -- we see them gaining traction and we see the MSOs gaining traction with offering voice solutions, right? So we play on both sides. So that is great for us. As far as inside versus outside, we -- our expectation is that that trend will further increase the outside of the home. So in 2022, we ended with 76% of our revenue outside of the home and we roughly expect that to go to 79%, 80% in 2023. First question is on pricing. So if I understood correctly, the assumption is that pricing stays in 2023 at the levels that were seen in the fourth quarter. I believe though the company was raising price over the course of 2022. So if pricing holds at current levels, I would think there might be some year-over-year benefit in 2023 relative to '22 in total. So if I'm understanding that correctly, maybe help us understand how much of a full year pricing benefit there may be this year just given that flow through dynamic? Since the -- I appreciate the question, Mark. Since the price increases that we've launched in the second half of the year were relatively modest. The pricing element of our organic growth guided for 2023 is very modest. It's less than a percent. Got it. Thank you for clarifying on that. That's helpful. And my second question was better understanding the backlog and bookings dynamics. You mentioned the very strong backlog. I think you said up 20% year-on-year. And similar to a lot of the other companies in this space, we've seen bookings could come down given how much backlog covers there is and customers don't need to order quite so far in advance. But the question though is as we're thinking about what's necessary in terms of new bookings to get to the organic growth targets for '23? When do you think book-to-bill would have to get back above 1? Yes. So Mark, our expectation in 2023 is that book-to-bill stays below 1. As far as where we need it to be, like what is the absolute lowest amount of orders, I think that's a good question. That's kind of difficult to answer but my expectation and our expectation and what we've heard from the teams is that book-to-bill probably doesn't get any worse than where it was in the fourth quarter at 0.91 and gradually improves over the next couple of quarters. Great. Thanks for taking my question. Congrats on the good results and pretty remarkable outlook I would say. I'm hoping to focus on some longer term things. Someone asked about the software. I think that's an important one, but another is customer innovation centers that you've begun to open. I'm hoping you can update us on how that's influencing your selling motion, your solution selling and demand trends generally? I very much appreciate that question. Yes, we're very happy with the results. So just a quick reminder, while we opened the first one in Stuttgart, Germany fully operational, we opened the second one in Santa Clara, California. We -- I'm planning on visiting the third one, which will be in Shanghai in the end of this quarter. And soon thereafter, we will open the fourth one in Chicago, Illinois and later on this year in Bangalore, India. The feedback has been extremely positive from our customers. And a significant part of the opportunities that are in the sales funnel stem from the interaction that we have with our customer at the customer innovation center. So this transition that we've been talking about from a component supplier to solutions provider is not an easy transition. I think in the past, we reference having to change compensation plans for our salespeople, having to hire solutions consultants, et cetera, et cetera. But obviously, you have to have a environment including technical capabilities that provide our customers with the confidence that we're able to indeed provide those solutions and that we're able to demonstrate at those innovation centers. So I could not be happier with the results we have and therefore we're rapidly expanding them to the initial five that we've communicated. Great. Thank you. One other one I guess is about capital allocation. You've talked about the focus on organic growth and also about potential for M&A both sounding like they prioritize over buybacks. I believe buybacks decelerated a little bit in Q4. I'm just trying to square that with what sounds like an incrementally positive outlook, especially relative to the macro. Should we interpret this as perhaps greater possibility that there would be a larger acquisition in the coming few months? Or is that overreading, overinterpreting the data? Yes, I wouldn't read too much into it, Will. So the truth is that in 2022, we deployed quite a bit of capital. So remember, we paid off €200 million in debt. We bought back €150 million in shares and we bought three companies. So we had deployed quite a bit of capital in 2022. As Roel mentioned in his prepared remarks, we are really well positioned and have a lot of options in 2023 and our focus is going to be investing in organic growth, number one. Number two, investing in bolt-on acquisitions, strategic acquisitions, but unlikely it would be anything significant, anything large and then number three, share buybacks. And with no other questions holding, I'll now turn the conference back to Mr. Reddington for any additional or closing comments. Thank you, Jess, and thank you, everyone, for joining today's call. If you have any questions, please reach out to the IR team here at Belden. Our email address is [email protected]. Thank you very much. Have a good day.

EarningCall_362

Greetings and welcome to the Euronet Worldwide Fourth Quarter and Full-Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce your host, Mr. Scott Clausen, General Counsel for Euronet Worldwide. Thank you, Mr. Clausen, you may begin. Thank you. Good morning, everyone, and welcome to Euronet's fourth quarter and full-year 2022 earnings conference call. On this call, we have Mike Brown, our Chairman and CEO; and Rick Weller, our CFO. Before we begin, I need to call your attention to the forward-looking statements disclaimer on the second slide of the PowerPoint presentation we will be making today. Statements made on this call that concern Euronet's or its management's intentions, expectations or predictions of future performance are forward-looking statements. Euronet's actual results may vary materially from these anticipated in the forward-looking statements as a result of a number of factors that are listed on the second slide of our presentation. Except as may be required by law, Euronet does not intend to update these forward-looking statements and undertakes no duty to any person to provide any update. In addition, the PowerPoint presentation includes a reconciliation of the non-GAAP financial measures we'll be using during the call to their most comparable GAAP measures. Thank you, Scott, and good morning, and welcome to everyone joining us today. I will begin my comments on Slide 5. For the fourth quarter, we delivered revenue of $865 million, operating income of $79 million, adjusted EBITDA of $127 million, and adjusted EPS of $1.39. These results produced strong double-digit constant currency growth rate, driven by strong growth from all 3 segments. With particular reflection on the continued improved domestic and international cash withdrawal transactions in the EFT segment, where the improved demand for travel continues following the lifting of COVID restrictions across the globe. Next slide, please. Slide 6. presents a summary of our year-end balance sheet, compared to the prior quarter-end. As you can see, we ended the year with $1.1 billion in unrestricted cash and $1.6 billion in debt. This increase is largely from cash generated from operations, partially offset by working capital changes. The decrease in debt was largely from the reduction in ATM cash, which was returned from the ATMs following the peak travel season. Next slide, please. Now, I'm on Slide 7. Here, we present our results on an as-reported basis for the fourth quarter. Similar to the last several quarters, many of the currencies in our most significant markets declined in the 10% to 20% range versus the U.S. dollar, compared to the prior year. I will note that towards the end of the fourth quarter, we began to see currency strengthen against the U.S. dollar, which has continued into the first quarter. The improving FX rates in the fourth quarter provided a benefit versus our guidance, which was largely offset by some higher-than-expected operating taxes. Again, that's operating taxes, which goes up in the operating expenses, not in the income tax expenses. To normalize the impact of these currency fluctuations, we have presented our results on a constant currency basis on the next slide. Slide 8. The strong improvements in EFT revenue, operating income and adjusted EBITDA were the result of increased domestic and international withdrawal transaction trends from the lifting of COVID travel restrictions across the globe, together with the addition of and the good performance from the acquisition of Piraeus Bank's merchant acquiring business in March of 2022. On a year-over-year basis, revenue and gross profit per transaction were consistent. epay revenue grew 9%, operating income grew 12%, and adjusted EBITDA grew 11%, driven by the continued expansion of mobile and digital and branded payments together with the continued growth of the digital distribution channel. Also included in the fourth quarter results was growth in loyalty reward programs delivered by epay on behalf of new large retailers. epay's revenue and gross profit per transaction were consistent on a year-over-year basis. Money Transfer revenue, adjusted operating income and adjusted EBITDA grew 9%, 6%, and 5%, respectively. The growth was the result of 13% growth in U.S. outbound transactions, 13% growth in international originated money transfers, of which transfers largely initiated in Europe grew 13% and transfers initiated in the Middle East and Asia grew 14%. In addition to these strong growth rates, XE transactions grew 25%, partially offset by a 17% decline in our intra-U.S. business. When you look at direct-to-consumer digital transactions on their own, they grew 38%. As we have in the prior quarters, we continue to monitor the impact of inflation across the business. We have generally seen increases across all segments in salary expense, both our own and our suppliers. On the revenue side, we have not seen any direct impacts of inflation on our EFT and epay businesses. However, in money transfer, similar to what we saw earlier this year, the average amount sent per transaction declined by about 3% or 4%, resulting in nearly a 1% offset in our revenue per transaction growth rates. Overall, on one hand, we saw constant currency revenue per transaction come in by about 1%, largely attributable to the decrease in average send amount I just mentioned. However, on the other hand, constant currency gross profit per transaction improved in money transfer by approximately 2%, largely due to favorable mix and improvements in overall correspondent payout costs. The drivers behind our full-year results for each of the segments were largely the same as the fourth quarter, so I won't go through the full-year results in detail, but we have presented them on the next few slides. As I reflect on 2022, I am pleased with the resilience of all three of our segments. In EFT, we saw our transactions improve in-line with the improvement in travel trends, if not a little better. And our new merchant acquiring business continued to perform quite well. Many of you may recall that epay started the year slow, but the business gained momentum in the second half of the year as we expected, and ended the year with double-digit constant currency operating income growth for both the fourth quarter and the full-year 2022. In Money Transfer, we continue to expand both our physical and digital networks. We are also continuing to build momentum in our digital initiatives as we sign more rent agreements, and we see large banks and brands realize the value proposition of our dandelion network. I know that many of you are going to ask what we expect for the full-year 2023. It is not our practice to give full-year guidance, but I do think it is helpful if we provide some direction for the full-year. As many of you know, on January 1 of this year, Croatia transitioned its currency from the Kona to the euro. Certainly, the currency migration will have some impact on our EFT results. However, we believe that there are a number of new rate-related opportunities in the EFT segment that will nearly offset the impact. And we fully believe that we can carry the momentum we have built in 2022 forward into the new year. To that end, we expect the first quarter adjusted EPS to be approximately $0.85 per share, which represents a 23% growth over last year, assuming consistent FX rates, interest rates and other unforeseen matters. We also continue to expect the full-year adjusted EPS to grow in the mid-to-upper-mid teens range over our full-year 2022 adjusted EPS. I think it bears repeating that we have a strong balance sheet, while making the right strategic investments in our business, which we believe will allow us to continue to grow at double-digit rates. It was another great year at Euronet. Thank you, Rick, and thank you, everybody, for joining us today. I'll begin my comments on Slide 15. Well, I guess, as I look back, all I can say is, what a year. We delivered very strong consolidated constant currency double-digit growth rates in the midst of ongoing economic and global uncertainties. We have continued to prove that our business is resilient, and as Rick mentioned during the pandemic, we were not afraid to invest in places we believe that would continue our long-term growth trajectory. In EFT, our most profitable transactions continue to improve. In epay, there continues to be a growing demand for mobile and branded digital payment content and consumers and businesses still need to send money across borders. The fourth quarter unfolded largely in-line with what we expected when we spoke in October. Despite not seeing a full travel recovery, we are encouraged by the continued signs set, at least as it relates to travel, the end of the pandemic seems to be upon us in the U.S., and travel conditions are improving the father East to go. The Euro Control outlook remains consistent, the passenger traffic in 2023 is expected to reach 92% or 93% of 2019 levels. While we'd like to see this data at least in-line with that 100% of 2019, this would still be roughly a 25% improvement from 2022. We are also seeing positive signs from travel booking sites, which indicates a very strong demand for travel this coming summer and year, due to the backlog of people wanting to take trips that were canceled during the pandemic, or delayed due to the capacity restraints, which really vexed us and global travel last year. On their recent earnings call, the Delta Airlines CEO was bullish on the travel industry recovery and expect double-digit top line growth in the coming years. This optimism in travel together with some pricing opportunities, entry into new markets, continued growth in our POS acquiring business and sales of our Ren platform, add support for our expectation that we will deliver strong growth rates in 2023. With this macro overview, let's get down to each specific segment, beginning with the EFT, starting on Slide Number 16. Slide 16. We have successfully grown our ATM deposit network in Poland this quarter, signing agreements with 23 new merchants who will have access to our broad deposit network. For some perspective on the success of this network, we received more than $6 billion worth of Polish Zloty in ATM deposits in 2022. And now we are continuing to expand that growth in Romania with an ATM network participation agreement with Unicredit Bank. These deposit ATMs allow customers and retailers to deposit money with nearly instant credit to their accounts, allowing them to avoid carrying large sums of money to the bank or having to wait until banking hours. As I reflect on the $6 billion in ATM deposits that we process, it seems like a good time to address one of the most common questions I receive. Of course, that is, is cash dying? I am certainly not going to deny that digital transactions are popular and convenient, but what we have seen and what the $6 billion in ATM deposit once again show us is there continues to be a large volume of cash used in circulation. Further, what we have seen is that in times of economic and other uncertainties, people tend to fall back to cash. So, I'd tell you that, no, we do not believe that cash is going away. Accordingly, our core business has proven to be very profitable so we have continued to use these profits generated from our cash base withdraw and deposit transactions to invest in the next-generation technology and digital transactions, which we believe will continue to diversify our global business. Moreover, the value of our cash business creates significant value to our shareholders. Getting back to the highlights in Spain, we signed a network participation agreement with Banco Caminos, this is the 15th agreement that we have signed to allow banks to provide their customers with convenient access to our market-leading ATM network in Spain. Also in Spain, we leveraged the content relationships in our epay segment to cross-sell Spotify, Xbox, Nintendo, and Paysafe card sales on Euronet ATMs. The combination of these two business segments is a great example of our goal to allow customers to participate in the global economy in a way that is most convenient for them. We signed two exciting agreements in the Philippines during the quarter. We signed our cardless cash withdraw on deposit agreement with payMaya, the second largest digital wallet in the country. This wallet has platforms and services that cut across consumers, merchants, communities, and government and provides more than 41 million Filipinos with access to financial services through its consumer platform. We also signed an agreement – a network participation agreement with the Bank of the Philippine Islands, BPI, to allow BPI cardholders to perform cash withdrawals and balance inquiries free of charge on the Euronet ATM network there in the Philippines, which now has approximately 900 ATMs in the country. Next slide, please. Slide Number 17 provides you with an update on our ATM portfolio. During the quarter, we reduced our owned ATMs by approximately 450 machines. This is the result of a couple of measures. First, we removed about 350 ATMs in Croatia that were in places that would likely not be profitable given the country's conversion to the euro. Second, a more robust post-COVID travel season last year, gave us another data point to analyze our ATM estate with higher transaction volumes, and we redoubled our ATM profitability management efforts. As a result of this process, we removed about 250 ATMs, which we will relocate in which we expect will ultimately provide us with a stronger and even more profitable ATM network as we move into this year and next. The culling of the network was offset by the addition of about 158 new ATMs in new and existing markets. We also reduced our outsourced ATMs by 200, due to the expiration of an outsourcing agreement in Poland. Finally, we deactivated about 3,900 ATMs for the winter season consistent with our historical practices. As we think about our ATM deployment plan for 2023, we expect to deploy between 3,500 and 4,000 machines in new and existing markets. Moreover, as we see the return of travel and provide a travel recovery is more robust, our optimism for ATM deployment may very well increase. To sum up the year and EFT completely, I'd say, it was a great year. We were able to answer the most lingering question from the pandemic, will consumers still want cash when they travel. We now know that, that answer is certainly a resounding yes. As our transaction growth paralleled the travel recovery reported by Eurocontrol. With Asia Pacific now accelerating its opening, certain pricing opportunities across our markets, and entry into new markets and our digital initiatives, we anticipate that EFT will continue to produce strong growth rates in 2023. Now, let's go on to Slide Number 18, we'll talk about epay for a minute. I am particularly pleased that epay closed the year with revenue growth slightly above the expectations that we provided over the last several quarters, with more than 40% constant currency growth above 2019 levels. This is a strong testament to the demand for our mobile and digital branded payments content, together with the expansion of our digital distribution channel. This quarter, we continue to expand our content by launching McAfee renewals and Currys stores in the U.K. and Ireland. In Spain, we launched digital subscriptions, for Disney+, we also expanded sales of Uber cars in Germany and Spain. We continue to expand our relationship with Microsoft to provide Microsoft 365 renewals in Germany, Brazil, UAE, and the U.S. We really like these renewals and the agreements that we've signed as they leverage our industry-leading tech stack and give us a recurring revenue stream. Finally, we launched a digital branded payments agreement in [legal stores] [ph] in the U.K. Our epay team continues to find innovative ways to give customers payment options in the way that they want them, whether that's in a physical store, online, at an ATM, or through a digital wallet. We believe that our content and technology solutions are industry-leading and will continue to give us new opportunities for expansion around the world. Now, let's move on to Slide Number 19, and we'll talk about Money Transfer. Our network now reaches 522,000 physical locations, 3.6 billion bank accounts, and 428 million wallet accounts across 188 countries and territories. During the quarter, we launched 16 new correspondent agreements across 14 countries. One of the more significant of these launches was with a Hong Kong-based OTT pay, which processes bulk small value cross-border business-to-consumer payments on behalf of companies that need to pay gig workers, influencers, and other independent contractors. We also signed 19 new correspondent agreements across 19 countries. We added four new mobile wallets across Cameroon, Molly, Sierra Leone, and Colombia, and we added corporate payments in both Egypt and Morocco. During the quarter, we acquired Sikhona, a global partner in South Africa, significantly strengthening our presence in the send and receive market with a license, a strong cash acceptance and promoter network, as well as a successful money transfer app. We are already seeing a large number of new in-bound and out-bound opportunities in that country and we'll consolidate our presence – which will consolidate our presence in South Africa and the broader region. Finally, we continue to expand our digital assets, launching our App Store, I mean our app, moneytransfer.com app in Singapore. This gives us another send market in our digital channel, where we are seeing direct-to-consumer digital transactions growing 38% year-over-year. Now, we'll talk about Slide Number 20 and our Dandelion successes. Well, we're extremely pleased to announce that we have signed an agreement with HSBC, the world's eighth largest bank to utilize our Dandelion platform. As a major bank with strength in Asia Pacific and the Rest of the World, the HSBC Group has a key role to play in today's global economy. We are very proud and very excited about this new relationship, and now we are laser-focused on going live with our first market this month. The agreement with HSBC is a good example of the favorable market response to Dandelions differentiated value proposition, which includes a real-time payments, alternative payment channels, and complete payment solutions all available through a single API integration. Dandelions’ sales pipeline grew significantly in Q4 with strong interest from banks, payment companies, MSBs, and fintechs across the globe. We will continue to work hard on this pipeline and hope to deliver more exciting announcements in the coming quarters. Now, let's move on to Slide Number 21, and we'll talk about rent. Well, on Slide Number 21, you can see that we continue to expand our Ren pipeline of agreements. During the quarter, we launched Visa prepaid card issuance and switching with TNG Digital, the largest e-wallet issuer in Malaysia with approximately 22 million customers. Using our Ren technology, Euronet will convert funds in the T&G e-wallet to a Visa-branded open loop program. We successfully ran the pilot program in December and did an official math launch in January. A few slides back, we told you about our ATM network participation agreement with BPI. In addition to this agreement, BPI has recognized the value of our Ren offering, and we launched person-to-merchant payments through InstaPay. InstaPay as a real-time payment service to allow customers and businesses to transfer funds instantly between accounts from a number of different banks in the Philippines. During this quarter, we expanded this functionality to allow person-to-merchant payments providing a comprehensive real-time payments experience to BPI's customers. You may remember, last year, we told you about an exciting partnership we had with Grab in Singapore where Euronet's Ren platform was selected as Grab’s strategic partner to provide end-to-end open-loop issuer processing and switching services. We have now expanded that same relationship with Grab to Malaysia. We also signed an agreement with Grupo Confianza in Honduras to become the SaaS card issuing solution and Mastercard BIN sponsor for their credit union clients. This agreement is strategic and that it gives us entry into Honduras with our Ren cloud-native platform and creates a bridge to attend to smaller clients who are better served with an aggregator. As you can see, the investments we have made in our digital technology solutions are continuing to pay-off with a strong pipeline of new rent agreements. We expect this Ren pipeline to contribute approximately 140 million in revenue over the next 6 years. Now, let's go to Slide Number 22, and we'll wrap up the quarter. As I stand back and reflect on 2022, it largely marks getting back to where we were [Technical Difficulty] Okay. I apologize for the – a little bit of a technology break there, but I will continue now. As I stand back and reflect, 2022 largely marked getting back to where we were pre-COVID. Had it not been for changes in currency, our full-year adjusted EPS would have been roughly at 2019 level. I think it is worth repeating a comment that we made at the end of the third quarter. History can often be a good predictor for the future. Through Euronet's history, we have been through every economic cycle, one-off events like cash demonetization in India, and now what appears to be the two biggest global economic setbacks in the last 80 years, the 2008 financial crisis and the COVID pandemic, and we have always come out stronger on the other side. This has been made possible by our hard-working employees, of course, but also our balanced product and geographic portfolio, the disciplined management of our balance sheet and investments for future growth, together with the fact that our product portfolio consists of products that people want, use, and need. With improving travel trends, more content, bigger networks, and more geographies, we believe our business is poised to continue to deliver double-digit growth rates in 2023 and beyond. Good morning Mike and Rick. Thanks for taking my questions. It's good to see that you're reiterating your mid-to-upper teens EPS growth guide for 2023. I just want to make sure that's off of the new 6.51 EPS base for 2022. And Also, if you can walk us through your expectations by segment for the year and for 1Q, that would be really helpful? Well, we – first of all, yes, it's off the full number for last year. So, when we say, kind of mid-teens, so we're thinking in that, kind of range of maybe 2014, 2015, 2016, maybe for a little bit like 17%, kind of growth rate over last year's total number yet. And then with respect to each of the segments, we don't really break it down by segment, but as I've mentioned and Rick did in our comments, we're pretty excited about all three segments. Of course, the one segment that's going to have the easiest growth you might say, will be the EFT segment because we do believe that we're going to get a lot more travelers to our ATMs this coming summer. And Rayna, what I would add and consistent with what Mike said, we typically don't give all that, kind of level detail in each of the segments. But I know in the past, we have talked at different times about what we, kind of expect in longer-term growth rates for our segments. And what we've consistently said and we continue to believe is that our epay business will have a revenue growth trajectory that would be in the upper single digits and the low – or the lower double digits on revenue, that operating income would be more on the lower double-digit side. In our money transfer business, we believe that we move – our revenue will be in the, kind of lower double-digit range, but a little bit more aggressive than what we might be on the epay side. So, that would be, kind of – it's possible that we could be into the low teens on that side of the revenue piece, but – so kind of think of that as a 12 or a 13 kind of a number. And we would then expect to see that our operating margins grew a little faster than that. And then on the EFT segment. As you can appreciate with the return of travel as we see the number Mike said earlier, if we just, kind of take the euro control number that, that would be nearly a 25, kind of percent number. What we saw as we, kind of finished up the year and what we're expecting is that the EFT would see a travel recovery, kind of in about the, kind of 70-ish kind of percent range that the end of the year we would end up a little stronger than that as that recovery continued, and that's exactly what we did see. So, if you kind of think of that as being, kind of in a ballpark of 75, kind of percent. If you then again, use the [92, 93] [ph], as Mike says, well, that's merely a 25%. I think it mathematically calculates out to about 22% or 23%, but that's the way I think you probably ought to directionally think about the revenue growth out of the EFT segment. And then obviously, that's going to contribute well stronger expansion on the operating income side. So that's, I think, very, very consistent with what we've talked about in the past. As Mike said, we continue to see very strong momentum going in the pipelines of our Ren product, our Dandelion products. We couldn't feel better than to be able to announce an absolute marquee name like HSBC, recognizing the value of our product. And I think as we continue to build that business, we'll see those pipelines grow, but that kind of gives you some perspective of, again, confirmation of what we expect the continued growth rates to be in our business. And I would like to also caution to, let's not forget, first quarter for the last 10 years has been our seasonally weakest quarter versus it's, kind of a perfect storm of all three segments tend to be weaker in the first quarter. So, just kind of bear that in mind. And also, when we talk about other things, we're excited about, our acquiring business that we purchased from Piraeus Bank did quite well last year. So, we're excited about that one going forward. Okay. That's a really helpful detail. Just on the point on travel, what are you seeing in terms of increased capacity at Heathrow Airport versus your expectations? Okay. So, we don't know exactly what it's going to do. All we know is that the travel caps were removed during the Christmas rush. Now, I would tell you also, let's not forget the Christmas rush isn't nearly the summer rush. So, we're cautiously optimistic that they're getting their act together there. So, we'll have to see what happens, but they know. I think everybody recognizes what a mess up it was last year, and so, they're going to do their best to get it fixed. And I think that's even reflected. You may have read some news about them having a change in their leadership there. So, they really want their travel industry to work well. And as Mike said, we didn't see any real hiccups going through the fourth quarter, albeit it's obviously much lighter than the third quarter, but those are favorable signs as we look towards next year. Hi Mike, hi Rick. Good morning. Thanks for taking my question. To dig in on the – just the reiterated mid-to-upper teens EPS outlook, just, kind of a little bit of a technical question. Are you flowing through the benefit of the FX rates, the favorability there? And then if you are, just wondering if there's offsets that [indiscernible] it seems like if you flow those through, you should be – could be a little bit higher or at the very minimum at the upper end of that range? Any thoughts there would be helpful. Thanks. Yes, we did – essentially, we've assumed that the IFRS rates are the same as what they are today and that they'll remain unchanged for the rest of the year. And it just, kind of depends on exactly where you want to pinpoint your math on that. As Mike said, if you were more towards the upper teens, it would be a little bit stronger, but yes, it has been appropriately reflected in that number. We've also – a little bit to the offset of that is we're planning on a couple more Fed rate increases and more rate increases in Europe as well. Got it. Okay. That makes a lot of sense. I appreciate that. And then just quickly on money transfer. If you just elaborate just a little bit on what you're seeing, it doesn't seem like, Rick, based on your commentary, that the growth rate has materially altered. So, are you seeing something different as we, kind of enter 2023 and maybe the fourth quarter was a little bit of a point-in-time? Or are you seeing kind of these inflation – this inflation kind of impact persist with the remittance customers? Any color there in terms of what you're seeing in money transfer would be helpful. Thanks. Well, we have essentially incorporated and we did this going back when we first started seeing what we thought were some inflationary impacts about impact on our growth rate because of inflation. So, we'll see how that kind of holds out. But if you take a look at just kind of the fundamental strength that we're seeing across the U.S. outbound, Europe, Middle East. It came back a little bit stronger. Again, we're seeing some of the impacts of COVID starting to lift more consistently around the world, our digital product has continued to improve. We don't expect that we'll see a gusher of additional revenue from Dandelion this year. We're continuing to build and grow that pipeline. It will be much more contributing next year. But I think all that just continues to build our confidence that we're going to be, kind of, like I say, in that kind of [12 to 13] [ph] kind of rate. As Mike said, we would expect to see that first quarter is a little bit slower as it always has been. First quarter is the lightest quarter of all three segments. And – but we expect to see that momentum develop a little bit later as we go or more of that momentum. But – so I don't think that our view or our thinking on money transfer has really changed any. I think that we've appropriately considered some impact of inflation, but we continue to see very good successes on customer addition, on network addition, as we go around the world. Thank you. One moment for our next question. Our next question comes from the line of Darrin Peller from Wolfe Research. Hey guys. Thanks for taking my question. Look, it's obviously good to see the progress on EFT. I guess, Mike, when we think about the business in EFT and what the behaviors that we're seeing are today, would you expect that if we got back to that 92%, 93% of 2019 levels by the end of 2023, that your profitability levels of EFT should be the same or more than they were assuming it was 92% in 2019? In other words, like-for-like, has anything changed to push that profitability up in that segment beyond just what travel activity is? I imagine that [indiscernible] in some factors, but yes, Mike, I just want – then if you get to add on to that, the comments you made over rate potential and pricing potential. It was good to hear. I'm curious if you can give us a little bit more specifics on that? So, I think the reality is if we only get 92% or 93% of the tourists that we did in 2019, we're not going to arrive at 2019's total revenue. However, we do have some opportunities and a lot of it comes down to mix. So, as we spin up some of these new markets in North Africa, in Asia, as we do things our experience is that those ATMs are quite a bit more profitable on a per unit basis than our European ones, even though our European ones are quite good. So, if we can get a little bit of a travel recovery in Asia, that would be great. If we're able – we have some supply chain issues of getting ATMs to expand into North Africa. As that abates, that will help us quite a bit as well. And let's not forget, every one – we were planning on a lot of ATM rollout last year in and around the countries of Central and Eastern Europe, all the ones that now surround Ukraine, in fact, we are planning on almost 500 growth in Ukraine last year. And then, of course, the war happened. Those markets are all cross currency markets. They all have their own [indiscernible] currencies. They're great contributors. And so, that's kind of – we obviously are going to do as much expansion there because last year, they only recovered in the [Technical Difficulty] 50% to 55%, where the rest of the market in general was in that [70%]. So, I think it's – we've got some opportunities. We'll have to see what happens, but I think if we get to 92%, we'll be pretty darn happy, and it also gives us a little bit of gas in the tank for the next year to growth. That does make sense. When we think about China reopening, can you just maybe remind us, in your view, what kind of contribution China – base travelers did to your business back before the pandemic whether it's in any of the regions, frankly, I'm just curious if you have any insight on that? The biggest reason place where we have Chinese tourists would be in Asian markets like the Philippines, Malaysia, that opened up [Technical Difficulty] has that ticked up would be fairly good. They were 5% for European travel [Technical Difficulty] will be helpful as well. But a number of these countries are also putting limitations on Chinese Tourism [puts a] [ph] little bit more friction in there, you know requiring COVID test before they come, et cetera. The other thing that's important to remember about the China travelers is generally speaking, the China UnionPay card does not allow for DCC. Now, in markets where we have a surcharge opportunity and benefit there, but if China has not been that big of a contributor because we don't get the spread on the DCC. We are working on opportunities to potentially enter into agreements with them to enable that, but as of now, it's not there. So, clearly, China travel would give us some benefit, but we've never had a lot of benefit in our P&L from Chinese [Travelers] [ph]. Thank you. One moment for our next question. Our next question comes from the line of Cris Kennedy from William Blair. Good morning. Thanks for taking the question. Can you talk about, kind of the timing of Ren revenue hitting your income statement and how that's tracking relative to your initial expectations? It's tracking pretty much right on what I said in prior quarters. So, in the very first year that we were really selling Ren, which was two years ago, we did about 8 million in revenue at about, call it, an 80% margin. Last year, we did almost twice that. This year, we're looking at 25 million to 30 million, if we can get everything installed. So, it's kind of doubling up every year. So, we're really excited about Ren and it's only growing. And I understand, when we talk about 140 million, kind of in the pipeline, these are contracted minimum revenues in the contracts that we're installing. So, that's what's exciting about it. That doesn't include anything we're going to – that we would sign this year. So, and our experience has been, once we put somebody on our platform, the transactions in almost every case exceeded their expectations. I think darn near every case as the transaction – their transaction-based licenses. So, and as the transactions exceed the expectations of the people we contract with, we end up making a little bit more. So, there's a lot of optimism around Ren right now. Thank you. One moment for our next question. Our next question comes from the line of Pete Heckmann from D.A. Davidson. Hey good morning. Most of my questions have been answer. I just wanted to follow up though on the digital money transfer. Can you talk about how that's been growing at a very nice clip for several years here? Can you talk about how that has changed the mix of money transfer and what the implications are for both revenue growth and margins if we continue to see the digital growing at 3x, 4x the rest of the [business] [ph]? Well, obviously, it's good. It changes the mix. So, if we're growing, kind of low teens in net, but that's growing 39% or whatever. It is changing the mix over time. It continues to gain more and more momentum. We open up in more and more countries. I mean, we have a real focus on digital, and it's profitable for us. I'd like to also throw that out there because about 90% of everybody doing digital money transfers are losing money on them. And – but because we can leverage the rest of our bricks-and-mortar business, it is nicely profitable for us. So, I think the mix will continue to change as we go forward. And it will be just more and more on the digital side. All right. And then in terms of just the Dandelion, I think you had said that you expect that to get some more momentum for 2024, and... Probably not of revenues this year because now these deals are, you know you hook up a bank and then they start sending, then they have the – our distribution channels now available to their customers, which they didn't – heretofore did not have. And so they then begin marketing to their customers, their customers use it, it gets its own momentum once you've signed up a bank and have it working. So, it's one of those things growing, growing, kind of over time. So, we wouldn't expect much additional Dandelion revenues this year, unless we maybe nail another like Fintech, like we have with Zoom or Remitly because that's a pretty fast ramp up of these banks, which are really where the big money is. They're going to take a little bit longer because they're used to only offering Swift. They didn't offer all the cash payouts, the wallet payout, and also the RTP payouts that we offer with Dandelion. So, but it's really interesting talking to these banks. They are absolutely starting to clue into this value proposition because they want to create a better product for their customers and be competitive. Thank you. One moment for our next question. Our next question comes from the line of Mike Grondahl from Northland Capital Markets. Hey guys, thanks. Can you guys roughly size up Croatia and that hit going to the euro? And then you did mention some offsets to that were rate related. Could you kind of describe what those rate-related offsets are or what that means? Well, yes, Mike, we've not disclosed exactly what our impact is. We'd rather not do that for competitive reasons out there, but the offsets are really in, kind of a couple of categories, some opportunities where interchange rate will improve and some places where we'll be able to add some surcharge or access fees. So – and then as Mike mentioned, we've been proactive on pairing back ATMs that we believe would not be profitable when we don't have DCC. So, it's largely the opportunities that we have to pick up some of this interchange and surcharge and then supplemented by some cost management to largely [Technical Difficulty]. Got it. And then just real quick. Any data points you can throw out there that makes you feel confident or decent about the 92% to 93% travel recovery? Well, I guess what I'd say is, really kind of two things. One, we have consistently seen, as Mike said in his comments, that our transactions have paralleled the Eurocontrol data. And it's just intuitive, I think, Mike. If people are on the plane, they get off the plane, they start walking down the street, they need cash, they stop by the ATM. So, it just seems so intuitive that there should be direct correlation, and that's what we've consistently seen. So, again, looking to what the outlook of Eurocontrol is, and how they've looked at it, we feel pretty confident with that. The second thing is, as I mentioned, as we kind of closed out the year, we saw that we're, kind of in that 75-ish, kind of percent range there. Some countries, a little better, some a little less, but overall about there. So, again, we've consistently seen this move up. We've seen consistent correlation with Eurocontrol. Mike said in their delta. Again, somebody that's in the business of taking people to Europe. They're feeling pretty bullish about their expectations for this year. So, those are all things that basically point us toward a continuing improvement, and nothing at this point tells us that it looks like the 92%, 93% numbers in jeopardy. So, that's where we continue to see and the optimism that we draw from. And also, let's not forget, it is [Technical Difficulty] issue. So, our favorite group of travelers, our largest single group are people from Britain because they all have an island currency of [where they land] [ph] of our other territories. And – but even though we averaged about 75% last year, we did the full analysis on flights coming out of Heathrow as an example. And they really – there's really only 62% of 19 travelers last year that came out of Heathrow. So, just by fixing Heathrow, will be good because it's not just the number of travelers, but where they come from. So, that's one of the little, you might say, gives us a little bit of, umph, as we go into next year. Operator, I think that has to be the last call. We're at the top of the hour. So, I'd like to thank everybody for listening in and happy to talk to you in about 90 days.

EarningCall_363

Hello, everyone, and welcome to our earnings call for the fourth quarter and year-end 2022. During the call today, we will review the financial results released after the close of the market and offer commentary on our commercial activity, after which we will host a question-and-answer session. If you have not had a chance to review the earnings release, it can be found in the Investor Relations section of our website at illumina.com. Participating for Illumina today will be Francis deSouza, President and Chief Executive Officer; and Joydeep Goswami, Chief Financial Officer and Chief Strategy and Corporate Development Officer. Francis will provide an update on the state of Illumina's business, and Joydeep will review our financial results, which include GRAIL. As a reminder, GRAIL must be held and operated separately and independently from Illumina, pursuant to the interim measures ordered by the European Commission, which prohibited our acquisition of GRAIL under the EU merger regulation. This call is being recorded, and the audio portion will be archived in the Investors section of our website. It is our intent that all forward-looking statements regarding our financial results and commercial activity made during today's call will be protected under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from those projected or discussed. All forward-looking statements are based upon current available information, and Illumina assumes no obligation to update those statements. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Illumina files with the Securities and Exchange Commission, including Illumina's most recent Forms 10-Q and 10-K. Thank you, Salli. Good afternoon, everyone. 2023 is off to an exciting start for Illumina and for genomics, and I'm pleased to announce that we've started shipping the first NovaSeq X Plus systems to customers. Later in my remarks, I'll share how we're scaling our manufacturing and distribution infrastructure to ship 40 to 50 units in Q1 and over 300 units for the year. First, I'll cover our financial results for both the fourth quarter and full year 2022. Illumina delivered fourth quarter revenue of approximately $1.1 billion and full year 2022 revenue of approximately $4.6 billion, in line with the upper end of our revised guidance range. We placed more than 3,200 instruments in 2022, increasing our installed base to approximately 23,000 instruments worldwide. Delving now into each of our platforms, starting with high-throughput. We've had a fantastic customer response to the NovaSeq X series launch. Both orders and the advanced pipeline continue to grow. There's strong global interest with orders from more than 25 countries, 4x more than in the first quarter of the NovaSeq 6000 launch. We're also seeing stronger-than-expected clinical adoption and orders from new to high-throughput customers who are bringing sequencing in-house due to NovaSeq X's ease of use and cost benefits. The NovaSeq X has had the strongest pre-order book of any Illumina instrument launch, and this demand will catalyze a multiyear upgrade cycle. We also shipped more than 340 NovaSeq 6000s in 2022, with more than 1/3 of those instruments for oncology testing and nearly half to new to high-throughput or new to Illumina customers. Placements were strong in the first half of 2022 even after a record 2021. Second half placements were tempered by growing customer excitement for the NovaSeq X series. Across 2022, average consumable pull-through for the NovaSeq 6000 was approximately $1 million per instrument. Moving to mid-throughput. In 2022, we shipped a record 1,215 instruments and saw the fourth consecutive record year for NextSeq shipments. The fourth quarter of 2022 was also the highest quarter on record for NextSeq 1000/2000 shipments. Customers appreciate NextSeq 1000/2000's unique capabilities as the only mid-throughput sequencer with built-in analysis and the first mid-throughput instrument to include the 2x300 kits. Close to 25% of NextSeq 1000/2000 units in 2022 were placed with new to Illumina customers. For low-throughput, in 2022, we shipped approximately 1,670 instruments, bringing nearly 700 new customers to Illumina. Our low-throughput instruments consistently open new geographies and applications while serving as an effective entry point to sequencing. Shifting to our markets. Our clinical markets currently include testing for oncology, reproductive health and genetic disease. In 2022, shipments to clinical customers represented 45% of core Illumina consumables. For 2022, oncology testing consumables grew 7% year-over-year from utilization of MGS-based molecular profiling across early detection, therapy selection and minimal residual disease. We see expanding opportunities for our oncology products globally. For our TruSight Oncology 500 distributed therapy selection assay, sample volume grew approximately 60% year-over-year across more than 500 accounts. And for 2023, we expect more than $100 million in revenue for TSO 500. Also in oncology, GRAIL continues to have strong demand from consumers, physicians, health systems and payers. Galleri is the only multi-cancer early detection test in a $40-plus billion market, and it had the fastest first year revenue ramp in cancer screening test history. GRAIL has established over 60 partnerships with leading health systems, self-insured employers and other health care stakeholders. In 2022 alone, more than 4,500 providers ordered the test, contributing to the more than 60,000 Galleri test orders that have been received to date. The Galleri test has received FDA Breakthrough Designation and was recognized by Time as one of the best inventions of 2022, by The Atlantic as one of the Breakthroughs of the Year and by Fast Company as one of the world-changing ideas of 2022. Galleri was also featured in an AARP health story on game-changing medical breakthroughs, improving lives today. GRAIL expects this exciting momentum to continue and to translate into an expected revenue CAGR of 60% to 90% over the next 5 years. Beyond oncology, genetic disease testing had a record quarter in Q4 and another strong year in 2022. For 2022, GDT consumable shipments grew 11% year-over-year, driven by broader adoption of whole genome sequencing globally and increased demand for rare disease treatment. We also saw additional evidence generation, with the European Society of Human Genetics updating its guidelines to recommend increased adoption of whole genome sequencing in diagnostics as well as increased coverage for rare and undiagnosed genetic diseases. Recently, 2 of the largest health insurance companies in the U.S., based on the number of patients served, announced that whole genome sequencing will be covered for patients with rare and undiagnosed genetic diseases, starting this quarter. And AIM Specialty Health, which provides lab benefits management services for more than a dozen regional health plans in the U.S. now considers comprehensive genomic profiling medically necessary for appropriate patients with advanced cancers. Tens of millions more Americans will be covered, a huge win for patients and our customers and for Illumina. Turning to our research and applied markets. Consumable shipments represented 55% of core Illumina consumables in 2022. Boosting the diversity in genetic databases is a significant need for our customers as they work to understand the underlying cause of disease. Genomics, combined with clinical information, can increase drug discovery success by up to 150% and reduce costs by up to 50%. To achieve this, we need more samples over time and for more diverse populations. We recently announced an agreement with Amgen and its subsidiary, deCODE Genetics, to sequence the first 35,000 genomes in our collaboration with Nashville Biosciences. This sample cohort will represent the largest data set of African-Americans to date as we aim to accelerate equitable access to precision health therapies, and they've already begun sequencing the first samples. Moving now to 2023. We're excited for this launch year and have now started shipping NovaSeq X Plus systems to our first customers. We're on track to ship 40 to 50 NovaSeq X instruments in Q1 and more than 300 instruments in 2023. To accomplish this, we boosted our operational capabilities. We've built state-of-the-art consumable manufacturing facilities in the U.K., Singapore and San Diego, adding 9 new production lines. At launch, we already have 2 to 3 months of inventory for each of the 6 core consumable SKUs. In our instrument manufacturing facility in Hayward, we are fully staffed and ramping up production and capacity. Right now, there are more than 60 NovaSeq X instruments in various stages of the production process. All primary and secondary sequencing metrics are meeting or exceeding specifications. In addition, we've taken steps to ensure our supply chain is strong. We began adding and onboarding new suppliers 2 years ago to secure the material and component supply fueling NovaSeq X production. We're also equipping our global commercial team to guide our customers as they receive the first NovaSeq X shipments. In January, we brought together more than 800 sales team members in a 3-day training session, giving them new tools and insights to support customers as they accelerate genomics worldwide with this powerful new instrument. The team is energized to bring these new capabilities to market and excited to see the outcome of years of preparation. We are confident that our organization's scale, reach and experience will enable our customers to sequence more samples, run more analyses and obtain more data than ever before. And NovaSeq X unlocks greater elasticity, we expect average pull-through for the X to comfortably exceed NovaSeq 6000 over time. Illumina will remain focused on supporting our valued customers with transformative innovations and continue to advance our road map to accelerate the genome era. Customers' interest worldwide continues to be very strong, and they are eager to harness the capabilities of the X, the most powerful, most sustainable and most cost-effective sequencer ever developed to further unlock the power of the genome. You'll hear more about the customer experience and data at AGBT this week. Now before I turn the call over to Joydeep, I'd like to thank him and welcome him to the role as Illumina's Chief Financial Officer. With over 2 decades experience in the industry, Joydeep brings strategic expertise, deep industry knowledge and extensive global business experience to the role. He is a proven and disciplined leader with a strong track record of creating value and an ideal partner to help drive the next phase of Illumina's growth. Thanks, Francis, and thanks for the kind introduction. I'm excited to step into the role on a permanent basis and continue to work with all of you. I'll start by reviewing our consolidated financial results, followed by segment results for core Illumina and GRAIL, and conclude with additional remarks on our current outlook for 2023. I will be discussing non-GAAP results, which include stock-based compensation. I encourage you to review the GAAP reconciliation of these non-GAAP measures, which can be found in today's release and in supplementary data available on our website. In the fourth quarter, consolidated revenue was $1.08 billion, down 10% year-over-year or down 7% on a constant currency basis, net of the effects of hedging. Non-GAAP earnings were $22 million or $0.14 per diluted share, including dilution from GRAIL's non-GAAP operating loss of $159 million for the quarter. Non-GAAP earnings per share were lower than expected due to approximately $87 million in incremental tax expense from the R&D capitalization requirements that were not repealed in Q4 2022 despite broad bipartisan support. The incremental tax expense includes approximately $80 million recorded in Q1 through Q3 that was ultimately not reversed in Q4. Our non-GAAP tax rate was 29.3% for the quarter and 26% for the full year 2022, which increased from 15.6% in Q4 2021 and 17.3% in fiscal year 2021, primarily due to the impact of R&D capitalization requirements. Our non-GAAP weighted average diluted share count for the quarter was approximately 158 million. Moving to segment results. I'll start by discussing the financial results of core Illumina. Core Illumina revenue was $1.07 billion, down 11% year-over-year or down 8% on a constant currency basis, net of the effects of hedging. Core Illumina sequencing consumables revenue of $687 million was down 13% year-over-year. As expected, growth driven by pull-through on the increased installed base was offset by delayed recruitment for some large research projects in the Americas and Europe, the ongoing impact of COVID disruptions in China, the year-over-year impact of customer inventory management, the anticipated decrease in COVID surveillance revenue and headwinds from foreign exchange rates. Sequencing instruments revenue for core Illumina declined 24% year-over-year to $146 million, driven primarily by the lower NovaSeq 6000 shipments in advance of the availability of NovaSeq X. The decline was partially offset by another quarter of record NextSeq 1000/2000 shipments, which grew 31% year-over-year as we continue to see strong adoption by new to Illumina customers and demand for our new 2x300 kits that bring longer lead capabilities to our mid-throughput platform for the first time. During the fourth quarter, COVID surveillance contributed approximately $20 million in total revenue, comprised of $19 million in sequencing consumables and $1 million in sequencing instruments. This was in line with our expectations and down $30 million year-over-year, driven primarily by lower sample volumes. Core Illumina sequencing service and other revenue of $131 million was up 24% year-over-year, driven primarily by higher instrument service contract revenue on a growing installed base as well as an increase in oncology and IBD partnership revenue. Moving to regional results for core Illumina. Revenue for the Americas was $577 million, down 7% year-over-year, and EMEA revenue of $301 million represented a 14% decrease year-over-year or a 10% decrease on a constant currency basis. As expected, the base business in both regions was impacted by an anticipation for NovaSeq X and the slowdown in COVID surveillance and research I mentioned earlier. We continue to see strong demand for NextSeq 1000/2000, with record shipments in the Americas up nearly 50% year-over-year, driven by strength across both research and clinical. In addition, NovaSeq Dx shipments exceeded expectations in the first quarter of launch with strong early demand by clinical customers in Europe. Greater China revenue of $94 million represented a 22% decrease year-over-year or a 14% decrease on a constant currency basis. The region continued to be impacted by COVID lockdowns that resulted in lower sample volumes year-over-year. We continue to expect our business in China to be impacted by headwinds from COVID-related disruptions, exchange rates and slowing GDP growth in the region, at least through the first half of 2023. Finally, APJ revenue of $93 million declined 10% year-over-year or 4% on a constant currency basis, net of the effects of hedges. Strong growth across clinical markets was more than offset by the conclusion of a large research project in Japan and delayed high-throughput instrument purchases due to the introduction of NovaSeq X. Moving to the rest of core Illumina P&L. Core Illumina non-GAAP gross margin of 67.3% decreased 430 basis points year-over-year, primarily due to less fixed cost leverage on lower manufacturing volumes. Core Illumina non-GAAP operating expenses of $528 million were down $52 million year-over-year, primarily due to cost containment initiatives, lower performance-based compensation expense and a onetime partnership-related expense in Q4 2021. Transitioning to the financial results for GRAIL. GRAIL revenue of $23 million for the quarter grew 130% year-over-year, driven primarily by accelerating adoption of Galleri as well as higher contributions from MRD pharma partnerships due to a milestone payment in Q4 '22 that GRAIL does not expect to repeat in Q1 2023. GRAIL non-GAAP operating expenses totaled $166 million and increased $35 million year-over-year, driven primarily by continued investments in clinical trials and to scale GRAIL's commercial organization. Moving to consolidated cash flow and balance sheet items. Cash flow provided by operations was $147 million. Fourth quarter 2022 capital expenditures were $88 million and free cash flow was $59 million. We did not repurchase any common stock in the quarter. We ended the quarter with approximately $2 billion in cash, cash equivalents and short-term investments. Cash as of the close of the quarter included $991 million in net proceeds from the term notes issued on December 13, 2022, which will be used to repay upcoming debt maturities in 2023. Moving now to 2023 guidance. We expect full year consolidated revenue to grow 7% to 10% to approximately $4.9 billion to $5.03 billion. We expect full year 2023 core Illumina revenue to grow 6% to 9% to approximately $4.83 billion to $4.96 billion. These ranges include an anticipated headwind from COVID surveillance of approximately 200 basis points as well as a year-over-year headwind from foreign exchange rates. We expect quarterly revenue to ramp sequentially through 2023 with linearity trends similar to what we saw in 2017 when we launched the NovaSeq 6000. GRAIL is expected to deliver revenue in the range of $90 million to $110 million for 2023, reflecting year-over-year growth of 82% at the midpoint, driven by accelerating adoption of the Galleri test. For fiscal 2023, at the midpoint of our revenue guidance range, we expect core Illumina sequencing revenue to grow approximately 8% year-over-year. This includes intercompany sales to GRAIL of approximately $35 million, which are eliminated in consolidation. We expect core Illumina sequencing instrument growth of approximately 9% year-over-year, driven by the NovaSeq X upgrade cycle and continued momentum in mid-throughput. We expect core Illumina sequencing consumables growth of approximately 8% year-over-year, primarily driven by the NovaSeq X launch as customers build consumables inventory and ramp utilization as well as continued growth in our mid-throughput consumables due to the growing installed base. This growth will be partially offset by further reduced COVID surveillance revenue. We expect annual pull-through for NovaSeq 6000 of approximately $900,000 to $1 million per system in 2023 as customers transition to NovaSeq X. We expect pull-through for NextSeq 1000/2000 in the range of $120,000 to $170,000 per system in 2023 as the record instrument placements in '22 and continued strong placements in 2023 are brought fully online. We expect the remainder of our pull-through ranges to be in line with historical guidance. We also expect revenue from COVID surveillance of approximately $30 million in 2023, which reflects a year-over-year headwind of $105 million or approximately 2 percentage points. We expect consolidated non-GAAP operating margin of approximately 8% in core Illumina non-GAAP operating margin of approximately 22% for 2023. These margins reflect: one, an increase in core Illumina operating expenses from 2022, primarily driven by normalization of our performance-based compensation; two, a temporary decrease in gross margins as we launch NovaSeq X, consistent with what we saw in 2017 when we launched NovaSeq 6000; and three, an increase in GRAIL operating expenses due to the ongoing investments to support the FDA application, NHS trial and to continue to scale GRAIL's commercial organization. We also expect a consolidated non-GAAP tax rate of approximately 36%, which includes an approximately $75 million impact from the R&D capitalization requirements. If these requirements are repealed in 2023, we expect our 2023 non-GAAP tax rate to be approximately 15%. We expect consolidated non-GAAP earnings per diluted share in the range of $1.25 to $1.50, which includes dilution from GRAIL's non-GAAP operating loss of approximately $670 million. And finally, we expect non-GAAP diluted shares outstanding for fiscal 2023 to be approximately 160 million shares. For the first quarter of 2023, we expect consolidated revenue in the range of $1.05 billion to $1.07 billion for Q1 2023, reflecting a sequential decrease of 212 basis points from Q4 2022 at the midpoint, primarily driven by: historical seasonality of our core business due to year-end budget flushes not repeating in the first quarter; partially offset by an increase in high-throughput instrument shipments due to the launch of NovaSeq X in Q1; and a decrease in GRAIL revenue of approximately $5 million due to a milestone payment in Q4 2022. We expect quarterly revenue to grow sequentially through 2023, driven by a ramp in NovaSeq X shipments and utilization, recovery from COVID disruptions in China, accelerating adoption of Galleri and an expected mitigation of macroeconomic headwinds in the second half of 2023. For the first quarter, we expect consolidated non-GAAP operating margin of approximately 1% and core Illumina non-GAAP operating margin of approximately 17%. We expect operating margins to improve throughout 2023 as revenue ramps and we scale our production of NovaSeq X and leverage the fixed cost of the manufacturing base. We expect net other expense of approximately $9 million, primarily due to the interest expense on our new bond issuances. Lastly, we expect non-GAAP diluted shares outstanding of approximately 160 million shares, in line with fiscal 2023. Thanks, Joydeep. Illumina continues to prioritize innovation. We know our customers invest in our road map, not just our instruments. I talked about the NovaSeq X series earlier. The X is a powerful catalyst for 2023 and beyond. We also prioritized sustainability. NovaSeq X features a 90% reduction in packaging waste and weight and a 50% reduction in plastic usage compared to the NovaSeq 6000. The enablement of ambient temperature shipping of reagents will result in nearly 500 tons of dry ice savings per year while significantly reducing waste streams for our customers. These improvements are game changers for our industry. We're also excited to bring long-read capabilities to market through 2 upcoming products in our Illumina Complete Long-Reads offering. Our long-read human whole genome assay will be available in the first half of this year, while the enrichment panel will be available in the second half of this year. We recently announced that our enrichment panel will enable a comprehensive, high-accuracy, long-read view for as low as $600 per genome. More than a dozen customers have evaluated data from their own samples using Illumina Complete Long-Reads and their feedback has been strongly positive. They find Illumina complete long-reads more convenient than other long-read technologies and more straightforward with flexible input requirements. They are impressed with the data accuracy, along with the read lengths and phase blocks that can be generated on Illumina sequencers. Illumina Complete Long-Reads and NovaSeq X will continue to evolve the genomics industry. This year, we will celebrate Illumina's 25th anniversary. Over this quarter century, Illumina has remained at the forefront of a global genomics movement, and we're even more optimistic about the road ahead. We're honored to be driving a global health transformation with our customers. And together, we will seize the potential of the genome era. Congrats on the permanent role, Joydeep. So my first question is, at AGBT, we saw that you had 150 orders as of this morning, and that's 10 more than what you had at the start of this year. So I just wanted to clarify sort of the number increase was only 10 versus what are the advanced pipeline prospects. Maybe if you can provide that number. Again, I appreciate that you're providing the full year 300-plus number, but last time, advanced pipeline prospects, I believe, were 200-plus so if you could clarify how much that increased by because the number increase here within a month was somewhat lower than what we had expected. And then I just wanted to clarify, Francis, on, what are you hearing from customers in those advanced pipeline prospects? What are they looking for at this point? How is -- what are they waiting for in order to convert their interest into orders? Are they looking for validation for customers, data or anything else? That would be super helpful. Sure. Thanks, Puneet. So let me start with the numbers, as you asked. So as we said, the customer demand for the X series has been very strong, exceeding our expectation. And you know that we recently shared, as you pointed out, that we had 340 instruments spoken for, between 140 in preorders and 200 in advanced pipeline. Now this momentum continued over the last few weeks in January, and we're currently at over 155 instruments in preorders and over 250 in advanced pipeline. So you've seen the progression as we work through January. Now going forward, we plan to update you quarterly, as usual, both on how we're doing with orders, but now as we've started shipping, obviously, we'll update you on shipments as well. What we're hearing from customers as we go through the pipeline is that they're incredibly excited about some of the things we expected them to be excited about. So they're excited about the power of the X series in terms of being able to run much -- many more samples concurrently than they could before. They're very excited about the economics associated with running the X. And they're equally excited about the sustainability features that we put into the X, so the reduction in plastic and waste, but also the elimination of the need for dry ice as part of the shipping. All of these combined with the ease of use that they're seeing, so when we describe the specs to them at IGF, they got a sense of the power and the performance and the faster turnaround time. But one of the things that people have been, I think, pleasantly surprised about is they get to interact with the X is the investments we've made around ease of use of the workflow. So this is even a significant step forward than the state-of-the-art with the 6000 before. And what that opens up is the ability for the sequencers to be used by a technical team that is not as -- doesn't necessarily require a degree in genomics, for example. And so that opens up workforce capabilities for them. Now what we're hearing from research customers is, increasingly, they're starting to see the X as a must-have in terms of being able to remain competitive for grants and grant dollars. And so we're starting to see people cost that into thinking about how they will apply for grants. On the clinical side, what we're hearing is that because of the superior workflow performance and cost associated with the X, clinical customers are designing their new assays and their new tests on the X with the anticipation that, that's how they'll roll out new testing. At the same time, they're starting to want to get familiar with the workflow so that they can plan a transition over on their existing tests. So that will take longer. So the first demand from clinical customers is about new testing that they want to do on the X. So that's some of the feedback we're getting from our customers. Yes. And maybe, Puneet -- thank you, first of all, for your kind words there. I think the other question you asked is what are customers waiting to convert from the funnel to the orders, right? And this is, remember, this is late-stage funnel so we have confirmed interest. They like what they see, as Francis mentioned, and they have line of sight to budget, right? So usually, it's the -- when are they going to get the budget? Maybe it's finishing up or confirming some of the grants, which then tips them over into orders. And we fully expect that, as we have seen in other years, to happen as we go through the year. Joydeep, congrats. Maybe first on the guidance. I believe at JPMorgan, you guys talked about the '23 guide reflected a conservative approach. I'm just wondering, just given the history in the back half of '22, have you learned anything? Has the process changed in terms of how you're guiding? Could you just walk through a little bit about the conservatism or however you want to quantify it, that's within the '23 guide? I know, Francis, you guys quantified a fair number of kind of headwinds. Just wondering how much maybe you baked in cumulatively for those headwinds or however you would kind of discuss the process and the conservatism. And then just, B, just on GRAIL. Would love an update assuming that the EC directive comes back here during Q1. I know you guys are going to apply for a stay, but I'm just -- if you can kind of walk us through the process as you see it. If you don't get a stay, then kind of what happens? And related to that, the GRAIL balance sheet. Just wondering, ultimately, if GRAIL has to be divested, how do we think about the capital that Illumina has to commit to that? Yes, Dan. First of all, thank you. So in terms of '23 guidance, we have, as we mentioned earlier, right, pulled in a few things that were visible, of course, is, one, the transition to NovaSeq X. We have mentioned that this is -- demand is going to outstrip supply. And we've also told you about linearity, that we do expect the second half to be -- for revenue to step up in each quarter as the NovaSeq X gets out to market and people start bringing up the instrument and ordering NovaSeq X consumables. We also expect that -- we placed a large number of mid-throughput instruments late in 2022 and continue to expect to place additional NextSeq 1000/2000 instruments in -- throughout '23. So as those come online, right, then you would expect an increase in the consumables ramp up as we get through the year. Also in 2023, we have talked a little bit about the recovery in China in the second half of the year. So we had seen China going into the end of '22 and then even the first quarter of 2023 with some COVID hangover and rollover from last year. So right now, we believe that those should abate. And we also have a lower impact of FX from first half from -- obviously, from first half into second half of the year. So for all those reasons, we do expect, even after taking into account some of the slowdown in recruitment that we have seen in large pop-gen projects, that we will see linearity and revenue step up throughout 2023. And I'll hand it over to Francis for the second part of the question. Sure. So Dan, in terms of the GRAIL process, we are expecting the divestiture order to come out at the end of Q1, so maybe beginning of Q2. And we are going to apply, if there isn't a stay associated with it pending the appeals, we're going to ask for one. And then we're going to pursue the dual track and we'd be pragmatic as we go down both paths. On the 1 hand, we're going to have a divestiture track where we work with the European Commission GRAIL and go down the path to -- on the divestiture sort of process. And we expect that to play out over the course of this year going into next year. And in parallel, we have our appeals, and we have 2 appeals underway. One is around the jurisdiction, and we expect a decision probably towards the end of this year and another one is on the prohibition order, and we expect a decision maybe towards the end of this year, maybe sometime into next year. And so those are the 2 paths. In terms of the capitalization, part of the divestiture track is going to be around making sure that GRAIL is capitalized going forward. And that could be through a combination of strategic partners that invest in GRAIL. That could be a path. It could be a multistep path that includes initially investment into GRAIL from strategic partners heading towards an IPO. But all of that is dependent on what comes out in the divestiture order, and that's something we're still in conversations with. So we'll keep you updated as that makes progress. I wanted to touch on GRAIL, too, if I may. Joydeep, on the dilution for 2023, the $670 million, I'm just curious how much flexibility you have to work with in that number and the investment associated with that number. Just with the point being that, obviously, the forecast for Galleri is tough to call at this stage in the game. So to the extent that the revenue picture were to start to look different down the road, I'm wondering just how much of what you might have to spend there might be variable in one way or another. And then Francis, on the GRAIL NHS project and part 1 of that study, the 140,000 asymptomatic population assessment. The documents from the NHS, if I remember correctly, stated that the initial results were expected to be available in late 2023. Is that still the time line we should be thinking about? I mean I'm just -- I'm thinking about your comment on potential IPO and just outcomes there and what might be important to that process. All right. Dan, thanks for the question. So in terms of the GRAIL dilution of about $670 million this year, right, a couple of points there. So a lot of that is going towards continuing to accelerate some of the clinical trials in advance of completion of the NHS trials, the submission to the FDA for the Galleri products and, of course, to ramp up the sales and marketing that is required as the product continues its successful commercial launch, right? They've had a really successful commercial launch. The way we have projected revenues into next year and based on -- it's really based on the run rate that we have seen with Galleri as they have exited 2022 and some of what they had in the funnel into 2023 and certain assumptions of repeat testing around that. So given that, I will point out, and again, I will say that GRAIL is held separate, so Illumina and Francis and I don't really control their -- how they spend their money and how they operate the company. But I will point out that in 2022, they have been very good with how they've managed to adjust operating expenses as revenues have been different from what their -- some of their original expectations were. So we have faith in GRAIL's management that they are -- they're good managers, they're good with how they allocate their money into the right places that really prioritize the clinical trials and the commercialization of the product. And then, Dan, I'll respond about the NHS contracts. As you pointed out, the GRAIL team has a contract with the NHS that covers the 140,000-person clinical trial that is underway, but also covers the next phase pending performance of the trial. And so they've already got an agreement with the NHS that if the trial meets its performance criteria, that the NHS will roll this test out to 1 million participants in the U.K. over 2024 and 2025, and that will be paid for by the NHS. The time frame for that readout is the end of this year, maybe the beginning of next year. So it's still the time frame that was contemplated in the contract. I had a 3-part question here. Francis, one on revenues. If you look at Q1, I think the implied guidance, teens declines. So I think the back half implied is north of 20% year-on-year revenue growth to hit the high singles to low doubles for the annual. What gives you that back half ramp here when I look at this on a year-on-year basis? I know you mentioned the historical launch year as a comp. But can you just walk us through on the visibility you have on those numbers? And Joydeep, one on margins here for you. Why did gross margin decline sequentially Q-on-Q when I look at Q4 versus Q3? And if you start in Q1 at 17% op margins for core Illumina, is the implied exit rate for core Illumina in the high 20s when we look at Q4 '23? Listen, let me start and I'll give you some piece in terms of back half ramp on revenues, right? So let me start with the first half -- the first quarter and first half, right? We had very strong quarters in 2021 for the first half. We had record shipments of NovaSeq 6000s, if you remember, at the beginning of the year, still ramping COVID surveillance revenues. So this year, because in Q1, we are -- we've said we're going to ship about 40 to 50 NovaSeq Xs, which is far short of what our demand is for that. You would expect that the first half of the year, growth rates are constrained as we ramp up NovaSeq X and we ramp up consumables purchases related to that. In the second half of the year, the story kind of flips a little bit, right? So you have much more kind of full -- approaching full throttle of NovaSeq X shipments. You have the incremental benefit of people bringing on NovaSeq X consumables. You also have some of the effects, which were headwinds this year, in terms of China COVID, in terms of overall COVID surveillance going down in the back half of the year. So you're right, the percentage growth rates in the latter part of the year and the actual revenue both start to step up in the second part of the year. So hopefully, that part is clear. In terms of margins, so let me talk about gross margin first. Gross margin declines quarter-over-quarter and, of course, this being a launch year, primarily due to the impact of -- especially if you look at quarter-on-quarter, is really due to the impact of launching NovaSeq X in Q1, which, as we had told you, would start off this year with a lower margin. We expect that margin to continue to improve as we go into the latter part of 2023, as we have much more utilization of the factories and, of course, we start squeezing out efficiencies in the process, as is normal. And I think the same thing with operating margin. I think your question there was, you start off with a fairly low operating margin. For us, it's -- as both gross margin and the revenue profile improves, operating margin should improve as we go into the second half of the year. And that's mostly just math in terms of much better revenue profile to cover operating expense, which remains relatively flat as we go through the year. So hopefully, that helps you understand a little bit of how we've thought through the year. So 2-parters here. First on GRAIL, Francis, just going back to Dan's question there. Can you talk a little bit about how much of that $670 million in OpEx this year is specifically related to that NHS clinical trial that presumably drops out starting in '24? And is there the possibility of a delay or a period of evaluation as the results come in from that before that 1 million paid pilot launches? And then second on NovaSeq X pull-through assumptions, if I look back to the 6000 launch, you guys were approaching almost 1 million in pull-through about 6 quarters into the launch. So is there any reason why you couldn't sort of easily exceed that, say, 6 quarters into the X launch or the back half of '24, should that number be sort of 1.3 million, 1.4 million-plus. Is that fair? So thanks for the question, Tejas. Let me take some, and then Joydeep will chime in if he has anything to add. So let me start with the GRAIL question and around how much of that $670 million is associated with the NHS trial and is there a chance that the readout is delayed or the next phase is delayed. So a portion of it is, so we haven't actually broken out that $670 million. A portion of it is, but it's not the majority of it. So there are a number of things going on at GRAIL. In addition to the NHS trial, there is also the studies they're doing for the FDA submission, and they are looking to have the final submission done towards the end of next year. And so they're sort of in the thick of things with the FDA. However, there is the part associated with that NHS trial. And as you point out, that moves from being a pure cost to GRAIL right now for this 140,000-person trial to next year being a paid rollout, starting next year over 2 years to 1 million people. So a pretty significant shift in economics positively for GRAIL next year. In terms of the time frame, the NHS did a very thorough sort of diligent job with GRAIL in terms of planning out this trial. And because GRAIL has done so many studies of such significant size before, they really had a good handle on how to analyze the data coming in and sort of what you would need to get to get to the decision that they're looking for. And so we don't expect and we haven't seen at this point any delays associated with the analysis that's happening of the data. And so we fully expect them to be getting to that readout at the end of this year, beginning of next year. And then similarly, because of the power of this test and the NHS being so keen to really use this test as a core component in their war on cancer, their intent is to get through the readout as responsibly and quickly as possible. And once the demonstrated meets the performance criteria, to get to that rollout as quickly as possible. And so there's a huge motivation on the side of the NHS again because of the potential life-saving benefits of this test. And obviously, there's motivation on the GRAIL side, too. And so I don't expect there to be any delays that pop up between the readout and then rolling out the test. In terms of the 6000 pull-through then, what we have said, and you've seen this before, is really we expect some time likely between the first and second year for us to get to a stable point in terms of pull-through. And you pointed that out that we got there on the 6000 in that kind of time frame. And so one, we do expect that to be the time frame and we'll keep you updated as we work through the process. And as you know, but for everyone else, before that, the numbers are still too volatile for it to be a useful modeling metric because as you put out a whole bunch of new instruments and people start to ramp up, the pull-through can move pretty significantly from 1 week to the next, 1 quarter to the next. And so it takes that year for you to get enough instruments out there for the number to be significant. Now also, as you pointed out, as we get to a stable number for the X, we feel really confident that the ultimate pull-through number on the X will be comfortably above what we had with the 6000 because of the power of the X and the quick turnaround time and the ability to run just so much more on an X over a year. Another one on GRAIL. Would love to get your thoughts, Francis, in terms of you talked about the FDA Breakthrough Designation for the Galleri test kind of -- I know -- but it's still kind of an uncharted territory to get it going through the FDA process and also maybe gaining broader reimbursement from Medicare. So could you kind of talk about kind of what efforts are being made in order to move forward with those -- in that direction? Yes, sure. So let me talk about a few things. One, as you pointed out, GRAIL has been able to get Breakthrough Designation from the FDA. And they have been working now with the FDA for a number of years on designing the studies that will be part of the ultimate submission. And so they've been working collaboratively with the FDA. And although they've been working with them, they've already submitted some of the modules associated with the FDA submission, and they are planning to do the final module submission at the end of next year, maybe extending into the beginning of the year after. So they're making good progress. The other big step with the FDA, which really breaks new ground, is that they've been talking to the FDA about submitting data from the NHS trial as part of the FDA submission. Now that's really powerful because that's a very large trial. And so that continues to add to the bolus of evidence that GRAIL was able to get and submit into the FDA. And so I think it's -- we're starting to see the benefits of that good working relationship between GRAIL and the FDA. And as you know, when you have the FDA approval, that's a pretty significant step forward in terms of getting broad reimbursement in the United States, which is a really, really big value creation point from a GRAIL perspective. So you'll see both things play out in the next couple of years. You'll see the big NHS move from going from a trial to a rollout, a population rollout, starting with the 1 million people and then going population-wide after the 1 million people rollout in the first 2 years. And at the same time, you'll see the progress in the U.S. with the final FDA submission at the end of next year and then the path towards broad reimbursement in the U.S. Congrats again to Joydeep. So 2 I'll just ask upfront. Many of the lab companies that we cover are talking about reduced cash burn, and they're really excited about NovaSeq X and how even some of them are kind of excited about going from NovaSeq from NextSeq. So can you help us reconcile their desire to reduce cash burn and your expectation of increased spend with you? And then just my second one is just continuing on some of the price stuff. Why should we not be concerned about the new $99 Complete Genome -- Complete Genomics thing today? Thank you for the question, Dave, so let me go through them in order. So first, we're hearing just like you're hearing from lab companies that are really excited about the -- again, it's the power, the performance, the turnaround time, but also the economics associated with the X. And I talked about the fact that increasingly, people are going to see those economics as table stakes for applying for and winning new grants. But for lab companies, too, especially in this environment, as they are looking to squeeze the most out of their operations, they see the X as a path to get there, and the superior economics will help them as they lower cash burn and reduce their capital needs going forward. And so we fully expect that to be part of the conversation with our customers. Similarly, we're seeing that on the NextSeq side, right? So we're seeing customers that are seeing more demand come in. And the question for them is do they buy the next NextSeq or do they fundamentally transform their cost structure and move to the X? And that's part of the reason why we're seeing a higher-than-expected demand from 2 segments: one, from the clinical segment, and we talked about the preorders coming in represent a higher percentage of clinical customers than we expected; and two, from new to Illumina and new to high-throughput customers. And so that dynamic is already showing up in the preorder number. In terms of the competitive dynamics. One of the things that we're really excited about is that when we talk to customers, they get very quickly that when they're comparing what system to buy, they really look at -- they need to look at the total cost of ownership in terms of running these sequencers. And that's one of the unique things about the Illumina portfolio around that, started with the NextSeq 1000/2000 but now with the NovaSeq X, is that we have built in capabilities like the compute associated with the primary, secondary and, in some cases, even parts of the tertiary pipelines that are baked into and built into the instrument, that we've built into the instrument capabilities like lossless data compression. And so when they start to compare prices, it's not just the cost of sequencing that they need to look at but it's also the associated compute costs, the storage costs that they would need if they had any other sequencer in the market. And one of the things that I talked about when we talk about the X is that just the compute savings you get associated with the NovaSeq X will save you over $1 million over a 4-, 5-year period. And so that's really exciting for them. Forget about the real estate requirements, forget about the time it would take to post process your data. All of those are important, but they also see that the total cost of ownership of the X is so much superior because of those built-in capabilities. Yes. I mean, Francis, just to dovetail on that, right, David, you had asked about, yes, there are cash constraints with people trying to reduce cash burn. But it's important to understand that, A, sequencing is at the very heart of the value that these companies are generating and even academic institutions are generating, right? So they want to do more sequencing because sequencing gives them answers that other technologies are not giving them and at scale. I think the second point that Francis mentioned is really important, right, that when they look at their cash burn, something like the X or a NextSeq 1000/2000 actually allows them to reduce their expenditure elsewhere, like things around storage or compute or other things, right, and allows them to redirect their investments more positively into areas that add value. And that's a really important point as you think through. And then the third thing is just what they're doing in elasticity, demand elasticity or new applications that Francis and Susan and others have pointed out earlier, which is moving to things that they have not done with the NovaSeq 6000s or any other instruments before, which really then pulls through the elasticity that we are expecting to see starting in 2023 but really picking up in 2024 and beyond as the Xs become fully entrenched. And with that, that is all the time we have for our question-and-answer session. I would now like to turn the call back over to Salli Schwartz for any additional or closing remarks. Well, thank you for joining us today. As a reminder, a replay of this call will be available in the Investors section of our website. This concludes our call, and we look forward to seeing you at upcoming conferences and other events.

EarningCall_364

All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. Thank you and good morning everyone. Welcome to Horace Mann’s discussion of our fourth quarter and full year results. Yesterday, we issued our earnings release, investor supplement and investor presentation. Copies are available on the Investor page of our website. Marita Zuraitis, President and Chief Executive Officer, and Bret Conklin, Executive Vice President and Chief Financial Officer will give the formal remarks on today’s call. With us for the Q&A, we have Matt Sharpe, Mark Desrochers, Mike Weckenbrock, and Ryan Greenier. Before turning it over to Marita, I want to note that our presentation today includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The company cautions investors that any forward-looking statements include risks and uncertainties and are not guarantees of future performance. These forward-looking statements are based on management’s current expectations and we assume no obligation to update them. Actual results may differ materially due to a variety of factors which are described in our news release and SEC filings. In our prepared remarks, we use some non-GAAP measures. Reconciliations of these measures to the most comparable GAAP measures are available in our investor supplement. Thanks Heather, and hello everyone. In line with our pre-announcement, last night we reported full year 2022 core earnings per share of $1.09, which included a fourth quarter core loss of $0.11 per share. Inflation’s continued pressure has driven escalated industry-wide loss costs and resulted in disappointing results for our property and casualty business. I’ll spend much of my time today unpacking how we are meeting the challenges facing the P&C industry. After that, I want to discuss and pivot to the substantial progress we achieved on the growth initiatives we laid out a year ago in conjunction with adding Madison National and expanding our educator value proposition to fully meet the needs of both educators and school districts. Sustained growth across both our retail and worksite divisions will be the most accurate predictor of our company’s long term success. Over the course of 2022, we made important progress against our plan, leveraging our leadership position in the education market to increase sales and build relationships, in other words to expand our share of the education market. In 2023, we will build on these successes, leveraging our sales momentum and distribution partnerships while resuming our trajectory towards our long term goal of a sustained double-digit return on equity. Bret will discuss the details of 2023 guidance later in the call, but at a high level, we expect core earnings per share to double over 2022 and be between $2 and $2.30 with return on equity rising to 6% as we head towards the double-digit ROE we expect for 2024. Our guidance anticipates a solid contribution from the worksite business with benefit ratios in that business moving closer to our long term targets: year-over-year improvement in life and retirement business, even as spreads compress, and a return to profitability for the P&C business, a business that is key to our educator value proposition and has been a historically profitable line of business for Horace Mann. In fact, before I turn to the way we’re addressing the inflationary environment for P&C, let’s look again at how we approach this market a bit differently, because we are not a model line P&C company, we’re an educator company. Horace Mann is built on a deep respect and admiration for our nation’s educators. We are proud to take care of the people who take care of our children’s futures. Our business strategy is to attract and retain multi-line customers by providing the financial solutions they need at each stage of their lives. Quite honestly, being an educator is tough right now, and they need someone in their corner. Coming out of the pandemic, there was hope things would, quote-unquote, return to normal in terms of school schedules and other challenges; however, the pandemic accelerated the national shortage of qualified teachers and support staff. Nearly 80% of educators Horace Mann surveyed for a recent study said school under-staffing has either a severe or moderate impact on students’ ability to learn and teachers’ ability to do their jobs well. Staffing shortages are requiring educators to take on more work and generate even more stress. That stress is compounded by financial concerns. Although teachers’ primary motivation is not a paycheck, generally teachers are paid less than their private sector peers but require more academic credentials. This leads to higher student loan debt and can preclude savings for retirement and other life goals, and that’s where Horace Mann can help. Our representatives can provide financial wellness workshops for school staff on topics like student loan forgiveness and state teacher retirement systems. They can work with educators to create a financial plan, becoming a trusted advisor. Further, we can support administrators looking to augment teacher recruiting and retention by bolstering benefit packages with employer paid and sponsored coverages. All of that is to say that we value our customers and our customers value the relationship with Horace Mann. They know we strive to offer a fair price through varied market conditions, creating long term value for our educators and for our company. Our underwriting, actuarial and pricing teams continually monitor trends in the personal, auto and property markets, and we use their expertise to guide our product pricing and features to achieve our combined ratio targets for auto and property. Similarly, our reserving practices are based on our best estimate of what we believe we will need to pay claims. However, inflation in a post-pandemic 2022 didn’t reflect anything seen in recent decades. Core inflation over the course of the past year has been the highest we have experienced in 40 years. Costs related to supply chain issues, labor, materials, medical care and litigation have all risen at unprecedented levels. As we noted in our preliminary announcement, we also have further accelerated both auto and property rate plans for 2023 to build on increases implemented in 2022. About 70% of our auto business is on six-month policies, so we will start to see the benefit of these increases in the coming months. We also continue to take other non-rate underwriting actions. To break this impact down by line, in auto in addition to the overall 5.4% in rate actions in 2022, we now expect auto rates to increase by 18% to 20% over the next four quarters. As these rates earn in and bolstered by non-rate actions, this should result in an auto combined ratio improving steadily to reach 97% to 98% in 2024. We added a slide in the investor presentation to illustrate how we expect the impact of our rate increases to compound over the course of 2023. It’s worth noting that state approvals don’t adhere to a quarterly schedule, so there will be some fluidity between quarters, but we’re confident in the cumulative outcome of 18% to 20% country-wide rate impact implemented over the next four quarters. In property, in addition to the overall 4.9% in rate actions taken in 2022, we expect rate actions in property of 12% to 15% over the next four quarters. When combined with the impact of inflation guard, these actions should results in average renewal premium increases of 17% to 20% in 2023. We expect property to generate an underwriting profit in 2023 and be at or near our target combined ratio of 92% to 93% in 2024 and beyond. We are managing these plans towards a segment combined ratio of 95% to 96% in 2024. We also are aware these actions may have an impact on retention; however, we suspect the impact will be relatively muted for two reasons. First, inflation is an industry-wide problem and our actions over 2022 and 2023 will be consistent with the industry over this period. Second, to many of our educator customers, we are more than an auto company. We help them plan for retirement, we help them manage their student loan debt, and we understand the issues they’re facing both in and out of the classroom. Stepping back, if you recall a year ago, I spoke about how Horace Mann planned to leverage our leadership position in the education market going forward. We aligned our operations to maximize our potential to effectively respond to the needs of both educators and school districts. We said we were working to maximize the opportunity presented by our worksite division by bringing together the strength of Madison National’s group products and distribution relationships with the supplemental businesses, individual product strength, and customer-centric infrastructure we are delivering on that goal. 2022 worksite sales, including the employer-sponsored products added in the Madison National acquisition, increased more than twofold over 2021. The strength of their products and the opportunities of the expanded distribution continue to exceed our expectations. In addition, in the fourth quarter worksite direct supplemental sales were the strongest they have been since the beginning of the pandemic and they continued strong in January. In the retail side of the house, we plan to take advantage of industry dynamics to drive sales and to cross-sell existing customers. In both life and auto, we saw strong sales. Our inside sales team doubled their cross-sales of existing customers over 2021, including strong growth in our sales from service initiative which resulted in several thousand new sales over the course of the year. In addition, improved access to schools let us ramp up our agent recruiting, which has shown positive results. We achieved our target for new appointments and also added a strong cadre of new insurance specialists who can support an already in-place agent with a single product focus. The return to a solid agency pipeline that was interrupted by the pandemic is a positive indicator for 2023 and beyond. Finally, we have seen the strength of our earnings and revenue diversification strategy firsthand in 2022. I don’t want to dismiss the impact of P&C short term volatility on the business, but it is manageable. In addition, we continue to evaluate ways to mitigate volatility while still retaining educator households, such as expanding the use of third party carriers. The strength and value of our multi-line offerings for our niche market will last far beyond these loss cost trends stabilizing. To sum it up, our focus has never wavered. We want to be the provider of choice for the education market and we want to provide our shareholders with a sustained double-digit return on equity. Those two goals have to be achieved together, and that is what we are working towards in 2023. Before I turn the call over to Bret, I have two corporate updates to share. First, I’d like to congratulate Ryan Greenier on his recent promotion to Deputy Chief Financial Officer to work with Bret to further build out our strategic finance function and to support initiatives underway across the company. Ryan will continue to serve as our Chief Investment Officer. Second, I want to note Horace Mann’s inclusion in the 2023 Bloomberg Gender Equality Index, which recognizes corporate commitment to gender equality and transparency in gender data reporting. Horace Mann has been included in the index since its inception in 2019. The reference index measures gender equality across five pillars: leadership and talent pipeline, equal pay and gender pay parity, inclusive culture, anti-sexual harassment policies, and external brand. At Horace Mann, we strive to nurture an inclusive corporate culture where every employee feels heard, respected and appreciated. We are proud to be recognized for this commitment to diversity, equity and inclusion for the fifth consecutive year. Thanks everyone for joining our call today. Marita gave a thorough summary of the challenges of 2022 and what we are looking forward to achieving in 2023 and beyond, so let me go right into the details by segment, starting with P&C. The loss for the P&C segment for the quarter and the year was in line with our preliminary announcement and largely due to the impact of inflation on loss cost. In addition, net investment income for P&C reflected a total limited partnership return of 7.9% compared to 20.3% in 2021. This year, the contribution from LPs in this segment began trending upward in the third and fourth quarters, in line with the overall recovery in this sector. Turning to the underwriting results, total written premiums rose 4.7% this quarter compared with last quarter’s 1.6% increase as we begin to see the benefits of the rate actions that have been implemented to date. Retention remained very strong, rising for both auto and property with strong auto sales coming largely from states where we’re most confident in the outlook for pricing. I’ll address the auto and property books in a moment, but we will certainly see the growth rate in total written premiums accelerate over 2023 and 2024 with earned premium growth following. Full year cat losses contributed 13 points to this year’s combined ratio versus 12.7 points in 2021. Fourth quarter cat losses included Winter Storm Elliot, which spanned more than 30 states. For our 2023 guidance, our cat loss assumption equals about 10 points on the full year combined ratio - that’s our 10-year average, which aligns with the calculation based on historical frequency and a modeled increase in severities due to inflation, partially offset by a model decrease in exposures. In the investor presentation, we have provided details of our January 1 cat tree renewal. We increased our retention to 30 million from 25 million, the first time we’ve raised retention since 2011 and our share of the lowest layer is higher. These changes recognize the impact of rising severity on cat costs as well as the harder reinsurance market. For 2023, our reinsurance costs will be up about $2 million or about 30 basis points on the combined ratio. Turning to property, the year-over-year increase in average written premiums reached 10.1% in the fourth quarter. 2022 rate increases country-wide were 4.9%, bolstered by inflation adjustments to coverage values over the course of the year. The full year property underlying loss ratio was 50.1%. Both frequency and inflation-driven severity of non-cat water and fire losses were above 2021 levels. Our underwriting teams review every large fire loss, and there is no apparent pattern or underwriting concern in those losses. The full year property loss ratio benefited from $6 million in favorable prior year reserve development. Our 2023 rate plan for property adds another 12% to 15% over the next four quarters on top of another year of inflation guard increases that keep coverage values updated. These will combine for an impact of 17% to 20% in 2023, which should result in underwriting profit in 2023 and getting us back to our targeted 92% to 93% combined ratio in 2024. Turning to auto, the year-over-year increase in average written premiums was 4.8% in the fourth quarter. Rate actions averaged 5.4% country-wide in 2022. Underlying loss costs reflected inflation that drove substantially higher severity, while frequency remained somewhat below pre-pandemic levels, although above what we experienced in 2020 during the height of the pandemic. Recognizing the impact on severity of overall inflation, including more severe accidents, higher medical costs, increased usage of medical services, and the current legal environment, the full year auto loss ratio included $28 million in unfavorable prior year reserve development largely for accident year 2021. The auto rate plan for 2023 is targeting rate increases of 18% to 20% over the next four quarters Bolstered by non-rate actions, this should lead to an auto combined ratio between 106 and 107 in 2023 and near our target level of 97% to 98% in 2024. Taking into account the various factors, P&C segment core earnings are expected to be between $5 million and $10 million in 2023, reflecting a combined ratio in the range of 104 to 105, including 10 points from cat losses. In 2024, we should be near our longer term combined ratio for the segment of 95% to 96%. Turning to life and retirement, the segment performed largely as expected in the fourth quarter with adjusted core earnings for the year at the high end of the range we guided to at the midyear. For the segment, full year limited partnership returns were below historical average compared to the unusually high returns seen in 2021. In addition, commercial mortgage loan portfolio returns declined in 2022 due to rising interest rates. The net interest spread on our fixed annuity business was 246 BPs in 2022 compared to 290 BPs in 2021, remaining comfortably above our threshold to achieve a double-digit ROE in this business. Looking to 2023, we expect the spread on our fixed annuity business to be lower but still above our threshold in the range of 220 to 230 BPs. For the retirement business, net annuity contract deposits were $429 million for the year and $105 million for the fourth quarter, with cash value persistency strong at 93.7%. We had another good quarter for Retirement Advantage, the fee-based mutual fund platform that we believe creates long term opportunity for this business segment. Life annualized sales rose 6.9% year-over-year with persistency remaining strong and mortality experience improving from 2021. We continue to look for life sales as a way to initiate educator relationships and we are very pleased with 2022 results. In total, life and retirement core earnings are expected to be between $67 million to $70 million in 2023. When thinking about the outlook for this segment, it’s useful to recall that this segment will see an impact from the adoption of LDTI. Now let me turn to the supplemental and group benefits segment, where full year core earnings of $59 million were at the high end of our guided range. After one year with Madison National’s results contributing, we couldn’t be more pleased with the performance of this segment and the revenue and earnings diversification it brings to Horace Mann. For the segment, full year premiums and contract charges earned were $276 million, of which employer sponsored products represented $154 million. Segment sales of $16.1 million for the year reflected the steady return to pre-pandemic sales in our worksite direct business, the supplemental products acquired in the NTA transaction in 2019, plus the first year sales for Horace Mann of Madison National’s employer sponsored products. Benefits and expenses for the quarter were in line with the third quarter and below the seasonally higher first and second quarters. We also benefited in the fourth quarter from the release of reserves from accounts related to lapsed policies. Looking at 2023, we expect core earnings to be between $40 million to $44 million. The comparison to 2022 is being affected by several factors. First, the blended benefit ratio is expected to be near our long term target of 43% compared with 36.7% in 2022. About half of the anticipated change in the ratio reflects our expectation that utilization will continue to move towards pre-pandemic levels. In addition, there were several one-time favorable reserve impacts in 2022 that we do not expect will recur. Further, due to our seasonality, the first quarter blended benefit ratio typically may be in the range of 45% to 47%. That’s a good opportunity to reiterate that seasonality will become a permanent fixture of this segment for benefits and expenses, but also for sales, so the first quarter can be expected to be the highest sales quarter for employer sponsored products but also the lowest earnings quarter. This reflects a benefit ratio for the employer sponsored products expected to be its highest in the first quarter due to the timing of benefit utilization in our market. The benefit margin for employer sponsored products should typically be at its lowest in the third and fourth. In addition, the pre-tax profit margin in 2023 will reflect the investment we’re making in infrastructure for this business, as well as a higher allocation of corporate expenses to reflect the segment’s utilization of shared staff, distribution and other resources. As a result, the expense ratio is expected to rise to the range of 37% to 38% in 2023 and beyond. Before I turn to investments, I want to give an update on LDTI, beginning with a reminder that the standard does not change long term earnings, underlying economics, or cash flows. Furthermore, it has no impact on statutory accounting; however, for the impacted businesses, it does require cash flow assumptions underlying policy reserves to be reviewed and updated, and those reserves to be revalued using current discount rates. As we said in August and covered in detail in the 10-Qs for the second and third quarters, when we adopt the standard effective January 1, 2023, the transition impact on reported GAAP book value will fall largely in three areas: one, an increase in the liability for future policyholder benefits largely due to changes in discount rate assumptions; two, a new benefit liability to be called market risk benefits; and three, elimination of the shadow DAC equity adjustment. As a reminder, most of the transition adjustment to shareholders equity that we’ll record as of January 1, 2023 has been recouped due to the effect on the discount rate of interest rate increases. After adopting LDTI, we plan to continue to provide an adjusted shareholders equity that excludes these adjustments, as well as unrealized gains. In addition, the transition will result in a restatement of net income for the years ending 2021 and 2022 to make those results comparable with 2023 following adoption. We’re planning to share those recast values in March. Full year net investment income and net investment income on the managed portfolio was in line with guidance, with limited partnership returns back in line with historical averages. The Fed’s actions on interest rates pressures limited partnership returns, particularly in the private equity portfolio during 2022. Investment yield on the portfolio excluding limited partnership interest remained near 4.25% with new money yields continuing to exceed portfolio yields in the core fixed maturity securities portfolio. The A+ rated core portfolio is primarily invested in investment-grade corporates, municipal and highly liquid agency, and agency MBS securities, positioning us well for a recessionary environment later in 2023. The realized losses we incurred over the course of 2022 were due to portfolio repositioning to improve book yield and exit positions in the portfolio that are more risky in terms of default and downgrade risk. Due to the significant rise in interest rates, unrealized losses on the portfolio have risen to $572 million. Changes in unrealized gains and losses do not affect statutory capital or our view of the high quality securities that make up our core portfolio. We expect net investment income on the managed portfolio will rise to the range of $330 million to $340 million in 2023, reflecting stronger returns from our commercial mortgage loan portfolio as well as the benefits of the rising rate environment over the past 12 months. We assume limited partnership returns will be close to their 10-year average. Our guidance for total 2023 net investment income reflects approximately $26 million quarterly from the deposit asset on reinsurance. In closing, 2022 was clearly a challenging year for Horace Mann as external factors detracted from the progress we are making to leverage the stronger and more diverse organization that Horace Mann has become. We remain confident that the growth we anticipate over the next several years will lead to an increasing share of the education market, putting us back on the trajectory to a sustainable double-digit ROE. As we return to our longer term profitability targets in the P&C segment, we estimate 2023 core EPS will be in the range of $2 to $2.30. As Marita detailed, in 2024 we believe we will return to a double-digit ROE with core EPS approaching $4. Our life, retirement, and supplemental and group benefits segments are a stable source of earnings and capital, which clearly mitigates the volatility of the P&C segment. When we have returned to our targeted profitability across the businesses, the business is fully capable of generating approximately $50 million in excess capital above what we pay in shareholder dividends. Our priority for excess capital will remain growth; however, we are committed to using available excess capital for steady shareholder dividend increases and opportunistic share repurchases while maintaining our financial leverage and capital ratios at levels appropriate for our current financial strength ratings. Of note, we repurchased approximately 69,000 shares in late January and early February for a total of $2.3 million. In 2023, our diversified business model will be key in getting us quickly back on our trajectory towards those objectives focused on providing strong returns to shareholders. Just wanted to touch on the personal auto side of things. Starting to see used car prices come down a little bit, and understand it’s just a portion of loss trends, but maybe you can comment on if you’re expecting to see any moderation in severity through 2023 and if that’s baked into the 106 to 107 auto combined ratio or if that’s just rate increases and underwriting actions getting you to that. Sure, this is Mark. I think as we’ve gone through the pandemic, it’s been quite a challenge to project loss cost trends, both for Horace Mann and the industry. We saw quite an unprecedented level of frequency drop at the height of the pandemic, but as we’ve all seen, quickly followed by inflation that we haven’t seen in probably three to four decades at the same time, with frequency starting to increase back towards pre-pandemic levels. With that being said, we have seen some moderation on the physical damage side of things when we compare the first half of the year to the second half of the year, but those trends still remain above what I would view as kind of the long term historical levels, and our expectation going into 2023 is that they will continue to moderate but remain above the historical levels, which is why we’ve focused a lot of our activity on the rate actions that both Marita and Bret described, and we have a slide in our investor deck on Page 14 which lays out how we think rate’s going to flow in country-wide throughout 2023, which is going to produce about an overall 18% to 20% increase throughout 2023, and that’s on top of the 5.4% that we raised rates during 2022. In addition, I would comment on additional non-rate actions that we’re taking, whether it be discount verification, mileage verification programs, more aggressive new and renewal underwriting, as well as some actions we’re taking in claims to ensure that we’re utilizing our internal staff and our preferred shops to adjust physical damage claims to get the best possible outcomes. Yes, and specifically to your question on used car prices, Mark’s pricing models, the team’s setting of picks for our coming year would include their anticipated number around used car pricing. It bounced a lot during the two years of the pandemic, and certainly last year as well. Information is readily available and we use that in our pricing models, for sure. Thank you very much. In your prepared remarks, you talked about utilizing third party partners more for P&C. How could this look, and maybe how material of the in-force could it impact? Thank you. Yes John, hi. Good question. I can turn it over to Mark for some of the specifics, but just very high level, if you remember several years ago, not too long after I joined the company, we started a concept called the Horace Mann general agency, and that concept was really around the theory that it didn’t make any sense for us to say no to an educator, for example if they had an antique car, if they had a summer cupcake business and needed a BOP policy. If they were a non-standard auto customer, if it really wasn’t within the conservative and tight underwriting framework of a Horace Mann, we could rely on other carriers and still keep the customer within the Horace Mann family, especially as it related to P&C, because as we say over and over again, we’re not just a P&C company, we’re an educator company. If the independent agent that we would send them to by saying no is any good, that independent agent is going to say, when was the last time somebody asked you about your life insurance, can I help you with an umbrella policy, or whatever the case may be. That early concept got us to a pretty decent size of premium with third party carriers. We leverage a lot of carriers, whether it’s high valued home, whether it’s non-standard auto, and that worked well for us. The concept has broadened a little bit as we think about is there a way in which we can broaden that in these types of environments when even a standard customer might be a customer that, for whatever reason in a given state, call it scale - you know, we use the example of Rhode Island. When you’re writing K through 12 public educators in the State of Rhode Island, that’s not a large set of customers, would we be better off relying on industry data and companies that have bigger scale in that state rather than doing it ourselves. It really is broadening the concept that we originally had and have done quite successfully to maybe have a larger share of fee income, where we’re not taking underwriting risk but have the ability to be Horace Mann first when it makes sense to be Horace Mann first. Yes, the only thing I would add is I think there is opportunities, for instance when we’re taking underwriting actions, like we have a standard practice now, if we’re going to take underwriting action on a particular risk, right, we’re going to look to those third parties automatically rather than just sending the customer off on their own, especially in a tough environment on the property side, where it may be a challenge for them to find other coverage. I think there’s going to be, to Marita’s point, increased opportunities where places we’re pushing a lot of rate, that if we’re risking losing that customer, there may be an opportunity for us to keep that customer in the fold by leveraging our third parties. And what we’ve learned with some good partner carriers is the ability to bring that customer back to Horace Mann, when and if that makes sense, we’ve had a lot of flexibility to do that because we’re doing this with a limited number of strategic partners. I’d say with improved process and the improved technology that comes with it, we believe we can probably by the end of next year begin to see a lot more scale than how we had attempted to do this in the early years. Think about if an agent had a customer, they’re going to an internal contact center, they’re working with our internal people, our internal people are placing that with another carrier. If we have better process and better technology, and we can do that with a smart algorithm and straight through processing, it becomes much easier to scale what I think was a good strategic start to this thought process. Thank you very much. A follow-up question, other companies have done voluntary retirements or workforce reductions given declines in fees on assets in some of their more AUM-sensitive businesses. Has that been completed, or are there thoughts for that? Thank you. Yes, first what I would say is from an overall retirement standpoint, we had a very strong year last year. I think the nature of our customers again, we can say what we always say, insulated but not immune. If you’re asking the broader expense question as it relates to staffing and expenses, our plan remains relatively flat for expenses. We look at it, we focus on it, we’ll be thoughtful around it. We’ve got decent growth in our plan, but we set an expense target in P&C and are very clear about that target, and we’ll remain disciplined around expenses, as we always have. Yes, just to add a couple comments, John, to Marita’s point, the L&R segment is actually--we even provided the guidance between the $67 million to $70 million, which has certainly increased significantly from the ’22 actual, and to Marita’s comment about managing expenses, certainly that’s something we pride ourselves on here as well as doing strategic spend with some of the growth initiatives we’ve been talking about for the last couple years. We typically target a percentage of total revenues with respect to expenses, and that actually is remaining around 28% between both our plan for ’22--or for ’23 and what the actual percentage was in ’22. Yes, I mean, because of our size, we have to, and it makes sense to remain disciplined on overall expenses. We learned a lot as far as efficiency during the pandemic and didn’t run back to the way we always did things, and I think that’s really helpful for us to employ those learnings as far as how we interact with folks in the place, how we interact with our agents, how our agents do business, as well as lot of the major technology initiatives that we’ve funded for over the last three to five years, and those are starting to come through - I mean, building those products but also building the pipes for growth so that as this growth begins to build and we’re confident in that, we actually have the pipes that can handle it. Thank you. My first question is on the supplemental and group benefit segment. Can you talk a little bit more about the infrastructure investments that you’re making, and just curious how you’re thinking about how these investments are going to contribute maybe through cross-sales or maybe better efficiency. Hey Matt, I think it would be a great opportunity for you to talk about what you’re investing in and what you’re building, the additional sales folks that you’ve hired, so I’m going to turn it over to you. Okay, thanks Marita. Yes, the investments we’re making in the supplemental and group division are primarily people. We do have some systems modifications and system builds to support the distribution model, but mostly it’s people, so hiring sales leadership on the institutional side or the employer sponsored side was a key factor - we added a bunch of people there, and then growing our direct sales force as well. That’s where the bulk of the investment’s going. Got it, that’s really helpful. Then my second question is on personal auto. It looks like you’re baking in an additional rate increase in California for this year. Is there increasing receptiveness within that state, and are you planning on filing for any additional rate increases aside from the one that you talked about last quarter, as well as this quarter? Yes, we have one pending--well, two pending technically in each company, but one pending rate increase for 6.9% that we’re actively working with the Department of Insurance. We’ve answered, we think, all their questions, we think we’ve justified the rate. We’re hopeful that we’ll receive an approval soon. They have approved a small number of filings, and if you look at the order in which those filings came in, they all predated this edition of our filing, so we’re fairly confident that something will happen soon. Then once we do receive that approval, we do anticipate making another filing because, like everybody else in the industry, the rate is needed; however, we only included the one first filing that we anticipate getting approval soon into our guidance for 2023. This concludes our question and answer session. I would like to turn the conference back over to Heather Wietzel for any closing remarks. Thank you and thank you everyone for joining us today. Look forward to talking to people over the coming weeks and most definitely look forward to seeing as many of you as possible in person when we’re at IASA in early March.

EarningCall_365

Thank you very much for waiting everyone. Now we would like to start SoftBank Group Corp. Earnings Results briefing for the Nine-Month period ended December 31, 2022. First of all, I would like to introduce today's participants. From left, we have Yoshimitsu Goto, Board Director and CFO; Kazuko Kimiwada, Senior Vice President and Head of Accounting Unit; Navneet Govil, CFO, Member of the Executive Committee, SB Global Advisors. He's joining remotely due to unavoidable reasons. Thank you for your understanding. Ian Thornton, Investor Relations, Vice President. Today's briefing is live broadcast over Internet. Now I would like to invite Mr. Goto, Board Director and CFO, to present to you the earnings results and business overview. Mr. Goto, please. Since last quarter, we have changed the approach for these earnings from Masa to myself. I'm not -- I'm still working on making better presentations. Hopefully that I will be able to make it a good presentation for you. And the first that I would like to start covering from most important indicators for SBG. I would also talk about the environment and market later on. But as you know, the indicators are somehow instable especially looking at the equity market, January to March, April to June last year was very instable, after then, we see some improvement signs, but still we cannot be optimistic at this moment yet. As a result, we've been seeing a lot of fluctuation in interest rates, key rates been moving around in many markets, but at the same -- but I believe it's important for us to show you the robust balance sheet. And as an investment company, of course, one of the most important engine for the business overall is Vision Fund. And I would also like to share with you the current status of Vision Fund. But including all those factors, I would like to first of all show you the robustness and healthiness of our balance sheet, net asset value. So this is about JPY 13.9 trillion and the loan to value to check the safetiness of the debt, which is 18.2%. So this is to calculate loan against how much we have as an asset. And for the short-term period, cash position is one of the important indicator to check our healthiness. And this was JPY 3.8 trillion. So these three indicators are well managed in safe level. And being in this position, we believe as an investment company, as long as we're being conservative in terms of new investment activities and so on, we believe that we will be able to maintain this healthy -- organization's healthy business. Compared to the end of September, net asset value has decreased a bit. September end was JPY 16.7 trillion, in the December quarter JPY 13.9 trillion. But we did have a foreign exchange impact, which was not small, JPY 1.5 trillion equivalent was about an impact to net asset value, so that not directly from the fundamentals from the portfolio companies or investees. Foreign exchange, September end was JPY 144 per dollar and December end was JPY 132 per dollar. So this was quite volatile and that made an impact to our assets as well as P&L. Loan to value 18.2% at the third quarter. So from the 15% of second quarter, we had increased by three percentage points. And for your information, this 25% itself is already safe number, and we do have a very low -- maintained low compared to 25%. Therefore, that even we have a slight increase compared to last quarter in teens level that we believe we are very much safe enough. So number-wise, it looks a bit increased. However, as you can see on Page 8, this has some foreign exchange impact. So if we exclude foreign exchange impact, it was 16.2%. So foreign exchange impact was about two percentage points. Cash position, end of September, JPY 4.3 trillion, JPY 3.8 trillion for December end, slight decrease and some are used for the debt repayments; therefore, that we don't think any changes in our healthiness. And also this had some impact from foreign exchange, about JPY 200 billion or so was due to the foreign exchange impact. Based on this KPI, our status, we are very much solid defense mode. No change, no issues here at all. And we have a very ample cash position in what is this for you may ask. This is whenever we would like to switch our mode to offense, we would be able to play for that, and we would like to be prepared for the time to come. And as of today, safetiness is as you saw, but for the Vision Fund, in over past one year or so, environment was very tough and very severe management has been executed. So with the tightened management and based on that, we would like to see how the market and environments will go and change. When do we start playing offense, which is a quite difficult question, but I want you to also see the market situation. This is equity market, so we have September end and the December end or the quarter end. But from December end to as of today, to-date basis on your far right on the chart, this is actually showing some increasing trend since December end. One example is S&P 500, NASDAQ, and also Golden Dragon China, this is -- which is the Chinese companies in NASDAQ and each, actually, that we also picked up the examples of our public securities that held by Vision Fund 1, Vision Fund 2 and SBG itself. And these are the major investee of each parties. And you see it has some characteristics, but trend voice in the past one year or two years, it has hit the bottom and actually showing the sign of increasing something that I believe we can summarize as a kind of a 1-year history. From now, what's happening after this, we believe that there will be three scenarios that we can think of, and we are actually prepared for each of these three scenarios for our financial strategies or for the time to switch our mode from defense to offense. So scenario one is the optimistic scenario, which is the linear early recovery. Scenario 2, instability followed by recovery from second half this year, which is based on the view by analyst, market, I believe that the majority of the people are actually looking into this scenario 2. And the scenario three is a further decline followed by recovery after 2024. So in each scenario, actually, we are fully prepared for that because that the investment -- as an investment company, we need to face those reality. In that case, do we want to -- and we do want to being very robust in terms of balance sheet so that we'll be able to be prepared for any risk case scenario. So optimistic case, pessimistic case or the base case, that as an investment company, we believe it is very even more important for us to keep the defense mode. I believe we can change our mode to offense mode any time. As you saw that we have a very ample cash position so that we can change our mode anytime if we wish to, which means we don't have to rush. We don't want to waste money either. And this is the market view. Private equity is the main direction for the Vision Fund investments, and we've been seeing the factors that we need to focus, which includes inflation trends, key interest rate, possible recessions, and in addition, we also need to focus and pay attention to this tension situations caused by these geopolitical risks and situations. So we do need to kind of make an outlook based on those movements. For the equity market recovery, there are many voices said that second half of this year is something that we may be seeing recovery. But also, we need to pay attention to the pessimistic scenario of further decline. And the majority of our investees are the private companies, therefore, can they do the financing under such circumstance? And also, can they look for IPO event in the course of their process. So those are the things that we need to pay attention to. As a group overall, including Vision Fund, this is the investment strategy as a group as a whole. No change at all. We will be -- being there as a vision capitalist for the information revolution. And also our fund is managed by the long term. We want to be the biggest player in the information revolution. Well, once again, we are in the defense mode, so that we are financially prepared for all the scenarios. And for Vision Fund case, they have about 500 and some investees, which requires the good monitoring and good support. And from the SoftBank Group's point of view, we have adrift investment in Arm, which is we're very much focused. And other than that, we have SoftBank Corp. Mobile Operators and also the holdings, which we recently announced the mergers amongst the Yahoo Corporation and LINE Corporation. So as a shareholder of those companies that we do need to be prepared and being ready for any scenarios to come. Now I have talked about the current snapshot. And let me move on to consolidated results, which it's shown on Page 19. This is a result from the first quarter through third quarter of FY 2022. Net sales JPY 4.8 trillion, loss on investment JPY 1 trillion, income before income tax JPY minus 290 billion, net loss JPY minus 912 billion. We are still against wind and these are consolidated numbers, and we have some specific characteristics when it comes to gain or loss on investment. That financial result announcement, we explained a little bit about Alibaba's transaction. We did early settlement of Alibaba, and we had about JPY 3.7 trillion. And that was a big gain in the last nine months. However, looking at loss from Q1 through Q3, we are looking at JPY 5 trillion loss from the SoftBank Vision Fund. So those has increased. So in that, we are looking at loss on investment by JPY 1.3 trillion, and again, this is loss on investment. Another number I'd like to mention here is income before income tax by the segment. SoftBank Vision Fund income before income tax was a negative JPY 4 trillion, difference between loss on investment and income before income tax is because LPs holding was deducted or not. When it comes to loss on investment, Alibaba's gain was included, SoftBank, Arm, all in good, especially Arm. We are looking at consecutive positive numbers, which I'll come back to later in my presentation. Net income by the quarterly is shown on this slide. On the far right, JPY minus 783 billion. This is third quarter number, but in the second quarter, because of the gain from Alibaba transaction, we are looking at a positive JPY 3 trillion. This was one time. And if we didn't have that Alibaba transaction, we would have seen negative numbers in the second quarter. But we are also looking at the trend of improvement of net loss by quarter by quarter. And the next slide shows impact of ForEx. In terms of net asset value, weaker yen has a positive impact. Why? Because most of our assets are held in foreign denominated currency. So for example, if yen gets weaker against dollar, assets in dollar term is improved. However, in recent months, yen is getting a little bit stronger. That's why this number compared to the September number is a little bit smaller. And in terms of consolidated net income, ForEx impact is negative. However, again, since yen is getting stronger a little bit, the impact was little bit milder compared to first half of this fiscal year. When it comes to monetization, we will see real value, of course, foreign exchange goes up or down, but we are not exercising extreme hedging. But again, most of our payment is in dollar terms and asset -- most of the assets, like I said earlier, are held in dollar currency. And like I said earlier, we have ample cash position. So we have a good balance of assets held in yen and assets held in foreign currencies. Next slide shows net asset value, the trend since 1999. In the last 12 months, the trend is downward due to market conditions. But still, we have a net asset value as much as JPY 14 trillion. In history of SoftBank, we believe this NAV is good enough. And from September through December, net asset value decreased from JPY 19.7 trillion to JPY 16.9 trillion and if you go deeper, impact from ForEx is JPY 1.5 trillion. Also share price had impact by about JPY 0.0 trillion. And share repurchases impact about JPY 0.5 trillion and also we paid tax. Therefore, NAV as of December 31 is JPY 14 trillion. And net asset value per share and share price is shown here. And also, you can see discount against actual market price, which I'm sure investors are interested. As of September end, discount was about 55% and stock price was less than JPY 5,000. As of December end, discount was 40%, so 15% improvement, it looks like. And stock price went up, which is good. But fact of the matter is, assets went down. So even though discount was improved, we can't be 100% happy about this. We need to make sure that our investees will gain values, improve values while we can improve our discount. By the way, our stock prices have been performing well. As of February 3, the price was JPY 6,328. Now equity value of holdings as of December end, it was JPY 16.9 trillion. One year ago, if you look at the far right bar -- excuse me, far left bar, Alibaba's portion decreased from Q3 FY '21 to Q3 FY 2022 of equity value holding Alibaba accounts for 12%. And in fact, SoftBank KK accounts for 13%, which is bigger than Alibaba. And SoftBank Vision Fund accounts for 43% and Arm, which is a private company accounts for 16%, which is a good presence here in terms of equity value of holdings. And how should we look at decrease of equity value of holdings at the beginning of April or end of March last year, if you compare to the end of March last year, the equity value of holdings was 23% and now 16.9%. Was that a significant decrease, while not necessarily so because JPY 3.2 trillion was for monetization. So that's one driver of the decrease. So it's not a simple decrease from JPY 23 trillion to JPY 16 trillion. In reality, it would have been from JPY 23 trillion to JPY 20 trillion. And JPY 3 trillion is for monetization or exchange to cash, which is stronger. So it could be said we had JPY 3.3 trillion of improvement in terms of equity value of holdings. So if you look at the diversified portfolio in pie chart, like I said earlier, a big increase came from Alibaba -- big decrease came from Alibaba. And Vision Fund 43%. You may say that this still has a big portion of the pie chart and 43% consists of about 500 companies in the portfolio. Diversification of the portfolio is very important from a value perspective and safetiness perspective, from credit perspective and a value perspective, from the April 1 through December 31, we have been further diversified our portfolio. But from the rating perspective portion of public shares, if you look at the right top corner, as of March 31, 2022, percent of these shares was 52%. And as of December 31, it went down to 44%, but when Arm is listed again, that percentage would go even further. I feel more comfortable about our safetiness and the stabilities of the business. Now let me touch upon SoftBank Vision Fund. This slide, which is Page 32 is gain or loss on investment since the inception of SoftBank Vision Fund. Unfortunately, however, in the latest second quarter, we are looking at increased loss. But this fund's longevity is long and we need to make sure that we will do our best to increase the value of the funds even further. And the next slide shows gain or loss investments on quarterly basis. In the latest quarter, which is the third quarter of 2022, we are looking at minus JPY 5.1 billion. So loss continues. But as far as the graph goes, the fourth quarter of last year and the first quarter of this year were most challenging, but it's been improving since then. So we are on the improvement trend. This trend is in line of the trend of the equity market. We try to value our assets as conservative as possible, especially when it comes to private companies, evaluating private company is very important and also difficult. So we are looking at third parties' views and also we combined with other indexes. And every quarter, we mark those investments. Again, our investments longevity is long, and we will do new investments. And also, we will increase the value of the portfolio so that we can make the funds assessed as core business of our group. As you know, we have SoftBank Vision Fund 1 and SoftBank Vision Fund 2. Now this slide shows SoftBank Vision Fund 1's cumulative investment return. Investment cost $89.6 billion and cumulative investment return as of December 31 was $100 billion. As you can see, exited a portion increased and private companies currently held, we have high expectations from those private companies, and the public companies currently held not exited yet. Currently return is getting smaller. So cost is bigger than the return for public companies currently held. That's a challenge for us. And Vision Fund 2's cumulative investment return is shown here. It's a relatively new fund, and they have been looking at very challenging market condition since the inception, investment cost is $49 billion and cumulative investment to turn $33 billion. That's a very conservative view of ours. Part of the investments were exited and this portfolio -- the management team is working on improving the value of the portfolio. Again, SoftBank Vision Fund 2 is relatively new. And again, we need to make sure that Vision Fund 2 will do their best to increase the value of the portfolio. And from a different angle of the underperformance of the fund business, if you look at this pie chart on the left-hand side, it shows as of March 31, 2022, 450 companies consisted of the portfolio and whether the value was gained or lost. At that point, 169 companies lost values, whereas 163 companies gained value. But again, since then, market condition has been very, very challenging. And although the company invested increased to 472. Of that, 344 lost their values. And even though the condition -- market condition was very tough, 100 companies gained value, so some companies were doing good, but most of the companies, however, are struggling. And that shows the overall trend globally. I believe that other similar funds like us are against the tough wind, but we as a venture capital are committed to supporting emerging businesses going forward. And this slide shows gain or loss on investments and factors behind gain or loss. If you look at markdown cases, 38 companies, public portfolio companies, $16.6 million marked down. And performance of the portfolio company was another reason why 138 companies are marked down by $12 million. That's something specific in the quarter. So not only the market but also economic environment and supply chain disruptions, there are some risks and challenges that those portfolio companies are struggling against. Investment amounts are shown here, we remain focused on defense. In fact, in the last quarter, we invested only about $0.3 billion compared to the last year, as you can see, we limit investment to 1/10th. This slide shows stock offerings and sales and monetization. We don't have many number of stock offerings, only four companies and sales or monetization we did by $6.5 billion, but we are not desperate in terms of monetization. We are looking at potential of the portfolio companies and also balance of the holdings, we will make sure that we have a most appropriate policy for monetization or sales in the future. We don't want to pick fees that have huge potentials in the future. So I understand there are some concerns from investors or the market for SoftBank Vision Funds and I pick up some examples here. What's the policy? And our portfolio companies' cash runways all right? Are we adding value to portfolio companies or how are we operating and also any IPO plans, I believe these are the kind of common concerns or questions that you may have. And starting from the policy, this is almost similar with the SoftBank Group's investment policy and the AI revolution is actually the base for the establishing this fund so that no change in belief in AI revolution. And also, at this moment, focus on defense in the current situation, therefore, that via heightened disciplines for new investments and also enhancing the value of current portfolios. And based on the needs from portfolios, we are also supporting a variety of the actions and events, expansion of business or entering into new markets through the M&A and through the partnership of opening new channels and accelerating innovations. Also, efficiency improvement is one of the biggest agenda so that driving OpEx reductions and so on. So those are the support and sometimes recommend for the concerned parties. Cash run rate of portfolio companies. When you look at Vision Fund 1, 99% of the companies does have a cash runway of over 12 months. When it comes to Vision Fund 2 compared to Vision Fund 1, of course, because small new companies, new investments than Vision Fund 1, so it's not 99%, but about 90% of the companies are securing 12 months or above more cash runways. LatAm fund is a little bit lower than that, close to 80%. So it's the same -- looks the same circle in the three respective funds. But actually, the size of each fund is different so that it cannot be apple-to-apple comparison, but this is the current situations for the cash runway for each respective fund. So for Vision Fund 1 and 2, roughly speaking, that I will say that those portfolios are very stable in terms of cash management. For the fund level initiatives, we are very much paying attention to diversification of portfolio and very much disciplined monetization. So we are not desperate to monetize everything, but actually that we would like to have a very much disciplined way of monetization. And in addition to that distributions another initiative that we're working on. One of the biggest characteristic of the Vision Fund is that ticket size is large. One ticket size is larger than the others. So taking advantage of such characteristic, we are -- we can invest in late stage or sometimes unicorns, and we can actually make many investments in such companies or such businesses. And that's one of the benefits that we have to operate in such a huge fund. So these companies of the $37 billion or above investment in late stage is something that we can say that in a better position for future IPO. So once the environment in the markets becoming clearer than that I believe that we can have a good expectations for the future. So one of the driver or the engine for the SoftBank Group is Vision Fund and the other engine is Arm, and let me summarize or let me also explain about the current status and also the semiconductor industry. In the past 20 years or 30 years, semiconductor industry sale has changed a lot. We have heard media reports about Japan's semiconductor industry and its weakened market positions. In the 20th century, the global semiconductor market was dominated by Japan, U.S. or European countries. However, in the 21st century, we have seen the rise of Taiwan or the South Korea. And recently, we've been witnessing U.S.-China trade frictions and so on. Japan is to account for, nearly, I would say, 50% of the global market, about 30 years ago, 40 years ago, however, now it's estimated to be around or below 10%. At the time that Japan used to -- Japan had a share of 50%, the role of semiconductors was different those days that the electric appliances are the kind of main user. And they were actually integrated model that where all the processes starting from design through manufacturing are completed in one group of company, so that's why that we were able to have about 50% of the share of the global market, and that's been changing in 21st century. This aggregated approach become more popular where design and manufacturing are separated. In the design stage, fabless firms focus on chip design and development using open architecture like Arm where the foundry firms focus on manufacturing. They are also not having any plans but actually they are designing the chip and asking OEMs to manufacture. So we are in a very much chained to this aggregated approach and that chain itself is actually even boosting the value of Arm in the market and making Arm stronger in the market. So the value chain of semiconductor, as you can see semiconductor IP to start with. And then on to chip design, manufacture, OEM product and software and applications. So with those process, semiconductor product is available for you so that you can enjoy using their service. Computer chips are now so complex that the semiconductor industry has disaggregated into specialists. And these specialist companies provide building blocks or tools such as CPU, GPU, memory controller and display interface, and these building blocks are used by public chip design companies to design the semiconductor. And this design step is accelerated by using the prebuilt components from the IP specialist. In these foundries, design companies will subcontract the manufacturing to a foundry, and due to the huge cost of building a fab where chips are made, few design companies can't afford to do this themselves. Only few companies can afford that by themselves. And once the chip is made, it becomes part of the materials going into an OEM product, such as smartphone or car. So as you can see on this Page 49, Arm is kind of a starting point of relay and then bringing on to chip design, manufacturer, OEM product to software and applications, and then you will be able to see the one completed product for you. Arm-based products indeed everywhere, I believe that almost everything with electricity is using these products and 250 billion -- excuse me, 250 billion chips has been shipped. And this is a graph to show the shipments that's been made, and immediately after we invested in Arm that you may recall one slide that we show at the earnings results announcement, which is something that made me feel something, and this is just to remind you that this was a slide that being used back then. This was a year -- one year after the Arm acquisition. So 2017 March, that actually, these are the forecast numbers. So we are expecting that 200 billion shipments is expected for 2021. And actually, March 2021 already, we have exceeded 200 billion. And at the end of December 2021, 230 billion. So actually, we have overachieved what we have forecasted back then one year after the acquisition of Arm. And now that we are achieving 250 billion Arm-based chip shipped. So the number of such shipments is actually even more growing, and we're expecting to expand the business. 8 billion. What's this number? Arm-based chips shipped from July to September 2022, this is the record number. And 1/3, what's this? Of all chips where processors are Arm-based. So Arm market share is this big and 70% of the world's population uses Arm technology every day. I think it's in sync with the penetration of mobile phones and Arm technology helps them to work in a good performance. Arm is gaining market share as the shipment number grows in four spaces, for example, mobile, market share grew from 90% in 2016 to 95% in 2021; IoT from 30% to 63%; automotive from 10% to 24%; and cloud 0% to 5%. In fact, in mobile space, close to 100%. And it can't be exceeding 100%, but Arm can go into adjacent areas from this mobile space. And when it comes to IoT, since Arm has most advanced technology, Arm was not really adopted at an early stage of Internet of Things, but it's been changing. High-performing chips are needed in IoT market and accordingly, Arm's market share grew from 30% to 63% in the space of automotive as automobiles have more functions and high-performing chips inside automobiles are needed more and more. And in the space of cloud, initially, the share was 0%. But we're working with Amazon, Google and Microsoft, those big cloud players, which have adopted Arm's chip technology. So accordingly, Arm has grown market share from 0% to 5%. Consumers want new technologies and new products in order to meet consumers' expectations, manufacturers need to deliver high-end products continuously. That's due to smartphones. In fact, one smartphone has 50 semiconductors for device and game console, 100 semiconductors per console. And when it comes to high-end automotive maybe Lexus, for example, or Porsche and Tesla, very different cars than traditional cars, those high-end automobile has 10,000 semiconductors per car. And in those spaces, Arm has great opportunities. And Arm is looking at growth of revenue CAGA is 19% and adjusted EBITDA even further growing in the latest nine months, it grew by 71%. Size of semiconductor industry is going to be bigger and bigger for long term and very short-term silicon cycle, in the long run, sometimes you may see ups and downs, but I don't think that currently used chips will go down. And as products get higher end and have more functionalities and more Arm as semiconductors will be used in those devices and Arm strength can meet our strong expectations. And the future of Arm is tremendous. Arm's strategy is not to sit and wait for the market to grow, in fact, Arm's strategy has four pillars to maintain or gain share in long-term growth markets because they've got almost 100% share of smartphone. They want to keep the share. And also, they want to develop more advanced IP delivering a greater value while maintaining a strong hold. Arm wants to invest in emerging technology areas and make sure that they have appropriate price point by gaining market share in CPU and by increasing GPU market, then loyalty per piece should go up. And loyalty, they need to make sure that their loyalty is a most appropriate level for them. And in the long-term, they want to create a sustainable business fit for the future not only developing things that can sell now. But they want to also focus on developing technologies that can grow in 10 years or even further down the road. In fact what's, happening is efforts paid off by the people that they took in some time ago. We announced the plan of Arm IPO, and we are planning to have Arm's IPO sometime in 2023. And the preparation is underway, and we will see how the market condition goes. Last but not least, no change in financial strategy. I don't go in too much detail as it has not changed. But while we're keeping our financial policy, we will look into and explore the investment opportunity. So it's not that we're going to be prioritizing investments to financial policy. I've been talking about this financial policy for, I would say, 14 years, even one quarter that we missed these words and maintain loan to value below 25% in normal times, maintain at least 2-year worth of bond redemption and secure recurring distributions and dividend income. And monetizations in the capital allocation, so when you see the waterfall of this, at the end of fiscal year, March 2022, we had cash position of JPY 2.7 trillion and with the monetization, we had an increase of JPY 4.3 trillion and we used only JPY 0.4 trillion for the Vision Fund investment and JPY 2.7 trillion are used for the debt repayments to improve our balance sheet. So the credit investors, for the loan investors that we wanted to return. Share repurchase, of course, is a return to shareholders. So we always are keeping these three factors in mind. So money, once it's available, of course, at the investments by Vision Fund is something that we wanted to use. So new investment, return to shareholders and the debt repayments, we always like to keep the good balancing between those 3 while keeping those we have JPY 3.8 trillion including undrawn commitment lines for the cash position for the December end. Cash position, JPY 3.8 trillion. Again, this is fully covered 2-year equivalent of the bond redemptions and buyback. Since last year, we had repurchased total JPY 1.4 trillion. You may –or the investors may wonder, do we have any other programs to announce. But actually, we have already done JPY 1.4 trillion. But buyback or the share repurchase is always the very important agenda for the Board of Directors meeting, we always keep discussing about it and the capital allocation, always explore the best balance of those three factors. Last but not least, SoftBank Group's vision what we need to do, we have no change in principle, always being a vision capitalist for the information revolution. We would like to be the player to lead IoT, AI, and for - as an engine for the SoftBank Group overall, we have - we are looking at the company as a net asset value based on the assets, but we say that the Vision Fund and Arm ecosystem, those are the two major engine for the company. Vision Fund once that went through the restructuring and now that, with those members that we are working on further good management in the Arm we are having a very steady and good performance and Masa, who is not here today, but he has been very excited about the future of Arm and the chip future. So that the deepness of the market or the size of the transactions, those can be something that we are very much expecting and we are very much sure that this business or this technology is going to make a big change to our lifestyle or the working style. So based on such huge -- such a huge assumption in the hypothesis that we would like to go on for and explore for the further steps of the business. So Masa is very much working hard on that, too. And I believe such steps for the growth is something that we always need to keep in mind for the future and the development and growth of SoftBank Group. So of course, we need to keep in good defense mode, but at the same time, we want to keep a good focus on something that we should be focusing on, including those drivers. And that's been done mainly led by Masa. And we believe that once that the time comes, we would like to make a good - another shift for playing offense. That's all for me. Thank you very much. Wada from Nikkei, I have two questions. First, maybe a very small thing and when it comes to new investment of the Vision Fund, from October to December, JPY 0.3 billion, is it only one company or not? That's the first question. Second question, as interest rates are going up. When it comes to repayment or when the bonds are redeemed, are you going to borrow again or how do you see increasing interest rates? Thank you very much. The second question about increase in interest rate of course, we are looking at the trend in Japan and Governor of Bank of Japan. Next Governor of Bank of Japan, his view has a strong impact. In terms of cost of our bonds, in terms of Japanese bond, maybe 1% increase can be possible, but our target financing cost should have no risk for foreseeable future the impact of increasing interest on our financing cost? Well, 80% is fixed rate. So we don't see any impact from the increased interest rate. And for variable rate, not only debt, but also we have deposits. In terms of dollar-denominated financing cost is huge, but also return on the deposit -- interest on the deposit is also big. So for Japanese part, even though risk is materialized by increased rate of interest maybe JPY 6 billion to JPY 7 billion impact. But from our total volume perspective, you can be reassured. My name is Nakaga from Newpek. I have two questions. First, Vision Fund I understand there were restructuring in Vision Fund, which was also mentioned in last quarter. How much reduction has been made in terms of headcount, and also, you said that they are monitoring and supporting the existing portfolio? But with this reduced organization, can you still maintain the operation for the supporting portfolio. My second question, the buyback has been done. And I believe that the Masa's ownership stake in SoftBank Group has exceeded 1/3. How do you feel about that? And there are some discussion about the management buyouts and so on speculations. What is your view on that? So the reduction in headcount was previously reported to be greater than 30%. In terms of our portfolio of companies, we are very well resourced with over 300 professionals to support our portfolio companies. So we feel we are rightsized in the current environment. Yes, thank you and for your next questions regarding Masa's ownership. This is only because of -- as a result of buyback, JPY 1.4 trillion, which was quite a huge size of the buyback has been executed and this was also in view of return to shareholders. As a result, increased the stake by Masa, but we are not intending to do so anything so that we don't have any specific comments on that. But I would say, he is also the stable investor. He is stable shareholders as well. So for the company's point of view, having stable shareholders, increasing the ownership stake is actually good for the company. It's not like 10 -- teens of the percent point or so. So that's nothing much for that. And for the management buyout, I have no comments on that. Thank you. Hyuga from Bloomberg, thank you very much for taking my questions. Two questions actually, first, about accounting and second - excuse me, press release of earnings calls and the second is Vision Fund. First, I think press conference is done by Goto San alone for the first time. And as you can see, we are only a few journalists here on the venue and investors may want to hear directly from Masa San, so what's your view, your press conference like this without Masa's presence. Can I continue my question, the second question is about SoftBank Vision Fund. Analyst estimate was loss JPY 100 billion to maybe JPY 50 billion. That was most analyst estimate. But now we are looking at a number of few bigger. Is that something that you anticipated or loss was bigger than you anticipated from SoftBank Group's perspective? In the full year, if you lose for the full year, then you will have two consecutive years of loss. What's your view, Goto San? Thank you very much. First, about the press conference of financial results, and Masa is not present anymore and if we have fewer journalist than before? Maybe that's my fault. But I don't know, we have fewer empty seats - excuse me, we have empty seats, but we have arranged more number of seats on the floor. So I wonder if reporters on the floor were fewer than before. I'm not sure. But if that's true, maybe that's my fault. It's of course, good for Masa to be here to talk directly to you about management strategy, that opportunity should be good for people like you. In the past rather than talking about financial numbers, Masa, we're talking about strategy mainly so that was in the past every quarter. I think only a few companies do so, like talking about company strategy on a quarterly basis. Masa wants to focus on whatever he wants to focus on for now. We don't know when, but hopefully, sooner, I hope that you will have opportunity to see and talk with Masa directly and give us more time, and please be patient with me. Your second question about Vision Fund initially, SoftBank Group as a holding company, we are on the position as an investment company. So what will happen in the next quarter would happen in the following quarter? Of course, we have some estimate and assumption, but also we need to make sure that we look at markets and market condition environment conservatively. Of course, smaller loss is better than bigger loss apparently. But I think as an investment company, as a management of the investment company, it's, I think, right to view our performance conservatively. And Navneet, would you like to add anything from your perspective? Thank you, Goto. So the performance for the quarter reflects the market conditions at the end of December, and it also reflects the performance of our portfolio companies at the end of December. And in March - at the end of March, we will see what the market conditions are and how our portfolio companies are performing. Thank you. Any other questions, please? Then we would like to take some questions from the floor. My name is as from [indiscernible] IPO market, stock exchange for Arm. Masa mentioned that looking at NASDAQ, London, New York, any specific comments on that? It's Arm, so yes why don't you comment? Thank you very much. Then in the interest of time, that's all from the audience on the floor. I move on to questions from participants online. [Operator Instructions]. First, Mr. Nagoshi from NHK. Thank you for taking my question. My name is Nagoshi from NHK. Maybe somebody asked a question before about Arm's IPO, there was a news article that you discussed with the government about the listing in London are you considering London or NASDAQ. So what's your progress on the preparation of Arm IPO? That's my first question. And second, JPY 1.5 trillion of our capacity to issue bond, what's the intention? Is it for the purpose of new investment in the future or not? Thank you. So we are indeed considering NASDAQ, NYSE and London, but no decision has been taken at this time. In terms of the IPO itself, I mean, to the IPO to proceed, both ARM needs to be ready and the market needs to be ready. Arm's IPO preparations are what advanced the market appear to be improving and hopefully, we'll continue to do so. And Arm itself remains fully committed to listing in calendar 2023. Yes, thank you very much. Yes, we are grateful that a lot of markets have high interest in Arm's future IPO. We are grateful for that. About your second question, it's a rather technical. In fact, we only have a little capacity to issue bonds. So when we did expand that. We did the same thing. Once you issue 200, 300, then the remaining capacity goes down. So we don't have intention to issue like JPY 1.5 trillion of bond so it's just a technical matter. I would like to ask you or your expectation on interest rate policy by Bank of Japan. So I believe that compared to central banks in U.S. and European countries, they are very much normalized, but we believe that Japanese banks are behind the steps, and there are many focus on how Bank of Japan is going to be bringing the interest rate back to normal, and with your view, what is your expectation on the interest rate policy by BOJ? Our company doesn't have any specific comments on your question. But I can say is, that expectations on interest rate being commented by many banks and industries. Hopefully, without any surprise, we will be able to see the good lending without any hurdles. For us, our business is, of course, cheaper is better when it comes to the interest rate. However, I am not in position to say anything about that. I believe that it's even more important to see that Japan overall when it comes to interest rates. So thank you. Thank you very much, that's all for Q&A session. Thank you very much for your questions. This concludes the SoftBank Group Corporation earnings results briefing for the nine-month period ended December 31, 2022. The video footage of this briefing will be uploaded on our corporate website. Thank you very much once again for joining the SoftBank Group Corporation earnings results briefing for the nine-month period ended December 31, 2022.

EarningCall_366

Okay. So a very good morning to everybody and welcome to IPC's Year End Results and Financial Update Presentation. My name is Mike Nicholson. I'm the CEO. Also joining me in presenting this morning is Christophe Nerguararian, the CFO. And Rebecca Gordon, who's our VP of Investor Relations and Corporate Planning. I'll begin with the highlights from the full year 2023, it will be a much shorter presentation for me this morning than usual. I’ll be just focused really on the 2023 results in terms of the operations update, and all of our forward looking and business plan we announced this morning that will all be covered in much more detail in our Capital Markets Day presentation which is due to start this afternoon at 2 O’clock. So to get started with the highlight from 2023, it was really truly an exceptional year and for IPC, a record performance across all of the business and if we start by looking at the investment year, and we originally guided through year capital investment of $170 million. We ended up spending slightly less than that, $163 million and we did have some carryover we expect, the bounds of our capital expenditure and to be concluded as part of our 2023 work program. In terms of production, it was a record high for IPC. And in the third quarter, you'll recall that we touched 50,000 barrels of oil equivalent per day, our original guidance was on the high side was 48,000. So to come in at 48,600 barrels of oil equivalent per day in excess of that high end guidance. Good delivery on the cost front, our operating costs were $16.60 per boe. And that combination of record production, and very, very strong commodity prices meant that the company was able to generate its highest ever cash flow. Operating cash flow for the full year was $623 million. And after the investment program, the free cash flow that the company generated $430 million, and that represents a just shy of 30% free cash flow yield extremely attractive compared with the rest of our peer group. Turning to the balance sheet with such a strong operational and financial performance, the balance sheet has really transformed in the last 12 months, we started the year with a net debt position just below $100 million. And notwithstanding the significant share buyback program and investment program that we delivered through 2023, we're still able to finish the year in a net cash position with US $175 million, taking into account the bond cash that we raised, the gross cash resources that the company has just under $0.5 billion. So company has never been in as good financial shape as we are today. We'll talk a lot more on this afternoon. An absolutely huge increase in our 2P reserves, 80% increase in our 2P reserves, it means that we've replaced 13x or 1,300% reserves replacement, largely driven by Blackrod and supplemented by the acquisition of Cor4, which we announced yesterday. And we'll be given a lot more details on that in our Capital Markets Day presentation. And finally, on the sustainability side been a very good performance. And we're still on track with our carbon net emissions intensity reduction to get down by 50% through 2025. I was very pleased that we didn't have any material incidents to report through 2022. So just to go into a little bit more detail on the production side and put the record production into context. If you go back to 2017 when IPC started, we were producing then 10,000 barrels of oil equivalent per day. And then through a series of acquisitions, you can see that we built production to 46,000 boe per day in 2019. We took the decision to scale back some production in 2020 as a result of the pandemic and to shut in some higher marginal cost barrels, but I think what's been impressive is the fast recovery from COVID, we push back up to pre-COVID highs 46,000 barrels a day in 2021. And in 2022, we've been able to reach new highs so above the 48,000 barrels a day high in guidance delivering full year production numbers just below 49,000 barrels of oil equivalent per day. And that's a huge credit to all of the IPC teams in Canada, in France, and in Malaysia for their continued excellence in operational delivery. Turning now to the cost side, again, very good discipline on both the OpEx and capital expenditure side, and fourth quarter operating costs was just below $17 per barrel that was in line with expectation and guidance, our full year guidance that we gave to the market was as expected our operating costs to come in the range of between $16 to $17, per boe and you can see, we're pretty much spot on the midpoint at $16.60 per boe for the full year. And as I mentioned, on the highlights, it was a very active investment year through 2022. We're investing in all of our assets in France and in Malaysia and in Canada. Our latest guidance on our budget was we expected to invest around $170 million, we have had some carryover of that investment program into this year into 2023. So $7 million slips into to this year's budget. So the full year capital expenditure was US $163 million. And if we go back and cast our mind back to 12 months ago, when we were standing here, and we were looking at the guidance for the operating cash flow, that our assets we generate, we had quite a wide bandwidth in terms of oil prices, on the low side, we're looking at $55 per barrel Brent, on the high side, we were looking at up to $100 per barrel Brent, obviously, oil prices were pretty close to $100 per barrel for the full year. And the cash flow guidance that we gave to the market 12 months ago that price was US $600 million to US $635 million, when you look at the $623 million of operating cash flow that the company delivered, that was net of a windfall tax of around $11 million. So really, we would have been right at the top end of that guidance, and with the exception of the windfall tax in France, which wasn't baked into our numbers a year ago. And when we look at the post the capital investment program, and it was by far the largest free cash flow generation that IPC has ever delivered. The top end guidance that we gave again, 12 months ago was between US $460 million to US $480 million. What we did during the year is obviously we increased our capital expenditure budget by $33 million. And we paid the windfall tax of $11 million. So again, really delivering cash flow right at the top end of that guidance, and a 29% free cash flow yield based upon our market cap at the end of January and extremely favorable metric when you compare that with our peers in the industry. And one of the things that we've been able to do, which again, I think has differentiated IPC is return a huge amount of that cash flow generation back to our shareholders last year. We came out at the Capital Markets Day, and with our capital allocation framework that said provided and the balance sheet is in good shape and our leverage metrics are below 1x, then we're going to distribute 40% of all incremental free cash flow above $55 per barrel. And based upon the estimates that you can see at $100 we said that should be around $146 million returned to shareholders, we've gone far in excess of that commitment. The first was through our normal course to issuer bid, which we started just over 12 months ago. And we've purchased 10.3 million shares under that program from December 2021 through December 2022. And we followed that up with a summer in July with the first time to do what's called the substantial issuer bid. Essentially, it was a Dutch Auction, and where we returned $100 million back to shareholders and we bought back 8.3 million shares. So really 2022 year was a year for IPC of delivery on that capital allocation framework. We bought back in toto and cancelled 12% of the company's shares. And that amounted to $187 million of share buybacks so well in excess of the $146 million that we originally committed to return. And finally my last slide on the sustainability side, and we're well into our ESG journey now and very pleased again that we had another good year on the health and safety side with no material incidents to report. In terms of our climate strategy, you can see from the chart on this slide that we're well on our way to achieving that target, which was a net reduction on our emissions intensity by 50%, through 2025. You can see in our 2021 report, we're already down to 28 kilograms, per boe. And I feel very confident that we're going to be able not only to achieve that, but as you'll hear this afternoon, to go beyond that commitment that we have currently. And we have published alongside our second quarter results, our third annual sustainability report, fully GRI and compliant aligned with the TCFD climate related initiatives, and so continuing to improve on our non- financial disclosures. So all-in-all, a very good year. I'll pass across to Christophe now to walk you through some pretty nice financial numbers. So Christophe, over to you. Thank you very much, Mike. And yes, indeed, it's very pleasing to be here this morning in front of you to discuss our yearend 2022 financial highlights because this year has been for sure exceptional for IPC. In terms of production, another very strong quarter, this fourth quarter 2022 was a production in excess of 49,000 barrels of oil equivalent per day, capping a very strong performance for the whole year, where we posted an average production of 48.6 thousand boe per day, just above the high end of the range, which is a true demonstration of what all teams on the ground across all countries have been able to deliver. The average dated Brent was a bit lower, just below $90 for the quarter, but still average in excess of $100 per barrel for the full year. And so with our operating costs within the range, we guide it for the full year at US $16.6 per barrel of oil equivalents. We posted very, very strong operating cash flow again this quarter at 100, close to US $115 million. And more than $620 million for the full year. $125 million of EBITDA, just for this fourth quarter and $640 million for the full year. So for the CapEx, we spent $44 million this quarter, and $163 million for the full year. So just shy of our guided $170 million. But that is mostly due to some carryover of some work into Q1 2023. So I think if you only needed to remember two numbers, that would be the free cash flow for the overall year at $430 million for 2022. And our cash position, which at yearend was $487 million gross and $175 million of net cash at yearend. The oil prices were lower in this fourth quarter. And the WTI, WCS differential widened to $26 per barrel. But fortunately, we had over 60% of our Canadian oil production hedged and so that we posted a $20 million hedging gain in the fourth quarter, because we hedged the differential at $13 per barrel for the fourth quarter. So good hedging management. And I'll talk about our hedging position later on for 2023. So if you look at the full year, as I said Brent was in excess of $100. We sold on average our Malaysian barrels at $11 above Brent, the French barrels slightly below Brent and the Suffield and Onion Lake or Canadian oil barrels we sold in line with the WCS. In terms of gas price, so that's been very, very volatile, as we all recognized, it's been sky high during the third and some extent the fourth quarter where we realized almost CAD 6 per Mcf during the fourth quarter, and on average for the year, we realized in excess of CAD 6 per Mcf, so almost twice as much as what we had in our original budget due to the war in Ukraine, obviously, the supply disruption from Russian gas to Europe, Europe needing to fill up its storage and pushing gas prices up across the globe, including in North America. And in Canada, the situation today is that the storage levels are pretty high in Europe, the winter is mild. And so there's less tension on the markets. In Canada as well, the gas prices have come off a bit and are closer to CAD 3 per Mcf. But I wouldn't be surprised if that spiked again in the future. This slide speaks for itself, I mean, very, very significant operating cash flow and EBITDA in 2022, in excess of $620 million and almost $640 million respectively, almost twice as much as what we posted in the prior year. In terms of operating costs. So on average, we delivered right within the range of what we guided for the full year between $16 and $17 per boe. And you can see that the evolution quarter-to-quarter reflects the lower production in the first quarter when we had to shut in production while we were drilling one of our wells offshore Malaysia and then with production increase in Q2, Q3, lower operating cost per barrel, in Q4 gas prices being quite high that increased some of our input costs for the Onion Lake Thermal operations and we had a bit more activity as well. So resulting in a slightly higher OpEx per barrel in the fourth quarter, but still within the range, as I said for the full year. In terms of net back, I think it's very important. So between $25 and $28 per boe netback for the operating cash flow and the EBITDA respectively. And a very strong actually the best ever for the full year for business at $35 and $36 per boe netback for operating cash flow and EBITDA for the full year. That's, as usual when one of my favorite slides and that's the consequence really of our capital allocation strategy. You can see how we've been using and deploying capital, we generated $620 million of operating cash flow. And we spent $160 million on CapEx and really drove production up from 46,000 in 2021, to in excess of 48,000 this this year, very limited amounts on G&A and cash financial item less than $30 million, and then even more on a share buyback in excess of $180 million more than what we spent on CapEx in 2022. And despite or thanks to this capital allocation from CapEx to share buyback, we also ended the year in a very, very strong balance sheet position was by moving the balance sheet from a position of being in a net debt position of $94 million at the beginning of ‘22. And closing with a net cash position of $175 million. Like I can mention it here, if you look at our financial items, you can see that in the fourth quarter our net interest expense is almost zero, which is a bit counterintuitive when you think that we're paying 7.25% coupon on $300 million of bonds. But given the market dynamics, we were sitting on close to US $500 million of cash, and we're depositing that cash with our banks and we're yielding 4.5% on those deposits. So receiving 4.5% on our cash deposits for $480 million is the exact equivalent of spending 7.25% coupon on a $300 million bond. So effectively, the cost of carry for our bonds as we speak is zero. The G&A remain under control and in line with the previous quarters at below $1 per barrel actually $0.8 per boe. So when you summarize the year was in excess of $1.1 billion of revenues and production costs in line with the guidance at $16.6 per boe will generate the cash margin in excess of $650 million, gross margin of in excess of $500 million and the highest net profit ever for the company, just shy of $340 million. The balance sheet is in very, very strong position as you can see here showing a cash of $487 million, you can see our bonds on the liability side at $300 million and the equity increasing as a result of our net profit. Capital structure of the company has not as much changed over the last quarter. So the bulk of it is the $300 million bonds at 7.5% coupon with interest payable twice a year and maturing in February 2027. We have this small French loan which we are amortizing every quarter. And in Canada, we have a liquidity revolving facility which we are not using at all for CAD 75 million. And as I just mentioned, our current cash deposits receive 4.5% interest, resulting in a zero cost of carry for current loans, putting the balance sheet in a very strong position, allowing us as Mike mentioned, for instance, to be very quick in seizing market opportunities, M&A opportunities like Cor4 acquisition, we released yesterday and will give you more information this afternoon. So to conclude this presentation on the hedging side, we mentioned that we've hedged roughly 60% or 12,000 barrels a day for Canadian oil production, we've hedged the transportation effectively costs so from Hardisty in Canada to the US Gulf Coast that WCS to ARV we had that $10, it's not speculative, it's really just to protect us against any issues or problems on pipeline transportation. And for instance, in December, there was an issue on one of the pipelines transporting Canadian oil to the US. And the result was a widening of that transportation costs in January. And so we were, because we were protected with that hedges that paid out quite significantly in the first months of this year. On the gas side, we were prudent in hedging some of our gas production. So in excess of 30 million Scf a day of gas for Q1 in excess of CAD 6 per Mcf and for the winter part of our Q1 and for the so call summer street from April to October this year, we've had as well the in excess of 33 million Scf a day at just above CAD 4 per Mcf. So, that compares very, very well to the current forward curve obviously, those hedges position well in the money as we speak. We have no specific covenants from our bank facilities or any of our financial arrangements. So we have no hedges in place for WTI or WCS or Brent other than what I just mentioned, for the transportation parts We did put when the US Dollar was extremely strong towards the end of last year, we brought forward some euro to cover some of for OpEx in France and some CAD to cover some of our OpEx and CapEx in Canada, those trades are well within the money as well because the dollar or those currency reappreciated a bit against the dollar. So that was quite timely as well in terms of hedges so you can find all of those details in our financials which have been released and are available on our website. Thank you very much. Okay, thank you very much, Christophe and amazing set of numbers. I think you can all agree so really just the final slide to conclude again, and to remind everyone of the highlights for 2022, a record exceptional year for IPC. And a huge congratulations to all of our teams for delivering such an amazing performance and investment, $163 million of targeted growth and all of our producing assets in France, in Malaysia and in Canada. And record levels of production above the high end of guidance at 48,600 barrels of oil equivalent per day, in line operating cost right in the middle of guidance at $16.60 per boe. And that combination of record production and the strong commodity price environment that Christoph talked about, delivered $623 million of operating cash flow, $430 million of free cash flow, or close to 30% of the entire market value of the company in just one year. And obviously, that financial performance meant that we have the strongest ever balance sheet and Christophe showed you that we're sitting on a net cash of $170 million. But more importantly, with the financial arrangements that we have in place, we've got close to $0.5 billion war chest to continue to fund the growth in our business and create value for our shareholders. The reserve increase is quite unheard of in our industry, 80% increase in one year, 1,300% reserve replacement, and up to 487 million barrels of oil equivalent. We'll be talking a lot more about that in our Capital Markets Day presentation this afternoon. And again, a very good performance on the ESG side where we continue to meet our climate and net emissions intensity reduction objectives. So that rounds out a phenomenal year. And as I said that at the beginning of the presentation, we can of course take questions, but we'll ask those please just to relate to last year's results. We've got a lot of material to get through at the Capital Markets Day. And we'll be given a full business update and operations update and long-term business plan update at 2 O'clock this afternoon at our Capital Markets Day. So I hope you can tune in to that presentation. But for now we'll pass across and see if there are any questions. You can ask questions via the website. Or we can also take questions from the telephone line, yes. Good morning, Mike. And good morning, Christophe. Congrats on yet another strong quarter. I tried to limit my questions to the fourth quarter results, just first quarter question. And can you just remind us so the OpEx impact of gas prices, I would expect OpEx to decline slightly in fourth quarter compared to third quarter given the gas prices. So that's the first and second question is on the cash balance. You now reported a very strong cash balance, almost 30% of the balance sheet is now cash. Should we expect it to be that way going forward? And then just second question cash balance. Christophe, you mentioned 4.5% interest rate. Where can I get that risk free, I am curious? Thanks. That's all. Thank you. Yes. So in the fourth quarter, our realized gas price is slightly lower than in the third quarter. But actually, because we use AECO, AECO was higher. So it's all about, we're selling at a premium to AECO and that premium goes up and down. But if you look, AECO was actually higher in the fourth quarter. So that drove OpEx per barrel slightly higher in the fourth quarter. So that's the reason. In terms of cash, I don't think we have a policy to keep $0.5 billion of cash on the balance sheet. The flip side is we're trying to remain very disciplined in the way we deploy capital between organic, inorganic growth or share buyback. But part of this answer I guess, will be answered this afternoon when we look at our capital allocation going forward and how the CapEx spent and Blackrod will impact our cash position in 2023 at different oil prices and yes, as for the deposit, frankly, we were very pleasantly surprised. I hope not all Canadian banks and international banks are listening but effectively with no risk with like one week deposit risk free rates, both in Canadian and US dollar are actually just in excess of 4.5% and everything being equal, we would expect that to actually even go further higher if you see further rates hike from Central Banks. Okay. We just have one questions by the web. So Christophe, another one for you here. What was the reason for the widening AECO differential in August and October? That’s from Ruben from Jefferies. Yes, thanks Reb. So the way it works as you know, Suffield is in the south east of Alberta and we are selling all gas literally on that Alberta, Saskatchewan border and what that means is at times where you have storage issues or logistic challenges withing the province of Alberta, having ourselves access to that sitting point on the border which id downstream to the logistical challenges in the province and closer to the end market which are thrown to New York, Chicago, gives us a premium which can be significant where you have typically the last summer you had some injection issues where the system as a whole had compression, faced compression challenges couldn’t inject as much gas as wanted weighing down on the AECO whereas the Empress trending significantly higher. And maybe just a following, Christophe, we obviously benefit from because we purchase the AECO gas for our Onion Lake Thermal property but essentially, we are selling our Suffield gas at the Empress price so we get the benefit of that arbitrage. We do have one more question that on the moving parts of the increasing the Blackrod CapEx. We do have a specific slide that we will present you this afternoon on how that’s changed and what parts are contingency and cost inflation versus the plateau production coming forward. So we will present that this afternoon, Mark, hang on. And we will state that at 2 O’clock at our Capital Markets Day. So that’s all the web questions here. Okay, very good. Thank you very much for everyone for tuning in. And it has been an incredible year for the company. I hope you can all tune in to the Capital Markets Day presentation at 2 O’clock this afternoon. You are going to see an incredible future for IPC. So thank you very much for everybody for tuning in.

EarningCall_367

Thank you. And welcome everyone to FormFactor’s Fourth Quarter 2022 Earnings Conference Call. On today’s call are Chief Executive Officer, Mike Slessor; and Chief Financial Officer, Shai Shahar. Before we begin, Stan Finkelstein, the company’s VP of Investor Relations will remind you of some important information. Thank you. Today, the company will be discussing GAAP P&L results and some important non-GAAP results intended to supplement your understanding of the company’s financials. Reconciliations of GAAP to non-GAAP measures and other financial information are available in the press release issued today by the company and on the Investor Relations section of our website. Today’s discussion contains forward-looking statements within the meaning of the federal securities laws. Examples of such forward-looking statements includes also with respect to the projections of financial and business performance; future macroeconomic and geopolitical conditions, the benefits of acquisitions and investments in capacity and in new technologies, the impacts of global, regional and national health crisis, including the COVID-19 pandemic, anticipated industry trends, potential disruptions in our supply chain, the impacts of regulatory changes, including the recent U.S.-China trade restrictions, the anticipated demand for products, our ability to develop, produce and sell products, and the assumptions upon which such statements are based. These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed during this call. Information on risk factors and uncertainties is contained in our most recent filing on Form 10-K with the SEC for fiscal year ended 2021 and in our other SEC filings, which are available on the SEC’s website at www.sec.gov and in our press release issued today. Forward-looking statements are made as of today, February 8, 2023 and we assume no obligation to update them. Thanks everyone for joining us today. As anticipated FormFactor’s fourth quarter revenue and profitability were down sequentially from the third quarter. That said revenue exceeded the outlook range and non-GAAP earnings per share were above the midpoint. Gross margin was below the midpoint due to larger than expected end of your excess and obsolete inventory charges. The revenue upside compared to our October outlook which primarily driven by our ability to ship products to certain domestic China customers in compliance with new export controls, which also drove stronger than expected DRAM probe cards and systems revenues in the quarter. As we start the first quarter of 2023, we're experiencing similar overall demand to the fourth quarter, with moderately stronger demand for Foundry and Logic probe cards offset by weaker demand for both DRAM and Flash memory probe cards. At the same time, our Systems business continues to run at record levels. We expect a significant increase in profitability in the first quarter on revenue levels similar to the fourth quarter from gross margin improvement driven by two factors. First, the full quarter benefit of our October restructuring and second returns to typical excess and obsolete inventory costs. With probe cards lead times typically less than a quarter, our visibility remains very limited. But we are encouraged by the first quarter stabilization of demand for our products as customers invest in innovations like new chip designs and advanced packaging. These customer investments are producing steady demand, even in the face of industry wide weakened high unit volume end markets like mobile handsets and client PCs along with export restrictions in serving domestic China's semiconductor customers. As we are a US based supplier, the significant exposure to the leading-edge foundry and memory technologies and customers affected by recent US China export controls. These regulations are a headwind in all of our businesses. FormFactor continues to take all necessary steps to ensure full compliance with the new rules by holding shipments and support as required. As additional information has emerged regarding the scope of these regulations, our local China team has worked closely with customers and our trade compliance team to enable permitted shipments to certain customers. I'd like to recognize this team for their outstanding work which enabled us to ship more than we initially expected to domestic China customers in the fourth quarter. We expect to continue this level of domestic China shipment activity in the first quarter. Overall, we believe this US, China trade headwind will persist over time as we do not anticipate any relaxation of advanced semiconductor export controls. This of course, provides a strong incentive for domestic China customers to onshore their supply base and deemphasize foreign suppliers like FormFactor to ensure their business continuity. Even as we navigate through this trade issue, and the industry's current cyclical weakness, we believe the core tenets of FormFactor’s strategy remain firmly in place. These core strategic tenets are first, sustained long term semiconductor content growth in both consumer and enterprise applications. Second, the industry's relentless investments in new technology and capacity. And third, the device specific consumable nature of advanced probe cards, which when combined with our customers’ innovation driven investment in engineering systems, have historically resulted in less volatile demand cycles than wafer fabrication equipment. Consequently, we remain committed to achieving our target financial model and continue to invest in both R&D for new product innovation and competitive differentiation, as well as in the long lead time facilities and equipment portions of our capacity increase plans. These investments are designed to produce market share gains and above industry revenue and profit growth when we emerge from the current cyclical downturn, positioning FormFactor to achieve and even surpass the levels of our current target financial model. Turning now to segment level details. In Foundry and Logic probe cards, our largest business, we see moderate strengthening in the first quarter, driven primarily by pilot production ramps for new mobile application processor designs, together with stronger demand in our microprocessor business. Although, customers are still burning off the excess inventory of processors, modems and RF chips in the channel, they're also investing in early production innovative new chip designs that will ramp in volume once this inventory is consumed. This provides insight into the unique characteristics of probe card demand. Since probe cards are a device specific consumable that is specific to each individual customer chip design. This early production activity for these new chip designs is driving demand for new probe cards albeit at a lower overall level than we'd expect to see in a cyclical upturn. As an example, we continue to ship probe cards to support pilot production of a major chiplet based client CPU product, despite the well documented weakness in end market client PC demand, because customers continue to innovate to differentiate their future product roadmaps. As we noted in the past, chiplet based advanced packaging processes like probe and 3D fabric are an exciting opportunity for FormFactor. These integration schemes drive both tire test intensity, which expands the number of probe cards required per wafer out and higher test complexity which raises the performance requirements for the probe card. Advanced probe card architectures like FormFactor’s MEMS technology are essential to meet these challenging technical requirements at a compelling cost of ownership, while also meeting the short delivery lead time needed to support our customers rapid and dynamic production ramps. Turning to memory probe cards, we expect first quarter sequential weakness in both DRAM and Flash probe card demand, driven by extremely weakened market conditions for both DRAM and Flash chips that are causing our customers to reduce the magnitude and speed of their new product RAMS. Despite this memory end market softness, each of our customers continues to release and validate new chip designs, like high density DDR 5DRAM to drive the roadmap forward. As in Foundry and Logic, this new design activity is driving demand for new probe cards specific to each one of these new memory chip designs, but at low levels aligned with the reduced output levels announced by each of our major memory customers. In the Systems business, we expect the first quarters to sustain the strong momentum which produce record revenue in both the third and fourth quarters of 2022. The strength partially offset some of the downturn driven softness in the production probe guard business, highlighting the financial benefits of our lab to fab diversification strategy. The strategic benefits of the systems business are also significant, as we partner with leading customers in their R&D labs to advance the industry state-of-the-art with innovations like Gate-All-Around transistors, advanced packaging, silicon photonics and quantum computing. We're also working with key customers on advancing high power applications like silicon carbide and gallium nitride, as the semiconductor industry enables the widespread electrification of the automotive industry. Finally, Ray Link, one of our directors has notified us that he will not stand for reelection at this year's Annual Meeting of stockholders. Ray has been a valuable member of our board, and has provided many useful insights both to me personally and to our management team. I'd like to thank Ray for his nearly seven years of service to FormFactor and wish him well in all his future endeavors. I'd like to close by reiterating that in the short term, we're encouraged by the stabilization of demand for our products in the first quarter. In the longer term, we remain confident in the growth prospects for FormFactor and the industry overall, driven by the fundamental trends of semiconductor content growth, and innovations like advanced packaging. These are trends where FormFactor is well positioned as an industry and technology leader. And we're confident that our resilience and commitment to invest in R&D and capacity will position FormFactor to emerge from the current downturn, a stronger and leaner competitor, enabling us to achieve our target model that delivers $2 of non-GAAP earnings per share on $850 million of revenue. Shai, over to you. Thank you, Mike, and good afternoon. As you saw in our press release, and as Mike mentioned, Q4 revenues exceeded the high end of our outlook range. Non-GAAP gross margin was at the low end of the range, and non-GAAP EPS was at the high end of the range. Fourth quarter revenues were $166 million, an 8.2% sequential decrease from our third quarter revenues, and a year-over-year decrease of 19% from our Q4 ‘21 record revenues. As Mike mentioned, Q4 revenues were above the high end of our outlook range, mainly due to our ability to ship to certain domestic China customers. Probe card segment revenues were $124.4 million in the fourth quarter and decreased to $50 million, or 10.8% from Q3. The decrease was driven mainly by lower foundry and logic and DRAM revenues. Systems segment revenues were record $41.6 million in Q4, a $0.1 million increase from the record third quarter and comprise 25% of total company revenues up from 23% in Q3. Within the probe card segment, Q4 funding and logic revenues were $82.1 million, a 9.4% decrease from Q3. Foundry and Logic revenues comprise 50% of total company revenues similar to the third quarter. DRAM revenues were $27.3 million in Q4, $7.6 million, or 21.8%, lower than in the third quarter, and were 16% of total quarterly revenues as compared to 19% of revenues in the third quarter. Flash revenues of $50 million in Q4 or $1.1 million higher than in the third quarter. And were 9% of total revenues in Q4, slightly higher than the 8% in Q3. GAAP gross margin for the fourth quarter was 27.2% of revenues as compared to 34.4% in Q3. Cost of revenues included $7.5 million of GAAP to non-GAAP reconciling items, which we outlined in our press release issued today. And in the reconciliation table available in the Investor Relations section of our website. Q4 gross margin reconciling items included the $4.1 million of charge related to the restructuring we announced in October 2022. On a non-GAAP basis, gross margin for the fourth quarter was 31.7%, 7.3 percentage points lower than the 39% non-GAAP gross margin in Q3 with lower gross margin in both the probe cards and the systems segment. Our probe card segment gross margin was 25.5% in the fourth quarter, a decrease of 9.1 percentage points compared to 34.6% in Q3. The decrease is mainly due to two factors. First, lower overall segment revenues and lower factory utilization, which accounted for six percentage points and second, higher than usual excess and obsolete inventory reserve which accounted for approximately two percentage points. As a reminder, our cost reduction measures were implemented at the end of October ‘22. So Q4 only partially benefited from the overall expected saving. Our Q4 Systems segment gross margin was 50.4%, 330 basis points lower than the 53.7% gross margin in the third quarter, reflecting a less favorable product mix. Our GAAP operating expenses were $61 million for the fourth quarter, $3 million higher than in the third quarter. The increase is attributable to the restructuring plan costs we implemented in Q4, higher stock-based compensation as a result of one working week in Q4, partially offset by the savings from the cost reduction measures we took during the quarter. Non-GAAP operating expenses for the fourth quarter were $47.9 million or 28.8% of revenues, as compared with $49.5 million, or 27.4% of revenues in Q3. The $1.7 million decrease relates mainly to the impact of the restructuring we implemented during Q4, lower performance-based compensation and higher PTO taken. Company non-cash expenses for the fourth quarter included $9.5 million for stock-based compensation, $1.5 million higher than in the third quarter, due to one additional week of vesting during Q4 and the timing of annual grants, $2.9 million for amortization of acquisition related intangibles similar to the third quarter and depreciation of $7.5 million, $0.4 million higher than in the third quarter. GAAP operating loss was $16 million for Q4 compared with GAAP operating income of $4 million in Q3. Non-GAAP operating income for the fourth quarter was $4.8 million, compared to $21 million in the third quarter. GAAP net loss for the fourth quarter was $13.7 million or $0.18 per fully diluted share, compared with a GAAP net income of $4.4 million, or $0.06 per fully diluted share in the previous quarter. The non-GAAP effective tax rate for the fourth quarter was 21.3%, 230 basis points higher than the 19% in q3. The annual non-GAAP effective tax rate for fiscal ‘22 was 15.4%. At the low end of our estimated non-GAAP and all effective tax rate of 15% to 20%. For 2023, we expect the benefits of the new advanced manufacturing investment credits or AMIC to lower our non-GAAP effective tax rate to mid to high single digits approximately 6% to 9%, similar to our annual cash tax rate. Maintaining profitability at the current reduced demand levels is an important goal for us. And the actions we took during Q4 to reduce our costs contribute to a fourth quarter non-GAAP net income of $4.1 million or $0.05 per fully diluted share compared to $18.3 million or $0.24 per fully diluted share in Q3. Moving to the balance sheet and cash flows. We had negative free cash flow of $5.4 million in the fourth quarter compared to positive free cash flow of $15.5 million in Q3. The $21 million difference between sorry, related to a $4 million decrease in net cash provided by operations, mainly as a result of severance payments related to the restructuring made during Q4 and an increase of $17 million in capital expenditures. At quarter end, total cash and investments were $242 million. As of the end of the fourth quarter, we had one term loan remaining with a balance totaling $15.5 million. We invested $26.2 million in capital expenditures during the fourth quarter compared to $8.9 million in Q3. With the core drivers underpinning our strategy stay in place, we continue to execute on increasing our long lead time facilities and equipment portions of our capacity increase plans, albeit placing equipment in service at a slower rate to ensure capacity does not significantly outpace demand. Capital expenditures in 2022 totaled $65.2 million at the midpoint of the estimated range we previously communicated. For 2023, we expect CapEx to range between $50 million and $60 million, $10 million lower than in 2022 at the midpoint of this range. Regarding stock buyback, during the fourth quarter, we purchased approximately 365,000 shares under our $75 million, two-year buyback program for a total of $8.9 million. At Q4 quarter end, $18.6 million remain available for future repurchases. Turning to the first quarter non-GAAP outlook. As Mike mentioned, we expect Q1 revenues to be comparable to Q4 with higher foundry and logic revenues offset by lower DRAM and Flash revenues with Systems segment revenue similar to Q4. This demand results in a Q1 revenue outlook of $162 million plus or minus $5 million. We have largely completed the restructuring that we announced in Q4 to reduce costs and improve the efficiency and effectiveness of our business. And Q1 outlook reflects the full impact of this saving. As a reminder, we estimated that these actions will reduce our cost structure by $25 million to $30 million on an annual basis, with approximately two thirds of the savings benefiting cost of sale and one third benefiting OpEx. In addition, we don't expect a similar excess and obsolete inventory reserve charge in Q1. Accordingly, first quarter non-GAAP gross margin is expected to increase to 37%, plus or minus 150 basis points. And the midpoint of these output ranges, we expect Q1 operating expenses to be $50 million plus or minus $1 million, with a $2 million increase as compared to Q4, mainly due to annual benefits reset and less PTO taken in Q1. Non-GAAP earnings per fully diluted share for Q1 is expected to be $0.13, plus or minus $0.04. Reconciliation of our GAAP to non-GAAP Q1 outlook is available on the Investor Relations section of our website, and in our press release issued today. Hi, good afternoon. Thanks for letting us ask a few questions. Maybe Mike and the team. Can you first size the piece of the China domestic revenue that you some of you initially excluded from guidance, but ultimately, it's nothing that you could ship in the quarter. Can you maybe put some parameters first on what would that represent? Yes, Brian, when we talked about it in the October call and set expectations for Q4. We talked about it being a $10 million to $15 million headwind in the quarter. We certainly didn't recover all of that, but recovered probably more than half of it. There were some other pieces of momentum in the business outside of the China domestic customers that helped get us above the high end of the revenue range. But as I said in the prepared remarks, we did do a better job once we got some clarifications on these regulations, in making sure we had the appropriate documentation appropriate paperwork, to get the shipments to the customers, perhaps a little bit more effective ways than we originally thought we were going to be able to. Got it. Okay. That's awful. And, Mike, I think let’s just stay one more question on that topic. I think you've been pretty clear about sort of how you see that business, potentially some of the domestic China business transitioning over time. You think it would be sort of more of a gradual phase out? And I guess nothing there's nothing gradual about US restrictions. So maybe put that to the side. But and just in terms of the activity you're seeing and engagement, do you feel there's any sort of pull in happening right now from later in the year into now or even longer horizons based on just the uncertainties that maybe some of your local customers have right now. Yes, I think there's several facets to that question. We have tried to be as clear as we can with people about our long-term assumptions that we're going to be really challenged to serve the domestic China market as a non-China US supplier. Over time, as you say, and there is a question of what that trajectory looks like. But over time, we would expect that business to go to zero if not close to it. As we look at what's happening right now, I wouldn't say there's much pull in. Now, that's probably because again, the bulk of our business, although the Systems business is performing nicely, is probe cards, which are designed specific consumable. So unless customers have math set fix to design fix, it's really impossible for them to pull that demand in out in front of any other anticipated restrictions or headwinds, so we typically don't see pull in for structural kind of conditions like that, and we're not seeing one here. Okay, that makes sense. In terms of your, last question on sort of, like the commentary around seeing stabilization in logic foundry, at least at this point, what's your sense in terms of logic foundries as well as memory, when we tie this into inventory reductions, and obviously there's some fab utilization reductions tied into that. Do you see a situation with your discussions where there's optimism that utilization rates come back up in the second half, maybe some of the inventory management has had effect here in the first half. And so in any way of characterizing how you view your business into the second half, those are some of the dynamics that are being discussed right now. Yes, I think first of all, the dynamics are very different in different segments. Obviously, anybody who covers the memory segment, both DRAM and Flash understands that there's significant inventory consumption that has to happen and different customers are approaching that in different ways. Foundry and Logic does appear to be stronger, but there's areas like client PCs that still have a tremendous amount of inventory to burn through. Compounded on top of that, obviously, with very short lead times in the probe card business, we're going to be seeing when customers turn back on wafer starts in production in almost real time, with lead times well, within a quarter to look into a second half utilization recovery is something that we just don't have the visibility, the length of lead time and the backlog to really make any intelligent comments on. Hey, thanks for taking my questions. And congrats on good execution in a challenging environment. On our China exposure. Can you just tell us the mix of the China revenue? I assume that it's not all 100% domestic Chinese manufacturers, but other people manufacturing inside of China? So when you talk about domestic China over time going to zero, can you bracket that revenue expectation? Sure, Christian, yes. And we've done this at different times in the past. But a good way to think about the past two quarters have been $50 million of revenue shipped into the region, shipped into China. But the majority of that between two thirds and three quarters is to the multinationals that operate in the region. We have big DRAM customers there. We have Flash memory customers there. And many people don't know this, but there's a very large microprocessor assembly and test facility in China run by one of the multinationals as well. So the bulk of that $50 million quarterly China revenue, really is the multinationals. Our domestic China revenue, obviously, is then the remainder. And that's been running somewhere between $10 million to $15 million a quarter. It's a little bit lumpy. We've seen nice activity out of a DRAM customer in China, the Systems business continues to perform well. So it does go up and down. But if I were to size it for you, I think somewhere between $10 million and $15 million a quarter is an appropriate way to think about the domestic China Business. Great, thank you for that clarity. On the Systems business, you guys talked about silicon carbide, I wonder if, which is a strong growth area obviously, can you kind of talk about your revenue opportunities there and what it means to the Systems business. And as the number of customers expand as a number of wafers starts expand? How should we be thinking about that portion of the business? Yes. So the Systems business overall is a pretty diverse mix of applications. As we've talked about in the past running from mainstream CMOS, right now working on Gate-All-Around to nanometer kind of things all the way through quantum computing, silicon photonics, and power applications like silicon carbide, which is obviously on a great growth trajectory right now. But one of the things it's important to remember about the Systems business is it really is R&D focused. So as silicon carbide wafer starts, continue to accelerate and ramp as they are expected to, we don't have a ton of leverage and exposure there because we're involved in the early development in the yield improvement associated with us. There are areas of some of these applications probably Silicon Photonics is the most promising for us right now, where we do have some production leverage, but I'd caution people on sort of using us as a proxy for silicon carbide production activity, we're really enabling initial yield improvement, customers moving from four inch to six inch to eight-inch wafers, things like that in their early R&D associated with silicon carbide. Oh, thank you for taking my question. Hey, good afternoon, Mike and Shai. Hey, Mike, I listened to your prepared remarks. And I kind of get the sense that looks like your mobile side of the business, which includes both SOC and RF seems to be that it's probably moderately strengthening, DRAM, I think, based on the commentary last quarter, and the upcoming quarter, it may be as bad as it gets. But things are probably in the stabilization process in terms of how the rate of decline. But I do want to ask you more on the microprocessor side, I mean, stripping out any contribution, let's say from the arm based on Mac OS based and microprocessor demand. I believe March quarter, you will see some of the strengths on that particular customer, but the x86 side, do you see stabilization from the December quarter level? And I think that particular customer, they probably have prematurely caught bottom two quarters ago. And but going forward, do you see where things will bottom out from your number one customer in terms of your demand? Thank you. Yes, so a couple of different things in that question. Let's start with the last one. First, we are seeing incrementally stronger x86 microprocessor probe card demand here in the first quarter. Again making a comment about anything beyond that is extremely difficult given the short lead times we have in the business well within a quarter. And we've seen overall the market, not just in the microprocessor probe card space, but overall in the probe card space, be pretty volatile over the last couple of quarters. So I think right now, again, we are encouraged by what's clearly a stabilization in our overall revenue and some strength in the foundry and logic space, driven both by the x86 microprocessor also, as you know it in the mobile business. Now shifting gears to the mobile business for a second, it really is isolated to mobile application processors, we are not seeing any significant strengthening in RF. Some of that's due to the different product launch cycle times. But I think you can draw a pretty straight line between the mobile application processor probe cards we're shipping now. And major mobile handset releases that are scheduled for later in the year or expected for later in the year. Got it. Thanks, Mike. That was very clear. I appreciate that. Maybe I want to ask you a little bit more on the DRAM side. Maybe I should ask from a historical perspective, I think back in 2019, that was a prior industry downturn. Your DRAM business was bad in the first quarter, but we covered in starting from the second quarter. I know your drivers for your DRAM probe cards are not exactly the same as [inaudible] folks. But do you think the same condition may exist this year as we go into the downturn in ’23 that with the DRAM probe card business may start to recover a little bit earlier than people thought or you think at this time may be a little bit different compared with 2019. Yes. I’ll caveat my answer with the usual understanding of lead times being very short. And this being a very dynamic environment across all of our businesses, including DRAM probe cards. What I will say is the depth of this DRAM downturn. If you look at the DRAM spot market pricing, what our customers are doing, it's very difficult to draw a parallel to 2019. This is a much more severe pullback than 2019 and as a consequence, our customers although they're behaving differently, are certainly behaving differently than in 2019. They're behaving differently from each other and behaving differently from 2019. So I think that's a parallel if inventories get consumed in a relatively short term in a handful of quarters, I think you could see customers take some of these new devices, things like high density, DDR5 for mobile, and ramp those more aggressively, but as long as this overhang of inventory, and what's a pretty unhealthy end DRAM chip market persists, we don't anticipate any significant recovery as we go through 2023 here. Yes, thanks for taking the question. And I wanted to start with just a few follow up. So Mike, very helpful to get the color on what's happening in foundry and logic and a better sense of what's going on with your largest customer. On that front, they've been public. And I think you in the past have talked about some early shipments to a tile-based product, which for them launches in the second half of the year. Can you just give us an update on how trends are looking there, and the degree to which that's contributing to revenues in the current quarter could in the coming few quarters? Yes, I talked about a little bit in the prepared remarks, because I think it's a very important trend for FormFactor and for the industry overall. And we are continuing to ship in volume for what's really the first client-based CPU on a tile or chiplet architecture. And we certainly, along with other people, I know view this as a significant event in the industry, because of the significant volumes for the client-based CPU drives throughout the entire supply chain. So that'll be, if you'd like a really good high volume pipe cleaner for tile architectures for chiplets structures, and for advanced packaging in general. Obviously, the magnitude of that opportunity, though, is as we go through the year really going to depend on the decisions our customer makes on how aggressively they ramp that product. And presumably a lot of that will have to do with the client PC market, the inventory stabilization there, the inventory consumption there, and then their willingness to drive the new product through the channel. I do think it's an interesting example we're seeing in all of our customers in foundry and logic and DRAM. Although volumes are obviously down from the peak levels, we had in the first half of 2022. Each of these customers are continuing to invest in new designs, so that their roadmaps are differentiated, they're not doing it at the volumes requiring the volumes of probe card, they would in a cyclical upturn. But we are seeing very healthy new design activity. That leaves us pretty optimistic about growth, when growth returns to the overall industry and this inventory correction gets done with it. Got it. That's helpful. And then I wanted to follow up on DRAM and just try and dig in a little bit. So I think oftentimes, when we talk, we talked about the generations of DRAM that might be in use or coming into production, DDR4, DDR5, DDR6, et cetera. But I wanted to talk a little bit about DRAM from an application basis as if the team has optics there, because it seems like what we're hearing from all our checks is that the mobile market is starting to find an inventory bottom. And obviously, PCs are in progress and the server correction was latest to the party, which is why we're just starting to server DRAM collapse in the first quarter. But the question to you is as you'd look at your DRAM business, are you seeing signs of relative stability in some of the application areas? Is it all acting the same? How would you frame things up for us on those parameters as you'd look at the market now and what's possible in the first half of the year? Yes. I'll go back to some of the some of the questions we've answered earlier, given how dynamic things are in the industry and our short lead times, it's pretty difficult for us to make any coherent remarks on those sub segment levels and how the inventory corrections are going. What we are seeing, although there's a sequential reduction in our projected DRAM revenue going from Q4 to Q1, we are seeing relative stability in the design activity. That's part of the reason why we're encouraged that overall Q4 revenues for the company, are normally the same as we're seeing year end demand that's going to drive Q1 revenue. Different puts and takes obviously, as you know, the different end markets applications for DRAM are all on a slightly different cadence in terms of supply, demand imbalance and inventory corrections. But for somebody, for company that's operating with lead times well within a quarter, it's pretty difficult for us to say anything coherent about the health of those end markets. Got it. Okay. And then if I can just sneak in the last thing before I hop back in. Shai, you talked about the $55 million in CapEx for calendar ‘23, can you just give us the top two or three buckets that we should expect that would deploy into and in any color round those would be appreciated. Thanks, guys. Sure. The majority of this $50 million to $60 million investment in Q3 will be in tools and equipment to continue investing in the long lead time items that are required to increase our capacity, right, we open a manufacturing, new manufacturing center in Livermore more than a year ago, we started with the Shell we are -- since then populating it with tools, what we're doing is because these tools have long lead time, we don't want to slow down the purchasing process. But we do slow down the process of putting them in service and starting depreciation, because we want to align as much as possible this capacity online with the demand coming in from our customers. Hi. Thank you for taking my question. Good afternoon. So first, I want to follow up on the mobile commentary. So can you give me an idea like was the typical revenue cycle for that this mobile customer for a new partner rent, and since that we started to see from the application process and then RF is not out yet. And then just give me a like general idea like maybe like 1Q, 2Q, third quarter, which quarter will be strongest in terms of rents with that customer? Yes. So Hans, the mobile application processor piece, although I think in earlier in the Q&A session, I gave some pretty decent visibility about where that project headed. That historically, that has been primarily a Q1, Q2 activity. Given where the industry sits now, I think we see perhaps it being a little more spread out. But one of the other interests is, so maybe some contribution in Q3, but think of it mostly as a first half of the year kind of thing. I think the other interesting thing is the mobile application processor activity, although it's dominated by the one big project in the industry. We do see other customers also releasing new apps processors, new mobile application processors that are going to go into other handsets in the Android ecosystem. So some interesting, multifaceted activity there. That all goes back to this theme of despite the demand downturn overall in the industry, our customers continue to innovate and release new designs, so that they're ready for the upturn and ready to differentiate their product roadmaps when things resumed to grow. Yes, so RF is typically later than the apps processor in the overall cycle. Because it has shorter lead times it has shorter fab cycle times, it has shorter lead times for our probe cards. It has shorter assembly cycle times. So it's just more compressed and closer to the actual handset launch than the more complicated silicone, like the apps processor. Now, the one thing we're keeping a very close eye on is obviously in RF, there's still a pretty good inventory build of things at the component level things like bonds or filters, and you've heard from our customers that there still is an inventory correction ongoing there. So keeping our eye on that, but again, new design activity would be expected as we go through, call it the middle part of the year to support the late year handset launches. Got it, it is very helpful. So next question is about the gross margin. And so it seems like the improvement in Q1, mainly driven by the inventory reserve back to a normal level and then also the restructuring effort. And probably make help for Q1, given we think that we have some strength in foundry logic, and then weakness in memory. And then how do we think about the rest of the year? Like just in terms of the maybe the makes, or the efficiency gain and et cetera just or how should we thing about the course marketing trends throughout ‘23? Yes, so I think you listed exactly the three main factors that impact the expected increase in gross margin from Q4 to Q1, like you mentioned, the no special or excess E&O reserve, the restructuring benefits, be a full quarter benefits in Q1, and the more favorable mix. And finally foundry and logic and DRAM, and these are the main factors that taking us back to 37% plus minus 50 basis points. As for the rest of the year, it's really depending on revenue, and depends on mix. And as Mike mentioned, I think few times during this Q&A, we still don't have a lot of visibility. But we are encouraged by the stabilization of the revenue between Q4 and Q1, we are adding capacity and to make sure that when our customers ramp, we are ready to be there and supply to them. And as historically we demonstrate our ability to perform at high 40s. If you go back to Q1 and Q2 of 2022, when revenues were around $200 million, we were able to achieve our gross margins around the close or even exceeded our target model. So as the industry recover and our revenue increase, we still, we are still confident in our ability to achieve our target model, gross margin as well. And it's going to fluctuate as we go up there along that trend line. Hi, this is Steven calling on a calling on behalf of Kris. Thanks for taking my questions. I guess, Mike, like to start head also on the question on the foundry and logic business. But want to ask in a totally different way as opposed to from end market perspective, do you have any perspective on from a leading edge versus trailing edge perspective? And how the Q1 sequential improvement in demand/ improved demand had its breaking out across the call it 16 nanometer and smaller geometry products versus larger geometry products, first of all? Yes, Steve, it's an interesting question for us because most of our exposure is on leading edge nodes. If you think about the probe card business, and even the Systems business, really what we're doing is enabling customers to improve their yields on these advanced nodes and then the probe card business screening out bad chips before they go downstream to what are becoming more expensive assembly processes. So if you think about where that's going to be deployed most, for sure it's on leading edge nodes and on brand new nodes where customers are very focused on yield improvement and trying to get, and try to yields up to entitlement levels. Our exposure on trailing edge nodes is quite a bit more limited. It's restricted to things like microcontrollers in the automotive segment where there's requirements like high temperature high parallelism so we're not a great read through on the mix of leading edge versus trailing edge. So I think you can conversely, look at the stabilization of at least our look, as we go Q4 to Q1 as a commentary on some of the stabilization that leading edge nodes. We really are much more exposed to leading edge nodes than we are trailing edge. Great. Thanks for that. And then one quick one on systems just getting in the distinct in that business. And I guess the multitude of sort of R&D applications that are driving that currently. Do you expect, we're assuming, call it your pockets and demand just from given the strength from all the different applications that have been driving, drive business so far. Well, one of the nice things about that business as it is rather diverse, right across semiconductor optoelectronics, broader sets of applications. And as we talked about the past, in the past a wide variety of customers and applications, I think as long as customers are continuing to drive their R&D budgets, their innovation roadmaps forward, we pretty, feel pretty comfortable about the strength of that business, primarily because of its diversification. So I don't see anything that's flashing any warning signs in the space across all of those customers and applications. The one place that is a headwind and has been a headwind is obviously our ability to supply into the domestic China market. But I think that's, as we said in Q4, and here in our Q1 guidance largely reflected in that overall view. Okay. If I can maybe one last one for Shai, also on gross margins, for the non-GAAP gross margin guide of 37%, what is the embedded a realization charge net? And what would be the sort of revenue level, you need to get back to in order to that it drives to be the minimums? Yes, so in terms of realization and utilization of factories, if you think about the three main components that are contributing to utilization, you have labor, tools and facilities. With labor with the restriction we had in Q4, we are basically 100% utilized, right, we took down the workforce to labor to the levels required to support this level of revenue, and we're going to ramp it as needed in the future. We do have enough tools and enough facilities and footprint to support larger revenue, as we saw in the first half of 2022 and enough to support our target model of $850 million of revenue. And can you repeat the second part of the question? Yes, well, I guess, what would be the revenue level that's needed to not have any additional charges, I guess, either from equipment and facility standpoint. Thank you. Right. So what we said in the previous call, and since then, is that with the new with cost structure, its revenue levels similar to Q3, which was around $180 million, let’s call $180 million, we expect gross margin to go back to the low 40s. And then in order for gross margin to reach the target model, mid-40s, high 40s, we need revenue to go to grow back to the $200 million plus on a quarterly basis. And we need the growth to come from foundry and logic, because that's our higher margin market. Yes, thanks for taking the question. And there's going to be a microprocessor using chiplets, which I would believe is about an order of magnitude larger than any other chiplet product in the past. And I'm just wondering if you could talk about sort of how that changes the incremental opportunity per million or 10 million units for you all. Right, thanks, Gus. We touched on this a little bit in prior Q&A. And I told you we were active in this project in the prepared remarks. I think, this is a great example of why we're excited about the chiplet opportunity. If you think about the test intensity and test complexity required for chiplet designs, test intensity, because you want to make sure that each of the chiplets is good before you assemble them in the stack before you tile them together. But also the complexity things like speeds are going up, the temperature ranges with which the chiplets tests are broadening. So the technical requirements for what we need to deliver to our customers for chiplet designs are substantially more capable probe cards than you have to do for a single die. You roll all that together, and we've looked at it and some of the 80 manufacturers have come to a similar conclusion. It looks like about a 20% to 25% uplift on a like for like basis. So the end good die out, you're going to get 20% to 25% more opportunity associated with the probe cards and when moving to a chiplet architecture. Now over time that's going to decrease, customers are going to get better at yields improvement better at their test methodologies. But nonetheless chiplet processes, tile processes are a much more test intensive process that has good ROI for our customers, right? Packaging bad chiplets together with good chiplets, really not very economically viable. And so we view ourselves as a key enabler in the probe card business and in other businesses, to helping the industry innovate and drive advanced packaging strategies like chiplets forward. And we view it as a great financial opportunity too. Got it, that those super helpful. And then my follow on is on your system business on photonics. In your prepared remarks you mentioned, you were sort of on the cusp of a photonics opportunity that was moving into production. I was wondering if either, a, you could quantify it or give a little color on what exactly in photonics, the application is? Yes. So most of the activity we're seeing in Silicon Photonics, in the systems business falls into two categories. Some of its detectors, things like components for LiDAR, but probably the more exciting one is co package optics, where datacenter applications are taking an optical chip and packaging them together with an electrical chip. These are the predominant applications that we're working on. Now, again, the systems business is we've been engaged in Silicon Photonics for several years in the systems business in R&D labs. Now moving to pilot production, we're still engaged, whether we have a play in full high volume production is something that we're working with customers to evaluate right now probably requires a few changes in our roadmap, but a really interesting area where the combination of our electrical test and optical test products and technologies appear to have some pretty significant value for customers as they're ramping these co package optics applications. And just a clarification for me, and I'll stop, is that tip to tip optical links is what folks are working on, am I getting that correct? Yes, early pilot right now and a lot of bugs to work out. But it is an exciting area, where we're working with customers on this fusion of optical and electrical technologies to help push the industry forward. Hi. So I actually wanted to touch upon some of the questions you had earlier regarding the chiplet architectures, right, so I understand you talked about that 20% to 25% increase in test intensity. But for me, the one a simplified way that I was looking at this was if you have four chiplets, you'd need four different probe cards. So why is it just a 20% to 25% increase versus like four times increase? And so I guess if you could help me understand that what are some of the strategies that are being used that your probe card requirement isn't as high? Right. So the reason it's not four times, yes, you need four different probe cards. But if you think about how customers are partitioning the end product, which used to be a single die into individual chiplets, you can imagine that the test coverage, the test complexity, or the number of tests you need to do for each of those chiplets is substantially less than you need to do for the composite die, right. If I'm going to test an entire microprocessor, the SRAM, the inputs, outputs, all of the buses, you can imagine, that's a fairly long test time because you have to go through a broad suite of electrical tests to get all those things. You break it up into chiplets, and now you're also breaking up the test coverage into the individual chiplets. So yes, I need four times the number of probe cards, but simply put, I'm also testing a quarter of the transistors on each of these chiplets. So the test times are shorter. That's why it's not a four times uplift, it's a 20% to 25% uplift. Got it, thank you This is very helpful. And for my follow up. So in 2022, you had market share losses to one of your number one competitor in foundry logic. So how should we think about this going into 2023? Are there any low hanging fruits that help you kind of reverse the market share? Yes. So you've hit on an area, that's key area of focus for FormFactor right now. You're right. We did lose market share to our primary founder and logic competitor for different reasons at different customers. But if I take a holistic look at it, it involves a couple of different things that we're now very focused on. One is making sure that we're aggressively delivering new technologies for those customers and engaging them very early on. I think in some cases we lost market share because our competitor was faster to deliver their technology. I think one of the other things is if you look at some of the customers where on an industry wide basis, we have lower than benchmark or lower than entitlement market share, we're working pretty hard on gaining share at those as well. So there's a very good competitor, a very viable competitor, and we're going to -- we are in an industry where you need two suppliers. So I think us executing better, us being more aggressive on getting our leading technology into customers' hands are a key focus area for us now. We've made some organizational changes, we've made some incentive changes, and are very focused on making sure that we're a sharper and stronger competitor against these guys in founder and logic. Thank you. Is pricing a sort of an area where it competes? Does that drive the market share gains? Is that --? No, not really. One of the things I think all of us understand in this business is they really are two supplier markets, and you're not going to be able to price your way to market share gains. Customers depend on us for critical product ramps. We've talked about lead times being short. That means there's a real premium on execution, right. Our customers can't ramp if they don't have the probe cards. And the value of the technology that all of us provide us our competitors is pretty compelling. And so you're not going to win on price. And we as a set of suppliers, sure, you got to be cost competitive, but it's not about the lowest price winning. Thank you. That's Helpful. And if I may squeeze in one more. So I know you talked about China being, domestic China being $10 million to $15 million. I think a bulk of that is DRAM. Could you sort of give some color on how much is systems portion of it. Are you able to ship into China domestic customers for systems revenues. Yes, it’s actually, I wouldn't say the domestic China revenue is dominated by DRAM. DRAM is a good chunk of it. And given that the major China DRAM manufacturer, domestic China DRAM is really just ramping up, that can pretty be a pretty lumpy revenues quarter to quarter. We do have pretty significant systems exposure and systems opportunity in China. Again, we've by and large found a way to at least what we're booking, understand whether it's going to be that we're going to be able to ship that we understand the trade compliance implications. So, at least in the short term, again, these headwinds are baked into our systems business over. I'm sorry, into our outlook for the systems business. Over the longer term, again, we do expect that business to continue to decline and eventually go to zero. The question is a question of when and when a local China supply chain is able to support its industry. That's probably a multiyear event. Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mike Slessor for any further remarks. I think we're about at a time, so thank you, everybody, for your participation. Thanks for the questions. And we'll see you either at some upcoming conferences or on our late April, early May earnings call. Take care and stay safe. Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.

EarningCall_368

Good morning, and welcome to the Emerson First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. Thank you. Good morning. Thanks for joining us for Emerson's first quarter fiscal 2023 earnings conference call. Today, I'm joined by President and Chief Executive Officer, Lal Karsanbhai; Chief Financial Officer, Frank Dellaquila; and Chief Operating Officer, Ram Krishnan. As always, I encourage everyone to follow along with the slide presentation, which is available on our website. Please join me on Slide 2. This presentation may include forward-looking statements, which contain a degree of business risks and uncertainties. Please take time to read the safe harbor statement and note on the non-GAAP measures. Thank you, Colleen. Good morning, and thank you for joining us. I'd like to begin by thanking the global Emerson family for delivering yet another strong operational quarter. I'd also like to extend my appreciation to our Board of Directors and the shareholders of Emerson for your continued confidence in this management team. We remain confident about the strength of our markets from both a geographic and an industry perspective. This is exemplified by our project funnel that continues to grow, exceeding $7 billion at the end of the quarter. Before I turn the call over and discuss the quarter's performance, in review of our strong outlook for the second quarter and the year, I'd like to say a few words about our headquarters announcement this morning. We conducted a comprehensive three-month review of location options. St. Louis was selected following this rigorous process, and we look forward now to finding an appropriate location in the region. Please turn to Slide 3. Operationally, the first quarter was very strong for Emerson. End market demand remains strong as first quarter order trajectory played out largely as planned. 5% underlying orders was as expected as broad automation strength was weighed down slightly by a double-digit decline in safety and productivity orders against tough comps. Sequential underlying orders were also up 6% versus the September end quarter. Sales met our expectations at 6% underlying growth, slightly impacted by shutdowns in China. Our business performed very well operationally, displaying the strength of our Emerson management system. Operating leverage, excluding AspenTech was 40% and ahead of our mid to high 30s expectation. Adjusted EPS was $0.78 for the quarter and was impacted by two main below-the-line items. Stock compensation was a $0.09 headwind versus 2022, driven by a 31% stock price increase throughout the quarter and its subsequent impact on the remaining mark-to-market plan. While we expect a slight headwind from the addition of AspenTech's stock comp rolling into our financials, the overall stock compensation headwind was 8% worse than anticipated. Frank will provide more color on this in his section. Similarly, FX was worse than originally expected. However, despite these headwinds, operations performed above guidance as our business continued to execute. Lastly, we completed our committed $2 billion of share repurchase in the first quarter. Turning to Slide 4. I'd like to walk through some exciting successes and the strong momentum we see in the value creation priorities we laid out on November 29. First, in late January, we visited the Middle East and had the opportunity to break ground on our new state-of-the-art innovation and manufacturing hub in Saudi Arabia. This investment is designed to not only spur innovation for the region, focusing on the transition to clean energy segments like hydrogen and clean fuels, but also demonstrates our commitment to our regionalization strategy and best cost manufacturing. Pillars of our operational excellence. As an example of the projects our investment will supply, Emerson was chosen to provide automation for the world's largest green hydrogen facility by NEOM. The plant will provide 600 tons a day of green hydrogen using Emerson Automation technology throughout production processes and renewable power generation. Emerson's local support and installed base in the Middle East were key differentiators. Secondly, Emerson and AspenTech continue to succeed with our joint customer solutions. In the first quarter, we were jointly selected to automate the Middle East's largest ethane facility by QatarEnergy and Chevron Phillips, Ras Laffan. Emerson will serve as the main automation contractor for the $6 billion facility, providing our leading DeltaV control system with AspenTech engineering and simulation products. The project is a scale example of our commercial agreement with AspenTech and how it successfully provides an expanded differentiated product offering to customers. Lastly, Emerson continues to diversify through life sciences and metals and mining markets. In the first quarter, Emerson was awarded the automation contract for FUJIFILM Diosynth Biotechnologies in Europe. The expansion project will include multiple bioreactors and processing streams, one of the largest CDMOs in Europe. These three projects are a clear demonstration of Emerson's commitment to the growth platforms we discussed at our investor conference, and our continued success differentiating as an automation leader in these markets. Before I turn the call over to Frank, I wanted to briefly discuss our proposal to acquire National Instruments for $53 per share in cash. As you know, we made our offer public on January 17 and our correspondence with NI since 2022, May, is available on maximizing value at ni.com. Emerson is committed to an acquisition of NI and is participating in the strategic review process. We believe our premium all-cash proposal with no financing conditions or anticipated regulatory concerns is compelling and in the best interest of Emerson and NI shareholders. We look forward to continued engagement with NI and its advisers and moving swiftly towards an agreed transaction. That said, the focus of this call is our performance for the quarter, and we're not going to be commenting further on our proposal for NI at this time. Be assured that we'll continue to execute financial diligence as we review these opportunities. Thank you, Lal, and good morning, everyone. Please turn to Slide 5. As Lal mentioned, we had a very strong operational start to 2023. Underlying sales were within our expectations for the quarter at 6%, driven by 10% growth in software and control and 5% in Intelligent Devices. Net sales were up 7% with a four-point drag from currency and a five-point contribution from AspenTech. World area growth was led by the Americas, which was up 13%, driven by strong process sales, particularly in energy and chemical. The continued energy crisis in Europe, affected demand as underlying sales were below prior year by 2%. However, sales were up 7% after adjusting for the impact of Russia. Sales in Asia, Middle East and Africa were flat versus prior year, as strength in the Middle East, driven by chemical and energy investments was offset by dam sales in China, mainly due to challenging year-on-year comparisons and sporadic code-related shutdowns. By industry, we continue to see strength in later cycle markets like energy and chemical. Chemical investments and plant modernization and sustainability remains steady in North America and Asia, but we are keeping a close eye on this market as we assess our outlook for the balance of 2023. Overall, first quarter process industry sales were up high single-digits. Similarly, hybrid sales were up high single-digits, led by continued investments in life sciences reshoring and metals and mining. Discrete sales were up mid single-digits as this earlier cycle business starts to lap more difficult comps. The growth in discrete was offset by weakness in our commercial business in safety and productivity, which was down 10% for the quarter, but with early signs that we are bottoming out. Overall, we feel confident about the health of our end markets and our conversations with customers indicate continued growth in investments during 2023. Price during the quarter contributed four points as our pricing actions from 2022 and additional actions taken at the beginning of 2023, are driving strong price realization. Backlog grew approximately $700 million during the quarter to $6.6 billion, giving us ample opportunity to execute on the rest of the fiscal year plan. Adjusted segment EBITDA margin improved by 130 basis points and leverage was 40%, excluding AspenTech. North America mix contributed to the margin expansion and price was accretive to margin in the quarter. Software and control margins were up 200 basis points, led by AspenTech. Intelligent Devices performance was strong with 110 basis points of adjusted EBITDA expansion. Adjusted EPS was $0.78, and I'll discuss the details when we move to the next chart. Lastly, on this chart, free cash flow of $243 million was down 20% year-over-year, mainly due to trade working capital, including the impact of supply chain performance, which is improving, but is still challenged. We are focused on improving trade working capital as we progress through the year, and we reiterate our expectation of 100% free cash flow conversion for the full year. Turning to Slide 6. This is our adjusted EPS bridge versus the prior year. First, I wanted to say that we had very strong operational results, again, reflecting low-40s leverage on incremental sales, which delivered $0.15 to adjusted EPS in the quarter. There was an unfavorable impact due to stock compensation as Lal said of $0.09 and an additional $0.09 due to currency. The stock comp impact was primarily due to our legacy long-term incentive plans, which required mark-to-market treatment on recorded expense of the 31% increase in our stock price during the quarter. The last of these plans will run off in 2023 and the new plans do not require mark-to-market accounting. So going forward, the variability from stock comp will be dramatically reduced in 2024 and beyond from what it has been historically. Currency in the quarter was primarily driven by the accounting treatment of our long-term contracts in addition to customary translation and transaction impacts. Other non-operating items and share repurchase contributed $0.02 through the quarter. Please turn to Slide 7. Turning to our 2023 outlook. We continue to see strength across our end markets. As we communicated in October, process, hybrid and discrete markets are all expected to grow mid to high-single digits in 2023. The long-term secular trends we discussed in November continue to be relevant for our business and are driving growth and successes in 2023. Energy transition spend continues to be strong as evidenced by the successes Lal highlighted a few minutes ago. Energy security investments, including LNG continue to accelerate especially in North America and the Middle East. In hybrid, life sciences investments due to reshoring continue to move forward and metals and mining spend is centered around electric vehicles and electrification value chains. Those value chains are also benefiting discrete markets, especially in the U.S. The one weakness we see in the business today is our commercial exposure within the Safety and Productivity segment, which was down 10% in the first quarter. We expect these sales to improve as we move throughout the year as we face easier comparisons and we see early signs of a turn in demand. Please turn to Slide 8. We’re maintaining our full year guidance based on the underlying strength in our end markets and robust backlog. The guide for underlying sales growth remains at 6.5% to 8.5%. We now expect currency to be less of a headwind at 2 points, and AspenTech is expected to contribute 3.5 points. Therefore, we are increasing our net sales expectations to 8% to 10% of a point from the previous guide. We are holding operating leverage, adjusted EPS and free cash flow conversion for the year at the previous guide. Within that guide, we intend to cover the unexpected stock comp headwind that we had in the first quarter with excellent operational performance. For the second quarter, we expect underlying sales growth of 8% to 10%. Currency continues to be a headwind, reducing sales growth by approximately 3 points. AspenTech will contribute approximately 5.5 points and net sales are expected to be 10.5% to 12.5% up. Leverage expectations again are in the mid to high-30s. Adjusted earnings per share is expected to be between $0.95 and $1, which is a 13% increase at the mid-point of the guide. We’ve included quarterly data for 2022 on a continuing ops basis in our press release and in the 8-K that was filed this morning. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question will come from Scott Davis with Melius Research. You may now go ahead. Couple little clean up items since I think these slides are pretty clear, but was price predominantly – you think about the total growth in the quarter, 6% was price. Does price make up most of that? Hey Scott, good morning. Lal here. Yes, in the quarter, price accounted for 4 points approximately out of the 6, 2 points of volume. Okay. And just a quick follow-up here on life sciences. I know some of your peers have seen some weakness in life sciences, but you guys made some pretty positive comments relating to that end market. Can you be – or just give us a little bit more color on what your customers are spending money on. You mentioned localization, but perhaps a little bit more color there would be helpful. Thanks. Yes. No, a very active quarter in life sciences globally, Asia, Southeast Asia, United States, East Coast and Europe, a variety of projects we chose one to highlight with you today. It’s predominantly around automation. It’s expansion of capacity. It’s driven by the trends that we discussed at our investor conference, whether it’s personalized medicine, or capacity derisking in the world areas. We have yet, Scott, to expand with a full offering of AspenTech into the space that’s in development and will be released to you shortly, but that will give us another avenue as we bring optimization software into that space. Just a couple of questions, both relating to kind of orders pipeline backlog and the conversions there. I guess while backlog has not had kind of this enormous surge that you’ve seen maybe in some other names that had a tougher time on supply chain, but how do you think about backlog conversion in your guidance? Is the expectation that orders start to moderate versus accelerate? Where would you be pleased to see backlog over the next 12 months? And then sort of a second related question, how do you feel about kind of the pipeline of projects today and the pace at which things are looking out of those? Yes. No, backlog did increase in the quarter as we went through. Look, I do feel very confident with the order pacing in the businesses with the weakness only in the Safety Productivity segment that we described throughout the call. Beyond that, the funnel is very robust. It actually grew almost $500 million in terms of size, as we went through the quarter to about $7.3 billion globally, a large number of sustainability projects, large number of energy transition projects. And we’re executing very well in that capital formation cycle. So feel very good about that. So look, I think from an orders perspective, my expectation is we continue to see a very positive environment as we go through the year. And our job here, and I think it’s embedded in our second quarter guidance to convert the backlog that we have in the business. Great. If I could just get one little follow-up on there. How do you feel about kind of the margin that you guys are seeing on some of these larger projects? I know people think about mega projects and margin erosion aggressive bidding. Has that been your experience with this wave? No. You see the leverage that we gained in the quarter, about 40 points. There were project shipments within the quarter embedded in it. We feel very, very good about our differentiating capabilities with our technology stack. Yes, there’s competitive bidding, but it’s nothing out of the ordinary that we’ve seen and nothing that we can’t manage within our pricing models. Lal, I just want to follow-up on the last question in terms of when I look at orders, have you seen any bigger signs of deceleration activity anywhere outside of Safety and Productivity? I know you mentioned you’re watching chemicals. I think Antonio also mentioned that. Would you expect orders to hold in chemicals? Or any of the other process markets? And orders continue to be focused in the Americas, as you’ve said in the past. Yes, good question. We had a really good Americas quarter and strong momentum there, a very strong Western Europe quarter with great momentum there. Of course, Eastern Europe is relative weakness because of Russia, of course, as we walked away from that market. So the comparables there were pretty tough. And then Asia and the Middle East, very strong. Of course, China was down for us in the quarter, but we see that coming back here in the second quarter and expect high-single digits as we finish out the year. So generally, Andy, based on what we’re seeing beyond the Safety Productivity segment, I feel very confident about not just the second quarter guide we put out there, but the full year at this point. Ram, any color? Yes. I think Western Europe being resilient is very positive for us. And then the KOB3 business, which is now close to 65% of our total sales mix in the new company has been very strong. So that’s a good sign and Andy, the project funnel is building. So at this point, in the core business outside of Safety and Productivity, no signs of weaknesses. Very helpful, guys. And then you talked about this a little bit, but you delivered incrementals of 40%. You mentioned the major reason is that positive mix from strength in the Americas. Is there any reason why that would change as you go throughout the year? And I know you talked a bit about price, but did price versus costs come in a little bit better than you would have thought for Q1? And could that continue for the year? Yes. I think we’re going to see strong price cost through the year. And frankly, with fundamentally price holding at high levels and like we saw in the first quarter, but also coupled with commodities softening as we go into the second half as we see both commodities as well as logistics turn favorable. So I think really, the margin performance in Q1 is, yes, Americas mix, but also strong price cost, which should continue through the year. And we don’t expect North America sales to soften through the year. So the dynamics we saw in Q1 should continue through the year. Look, I know it’s a happy day in St. Louis. Emerson has had such an important presence in the community for so many years. So I’m sure that’s great news for everybody. And it also avoids the logistics and disruptions and so forth. So that’s great to hear. My question, it would be for Frank. For reaffirming the free cash flow conversion, 100% for the year, what has to change in working capital? We’re still seeing such across the industrials. The buffer inventory required with supply chains are still chewing up enough of working capital that you’re seeing lots of underperformance on free cash flow. So how do you see this playing out? Yes, good morning, Deane. Mainly, it’s an inventory story. It has to be around getting the backlog out in order to get the inventory down and supply chain is adjusting and improving but in ways that aren’t always helpful in terms of difficulty and timing, receipts of materials. So that’s the fundamental thing that needs to change is that we need to get the inventory out over the next three quarters. And a big part of that will be shipping the backlog that we have, and we certainly have a robust backlog level. So it’s about execution now going forward. Ram and I discuss that in detail with our businesses when we had our quarterly ops reviews and I’m sure Ram can comment a little further on the supply chain implications. Yes. Frank, you said it. I mean at the end of the day, I think right now, we were somewhat positively surprised at the pace in which the supply chain delivered in the first quarter. So I think that was one of the reasons inventory built, but that’s, in some ways, good news that positions us to execute on the backlog in the remainder of the three quarters and that remains the focus. And obviously, we’ll make slight adjustments in optimizing how we drive material in from our supply chains, given that they’re performing better. But ultimately, it will come down to execution of the backlog, which we’re poised to do. Great. And then just as a follow-up, and I know there’s not been any specifics provided yet is what’s the potential for other portfolio moves more in the way of cleanup we could point to some businesses that would be less core under the new automation pure-play framework. It’s just – maybe you can just comment on the willingness of the Board to look at this and potential timing in terms of monetization of those businesses. That’s great question. We’re – we voiced in our November 2019 Investor Conference that we’re going to be active managers of the portfolio, and that is inclusive of both the opportunities to build on the cohesive automation company, but also to continue to prune where and when necessary. At this point, we don’t have an impetus to do so, but we’ll continue to pursue critical bolt-on acquisitions. Of course, the NII pursuit that I – that you’re aware of. But we’re also continuing to look at the existing portfolio. But I would not expect anything of scale there after a very busy 2022. Hi, good morning. I think we’ve had sort of good top-down color. So maybe trying to look at some of the segment pieces a little bit. Maybe on safety and productivity, just starting there. I realize it’s quite a small business for you, but I guess two questions on it. One was just talk a little bit about how you see the slope of the organic sales playing out the balance of the year? And then secondly, the margins were up, I think, 100 points in that business year-on-year despite a weak revenue performance. So maybe help us understand how you delivered that and is it sustainable? Yes. Julian, Ram here. In terms of the buildup of the sales, I think Q2 will be negative, but we anticipate it going positive in the second half or close to a flat year for the full year. That’s kind of how we’re looking at safety and productivity. The margin improvement clearly driven by – we had some focused restructuring that we executed in that business, anticipating the slowdown second half of last year and then favorable price cost performance, certainly strong price in the business close to 9 points of price in Q1. Obviously, the cost savings flowing through and then softening materials or material costs as we get into the second half should drive continued strong margin performance in the business through the year. That’s very helpful. Thank you, Ram. And then secondly, just on the discrete business. You grew, I think, 6 points in the quarter. Maybe remind us kind of what your main areas of strength are in discrete, whether it’s by vertical? And I assume there’s a lot of domestic business and also Europe in there. And also, I think you mentioned briefly some early cycle elements softening. So maybe expand on that a little bit and whether you see the discrete business kind of holding that 6% growth rate through the balance of the year? Yes. We have a very balanced business from a global perspective, Julian. We saw a broad strength in the United States, both into direct OEM business as well as through our distribution networks. That continues to be very robust. No signs of weakness there, although we’re watching that very carefully in terms of stocking levels and other elements. Our Western European business, which I cited earlier, was very strong in the quarter, heavily driven by – within the discrete business as well. It’s particularly in places like France and Germany, which are critical markets for us. And then lastly, in Asia, outside of China, a very strong market. And now with China recovering feel that we are well positioned there. From a technology perspective, again, very good growth on the automation on the control side, PLCs and industrial PCs, and of course, with the various devices around material movement in the plants. Ram, any color for Julian? No. I think – I mean, from a segment perspective, we broadly have factory automation and industrial automation segments within the business. So both those continue to do very well. And frankly, I think we anticipate mid to high single-digit growth for the year in that business overall. The 6% was somewhat impacted by shutdowns in China, which that business experienced. So frankly, we expect that to improve as we go through the year. Maybe a housekeeping one for me first and then I want to come back to some of the projects, but just can we put a finer point on comp and FX? So the $0.09 headwind, it seems like you expected the $0.01 headwind. Can we just clarify what was – what is assumed for the entire year and how that’s changed versus your original expectations? And then on FX, so you’re saying in addition to just kind of normal translation headwinds, there was some contract or other backlog adjustments. Could you just elaborate on that a little bit? Yes. Good morning, Jeff. It’s Frank. Yes. So on FX, I mean, we originally had low double-digit impact on current – on the – from currency for the year in the guide back in October. That’s moderated. It’s probably in the $0.05 to $0.10 range now. So I mean, we have a little bit of an improvement there based on the turn in the dollar. And then you asked again about stock comp as well. So yes, there, we had built in a little bit of an increase in the addition of AspenTech and more or less flattish for the quarter for Emerson, and then we had the mark-to-market impact that was driven by the 30%-odd increase in the stock price on the legacy plans. So that was entirely incremental to what we had in the guide, $0.09 year-over-year and kind of $0.07 or $0.08 versus the guide. So that’s the big headwind we had there, which we are – which is now kind of embedded in the year, and we will just absorb that and overcome it within the year guide. And just on the projects law, interesting couple you call out here. Could you just maybe give us a sense of kind of the dollar scope of some of these large benchmark product – project like this, maybe the green hydrogen project, what your content looks like on the front end and maybe what the tail of a project looks like? Yes. No, these fall very much within the parameters, Jeff, that we laid out in terms of automation dollars per gigawatt as we think about hydrogen, for example. 600,000 – I think it’s – I believe it’s 600,000 per gigawatt is what we laid out, if I’m not mistaken, Ram? But on the petrochemicals – and for example, ethylene, again, KOB1, very significant there in the $20 million to $30 million type of scale. And then, of course, there’s all the downstream and the instrumentation business to come. So, some of these are very sizable. The specific one that we highlighted, of course, about $50 million in first purchase, which is the DeltaV system and then there’s further instrumentation to come. So they’re very sizable in terms of scale, but in line with how we think about dollars of automation per capacity, depending on the market they’re in. Can you guys just talk about maybe some guidance for Aspen in particular, especially the cash flow coming in the next couple of quarters? How confident you are in that? And where you see that coming in? Yes. Steve, you cut out a little bit – this is Frank. You cut out a little bit at the beginning of your question. I mean, again... Yes, on plan, very seasonal. So their fourth quarter, our third quarter will be a big cash flow quarter. And we see and we – based on the plan, we think they’ll deliver it as they have in the past, so it will be heavily in that quarter. Yes. On guide, Steve, I think – and third quarter for them will be – or our third quarter will be the big quarter. Yes. I mean, obviously, they can provide the color and the background on that. But I mean, that is the seasonal pattern for their cash flow, and we would expect that to maintain. Right. Yes, it does influence your cash. So just curious if you guys – the owners have a view on that. When it comes to NATI, how coveted is this asset for you guys? I mean it doesn’t seem like they’re going to take anything below $60. Is – are you guys really willing kind of go to the wall for this? Okay. Thanks. Good morning. Okay. I won’t be asking questions on the NATI purchase price, so I’ll move on from that. Just want to go back to FX, if I can. I think you mentioned long-term contract marks, and it’s not something I’ve heard from Emerson before. So I know we’ve had some backlog revaluation. So just maybe talk about what caused that to that mark on FX? And maybe just on the below line stuff, what is the normalized stock comp beyond this year once we roll off this plan? How should we size that? Okay. So Nigel, hi. This is Frank. So the – yes, we had a significant – of the currency that was in the quarter, a significant portion of it was due to the impact of the accounting on long-term contracts. So you have to mark-to-market long-term contracts. Typically, these are to EPCs, and they tend to be in places like Korea and other markets where we typically are in talking about currency as opposed to translation currency when we talk about Europe and China. And the accounting basically brings those marks to zero when the contract closes out, but during the life of the contract, you mark-to-market up and down. And depending on where you are in the life cycle of a contract and what the backfill is for those contracts, you’ll get a mark most quarters, it’s not big enough to matter. This quarter, it was $0.04 or $0.05, so it was big enough to matter and that’s what drives it. And we try not to talk about it, the word – it’s embedded derivatives. We don’t talk about embedded derivatives because it’s just not helpful, but that’s specifically the accounting that drives that mark on long-term contracts. Okay. Yes, embedded derivatives, above my pay grade. So let’s move on from that, but we’ll follow up offline. But on the – just on the guide, so there’s some moving pieces here. So it feels like FX is very neutral. The weaker dollar offset by some of these marks probably got some share buyback benefits relative to plan, well, certainly versus our model and then we have the stock comp offset. Is that sort of the major moving piece? Is there anything else you’d highlight? And then maybe just talk about the sales acceleration. We’ve got some China noise in the back half of the year with the lockdowns in the prior year. But what kind of macro environment you’re planning for, especially in second quarter fiscal, some of your short-cycle peers are highlighting some inventory corrections, et cetera. What do you see in discrete markets and some of the other relevant markets? Yes. So I’ll take a crack, Ram here, on the sales. From a sales perspective, obviously, we have acceleration built in to the year, fundamentally with orders holding in the mid-single digits and us shipping backlog that we described with improving supply chain. So certainly, Q2, Q3 and into Q4 we’ll expect the ramp-up in absolute sales as we execute on the backlog. In terms of distributor destocking, we haven’t seen it in any of our businesses. Certainly, a lot of our discrete businesses go through distributors. Some of our process businesses go through distributors. We haven’t seen it and nor do we anticipate it just given the dynamics of what we’re seeing. And then to top it off, price will remain strong through the year that will contribute to growth as well. Hey guys. Can you just touch on AspenTech a little bit? I know, Lal, you mentioned some of the wins [indiscernible] that was interesting. But like how is that going thus far? And then I noticed that the adjusted EBITDA margin was a tough lighter than what you guys expect for a full year basis. Maybe just provide some color around seasonality in that business as well. Yes. So AspenTech, I think for us, from a synergy perspective, going according to plan. And frankly, a lot of the early synergies we’ve built in is on projects like Ras Laffan where Aspen won some very, very good content. I think the sales channels and the engagement of our sales channel and selling their capabilities continues as planned. Now really what we’re driving there is in terms of perpetual licenses and bundling them on projects, a lot of success converting our wins into ACV type of revenue for AspenTech is a work in process and should pick up momentum as we go into the second half of the year. So we feel pretty good about the synergies. We certainly feel pretty good about the sales forecast we’ve built in for AspenTech. Obviously, the plan they presented and the plan we’ve built in into the consolidated Emerson numbers, and then no concerns on the margin performance, the EBITDA performance. Seasonally, their third quarter or their fourth quarter, our third quarter is the biggest quarter. It was last year, and it will again be this year. Super helpful, Ram. And then maybe my follow-on question. While, at the Investor Day, you guys highlighted all of these big opportunities in automation technology and you talked about your pipeline extending. I’m just wondering where have you seen the most movement recently in terms of your pipeline and those opportunities? Yes. No, it’s a good question. Of course, we did have a very active quarter in terms of the project funnel and particularly not just in projects that were booked and hence exited the funnel, but also in the build-up what we saw in terms of activity. I would suggest that the predominant element of growth came in two areas: One is life sciences, which grew significantly in the funnel in the quarter; and secondly, the energy transition, which continues to be very robust, both here in the U.S. and in the Middle East predominantly and became additive to the funnel. And that funnel grew not just in terms of dollars by about $0.5 billion, but also in terms of number of projects, but only by eight projects, which tells you that the average size of projects are getting larger, which is also a dimension here. And the only thing I would add is the LNG size of the funnel remains large, meaningful. And what we saw in the last quarter was a good momentum on the FID progress associated with many LNG projects in the U.S. where we’re very, very well positioned. A lot of these are going through Bechtel, in Texas and Louisiana. And our expectation is, we will ramp up order booking activity in those – on those projects as we go through the second half of the year. Hi. Thanks for taking my questions. I wanted to start on sort of price and price cost. On the price cost side of things, can you size the margin impact in the quarter? And then what you’re thinking about for the cadence of that impact over the course of the year? And I think you also noted some price increases to start 2023. Is that broad-based? Are those more concentrated in parts of the business? Yes. So from a – I’ll take a crack at the price increases. I mean, we did have a good price increase in October, we typically do as we enter the fiscal year. Select product lines had price increases in Jan. We have a few more product lines slated for midyear price increases around the April time frame. In general, though, I think pricing was 4% realized price in the first quarter. We expect it to stay at those levels as we go through the year. So pricing will remain strong. As we go through the year, we expect those price increases as they roll through will continue to be accretive to margin. Through the entire year, it was bigger in the first quarter than it will be [ph] as we go through the year. Again, then we’ll see what incremental price increases we might put through. Net material inflation also should become a tailwind in the back half of the year. So all in all accretive, somewhere between half point and the point, it really depends on how it rolls through, but certainly a good story from a margin standpoint as we go through the year. Got it. And then I wanted to circle back on some of the Discrete questions and just kind of bigger picture macro. And I think that the industry outlook for Discrete up mid-single digits. I assume that’s sort of a combination of kind of low-single digit price, low-single digit volume would expect areas like batteries and semiconductors are growing faster than that. But when we think about what we’re seeing on sort of the PMI side of things and then thinking about sort of Discrete just growing through a PMI slowdown. I mean, can you touch on as the expectations sort of outside of some of these structural growth areas that we just continue to see some kind of low-single digit volume growth and sort of no kind of connection there between some short cycle macro indicators of slowing, but not really seeing it in your end markets? Yes. So you said most of it. I think that the plan really is LSD, low-single digit price, low-single digit volume, the growth vectors – semiconductors, battery manufacturing, frankly from a sector that we are cautious on automotive is something we’re going to have to carefully watch. We have had good performance so far. But automotive is an area that we have to watch very carefully. And then our stocking levels in terms of distribution, again, we haven’t seen any slowdown yet. But certainly to your point, based on the PMI forecast and what is anticipated there could be slowing in that sector. So if you put all that together, I think we feel pretty good about our mid-single digit forecast. Thanks. Good morning, everybody. Just wanted to tie a little bit the organic outlook versus backlog growth up $700 million suggests the 1.2 book-to-bill which seems a little incongruous with 5% orders growth. But I suppose that’s a function of the prior year book-to-bill. So just wondering if you could comment on that book-to-bill interpretation and how do you characterize backlog size versus what you might consider normal in a moderately expanding net end market mix? Yes. So I think the $700 million is a GAAP number. The 5% is an underlying sales number. But net-net, you are right. If you looked at the first quarter of last year and calibrated versus orders and sales, I think the 5% makes sense with the $700 million build in backlog. I think our expectation for a normalized level of backlog in this business. We’re probably at least close to $800 million to $1 billion too high in terms of where we could normally be – if the supply chain were optimal. And that’s what we’re going to have to execute through the year. And as the supply chain continues to improve, that’s the normalized level of backlog for this level of sales. So to answer your question directly, it’s about $800 million to $1 billion higher than what we would’ve anticipated. I was wondering if you could talk a little bit about the aftermarket, the KOB 3 stuff. I think you said it was 65% of sales in the quarter. But where do you see that trending over the next year or year and a half because it seems like it’s been on full tilt for quite a while? Just what do you think the new normal is? Yes. No, I think we’ve had a concerted effort across our business to maximize the value of the $130 billion plus installed base. And those are programs that we’ll put in place that drive service MRO and replacement opportunities. We’re sitting at, you’re right, right around 65%. I expect that to remain within that range. And it’s supported by the business programs that we have in the operating companies. And I would add that’s the segment of the business where the pricing flows through at higher levels. So obviously that will remain robust through the year. I appreciate it. And then just to follow up, any change the timing of the divestment out there on Climate Tech, anything noteworthy? No, we’re still thinking about the first half of this calendar year and everything’s on track in terms of the regulatory approvals and standing up the business. So that’s all well underway, so we’d expect April may shifts as a guideline there. I wanted to start on the industry outlook you provided across process, hybrid, discrete, little variation across the three, but essentially all growing nicely in the single digit range. There are others in some of these markets that have double digit outlooks versus the singles that you provide, I am well aware there’s often apple and orange impacts here in making comparisons. But I was just curious, is there any conservatism embedded in these outlooks you’ve provided? Is there anything you would do to help us reconcile some of what we’ve heard elsewhere? Thanks. In terms of the market outlooks, Tommy, we feel that we’ve given a very balanced view of what’s out there. The blend of the different types of businesses that we cover in terms of capital modernizations and replacement. We’ve also taken into account that the various geographic trends. But no, I feel that what we’ve put there ties into the guide for the quarter and of course our expectations for the year as well. And again, within each of the segments, as you recognize, there are big pluses and smaller pluses clearly in the Discrete space, which we’ve been speaking about to a significant amount today. EV semiconductor elements like that, of course have a significantly higher growth than some others. But overall, I feel that the indications we’ve given are fair based on what we’ve seen this in the marketplace today. Thank you. That’s helpful. I also wanted to ask about the repurchase activity. Is it fair to say that the deployment of the full 2 billion in the quarter was an acceleration versus the original plan? And if so was that – should we view that more as an opportunistic decision where your stock was under pressure for a period of time? You decided to lean in and to the extent that… Yes. I’m sorry, Tommy, this is Frank. No, not really. When we communicated the 2 billion, our intent was to get it done as quickly as possible. And we were able to get it done in the quarter. So it was not really driven by market events so much as a desire to just make good on the commitment and do it quickly. And any possibility that you might revisit the potential for more later in the year, or should we think about 2023 is pretty well spoken for at this point? There’s really no current intent to do any more share repurchase. We’ve got another, other irons in the fire right now. So, obviously circumstances change. We can always revisit, but we have no current plans to revisit it right now. We said we do 2 billion and we’ve done that. Thank you. I wanted to follow up on safety and productivity. You guys mentioned that you’re seeing early signs of things bottoming out. I understand comps get easier, but it sounds like you’re also starting to see demand turning, so just hoping for more color on what you’re seeing to give you confidence that demand is turning there? Yes, so I – first off, I think a majority of what we’ve baked into the plan is comps getting easier. So, absolute levels stay the same with where they sit today. Price comes through and comps get easier. We’ll have a better read of it as we go through the current quarter. And I think we’ll have a better expectation of the second half if demand were to improve, which is not baked into the plan, we should get better numbers in safety and productivity. But at this point, it’s staying at the current levels and comps getting easier. I appreciate that. And then just to follow up on China, the presentation called out a headwind from China shutdowns on organic growth in the quarter. Could you provide some more color on how China performed in the quarter? And then maybe how it’s exiting into the fiscal second quarter with the reopening? Thank you. Yes, so China was down mid-single digits, both incoming orders as well as sales performance in the quarter. And we expect China to be mid-single to high-single digits for the full year with high-single digits in the second half.

EarningCall_369

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to Royal Caribbean Group's Fourth Quarter Full Year 2022 and Business Update Earnings Call. [Operator Instructions] Good morning, everyone, and thank you for joining us today for our fourth quarter and full year 2022 business update conference call. Joining me here in Miami are Jason Liberty, our Chief Executive Officer; Naftali Holtz, our Chief Financial Officer; and Michael Bayley, President and CEO of Royal Caribbean International. Before we get started, I'd like to note that we're making forward-looking statements during this call. These statements are based on management's current expectations and are subject to risks and uncertainties. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release issued this morning as well as our filings with the SEC for a description of these factors. We do not undertake to update any forward-looking statements as circumstances change. Also, we will be discussing certain non-GAAP financial measures, which are adjusted as defined, and a reconciliation of all non-GAAP items can be found on our website and in our earnings release available at www.rclinvestor.com. Jason will begin the call by providing a strategic overview and update on the business. Naftali will follow with a recap of our fourth quarter and full year results and an update on our latest actions and on the current booking environment. We will then open the call for your questions. Thank you, Michael, and good morning, everyone. Before getting started, and on behalf of the entire Royal Caribbean Group organization, 100,000 proud, I want to express how happy we are that our business has returned to normal. In fact, as you saw in the release this morning, our business is accelerating. So let me get into the detail and start off by talking about the fourth quarter and the full year 2022. As highlighted on Slide 6, 2022 was a challenging but successful transitional year as we returned our business to full operations and delivered memorable vacations to 6 million guests. As you can see on Slide 7, during the fourth quarter, demand for our brands accelerated. We delivered a record 1.8 million vacations, achieved a 95% load factor and successfully returned to Australia for the first time in three years. Pricing for our vacation experiences was higher than record 2019 levels when we operated with normalized occupancy and guest satisfaction scores were exceptional. Adjusted EBITDA and adjusted loss per share were above our expectations and at the high end of our guidance. It is incredible to consider that just one year ago, we were in the midst of Omicron, we were still returning our ships to service, and we were sailing at load factors below 60%. Our fourth quarter results clearly demonstrate that we are back, back to usual occupancy, back to our full addressable market, back to EBITDA and cash flow profitability, back to providing full year guidance and most importantly, back to delivering a record number of incredible vacations on the most innovative fleet in the industry. We finished 2022 on a high note and are entering 2023 with the full strength of our operating and commercial platforms. Our strong book position along with the normalization of the booking window provides the visibility needed for us to resume annual guidance, which is in line with our Trifecta program. I am incredibly thankful and proud of everyone at the Royal Caribbean Group for executing so well on our mission of delivering the best vacation experiences responsibly and building the foundation for our future growth. There has been a lot of talk about the state of the consumer, so I want to share what we are seeing from daily interactions with consumers who are either booking their dream vacations or who are currently sailing on one of our amazing ships. Overall, we continue to see robust demand, financially healthy, highly engaged consumers that are excited to sail on our brands. Secular tailwinds continue to benefit us as consumer preferences shift from goods to experiences. Entertainment and travel spend remains strong and the job market continues to show resilience. Consumer sentiment has improved and banks have recently reported healthy savings and continued resilience in credit card spending. Our addressable market is larger than in 2019 and continues to grow. Our products appeal to a broad range of vacationers with everything from a short getaway to Perfect Day to a luxury world cruise. Cruising remains an exceptionally attractive value proposition. And as I have said in the past, it is too attractive, and we are working very hard every day to close that gap. Growth in cruise search has outpaced general vacation searches, resulting in double the number of visits to our websites compared to 2019. Our brands are attracting new customers into our vacation ecosystem with fourth quarter new-to-cruise and new-to-brand mix above 2019 levels. We are constantly enhancing our commercial capabilities so we can further capture quality demand. Approximately 60% of our guests book some of their onboard activities in advance of their cruise, representing double-digit growth in pre-cruise purchase penetration when compared to 2019 at significantly higher rates. As we have said before, every dollar a guest spends before the cruise translates into about $0.70 when they sail with us and over double the overall spending when compared to other guests. Our guests are now engaging with us to book onboard activities much earlier than in 2019. So far, guests booked on 2023 sailings purchased onboard experiences an average of more than two months earlier than in 2019. This translates into more revenue, stickier bookings and happy guests. Now I'll provide some insight into the demand environment and what can only be described as a record-breaking WAVE season. As you can see on Slide 8, bookings outpaced 2019 levels by a very wide margin throughout the fourth quarter with particularly strong trends during Cyber Weekend. We expected a strong WAVE season, but what we are currently experiencing has exceeded all expectations even when considering our capacity growth. As a result, and as highlighted on Slide 9, the seven biggest booking weeks in our company's history all occurred since our last earnings call. Our commercial apparatus is full speed ahead, and all channels are delivering quality demand above 2019 levels. Our direct-to-consumer channels continue to perform exceptionally well as a combination of consumer preference for digital engagement and our enhanced capabilities is supporting record level bookings. We are also encouraged that our strong base of loyal travel partners continues to recover and supporting our brands with bookings above 2019 levels. As always the case, trends vary by region. We are seeing particularly strong booking trends for North American-based sailings, which account for nearly 70% of our capacity this year. From a cumulative standpoint, these itineraries are now booked at the same load factor as they were in 2019 and at higher prices. Our 2023 European sailings are booked within historical ranges at better rates with recent bookings outpacing 2019 levels. We expect almost 80% of our guests to come from North America as we continue to see particularly healthy demand from that region. Our global brand's appeal and nimble sourcing models allow us to continuously shift sourcing to the highest-yielding guests. I will now comment on our outlook for 2023. In 2023, we expect to deliver amazing vacation experiences to over 8 million guests at record yields as we deploy our best-in-class fleet across the best global itineraries. The ramp-up of our load factors in 2022, coupled with a higher and improving pricing environment, is positioning us to fully recover our yields beyond 2019 levels in the first quarter, which is another important milestone, and then ramp up further to record levels as we return to historical load factors in late spring. Our strong yield growth outlook is driven by the performance of our new hardware, strong demand for our core products and continued growth from onboard revenue areas. This year, we expect to increase capacity by approximately 14% compared to 2019 with eight new ships already introduced since 2019 and three more set to be delivered this year. Each of our wholly owned brands will welcome a new vessel in 2023. Silversea will welcome Silver Nova, the first of the Evolution class. Celebrity Cruises, will welcome the fourth Edge series ship, Celebrity Ascent. And Royal Caribbean International will take delivery of Icon of the Seas, marking the first new ship class for the brand in nine years, which is sure to set a new standard for vacation experiences. In addition to our incredible new vessels, we plan to launch Hideaway Beach in the fourth quarter of 2023, an adult-only neighborhood, making Perfect Day at CocoCay more perfect and increasing capacity in the island to 13,000 visitors daily. Our journey to deepen the relationship with the customer will continue with 2023. We will further enhance our commerce capabilities to optimize our distribution channels, build a deeper connection with guests and lower customer acquisition costs. We will also further enhance our e-commerce and pre-cruise capabilities and focus on increasing our guest repeat rate and spend. We will continue to excel in the core and drive business excellence in order to increase yields and capture efficiencies across our platform. Our teams have been working hard for over two years to reshape our cost structure and abate what would have otherwise been at least a 25% increase in nonfuel cost per APCD when compared to 2019. Net cruise costs, excluding fuel, is expected to grow 4.75% to 5.75% versus 2019. That's versus a three-year benchmark that includes a period of significant global inflation. Our cost outlook for the year includes approximately 210 basis points from lingering transitional costs such as crew movement and additional structural costs such as full year operations of Perfect Day at CocoCay and our new Galveston terminal. Our teams have been committed to controlling costs and enhancing profitability while focusing on delivering the best guest experience. We continue to expect the business to accelerate and allow us to deliver record yield and adjusted EBITDA in 2023. Our proven formula for success remains unchanged: Moderate capacity growth, moderate yield growth and strong cost controls leads to enhanced margins, profitability and superior financial performance. Our ESG ambitions help inform our strategic and financial decisions on a daily basis, ensuring that we always act responsibly while achieving our long-term profitability goals. In 2023, we will continue active efforts towards our target of reducing carbon intensity by double digits by 2025. We also expect to deliver on significant milestones in our decarbonization pathway, including the advanced technologies on our new ships, while also investing in retrofitting our existing fleet with a mission of reducing technology and programs. We will utilize tools to expand supplier diversity and improve our ability to build an exclusive network of suppliers. We will further focus on improving diversity, equity and inclusion and ensure our employees are physically and mentally healthy. To wrap up, 2023 sets the foundation for our Trifecta program. Our people are committed to our mission of delivering the best vacations responsibly and doing so while achieving our Trifecta goals. In 2023, we will be hard at work executing on our strategic pillars, focusing on deepening customer relationships, delivering the best hardware and destinations and excelling in the core. The future of the Royal Caribbean Group is bright. I am confident in our growth trajectory and our ability to deliver on our near-term and long-term goals as well as to reach new financial records. As you can see on Slide 10, we reported a net loss of $500 million or loss per share of $1.96 and adjusted net loss of approximately $300 million or per share of $1.12. The results were above our expectations at the high end of our guidance range. Total revenue was $2.6 billion, operating cash flow was $600 million and adjusted EBITDA was $409 million, again, above our expectation and guidance. Fourth quarter outperformance was a result of continued strong demand for our brands vacation experiences, strong close-in bookings at higher prices and continued strength of onboard revenue. Better cost management and favorable timing of expenses across several categories, lower fuel rates, lower customer acquisition cost and lower interest expense also contributed to the financial results. We finished the fourth quarter at 95% load factor with peak December holiday sailings at 110%. Load factors varied by itinerary with the Caribbean averaging 100% in both late season Europe and Australia, which opened in Q4 at just under 90%. Total revenue per passenger cruise day was up 4.5% in constant currency compared to the record fourth quarter of 2019. Net yield was down 7.4% in the fourth quarter compared to 2019, a significant improvement for the 14% decline in Q3 and above our expectation. 2022 closed out as a successful transitional year and we generated $8.8 billion of total revenue, $712 million of adjusted EBITDA and almost $500 million of operating cash flow. I'll now provide an update on our 2023 business. Let's start with capacity. Our overall capacity for 2023 will be about 14% higher than 2019. Nearly 70% of our '23 capacity will sail on North America-based itineraries, about 17% will be in Europe and close to 10% will be in the APAC region. The remaining capacity will operate in a number of other regions, including South America and Antarctica. From a cumulative standpoint, our book load factor remains well within historical ranges and we have meaningfully narrowed the gap to 2019 levels. Overall, our North America-based itineraries, many of which visit the amazing Perfect Day at CocoCay, are booked in line with 2019 for the full year and are ahead for Q2 forward at better rates. Sailings in Europe are booked within historical ranges and are catching up. We have seen improved booking trends for these itineraries so far in WAVE, particularly from the U.S. and the UK. We expect the improvement to continue, supported by our global sourcing model. Constant currency net yields are expected to be higher than 2019 in all four quarters with more growth for Q2 through Q4, when load factors returned to normal. The return to yield growth in the first quarter marks a significant point in our recovery and highlights the resilience of our company, the strength of our brands and the consumers' desire to spend on our amazing vacation experiences. As of December 31, our customer deposit balance was $4.2 billion, which is about $400 million higher than our balance at the end of the fourth quarter in 2019. Shifting to costs. Our teams continue to demonstrate the ability to manage cost pressures while staying focused on our mission of delivering incredible vacation experiences to our guests. Net cruise costs, excluding fuel per APCD increased 3.9% as reported and 4.7% in constant currency compared to the fourth quarter of 2019. Net cruise costs for the fourth quarter included $1.23 per APCD or a 100 basis point impact of transitory costs related to our health protocols and lagging costs relating to fleet ramp-up and crew movements. We expect these transitory costs to substantially dissipate as the majority of our crew has returned and protocols have eased. Our teams have been working constantly for over two years on reshaping our cost structure through operational and distribution efficiencies, and leveraging group scale. We continue to see the benefits further materialize in 2023 to partially mitigate continued inflationary pressures. Regarding fuel. Fuel rates are coming off the highs of last year. We continue to improve consumption and have partially hedged the rate, which is helping us mitigate the volatility and cost of fuel expense. As of today, fuel consumption is 55% hedged for '23 and 10% for 2024. As highlighted on Slide 11, we are resuming annual guidance for the first time in 3 years as we have more visibility into our book of business and the year ahead. We expect net yield growth of 2.5% to 4.5% for the full year. The underlying yield improvement is driven by the performance of new hardware, strong demand for our core products, continued growth from onboard revenue areas, and it also accounts for lower expected load factors versus 2019 levels. We expect yields to ramp up as we will return to historical load factors in late spring such that we achieved record yields and revenue throughout the year. Net cruise costs, excluding fuel, are expected to be up 4.75% to 5.75% for the full year as compared to 2019. Our cost outlook reflects our culture of continuous improvement and innovation. Now let's remember that we are comparing cost figures to a three-year-old benchmark, including a period of high global inflation. We expect that NCCx also includes 210 basis points of lagging transitory and structural costs. Inflationary pressures and supply chain disruptions continue to put pressure on costs across many categories, including food and beverage, airfare and shoreside human capital. Our teams continue to find creative ways to manage through inflation and increase profitability. Lastly, costs in the first half of the year are also burdened by more dry dock days during the second half of the year. Fuel expense is expected to be approximately $1.1 billion for the year, and we are 55% hedged at below market rates. Based on current fuel pricing, currency exchange rates and interest rates, we expect record adjusted EBITDA and adjusted earnings per share of $3 to $3.60. Now turning to Slide 12, I'll provide some color on first quarter capacity and guidance. We plan to operate about 11.2 million APCDs during the first quarter with load factors at 100%. During the quarter, approximately 80% of our capacity will operate from North America, mostly sailing to the Caribbean. This is higher than in the first quarter of 2019, particularly for short Caribbean sailings, and we have added more capacity in the region to capitalize on the incredible Perfect Day at CocoCay which was not yet opened three years ago. 10% of our capacity is in Australia, close to 5% is in Asia and the remainder spread across multiple other itineraries. Based on current currency exchange rates, fuel rates and interest rates, we expect adjusted loss per share of $0.65 to $0.85. Net yields are expected to be up 1% to 2% versus 2019 in constant currency. We are excited to finally recover our yields to record 2019 levels and continue to work hard at further growing our yields and revenues as occupancy level normalizes. On the cost side, overall, we expect our net cruise costs, excluding fuel, to be up approximately 8.5% compared to '19. Similar to the full year guidance, the first quarter carries 320 basis points of transitory costs, structural costs and timing of expenses that are weighing on NCCx when compared to the first quarter of 2019. Shifting to our balance sheet. We ended the quarter with $2.9 billion in liquidity. Our liquidity remains strong, and we are focused on expanding our margins to further enhance EBITDA and free cash flow. Our ultimate goal is to return the balance sheet to an investment-grade profile. During the fourth quarter, we repaid $600 million of debt maturities and closed on the refinancing of $2 billion of secured and guaranteed debt previously due June 2023. Additionally, in January, we successfully extended $2.3 billion of our existing revolver credit facility commitment to April 2025. Our access to capital remains strong, and our execution and performance resonate with our investors and financial partners. We will proactively and methodically continue to manage near-term maturities and improve the balance sheet. For 2023, our scheduled debt maturities are $2.1 billion, made up of predominantly ECA debt amortization, which we expect to pay down with cash on hand and cash flow generated from operations. Our business continues to accelerate, and we expect to grow yields and control costs, such as we achieved record yields and adjusted EBITDA in 2023 as we regained the tremendous profitability of our business. Our strong book position and enhanced commercial capabilities provide further visibility into 2023 and remain committed and focused on executing our strategy and delivering our mission while achieving the Trifecta goals. Good morning, and very solid results here. So look, when -- you're back to getting the way you used to guide before COVID, which should tell us that your visibility is as good as it's probably ever been or I should say, back to normal. So my question is like historically, you've turned the year, let's call it, 55% to 60% booked. And I first want to understand maybe kind of where you stand right now in terms of that book position versus historical levels. And then it does seem based on your current strong visibility that if your customer base stays pretty much status quo. It would seem to us that your EBITDA for this year would not just exceed 2019 levels, but I mean, pretty well exceed 2019 levels. I just want to understand if that's fair. And your guidance maybe incorporates some conservatism around maybe consumer trends. Steve, thank you for your questions. I would first start off and say that on a book position standpoint, we're now an eyelash away from our historical load factors or book position. But we also expect our load factors as we guided to be a little bit lower until we get into the spring, and that's why on the Q1, our load factor. So when you adjust for our expectations on load factors, we're in a very strong book position and at rates that are considerably higher than what we saw in 2019. I think your teams have put together a forecast that we believe is achievable, and it is based off of what we believe is very strong visibility on the revenue side as well as our ability to manage our cost structure. We do expect to exceed handsomely our EBITDA that we generated in 2019. And clearly, we see patterns continuing to accelerate in the way that they are, there's certainly opportunity for us to have a better outcome for the year. But I think we're thoughtful in just how we've always been. We're very thoughtful on how we guide. We're thoughtful on how we're seeing these different products and markets operate. And so, we feel really strongly about 2023. And quite frankly, we feel very strongly when we consider the acceleration towards Trifecta. Okay. Got you. And then second question would be around the transitory costs. And I would assume that most of these costs are kind of hitting your -- the other operating and SG&A lines. But look, I would assume by the time we get to the third quarter, maybe fourth quarter, the majority of those headwinds should be gone. And by the time we get to '24, all those costs should be gone. I just want to make sure that I'm kind of thinking about that the right way. Hey, Steve. Yes, that's exactly right. And you can see that we made progress every quarter, and we expect that to dissipate as we progress throughout the year. Yes. And I just want to add because I know it was in our remarks, but we're a little bit of a different organization than we were in 2019. We have a full year of Perfect Day now. We have things like Galveston. We've also shed some businesses like Azamara as an example. And so, I think when you step back and you see that our costs are basically up mid-single digits versus 2019, and 210 basis points of that are the structural and some transitory, you kind of get into like a 3% or so cost of increase versus '19. What it shows is that what we were saying during the pandemic about us getting into our wedding weight has really helped us absorb a very high inflationary environment that we've all experienced during 2019, and that is really the result of incredible effort by our brands and our shared service areas who really put the time and the work in while not impacting the guest experience. Just wanted to get a little bit more of a split in your yield guidance between the occupancy and the revenue per day piece of it because thinking about the occupancy issues sort of going to cure itself, and I guess, we would think about that price increase as something that would carry forward into 2024, unless you think that some of that pricing -- that there's a trade-off to get back to full occupancy. So just trying to think about how much of the yield increase that you're guiding to, really when the occupancy is back, implies a price -- a greater yield increase for going forward? Yes. So Robin, so first, for the full year, obviously, many moving pieces as we are again comparing a three-year benchmark. And as Jason said, just a minute ago, we were obviously different. So we are good at some ships, some brands. We added Galveston. We have direct contribution now from Perfect Day at CocoCay. All of it is slightly negative to yield, but overall, obviously, very, very important to us. The majority of the benefit that you see on the yield side is from new hardware. We also put that hardware on the best itineraries. They have more onboard revenue opportunities. And the rest, the like-for-like, that is up despite the fact that, as you mentioned, the load factors are much lower than what we had in '19. For Q1, if we adjust for the load factor, the difference -- yield would have been around mid-single digits. So it's obviously more impact for Q1. Okay. Great. That's helpful. Thanks. And then maybe just sort of follow-up to that is one of your Trifecta goals is that sort of EBITDA per berth that you've given us a long-term goal. Is there any kind of ballpark EBITDA per berth that you might give sort of a range for '23? Just thinking about, obviously, the -- a lot of the EBITDA versus '19 would clearly be above given the 14% capacity growth. So if we just think about the passenger billing on per berth basis, just kind of wondering how recovered you may be in '23 versus '19? Yes. And so, Robin, just -- we've -- obviously, we’ve moved now to start to guide back to what we were doing in 2019 to make sure we create comparability. We clearly believe that our EBITDA is going to be up and our EBITDA per berth is on its way getting back to those record levels, which is really just being impacted by fuel prices. But that's really where we're very focused because we believe one of our paths to getting to ROIC in the teens is obviously focusing on improving our margins across all of our brands. And so, that's how we've guided for 2023 and the focus is very heavy on -- internally on us improving those margins. Helpful commentary there with the onboard bookings in advance and especially strong results during 4Q despite you continuing to close that occupancy gap versus 2019. So curious how you're thinking about that on board for passenger cruise day throughout the course of this year as you fill out the interior shift, I imagine there's maybe a little bit of a mix headwind there. But can these onboard less remain elevated? And secondarily to that, the ticket component, how would you expect that to evolve through the course of this year? This is Michael. If you remember, when we first started coming out of the pandemic, and we saw this really strong robust onboard spend, we wondered how long it would last for. And we had different theories about that. It's just continued to strengthen. And I think all of the investments we made during the pandemic with [Hybris] and our pre-cruise software and our capabilities with the web, really has changed this needle. And we just continue to see incredible strength with the onboard spend and the number continues to improve. So the pre-cruise penetration is now above 60%. We've now got 25% of activity occurring on our app, which is something new over the past couple of months. We've made multiple changes to the software and our capabilities to communicate with the customer pre-cruise and on cruise. And the response has been extremely positive. So we see a great deal of strength. We're very pleased with the performance, and we think it's going to continue all the way through this year and into '24. Yes. I just want to just add on a few things. Obviously, as we add more third and fourths, that can weigh a little bit on the average APD on the onboard side. But I think what's important to point out is that the strength in onboard and the spending, as Michael mentioned, one is obviously the consumer or our addressable consumer is healthy, is sitting on a lot of savings, is searching for experiences and creating memories with their friends and family. But our ability to get the consumer to book earlier is really the main force behind why we're seeing an increase in onboard activity. So a healthy consumer certainly helps. Their desires and interests certainly help. But also allowing them to effectively get at least a day back of their vacation by being -- allowing them to plan what they want to do on the ship as well as shore excursions is certainly creating a great tailwind for us. And on the ticket side, we expect our ticket yields to continue and APDs to increase. There's a little bit of always that how we package and how we do things can lead a little bit more into ticket or a little bit more on to onboard depending on how it is with the brand. And also one of the -- I think the other drivers on the ticket and onboard side is just whether it's through e-commerce and other things. We're taking more and more friction out of the acquisition experience or how the customer shops. And that's also allowing them to get the vacation of choice that they're looking for and on the platform or the channel of choice that they choose to go through. That's helpful. And maybe taking a step back, a bigger picture question. If you look at the order book for industry supply growth, looks like kind of this 4% to 5% range in '23 and '24, but then falls off in '25 and '26. So can you remind us the time line around new ship builds? Is that decel in '25 into '26 pretty set? And your take on what decelerating industry supply growth might mean for the broader pricing picture. Well, it's -- I certainly don't know the plans of our competitors on a new building standpoint. As we had kind of noted in our release, how we expect our business to grow next year by about 10%, then about 5% and then about 6%, respectively. And I think the first thing to point out is, that's not just one brand in one market, in one destination. So this really reflects our three wholly owned brands and how they're going to grow in their different segments and also for these ships to be in different parts of the world. If you look at the order book, you do see, as you get into '27 and '28, a lighter order book. We believe that Royal Caribbean that the addressable market is underpenetrated, especially in all the different markets that we operate. We are -- we work very hard to create global brands that attract guests from all over the world, and of course, to build the revenue management systems to effectively harvest that quality demand. And we think that apparatus more than supports our expected supply growth over the coming years. Vince, it's Michael. I just have to add one little comment here talking about new ships coming online. Obviously, we opened up to sail Icon of the Seas a few months ago, and that ship literally has been the best-selling product in the history of our business and has been absolutely outstanding in terms of the demand and the pricing that we're generating for the product. And in fact, it's really driving a great '24. I mean we don't -- we never talk about '24 at the beginning of '23, obviously, but '24 is looking very healthy. And a big driver of that is Icon. We've had some remarkable stats coming out of Icon. Just one little nugget that gets me very excited is it's only one category of room, but the ultimate family townhouse that we sell on Icon, which is a 3-story experience in our new Surfside venue for younger families is already 55% sold for 2024 at an average price of $75,000 a week. So you can just get a feel of the kind of demand that's being generated by these new products. And obviously, we're very excited with what we're seeing with Icon. And that new class, which Jason mentioned is the first time Royal Caribbean International has had a new class of ship in nine years, and we are delighted with the performance so far. First off, congratulations on this really important milestone. So my first question is on WAVE season. By all accounts -- in your account this morning, WAVE season is going really well. Volumes seem to be pretty consistent week-over-week, month-over-month. Jason, or anyone, if you could just expand a little bit more on the behavior you're seeing within the bookings? Any differentiation between brands or any pricing sensitivity sort of forming at either at the lower end, which are lower -- with your older fleet ships or at the higher-end suites and things that were pricing much better last going into this year? Thanks, Brandt. First, I mean -- and it's -- I don't say this lightly, so it's wonderful to say, but we're really seeing these very strong WAVE trends across all of our brands. And you see an elevated amount of demand coming from North America. And we have been very happy to see over the past two or three weeks, that elevated demand now move into Europe as well. We have been very happily surprised by how strong we're seeing the consumer plan their vacation travel and to see that our booking window is now within a couple of weeks of what it has normally been. And that includes a lot of acceleration for short close-in products, especially as we've increased more of our 3, 4 and 5 night products is really encouraging overall. So I wish I could say it's different -- well, actually, I don't wish I could say, I should say that it's different from the family to ultra-luxury or to expedition. But we're really seeing this across all of our brands really strong. And we've seen markets like, for example, like Northern Europe now begin to move into a much stronger place. I also just add is demand, as you probably have seen in other travel products for North Americans to go to Europe has been exceptionally strong. And so, we're now seeing that take over here in the cruise space. Sorry. Sorry, just to add one comment on the demand from North America. We've also seen strong demand coming out of the Latin American markets for the European product, which has surprised us, but obviously, we're taking advantage of that. But it's pretty much across the board that we're seeing the strength in the consumer and it's across so many of our markets, which is really healthy to see. That's great. And just a follow-up on both of those comments. It sounds like U.S. into Europe and the UK that you called out are where you're most excited, even if it's the Europe end market. In terms of the consumer that you sell to and that European consumer that you sell to that might not be as good as a consumer right now for you, are they accelerating to sort of against their own comparables? Yes, they are. And I think the other thing that has been -- that we've seen through the course of this WAVE is our ability to raise prices at the same time. So the demand is that strong and we're able to raise price across these different products and really not seeing a pullback from the consumer as we continue to do so. And that is really a reflection of what we've seen since our last earnings call, or really since the announcement of the protocol being dropped just acceleration and the propensity to cruise across all three categories of new-to-cruise, first-to- brand, first-to-cruise has returned. And in many cases, it's better than what we saw pre-COVID. Maybe I missed it, but the guide implies some net yield growth for the year, clearly. Is this simply occupancy improving? Or is the revenue per passenger cruise day also expected to improve? And I guess I asked that in the context of what sounds like better pricing in the last few weeks and months. Ben, it's Naf. So it's both. And you can see the acceleration in the business. Obviously, with the normalizing of the occupancy levels and the continued strength of pricing. Got you. That's really helpful. And then on CocoCay, are you still seeing the same or similar pricing premiums to the CocoCay itineraries as you did in 2019? And then longer term, should we assume that you make further build-outs in other locations that are similar to CocoCay? And if so, how do you think about that opportunity while also bringing down [Hideaway Beach]? Hi, Ben, it's Michael. I think the answer to those questions is yes and yes. I mean we ironically opened CocoCay in 2019, and it is just a huge success. Now, of course, it's really doing an amazing job. And the demand for that product is exceptionally high. We have a significant increase in our overall capacity that we bring into CocoCay. I think for this year '23, we'll be bringing 2.5 million to 3 million guests to CocoCay. And the demand not only is there from a volume perspective, but the rate is there. And that rate has been going up again in a very healthy way. And it's the same with the spend for the products and experiences on Perfect Day. We've seen a great demand and a lot of resilience as the prices go up. So it's a hit and it's very successful. We are opening Hideaway Beach on the fourth quarter of this year in preparation for Icon of the Seas. It will be arriving also towards the end of the fourth quarter. And of course, that Hideaway Beach will allow us to bring an additional 3,000 people to Perfect Day. So our capacity will be approximately 13,000 people a day. And yes, we have an appetite for other such ventures. And as soon as we're ready to make any announcements, we will. But clearly, from our perspective, we think this is a really -- it's a wonderful part of the product experience, and our guests clearly demand this type of experience that we can now give them. So our intention is to continue to grow this piece of the experience for our guests. So let me just add one other thing, which is the financial returns associated with CocoCay and the like are exceptionally high and are significantly above our targeted returns. So this should be accretive to profitability and obviously to EBITDA and those are the type of investments that we obviously want to continue to make. Got you. And just one quick follow-up. Is the -- those numbers are on Hideaway Beach, 3,000 a day. Is that incremental to the 2.5 million to 3 million at CocoCay? Or is 2.5… And congrats on a great quarter and some really important benchmarks here. I wanted to dig in a little bit on Europe and Asia. Obviously, a year ago, WAVE season, there was -- it was obviously marred by the Russia-Ukraine conflict. Being such a global brand, you guys do what you do, you adjust. And it sounds like both in terms of the destination markets as well as sourcing customers, things are getting better. I guess my question is on Europe, is there still a lingering impact of that conflict in your business that, who knows what's going to happen with that conflict, but that could ultimately be a positive for next year? And then sort of similar question with China. I'm assuming there's not much of a benefit yet from sort of the zero COVID policy going away there. But is there any way to sort of quantify or even anecdotally speak to what sort of a drag that is on your business that could potentially open up for you next year? So I'll just -- I'll start on the Europe one, and Michael can then take China. First off, I think the consumer -- the impact on the Ukraine, Russia, I think, comes to us in two ways. One of which is a little bit of a deployment impact, and we're not able to go more east into the Baltics because of the very unfortunate conflict that continues on. And then obviously, there's some impact in the European consumer because of energy prices. That, I think, is the impact that hopefully will evaporate over time. But their propensity to cruise, their desire to go on a vacation experience is high. The value proposition for the cruise, as I noted in my remarks, that gap is still very significant. That's too significant as we look to try to close that. But I think that's really where you see the effect. The consumers' desire to go -- or European consumers go to the Nordics, desire to go to the Western Med, Eastern Med, which is really kind of fully open to them to experience is that demand is there. I just think that they continue to probably be a little bit more pinched, certainly more pinched than the North American consumer because of the increase in energy prices and how that's impacted their economy. And with that, I'll let Michael comment on China. Yes, on China, there's -- obviously, the environment's improved significantly from what we've being told by our China team. So things have started to normalize, and they seem to have got over that very difficult period. There's currently two impediments to the China cruise market opening up. One of them is there's still a ban technically on cruising and group travel in China. And also, there's a requirement from the Japanese that Chinese tourists have to test and potentially could be quarantined. We understand that both of these conditions will drop away at some point during this first half. That's what we've been led to believe, and we believe that that's going to happen. As soon as those two conditions change, then obviously, the market will reopen and we're thinking that it will be late '23, and we're kind of thinking that '24 probably, realistically, the China market will be back. But obviously, that's based upon how we understand and see the situation currently. Yes, I was just going to -- and clearly, China was a very high-yielding, highly profitable market for us. And as that market comes back online, we're very optimistic about how that can either further propel the opportunity for us. And I would just comment in the context of Trifecta, we didn't contemplate China in that consideration as it has not turned itself back on. Got it. All really helpful. And then by way of follow-up here. I mean, you've talked a couple of times, I think, about closing that gap to land-based vacations. I thought the commentary about cruise search outpacing general vacation searching seemed relevant. Maybe speak to that. Do you think that gap has gotten as big as it's going to get and maybe you close that gap this year? Obviously, you have much more insight into your own business than into land-based vacation but maybe sort of updated thoughts there. Yes, I don't know -- I don't think we're going to close that gap in 2023. I'm encouraged by the ability now for us to increase our pricing even more, which I think will give us the opportunity to close that gap. I'm excited about what we're seeing in the onboard side, which also helps us close that gap. But that gap, which used to be 20% is now in the 30% zone relative to pre-COVID, which was around the 20% mark. But we do think that, that's -- there's a lot of runway for us, and that just I think through great execution, just broader awareness of our brands and the cruise complex that we see now as being appreciated more and more by our guests helps us lead to getting the pricing and which helps us lead that to that -- closing that gap. What we're not interested in is the gap closing just because their pricing could potentially go down. Like we want to elevate ourselves up to that level, and we think that's definitely something that's in our capabilities to do so. Congrats on a nice quarter. So first, I wanted to just touch on the cost. It sounds like you're going to exit 2023 more in line with your historical levels. As you get to 2024, and I know it's still early days, are there any kind of onetime items that we should be thinking about that could impact your algorithm, that kind of 1% to 2% cost increase and whether it's China relaunching or land-based destinations or any technology initiatives? Good morning, Dan. So as we said, our formula is moderate capacity growth, moderate yield growth, strong cost control and obviously, you have several linked pieces here in the first quarter and throughout the year. But this is kind of where we're marching towards. So our expectation is to get back to that formula. Got it. And then I guess for my follow-up on TUI. Can you just talk a little bit more about the ramp there? I know that there's a big European piece, and it sounds like things are moving along. But how should we think about that contribution ramping over the course of 2023 given that it was a big piece of that adjusted EBITDA in 2019? Yes. So they continue -- we're very happy with TUI, and their performance has been a very successful cruise brand. Their recovery is well underway. They have been positive operating cash flow and EBITDA for several quarters now. They're very strong occupancy levels and pricing. So we continue -- we expect this to continue to recover towards 2019 levels and beyond. Yes. The only I would add is for TUI cruises, a -- cruise is just similar to all of us. They still have some negative carry to burn off as well. And I think there are a few years from being at a place where they're contributing at the same level to us as they were in '19. But that's -- I think it's a very short duration as they have been really effectively managing the business. They've really been outpacing, I think, just a broader cruise world and getting their business back up and running and profitable and generating positive cash flow. But like all of us, they have some negative carry they're going to have to burn off. First is actually just a modeling clarification question. On your percentage guidances to grow off of versus '19 for the net yields and the various cruise costs, are those apples-to-apples based numbers? Basically the reported numbers that you had in -- back in 2019, are those the numbers we should be growing off of? Or is there any adjustments in there that might make those percentages different than -- okay, all apples-to-apples? Okay. And then a different question here. With the increase in direct business, do you see that disproportionately going to any types of destinations such as Caribbean or perhaps higher-end Alaska or Mediterranean any differentiation between those? Well, clearly, on direct business, the shorter the product, the higher the percentage, and that's just more because the consumer is comfortable and understands the complexity of -- or the lack of complexity on the short product. The further typically, the consumer goes or the higher end that it goes typically requires, they're more comfortable going to our travel partners. We have really tried hard to be just kind of a channel of choice. And of course, the consumer has become a little bit more digitally minded through COVID because they were buying a lot of stuff online as we all know. And as they now shift to experiences, they're comfortable in different channels. And some of those digital platforms are through us and some of those digital platforms where our travel partners. But that's typically how you would see it as the shorter and closer higher. No, that I understand. But as far as any changes since pre-COVID, have you seen a greater acceleration in sort of direct booking to higher end or perhaps a greater acceleration to... It's really across the board. On the consumer at all different levels have gotten more comfortable using digital commerce to make their purchases. And that's kind of -- that is whether you want to look at Royal or Celebrity or Silversea or TUI or Hapag, that's what we have been consistently seeing. I just want to make sure I understood the equity investment line commentary. Are you guys saying to just take a haircut to what you guys did in '19, but it will be relatively similar from a seasonality perspective? Or were you trying to say something else? No. I think if you go through the guidance and our expectations of what we provided, our expectation is obviously, it's going to be lower than 2019 because what Jason mentioned is the negative carry. So they continue to recover. Okay. And then there was a comment that 4Q new to cruise was above pre-COVID levels. Just curious, when you look at what you have on the books for '23, does that percentage continue to improve? And could you give us a sense for order of magnitude? Yes. Well, and just our general commentary on WAVE. What's driving that strength is new-to-cruise and new-to-brand. And so, that mix is not only similar, but it's better than what we saw take place in the fourth quarter. So we feel that propensity to cruise -- and by the way, I think one thing that's important on the new-to-cruise stat, especially relative to '19 is because we don't have China in the mix of our business. Pretty much every Chinese consumer back in '19 was a new-to-cruise consumer. So that really talks about the strength of the North American and European consumer and their interest to go on a cruise for the first time or to go on to one of our brands for the first time. We thank you all for your participation and interest in the company. Michael will be available for any follow-ups. I wish you all a great day.

EarningCall_370

Greetings, and welcome to The Hain Celestial Group Second Quarter Fiscal 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Chris Mandeville with ICR. Thank you. You may begin. Good morning and thank you for joining us on Hain Celestial's second quarter fiscal 2023 earnings conference call. On the call today are Wendy Davidson, President and Chief Executive Officer; and Chris Bellairs, Executive Vice President and Chief Financial Officer. During the course of this call, the management may make forward-looking statements within the meaning of the federal securities laws. These include expectations and assumptions regarding the company's future operations and financial performance. These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in these forward-looking statements. Please refer to Hain Celestial's annual report on Form 10-K, quarterly reports on Form 10-Q and other reports filed from time to time with the Securities and Exchange Commission as well as its press release issued this morning for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company has also prepared a presentation inclusive of additional supplemental financial information, which is posted on Hain Celestial's website under the Investor Relations heading. Please note, management's remarks today will focus on non-GAAP or adjusted financial measures. Reconciliations of GAAP results to non-GAAP financial measures are available in the earnings release and the slide presentation accompanying this call. This call is being webcast, and an archive of it will be made available on the website. Thank you, Chris, and good morning, everyone. We appreciate you joining us for my first earnings call since joining Hain. First, let me thank Mark Schiller for his leadership of the company over the past four years through a time of significant transformation of our company portfolio and operating model. In the past month, Mark has been a valuable resource in my transition into the company and the role. I'm only a few weeks into the job, but I've had the opportunity to review many of our key commercial, supply chain and brand plans across our businesses. And in the coming weeks, I will have a greater opportunity to visit our locations and connect more with our local teams to further my understanding. What I have learned thus far has only confirmed my decision to join Hain and our opportunity to build a sustainable, profitable and high-growth business with leading brands in the better-for-you consumer space. During my early weeks with our team, I have been impressed the potential of our brands, many of which are number one or number two in their category. However, while much work has been done to simplify the portfolio and generate productivity, it is apparent that a variety of challenges have prevented sustained investment to scale our brands. In fact, I've noticed our brand building spend has historically been far below industry average. And in certain instances, we have been off air for over a year on some of our largest brands. Moving forward, I anticipate committing greater support behind those brands, and eventually spending more in line with our category growth peers with sustained brand building support. I see strong potential to drive growth in our categories and brands with expanded reach across channels and geographies. But to do so, we will need to ensure we are investing in the organizational capacity and capabilities to enable accelerated growth. I’m impressed with the talent on our team and appreciate the time and efforts they have spent to help me more fully understand the state of the business, our capabilities and our opportunities. I'm encouraged by the progress in advancing end-to-end supply chain improvement. And while we are in the early stages of integrated business planning implementation, in my experience, I've seen firsthand the impact this can have in improving planning and forecasting discipline across the business. In our international business, we will be adding resources in our commercial capabilities to improve our distribution and end market performance, and we are streamlining our operating model in our North American business to accelerate our go-to-market potential. While we are facing similar headwinds and challenges as the rest of the industry in our categories and markets, the company has taken on a number of initiatives to drive productivity, improve service levels and enhance margins. The organization and team are passionate to drive growth and deliver on the opportunity we have to scale our brands. As I'm still in my early weeks, I'm examining the key elements of the current Hain 3.0 strategy and growth algorithm. I will not be providing any formal update to our long-term strategy today, except to say that I am committed to building a clear path to sustainable top and bottom line growth. I will be ready to share my thoughts in the next quarter and a more detailed strategic plan outlook sometime in the late summer or early fall. In the past few years, we have established a level of transparency into our performance and our strategic growth plans which I will continue, and I look forward to working with you and providing updates as we shape and execute our growth plan. Thanks, Wendy, and good morning, everyone. We are pleased to report a solid second quarter ahead of guidance in both adjusted gross margin and adjusted EBITDA on a constant currency basis. Importantly, we continue to see sequential improvements in both the international and North America business units. And with a better-than-expected second quarter we are reaffirming our full year adjusted net sales and adjusted EBITDA at constant currency guidance of minus 1% to plus 4% versus prior year. As it relates to the underlying health of our brands, we continue to see bright spots in our in-market consumption versus prior year period. U.S. consumption dollars in our snacks business grew 5%, driven by double-digit gains on sensible portions. We also saw double-digit distribution growth in our U.S. snacks business for the quarter as we successfully entered new markets and channels. We are particularly encouraged with early gains in C-stores as dollar growth was up 90%, and TDPs increased double-digits. With our supply chain challenges largely behind us, Terra realized positive U.S. consumption growth for the second straight quarter with velocities up an impressive 15%. Both Sensible and Terra also saw year-on-year increases in repeat buyers in the U.S. In the baby food category, Earth's Best grew over 15% in the U.S., driven by strong velocity despite persistent supply chain challenges due to continued industry-wide pouch and formula shortages. And Greek Gods yogurt remains a standout, growing 19% in the quarter in the U.S. driven by velocity growth of 11% and TDPs up 8%. Now shifting to our international end market consumption performance for the quarter versus prior year period. In the UK, total store sales grew 7% in the quarter with the categories we compete in, growing 4%. Excluding plant-based categories, our UK portfolio grew 4%. Hartley’s jams were up over 20% versus prior year period, picking up two full points of share. Our UK soups portfolio was up 10% versus prior year period with Cully & Sully as a standout with 20% growth. We're also seeing strength in the Continental Europe nondairy category, especially in private label, where we are a significant supplier. For example, in Germany, the total category grew by 11% in the quarter versus the prior year period, with private label growing almost 21%. Now turning to our reported results. In the second quarter, consolidated net sales decreased 4.8% versus the prior year period to $454.2 million. Consolidated adjusted net sales decreased 2.4% and included approximate 2% impact from select retailer inventory reductions in North America during the quarter. Foreign exchange was a $26 million reported net sales headwind in the quarter. Adjusted gross margin was 22.9% in the second quarter, a decrease of approximately 170 basis points versus the prior year period. However, adjusted gross margin increased approximately 140 basis points sequentially, a favorable outcome relative to our guidance of flat to up modestly quarter-over-quarter, driven by greater price realization as well as strong productivity gains within our supply chain. These actions allowed us to offset elevated inflation, which we expect to plateau as we head into the second half of the fiscal year. Adjusted EBITDA on a constant currency basis was $52.7 million versus $59.3 million in the prior year period. Relative to Q1, adjusted EBITDA dollars and margin on a constant currency basis increased by approximately 37% and 270 basis points, respectively, which compares favorably to our guidance where we called for only modest improvement. Including the impact of foreign exchange, Q2 adjusted EBITDA was $49.8 million. The lower year-over-year adjusted EBITDA was a result of higher raw material and finished goods inflation as well as lower volumes. Partly offset by pricing, productivity and timing shift in marketing spend. The shifts in marketing spend as a result of supply chain challenges and moderating sales in select categories from retailer inventory reductions. In our guidance for the second half, please note that we have moved these brand-building investment dollars into Q3. Adjusted EPS was $0.20 versus $0.36 in the prior year period. Increased interest expense accounted for approximately $0.07 of the year-over-year decline as rising rates as well as a higher outstanding debt balance translated into an incremental $8.3 million in interest expense compared to the prior year quarter. Now turning to our individual reporting segments. In North America, reported net sales increased 2.7% to $282.4 million in the second quarter. Adjusted net sales decreased by 1.9% versus the prior year period. In the quarter, we saw select customers aggressively reducing inventory levels, particularly in tea, this reduced our adjusted net sales growth by 3% versus the prior year period. And excluding this, we would have been ahead of our quarterly segment guidance of being flat to the prior year period. Select categories such as snacks, up double-digits in the quarter and yogurt up high single-digits, continued to perform well. While our Canadian business is showing good progress as pricing negotiated last quarter took greater hold. These areas of strength were offset by retailer inventory reduction activities, particularly in tea, where we also faced a difficult comp created by the year ago Omicron surge, well-documented industry-wide formula and pouch supply challenges in the baby food category, and top line softness in personal care and ParmCrisps due to lost customer programs previously discussed on our Q1 call. Q2 adjusted gross margin in North America was 25.2%, a 250 basis point improvement versus Q1 and a 50 basis point improvement versus the prior year period. Our margin performance has continued to improve sequentially as our pricing actions took further hold, and our productivity efforts resulted in additional efficiencies. Adjusted EBITDA at constant currency in North America was $38.8 million, a $5.5 million or 16.4% increase versus the prior year period. North America's adjusted EBITDA margin was 13.6% on a constant currency basis, a 150 basis point increase from the prior year period. This is further evidence of the strengthened potential of the North America business. In our International business, reported net sales declined 14.9% to $171.8 million in the second quarter. When adjusted for the impact of foreign exchange of $24 million, net sales declined 3.2% compared to the prior year period, representing a 350 basis point sequential improvement from last quarter. Our year-over-year decline for international adjusted net sales reflects a 1.7% increase in the UK that was more than offset by a 14.3% decline for Continental Europe. The UK increase was driven by our baby food portfolio and because of our diverse offerings, we benefited from the ongoing shift toward private label. The rate of decline for Continental Europe improved notably when compared to Q1 2023 due to nondairy beverage category performance and private label mix shift within the category where we have a meaningful presence. As further evidence of the ongoing recovery in Continental Europe, note that adjusted net sales growth versus prior year improved sequentially in five of six months in the first half. International gross margin was 19%, essentially flat with Q1 2023 results. Adjusted gross margin saw meaningful compression compared to the prior year period due to ongoing high inflation in raw materials, increased energy costs and fixed cost deleverage. That said, the rate of year-over-year decline improved sequentially to down 540 basis points versus down 700 basis points in the first quarter. International adjusted EBITDA at constant currency was $21.9 million, a 36.2% decrease from the prior year period. As a percentage of net sales on a constant currency basis, adjusted EBITDA was 11.2%, down 580 basis points versus the prior year period, yet up 130 basis points compared to the first quarter. Shifting to cash flow and the balance sheet. Second quarter operating cash flow was $2.5 million versus $30.4 million a year ago. The lower operating cash resulted from a reduction in net income and use of cash for net working capital as inflation continued to increase the value invested in inventory. As we anticipate generating incremental positive cash flow in the second half of the fiscal year, we would expect resulting cash to be used to pay down debt. CapEx was $6.8 million in the quarter, approximately $3.3 million lower than Q2 2022. Finally, we ended the quarter with cash on hand of $43 million and net debt of $835 million translating into a net leverage ratio of 4.3 times as calculated under our amended credit agreement. Regarding our outlook, we are reaffirming our full year ranges of minus 1% to plus 4% growth for adjusted net sales and adjusted EBITDA growth on a constant currency basis. Before I provide some updated color on how to think about the remainder of the year, I would note two things. First, we are reaffirming our expectations for approximately $40 million in net interest expense for fiscal 2023. And second, the strength of the dollar has moderated quite a bit in recent months as such assuming a dollar exchange rate of $1.19 against the pound and $1.03 against the euro for the remainder of the year, we now expect our full year currency exchange headwind to be approximately $85 million and $10 million for adjusted net sales and adjusted EBITDA, respectively. For the second half of fiscal 2023, we now expect on a consolidated basis, low-single digit adjusted net sales growth versus the prior year period. Adjusted gross margins to be up year-over-year and sequentially better than the first half of the year as we continue to benefit from our pricing actions and recognize a ramp in savings from our robust productivity agenda. And consistent with our original guidance, we expect adjusted EBITDA growth at constant currency to be second half weighted due to easing comparisons abating supply chain disruptions, plateauing inflationary pressures and greater benefits realized from both existing and planned pricing actions as well as increased productivity. Turning to our segment outlook. For North America in the second half, we expect adjusted net sales growth of low-single digits versus the prior year period as we realized consistently strong growth in areas such as snacks and yogurt that will be partially offset by softer trends in other areas of the business during Q3 that I will discuss momentarily. North America adjusted gross margins are expected to be approximately flat versus the first half of this year, but up when compared to the prior year period. And last, constant currency adjusted EBITDA approximately in line with the first half as we accelerate brand-building investments to better support our future growth. Yet up high-single digits when compared to the prior year period. For international, we expect the following for the second half. Adjusted net sales to return to positive growth up mid-single digits compared to the prior year period, driven by accelerated growth in the UK relative to the first half of the year. UK performance is expected to be driven by new and already implemented pricing actions expanded distribution and the lack of significant declines from last year as consumer confidence and total store sales plunged after the start of the Russian-Ukraine war. In addition, we anticipate improved performance in our non-dairy business as the category performance continues to improve, especially in private label where we are a significant supplier. International adjusted gross margins will improve materially versus the first half and versus the prior year period as we benefit from aforementioned pricing actions, energy cost caps and subsidies, productivity savings, which ramp meaningfully and early signs of inflation stabilizing. And last, adjusted EBITDA on a constant currency basis is expected to realize strong growth versus the prior year period with margins several hundred basis points higher than both the first half of this year and second half of fiscal 2022. Speaking specifically to the third quarter now. On a consolidated basis, we expect adjusted net sales growth to be down low-single digits due in part tapping the North American demand surge for baby formula in the prior year period, coupled with persistent packaging and formula shortages in the baby food category, and previously mentioned lost customer promotional programs in North America within Personal Care and ParmCrisps. Adjusted gross margins are expected to be down modestly compared to the prior year period and sequentially with expected improvement in Q4. And adjusted EBITDA at a constant currency basis is expected to be in the mid-$40 million range with the majority of the decline versus Q2 2023 being driven by the previously discussed shift in marketing spend as well as the broader increase in brand building investments Wendy noted earlier. In conclusion, we are very encouraged by the momentum we have leaving the first half, and we remain highly focused on executing our strategic priorities as we enter the second half of fiscal 2023. We’ve taken significant steps to offset higher inflationary costs. And while we continue to take the actions necessary to secure greater profitability, we will balance this against the opportunity to invest behind our brands and our primary focus of accelerating top and bottom line growth. Thanks, Chris. To summarize, as we head into the second half of our fiscal year, we are tracking the guidance and showing great momentum in several of our brands, but more can be done to support their growth. As I mentioned earlier, in my first few weeks, we’ve made some early decisions to streamline our operating model, leverage our global capabilities, focus our leadership and invest behind our brands. I look forward to providing more details in the next quarter as we assess the actions needed to unlock the full potential of our brands and portfolio. And I look forward to fully unveiling our renewed plans to maximize shareholder value and return our brands to sustainable long-term growth in the late summer or early fall of this year. Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question. Sure. It sounds as though I think your most recent sort of successful turnaround experience at Glanbia was, in many ways, similar to the work done as part of Hain’s 2.0 program. SKU rationalization and portfolio and cost optimization and I think generally, we’re moving a lot of complexity. I was hoping you could talk a bit more about your experience in sort of building brand equities, particularly as you’ve mentioned several times in the course of the prepared remarks and the slide deck, the plan to reinvest behind Hain’s brands to accelerate growth? And then I’ve just got a follow-up. Yes. Thank you, Andrew, and it’s great to chat with you. The – as you mentioned, the experience at Glanbia was similar to the work that was done prior to my arrival in streamlining the portfolio to focus for growth. There were lots of challenges that Mark and Chris talked about last year that really prohibited the investment behind those brands relative to supply chain with those largely behind us, it opens the opportunity for us to be able to, in some of our higher growth brands, ensure that we are driving both physical and mental availability, physical availability and driving channel reach, right price pack architecture to put the right products in the right place so that they’re available for the consumer and then making sure that we have an always-on message. I was a bit surprised joining the company that some of our brands haven’t been on air in over a year, and we haven’t been in a position to be able to keep them top of mind with the consumer. So we’re in a much better position to do that in the back half of this year both because we have a supply chain that will support that, but we also have built it into our model because of the productivity savings to be able to do so. Got it, got it. And I guess it sounds like, so obviously the step-up in brand marketing will start in the back half of this year given the business structure and supply chains in a better place. I guess is marketing spend or the increase in marketing spend in fiscal 2023 going to be higher than was in the original plan? Or is the step-up versus where you think you’re going really more about fiscal 2024 at this point? A bit of it will be closer to the back half of this year. So think of it into quarter four and allows us to be able to start 2024 with a much stronger momentum. As you know, when you turn off marketing, it takes a while to feel the impact when you turn it back on, it also takes a while to feel the impact. So we’ll be investing in quarter three ramping up a bit more in quarter four. We won’t expect to see significant impact to that in our revenues until we get into the quarter four time period. Kind of taking on to the comment around an increase in marketing spend in the second half. Could you talk about your expectation that elasticity trends improve we can track the volume and pricing performance in measured channels, but that would capture the impact of the supply chain performance as well. So can you talk about that moderating elasticity expectation in relation to your increased marketing investment and the supply chain improvement. Yes. Thank you. Good morning. From an elasticity standpoint, we’re actually seeing elasticity is about in line with what we expected. And you’ve probably heard Mark talk about this in the past that our brands and the place we play in our categories tend to be a bit more price protected than some parts of the category – price point into the premium end of some of our categories and that’s allowed us to be able to continue to appeal to a less recession-sensitive consumer. So elasticities have been in line with where we expected them to be. But as we go into the back half of this year, the investments behind marketing will ensure that we’ve got right shopper programs. In some cases, it’s shippers. It allows us to be able to have incremental points of distribution. So it’s not all just traditional marketing, but it will allow us to invest in right place, right message, right time. Thank you for that. And just a quick follow-on. Can you talk about the price gaps today, particularly in your snacking portfolio? And is there a need to increase the investment in promotional spending there to shore up the volume performance? Or do you believe the marketing investment should lead to that improved elasticity? I’ll leave it there and pass it on after your response. Thank you. Across the Board, Matt, the price gaps have remained with a few isolated examples both in snacks and the broader portfolio, the price gaps have remained about where they were before we started taking price. It’s something, as you’ve heard on prior calls. We monitor that very closely. Price thresholds and our prices, our gaps relative to competition. And so we haven’t really seen much of a change there, again, with the exception of a few isolated examples. And so we don’t really see that as being a major player in snacks performance right now. And again, it’s one of the reasons – one of the main reasons why elasticities have performed where we thought they would or in some cases, even better, because it’s really that gap to competition that has been stable and therefore didn’t then lead to a consumer behavior. When do you – with the understanding, you’re still in, I guess, information gathering mode what do you see early on as Hain’s greatest core competence? I’m asking because I think there’s some questions out there about what Hain really stands for. Given you have a diverse set of categories, you’re pretty big in Europe but also pretty big in the U.S. I think people are curious, at least the questions I’m getting. What gives Hain’s sort of the right to win overall in the market. I realize it’s a very broad question and maybe a little early to ask you that. But I’m just curious what your initial thoughts are there. Yes. Good morning. I would say – I guess I’ll answer it with the reasons why I came to Hain less so than where I think we’re headed going forward. I think Hain has a fantastic portfolio of brands. And as I said in my opening, that are largely number one or number two in their categories. But when we look at the broader category, we’re under indexed and under shared. So can we be a bigger player in the categories around better for you fill in the blank, better-for-you snacking, better-for-you baby, better for you yogurt, better-for-you plant-based. So lots of categories that we’re in that the consumer continues to look to Hain has a credibility in that space that, in some ways, we may be under leveraged and reach across channels and reach across our geographies. So those are the reasons why I came here and those are still the opportunities that I see ahead of us. We’ve also got, I think, a really passionate group of people. And I know everybody says that, you come to a company, you say, well, the people are really interested in the company, but it’s very unique here. Every person that I met with in my early days when I asked why they came to Hain or why they stayed at Hain, all centers around a belief in where we’re bringing better for you to the consumer, and we’re all the consumer as well. So it’s really inspiring to see the people here. I think there’s an opportunity for us to align ourselves around categories where we can win with brands that can be a bigger player and get our full share, fair share and full potential across the marketplace. Thank you for that. And a quick follow-up, as you think about getting your fair share, often, companies talk about that. It’s harder sort of I’ve found to achieve fair share that you kind of pointed out. So what do you think the steps might be? And maybe this is a little premature to ask this, right? But the steps might be a sort of getting Hain its fair share. Is it a question of leaning in on marketing? Is it a question of top-to-top conversations with customers? I’m just trying to get a sense of the plan of attack there because it has been a question for about Hain for a while about how they can expand distribution. Yes. I think the work that the team had done over the last four years really put us in a great position along those lines. Streamlining the portfolio around where we play, brands that we should be in categories we should be in to focus the energies of the company. When you have too many small brands the entire organization and that complexity is distracted with lots of small opportunities instead of placing a few big bets. So I think we’re better positioned to be able to go after the market opportunity. It’s early days, so too soon for me to say sort of how we will do that. I will say that the – if you look at CPG-101, it’s – do you have the core portfolio in all the right places? Do you have the right pack size and right price architecture to be in the right place in the right way? Is your sales team executing across the marketplace in the way you want? And have you built a P&L shape that enables you to consistently support the brands in all the points of distribution. And then you follow that up with planful innovation that keeps fresh news around the brands, but that is sustained investment around the innovation big bets. Those are – I mean, has basic playbook around building brands and building high-growth businesses. That’s what I’m assessing where we are as a baseline and where we need to go from here. Hi. Can I continue with Ken’s question about capabilities and competencies, but ask more about what’s missing. So you’ve been in the business for a few weeks now. It sounds as though marketing investment on the financial side, that’s something that needs to be stepped up. But are there any capabilities that really do need shoring up in your view, given what you’ve seen so far? And then I have a follow-up. It’s really too soon for me to assess our starting point around some of those capabilities. But I’ll give line of sight to sort of what I’m poking around at to explore. I’m looking at our capabilities around insights and analytics and consumer and category insights and analytics to make sure that we’re able to see what’s happening in the marketplace and where we need to be. We’re looking a lot around our innovation capabilities, but also our ability to build strong brand strategies and even things like our agency model and support model. I’m looking at what we do around communications and public relations. So how are we not just doing paid media, but where we’re getting earned media credit for our categories and brands to be a category leader, you need to know the most about the categories, you need to be delivering great strong brand news and you need to be top of mind, even with media. So those are the things I’m looking at. On the sales side, do we have the right resources against all the channels that we should be playing in? Do we have the right customer and channel mix, are we too concentrated in particular areas, and we’ve got white space in the market where the consumer would expect to see our products and brands. So it’s looking at where those potential gaps might be. Great. Thank you so much. And then just a quick follow-up and more specifically, I remember talking to the previous management team, and they were talking about how energy costs in Europe were a big unknown for the remainder of the year. Do you now have much more visibility into that? Are we sort of okay on that front now? And has it come through better than expected, and I’ll pass it on. Thank you. We do, Alexia. A great question. So we have better visibility, and we have a little bit of a feeling that it’s actually going to be a bit of a tailwind in the back half, not materially changing, but maybe shoring up some places where there were going to be risk. So in both the UK and in Germany, primarily and also in Austria, the government, as I think you know, they rolled out some CAP programs and some subsidy programs so that any of the exposure we have probably now be laid off as a result of those. So better visibility and a slight tailwind relative to what we had been seeing before. Thanks. Good morning. Wendy, your comment about advertising and brand building is interesting. The advertising at Hain has been pretty low for a while, a 1% to 1.5% of sales for a pretty long time. Where do you see advertising as a percent of sales going over time? And perhaps to the pushback that some people would say, and perhaps even legacy leadership that advertising is not going to be as high for some of your categories or for some of your brands at the scale that they’re at, it just doesn’t make as much sense. What would you say to that? Yes. Good morning. I would say that it depends on the part of marketing that you would be focused on and what’s right for the brand. So over time, we want to make sure that we are consistently investing behind awareness of the brands at a level that will allow it to break through in a category. That will differ by category, it will differ by brand, but it won’t just be advertising. Brand building holistically will be – are we using it to drive distribution? Are we doing shopper activation programs? Are we doing things that on digital that keeps our brands top of mind what’s the role of e-commerce, not just traditional e-commerce, but even our own channels that use – we can use as brand-building vehicles to keep our brands top of mind with the consumer. So I would look at it as the 360 of marketing rather than just traditional advertising. Our categories and brands and even the consumers were appealing to aren’t necessarily going to be in mass media. So do you think your advertising, is there a certain percentage of sales that you might get to? And then maybe more specifically, are there categories where you think you’re being outspent on a category basis for nearing competitors at your size categories that would be more likely to get that spending? Thanks. Yes. I would say it’s early for me to say where I think I want our long-term investment around brand building to be and it would also be really soon for me to say where is our spend versus the competitors we should truly benchmark ourselves against. But that’s exactly what we’re looking at. How do we ensure that we have optimum share of voice and that we are investing in a way that can provide continuous support behind the brands, not just we wouldn’t want to come out big and then be able to – and then have to be in a position to starve the brands later in the year or later in the second year. So figuring out what that right shape looks like for each brand and category will be a key part of our next phase of focus. Thank you. Our next question comes from the line of Brian Holland with Cowen and Company. Please proceed with your question. Yes, thanks. Good morning and welcome, Wendy. If I could just ask about the second half of 2023, you reaffirmed the top line guide, but obviously, some moving parts in there, the shifting of the brand spend. We obviously had some of the retail inventory adjustments. So I guess, I’m just wondering, within the reaffirmed guidance, has anything changed around the shape of that specifically? Do retailer inventory adjustments remain a little bit of a pain through the second half or into the second half? And similarly, is productivity ahead of plan, therefore, maybe some capacity coming back a little bit faster than what you would have expected last quarter. Thanks. So Brian, to confirm, we reaffirm both net sales and EBITDA for the full year. So we feel comfortable about that. And to your point, kind of below the service that there are a number of moving parts. So certainly, versus the original guidance, we believe we’re on track and how we’re getting there is the same or a little different depending upon the quarter. You heard us talk about kind of the view we have for what the third quarter will look like and then that relative to the fourth quarter, of course. On the retailer destocking that took place in the second quarter, we think we’re through the worst of that, that was more of an isolated thing for the second quarter. I don’t see that as continued overhang for the balance of the year. And productivity, to your point, ahead of plan back-end loaded. So I would say our productivity savings that we’ve built into the forecast right now and it’s embedded in guidance, is about 60-40 back half versus front half. So as we’ve talked certainly in the original guidance, as we talked on the last call, we believe that productivity will ramp throughout the year, and we’re seeing that come to fruition. Great color. Much appreciated, Chris. And then if I could just ask, in recent weeks, it is a new story out that Whole Foods has talked about supplier price concessions. I’m just wondering, and I won’t – I appreciate you may not want to talk too specifically about any one customer. But just kind of curious what you’re seeing more broadly in your retail conversations, what folks are looking for from you? And really what’s possible because we’re not talking about maybe some moderating of inflation here, but not fully reversing quite yet. So just how you plan on having – or how those conversations are taking shape here as we think about where price goes from here? Yes, good morning. I’ll start and then let Chris add in some additional color. More broadly, when I took a look at the pricing actions that we have taken to date, Hain’s taken pricing to cover for the majority of inflation but not all. And the balance of our profit delivery was through our productivity initiatives. And that’s sort of what you would want to do is you take pricing where you can, but not to fully offset inflation and then there’s some efficiency initiatives you want to do inside the company that will assure that you can cover your profit without passing it all along to customers or the consumer. And I think the team has effectively done that. We still have some inflation pressures coming at us in the space, especially around packaging, but we feel comfortable that we’ve been able to offset the majority of that through our productivity and won’t need to take additional pricing this year except for some – a few areas, especially around international. That said, I think because of that and because of the fact that we are largely an entry price point into the more premium parts of our categories, I’m not anticipating that we’re in a position where we will need to take ourselves backwards. But that’s something that we monitor very closely as Chris said. I don’t know, Chris, if you want to add any additional color? Yes. Brian, as we said in the prepared remarks, we see inflation plateauing, but actually beginning to sort of reverse and become a significant tailwind in the back of the year. That doesn’t look like it’s on the horizon as we sit here today. And keep in mind, the vast majority of our input costs, our raw material and our packaging costs for the back half of the year are mostly locked in at this point. So even if you did start to see some inflation begin – some deflation beginning to emerge, when that will actually pass through to our cost structure and our gross margin is probably still out over the horizon a little bit. And as Wendy indicated there is a difference between what we’re seeing in North America and what you’re seeing internationally still. I think with CPI coming down month over month in December in North America, good news. And certainly, I think it supports what we said in the prepared remarks around plateauing. In international, there are still some items that are running pretty hot and no sign yet that that’s going to abate in the short-term. So we’re definitely seeing the two segments differently and managing the business differently as well. You had your North America organic revenue growth down looks like just a little over 2%, but then you called out the core brands, snacks up 5%, and some of these others in the double – strong double-digits category. How much does that – Wendy, I know you’re still settling in and fairly new, but how much does that make you think about further portfolio optimization given that there’s still – you just mentioned again the value of being streamlined. How much further can you push that if you still have a bunch of these smaller brands that also are quite a bit of a drag on growth? I think from a portfolio shape, the bigger question I’m asking is less about where we currently are or looking backwards. But as we look forward, are the categories large enough? Are they growing? What’s our relative position? What is our opportunity to be able to get a larger share in some of those categories? That’s probably the bigger focus as we go forward. So those are the things that we’re evaluating. But there are some one-time or sort of episodic events over the last year and then some because of our supply chain situation that resulted in some softness in categories. But I don’t think that’s an indication that those aren’t spaces we want to be in or that those aren’t areas that could turn around. Those are still questions that we need to explore. Okay. That’s helpful. And just a follow-up, a little bit related to Alexia’s question. You also had these – the co-manufacturing contracts that I think renewed or reset January 1. Obviously, you’re reiterating guidance, so it must be around what you expected, but just to the extent that that also would spill into next fiscal year. Can you give a sense where those landed? Was that better than you expected? Or offset – worse, offset by something else? Or how should we think about where those landed? Yes, yes. Thanks. Okay. So yes, we are beginning to land those contracts. As you heard before, as we’ve discussed in previous calls, those tend to be full calendar year contracts. So we’ve been bidding on those throughout the back half of last calendar year. And now we’re beginning to see some of that volume come into our portfolio. It’s slow. Some of the contracts I think we said in the past that some of those retailers may move more slowly and transiting from the old contract to the new than they have historically because the new contracts have priced in some of the inflation that’s taken place over there. So we’ve definitely won some good contracts and are beginning to see that, and we’ll continue to see that ramp up over the back half of this year and into the first half of next year as well. Great. Thanks so much. A lot of questions have been asked. So maybe I’ll just shift to capital structure a little bit. I respect your comments on further optimization or lack thereof needs in certain brands. But as you kind of speak to the ability to scale, I guess, some brands and more specific categories over time, the first question is it logical for us to think that step-up in brand investment will likely be focused on more specific categories to actually get you there? And then secondly, kind of as part of the overall review process that you’re doing internally. Is there any area where you would actually consider or think about at least adding to CapEx to maybe build a bit more internal capacity relative to doing the co-man model? That’s it. Thanks so much. As it relates to whether we want to be self-produced or co-man, I think that really comes down to where we think supply chain is going to be a distinctive part of a brand or a category. I’ve worked at companies that were majority co-man, and it was never an issue because they were areas where the manufacturing was not what made it unique. It was the brand or it was the route to market. So it will be on a category-by-category basis, brand-by-brand basis. That said, the one thing we do need to do, and the team has done a nice job of managing our co-manufacturing relationship similar to how we manage our own manufacturing. So monitoring the same levels of plan attainment, cost structures, quality, ability to be able to service the marketplace. We need to hold our manufacturing partners to the same standards that we would hold our own manufacturing locations and some of the adjustments that we’re making in our operating model, so that we do have a full end-to-end supply chain model that has that visibility and management. Thank you. Our next question comes from the line of Andrew Wolf with C.L. King & Associates. Please proceed with your question. My question is also on your marketing. You’re welcome. So as I look at Hain and I see the U.S. versus the UK, Europe, at least in my view, it’s structurally pretty different between the brands, their distribution, their maturity, their growth potential and things like that. I guess the question really is, is the structural difference enough that you have to kind of almost come up with two different kind of playbooks, one for each segment that’s quite different than Hain truly had global brands? Well, I think today, you’re right. There are very few in our portfolio that today are truly global brands. The question though is, do we have brands in our portfolio that could be more global or could span broader geographies. And if so, how do you effectively have a global brand strategy and then local execution, regional execution? Those are big questions that we’ll be asking as we go through this strategic review is to make sure that where we can we will and how do we best get global leverage around those brands and global awareness. It’s very possible that you look at our business today, we have some wonderful regional and local gems that, as I said in my opening remarks, are number one or number two in their categories in their region. They may only stay local or regional. But we do have some brands that could span outside of its core geography, and we have a right to play there. Those will be the areas that we’re exploring and setting ourselves up to be able to go after that. Thank you. And this is a follow-up, Chris, on the tea destocking you referenced just for my own bet, could you clarify, it was a warm winter, at least or late fall, and that can drive disappointments in demand for the category. Was it more of that? Or is it kind of brand related? Or was it just also just the fact that the retailers have been – had negative – in the U.S. have had negative volumes for quite a while and they’re just kind of readjusting. Could you just give a little clarity on what you think happened? And what’s the go-forward look from the retailer? Yes. Good question, Andy. Definitely not brand related. We see it as being category related, and it was driven by two things. One, you mentioned the warmer weather that depressed tea sales throughout the quarter. But a part of it – the second part actually goes all the way back to earlier in the year, kind of the December, January period at the beginning of the calendar year when the Omicron surge took place. So Omicron surged right about the time that retailers would have been starting to bleed down their inventories from the prior tea season. So they bought in a second round of inventory to account for the Omicron surge, then Omicron faded and a lot of retailers were left with heavier inventories that they normally would have had coming out of tea season. And so then we arrived at this year’s tea season, they ordered again, and now they found they kind of almost had two sets of inventory, some left over from the Omicron surge and some from the new. So at that point, we started to see late in the quarter, the selected retailers beginning to reduce their tea inventories. We would believe across the category, not just on Celestial. Thank you. Ladies and gentlemen, our final question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question. Thank you. So just on the comment about being cash flow positive in the second half of 2023. Wendy, if have decided how much capital will be allocated to the marketing effort? I know you said you’d probably pick up towards the back end of 2023 and then obviously into 2024. But has there been a dollar amount that you’ve determined? Or how do you look at that balance? That’s something that we’re still really assessing both what we need, but also how we fill that into the overall shape. So I mean I think the way Chris has expressed it is right, which is a ramp up, and you’ll see it as a ramp up. But what that is in terms of dollars, we’re not final on that yet. And then just lastly as a follow-up. So I believe North American sales were up 3%. Net sales, up 3% this quarter, in the fiscal second quarter 2023 and they were up 9% in the fiscal first quarter 2023. Is there – what do you think the reason is for the – to slow down even though it’s still up. So we talked on our last call about some of the things that were going to be a little bit of a headwind in Q2. We had the hair care program last year that was shipped in both Q2 and Q3 last year. So we’ll see that again as negative overlap that we’ve got to replace in Q3 this year. But that was a piece of the headwind in Q2 that led to modestly lower growth sequentially. There was also a ParmCrisps program, a club store program that wasn’t repeated that led to a little bit of a headwind in Q2. So I think we accounted for most of the things in our guidance on the last call that led to lower growth – expected lower growth in Q2 for North America than what we saw in Q1. The one thing that we didn’t see and we didn’t see coming, and we didn’t include in our guidance, it was the reason why we were a little shy of guidance on North American net sales in the quarter was what we were just talking about with Andy, the tea destocking that took place sort of a one-time event that reduced tea sales in the quarter. And again, we don’t see that continuing on into the back half. Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I’ll turn the floor back to Ms. Davidson for any final comments. I want to thank everybody again for joining us today to review our second quarter performance and updated fiscal year outlook. I’d like to close by reiterating how excited I am to be at Hain and about the long-term prospects of our brands and our business. And I want to thank our Hain team for their warm welcome and their action orientation in these first few weeks. I look forward to sharing more with you all on our strategic outlook and initiatives in the months ahead. Take care.

EarningCall_371

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Jacobs Solutions Fiscal First Quarter 2023 Earnings Conference Call and Webcast. 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]. Jonathan Doros, Investor Relations, you may begin. Thank you. Good morning to all. Our earnings announcement and 10-Q were filed this morning, and we have posted a copy of the slide presentation on our Web site, which we will reference during the call. I'd like to refer you to Slide 2 of this presentation materials for information about our forward-looking statements and non- GAAP financial measures. Turning to the agenda. Speaking on today's call will be Jacobs' CEO, Bob Pragada; and Chief Financial Officer, Kevin Berryman. We are also joined today by our incoming CFO, Claudia Jaramillo. Bob will begin by summarizing highlights from our first quarter results, discuss our commitment to sustainability and then provide an update on our strategy. Kevin will provide a more in-depth discussion of our financial metrics as well as a review of our balance sheet and cash flow. Finally, Bob will provide details on our updated outlook along with closing remarks, and then we'll open up the call for your questions. In the appendix of the presentation, we provide additional ESG related information, including examples of our leading ESG solutions. Thank you, John. Good day, everyone. Thank you for joining us today to discuss our first quarter fiscal year 2023 business performance. Starting on Slide 4. I'd like to welcome to the call, Claudia Jaramillo, who is currently our Executive Vice President, Strategy and Corporate Development. We recently announced her transition to CFO later this year. I'm excited to now lead Jacobs as CEO. Over the last several years, we have repositioned the company through a purposeful strategy of transforming our portfolio and capture higher value opportunities in our core and adjacent sectors. At this juncture in our strategy, strong execution and focus is pivotal to our success. There are three key priorities, first, we will maintain our inclusive and inspirational culture that fosters the creativity needed to live by our mission, challenges today reinventing tomorrow. Second, we will focus on driving a higher structural growth rate across our core sectors by executing against the three needle moving growth accelerators of climate response, data solutions and consulting and advisory across the entire organization and sectors we serve. While we are in a leading position to capitalize on the mega trends and structural tailwinds, our relentless focus on long term client relationships is driving sustained growth. Third, we will deliver long term returns for our shareholders by driving further operational discipline across the business to accelerate cash flow generation with disciplined capital allocation. From a financial standpoint, our underlying business remains strong. Our People & Places Solutions line of business delivered strong performance with net revenue up 8% year-over-year, 13% in constant currency, operating profit up 20% year-over-year, 28% in constant currency, and we continue to gain market share in both the global critical infrastructure and advanced facility sectors. In CMS, we continue to deliver a strong base of recurring revenue with a growing new business pipeline. We anticipate strong tailwinds and backlog growth with CMS moving forward. PA Consulting experienced lower than expected utilization, but we continue to experience double digit top line and backlog growth. We are seeing strong demand with robust opportunities in PA sales pipeline. The number of recent wins underscores our strategy and demonstrates our move of the value chain with our clients to higher margin consulting and advisory services. Across the company, we see exciting opportunities ahead of us, specifically in the areas of climate response and especially in energy transition. Our ability to deliver data enabled solutions is enhancing our clients’ resilience and sustainability. The establishment of Divergent Solutions enables Jacobs to scale and deploy our domain centric data platforms across multiple sectors and geographies, further enabling us to deliver solutions to typically complex challenges. I will talk to these key themes further in the presentation. Turning to Slide 5. We remain steadfastly committed to our cultural transformation to create an inspirational journey for all. In 2015, we started our culture journey with the empowerment and accountability, incorporating inclusion, innovation and inspiration into the very fabric of the company. I believe our emphasis on inclusion and diversity has been a critically important contributor to our success and provides a key differentiator in attracting and retaining the world's best talent as well as driving innovation for our clients. A key benefit of being a company with a broad range of capabilities is our ability to provide multiple career and development opportunities, what we refer to as agile careers. When we learn and grow together, we activate empowerment and accountability, inclusion and diversity and innovation. We lead, embrace and anticipate change. To further demonstrate our commitment to inclusion and diversity, we have included a KPI in the refinancing of our credit facilities linked to female leadership representation. Kevin will discuss further details in his remarks. Turning to Slide 6. Our commitment to sustainability is core to our strategy and our significant performance is being recognized by many of the top ESG accredited institutions. Over the past five years, we have advanced to an industry leading status. This culminated in our inclusion into 2022 Dow Jones Sustainability World Index, ranking Jacobs among the world's leading companies with outstanding sustainability performance. While the scores themselves are impressive, what's even more significant is the public recognition of Jacobs' positive impact on our clients, communities and the world. As we turn to Slide 7, we will focus on our 4 key growth sectors of critical infrastructure, energy and environment, advanced facilities and national security. These growth sectors are are driven by the following catalysts: federal government stimulus from the Infrastructure Investment Jobs Act, the Inflation Reduction Act and the CHIPS Act, supply chain and technology investments in advanced facilities and the emergence of increased global threats. Let's examine the legislative drivers first and our positioning in the market. I am proud that Jacobs has helped our clients secure over $1 billion in IIJA competitive grants since its patent, and the bill is only in its early stages. We supported our clients in securing over $350 million in IIJA competitive grant funding just last quarter, the largest quarter since the passing of the act. This includes the largest grant awarded nationwide for subway station accessibility in New York City, a major port infrastructure development grant to a long term client in Alaska, the first phase award of one of the largest water treatment plants in the US and the design of a sustainable battery recycling facility. With another four years of locked in and robust funding the US infrastructure climate is strong. The coming months will also bring the first dollars of two other areas of focus for Jacobs. The inflation Reduction Act with $369 billion to fund the Green Economy transition and the CHIPS Act for semiconductor investment, all in core Jacob sectors. Before the end of the calendar year, we fully expect to have all three bills firing at full strength and funding critical projects sponsored by local governments, the federal government and the semiconductor industry. This overlap of spending will continue for four or five consecutive fiscal quarters and drive growth across the infrastructure and energy markets. In advanced facilities, we continue to see sustained capital investment in the semiconductor manufacturing space, biotechnology capacity expansions and the electric vehicle ecosystem, all being driven by reshaping of global supply chains, technology advancements and decarbonization efforts. Turning to Slide 8. As evidenced by double digit pipeline growth in each of these sectors, our industry position continues to grow, and we see this being a long term secular trend. In addition to previously discussed infrastructure wins, we have been awarded major programs in the semiconductor space to include greenfield expansions in the US and Europe for a global chip manufacturer. In the biotechnology sector, we have won multiple expansions in the US, Europe and Asia, and we continue to see global growth in electric vehicle ecosystem driven by a favorable regulatory environment with project wins for battery and vehicle manufacturing and charging infrastructure in the US and Europe. Within National Security, we are seeing increased defense spending in the US, UK and Australia due to continued global threat. As highlighted as a future prospect last quarter, in the US, we were successful in winning a critical Cyber Intelligence Award for $469 million, five year contract for a classified defense customer to provide secure data and network solutions globally. In the UK, PA is leading the consortium that has been selected by the MoD to deliver Crenic, a future force protection electronic countermeasures program. It will provide the next generation of innovative solutions to counter the threat posed by radio controlled and provides explosive devices, otherwise known as IEDs. And in Australia, we are supporting the acquisition and sustainment of military platforms for the Australian Defense Department, which has engaged Jacobs with increasing volumes of work. Thank you, Bob. Let's turn to Slide 9 for a financial overview of our first quarter results. First quarter gross revenue grew 12% year-over-year and net revenue grew 8%. Net revenue grew 12% year-over-year on a constant currency basis, an acceleration from our fiscal year 2022 constant currency growth of 8%. Adjusted gross margin in the quarter as a percentage of net revenue was 26%, sequentially in line with the fourth quarter, but as expected, was down approximately 130 basis points year-over-year, primarily driven by: one, the remaining year-over-year impact of the Idaho remediation contract; and two, lower utilization and NPA consulting. I will provide additional comments regarding our segments later in my remarks. Both People & Places Solutions and Divergent Solutions gross margins were flat year-over-year. We expect total gross margins to remain plus or minus 26% of net revenue for the remainder of the fiscal year and trending higher as we exit the year from a higher margin mix of revenue and new higher margin opportunities from our growth accelerators. Adjusted G&A as a percentage of net revenue was 15.5%, slightly higher than Q4 but down 130 basis points year-over-year. During the quarter, we benefited from lower employee benefit costs, which were mostly offset by miscellaneous other cost. During the remainder of the fiscal year, we plan to make additional investments in employee welfare programs such as higher 401(k) match and improved medical benefits as part of our continued investment in improving our culture and employee engagement. These costs are factored into our full year outlook. As a result, we are still targeting G&A as a percentage of net revenue to stay below 16% for the full fiscal year 2023. GAAP operating profit was $238 million for the quarter and included $50 million of amortization from acquired intangibles, a $28 million noncash charge related to decreasing our real estate footprint aligned to our future of work strategy and finally, other acquisition deal related costs and restructuring efforts of $17 million. Actual restructuring costs were less than half of these costs and supported the creation of our new Divergent Solutions reporting segment. The remaining costs are largely related to PA noncash contingent equity based agreements associated with our PA transaction structure. Adjusted operating profit was $332 million, up 8% year-over-year. On a constant currency basis, adjusted operating profit was up 15% year-over-year. We remain committed to reducing our restructuring related costs. Consistent with our previous comments, we expect $15 million of restructuring charges for the full year fiscal year 2023. We also expect another $30 million in noncash real estate impairment charges over the course of Q2 and Q3 as we further execute our future work strategy. Finally, we expect approximately $20 million of transaction related expenses from deal related integration and other costs, most of which is performance based incentives that were factored into our total purchase price consideration for these acquisitions. It also includes the noncash contingent based equity associated with our PA transaction structure. Our adjusted operating profit to net revenue was 10.6%, flat year-over-year. I'll discuss the underlying dynamics during the review by reporting segment. GAAP EPS from continuing operations was $1.07 per share and included a $0.26 impact related to the amortization charge of acquired intangibles a $0.16 noncash impairment charge related to reducing our real estate footprint, a $0.09 adjustment to align to our projected annual tax rate and a $0.09 from transaction, restructuring and other related costs. Excluding these items, first quarter adjusted EPS was $1.67, up 7% year-over-year. Q1 adjusted EBITDA was $339 million and was up 9% year-over-year, representing 10.8% of net revenue. Finally, backlog was up 1% year- over-year and 2% on a constant currency basis. The revenue book-to-bill ratio was 1.1 times with our gross margin in backlog as a percentage of net revenue up over 100 basis points year-over-year. Our book-to-bill ratios continue to be impacted by the burn of the approaching NASA -- Kennedy NASA rebid as the project's backlog continues to fall until which time the rebid is awarded. Regarding our LOB performance, let's turn to Slide 10 for Q1. Before delving into the details by segment, I would like to make some overall comments regarding the strength and diversity of Jacobs portfolio. As you all know, all aspects of our portfolio are aligned with long term secular growth trends. Our results in the quarter exhibit the strength of this diversity and its ability to deliver strong consistent operating profit growth. In this quarter, our People & Places Solutions business led the way. So let's start with them. Overall, People & Places delivered strong revenue and operating profit results driven by an alignment to the secular growth trends that Bob discussed earlier. Q1 net revenue was up 8% year-over-year and up 13% in constant currency. All business units contributed solid and often very strong constant currency growth. Backlog grew 2% year-over-year and gross margin and backlog was up double digits in constant currency with a book-to-bill greater than 1. Total People & Places Solutions Q1 gross margins were flat year-over-year, with Q1 operating profit up 20% and 28% in constant currency. Operating profit as a percentage of net revenue was 14.5%, up over 140 basis points year-over-year, driven by revenue growth and a disciplined management of overhead costs. We continue to expect year-over-year improvement in People & Places operating profit and margin, resulting in strong double digit growth in full year operating profit. Our Advanced Facilities unit which benefits from investments in the life sciences, semiconductor and electric vehicle supply chains posted the strongest double digit revenue and operating profit growth. We continue to monitor the macro demand trends across sectors that impact our advanced manufacturing clients, and we continue to see robust demand from our life sciences clients, which comprise two thirds of our People & Places business. Our backlog and sales pipeline remains robust across a diverse set of customers. And as a result, we continue to expect our advanced facilities growth rate to remain strong during fiscal year 2023 despite the very solid and strong 2022 year-over-year comparisons. Our Americas unit had an outstanding quarter with over 20% year-over-year operating profit growth, driven by infrastructure related monetization wins beginning to convert to revenue. The backlog and sales pipeline provides us confidence as we are seeing many large programs mature for a late 2023 or early 2024 award, which should continue to support longer term momentum. Our international business, Q1 revenue and operating profit were up single digits year-over-year on a reported basis but grew double digits in constant currency. Our international business will continue to be materially impacted by FX during Q2 and with FX neutralizing over the second half of our fiscal year, assuming no large variation from existing current foreign exchange rates. Moving to Critical Mission Solutions. CMS benefits from highly recurring multiyear contracts that require limited overhead support. The business is aligned to national security, space exploration and energy transition priorities mainly in the US, Europe and Australia as well as infrastructure monetization solutions such as US 5G telecom investments. Q1 revenue was up 10% year-over-year and up 13% in constant currency, driven by the Idaho nuclear remediation project contract that ramped up in Q2 of last year. For the remainder of fiscal year 2023, we expect revenue growth in the mid single digits for the CMS business as we now compare to quarters that include the Idaho project. CMS book to bill was just over 1 times and continues to be impacted by the approaching NASA Kennedy rebid, which we expect to be awarded soon. Gross profit margins were down year-over-year due to the revenue mix impact from the lower margin remediation project and the year ago closeout benefits associated with our strong performance on several enterprise contracts. CMS operating profit was $82 million, down 10% year-over-year and down 6% on a constant currency basis. Operating profit margin was in line with expectations and was down 170 basis points year-over-year to 7.6%, but up 60 basis points sequentially from the Q4 figure. We expect operating margins to improve in the second half of fiscal 2023 with the ability to expand margins as we can convert higher margin opportunities in our sales pipeline. Moving to Divergent Solutions. Gross revenue was up 11% year-over-year. And when excluding the impact from pass-throughs, net revenue increased 7% year-over-year. We expect net revenue growth to accelerate materially in the second half of our fiscal year as we start to see growth from our investments in sales, data solutions and technology offerings. Gross margins in Divergent are in line with our consolidated gross margin, which we believe provides us the ability to significantly expand DVS operating margins as we gain additional scale from our heightened growth investments. Operating profit margins were 6%, driven by early stage investments and well below our future run rate projections for this business as we begin to embed integrated [data] enabled offerings in our core markets. We expect Divergent to finish fiscal 2023 with margins approaching double digits. Turning to PA Consulting. The translation impact from a stronger US dollar from the year ago period continued to impact reported revenue and operating profit growth. Revenue from PA was down 3% year-over-year in US dollars but up over 11% in British pounds. PA had a solid book-to-bill of over 1 times. We expect revenue growth in British pounds to remain near or above 10% during fiscal year 2023. Turning to profitability. During fiscal year 2022, PA aggressively hired ahead of an increasing demand from strong secular growth opportunities across energy transition, sustainable consumer goods and strategic and digital transformation opportunities. While the sales pipeline remains robust and backlog continues to grow, the delayed conversion of these opportunities into burn continues to impact utilization. As a result, Q1 operating profit margins were 18%. While actions have been taken to significantly improve utilization, we expect margins to improve incrementally approaching 20% as we exit the fiscal year. Our nonallocated corporate costs were $40 million, down year-over-year as we made a strategic decision to move to a more flexible paid time off program in the US and invest further enhanced employee welfare plans, including improved medical, 401(k) match benefits and parental leave offerings. We believe this strategic decision is key to further strengthening our culture and attracting and retaining world class talent. While Q1 was lower than our previous quarter run rate guidance, we do expect that our corporate costs for the year will increase to our previous estimate of $190 million to $210 million. And we are monitoring our medical and other fringe costs closely which can vary depending upon our revenue and delivery mix as well as seasonality of medical claims. Turning to Slide 11 to discuss our cash flow and balance sheet. We posted another strong quarter of cash flow generation, which is indicative of the quality of our earnings power and cash conversion capabilities. Free cash flow was $270 million and included an outflow of $60 million for payment of the CARES Act deferral benefit of payroll taxes and $6 million related to transaction costs and other items. Excluding the unusual payment associated with the CARES Act, our underlying free cash flow for the quarter was a very strong $330 million. In the second quarter, we expect free cash flow to approximate the year ago figure driven by the very strong Q1 performance. For the full year, we continue to anticipate 100% adjusted free cash flow conversion to adjusted net earnings. Regarding the deployment of our free cash flow, we repurchased approximately $140 million of share during the quarter. As we previously have discussed -- as we previously announced, the Board of Directors has also approved a new three year $1 billion share repurchase authorization. We will remain agile and opportunistic in repurchasing shares if we see price dislocation in our relative valuation. We ended the quarter with cash of $1.2 billion and a gross debt of $3.5 billion, resulting in $2.3 billion of net debt. Our Q1 net debt to 2023 expected adjusted EBITDA of approximately 1.5 times is a clear indication of the continued strength of our balance sheet. We remain committed to maintaining an investment grade credit profile. And given our commitment to inclusion and diversity, all of Jacobs bank debt now has a sustainability linked KPR target of achieving a 40% female representation in our management team as defined as our Vice President and above population. As of the end of Q1, approximately 60% of our debt is tied to floating rate debt, which includes our $500 million notional interest rate lock of 2.7%. As of the first quarter, our weighted average interest cost was 4.6%. For your benefit, in the appendix of the presentation, we have included additional detail related to our debt maturities, interest rate derivatives and quarterly interest expense. Finally, given our strong balance sheet and free cash flow, we remain committed to our quarterly dividend, which was increased 13% year-over-year and which will be paid on March 24th. Thank you, Kevin. Turning to Slide 12. Our portfolio is positioned to benefit from multiple secular growth trends across our core sectors with the opportunity to structurally increase our long term earnings power by executing against our growth accelerators of climate response, data solutions and consulting and advisory. We reiterate our outlook for fiscal 2023 adjusted EBITDA of $1.4 billion to $1.48 billion and adjusted EPS to $7.20 to $7.50, which incorporates recent FX rates. In closing, I would like to reiterate my priorities as CEO to maintain an inspirational and inclusive culture that will capitalize on our growth accelerators and drive long term returns for our shareholders. Before we open up the call for questions, I'd like to take a moment to express my sincere condolences on behalf of Jacobs to all those affected by the terrible earthquakes that occurred in Turkey and Syria earlier this week. Our employees have yet again demonstrated a culture of caring and practice by raising their hands to seek ways to support those most impacted by this tragedy. I'm proud to lead a company that rises to the calling in such challenging circumstances. Operator, we will now open the call for questions. This is Adam Bubes on for Jerry Revich today. Now that your leverage ratio has declined. Can you provide an update on the M&A pipeline, and if you'd care to comment on opportunity set by line of business? So look, I think the M&A pipeline, we have a list of opportunities at every single point in time. There are things that are of interest. But ultimately, I would suggest to you that we really have nothing to comment on other than we do believe there's some things that are aligned with our strategy. And remember, how we think about our deployment of capital against M&A is to be aligned with our accelerators. So it's climate response, that's data consulting, data solutions and data -- consulting and advisory. So those are the areas we're continuing to focus on. And certainly, given the strong cash flow that we continue to generate, we'll have degrees of freedom to deploy that capital as appropriate when we see value added opportunities. Kevin, I guess I just wanted to dig in a little bit to some of the comments you made about I guess, some of the adjustments here. So you previously said $15 million of restructuring. You reiterated that again, obviously noting some real estate impairments that are noncash. But I guess here you took an exclusion on Focus 2023 expenses. I guess I wasn't expecting that. Could you talk about what that was in the quarter, what you're hoping to achieve with that? And maybe what the expectation or the budget is for the year, if there are going to be any further Focus 2023 expenses? The focus 2023 to the extent that there is any indications that are really related to the real estate impairment. It's part of our overall Focus 2023 initiative. So it's not over and above the kind of real estate impairments that I highlighted. Bob, you talked about your drivers, the key drivers in the end markets and how they will be impacted. How comfortable do you feel as you're taking over here how you're positioned from a resource basis to drive that growth, what areas there’d be more tension paid upon? And of the several different end markets that you see, you did touch on some of them in your prepared remarks. But what ones could we expect to see some more better growth, better opportunities for Jacobs not only just to increase the book your bookings, but also drive the higher margin mix that you're anticipating? From a resources standpoint, Michael, I'd say that we're feeling comfortable. And really, it goes back to what we've talked about previously. Our use of global talent has really balanced our ability to deliver on our clients’ expectations. So it's not where the capital is being deployed. It doesn't necessarily map to where we source talent and deliver the solutions that were expected and can deliver. So we're really positive about the resources front. As far as of the areas that we're looking at, I'd say that specifically in infrastructure and even more specifically in energy transition is providing some real overextended growth opportunities. And that was very evident this quarter in our growth in pipeline, I talked about double digit composite for the entirety of our insectors, the highest was energy transition. And we've got a great base, great talent, great solutions and with work that we've already been doing in the renewable space for quite a while, it's serving us well. Bob, you mentioned four years of locked in funding for IIJ and that you expected funding from IIJ, IRA and the CHIPS Act to be a strong run rate by the end of the calendar year. Maybe you can give us a little more color regarding what that could mean for PPS NSR. You're already growing NSR at 8%. So does it mean you could trend higher than that, and is there any risk that DC related budget noise can impact the infrastructure ramp up? So let me answer the last part first. I think that the infrastructure ramp up is pretty locked in with regards to IIJ. And then the effects that the IRA and the CHIPS Act will be supplemental to that. My comment about the end of the year is that those three will be in real time. So we're feeling comfortable about that four year time line. I think what's also important to understand is that when we -- the difference between the appropriation, the deployment of the funds and capital and then the duration of the projects, programs and engagements, that has a tail on it that's six to seven years. And so you see -- Kevin talked about the backlog growth in revenue being kind of in that mid single digits, but the gross margin being in double digits on a constant currency basis, that's really a function of where we are in the phasing of that work. So comfortable on that front. As far as could that mean incremental growth to what we've already projected in our out year plan, we're feeling strongly that it could really be a big part of the company. So we're optimistic. This is [indiscernible] on for Jamie. So on CMS, I was wondering if you continue to expect low to mid 8% margins for the year? And is there any opportunity to look at divesting underperforming or noncore businesses in CMS and focus more on higher margin businesses, in particular, now with Claudia on board. So look, I think we are a proactive team that always evaluates what we believe is the right portfolio for our company, both now and into the future. We've proven that by the divestiture that we executed against in 2019 with the sale of our Energy, Chemicals and Resources business, which one could argue was actually the legacy of the company. So we are always proactive in that consideration. So I'll leave it there. And so we can't really comment on anything other than, look, we always consider the opportunities. As it relates to CMS, we do believe that they are going to be able to get up into the 8% margins over the course of the year. So we see improving, they're at a point in time where some of the wins that they've had, which are a little bit higher margin are yet to kind of get into the burn. And we would expect that, that will be happening over the course of the balance of the year. If I could add just one item to what Kevin said. When we talk about energy transition, please keep in mind that, that includes components of CMS that’s around our our nuclear new build and the AMR SMR technologies that we have, and we're seeing some real opportunities and growth in Europe that will be contributing to the margin profile that Kevin mentioned. And just to clarify as well, when we talk about the future, I think we're approaching 8% for the year, which means because we started at the level we are, we're going to have to be having in subsequent quarters margins that are going to be above 8%. On the potential DC lockdown or just headlines around a prolonged continuing resolution. Just Maybe, Kevin, you kind of walk through on -- I know we talked on IIJ, but even on the CMS side, anything that we should be aware of that could lead to orders being pushed out, rebid being pushed out? Are you hearing any of that based on some of the headlines we're seeing down in DC? Look, I think the bottom line is we have an Omnibus in place for 2023. So what we're really fundamentally talking about is a continuing resolution for 2024. Look, it remains to be seen how that plays out. Clearly, there's some differences of opinion in the house right now relative to where we may end up. I would say the good news is relative to this, if there is good news, is that we're kind of based off a strong Omnibus program in 2023, it could impact new items getting funded, but we're based on a 23% kind of level, which is pretty straightforward. As it relates to the disruption relative to the debt and whatnot, we think our view is they’ll come to some rational conclusion on that, but we'll see how that plays out. And right now, the programs, Michael, that we're looking at are not totally insulated, but we've got a strong view on those programs being funded here in the near term -- awarded. Well, first off, Bob, if I remember correctly, I'm wishing your birds a good luck next weekend. And I guess for my question, you guys have a lot of tailwinds going into the back half, strong outlook on various end markets. Just sort of wondering what your thinking was with around sort of maintaining the guidance, especially with currency sort of being a tailwind here. Well, there's a couple of things that we have to recognize certainly exchange rates are a positive, but also we have incremental interest costs that are largely offsetting that. So there's gives and takes here. I think given the dynamic of how we're playing out in DC, I think we're being prudent relative to our guidance that we've provided. And look, there's gives and takes here. FX isn't the only one. I would say, certainly, interest is some headwinds that we're facing and then the business is kind of net off. And I think at the end of the day, we're I think, positioned for good results for the full year fiscal 2023. And then, Robert, maybe I'll make a couple of comments on the markets. The reason why we highlighted those four sectors that we did is the tailwinds that we are seeing and it's materializing in the double digit pipeline growth, the backlog growth that we're seeing and our bookings performance, all leading indicators to strengthen those markets. The burn of those bookings is something we continue to monitor very closely. But the stage that we're coming in on those programs are creating a higher level of utilization, specifically in the US for the Jacobs business. Congrats to everyone on your promotions and new positions. As it relates to the exceptional strength for advanced facilities for this current fiscal 2023 on top of 2022, Kevin, I think you mentioned how this is [called on]. And I was wondering, should investors expect a consistent long term upward trajectory for advanced facilities with all of the stimulus funding from the CHIPS Act, or will it be lumpy in certain years as funding maybe inconsistent? Louie, I think if you go back over a decade ago, that lumpiness was -- in the time between cycles, whether it be semi or in life sciences was a lot longer. We're seeing those cycles contract look at the current semi cycle as well. And so we think that, that long term growth aspect versus what we used to see a decade ago, we've demonstrated that the diversity of our portfolio has been able to really sustain that. You mentioned '22, it was also '21 as well. So we're feeling really positive there. The other item I would highlight is that it's the reason what's driving these growth catalysts, the reason why we highlighted the supply chain disruption as well as technology advancements is that in the past, the lumpiness was driven by demand. And so capacity was almost exclusively tied to demand and then you could just map it via economic cycles. Today, that has completely changed and the drivers are more driven around technology advancements, reshaping of supply chains from the east to the west as well as innovations that are happening in, whether it be chip design or novel therapy. So the drivers also give us that level of confidence too. I was wondering if you could talk a little bit about recompetes, besides the Kennedy contract over the next 18, 24 months, do you have any big ones coming up? And then just related to the continuing resolution risk around the budget next year, are there any programs that kind of new programs that -- in your prior guidance, you were counting on growing, but that might not be able to grow in such an environment? Anything that we should be thinking about as a potential headwinds in '24? Maybe I'll talk first on the recompetes. Outside of Kennedy, for the next 12 to 18 months, I think that was the time line that you put it at nothing of that size. We have smaller recompetes that are probably a little less under the radar -- a little bit more under the radar. But those are well within the normal cycle of our business. On the CR with new programs, Gautam, that's one where we continue to be very sensitive to that. From a recompete standpoint, those could end up being upside for us, because we're on programs that are continuing to be determined. But I think the diversity of our portfolio has lessened the impact of what we saw historically with CRs. And so I think that's where -- I think it would not be wise of us to predict the effect of CRs. But I think the diversity is where we see the hedge and we feel confident about our business. Just to follow up on that a little bit. As far as the NASA Kennedy rebid itself, given so many changes in the space industry and emergence of a lot of commercial space interest, where is your confidence in retaining the work? Our confidence is solid. As whether it be NASA or other clients you could even outside the aerospace world, we've grown with our clients. So the intimacy that we have with the science of our clients’ business has allowed us to be their long term advocate and long term partner. So wherever the space industry goes, a movement to commercial, which we're involved with or in other areas of exploration, we've been a part of that journey and a valued partner. So we're feeling confident. This is Brandon on for Chad. Follow-up on CMS margins. You said that ending the year above 8% to give the full year to 8%. But given the high margin projects you all have been talking about, is it safe to assume that we can expect that exit rate to be the prevailing rate going forward and could the margins potentially approach People & Places levels given all these projects? That would certainly be consistent with our strategy. I would say the margin burn that I was referring to is second half oriented primarily. So as we look to beyond 2023, certainly consistent with our strategy, we are always looking for an incremental profit improvement in terms of margin. So yes, that would be consistent with our execution strategy. This is Alex on for Sean this morning. So my question, the backlog was very strong this quarter and it looks like all segments grew sequentially from 4Q. You guys had highlighted this gross margin in the backlog was up 100 basis points. Can you guys talk a little bit about what's driving this 100 basis point increase in margin? Is it one or two segments or is it more broad based in all the segments? I'd say it's broad based. This is -- again, when we keep reiterating, moving up the value chain with our clients, these are higher higher level technically complex as well as digitally enabled offerings that we have now in the marketplace, which is driving that higher margin in our backlog. And so it's not acutely focused in a specific one area, it's across the board. All right. Thank you, operator. And thank you, everyone, for joining our earnings call. Looking forward to future calls and providing further updates on upcoming events and on our further calls. So thank you very much, and have a great week.

EarningCall_372

Greetings, and welcome to the Mastech Digital, Inc. 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, Jennifer Lacey, Manager of Legal Affairs for Mastech Digital, Inc. Thank you. You may begin. Thank you, operator, and welcome to Mastech Digital's fourth quarter 2022 conference call. If you have not yet received a copy of our earnings announcement, it can be obtained from our website at www.mastechdigital.com. With me on the call today are Vivek Gupta, Mastech Digital's Chief Executive Officer; Jack Cronin, our Chief Financial Officer and Michael Fleishman, our recently appointed Chief Executive Officer of the company's Data Analytics Services business segment. I would like to remind everyone that statements made during this call that are not historical facts are forward-looking statements. These forward-looking statements include our financial growth and liquidity projections, as well as statements about our plans, strategies, intentions and beliefs concerning the business, cash flows, costs and the markets in which we operate. Without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are intended to identify certain forward-looking statements. These statements are based on information currently available to us and we assume no obligation to update these statements as circumstances change. There are risks and uncertainties that could cause actual events to differ materially from these forward-looking statements, including those listed in the company's 2021 annual report on Form 10-K filed with the Securities and Exchange Commission and available on its website at www.sec.gov. Additionally, management has elected to provide certain non-GAAP financial measures to supplement our financial results presented on a GAAP basis. Specifically, we will provide non-GAAP net income and non-GAAP diluted earnings per share data, which we believe will provide greater transparency with respect to the key metrics used by management in operating the business. Reconciliations of these non-GAAP financial measures to their comparable GAAP measures are included in our earnings announcement, which can be obtained from our website at www.mastechdigital.com. As a reminder, we will not be providing guidance during this call, nor will we provide guidance in any subsequent one-on-one meetings or calls. I will now turn the call over to Jack for a review of our fourth quarter and full year 2022 results. Thanks, Jen, and good morning, everyone. Fourth quarter 2022 was clearly a difficult quarter for Mastech Digital, as we saw both of our business segments negatively impacted by economic uncertainty, including customer concerns regarding inflationary conditions and a possible recession. Revenues for the quarter totaled 57.2 million, representing a 3% revenue decline compared to $59 million in Q4 2021. Our data and analytics services segment contributed revenues of $9.1 million in Q4 2022 compared to $10.1 million in the 2021 fourth quarter. As order bookings in the second half of the year came in short of expectations and as a result, utilization rates were well below our historical norm. Q4 2022 revenues in our IT staffing services segment totaled $48.1 million compared to $49 million in the fourth quarter of 2021. Customer demand declined during the quarter which when combined with seasonal high levels of assignment ends resulted in our lower revenues. Consolidated gross profits in the fourth quarter of 2022 totaled $14.2 million compared to $15.7 million in the fourth quarter of 2021. Gross margins as a% of revenue in Q4 2022 was 24.8% compared to 26.6% in the 2021 fourth quarter. This margin decline was entirely related to our D&A Services segment and was attributable to lower utilization and reduced margins on several long term assignments, largely due to compensation increases in today's inflationary environment. GAAP net income in the fourth quarter of 2022 was $1.5 million or $0.13 per diluted share compared to $3.9 million or $0.32 per diluted share in Q4 2021. Non GAAP net income for Q4 2022 was $2.8 million or $0.23 per diluted share compared to $4 million or $0.32 -- $0.34 per diluted share in the fourth quarter of 2021. SG&A expense items not included in Q4 non GAAP financial measures net of tax benefits are detailed in our fourth quarter 2022 earnings release, which is available on our website. Highlighting our full year 2022 results, revenues were $242.2 million, which were up 9% year-over-year as both of our business segments achieved revenue growth during 2022. IT staffing services had 10% revenue growth in 2022 and D&A Services had 6% revenue growth. Consolidated gross profits grew to $63.2 million in 2022, up 6% compared to $59.4 million in 2021. GAAP diluted earnings per share were $0.72 in 2022 compared to $1.02 in 2021. And non GAAP diluted earnings per share were $1.13 in 2022, compared to $1.19 in 2021. During 2022, our liquidity and overall financial position remained strong. Today, we are 100% debt free, we have cash availability of approximately $32 million under our revolving credit facility. Additionally, our credit facility's accordion feature can provide us up to an additional $20 million in term loan capacity for M&A activity. And our day sales outstanding measurement at December 31, 2022 improved to 59 days from 61 days a year ago. Let me start by saying the obvious, our 2022 financial results didn't end up the way we started in the first half of the year. Concerns over a possible recession, high inflation and an acceleration of interest rates have led to many of our clients taking a conservative posture with respect to spending, which clearly impacted our demand curve in the fourth quarter 2022. However, despite the fourth quarter's underwhelming performance for the full year 2022, we achieved 9% revenue growth, 6% gross profit expansion and solid profitability. And I believe that our businesses and their future prospects remain fundamentally strong. Let me point out a number of positives heading into 2023. First, we have on board a new Chief Executive Officer for our Data and Analytics Services business, Michael Fleishman, who I will introduce to you in a few minutes. Second, our Board of Directors has authorized a share repurchase program of up to 500,000 shares of the company's common stock over the next two years. As described in our earnings release, repurchases will be dependent upon market conditions regulatory requirements and other considerations. Third, our balance sheet has never been stronger. We currently have no bank debt, we have access to approximately $32 million of borrowing availability and up to an additional $20 million for M&A activity. Fourth, we have a business model that historically generates free cash flows that should strengthen our balance sheet even further as the year progresses. And finally, fifth, we have high quality accounts receivables with days sales outstanding measurement of 59 days. Let me now introduce to you Mr. Michael Fleishman, our new Chief Executive Officer of the Data and Analytics Services segment. I won't steal Michael's thunder, but I have to say that he is a very strong addition to our management team with an impressive background and I believe Michael will be a difference maker in our ability to execute our business plan more effectively and accelerate revenue growth. Thanks [Technical Difficulty] on my background. I have a little over 26 years of enterprise IT experience with close to 14 of it being with IBM, where I held sales and sales leadership positions across the majority of IBM's portfolio at the time. Hardware, software and services, both consulting as well as traditional IT outsourced services. I left IBM in 2010 to pursue roles as a P&L owning GM, as well as sales leadership roles across several [wellness] (ph) services providers that have strong delivery capability out of India. Before joining Mastech, I ran digital transformation for capital markets in North America at Cognizant. The majority of my 26 plus years have been spent driving strong levels of sales growth across multiple verticals, both across North America, as well as globally for the company’s I was with. I joined Mastech late last year, because I saw a company with excellent capabilities across data modernization, especially in data management and data warehousing. Warehouses, lakes and lake houses with a strong customer base of marquee logos that had not fully capitalized on their opportunity for growth nor on their competitive differentiation in data modernization. I think it's not just a dream of mine, but a dream of many leaders to have the opportunity to work for a company that has Mastech's strengths and capabilities, not to mention existing customer base with so much upward mobility in front of them and a market space where the demand is expected to exceed $3 trillion by 2026. Mastech's capability to deliver our competitive differentiation and the significant opportunity for growth in front of us were the primary reasons why I joined Mastech. Thank you. We will now be conducting a question-and-answer. [Operator Instructions] Thank you. Our first question comes from the line of Lisa Thompson with Zacks Investment Research. Please proceed with your question. So I guess the number one question is, after last quarter's call with your record IT staffing revenue, it seems like everything fell apart quickly. And I know it's not your first time through business cycles. I was wondering if you could like go into a little detail of what happened? So Lisa, the IT staffing got impacted because of the drop in revenue that I mentioned in the last earnings call that happened in Q3 and it continued into Q4. So we had a drop in demand and that impacted this number of starts that we have on the staffing side. And then we also had much higher than the seasonally expected ends that we expect in Q4. Q4 is always a low quarter from an ends point of view, there are more ends in that quarter seasonally than other quarters. But this time they were even more than usual. So it's really that same kind of equation which is not enough starts and higher number of ends and that ended up impacting our staffing business. The positive note that I can share is that, the demand seems to be better. We've only had five weeks into this quarter, but the demand seems to be better this quarter than what we saw in Q4. So we are optimistic, but it's still too early for this quarter. But I guess that's how the market is panning out. So is there any bright side to this? Are you having -- obviously, everybody being laid off in Silicon Valley? Is it easier to find the ideal people for your needs? Yes, to some extent, there is a larger pool available now, because there are so many companies which have let go of large numbers of IT resources. But for us to be able to fully leverage that, we also need to have greater demand. And right now, customers are being cautious, right? In light of the recessionary conditions or seeing what's happening elsewhere in the other IT companies. So the demand needs to pick up, but definitely there is -- the pool is becoming a little larger right now to fish from. All right. That totally makes sense. How do you feel this is going to flow through to next year? Is it just -- you think it's going to be a down year for revenues just because of the economy? Lisa, no, we are not taking that attitude or approach. We are -- as I said, it's only the first few weeks. We are seeing some signs of demand picking up. But we still have to see how the year is going to pan out. But we are preparing for growth rather than preparing for any shrinkage. So we will, of course, be very careful with our costs. We'll keep a very close eye on the demand. And take a quick action as we did in 2022 when COVID hit us and we got adversely impacted and we did a pretty decent job in the first couple of quarters controlling our costs. So we'll keep a keen eye on this and see if that needs to be done. But we are actually preparing for some growth rather than shrinkage in this year. And I guess, the last logical question is, given the economy and the opportunities, are you going to be more likely or less likely to do M&A? I think the honest answer, Lisa, is that, Michael has just come on board and the year is -- because there's a lot of changes that Michael is bringing into the organization, I think we just have to give ourselves a little bit of time for him and the organization to settle down. But we have not shelved the idea of the M&A, we are still going to go back to it. It may be a little later in the year, later quarters, but it's definitely on the cards. We will get back to the strategy of inorganic acquisition. Good morning. Given your history of accretive acquisitions and the last one AmberLeaf was roughly $1 million, do you consider the $52 million of potential borrowings for acquisitions to be exceedingly high? Would you ever have multiple acquisitions or acquisitions that large? And are your disciplines for acquisitions still the same or they would be immediately accretive and additive to the company? So I think, Tim, we don't have any targets right now in front of us. But it could be a one large acquisition, it could be multiple or maybe two smaller acquisitions, it would depend what kind of companies are out there and what kind of pricing they'll be able to command. But I think this total war chest that we have, which Jack mentioned, of about $52 million plus we think is adequate for what we need. We may not even need all of it or we may need that one. It all is a function of what kind of company we find out there. And in the interim given your free cash flow and $7 million of balance sheet cash and zero debt. Do you expect to actually repurchase some stock in the upcoming year? Yes, the Board approved a 500,000 share repurchase program. So yes, clearly, our goal is to buy back some of our shares. [indiscernible] terrific price. So an acquisition one way or another, but you know your company well and know how good it is. So that makes sense in the interim. Thank you very much. So I wanted to talk a little bit about some of the basics. The way you talked about the pacing around the client demand slowdown. And then I was wondering if you could talk a little bit about some of the things that you're seeing maybe around bill rates and pricing dynamic of what you are working with? And then also if you could sort of give a little bit of color around whether or not that demand -- are you getting the sense of that demand as a matter of just delayed activity by clients or projects that are going away for a period of time? Sure, Marc. Let me -- there are multiple sort of mini questions embedded in your questions. Let me try and address those one by one. So on the build rate front, we've actually not seen any major, what shall we say, pressure at this point in time. In fact to the contrary, over the last few quarters we've been able to steadily increase our bill rate and I'm talking more on the staffing side. And the pricing is always a function of what is the market command for that kind of offering and also what is it that we need to pay to our resources. So we've been able to maintain the gross margins there and manage our pricing accordingly. So that's how it is. In terms of demand, it's slightly different between staffing and data and analytics. And maybe I'm going to give Michael a chance to talk about the data analytics part in a minute. But on the staffing side, there is actually a pretty close correlation between the state of the economy and the demand on -- for Staffing. And the time difference between the two – the reaction time is actually pretty small. So there is -- just a couple of quarters ago there was the worry about the recession was extremely high. It's still there, but it's to a lesser extent right now. And that's probably what's going -- what's maybe easing the drop in the demand that we saw. So we are hopeful that we will see a pickup in demand over the next few quarters. Of course, nobody has a crystal ball, but at least early indications are that's what's going to happen. So that's all on the staffing side. And on the data analytics side, the dynamics are slightly different. So Michael, would you like to comment on that? Sure. So while a recession or rather, I should say, the fear of a potential recession is causing some customers not so much the slowdown, but to be a little leery until they see the actual impacts to their bottom lines. So we are seeing some small percentage budget cuts into customers' IT budgets in 2023 over what they had in 2022. That being said, digital transformation will not be impacted by a recession for a couple of years at least at a minimum. That spend is still ongoing and a lot of our customers have locked in a multi-year spend budget for their digital transformation initiatives, whether you're talking application modernization, legacy modernization or data modernization, all of which play into digital transformation. What we have actually seen is, because of the issue around attrition and the ability to retain IT professionals as well as the inability to fulfill demand for IT professionals that we experienced in 2022, it's actually driving rates higher versus having to cut rates in the digital transformation space. People are having to pay more to get the same skills that they had to pay less for in previous years. And it is because the attrition is so high. The average attrition across IT services in 2022 was 25.2%, for example. That's actually one of the competitive differentiation that Mastech [indiscernible] has over the market because our attrition in 2022 was 9%. I've been waiting for an opportunity to say that. So that's what we're seeing in the D&A space. I hope that answers your question. If not, I'm happy to go into more detail. No, that's certainly helpful. Thank you. And then, I was wondering if you could talk a little bit about and you touched on this already as far as the timing of targeting acquisitions and that's certainly understandable given the timing of you joining the firm. I was wondering if we sort of just confirm I would imagine that the prioritization remains within D&A. But I was wondering if you could sort of talk about just overall prioritization of acquisitions and whether that has changed at all and/or if you have any particular views on just the general pricing environment that's out there that you think you might be able to take advantage of? So Marc, I don't think there's any change in our thinking, our strategy regarding the acquisitions. We will probably fine tune it. As I said, just giving Michael a little bit of time to settle down and then we'll fine tune our requirements and initiate the search. So right now there is really no change to what our thinking has been. Our acquisitions will be on the data analytics side and not on the IT staffing side. That's something I've said multiple times before and that remains unchanged. Okay, great. And then just to confirm, so if you are finishing the year with the headcount at just over 1,200, are there any thoughts as to sort of where you would like that to be through the year or any thoughts at least in the near term as to where that can go? So Marc, obviously, the plan is always to grow that number and not let it stay at this number or reduce. And that's what the entire organization is working towards. But as I said, it's difficult to give a -- first of all, we don't give any guidance it's also -- directionally also it's difficult to predict how the next few quarters are going to pan out. But we are encouraged with what we have seen in the first few weeks, not a dramatic increase in demand, but better than what we saw in Q4. So that's sort of directionally tells us and we are hopeful that we will be able to grow over the year. Okay. And then the last thing for me, I was sort of curious as to whether or not you've seen any -- were there any differences in behavior or any stand up either they are negative when it comes to client verticals. Are there any particular groups that maybe were a little more cautious than others or vice versa? Thank you. Yes, actually it's interesting. This time around, it's unlike the 2020 COVID times when it was focused, I guess, there was positive on the healthcare side and extreme negative on the entertainment and hospitality side. This time, it's -- the verticals are fairly similar in their behavior. I think everybody is being cautious and trying to control spend and not make any big investments on new initiatives. And that seems to be across the board. But clearly, two verticals do stand out where I think the caution has been a little more. One is on the IT InfoTech side, the technology side, and we hear that news every day from these big organizations. And the other one is, maybe to a lesser extent the financial services, banking financial services. But all the other industries are just almost equally being cautious. Okay. And then the last one for me. I'm sort of curious if you could touch a little bit as to the -- I mean, I can imagine sort of you wanting to take advantage of the opportunity, but maybe sort of talk a little bit about sort of the Board's thinking around the implementation of the share repurchase program, the authorization and maybe sort of talk us to a little bit about sort of how that came to me and maybe the timing there? Thank you. Well, I mean, the program is in effect. So we can execute it at any time. And we're going to be a little bit constrained by our daily volume because I think we can only purchase, I think it's up to 25% of our daily volume. So we're going to monitor the volume and get into the market when we think it's most appropriate. Right. But I'm sorry, I should have clarified it, but I think the press release said it was a two year period, so I just wanted to know... Yes, it's a two year period. Right. So the last time we did a share repurchase program, we had -- I think it was a two year period and we extended it. So we can always extend it. But it's a two year period, you're correct. [Operator Instructions] Mr. Gupta, it appears we have no further questions at this time. I would now turn the floor back over to you for closing comments. Thank you, operator. If there are no further questions, I would like to thank you for joining our call today. And we look forward to sharing our first quarter 2023 results with you in early May. Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

EarningCall_373

It is time, so we would like to begin. My name is Suzuki from the PR division and I will be the emcee for today's session. First, let me introduce today's content. First is Mercari has celebrated our 10th anniversary on February 1, 2023. Our representative and CEO, Shintaro Yamada, would like to say a few words. Next, we would like to take you through our results for the second quarter for the fiscal year ending in June 2023. Then a Q&A session for the media will follow. We will be explaining how the Q&A session will go later on. Please refrain from recording and distributing the entire duration of today's session. Thank you for taking time out of your busy schedule to join us today. My name is Shintaro Yamada and I'm the representative and CEO of Mercari. Mercari is a service that I created after I became aware of a problem when I traveled around the world. During my journey, I experienced firsthand the gap between advanced and emerging countries. And I realized that as resources on this planet are limited, it will be difficult for everyone to live comfortably as people in advanced countries do. However, after returning home and seeing how widespread smartphones have become, I began to think that if we can use the power of technology to smoothly circulate earth's resources, we could help realize a society where everyone around the world can lead enriched lives. With this in mind, I launched Mercari in 2013. On February 1, we celebrated our 10th anniversary. It is thanks to many people's support that we are here today. I would like to take this opportunity to sincerely and deeply thank all of our users as well as our partners, investors and shareholders today. Thank you very much. Over the last decade, we have overcome many challenges and failures to grow dramatically. On the day that this service was released, we only had a couple hundred downloads, but now there are over 25 million monthly users across Japan and the US. And we have created a circular economy for goods that allows people to pass on something that they no longer need to others. Moreover, with the addition of Mercari shops in 2021, which enables everyone to start an online shop, Mercari evolved from a marketplace for individuals to a marketplace for everyone, including businesses and local governments. And with respect to fintech, by providing our smartphone payment service, Merpay, we have made it more convenient for our users to use Mercari, but we also enable the use of Mercari and Merpay usage history for credit limit decisions, thereby providing a more convenient and inclusive financial service. And with the addition of our credit card business, Mercard, that we soft launched last November, the Mercari Group will continue to grow rapidly by taking advantage of our business synergy. Furthermore, by helping pass items that are so usable to others, Mercari is helping to reduce CO2 required to manufacture new items and thus can contribute to mitigating environmental impact. When we calculated our potential impact base based on Mercari's most traded category, apparel, with our users in Japan and US transacting at Mercari, we have found that approximately 480,000 tonnes of CO2 have been avoided per year. If we look at Japan, with people listing clothing on Mercari, we have prevented around 43,000 tons of apparel each year from being disposed of. This is approximately 8.8% of apparel being disposed of in Japan annually. As we have illustrated, Mercari has grown as a business, but it is steadily contributing to the realization of a circular economy. Macro has celebrated 10 years, but we are already undertaking new challenges looking ahead to the next decade. First is an ecosystem that will circulate both tangible and intangible values. First is an ecosystem that will circulate both tangible and intangible values, various values. Until now, Mercari has brought together people through technology to make physical transaction of goods more smooth. Going forward, we would like to partner with various companies and individuals to create an ecosystem that circulates tangible and intangible items, such as varied, yet attractive content. Apologies, it's not working well for me. We would like to create an ecosystem that circulates tangible and intangible items such as varied, yet attractive content as NFT's and other digital assets partnering with various companies and individuals. With a wide range of values being circulated smoothly, Mercari would like to become an essential presence in the circular economy. The second is global expansion. Mercari has from our early stages aspired to become a global marketplace. And we will continue to prioritize strengthening our efforts in the US, but also being prepared to enter a third country should the opportunity arise. On the other hand, when we look across society, there are so many challenges that Mercari should be contributing to. In comparison to when we first launched, environmental issues have become even more serious. So more so than ever, we need to make a shift away from mass production, mass consumption and mass disposal. Furthermore, only a certain group of people are enjoying resources, and there still are people around the world that are having difficulties leading an enriched lifestyle. This reality has not changed. But as I mentioned before, with the help of technologies such as Blockchain and Metaverse, anyone can freely buy and sell intangible things like time and services and contents. And we are already seeing signs of such new possibilities. With the change in the environment, Mercari Group's business domains are expanding, but to become an even more essential presence for society, we believe it is important to clarify once again what kind of value we will provide. Therefore, we have come up with a new group mission that we would like to announce today. Circulate all forms of value to unleash the potential in all people. This is our new group mission. There are still uncovered values such as things, experiences of people around the world. And it is also true that there are a lot of people around the world who seek such value. By bringing people together through technology, peoples around the world together through technology and creating an ecosystem that circulates tangible and intangible values, we hope to unleash the potential in all people. By realizing such an ecosystem, we hope that everyone, regardless of background, will be able to do what they desire, something they haven't been able to do before, contribute to other people and society and live an enriched lifestyle. This is the kind of world we would like to realize. Mercari has celebrated our 10 year anniversary, but we have only begun a journey towards a group mission to circulate all forms of value to unleash the potential in all people. Going forward, we will continue to take on both challenges without fear or failure, striving to be a company that unleashes the potential in all people around the world. Thank you very much. That concludes our message from the CEO. Next we would like to take you through our results for the second quarter for the fiscal year ending in June 2023. Please give us a few give us a few moments to get ready. The results briefing material is available for download on our IR site. You can also download the official photographs of today's briefing session from this URL. The photos will be uploaded around 05:30. Let us begin our results briefing for the second quarter for the fiscal year ending in June 2023. Our Senior Vice President of Corporate and CFO, Sayaka Eda, will take us through the results. Thank you. Good afternoon, everyone. Thank you for taking part in the FY 2023 second quarter results briefing. I am the CFO of Mercari, Eda. I will take you through the results of this quarter. Here is the agenda for today. First, let us introduce a financial summary. Here are the progress and highlights of this quarter. With respect to our consolidated results, we have started investing in our credit card business since November last year to maximize our group's synergy. But we have continued to focus on our – in relation to that, we have been investing in the new customer acquisitions, but we have also continued to focus on our existing marketplace, fintech business and US business, thereby booking the group's highest ever sales as well as third consecutive profitable quarter. On the third quarter onwards, we will be making greater investments than the second quarter as a group, but we will continue to operate or existing businesses while balancing growth with profit. The growth of the marketplace, GMV, in Q2 was 10% year-on-year, and we are for the most part on track. And as a result of disciplined investment and establishment of a lean business foundation, the adjusted operating margin increased to 42%. On the other hand, especially in the first quarter, we had a major update to the Mercari app. And we injected a lot of engineering resources for this update. But there was a delay in the product updates and PoCs that we have implemented in the first half of the year, but these PoCs will start contributing to the second half of the year. But in order to actually make sure that these PoCs will work, we want to continue with the examination with our experiments. So our target of 10% to 15% GMV for the full year that, we will be facing higher hurdles, but we will continue to strive towards hitting our target. With regards to fintech, we launched our credit card business on November 8 to achieve further growth in the promising credit business. We have rolled out this service gradually and we have invested in acquiring new credit card users as well. But the existing credit business is providing a profit base, so we booked unadjusted operating profits in Q2 as well for the fintech business. Although we expect to invest more in Q3 than Q2, we will continue to make disciplined investments. Moreover, over the mid to long term, we expect top line growth for this business and intend to further strengthen our profit base. In the US, due partially to our continuous marketing and branding efforts to drive awareness, the MAU increased 1% to year-on-year. Against a full-year target of 0 to 10% GMV growth, we are underachieving due to the long term impact from inflation. Thus, the business environment will continue to be hurt in the second half as well. So we would like to revise the initial targets. We will be revising our full-year year target, while keeping an eye on the business environment and we will be announcing these targets after the third quarter. We will continue to focus on product initiatives to deliver mid to long term growth, review costs, and balance growth and profitability to minimize losses in the second half. Next here are the KPIs for each segment. The GMV of our marketplace grew by 10% year-on-year to ¥254.8 billion and the adjusted OP was up 16 points year-on-year to 42%. Thus our profitability has improved drastically. With regards to fintech, Merpay users grew to 14.58 million. Moreover, we have discussed the credit balance and loan collection rate for the credit service Merpay is providing. Merpay is providing a lump sum payment as fixed amount, payment as well as smart money. So these three services are included in the credit balance. And due to steady growth, the credit balance was ¥92.3 billion and the loan collection rate was 98%. The MAU for the US business grew by 1% year-on-year to 5.16 million and the GMV decreased by 12% year-on-year to $270 million. And this is a consolidated net sales and operating income by segment, so please take a look. Next, moving on to the financial highlights. The consolidated net sales in Q2 has increased a record level due to steady growth focused on marketplace. It grew by 18% year-on-year to ¥44.2 billion. We booked operating profits for three consecutive quarters by prioritizing discipline in our investments, and for this quarter it was ¥2.7 billion. We have made steady progress in Q2 with regards to fraud countermeasures. And as explained previously, we expect the impact to return to normal levels in the second half of the fiscal year. Next, the number of employees decreased by 64 Q-on-Q to 2,184. Taking into consideration external conditions, we have implemented a more selective hiring policy as a group. Thus the number of employees has decreased. However, we will continue to selectively hire mainly engineers to establish a main business foundation. For the marketplace, this is the progress for Q2. For the marketplace, we have set increasing the number of listing through strength and collaboration between C2C and B2C businesses as our business policy this fiscal year. And by focusing on new user acquisition and strengthening listings, the MAU has increased. And as a result, the GMV grew by 10%. In Q1, we nearly completed major updates to the Mercari app. Thus, we have been able to make quick improvements to our service. And thus, we have begun PoCs of various initiatives that will contribute to growth over the mid to long term. By strengthening listing and improving personalization capabilities, we are focusing on initiatives and investments that will consistently produce results over the mid to long term. And we will also continue to focus on improving features of our B2C business. Murasaki Sports and other outlet items are doing well. So we have begun expanding our merchant base to include large scale businesses that have a high affinity with Mercari shops. This is the GMV MAU for the marketplace. We have begun acquiring new users through referral campaigns and we have also strengthened listing through offline initiatives such as Mercari workshops. As a result, we marked record high MAU, which grew by 780,000 to 21.53 million. GMV has grown by 10% year-on-year as per our expectations, as I mentioned earlier. With respect to net sales, the second quarter tends to be our high season for our C2C business, and thus it has grown in line with – net sales has grown in line with an increase in GMV. So we grew by 90% year-on-year to ¥26.3 billion. And I will explain the adjusted OP on the next page more in detail, but as you can see, it is growing steadily. The cost structure for each quarter is shown here. The cost structure for Q2 has changed. From the latter half of last year, we have begun making investments selectively focusing on areas that provide sustainable impact. By focusing on these areas, year-on-year, the promotion cost ratio has decreased significantly. Furthermore, because fraud related expenses has decreased as we expected, commission fees have decreased or improved and the adjusted OP increased to 42%. In order to further accelerate the well performing credit business, we announced our entry into the credit card business and began gradually rolling out our Mercard from November 8. We have faced our service provision, but it is now available 100% And the number of members, which is an important KPI, has grown strongly from the onset, so we are off to a great start. In time with the launch of our service, we have begun investing to acquire new users and encourage usage. But the credit business that we have been promoting since two years ago is providing a solid profit base. Thus we have booked unadjusted operating profit in Q2 as well. We believe that, by growing this business, we will be able to create and maximize group synergy over the mid to long term, and that we can further strengthen our profit base. To do so, it is important that more people utilize the Mercard. So we will keep an eye on user trends and reexamine our service and investment plans with flexibility and continue to acquire new users by making appropriate investments. Furthermore, as I mentioned before, Merpay's credit service has been growing steadily, and thus the credit balance has surpassed ¥90 billion in total. And by utilizing unique criteria for setting the credit limit, such as behavior in Mercari and Merpay, our loan collection rate is 98%. Hence the business is experiencing healthy growth. In the field of crypto, we are promoting the development of services utilizing Blockchain technology, and we plan to release a new service that will enable users to purchase Bitcoin using their sales proceeds this coming spring. The payment and credit businesses are growing steadily, and net sales and also sales outside of Mercari have both increased. As mentioned earlier, investments have increased in relation to the launch of Mercard. Therefore, the adjusted OP decreased Q-on-Q, but we booked profits in Q2 as well. We do plan to further increase investment in Q3 in comparison to Q2. Here is a list of services Merpay provides. Regarding payment, we have enabled ID and code payments and provide virtual cards, and we have also launched a new credit card. Moreover, with respect to credit, we offer smart payments such as fixed amount payment and lump sum payment and smart money, which is a small sum consumer loan service that allows people to borrow small amounts. From FY 2021, two years ago, Merpay has been focusing on the credit business and are strengthening our profitability and building a profit base that focuses on the credit business. Responding to the needs of Merpay users to make payments in installments, our credit balance, mainly for fixed amount payments, is growing steadily and our loan collection rate as of FY 2023 Q2 is high at 98%. We have gradually rolled out the Mercard from November. And going forward, we will maintain and improve our loan collection rate while further growing our credit business. With the help of TV commercials and customer acquisition campaigns, our number of users are growing at a good pace. Since we have just rolled out the service and are implementing various campaigns, we would like to refrain from sharing detailed KPIs. But when we compare the behavior before and after users sign up for the Mercard, the ARPU tends to be higher after they sign up. By providing Mercard, we aim to strengthen the profitability of Merpay in the future, contribute to the growth of Mercard's GMV and reduce processing fees for payments. In order to do so, it is essential to acquire even more users and encourage usage. We will make disciplined investments and aim to make larger contributions to the business next fiscal year and beyond, so that we can realize the circular economy. We have made steady efforts to verify users to ensure a safe and secure environment. And 87.5% of our users are now verified, 0.4 points increase Q-on-Q. This is important to realize the safe and secure environment we envision and to provide an excellent user experience. We believe that this can provide a smooth user experience when the users are verified for our credit service, and we believe this is also contributing to the steady growth of our credit business as well. In the US, the MAU and the number of listings have grown and our recognition as the easiest and safest selling app also improved. However, the GMV fell below our expectations. The external business environments remain uncertain, impacted by inflation and other factors. Thus, we will be revising our financial year target of 0% to 10% GMV growth. We are currently setting new targets whilst keeping an eye on the business environment, which we will announce in the second half of the fiscal year. In order to reactivate purchase behavior, we have updated our product and implemented measures to promote purchases. You will see how effective these measures that we implemented in the second quarter are and further strengthen our efforts going forward. We will continue to focus on product initiatives and review expenses to minimize losses. Here are the GMP and MAU for the US. With respect to the MAU, we have gained a certain level of awareness. And by acquiring new users through targeted campaigns, the number of users has grown to 5.16 million, increasing 1% year-on-year. On the other hand, we are facing higher hurdles this quarter since our GMV grew by 70% same quarter last fiscal year. And combining that with a rise in prices due to inflation, prioritization of consumer spending on necessities and discounts offered by retailers with surplus inventory, we continue to see declining trends in purchasing. Thus, the GMV decreased by 12%. To address our key challenge of reactivating purchase behavior, we are promoting purchases and mitigating the burden on buyers. Some of these measures have already been implemented. During the latter half of the year, we will update these measures and fully rolled out point rewards systems encourage repeat purchases and improve convenience with bulk delivery options to promote purchases, so that we may optimally balance listings and purchases. As the GMV growth rate declined – this is the net sales and adjusted operating income. But as the GMV growth rate declined, the net sales also decreased 12% year-on-year. We have continued to make disciplined investment, prioritizing mid to long term growth. The environment will remain difficult in the second half of the fiscal year, so we will further review our costs to minimize losses. Lastly, with respect to our ESG activities, we would like to give you a progress update. We aspire to be planet positive to help solve environmental issues through our business, help people share Earth's limited resources across generations and enable people to create new value. Through our businesses, we want to be involved in creating values that contribute to solving social and environmental issues, and also to establish a management foundation necessary for sustainable growth. To this end, we have identified five material topics. As you can see here, we will aim to achieve sustainable business growth by maximizing opportunities and mitigating risk for each topic. As part of the action plan to become planet positive, we are focusing on local empowerment. We are accelerating our efforts working with local governments across the country, mainly on easy usage, promoting reuse, education and donations. As an example of our undertaking in Q2, on October 24, Mercari and Sozo announced a partnership with Nishinomiya City Hyogo Prefecture to conduct a pilot test for city of Nishinomiya will sell reusable items collected as trash, big or small, or items brought in by its citizens on Mercari shops. There is hope that this will reduce the costs required to dispose of such trash and enable the city to use the proceeds from Mercari shops for its activities. Moreover, in January this year, we received the FY 2022 award for being a great example of regional revitalization, SDGs, public private collaboration. Therefore, our activities have been praised by the national government. We will continue to become planet positive by executing a wide range of action plans. This concludes our results briefing session for FY 2023 Q2. Thank you very much.

EarningCall_374

Good morning, and welcome to Voya Financial's Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator instructions] After today's presentation, there will be an opportunities to ask questions. [Operator instructions] Please note, this event is being recorded. Thank you, and good morning. Welcome to Voya Financial's fourth quarter and full year 2022 earnings conference call. We appreciate all of you who have joined us for this call. As a reminder materials for today's call are available on our website at investors.voya.com or via the webcast. Turning to Slide two; some of the comments made during this call may contain forward-looking statements within the meaning of Federal Securities law. I refer you to the slide for more information. We'll also be referring today to certain non-GAAP financial measures, GAAP reconciliations are available in our press release and financial supplement found on our website. We plan to release our fourth quarter 2022 financial supplement restated for the accounting impacts from long duration targeted improvements or LDTI with our first quarter 2023 earnings call. The restated financial supplement will include the impacts of the targeted improvements, which build into effect in the first quarter 2023. That said, we do include forward-looking guidance related to LDTI in the analysts modelling considerations within our presentation. Joining me on the call are Rod Martin, our Executive Chairman; Heather Lavallee, our Chief Executive Officer; and Don Templin, our Chief Financial Officer. After their prepared remarks, we will take your questions. For Q&A session, we have also invited the heads of our businesses, specifically, Christine Hurtsellers, Investment Management and Rob Grubka, Workplace Solutions. Good morning. I'd like to begin by sharing how energized I am to serve as Voya's CEO and lead this management team as we execute on our strategic objectives and continue to deliver strong financial results for our shareholders. I also want to thank Rod for his leadership over the past decade. Thanks to Rod and the incredible work performed by so many across our company, Voya has been at the forefront of strategic developments in our industry in recent years. We've divested capital-intensive businesses, grown high ROE and free cash flow generating revenues and deployed capital in a manner that maximizes value for our shareholders. I'm enthusiastic about our leadership team and Voya's prospects, as we continue to execute on our strategic and financial objectives this year and into the future. Together, we are guided by the same set of principles that have served Voya and its shareholders so well over the years, careful stewardship of shareholder capital, skillful management of expenses and a focus on profitable growth. And as I think back to everything that our team has accomplished in just the past year, I see those principles in action. Today, we are reporting strong financial results for a year in which macro headwinds were among the most difficult we have faced. Across every business, we have proven our resiliency and our ability to execute. We carried out transformative M&A transactions throughout 2022 that have positioned Voya for strong growth in the years ahead. Our acquisition of AllianzGI's U.S. Asset Management business has added scale and diversification to Voya Investment Management and is already delivering outstanding financial results. And we just recently closed our acquisition of Benefitfocus, adding a highly strategic business that provides the capabilities we need to fully capitalize on our workplace strategy. Through these two notable acquisitions, we have carried out in significant part the inorganic moves that we signaled at Investor Day just 16 months ago. We are focused on continuing to execute and deliver on integration of the businesses we have acquired, achievement of the strategic goals these transactions have enabled and driving Voya's continued growth. Before I cover our key themes from the quarter and full year 2022, I'd like to ask Rod to say a few words. Rod? Thank you, Heather. Today's call is special for me and everyone at Voya, as it's our first following our successful CEO transition earlier this month. As we approach Voya's next decade as a publicly traded company, we do so with a CEO and a management team that have my complete support and the full confidence of our entire Board of Directors. Since we began our CEO transition six months ago. Heather with the strong support of our management team, has demonstrated that Voya will continue to build upon our proven foundation of success. Under Heather's leadership, Voya's next chapter is an exciting one. Building on the commitments at our last Investor Day, Voya is well positioned to create even greater value for our customers, clients, employees and shareholders. I want to personally thank everyone at Voya for the dedication and commitment that has enabled our company to positively impact the lives of our customers and clients and to contribute to the communities in which we live and work. As Executive Chairman, I will continue to serve Voya and support our outstanding CEO and management team. Thank you, Rod. Let's move to Slide 6 with some key themes, starting with our strong EPS growth in both the quarter and full year. For the full year, we grew adjusted operating EPS by 24%, well above our annual growth target of 12% to 17%. Our strong EPS growth reflects Voya's continued execution of our net revenue growth, margin expansion and capital management initiatives. In terms of net revenue growth, commercial momentum continued across our businesses. For Wealth Solutions, we grew full service recurring deposits over 10%. In Health Solutions, annualized in-force premiums grew nearly 11% year-over-year. In Investment Management, we generated approximately $150 million of net inflows during the fourth quarter despite a challenging backdrop for asset managers. This contributed to full year net flows of over $1 billion, reflecting, in particular, the strong performance of the business we acquired from Allianz's global investors last July. In a few moments, Don will share more on our results and performance. With respect to capital management, we concluded the year with approximately $900 million of excess capital after deploying $1.2 billion to repurchase shares, extinguish debt and pay common stock dividends. And having completed our acquisitions of Benefitfocus last month, we expect to resume share repurchases in the second quarter of 2023 and assuming market conditions remain constructive. In addition to net revenue growth and capital deployment, we have also remained focused on margins, which has included our successful elimination of all stranded costs associated with prior divestitures ahead of schedule in 2022. Underlying the results this year is our continued commitment to the execution of our plans, controlling what we can control despite the headwinds of the macro environment. Let's turn to Slide 7. We completed our asset management transaction with Allianz's global investors only six months ago, and we are already seeing significant benefits from this acquisition, including strong earnings and positive net flows. Through this acquisition, we have significantly diversified our asset management business, transforming Voya Investment Management into a global provider of investment solutions to clients across numerous attractive asset classes and markets. The transaction also added considerable scale to our business with $90 billion in new assets under management, as well as access to AllianzGI's extensive global footprint to distribute our investment strategies outside of the U.S. and Canada. Let's turn to Slide 8. We also completed our acquisition of Benefitfocus last month. Benefitfocus helps us achieve one of our core strategic objectives: connecting workplace health benefits and workplace savings in a manner unique to the marketplace. With a Benefitfocus platform, Voya can meet the increasing demand among employers for workplace benefits and savings solutions that optimize their benefit spend. Just as important, the acquisition allows Voya to simplify what is too often an overly complicated process for employees to select the right package of benefits to meet the unique needs and circumstances, providing a superior user experience for our clients and customers. From a financial standpoint, it adds capital-light, fee-based recurring revenues, while positioning us well over the longer term to grow into highly attractive markets connected to health benefits at the workplace. For 2023, we expect the business to generate EBITDA of approximately $50 million including expense synergies. Turning to Slide 9; our focus on our culture and the character of our brand continues to differentiate Voya. Once again, this quarter, we have been recognized externally by several prestigious organizations, including those noted on this slide. These honors speak to the Voya culture that we have developed during the past decade and is reflected in the diversity and strength of our Board, our management team and our workforce. The transformation we have executed over the past 10 years is directly attributable to our people who have consistently worked in partnership to achieve the ambitious goals we have set. As Voya's CEO, I will continue to protect and develop the strength of this culture, preserving the powerful legacy and differentiators that Voya has built over many years. Looking forward, our culture will continue to help us stand apart in the marketplace. Before I pass it over to Don, I'd like to take a moment to welcome him to Voya. I'm excited to have him as part of our management team, and I'm confident that all of our stakeholders will benefit from his great experience and knowledge. We are looking forward to working closely with him as we advance our strategy and financial plans. Don? Thank you, Heather. Let me begin by saying how delighted I am to join you all on my first earnings call as CFO. I'm incredibly excited to join a high-caliber management team with an established track record of execution. I look forward to working with this team to accelerate organic growth opportunities, maximize value from our recently acquired assets and drive long-term shareholder value. Let's turn to our results on Slide 11. We delivered adjusted operating earnings per share of $2.18 in the fourth quarter and $7.58 for the full year. This included notable items totaling $0.13 for the quarter and $0.17 for the full year. Excluding these items, year-over-year adjusted operating earnings per share for the fourth quarter grew by 31% to $2.05 and for the full year by 24% to $7.41. Organic growth was driven by higher investment spread revenue in Wealth and strong underwriting results in Health. This was partly offset by the impact of equity markets on fee revenues in Wealth and Investment Management. Fourth quarter and full year 2022 GAAP net income was $190 million and $474 million, respectively. From an excess capital perspective, we generated over $600 million in 2022. This is meaningfully above net income, primarily due to the noncash impacts related to businesses we exited through reinsurance. Our strong results exemplify how diverse revenue streams and complementary businesses enable us to effectively navigate through rapidly changing economic landscapes. Moving to Slide 12. Wealth Solutions delivered strong fourth quarter and full year results. We generated $148 million of adjusted operating earnings in the fourth quarter and full year earnings of $707 million. Full year net revenues ex notables grew approximately 3%, in line with our 2% to 4% target. Our spread-based revenues continued to benefit from higher interest rates. This more than offset the impact of lower average equity markets on our fee-based margins. First quarter investment spread income is expected to be in line with fourth quarter 2022. While we expect to benefit from the higher rate environment, this will be offset by increased crediting rates. Full year adjusted operating margin was 37.5%, this exceeded our target range of 34% to 36%, highlighting our ability to manage through challenging macro cycles. Turning to deposits and flows. Full Service recurring deposits grew 10% on a trailing 12-month basis, consistent with our 10% to 12% growth expectation. Full Service net inflows were over $950 million in the quarter, reflecting strong planned sales and favorable retention. This contributed to a record year of Full Service net flows of nearly $3 billion, marking the seventh consecutive year of positive flows in Full Service. Finally, recordkeeping net outflows were approximately $570 million in the quarter. Looking ahead, we expect a favorable trend in full service and record keeping net cash flows to continue, supported by a healthy 2023 pipeline. Turning to Slide 13. Health Solutions delivered strong fourth quarter and full year results, demonstrating marketplace demand and pricing discipline. We generated $74 million of adjusted operating earnings in the fourth quarter and full year earnings of $291 million. Adjusted operating earnings grew on solid revenue growth, and operating margins were within our 27% to 33% target range. Full year net revenues ex notables grew close to 13% year-over-year, reflecting favorable net underwriting results and premium growth across all product lines. Annualized in-force premiums grew nearly 11% year-over-year exceeding our 7% to 10% expectation. We saw growth in all products, including 20% growth in voluntary. Total aggregate loss ratios were 69% on a trailing 12-month basis. This was better than our targeted 70% to 73% range, primarily due to favorable claims development within stop loss during the quarter, which more than offset elevated non-COVID mortality within group life. A successful sales and renewal season, the diversity of our revenue mix and the momentum from executing our workplace benefits and savings strategy gives us confidence in our ability to deliver on our growth targets. Moving to Slide 14; fourth quarter and full year investment management results reflect the strength and diversity of our platform and benefits from the AllianzGI transaction. We generated $42 million of adjusted operating earnings in the fourth quarter and full year earnings of $158 million, excluding the noncontrolling interest attributable to AllianzGI. Full year net revenues ex notables grew 11% year-over-year as additional revenues from AllianzGI more than offset the impact of macro headwinds on both equity and fixed income fees. Full year adjusted operating margins improved over 100 basis points over the prior year to 26.8%. We expect it to improve at least another 100 basis points in 2023. This will be driven by our expanding private and alternative franchise, growing retail assets and continued expense discipline. Turning to investment performance. While our 3- and 5-year fixed income performance were impacted by the challenging markets in 2022, 100% of our fixed income funds outperformed on a 10-year basis and is a key differentiator. Turning to flows. We generated $147 million of positive net inflows in the fourth quarter and over $1 billion for the full year 2022. It is worth highlighting that this was achieved in a year of significant headwinds across global equity and fixed income markets and this marks seven consecutive years of positive flows for our business. Our positive net flow result is distinguished from the outflows seen across the industry, primarily reflecting the strength of our insurance channel, demand for our private strategies and the contribution from AllianzGI. We are excited about our momentum going into 2023. We expect to build on the successes with AllianzGI, expand our private and alternatives platform and continue delivering strong long-term investment performance for our clients. Turning to Slide 15. Our year-end excess capital was approximately $900 million. During 2022, cash generation was once again in line with our 90% to 100% free cash flow conversion target. We generated over $600 million of excess capital from our strong adjusted operating results. Our ending RBC ratio was 488% and well above our 375% target. We deployed $1.2 billion of capital over the year across share repurchases, debt extinguishment and common stock dividends. With respect to leverage, we plan to utilize a new metric that excludes AOCI. This is consistent with the approach most rating agencies are taking and is more resilient across market cycles and post LDTI. Going forward, our target leverage ratio will be within a range of 25% to 30%. Over time, we expect to manage to the lower end of that range to provide ongoing flexibility. Our balance sheet and capital position is strong, and we are confident that our well-diversified investment portfolio will continue to deliver attractive through-the-cycle, risk-adjusted returns. Turning to Slide 16; our 2022 financial results build upon our strong execution track record. We are 1 year into our 3-year Investor Day plan, and we are ahead of our EPS growth expectations. Looking ahead to 2023, we expect at least 10% EPS growth. With Benefitfocus, we see a path to our 12% to 17% EPS growth range. And notably, this is off a higher 2022 EPS base. In summary, our fourth quarter and full year earnings were strong, particularly given the challenging equity in fixed income markets, highlighting our execution strength and the benefit of our diversified businesses. We are focused on integrating and maximizing the full value from our recently acquired assets, while driving our workplace and investment strategy. We are also focused on delivering exceptional customer value which should translate into shareholder value, and we will continue to be balanced and disciplined around our capital. Could you provide some additional color on the pipeline for investment management flows as well as the opportunity to -- from the enhanced AGI distribution as we move into '23? Yes. Good morning. So how to think about the strength of flows going forward? Listen, we -- as you saw, we are quite proud of the business results we had in '22, which is a challenging year. And so we really are well set up to leap with strength into 2023. So we see a very diverse, strong pipeline represented by many strategies. And we're seeing green shoots in what were headwinds last year in retail flows, as an example, and increasing interest in fixed income, just given where overall levels of yields are, right? Globally, they're quite attractive. And so thinking about Allianz and our distribution partnership in two ways. Number one, there's going to be strong global demand for fixed income, given where our yields are. And when you think about leveraging that partnership near term and long term, we are going to launch -- we expect to launch four new funds this year with Allianz off their UCITS platform. Two, earlier in the year that are off of the new teams that we acquired as well as, two AfavoyaIM [ph] strategy. So there are many ways to leverage the strength of the partnership, the strong demand for income-related assets in Asia specifically, were really -- that's the high-growth area when you think about investment product demand. So overall, transformational year for the business, in terms of the strategic distribution partnership, and I'm very excited and optimistic as we go into the quarters ahead. Great. And then just a quick one on Benefitfocus. How should we think about the $50 million EBITDA guidance in terms of how it would actually come through as GAAP operating income? Sure, Ryan. So we have -- the $50 million of EBITDA, if we deduct from that what was sort of the historical depreciation and amortization of Benefitfocus, that gets us into a range of $25 million-or-so of pretax operating earnings. So for purposes of modeling, that's what we would expect to use is somewhere in the range of $25 million. I might note that our definition of EBITDA and their definition of EBITDA are different. So this -- our number includes stock-based compensation, the burden of stock-based compensation, theirs did not. So we've had some questions around that. But $50 million of EBITDA and roughly $25 million of pretax operating earnings. And maybe, Ryan, it's Heather, if I can just add as a follow-on to that. While we talk about the financial benefit from Benefitfocus, we really acquired this for the long-term benefits and really thinking about how it accelerates our health and wealth strategy. It really puts us right at the center of the customer experience as well as helping employers to optimize their overall benefit spend. And this is an established partner with an established business that we've acquired. And I'll close with what gets me so excited for Voya to own this property is we can put our muscle behind accelerating the road map, bringing in our health and wealth guidance tool into their client experience, helping to improve churn rates, RFP, close ratios and overall operating margins. So while there is certainly real and significant financial benefits in '23, we're most excited about the long term and how this will help ultimately drive growth and shareholder value for our shareholders. My first question, as we think about you guys going back to buying back your shares, should we still think about debt management being about 40% of buyback? And do you have a target on the buyback side of what you would want to return to shareholders during the last three quarters of the year? Sure, Elyse. As we are -- as Heather indicated, we are committed to returning back to share repurchase and return of capital in the second quarter. I think with respect to pacing, there's a number of items that impact the pacing of that, including what happens in the macro environment. So we indicated that we expected to go back into share repurchase, assuming a constructive outlook. We don't see anything that causes us to believe that, that won't occur, but that will obviously impact our ability to generate excess capital and then return it to the shareholders. With respect to leverage, we noted on the call that we are going to be using a different leverage metric, a revised leverage metric, if you will, and we are in the sort of the higher end of that range. So the range was 25% to 30%, excluding AOCI. And I would anticipate that during 2023, we will be managing that leverage ratio down so that we do buy ourselves some capability or some flexibility. So we are committed to returning capital. It will be influenced by a number of items, including sort of what happens over the next two quarters. But we are very confident in our cash generation capabilities. We are very confident in the forecast that we presented to you, and so we are very comfortable that we'll be back in the market at some point in time and returning capital to shareholders. And then my second question. Within Wealth, you guys talked about higher crediting rates offsetting some of the tailwinds from the rising interest rate environment. Can you help us think through the longer-term benefit of rising rates? And how much of that should be credited back to customers versus falling to the bottom line? Yes. So Elyse, I'd just step back and as we think about we saw in the quarter. There was some element of credited rate increase that occurred in the quarter. There's more of that that we expect to happen in the first quarter. It's the question of like, well, how much and how should we think about it? As Don said in his comments, we guided from a spread perspective to be consistent with fourth quarter, that's our best view of it as we sit here today. And then look, as time marches on, and we're always trying to balance out what has been a very good retention story for the business. Credit rates are part of that, calculus that we need to do and the balance of decisions that we need to make. So looking at it in isolation, maybe not the cleanest answer for me to give you, but I can tell you we're going to do it in a really balanced, thoughtful way looking not only at spread, but also the fee side of the business and striking the right balance as we move forward in an environment that we're all alluding to is going to have some twists and turns to it. But again, if you look back over the last few years, I think we've gotten adapt to being agile and disciplined about striking those sorts of right balances as we move forward. Maybe first to stay on Wealth. The Wealth margins came in above your 34% to 36% target range last year and it seems like there's a nice tailwind in the business still from higher interest rates, but you're guiding for margins to return to the target range in 2023. So I was just wondering is there any reason the margin can't remain elevated in the near term, given the rate uplift in a special way of kind of equity markets recover as well? Yes, sure. So when we think about margin and just call it out, I think it's in the material and the modeling assumptions that we expect from LDTI, also to have a benefit to your specifics around rates and fees in the macro environment again, I won't be overly repetitive in my answer, at least. We're going to make good balanced decisions about growing the business, doing it in a disciplined way from a pricing perspective that includes being smart on expenses and all those factors come into play. But yes, we would think about our margin guide that we've given of the 34 to 36, we're going to be at the high end of that or potentially over depending on how the market plays itself out. Does that help, Erik? Yes. And then maybe a somewhat similar question for Investment Management as we think about the margin trajectory. I don't think you gave a specific target for 2023, but I believe Don indicated the goals to be up 100 basis points or more, which should be a little bit below the 29% to 31% range you talked about previously. So I'm assuming that's just market factors. So maybe if you could talk about how you're viewing the margin trajectory for Investment Management going forward? Yes, Erik. As you say, markets will definitely have an influence, right? But this is sort of near term when you think strategically, though, we continue to see great opportunity to grow the operating margin. And as Don said, based on our disclosed market assumptions as far as what drives a lot of our modeling, we fully expect that there's going to be a 1%-plus margin expansion in the year ahead. So it all goes back to the fundamental strength of the pipeline as well as, listen, we've seen good operating leverage and scale as far as what we've been able to do on expense synergies with the acquired teams. And as any good operator and we've demonstrated we're going to continue to be very focused on expense management as well and making sure that we're feeding and growing our strategic initiatives, but again, being very disciplined. So I see a lot of path, a lot of levers to deliver operating margin expansion despite potentially some market challenges. Just a first question on -- I don't want to be too shortsighted, but just understand how you're thinking about the accretion of Benefitfocus versus share repo? Based on the numbers you're giving out, the GAAP PE is something like 15x. But I recognize, I think, that was a cash flow accretion number. And -- but even looking at your EBIT number, assuming that's an approximation of cash flow, it looks like you paid over 10x when your stock is stil high single-digit multiple. So just curious how you would reconcile that? Yes. So Tom, I think what's really important to sort of reflect back on was the guiding principle that we were focused on at the time that we were considering the Benefitfocus acquisition was, one, that it needed to make strategic -- it had to be of strategic importance and have to be impactful from a strategy perspective, but it also had to be accretive, and we were assessing that accretion compared to our base plan. So our base plan at the time, if you recall, there were some fairly significant macro headwinds and some uncertainty about the future. The base plan was conservative, given that macro environment, and I think it was particularly conservative in relation to share repurchase and debt extinguishment. So the deal model that we had at the time contemplated an EBITDA number that was very similar to the one that we've guided to. It contemplated a pretax operating earnings number that's very similar to the one that we guided to. And as a result, we believe that the deal economics are consistent with sort of that original base plan. Okay. Don, just a follow-up for you. Can you talk a little bit about any lessons learned from your years spent at Marathon that you think can be applied to the new Voya role from a shareholder value creation perspective? Yes, Tom, I really appreciate that question. So when I came to Voya, there was probably three things that got me really excited about Voya. One was the people. Secondly was the courage that the company had exhibited in trying to evolve the company. So you think about what it was at the time of the IPO and what the company looks like now, that's a significant change and took a lot of leadership and a lot of courage to undertake. And then I was very optimistic about sort of the upside of Voya, so both from a cash generation capability and an EPS perspective. When I look now 80-plus days into my role here at Voya, I'm actually more excited about it than I was at the time that I came on board. The chemistry and the nimbleness of the management team. And I think from my prior Marathon Petroleum days, you need to be nimble, you need to have great chemistry among the leadership team in order to operate in an environment where the macro can change very dynamically and very quickly. And I think the team has really demonstrated in 2022, as an example, that they are really, really good at that. The plan that was delivered was above what was guided to and what we talked about at Investor Day, and you could never have predicted what 2022 would have been like at the beginning of the year. The second thing that I've noted, and I'm really excited about and was also something that was really important to me at MPC, was the execution muscle, the leadership team has here, it is not easy to divest yourself of businesses, but they've done that effectively. It is not easy to take significant costs out of the business, but they've done that effectively. And so I'm really excited about that. It's not easy to integrate companies. I saw that in my days at MPC as well. And I'm really heartened by the really positive momentum we have at AGI after owning those assets or having that relationship for just over six months, and I'm really excited about the opportunities that present themselves with Benefitfocus. And then what I also learned at MPC, that I think is an appropriate carryover here, is that in a world that is dynamic, investors expect a management team that is committed to discipline and a management team that is committed to returning capital to shareholders. We returned billions of dollars to shareholders at MPC and the management team here has returned, I believe, over $8 billion, $8.5 billion to shareholders since the time of the IPO. So that was a bit of a long-winded explanation, but hopefully, it gave you some perspective around why I came here, some of the things I learned at MPC and why I'm so excited about the future here at Voya. I'm trying to get a general feel for how you're thinking about your capital going forward? So as I estimate post Benefitfocus acquisition, you probably have around $300 million of excess capital. So I'm wondering why not get to work earlier on the buyback given how cheap Voya stock is relative to peers? And along those same lines, M&A. You've done two material acquisitions last year? And how are you thinking about M&A going forward? Yes, Andrew, thanks for the question. It's Heather. Don and I are going to tag team this one. I'm going to let him start on the capital, and I'll finish on the M&A question. Yes, Andrew, I think we would have been pretty clear when we entered into the transaction and announced the transaction with Benefitfocus that we were going to pause the share repurchases for the fourth quarter and that we were going to pause the share repurchases for the first quarter. We obviously delivered a very, very strong 2022. Our capital is in a very strong position. We're very optimistic about our capital generation capability, cash generation capability in the first quarter. And that's why we were able to, I think, so firmly and make the commitment that we would begin returning capital in the second quarter. I think pacing will depend a little bit on what happens economically and our actual cash generation in the first quarter, but we are really committed to returning to the repurchase of shares or the return of capital. And as I said, we're also going to balance that with making sure that we're managing appropriately our leverage ratio. Yes. And Andrew, if I can pick it up from there. If you just go back to, Don referenced the $8.5 billion, $8.7 billion of capital we've returned to shareholders since we've been a public company. If you just look at 2022 alone, the fact that we deployed $1.2 billion of capital and $750 million in share buybacks. I think that's a strong result and certainly, capital management is going to continue to be a really important lever for us as we go forward to be able to increase our EPS in addition to revenue growth and margin expansion. So just to kind of add that on to Don's point, but to your question specifically around M&A, and I'll go back to what we talked about at our 2021 Investor Day. And we've said our approach to M&A has always been, it's got to be strategic, it's got to be additive, we want -- we've always been very opportunistic in terms of how we've approached it and very, very selective. So -- and at the end of the day, we want to do something that is in the best interest of both customers and shareholders. So when we talked at Investor Day in 2021, we said that there were really three capabilities that we needed to fill. We talked about improving customer outcomes and experiences at the workplace, we talked about adding technology and data-oriented capabilities and then we also talked about in investment management, expanding international distribution and growth in privates and alternatives. And so if you look at what we have done with the acquisitions that we announced and then recently closed, we have executed on the M&A. We believe at this point, we've got -- we've achieved scale, we have all the capabilities that we need to be able to grow. And hopefully, we were clear in our comments that our focus on '23 is, I'll just say 2 words: integration, execution. Integration and taking full advantage of the AGI, including Czech Asset Management as well as Benefitfocus and really driving the revenue growth we see and increasing shareholder value and then execution is we're in year 2 of our Investor Day plan. We've executed on year 1. I think it's demonstrated by our full year 2022 results. And so we've got our heads down for 2022, and that also includes capital management. And maybe the final comment from me on M&A is, as we think going forward, we're going to continue to invest in initiatives that -- whether it's organically or inorganically, that will accelerate our strategy and always be in the best long-term interest of both shareholders and customers. So hopefully, that gives you a little greater context of how we're thinking about M&A. Yes. Very helpful, Heather. And if I could just ask a quick technical question with the Inflation Reduction Act putting forth a corporate minimum tax, does that affect Voya in terms of having to pay taxes going forward? And any color on that would be appreciated. Yes. So we're evaluating that act. I mean I think there's some provisions that need to be clarified in terms of that act. At this point in time, we do not anticipate that we will be paying taxes. But that -- there's some consideration around the significant gains that we had in 2021 and how that gets evaluated for purposes of determining whether you fall into the category of being the alternative minimum tax payer. Congrats to Rob and Heather as well. Health Solutions had a strong quarter for distribution across the products. Can you maybe talk about the experience there? How Benefitfocus enhances this, and then an early look on stop loss?. Yes. Great. Thanks, John. Yes, so a couple of things. As you look our business, just historically, obviously, first quarter, we always guide towards 1Q is going to be a real driver of how we think about the full year.. Part of what we've started to talk more about though is also in particular with stop losses broaden out, branching out our distribution approach and sort of the size part of the market that we focus in on, which helps lend towards some diversification on where we do business, who we partner with, how we partner with them. I would say what we saw this fourth quarter, while up a bit, not dramatic in the total of the full year, but those things are starting to create just a different diversity of who we're talking to, when do we talk to them. And as you get away from what we historically talked about is our middle and upmarket approach, think 500 lives and up, we're going to start getting into different conversations, which also necessitates doing business and setting up cases in a more through-the-year sort of cycle. So net-net, I wouldn't sort of view anything surprising there. It's a bit of an outcome of us just thinking about the right we've earned, I think, by executing really strongly over a number of years now, a reputation in a market that's brought us credibility and gives us access to more opportunities throughout the year. To the Benefitfocus question, look, we're in early days. And again, to this point of when do you sell stuff? When are you busy in market? They're busy right now. And so I think from a management team and an integration perspective, we're really focused on not distracting them from what they need to do and what they need to deliver on. As we move forward, though, we see tons of opportunity. Heather alluded to it a little bit in her comments already about Benefitfocus from a solution perspective, what do we deliver in the market, how we deliver it in a more integrated way. We're really excited about that. Our strength in broker distribution should increase their strength in broker distribution. So I think it's early days, but the opportunity, I think we're excited about what we see. We'll be disciplined about how we pace into it and pick the right time to lean in again, all in the spirit of driving growth and value for the customer and shareholder. And then on stop-loss, look every year is a little bit different story, a little bit nuanced. I would do the step back and just say, we feel good about where we're at. Obviously, the results we had for '22, we feel like we're pricing the business right. I'm willing to win the right business and walk away from the stuff that we don't want. And that's both on the front end as well as the retention side of it. So as we look at where we'll talk about things in first quarter as the dust settles, again, still come back to our guide in Investor Day targets are still our guide in Investor Day targets. So we're going to continue to be laser-focused on growing the book of business in a disciplined way. First one I had for you all was on recordkeeping. I think in recent quarters, you've talked somewhat optimistically about the pipeline for recordkeeping. And I just wanted to see if there was an update there? I mean we didn't see a whole lot coming through this quarter, but wanted to understand if that's something that we should expect as we think through the first half of '23? Yes, sure. So look record-keeping, I think the standard answer it's episodic. It's lumpy. All those things still apply. I think we're feeling good about just the activity and the volume of cases that we're seeing, as Heather and Charlie have talked about M&A and the things that have gone on in the market over the last 24, 36 months, it just inevitably creates opportunities. So I think the story and the consistency of it is intact, right? It's going to be episodic. We're seeing things that we want to go after. And again, being disciplined on the stuff that we don't, recognizing we're in a position with a really balanced book of business, good strength across the market size segments, and this is a piece of it, but it's not the only way that we drive growth in the business. And again, a quarter here where you see assets go down from a net flow perspective doesn't mean the participants have. And so when you get under the hood of what drives revenue there, we show you what we show you, but the undercurrent is also participant growth, and we've been happy with what we're seeing on that front. Got it. Second one I had for you all is on the excess capital generation. I know you talked about a little over $600 million for 2022. When we think through sort of what you're guiding to on EPS growth in 2023 and the cash conversion that you're expecting, I think it triangulates to something closer to $800 million. And I just wanted to understand sort of, is that right? And was there anything that maybe held the $600 million back a little bit this year? Like how do we think about bridging that gap year-over-year? Yes, Alex, this is Don. Let me maybe start with 2022 and then we can get into 2023. So we indicated that we generated over $600 million of capital or cash generation this year. So if you think about our adjusted operating earnings, they were in the $835 million range. I guess, they were $835 million. And then in there, included in there, was unlocking related to Wealth. So if you deduct that, that happened earlier in the year, a reserve release related to health that happened earlier in the year and then we have the tax benefit, the foreign tax credit benefit that we talked about in the fourth quarter, that gets you from the $835 million to, I'll say, $700 million-ish and then you multiply that $700 million by the 90% conversion, 90% to 100%, you get yourself into the 600 -- over $600 million range. So that's the walk from 2022. I would expect that we would have a similar conversion ratio in 2023. Obviously, there will be things that come in and things that come out. But broadly, we've been able to deliver that in the past, and I'm confident that we can deliver that in the future. Most of my questions were answered. But just on your point on spreads being flat from 4Q to 1Q. How should we think about just competition in the market and also your outlook for spreads? Assuming interest rates don't move up any further, should you assume fairly stable spreads beyond 1Q as you're going through 2023? Yes, Jimmy, look, I'll hit it, and then I don't know if others want to talk about more of the macro view on rates at all. But look, the spread point, as I alluded to before, we're going to be balanced and sort of follow the ball where it goes and what the portfolio is doing, how we see competition in market. Given how the yield curve has moved around so quickly on the short end versus how the long end is trading, it's going to be dynamic, it may be the easy word to put around it. But look, we get paid to make those hard calls and try to find the right balance between what we're seeing in our book, what we're putting on and selling obviously influences things, how reinvestment is playing itself out and pushing on the rate from a gross perspective and then figuring out what it's going to take to strike the right balance on the crediting side. So I'm not being overly specific here, on purpose because we'll be very much data-driven on what we're seeing in the portfolio and what we're seeing in market to continue to compete to both win but also retain business and strike that good balance. Yes. And Jimmy, this is Christine. Just to add a little bit too from more of a macro context and how to think about the investable yield on the portfolio from that standpoint. So the new money rate or the investment opportunities, given where credit spreads are and interest rates, is above sort of our in-house, if you will, or existing portfolio yield. Plus, when we look out at maturities, things will be rolling off over the year that are below. So I think that interest rates from that standpoint are still a tailwind for the overall company. Okay. And then on the warrants are coming due in a few months, should we assume most of your buyback activity is just going to be normal stock? And given the ownership structure of the warrants, there's not much that you could do to maybe eliminate those before they're due? Yes. So Jimmy, they obviously expire in early May. We I think we have been open to early extinguishment of those, and I think we've mentioned that on previous calls. But to date, it hadn't been economic to do so. So if it's economic, we would do it or consider doing it. Otherwise, we will let them kind of expire in normal course and have that unwind. I guess, we're looking forward to sort of a post warrant period because obviously, there's a relatively large short position, and when that obviously -- or when that ends, we should get back to a much more normal situation, which we think will be good for trading and for our investors. Thank you. This concludes our question-and-answer session. I would now like to turn the conference call back over to Heather Lavallee for any closing remarks. Our achievements throughout 2022 reflect our strategic focus, the strength of our leadership team and our continued attention to the core principles that have long guided Voya's success. While 2022 was a year of transformation, we see 2023 as a year of execution on our critical integrations, on our strategic goals and on our growth objectives.. In this manner, we will continue to remain centered on the needs of all of our customers, which will help drive achievement of the objectives that we shared at Investor Day in 2021. We look forward to updating you on our progress. Thank you, and good day.

EarningCall_375

Welcome to the ScanSource Quarterly Earnings Conference Call. All lines have been placed in a listen-only mode until the question-and-answer session. [Operator Instructions]. Today's call is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Mary Gentry, Senior Vice President, Treasurer and Investor Relations. Ma'am, you may begin. Good morning and thank you for joining us. Joining me on the call today are Mike Baur, our Chairman and CEO; John Eldh, our President; and Steve Jones, our Chief Financial Officer. We will review our operating results for the quarter and then take your questions. We posted an earnings infographic that accompanies our comments and webcast in the Investor Relations section of our website. Let me remind you that certain statements in our press release and the earnings infographic and on this call are forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties include but are not limited to, those factors identified in the earnings release we put out today and in ScanSource's Form 10-K for the year ended June 30, 2022, as filed with the SEC. Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. ScanSource disclaims any duty to update any forward-looking statements to reflect actual results or changes in expectations, except as required by law. During our call, we will discuss both GAAP and non-GAAP results and have provided reconciliations between these amounts in the earnings infographic and in our press release. These reconciliations can be found on our website and have been filed with our Form 8-K filed today. For the quarter, we delivered 17% net sales growth and adjusted EBITDA margin of 4.8% and record adjusted EBITDA for the quarter and the trailing 12-month period. This exceptional performance is a result of strong demand and operating leverage in our hardware and Intelisys businesses. Given our outstanding Q2 results, we are raising our full year outlook for FY '23 and now expect net sales growth of at least 6.5% and adjusted EBITDA of at least $176 million. We remain focused on executing our hybrid distribution strategy to drive profitable growth for both our customers and ScanSource. Our hybrid distribution strategy of selling hardware, SaaS (Software as a Service), connectivity and cloud services expands profitable growth opportunities in two ways. First, our customers have a broader technology portfolio to meet demand in an increasingly digital world. These expanded offerings and capabilities allow our customers to meet the solution requirements of their end users. And second, we give our customers the opportunity to grow their revenues and build a successful stream of recurring revenue that will result in a more profitable business. We believe our hybrid distribution strategy is a win-win model, and it guides how we operate our business for sustainable growth and profitability. As ScanSource enters its 30th year of business. We are honored to again be named a World's Most Admired Company by Fortune Magazine. I'm pleased to see our Number 1 ranking in People Management. Our focus on people and culture has never been stronger as our employees strive to support our valued customers, suppliers and each other every day. Thanks, Mike. Q2 net sales topped $1 billion, an all-time sales record for continuing operations. We delivered 17% net sales growth highlighted by strong demand for our technologies and outstanding execution by our team. During the quarter, we met the demand by building our inventories as lead times from our suppliers improved. Our business is built for top-line growth, and we realized operating leverage in our outstanding bottom-line results. We are committed to helping customers execute on the expanded opportunity to sell hardware, SaaS, connectivity and cloud services. ScanSource is guiding our customers on their hybrid journey, starting with discussions with their account managers on their unique hybrid opportunities. I'd like to share a recent hybrid example of how ScanSource is helping our customers transition their end users from on-premise telecommunications products to next-generation cloud-based communication solutions. In this example, one of many a traditional telecom bar transitioned an existing customer, a university with an on-premise communication platform to a hybrid cloud-based solution, along with handsets and headsets. Key to our value proposition was providing access to our team of solutions engineers who architected and designed the hybrid solution. This hybrid deal, a combination of recurring revenue and hardware shows how our customers trust ScanSource and our capabilities to provide new opportunities for growth and profitability. In our Specialty Technology Solutions segment, Q2 net sales increased 26% year-over-year, fueled by strong demand for our hardware technologies and increased big deals. We had double-digit sales growth in devices that enable productivity, automation and the customer experience. This includes barcode scanners and printers, point-of-sale terminals, self-checkout systems, data networking and physical security, led by Zebra, NCR, Aruba, Access and Extreme Networks. One area to highlight is our physical security business where our dedicated technical support resources, configuration services, speed and efficiency create a competitive advantage for ScanSource. Moving on to our Modern Communications and Cloud segment. We delivered 4.5% net sales growth for the quarter. We had record Cisco sales with double-digit growth led by large enterprise projects in networking collaboration, growth in our federal business, growth in new customers and outstanding execution by our team. The fastest-growing area in our Cisco portfolio is cybersecurity. We're driving growth by leveraging our cybersecurity specialist to host customer enablement and threat assessment workshops, expanding our customers' skills and opportunities. We are well-positioned for growth with our cloud communication solution offerings including UCaaS and CCaaS. As part of our Intelisys business, UCaaS grew 14%, led by RingCentral, 8x8 and Zoom and our CCaaS business grew 60%, led by Five9, Genesis, ICX, Talkdesk and Dialpad. While cloud communication solutions continue to grow, our on-premise communications business continues to decline. It represented only 10% of total segment sales in the quarter. Intelisys continues to be the leader in the agency space with end-user billings of $2.4 billion annualized. Our customers look to us for thought leadership, enablement and education to drive growth and success across their businesses. Intelisys net sales growth increased 9% for Q2 and drove strong growth in recurring revenue profits. In summary, I'm very excited about our Q2 and first half results and wanted to send out a huge thank you to all our people for their dedication and commitment throughout the quarter and to our customers and suppliers for their ongoing trust and loyalty to ScanSource. For Q2, we delivered strong top-line growth with net sales exceeding $1 billion, up 17% year-over-year. Our Q2 results benefited from supply chain improvements late in the quarter. We estimate that over $40 million of our Q2 revenue was expected to ship in Q3 and but early availability allowed us to fill those orders in December. We delivered record profitability in Q2. Adjusted EBITDA of $48.8 million is an all-time record for ScanSource and highlights our consistent strong financial performance. We achieved 15.6% adjusted ROIC in the quarter. Gross profits for the quarter increased 7% year-over-year to $115 million, while our gross margin of 11.4% reflects a higher mix of big deals and less favorable sales mix for the quarter. Our hybrid distribution strategy is winning in the market and strengthening our financial results. Our Q2 recurring revenues of $26.7 million grew 7% year-over-year and that business is close to 100% gross profit margin. For the trailing 12-month period, approximately 24% of our consolidated gross profits are from recurring revenue business. Our non-GAAP SG&A expense for the quarter of $71.9 million increased $2.7 million or 4% year-over-year, demonstrating operating expense leverage. Our record Q2 adjusted EBITDA of $48.8 million represents a 15% year-over-year growth and a 4.83% adjusted EBITDA margin, emphasizing the scalability of our business. Q2 non-GAAP EPS of $1.06 grew 4% year-over-year and includes interest expense of $5.1 million, significantly higher than in prior year. Our higher interest expense reflects both higher working capital investments and the increasing interest rate environment. As we look to the full year, we believe our interest expense will be between $17 million to $18 million for FY '23 and compared to $6.5 million in FY '22. Now turning to the balance sheet and cash flow. Our strong balance sheet enabled us to invest in higher working capital to mitigate supply chain challenges and support the strong demand across our technologies. We used operating cash of $27 million for the quarter and $124 million for the trailing 12-month period. Year-over-year accounts receivable increased $166 million and Q2 DSO decreased quarter-over-quarter to 69 days. The overall health of our receivables portfolio is strong and Q2 was a record quarter for cash collections for the company. Our balance sheet remains strong. From a net debt leverage perspective, we ended Q2 at approximately 1.8x trailing 12-month adjusted EBITDA. And finally, as Mike mentioned, we are raising our full year outlook. Our strong first half performance helps offset the macro uncertainties in the second half. We now expect sales growth year-over-year to be at least 6.5% and adjusted EBITDA to be at least $176 million. As we think about our cash flows, we expect to generate free cash flow in the second half, and we expect our working capital to improve in the second half. To help with analyst models, we expect a net expense range for interest expense, interest income and other expenses from $13 million to $15 million for fiscal year '23. We are updating our estimated effective tax rate, excluding discrete items, to range from 27% to 28% for the full fiscal year. Good morning. So just to start with the pull forward of some of that revenue into the second quarter from the third quarter. Do you foresee that playing out in the third quarter again? Like are we getting back to more normalized kind of lead times where maybe some of this longer-dated revenue is going to start closing sooner? Like do you expect the same dynamic in the third quarter as in the second quarter? Hi, Greg. Thanks. This is Steve. Thanks for the question. In the second quarter, what we saw in that pull ahead was really availability. We did nothing to prompt it other than have the available inventory late in the quarter. As we look at 3Q and 4Q, we hope that we're going to continue to see these supply chain issues evolve. But we're not expecting in our guidance to have any pull ahead in 3Q right now. Okay. And with the mix of revenue, I guess, on the specialty technology side, with the larger deals, are those I guess they come with lower margin, but are those like kind of land and expand deals? Do they provide longer opportunity over time? Like how do you view kind of balancing some of those larger, lower margin deals with the value they create over time? Hey, Greg. It's John. Thanks for your question. And I would offer that absolutely, there are more land and expand value kind of broader solution deals than onetime transactional. And that's just for the mere fact that they're incorporating more solutions, oftentimes more suppliers, which ultimately creates greater value for the customer by really delivering an outcome, which leads to more opportunities due to greater trust with the customer. Okay. And then as you look at the demand outlook or the demand you're seeing in the market and how you've been leveraging your balance sheet, do you foresee the need to continue to use keep your working capital at elevated levels? Or do you see that unwinding or is demand still there where you feel the need to continue to kind of flex that balance sheet? Yes. Thanks, Greg. This is Steve again. So I would say that when we think about our balance sheet and our working capital, the first priority is to make sure that we are in a position to take advantage of a strong growth opportunity. But we do think as we exit the year, our fiscal year, that we'll start working that working capital down provided that the supply chain continues to improve. I think that's really the point for us is as the supply chain improves, that gives us the opportunity to bring our working capital needs down. Thank you. One moment for our next question. Our next question comes from the line of Keith Housum from Northcoast Research. Good morning, guys. Just if I can, I want to focus on the guidance here because I think that's what really investors are most concerned with today. I appreciate the fact that you guys pulled forward some business into the quarter from the third quarter, but it still implies that roughly flat growth for the remainder of the year. Are you guys seeing a decline in demand as you guys finished the year but perhaps you can talk about the demand environment that you expect going forward? And is there an opportunity, I guess, perhaps you can give us a high-end of the range here? Because again, at least 6.5% I think, is going to have investors concerned here. HI, Keith. It's Steve again. Thanks for the question. Yes, when we're looking out in Q3, we still see strong demand. One of the reasons why we're guiding where we're guiding is, we've got a tough compare in the second half. Our fourth quarter last year, our third and fourth quarter last year were records for us, just really, really big quarter. So that compares what's tempering our guidance a bit. Got you. And if I focus on your adjusted EBITDA margin guidance, that's suggesting they fall to roughly 4.5% for the rest of the year versus what you've been able to deliver the past several quarters. Is there something on the horizon that suggests that that may change as well? This is Steve again, Keith. There's nothing fundamental that we're seeing any change in our business. And in fact, we believe that we can add some scale to our business as we go forward, and we're in a position to do that, both on the Intelisys side of our business and the hardware side of our business. Okay. In the fourth quarter, obviously, in the SPS segment 26% growth is outstanding. Would you characterize that as taking market share from your competitors? I'll leave it there. We believe every opportunity to win business is taking market share. So yes, I would say that is the way we look at that. We also look at it as an opportunity to use our balance sheet to use our relationships with our suppliers. To get our fair share and be able to execute on that strong demand. Got you. And then, was the quarterly sales was it dominated by some -- just a few large deals that are unrepeatable. Or was it a healthy mix of large deals as well as the channel work? Hey, Keith. It's John. Thanks for your question. We saw really a mix. I mean we saw strength in our large deals for sure, but we also saw a rebound in our run rate. So to characterize it as one versus the other wouldn't be correct. It was kind of across the board. Got you. And last question from me, I apologize. Your inventory levels at the end of the year -- end of the quarter, obviously, high. Would you attribute that to the fact that inventory availability increased significantly at quarter-end, and you expect to be working that down going forward? Keith, this is Steve. Yes, we did see a lot of inventory availability late in the quarter, which was good. We also have higher elevated inventories because of all the price actions. So that kind of elevates it even further due to that dynamic that's in there. But we did see late availability improve. And we think with the continued improvement, we'll be able to work that inventory levels down as lead times come in. And we say the pricing action, that's just the fact that the value -- for the equal amount of volume, does the average prices increase over the past year is naturally going to be higher? Thank you. One moment for our next question. Our next question comes from the line of Jake Norrison from Raymond James. Hey. This is Jake on for Adam. I was just hoping to get a little more color on your sort of capital allocation strategy for the rest of the year. Has anything changed from your perspective given your strength in the macro environment, are you looking to accelerate or decelerate any investments? Just an overview on capital allocation. Thanks. Jake, thanks. This is Steve, again. Let me just talk a little bit about our capital allocation priorities. No, they haven't changed. We're still looking our first priority is growth in our business and we also want to protect our balance sheet. So we're always watching our targeted net leverage ratio. And then, our third priority would then be to do share repurchases under $100 million share repurchase authorization. Thank you. One moment for our next question. Our next question comes from the line of Mike Latimore from Northland Capital Markets. Thanks. Good morning. Thanks for the UCaaS and CCaaS growth rates. For comparison purposes, you happen to have them for the third quarter as well? Very good. I can ask another one in the meantime. So in those categories of UCaaS and CCaaS, was the demand relatively as expected or consistent throughout the quarter? Or did you see some changes in the December month. Hey, Mike. It's John. Thanks for your question. And I would characterize it as steady all throughout the quarter, but of course, being calendar and fiscal year-end for so many companies, we definitely saw a bit of a spike in the December quarter. We also saw a move from kind of a move, if you will, to more enterprise deals and larger deals as the environment moves from where we were at the beginning of the pandemic where people were racing to get tactical solutions deployed. We now see that we've moved into a more strategic kind of enterprise project environment where people are kind of architecting and building for the long-term, and we see that in our results. And Mike, it's Mary. I have the Q1 growth rates. The UCaaS it was 20% and CCaaS was 60% and that's for Q1. Okay. Great. And then, just last, how are you thinking about these categories and sort of, I guess, it's the second half of your fiscal year, first half of calendar year. Do you expect kind of similar growth trends here? Or is there anything kind of showing up in the pipeline that would suggest a change in growth rates? Mike, as we look to the second half, we think it's kind of a consistent course and speed as we've seen in the first half. Thank you. One moment for our next question. Our next question comes from the line of Arthur Winston from Pilot Advisors. Hi. I was wondering if you could give an estimate or a guess of what the cost increases or unit cost increases for your inventory. And as a follow-on to that, was that somewhat unanticipated so you had contracts in the cost of the inventories went up, so that really impacted your profit margins negatively? This is Steve again. So from a price action perspective, they're really all over the board with our different suppliers. We have a very wide range. And I would say they go from 5% to 10% and some of them have been multiple price actions throughout the year, even starting in last year. As we sell that inventory through it really just is part of our cost of goods sold, and we pass that on to our customers. That's our business model is to be able to pass those price actions on to our customers. If we have inventory, we're able to keep some of that as we've leveraged our balance sheet to be able to do that. And that's kind of our reward for having that extra inventory. No, they're not. They will be temporarily as we have that inventory, and we're able to sell through that inventory. So we get a little bit of a pickup really kind of an arbitrage pickup of the inventory levels that we have. But longer term, they normalize out. Okay. My last question is, in your beginning speech, you mentioned macro uncertainties impacting your guidance. But it doesn't -- can you explain what these macro uncertainties are? Because it doesn't sound like from your answers to these questions, there are a lot of uncertainties going forward. Yes. It's really the length of time that we're looking out. We have pretty good visibility to Q3 and we're confident in our Q3 view. It's really what's going to happen in Q4. And as we know, are words out there. And so are we going into a recession? Are we coming out of a recession? So that uncertainty could affect our ability to grow in the fourth quarter. Now we don't believe that -- in our guidance, we don't believe that there's a big risk to our guidance range. So basically, this is what economists write about, and you read in the newspaper is what you're talking about rather than talking to your customers, et cetera, to create this uncertainty. It sounds like. Well, thank you for joining us today. We expect to hold our next conference call to discuss March 31 quarterly results on Tuesday, May 9 at 10:00 a.m.

EarningCall_376

Good day, and thank you for standing by. Welcome to the Robinhood Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be questions and answers from retail shareholders provided by Say Technologies, followed by a live 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 Chris Koegel, Vice President and Head of Investor Relations. Please go ahead. Thank you, Latif. Welcome, everyone, and thank you for joining us for Robinhood's fourth quarter earnings call. With us today are CEO and Co-Founder, Vlad Tenev; and CFO, Jason Warnick. Before getting started, I want to remind you that today's conference call will contain certain forward-looking statements about our financial outlook and plans. Actual results could differ materially from our expectations, and we have no duty to provide updates unless legally required. Potential risk factors that could cause differences, including regulatory developments that we continue to monitor, are described in our press release issued today, the related slide presentation on our Investor Relations website, our Form 10-Q filed November 2, 2022, and in our other SEC filings. Today's discussion will also include non-GAAP financial measures. Reconciliations to the GAAP results we consider most comparable can be found in the earnings presentation on our Investor Relations website at investors.robinhood.com. Thanks for the intro, Chris, and thanks to everyone for joining. This earnings call marks the end of our first full calendar year as a public company. And I think it's a great opportunity to really evaluate ourselves and reflect on how the year went, what we promised, what we delivered and how we responded to the twists along the way. Looking back one year, at the Q4 2021 earnings call, we committed to the following things, [expanding] (ph) equities trading hours, which we delivered with hyperextended hours in March; introducing a new day-to-day spending experience, and we delivered Robinhood Cash Card in March also; rolling out our fully paid securities lending product, which we provided with the launch of Stock Lending in May; adding IRAs, which we launched in December with Robinhood Retirement, the first and only IRA with a built-in match, no employer necessary; we committed to providing faster and more money movement options, which we delivered with the launch of debit card funding, instant withdrawals and support for U.S. DC in Robinhood Crypto. And we committed to open up our crypto platform internationally, which we did with the launch of our Noncustodial Robinhood Wallet. When we laid this out a year ago, we didn't anticipate a land war in Europe or inflation at a 40-year high prompting one of the most aggressive tightening policies we've ever seen from the Fed. This led to a sharp drawdown in growth stocks and a frigid crypto winner. All these factors presented extraordinary challenges for our customers and our company to navigate. So nine months ago, we committed to returning to adjusted EBITDA profitability in Q4. This was an aggressive goal, and we delivered it a quarter ahead of schedule by both lowering costs and increasing revenues. We also diversified our business as our net interest revenues more than doubled over the course of the year. And to help customers generate more income in the new environment, we launched a revamped Robinhood Gold that offers customers an incredible 4.15% interest rate on their cash, among the highest rates out there. We also strengthened our core business with a number of improvements to our trading products like options and cash accounts, advanced charts and 24/7 live chat customer support. We did all this and more while having to make some difficult decisions, we ended 2022 with about a third less headcount than a year before. I want to congratulate the team for their tremendous execution. Our product velocity has never been higher, and the quality of talent at Robinhood has never been greater. I also want to mention, and Jason will discuss further in his section that we had a processing error on a corporate action that led to a $57 million expense. This was really disappointing. We've done a full postmortem and remediated the issue. It's important for us to build a culture of accountability. So following this event, I made the decision to eliminate the executive team's 2022 cash bonuses. It's my responsibility to make sure that we learn from this, adjust our systems and processes accordingly and ensure that we do everything we can to prevent errors like this from happening again. Before I review our Q4 product roadmap, I want to provide a couple of shareholder updates. As founders, Baiju and I have always been motivated by our mission, and our goal has been to build a financial services company that does right by our employees, delivers extraordinary value to our customers, and in doing so, generates healthy returns for our shareholders. It took tremendous sacrifice on behalf of many people throughout 2022 to get Robinhood to the healthy position we're in today. And so at the end of the year, Baiju and I were reflecting on this. And we were thinking about whether there was more that we could do personally. So we decided we would cancel nearly $500 million of our combined share-based compensation. This lowers our GAAP operating costs by up to $50 million per quarter starting in Q2, and it has already reduced our fully diluted share count by 3.5%. Second, we also announced today that our Board of Directors has authorized us to pursue purchasing most or all of the Robinhood shares that Emergent Fidelity Technologies bought last May. The Board and management team are incredibly confident about the future of our business. We also have a fortress balance sheet with over $6 billion of cash and feel very well-positioned to execute on our growth plans. So we think this repurchase will be accretive over time and remove the distraction for shareholders. Since there isn’t much precedent for situations like these, we can’t predict how long this will take, but we’ll keep you posted as is appropriate. Now I’ll cover Q4 business results. While assets under custody was down 4% in Q4 from Q3 due to lower valuations for growth stocks and crypto, customer portfolios had a great start to 2023. In January, as valuations rebounded, customer assets grew by 20% to $75 billion, the highest level in the past nine months. This January outperformance is a good reminder of the importance of investing through the cycle. So we’re encouraged that customers continue to entrust us with billions of dollars each quarter, including nearly $5 billion of net deposits in Q4. Now we’ve talked a lot about our product velocity and all of the new products we launched last year. And as we’ve continued to work on them, we’re now starting to see meaningful traction on several of our new products, which gives us confidence that they can grow into significant business lines over time. First is stock lending, which we launched last May, to help customers generate passive income by lending the stocks they’re holding. It had some good early results by reaching about $15 million of annualized revenue in Q3. Since then, the team has kept iterating on the product relentlessly, speaking with customers, improving onboarding, making more equities available to lend and migrating to a new collateral agent. By the end of January, we had over 1 million customers enrolled, and we generated over $30 million in annualized revenue. As we look ahead, we see lots of opportunities to improve the product even more and make it even more accessible and useful to customers. Next, Robinhood Gold. In September, we launched an industry-leading 3% yield on cash and then raised the yield 3 more times to reach our current 4.15% rate. The customer response has been terrific. As more and more customers feel, we’re giving them access to one of the best and easiest opportunities to earn yield in the U.S. Gold subscribers increased in Q4 for the first time in over a year, and Gold Net Promoter Scores have moved way up. We’ve also seen Gold cash sweep balances grow to $6 billion at the start – at the end of January. That’s up by about $1 billion per month since the launch. We’re excited to keep investing in our gold offering and deepening these relationships this year. In Q4, we also launched instant withdrawals, a new money movement option to help customers who want faster access to their money for everyday needs at a competitive 1.5% fee. We’re seeing strong early adoption here, growing from 1% of total withdrawals when we launched in October to 7% in January, translating to about $20 million of annualized revenue. These are just a few examples of how the products we’ve launched over the past year are now gaining traction. And we see a path for many of them to drive meaningful revenue growth from here. Finally, I want to give you a preview of our 2023 product road map. While the macro uncertainty is leading some companies to pull back, we plan to stay aggressive as we believe investing through the cycle is the right long-term strategy. So let me highlight a few of the opportunities we’re working on. First, deepening relationships with our existing customers. As we grow into a larger, more diversified company, we’re shifting our focus from just adding users to driving net deposits as well. Retirement is off to a good start. And we’re working to take our first steps on the path to advisory, which can bring even more customers into the market in the future. Second is becoming the best destination for advanced customers. Last year, we made a ton of progress by launching several new products and features that drove advanced customer NPS significantly higher, a great sign for growth and retention. This year, we’ll go beyond tools and improved experience and really innovate for our advanced customers. We’re excited to show you what we have in store. Third, international. We recently launched Robinhood Wallet, which empowers customers around the world to custody their own crypto. We’re getting more aggressive this year and have set a goal to offer brokerage services in the UK by the end of 2023. I’m also excited that we hired JB Mackenzie, an industry veteran from Schwab and TD Ameritrade to lead our international brokerage efforts. We’re really excited about the year ahead. The road map is full, and there’s so much to do. Thanks, Vlad. It’s good to speak with everyone today. In the fourth quarter, we stayed focused on serving customers, growing our business and driving long-term shareholder value. Our team continued to deliver on our product road map, and we generated positive adjusted EBITDA for the second quarter in a row. I’m proud of what we accomplished last year and look forward to 2023. Before I discuss our Q4 results, I want to provide context around the error that Vlad mentioned. Each quarter, we process hundreds of corporate actions as part of our day-to-day operations. In December, we received notification of a corporate action that was irregular, both in its timing and format and unfortunately got through our controls. Cosmos Health Inc., a NASDAQ-listed company, affected a one for 25 reverse stock split on December 16. A processing error caused us to sell shares short into the market. And although it was detected quickly, it resulted in a loss of $57 million as we bought back these shares against a rising stock price. While this event was an outlier, as Vlad said, we’re taking it very seriously and have made the necessary changes to do everything we can to ensure this won’t happen again. With that, let’s look at the fourth quarter, starting with business results. We continue to add new customers, growing net funded accounts to 23 million, up about 50,000 from Q3. We’re off to a good start in Q1 as well by adding about 60,000 accounts in January. I’d also note that we only include unique users in our net funded account definition, so this metric doesn’t benefit from existing customers opening retirement accounts. So we’re working on additional disclosure to show how many of our products customers are using. For monthly active users, they were 11.4 million, down 800,000 from Q3, though MAUs increased back to roughly 12 million in January. I’d also note that the vast majority of our customers continue to engage over time even if they aren’t active every month. For example, if we look at the last three months of 2022, over 16 million unique customers were active. And if we look over the last six months, that figure grows to over 20 million customers. Turning to assets under custody. While they were $62 billion in Q4, down about 4% from last quarter, they rebounded to $75 billion in January as growth stocks and crypto recovered. Looking at net deposits, they were $4.8 billion in Q4, which translates to a 30% annualized growth for the quarter and brings the full year rate to 19%. We’re encouraged by the resiliency of customer net deposits, which positions us really well for growth as markets rise over time. Now let’s look at Q4 financial results. We grew adjusted EBITDA to $82 million, which was up $35 million from last quarter. This brought our adjusted EBITDA margin to 22% in Q4, which is up nine points from Q3. Going forward, we remain focused on delivering positive adjusted EBITDA and a driving attractive margins over time. Looking at our GAAP results. Q4 EPS was negative $0.19, an improvement of $0.01 from Q3. This included a combined negative $0.08 impact from the processing error and an impairment charge on Ziglu. Q4 EPS prior to these impacts was negative $0.11. Now let’s review our Q4 revenues. Total net revenues were $380 million, a 5% increase from Q3. This was primarily driven by higher net interest revenues, partially offset by lower transaction revenues. Q4 ARPU was $66, up from $63 last quarter. Next, transaction-based revenues were $186 million in Q4, down 11% sequentially, primarily due to lower equity and crypto notional volumes. In January, we saw equity, option and crypto volumes, all roughly in line with Q4 averages. Moving to net interest revenues. They reached a new high of $167 million in Q4, up 30% from Q3. The increase was primarily driven by higher short-term interest rates and 12% growth in interest-earning assets. These factors were partially offset by lower margin balances and securities lending activity given the macro environment. Looking ahead to Q1, we are encouraged by what looks like likely to be another quarter of net interest revenue growth. As we consider what we see today for the forward Fed curve, customer balances and deposit rates as well as some pickup in securities lending activity, we anticipate Q1 net interest revenues will be up by roughly $20 million from Q4. Additionally, as we now appear to be in the later stages of the Fed rate hiking cycle, I wanted to note that we’re exploring strategies to reduce our interest rate sensitivity, and we’ll keep you updated when we have more to share on this. Moving on to other revenues. They were $27 million in Q4, up 8% from Q3. Gold subscribers increased by about 50,000 sequentially, and we plan to keep investing so that more of our customers find value in becoming a gold member. Looking ahead to Q1, we expect other revenues to be similar to Q4 levels. Looking a little further ahead, Q2 is proxy season, which drives a seasonal increase in revenue. And late last year, we transferred our proxy services from a third party to our Say Technologies team. So in Q2, we expect to see a sequential increase of about $30 million from Q1 levels. Now let’s look at Q4 expenses. Prior to SBC, the processing error and some minor carryover from our Q3 restructuring, OpEx was $319 million, which brought our full year total to $1.55 billion. These 2022 results were an 18% improvement versus the prior year as we moved to a leaner cost structure. Looking forward to 2023, we’re planning to improve our costs by another 7% on average as we plan to keep our cost lean, while investing for future growth. Our outlook for 2023 OpEx prior to SBC is a range of $1.42 billion to $1.48 billion. I’d note that on a quarterly basis, this outlook is about the same as the Q4 2022 range we provided last quarter, as I think this is a good zone to operate our business this year. Turning to SBC, it was $160 million in Q4, which brings our full year total to $654 million. Looking ahead, Vlad and Baiju’s decision to cancel their 2021 pre-IPO market-based awards significantly lowers our outlook for the back half of this year. Under accounting rules, we will record a Q1 non-cash charge of about $485 million for the full acceleration of the canceled awards. We also expect SBC this year, excluding the charge will be in a range of $470 million to $550 million, which is a 22% improvement on average from last year. Including the charge, our full year 2023 SBC outlook is a range of $955 million to $1.035 billion. For Q1, we expect SBC of $615 million to $645 million mostly from the accounting charge. Given our progress on costs over the past year and improved SBC outlook, we now expect to get much closer to positive GAAP net income in the back half of this year. Beyond that, we think it’s a little early to predict a specific timeline for reaching GAAP profitability as our revenues vary with the market backdrop. That said, we’re focused on getting there by keeping our costs lean and scrappy to drive operating leverage as our business grows, while staying flexible to invest for the long-term. Now to capital management. I want to touch on a couple areas, first, on the Ziglu deal. After careful consideration, Robinhood terminated the deal and we booked a $12 million charge in Q4. Second, as Vlad mentioned, our Board authorized us subject to final approval to purchase our shares that Emergent Fidelity Technologies bought in May of last year. We’re confident in the future of our business, so we think it would be a smart use of our excess corporate cash to buy most or all of the roughly 55 million shares, while continuing to have a strong balance sheet to invest for growth. In closing, I’m really pleased with all that we accomplished in 2022, delivering on our product roadmap, moving to a lean and scrappy cost structure, and ending the year with two straight quarters of adjusted EBITDA profitability. As we look ahead, we see a large opportunity to grow shareholder value from here. Thank you, Jason. Leading into this quarter’s Q&A session, we’ll start by answering some of the top questions from Say Technologies ranked by number of votes. We’ll pass over any questions that were answered on the call already or in prior quarters, and group together questions that share a common theme. After that, we’ll turn to live questions from our analysts. So we’ll kick it off with some of our top questions from Say. So first, so John P asks, what does the product roadmap look like for 2023? Vlad, do you want to take that one? Yes. Thank you as always, Sajan for the good questions. So I mentioned a little bit in the call, while the macro environment might be leading some companies to be less aggressive, we plan to stay aggressive. And there’s three things that we’re focused on in terms of product roadmap, the first thing, deepening relationships with our existing customers. And you’ve seen that we’ve been very successful in providing value in terms of higher interest on cash with our Gold product. We also rolled out Retirement and are very excited to offer the first IRA with a built in match, no employer needed. We think it’s particularly useful for gig economy workers and other freelancers. So we’re going to continue to invest in that and grow that. We think that gives us sort of a great entry point towards offering advisory services to customers. Second, becoming the best place for advanced customers. So this is our customers that trade a little bit more actively, use options, engage in equities trading. We’ve made a lot of progress this year and we’re working even harder to deliver innovative new functionality for our more advanced customers. And then the third international, so we recently launched Robinhood Wallet, we’re also working aggressively this year to bring brokerage services internationally. And we’re excited to welcome JB who will be leading the efforts to take our brokerage internationally. Great. All right, thank you, Vlad. The next questions from Jason R who asks, when will Robinhood go global and allow users to buy individual shares from all over the world listed exchanges? Sure. Happy to field that one. So there’s really two questions there. First of all, for our U.S. customers, we’re very focused on expanding selection and being the best place for you to invest in trade. In terms of access to foreign securities, customers can trade ADRs today via our platform commission free, and that gives investors exposure to foreign traded stocks. The second thing, expanding our operations internationally so that customers based in other countries can access Robinhood services. A huge part of our mission, we think that we’ve done a lot of great work to open up access and to make investing more accessible to people in the U.S. U.S. is comparatively a mature market where access is pretty good relative to some parts of the world. So we think it’s a natural extension of our mission and a great business opportunity to take our technology and make it available overseas. I talked about Robinhood Wallet, which is available globally and will allow customers all over the world to self-custody, have control over their crypto and trade and swap with no network fees. On the brokerage side, we’re being more aggressive and set a goal to start brokerage operations in the UK this year. So look out for that. We’re very, very excited to make Robinhood available all over the world. Awesome. Thanks, Vlad. All right. The next question comes from GC who asks, there’s a new feature that was implemented by Twitter that directly links users to the Robinhood app. What’s the relationship between Robinhood and Twitter? Is there an official partnership forthcoming? Yes, sure. Thank you, G. Part of the mission of democratizing finance for all is giving access to the best information whenever and wherever customers need it. So we’ve been speaking to the folks over at Twitter for a while and heard about what they were doing with the stock pages and crypto pages on their platform. And we got excited to create an investing experience that gives value to their customers and makes it easier at a deep link to the Robinhood app. So you’ll see us experimenting with more things like this over time. As of now, we don’t have any plans to expand or form an official partnership with Twitter. All right. Thank you. Okay, so the next question is from William C. What happens if the SEC bans payment for order flow? Sure, I’ll field this one. The first thing to note here is, as you’ve seen through the quarterly results and the progress we’ve made in diversifying our business, we’ve got a diversified business and are continuing to grow. And we feel like we’re incredibly well positioned. In terms of payment for order flow and the SEC market structure proposals, we think investors have it great right now. The all in costs of investing, the accessibility, the tools and functionality have never been better. And we’re worried that these proposals have the potential to give investors worse execution quality and higher prices in many instances. And these are really complex proposals. It’ll take a long time to work through them. Ultimately we think they are unlikely to pass in their current form. So we’re going to keep working with the SEC, including our comment letter coming soon and make sure customers continue to receive the best deal and have access to equities trading and make sure we’re continuing to advocate for what we think is right for our customers. All right. Thank you, Vlad. The next question is related. So it asks will – from Mark D, will Robinhood become a member of the New York Stock Exchange and NASDAQ and reduce its reliance on payment for order flow? We actually are already a member of NASDAQ. We have a connection there, and a portion of customer orders are routed there. The way that we think about execution quality and routing orders is the routing is based on execution quality. That’s really the deciding factor. So we aim to send customer orders where they’re getting the best execution quality. And we actually publish execution quality statistics on our website and are very proud of it. All right. The next question is for Jason. Will Robinhood ever work with tax companies like TurboTax to get tax information to clients at a faster pace? Thanks. We already work with TurboTax. And in fact customers get a $15 discount if they upload to TurboTax. We’ve been making a number of changes to the tax experience for customers. This year, we consolidated the tax form for customers who are trading both equities and crypto. So they receive a single tax form from Robinhood this year, which makes it a lot more convenient. And also we’re sending in a form that makes it really easy for customers to upload their data to the tax software of their choice. And then also we’ve already sent well ahead of the deadline millions of these forms out to customers and should have the remaining ones out really soon. So we’re making a lot of progress for customers on the tax front and proud of the team for doing that. Great. Thanks, Jason. All right, let’s do one more before we open the call to analysts. So Vlad, GC asks, any thoughts on creating a Robinhood Pro app with more advanced charts, tools, data and live streaming newsfeeds and chat rooms to keep the more advanced users strict – staying strictly on Robinhood? Thanks, G. So we think serving our advanced customers is incredibly important. As I outlined a bit earlier, it’s one of the top three things we’re working on this year. We made a lot of progress last year really improving the experience for them, and we spent a lot of time talking to our advanced customers. And what we’re hearing is they stay with Robinhood and they love Robinhood because we make things simple and are easy to use. And they actually love the flexibility to be able to see a very simple overview of their portfolio and their holdings and be able to trade simply along with the flexibility to dive into things like advanced charts and tools and features when they need to. So right now we think we can deliver on an awesome experience for advanced customers within the existing Robinhood app. And so we’re not necessarily going to be creating a separate app, but we’re focused on making Robinhood the best tool for our advanced customers. All right, thanks, Vlad. And thank you for everyone for your questions. We really appreciate all the thoughtful engagement from our shareholders and customers. And now it’s time to open up the line for analyst questions. So with that, I’ll turn it to Latif. First question. Obviously, nice to see the acceleration and the solidly positive adjusted EBITDA which has been driven more by getting leaner on expenses. And so if you do start to see an acceleration in engagement from some of your newer initiatives, or just a broader improvement in the operating environment, should we expect that you would potentially re-ramp on certain growth investments? Or are you comfortable you can execute at the speed that you want to kind of at the new leaner model? And obviously that would imply more would fall to the bottom line. And really the question is, how you want to manage the business over time as you kind of get to eventually this GAAP profitability? Is it further expanding profitability from there, or you then happy to kind of then re-lean in on growth investment? Thanks, Devin. This is Jason. I’ll take it. And then Vlad can add in if he has additional color. We think there’s a lot of leverage that we can achieve as we grow our business over time. We’re going to continue to manage our cost to stay lean. That said, we’ll have some flexibility to lean in a little bit more on investments that we think are the right ones to make. But the guidance that we’ve given incorporates the investments that we’re planning for the things that we’ve talked about and have in our plan for this year. So we feel really good about the range that we’ve given on OpEx given our growth plans. Yes. The only thing I would add is last year was in terms of products, one of the best years we’ve had. We’ve rolled out lots of new products to customers. And as I mentioned earlier in the call, to have two of our recent products in a relatively short amount of time get to double-digit millions in ARR in a year like 2022, we’re incredibly proud of. So Stock Lending, as we mentioned, getting to a $30 million run rate, instant withdrawals within a couple of months of launch, getting to $20 million. So we have new businesses that we were able to roll out and I think this year we’re in a great position to keep investing and be aggressive. Okay. Terrific. Follow-up just on crypto. So customer engagement in crypto really saw some pressure after the FTX-related contagion and obviously following valuations as well. At the start of the year, we are seeing some improvement in valuations. And so just curious from what you guys can track internally. Does it feel like customers primarily just move to the sidelines versus exiting the space altogether? And related, how did those events from the fourth quarter effect? How you're thinking about just the crypto offering more broadly? How you're budgeting for and developing the road map, if at all? Thanks. So Devin, we have seen a pickup in the first part of the year to levels that are kind of on par with the average for Q4. So I'd say it was a bit of a step on the sideline, watch a little bit, particularly in the month of December. But we're definitely encouraged with what we're seeing in the first part of the year and really into February. We continue to think that crypto is here to stay, and we're continuing to invest in this space and are really optimistic. Yes, you probably saw we recently launched a Robinhood Wallet, which really gives the power and utility of self-custody to customers. And we're continuing throughout the year to make improvements to our core Robinhood crypto offering as well. Hey, guys. Good evening. Appreciate you taking the question. I think you made some comments in the prepared remarks around thinking about the level of asset sensitivity and interest rate sensitivity, the kind of tools that you can use to bring that down. I'm wondering if you could expand a little bit on what types of things that you are contemplating? And just maybe thought through a framework for how you might approach it? For instance, is there a situation where you think you could remain EBITDA breakeven or positive even if we see significant fall in interest rates over the next couple of years? Thanks. Yes. Well, it's a great question. Look, it's not lost on us that net interest revenue is a rising and important part of our mix, and it's something that we're paying really close attention to. It's a little early to talk about the specific strategies that we're looking at. But really just wanted to signal to shareholders that it's something that we're paying attention to, and we look forward to implementing some strategies that will decrease the sensitivity that we have there. So we'll update you over time. But unfortunately, I probably shouldn't get too far into the details I'd be getting ahead of myself. Understood. Appreciate that. And then maybe a question for Vlad on M&A strategy. You laid out a handful of things in today's release, international expansion, more retirement. I think you mentioned advisory. I guess, just how are you thinking about the role of M&A in your product road map? It seems like you guys have gone the internal route for the majority of your new products, if I think about securities lending, retirement thus far. But any kind of change in that approach or any thoughts around where you get more aggressive on the M&A front? Yes, you're right, Will, that we feel very confident in our ability to roll out products and sort of independently build new features that serve our customers. That said, it's not lost upon us that we have a large balance sheet. And the environment now is going to create some opportunities. So we have done M&A in the past. We're very deliberate about the opportunities that we're considering. We consider things like acceleration of our road map, team quality and fit. And we're proud of the M&A that we've done thus far. Jason mentioned Say Technologies. I think that team has integrated very well and is driving considerable business impact in terms of revenue to Robinhood. So I think we've had a good deliberate approach, and we do see opportunities with our balance sheet going forward. Hey, good afternoon. So it was certainly encouraging to hear some of the positive commentary around retail engagement starting to improve, certainly seeing some inflection in some of those brokerage metrics. If I think about the narrative with regard to the fundamentals in 2022, it was subdued retail engagement, NII tailwinds, better cost control. And given that the rate sensitive revenues are arguably close to peaking, the expense guidance for full year 2023 implies modest growth, well controlled, but still growth versus that 4Q 2022 exit rate. It really does feel like the path to profitability is almost exclusively contingent on better retail engagement metrics. I wanted to understand, first, if the engagement moderates, how much flex you have in the model to bend the cost curve? And then second, and this is more nuanced, but on GAAP profitability, the expense guidance for full year is $1.95 billion. The 1Q revenue guide implies closer to low 1 6s. And just wanted to understand what the revenue or growth levers you can pull to help you close that gap? Certainly, the KPIs are improving, but just want to get a better sense as to how we can reconcile that path to GAAP profitability as well. Yes. So the first part of your question is just what kind of levers we have on cost. 2022 marked a big shift towards getting lean and being productive. I think there's more opportunity there. I wouldn't say that there's the kind of opportunity that we were able to realize in 2022. But you should expect us to continue to find ways to be more efficient across the company and serve our customers great even while being super-efficient. We're feeling really good at the level that we're at. We think it's a good level to operate in 2023. But that said, there's always ways to be more efficient. And I know the finance team, the engineering team and others across the company are constantly looking for ways to optimize our costs. And so I wouldn't say we're as low as we could possibly be right now. And certainly, about a third of the increase in our kind of run rate costs into 2023 are about pursuing new growth initiatives and growing the business, which I think kind of takes us into the second part of your question is what are we doing to drive growth? And you heard Vlad talk about all the initiatives that we rolled out last year and highlight a few of them that are starting to get some traction on a revenue basis. We want to build a portfolio of businesses and services over time that can each in its own right become like nine-figure and growing revenue contributions. Some of them will get going faster than others, but it's a long-term effort for us. And we're going to keep investing and keep planting seeds, including just by improving the experience that we're offering on our existing businesses. If you take fully paid securities lending, for example, when we initially rolled that out, we had – in the first few months, we had an ARR run rate of about $15 million. And that's great. That's a great way to kind of get started on a new business. But the team didn't stop. They kept iterating. They kept finding ways to get more people to adopt, to get more efficient and better tools in the hands of our trading desk. And now we're running at a $30 million ARR. And there's a direct line between all the work and all the iteration that's been going on since launch. And so you're going to see us launch products, you're going to see us iterate on those products and just keep driving for improvement. And I think when you add all that together, it leads to revenue growth over time. Lots of singles and doubles, got it. If I could just squeeze in one more, just ticky-tack modeling question. You mentioned the reaffirmed the dilution of 4% or less in 2023 in terms of share count. Does that contemplate any of the buybacks or planned buybacks of the FTX Founder shares? And is there any appetite to initiate buybacks, just given the improved EBITDA profitability that you're seeing? Yes. Thanks for your question. No, it doesn't incorporate any anticipated repurchase of those Emergent Fidelity Technology shares. So a good clarification there. And in terms of kind of ongoing repurchases at this point, we're just focused on buying the shares that we had talked about and we'll save for later. As we think about capital management, we really want to be investing in the business for growth, having flexibility to complement that organic growth through M&A and then kind of as a third option in priority order would be thinking about returning value to shareholders through things like repurchases. So nothing to announce there and nothing to signal either. And first, congrats on the right – quickly rightsizing the company last year. So I also want to thank you for given all the color on the, I guess, sort of the rebound in engagement in January. And I guess, two sort of questions. Does that include – we saw deleveraging in the brokerage. We saw your margin balances, not just U.S., but across the industry drop. So how are margin balances? And you gave us half the picture of the engagement. I think a lot of people are wondering how profitable these flows are from retail investors? Can you – could you just sort of give it qualitatively at the capture rates of what you’re making the spreads, et cetera, that determine the payment [indiscernible] have they improved as well in January? Yes. So in terms of the margin book, we have seen it move up. I wouldn’t say it was a big move up in January, but it has moved up slightly from the levels that we saw right at the end of the year. In terms of the take rate on equity PFOF, nothing has changed structurally there. It moves with kind of the mix of what our customers are buying and selling as well as the level of spreads on the things that they’re buying and selling. So that’s probably all the color really I have on the take rate. Okay. And my one follow-up. You’ve done a great job at diversifying the revenues and the new product rollout. So can you give – just given – I still think there’s probably a few more hikes coming. So what’s the sensitivity, Jason, to the next Fed rate hike? Yes. So what we said for next quarter is that we think interest revenues will move up about $20 million versus what we saw in Q4. We’re providing a schedule in our investor presentation that kind of lays out the $18 billion of interest-earning assets. What you expect is when those rates come that a good majority of that should flow through against those interest-earning assets, offset by anything that we pass along to our customers. And in that regard, we look primarily at the gold cash sweep. And our rate right now is 4.15. So the take rate there relative to the Fed funds effective is roughly 50 basis points. We’re giving over 400 basis points by comparison to our customers. So the vast majority of that is going to customers. And really, when we think about pricing on that, we just want to be at or near or kind of with the top of the market in comparable offerings, which we think we’re doing a really good job and customers are seeing and reacting to. Hi, good evening or afternoon. Thanks for taking the questions. So maybe first on the Cash Card, you guys re-launched it. I wanted to follow-up there. How many of your cash management customers have transitioned to the new card? And what is the number of sort of Cash Cards outstanding at this point? I think at the last quarter, it was 500,000. And then if it’s possible, can you give us any insight into the Cash Card customer in terms of like average number of transactions and average size of transactions? Hey Ken, so this is Jason. I’ll take that, and Vlad can jump in with any additional color. So it’s an opt-in rather than opt-out for the cash management customers that are moving over. And so far, we’ve seen kind of a slow uptake in the opt-in to the Cash Card. That’s something that we’re looking at. We’re – I talked earlier in one of my responses to just iterating and improving our offering. And so we’re talking to customers. We’re working on optimizing the onboarding flow. And we hope to see even more customers choose to adopt the Cash Card. We’re also looking at just the value proposition of the Cash Card. And over time, we’ll continue to iterate on that until we get to a point that we think we’ve got really great product market fit. In terms of the update on the number of kind of card users, it’s around 800,000. So it’s up a couple of hundred thousand since the last time that we shared that with you. And then there’s – of that 800,000, there’s a minority of that, that are engaging more frequently is kind of top of wallet. And that also is something that we’re looking at to make sure that we just get the value proposition right for customers and get it to where the green Robinhood card just moves up to the top of the stack in our customers’ wallets. So well, it’s early, and we’ll continue to update you as we make progress there. Yes. The only thing that I would add is, like we said, with stock lending post-launch, we made a ton of improvements to the product and the funnel, and we’re really proud of the work that we continue to do there. With the Cash Card, it’s the same story. We’ve got a great team on it. The road map is full. There’s a lot of exciting things coming. So we’re very excited about how much that product will improve in the near future. Okay. Great. Thank you. And then trading volumes have been resilient in options relative to the other asset classes. What is the experience your clients are having in options? Like can you tell, are they making money in options? Is your experience getting better over time? And if they are making money in options, why do you think the experience is better there than in equities and crypto? Well, one of the things we’ve been really looking at is the Net Promoter Score, the retention characteristics of our options product. And we’ve made a lot of improvements in the past year. At the beginning of 2022, the more advanced customers, the ones that we’re engaging in options a little bit more, were on average less happy with our service than the typical customer and then we were able to reverse that quite aggressively in a relatively short amount of time. And that’s through things like options and cash accounts; better customer support, including 24/7 live chat, which launched a couple of months ago; advanced charts; and more tools there. And we continue to rollout awesome, innovative options features with a lot more coming this year. So really, the options team has been firing on all cylinders. We’re really happy with kind of our relative market share, especially in the light of overall sort of decline in volumes industry-wide. And I think there’s a lot more to do. But a lot of it comes down to just us relentlessly improving the product. And I’m very proud of the work the team has done there. And it’s been, as you know, Ken, just a really challenging macro environment, not just for our customers, but for all market participants, frankly, over the last year or so. And that’s one of the reasons why we’re really excited about being able to offer over 4% yield on the gold, cash sweep program, introducing retirement, which is going to help customers just kind of systematically, dollar cost average over a long period of time to reach their goals. And so really, you’re going to see Robinhood evolve its platform so that no matter how customers want to trade, Robinhood will be the place to do it. And so it’s a long-term strategy for us, but we’re making progress there. Hey, good evening, good afternoon. Thanks for taking the question. Maybe just coming back to your earlier point around innovating for advanced customers. I was hoping you could maybe elaborate a bit on what additional functionality could helpful that’s not offered today? And to that point, we’ve seen tremendous growth in index options, including some of the smaller-sized index options contracts yet. I do not believe they’re available on the Robinhood customers. Just curious how you think about the opportunity there? What hurdles could they be for adding index options? I understand they’re a bit different in that there cash settled as opposed to net share settle. So how much of a platform built that required? And how does that stack up on the priorities for Robinhood year 2023? Thanks for the question. I’ll field that one. I don’t want to let the cat out of the bag too early. I think we’ve got some really exciting things in store. Certainly, we’re looking at new assets and new features. And JB and Steve Quirk, awesome teams. They’re putting a great team together. They care a lot about advanced customers. They’ve really done wonderful things in the past with thinkorswim and TD, which really innovated for advanced customers. And I think we’ve got another year we can go here at Robinhood, so stay tuned. Any comment on the index option side? Is that something you guys are interested in or not of interest to your customer set? Great. If I could just ask a follow-up question on the expense side. You guys have made tremendous progress bringing down the pace of expenses. If I just look at 2023, it looks like the guidance is a little bit of a growth relative to the fourth quarter run rate. So I was just hoping maybe you could unpack some of the moving pieces that are driving expense growth from fourth quarter levels. And maybe you can comment on the headcount growth, inflationary pressures, how that’s all impacting it versus investment spend? Yes. So very, very modest headcount growth. We had a number of open positions at the end of the year. We’re planning to fill those and then very, very modest incremental growth on top of that primarily for funding investments in growth. If you think about the run rate for Q4, excluding share-based compensation, that gets you to roughly $1.3 billion. And then our guidance was $1.42 billion to $1.48 billion for the year. So to unpack that a bit, there’s really three categories of incremental growth versus the run rate from the fourth quarter. Each of them represent roughly a third, so a third, a third and a third for the following categories. The first is just kind of, first, you got to normalize Q4 spend for things like seasonality as well as we’re assuming that we fully fund our company’s bonus program in 2023, whereas we’re paying much less than fully funded in 2022, given the macro environment and how the year went for us. And so you kind of – if you take seasonality and that bonus effect, that’s roughly a third of the incremental off the Q4’s run rate. The second is just existing business growth, continuing to deliver and improve on the existing products that we have. It includes things like merit increases for employee compensation that happens regularly on an annual basis. Pull-through of expenses that started kind of late in the year and you get the full year effect. And then the third category also, as I mentioned, roughly a thirdof the incremental is just investing for new business growth. And so that really bridges the baseline to the guidance. Hey, guys. Thanks so much for taking the question. I wanted to ask about the UK launch. I understand that it’s – the target is for the end of the year, but we sort of understood that Ziglu was expected to be a little bit of a launching off point and with that deal no longer happening, if you could share any thoughts on kind of your go-to-market strategy? Or are you thinking about leading more with the Robinhood Wallet? And kind of how do you think about the competitive environment over there? Yes. Happy to field that. So the Robinhood Wallet is global by default. It’s a self-custodial Web 3 Wallet that offers trading and swapping with no network fees. So that we’re very excited about. A separate app from the main Robinhood app, which offers brokerage services. And the goal for this year will be getting brokerage services live in the UK by the end of the year. Okay, great. Thanks so much. If I could sneak one in as well. Just on your net interest revenue, you beat your own kind of guidance pretty nicely in the quarter. I guess, where are you sort of the most surprised? And if we’re thinking about the first quarter, where would you expect to – if there were a similar outperformance, where would you think that would be most likely to come from? Thank you. I don’t want to predict where the outperformance might come in the following quarter. Certainly, it’s sensitive to the interest-earning assets that we carry. Movements in things like the margin book could definitely be a lever outperformance and the securities lending would be another area that, that might surprise. In Q4, we did outperform our expectations that owed mostly to just nice asset growth and a little bit better on deposit betas than we had forecast into the model. Hey, Vlad. Hey, Jason. A couple of questions. I just wanted to jump back to, I guess, first, Robinhood Wallet. Just wanted to understand how you feel about the completeness of the offering at this point and kind of parity versus global peers on the wallet side? And then just any sort of planned marketing initiatives in international markets for 2023 to keep in mind? Yes. On the wallet side, I think the core functionality is in place, and we’re getting great feedback from customers. There are a bunch of things that we’re looking to add to make it even better. And the road map for that team is pretty full, and they’ve been executing pretty relentlessly. So kudos to the wallet team for that. And then – I’m sorry, you had a question about international beyond that… Marketing? Yes. It’s really early for us. Of course, we’re open to doing marketing in the future. But right now, we’re focused on rolling out the product and getting as much feedback from the users on the wait list as possible. Awesome. And then just on UK brokerage, I guess, maybe just to expand on the earlier question. I mean, what are some kind of key operational mileposts that we should be thinking of as you look to launch that by year-end? Yes. It’s mainly just making sure the technology is in really good shape, and we adhere to all the different requirements for the UK market, making the experience seamless with the Forex money conversions and things like that and talking to customers and making sure that we do any UK-specific adaptations that we think will make the product as useful as possible for them. But we think we have a great foundation. We’ve made really big improvements in our infrastructure and technology over the past couple of years. So scaling, we don’t anticipate it will be a problem. It’s more about just getting the user experience and getting everything set up there. So this is Jason. We’re hearing from our PR team that one of the news outlets is incorrectly reporting that Robinhood is affecting a split on our stock. I just want to be super clear that, that is not any plan that we have. It’s not factually accurate. And so for all those listening, if you can spread the correct news, that would be fantastic. Thank you. We don’t have any more questions. I would now like to turn the conference back to Vlad Tenev for closing remarks.

EarningCall_377

It is time to start. Good evening, and thank you for joining us for this telephone conference of ORIX Corporation for the third quarter consolidated financial results for the nine months period ended December 31, 2022. I am from [indiscernible]. My name is Nakone. I'll be the Master of Ceremony for today. Thank you for this opportunity. Today's conference is attended by Mr. Hitomaro Yano, Executive Officer responsible for Accounting and IR and I would like to ask the participants to kindly either turn off your mobile phone or other communication devices or move them away from the telephone in order to prevent feedback. Hi [indiscernible]. Good afternoon. This is Hitomaro Yano, Executive Officer responsible for Accounting and IR. Thank you for joining us in this financial results briefing today despite your busy schedule. I will begin by explaining the results for the third quarter of fiscal year ending March 2023. Please refer to Page 2 of the materials on hand. I will first review the executive summary. First, please note that net income for the first nine months of the fiscal year was JPY211.4, although it was only several millions at the end, but we did manage to record year-over-year. The annualized ROE was 8.6%. Net income for the third quarter increased by 50% from the second quarter. This is ORIX's second highest quarterly net income since the pandemic started following the fourth quarter of the previous fiscal year in which we recorded an investment gain on the [indiscernible]. Second, thanks to progress in reopening businesses that have been strongly impacted by COVID-19 and continuing to recover towards higher profits. The Insurance segment also experienced a significant decrease in COVID-19 related payout expenses compared to the first half of the year. Third, I would like to highlight on capital recycling. In the second half of the fiscal year, we've continued to both make new investments and [indiscernible] exit mainly in our focused businesses of overseas renewable energy and domestic PE. Through this we are increasing profitability by replacing assets. The fourth key point is shareholders return. Last May, we approved a share buyback program of JPY50 billion and have already completed the acquisition and cancellation of 23.43 million shares, which is approximately 2% of our signing shares. We plan to pay big dividends for the full year as previously indicated. So please refer to Page 3 for third quarter FY '23 March end ORIX recorded sharp increase of 50% versus second quarter for the quarterly net income. The aforementioned recovery in the Insurance segment played a part while strong performance at Transtrend in ORIX Europe led to booking of a performance fee. The partial sale of our stake in leading geothermal energy producer, Ormat in the Environment Energy segment also contributed. Now please turn to Page 4. The page shows breakdown of segment profit. Nine months segment profit was up JPY290.7 billion. Please see the bar chart on the right. The breakdown of quarterly segment profit for the past two years is shown. Net income for the third quarter increased 15% year-on-year and 44% quarter-on-quarter to JPY120.7 billion. Please look at the left hand side bar chart where you can see that investment gains for the fiscal year have returned to a usual level. I'll explain the details on individual segment pages later. Now please turn to Page 5. This page describes the earnings improvement due to progress in with opening of the economy. The bar chart on the left shows the trend in segment profit for the three COVID impacted businesses of Aircraft and Ships facility operations and concessions. In the fourth quarter of the previous fiscal year, we posted losses of JPY11.2 billion, but a steady recovery in profits thereafter resulted in a positive JPY5.6 billion in segment profits for the third quarter. In Aircraft and Ships the passenger market in North America and Europe remained strong, and aircraft leasing profits are in an up-trend. Hotels and Inns and other facility operations have recently achieved an occupancy rate of about 80%, thanks in part to the government's nationwide travel support program and ADR has mostly recovered the FY '20 March level. In the concession business, the number of progress on international routes has increased rapidly following the Japanese Government's easing of border measures in October, 2022. Kansai Airport results are reflected in ORIX's Group's earnings with a three months lag, so we expect a full flash recovery in profits to take away in the next fiscal year. However, based on the current number of passengers, we believe that we are within striking range of returning to black. We expect further improvement in performance in all our COVID impacted businesses as travelers from China return. Please refer to the following page for a summary of the trends and recovery indicators for each businesses. Now, the bar chart on the right shows the trend in segment profit for insurance, payouts to policy holders with COVID increase and segment profit fell to JPY2.1 billion in the second quarter, particularly in the wake of the seventh wave peak of the infections. However, the eligibility criteria for receiving benefits were changed from late September, 2022. Only policy holders meeting certain conditions are now eligible for payouts for quarantining at home. As a result, payout expenses have declined from the third quarter and profits have recovered. Please turn to Page 7. Next I will comment about capital recycling, which supports our sustainable growth. Capital recycling involves constant monitoring of capital efficiency, making exits in assets and businesses as needed while continually making new investments. This will increase earnings growth rate and lead to improved ROA and in turn ROE. The box on the left shows exits and new investments in the overseas renewable energy business. As I mentioned earlier, in the third quarter, we sold 7.8% of 19.7% stake in Ormat shares in the marketplace resulting in a gain of about JPY15 billion in addition to retaining 10% or more of Ormat shares. We will continue to discuss outside directors to support further growth of the business. Furthermore, we plan to acquire the remaining 20% of Elawan where we acquired an 80% stake in July, 2021 and make it a wholly owned subsidiary in the fourth quarter of 2023. In addition to that we will be able to make most of the result, we will be able to make more flexible and swift decisions regarding business and financial strategies such as acquisitions and new business development. Now the box on the right shows exits and new investment in our domestic PE business. In 2014, we acquired a major precious metal recycling company called NET Japan, which we sold in a trade sale in the third quarter. We achieved a high return on the deal of MOIC of three times and 16.4% of IRR. In addition, as recently announced, we acquired a majority stake in DHC, a leading Japanese manufacturer of cosmetics and health foods by promoting the smooth succession of DHC businesses further starting its compliance system, corporate governance, and implementing a new growth strategy, we to aim increase its corporate value while enhancing profitability and achieve an IRR of at least 20%. Now, Page 8 and Page 9 are a summary of segment information, but today I will explain it by using the specific slides for each segment, so please go all the way to Page 12. The first segment is the Corporate Financial Services and Maintenance Leasing segment. Segment profit decreased 9% year-over-year to JPY56.4 billion, but excluding the set of YoY in FY 2022 and investment and valuation gains on an investee recorded in the previous fiscal year, segment profit increased. In Corporate Financial Services, service revenues increased from the previous fiscal year due to strong performance in various fee businesses. The auto unit posted a year-over-year increase in segment profit versus the previous year when it achieved a record high. This was thanks to the continued higher market, high market price for used car and the recovery in car rentals for the pandemic from the [indiscernible] rent posted record high profits as well. Now please see Page 14. The page shows Real Estate segment. The investment and operation unit showed an increase in profits due to improved earnings at Hotels and Inns, thanks to progress in reopening as I explained earlier. In Daikyo profits declined versus the previous year. A number of condominium unit [indiscernible] FY 2022 skewed to the first half of the fiscal year and in line with our full year forecast. In real estate too, we operate a capital recycling type business model whereby we procure and develop land by ourselves, lease up property and then sell it at the right time in the market. Please see Page 16, PE Investment and Concession. Now PE Investment unit posted a loss in the previous fiscal year due to losses at Kobayashi Kako, but the investment portfolio has been sorted for this fiscal year. Even excluding losses at Kobayashi Kako, segment profits increased. In the Concession unit the number of passengers in international routes continued to increase in addition to those in the domestic routes and this shrunk the loss. Again, I expect earnings to grow at an exciting pace as earnings are already on recovery track and inbound tourists from China begin to arrive in near earnest. Please see Page 18, this is Environment and Energy segment. Profit increased 86% year-on-year to JPY34.1 billion. As I explained, in addition to the partial sale of stake in the energy company, we also benefited from higher electricity spot prices in some of overseas regions, which led to higher electricity sales revenues. In the domestic market sales increased in the solar power generation business due to the continued fine weather. We expect the global shift towards renewable energy to accelerate, partly due to the prolonged war in Russia and Ukraine. We are already operating 3.4 gigawatt energy production facilities in Japan and abroad, and we plan to grow this to 10 gigawatt by the fiscal year ending March, 2030. In addition to [indiscernible] we will have Greenko, a major Indian renewable energy company where we hold a 20% stake to develop its pipeline. Please turn to Page 20, Insurance segment. As I mentioned, profit decreased compared to previous year due to an increase in COVID-19 related payout expenses for patients isolating at home. Meanwhile, since last September of last year, eligibility for benefits has been limited to those with high risk of severe symptoms. So we expect the COVID-19 related expenses picked out in the first half of this year. The number of policies enforced has continued to increase and the premium income has risen. In addition, asset management has seen steady results and investment incomes have been increasing. Segment assets decreased. This is mark-to-market and rise in both Japanese and [indiscernible] interest rates resulting in our lower valuation. However, the market value of debt has also declined since the duration of policy reserves of, or liabilities longer than that of assets. The rise of interest rates, particularly in yen, has been a positive for embedded value. So in other words, interest rate rise and revenues rose faster than increasing insurance expenses and profits increased. Please turn to Page 22, Banking and Credit. Banking unit revenue from real estate loans for investment continued to be firm despite the absence of a one-time profit booked for the previous year. In the credit business, we are actively investing advertising to develop a new ORIX money product which resulted in decline in profits. However, performance is in line with expectations and loan balance is increasing. Please turn to Page 24, Aircrafts and Ships segment. Profit increased JPY14.2 billion year-on-year to JPY17 billion. As mentioned, the aircraft leasing business has the benefits from rebound from passenger markets, particularly North America and Europe. In addition to leasing revenue, service revenue from aircraft management is strength and it grew. Avolon earnings are also on the upward trend reducing its losses. Please note that the financing costs from investing in Avalon are included in the profit report. The Ships unit boosted earnings, but partly reflecting the sale on ships in response to federal market prices as well as financial income from ships financing deals. Please turn to Page 26, ORIX USA. Segment profit fell sharply from the previous year when it had shipped record high to JPY33 billion. The decline was primarily due to fewer PE exits caused by changes in the macroclimate and the origination fees and in the real estate lending limit. The capital gains improved in the second and third quarter compared to first quarter. Please turn to Page 27. We currently are in the process of adjusting risk controls or CUs in light of the uncertain economic outlook in the U.S. We have strengthened our governance framework in order to achieve additional growth in our asset management business, utilizing investor capital such as establishing asset management investment and with our committee in addition to the investment committee. The asset quality of ORIX USA is sound. It appears that the assets have increased due to the FX effect, but we aim to keep the asset sized to a certain level and the dollar denominated asset has actually declined. Please turn to Page 29. This is ORIX Europe. Segment profit fell 36% year-on-year to JPY35.9 billion as a result of decline in AUM, which hit record high in the previous fiscal year due to impact of a weaker financial market. Meanwhile, the third quarter, in the third quarter, Transtrend a CTA asset management firm recorded performance fees, which resulted in high, significant increase in profits in the second quarter. And the asset management business, we have a diversified and each company has a distinct management style in addition to Transtrend post on partners, which is strong. Value investment is also performing well. Please turn to Page 32. Asia and Australia segment profit decreased 3% compared to the previous year to JPY34.1 billion amid ongoing re-openings in Asian countries. We expected new deals and in India and Indonesia in addition to Australia and South Korea, and the declined profit is due to absence of gain on sale of the previous fiscal year. This completes the segments. Please turn to Page 10. With regard to shareholder return, our basic policy is to distribute one third of net income to dividends, one third to investments and the remainder to retained earnings and the share buybacks. Dividend for the current fiscal year is JPY 85.6 or dividend payout ratio over 33%, whichever is higher. However, the dividend payout ratio will be 40% assuming the net income forecast announced November last year, over JPY250 billion can be achieved, including the share buyback of JPY50 billion the total payout ratio is 60% for the fiscal year. Now, I would like to talk about our credit ratings. Last week S&P reduced the outlook from stable to negative to reflect our execution as investment in DHC. Although the downgrade itself is undesired change from our perspective, we undertake for our risk management, for our portfolio and plan to proceed with our capital recycling strategy while both maintaining and strengthening the financials. By providing appropriate information disclosure to rating agencies, we hope to improve mutual understanding. Meanwhile, please note that the rating action will not affect the basic policy of our shareholder returns. Lastly, we understand that the economic environment continues to be uncertain worldwide, and strengthening the risk management system is important. Nonetheless, we do see some bright news on the horizon, such as the progress of reopening around the holdings in Japan. In the domestic PE and other fields we are seeing numerous inquiries for potential investments, including large project, while maintaining a cautious and selective stance we intend to actively seek investment opportunities towards achieving the midterm goal of what we announced last May, which is net income of JPY440 billion and the 11.7% ROE in the fiscal year ending March, 2025. Thank you very much. My name is Sakamaki from Nomura Securities. Thank you for the opportunity. Now, I would like to ask you a question, and at this time the Ormat their holding that are remaining, I think you're going to be holding onto 10% or more stake. Is your strategy or I believe that it is the expression of your intending retaining the rest of the 10% or more. And also with regard to geothermal energy, I read an article saying that there has been some changes in the earnings, so any, so if you could be so kind enough to tell us your involvement and also your intent in the geothermal businesses? As to Ormat, so this time we've sold about 8% of the stake, and I think we would like to maintain the rest of the stake for the time being. And the capital recycling, in fact is a strategy that we are pursuing as we have been explaining. I don't know how long we will be retaining the shares, but for the time being, we'd like to hold onto it. And the reason why we have decided to sell 8% of the stake is because for the reason of this chapter recycling in the areas of geothermal, yes, we are trying to en engage ourselves in the geothermal businesses here in Japan, but getting consent, the approval is not that easy because you need to of course excavate and there seems to be not very many deals that you can engage yourself in. On the other hand, renewable energy, of course, is remaining to be strong with the share price being steady as well. So therefore, we have decided to set off some stake of Ormat and post some capital gain and we use the capital that we have gained from the sales of Ormat and dedicate the capital to renewable energy elsewhere. So this is the decision that we have made. And talking about renewable energy businesses, for sure, we have every intent in wanting to expand our businesses in the renew energy, but it doesn't mean to say that we quit our idea on the geothermal, but it's just that we have decided to make a selection and concentration and Elawan of course, is 100% Greenko. The new development is going to be proceeded and for the timing and there could perhaps be a possibility of M&A of new renewable energy related businesses. I hope this answers your question. Yes, this is Sasaki from Bank of America. Just one question, thank you for this opportunity. We're now in February and next fiscal year is the business plan must be probably formulated within your organization. And at this point in time, how do you see the fiscal year ending March, 2024 in terms of business as well as performance as much as you can share with us? Thank you. Yes. With regard to next fiscal year's numbers, we were hoping to talk about that in May when we conduct our next earnings call. JPY250 billion for the fiscal year is the number that we have announced and we want to achieve JPY440 billion in two years time. Compared to two years ago when we formulated this plan, of course the environment is different now. And last May how much profit in two to three years? I think we showed you our outlook, but we may have to revisit these assumptions and that's exactly what we're doing right now. So looking into the next two years, we would like to share some of the information about next fiscal year in coming May. Well, recovery from COVID-19 is in sight, which is positive news. According to the original plan, we were not really expecting a big number for next fiscal. We may be able to expect a little bit more than before. That is one thing that I can say. Insurance revenue income may be one of those potential positive factors, but including those, we will have to take another look at if this is clear and please wait, be patient with us. Wait until May. Thank you. I understand that at the full year earnings announcement you can give us more specifics, but what about the confidence for the JPY440 billion? Have you changed the confidence level? Level of confidence is very difficult to talk about, but we will do our best to achieve the objective and we are discussing exactly how we can do that. So that is unchanged. So going away from the fifth financial earnings, DHC I know that you had completed your acquisition as you had explained, if you could be so kind enough to give us a little more color? So IRR of 10% as compared to that last year's profit double was still lower than your expectation. So any kind of wasteful waste that you can see and you foresee making improvements? And how would you be able to realize the turnaround of the profit generation going forward? So JPY300 million or so that is, and one thing that I can say for sure at this point in time, they do have a current asset which is pretty ample. So we would very much like to make use of that as well. So we don't think this JPY300 billion is a higher price that we have paid. And talking about this company, DHC, so the prior -- from the prior owner of the business, the chairperson, we have succeeded the businesses. So they have not been making use of advertisement and promotional costs very much. So we would very much like to concentrate our effort in that as well. And we can foresee ourselves rolling other businesses in the overseas location as well. So these are in our plan. And also on the other hand, we need to of course reinforce governance. So therefore our -- making use of our of course manpower as well, that is in of course improving the businesses. So that's our plan. Which means in the next fiscal period, the cost tends to increase, which means that the profit level is not something that we can expect to improve in the next year and also financially speaking. So JPY300 billion was appropriated for the acquisition, but the cash in fact is held at the company. So that could be paid out as a dividend to ORIX in the short run, do you think? Yes. Yes. And the first point that you have made is true as well. Yes, we would very much like to incur some costs in order to improve the businesses. So I don't know how much of a profit that we will be able to generate in the first year of the acquisition, but of course we would have to pay for the due diligence cost as well. So there will be some negative or other cost that we would have to incur in the first year, but we would like to of course take a little more time in turning around the businesses for the better. Thank you very much. Yes this is Watanabe, Daiwa Securities. Profit progressing at high level, what would be the impact and also the confidence? I think every year to the four quarter you were doing some measures and you talked about risk management. Are there any things that we should be careful about going into the fourth quarter and do you think the current situation would impact the capital allocation in any way except for exceeding the JPY332.1 billion? So the dividend policy, if you are going to upgrade the dividend, you have to basically exceed the previous year's profit. But if there is going to be, if there is going to be something good if you overshoot or do much better than the profit from last year or against the target? Oh, I'm sorry. Well, we will just continue to account for impairment and as we usually do in a steady manner. It's not as if we will do something special for the fourth quarter, but in the second quarter and fourth quarter, generally speaking, we tend to see these numbers come up. But it's not as if there is no impairment, no write off right now. Of course we are doing so many different things and we will continue to see some level of a write off, but we have not really identified any big potential issue so far. That is the current situation, but there will be some here and there that is the current situation. So that's the first question's answer. Now as far as the dividend is concerned, 33% or previous year's number whichever's higher, that is what we communicated for this fiscal year and this will stay the same. This will be unchanged. That's all I can say to you. Would that be okay? Well, first of all, with regard to the U.S., if you could be so kind enough to give me some idea as to your approach right now. So I think there are some losses of JPY10.5 billion from the securities that was held and on the other hand, there's JPY4.2 billion of profit. So I was looking into these perhaps noises and the segment profit is about JPY5.1 billion, and it was lower than the first quarter, but then higher than April to June. So this sales, the impairment loss that was posted, where did it come from? And also in actual fact, how's the business like right now and Lument so how is it like towards 2023 margin, how would it perform going forward? Well, on Page 27, if you could refer to Page 27 then, so just as you have mentioned, the PE investment, the capital gain has been generated from some PE investment. I would like to refrain from mentioning the actual specific names. There are different pieces of PE investment that we have made and generated some capital gain from. And as you have said, the appropriation of that was made. So there are two. So a specific appropriation of reserves and also see through. So when we change some outlook of the future, we may have to add some reserves. And referring to Page 27, the credit, the base profit has declined as a result of the reserves that we had to increase and the others that affected our performance. So we have estate in Lument and also, we call it as BFIM in other words Boston Financial for low-income bracket people, so we develop housing and we securitize it. So these deals, in fact, will create some ups and downs. And so therefore, there has been some, as I say, ups and downs in our earnings as a result, but the first quarter was the bottom, and we did manage to recover from the bottom somewhat. So the real estate Lument, in fact, has not fully recovered yet, and that is because of the interest rate being pretty kind of volatile, so we have to see it shutting down. But I'm not -- we are not worried about credit very much though. Of course, we would have to have a conservative outlook. So far as the reserve appreciation is concerned, but there is nothing major that concerns us. And as for PE investment, there are some, I think, actions that will be taken. Whether these actions will be taken in the fourth quarter or in the next fiscal period, but there will be certain amount of exits as well. So towards the next fiscal period, how much more can we improve the earnings is yet to be known, but for sure, we are aiming to increase the profit. On the other hand, as to the U.S. businesses, as I had shared a little earlier, we don't particularly intend to increase the asset in a dramatic way. So just like OCE the public assets -- not in the public asset management businesses, but the fund formation and all of that, so more than before, we would very much like to increase the businesses, not in a dramatic manner, but thereby, of course, recover the business of ORIX USA and that is our idea. I hope this answers your question. Yes, yes. Well, talking about the vehicles, the transportation equipment, you in fact shared that you did manage to post some profit from selling ships, the vessels, but you have not shared very many kind of details. Avolon, yes, that is held on equity method. That is okay. But the other like gain on sales for those assets, I think it will be helpful if you could be so kind enough to share us a little more details. Well, from that perspective, with regard to ships, at this point in time, there are some extraordinary factors that needs to be taken into account because ships after all, every year, on a continued basis, we don't -- we would be able to generate profit on a constant basis. But rather we would kind of approach it in a conservative manner and if they were ever possible, we would try to generate profit. So for ships, I don't know how to explain, but for this fiscal period, maybe several billions of yen, several billions of yen, I would say, for ships. So several billions of yen for the full year, meaning that I think you're talking about the little more sizable business, right? Well, it's not a big size, somewhere in the middle if you could be so kind enough to understand where we're coming from. So this fiscal period as compared to the first half, it will be smaller in the first half in any case. Is that what you're saying? Yes. So for the transportation equipment, the recovery of the business, so it is not affected by the primary reasons, may I take it? What do you mean by, you mean, oh one time reasons? In other words, sales -- in other words, you are recovering in the businesses as opposed to the gain on sales. I don't know how to express it like DAIKYOs condominium, sales of condominium or whether you would regard that to be a gain on investment, because after all, like aircraft, like in the case of JOL, we do sell to Japanese investors as well as fund and we regard that to be our ordinary businesses and that is recovering for sure. In the case of aircraft leasing, of course, rates are recovering and also we are selling some of the aircraft as well and the fees are increasing as well. So those are improving. On the other hand ships, gain on sales of ships may perhaps, may perhaps be generated bit by bit in this year as well as in the next. So JOL sales, you would not like to describe it to be gain on sales, but those are included as well, may I take it. Yes. Yes, thank you. JPMorgan, Otsuka speaking. Page 5, reopening update until recently is shown. For the midterm information previously, the segment profit for the full year was JPY60 billion for the fiscal year ending March 2025. And so what is the confidence? Do you think is the progress steady and as expected, even if it's a qualitative assessment, if you could share that with us that would be great? Yes. We want to recover to this level by fiscal year ending March 2025 and we did have our concerns. But in this fiscal year, the recovery started at a faster pace than we expected, although it's not sufficient yet. And for next year, we believe that the number will be a little bit better than what we announced last May. And hopefully, in two years' time, we can achieve JPY60 billion or even higher, if possible. So the speed of recovery is a little bit faster than we had originally anticipated. Hotels and Inns unfortunately, the ratio against the total profit is relatively small. So that recovery will not contribute to a great extent, but this is domestic and this is something that we can see firsthand that there is a recovery happening. Hello, this is Morgan Stanley MUFG Securities, Nagasaka is my name. Thank you very much for this opportunity. On Page 32, Asia as well as Australia, I would like to ask some questions. And as a result of reopening, I know that the new execution is underway in Asia and in the first half, considering risk, I thought that you are not executing new investment. But in which area of Asia are you engaging yourself in new businesses and also the outlook going forward? And also, if you were to exclude gains on investments, if you could be so kind enough to share as your look as well in Asia? Asia, Korea, in fact, has been pretty steady. So we have been increasing our asset in Korea. On the asset base, rather, we did reduce it dramatically because you see – unless you see – you carry through new investment, it would continue to decline in any case. So we were refraining from making new investments. But like Indonesia and other areas, but we are now back in then. In other words, we are increasing the new investment. So in which area, more specifically those kind of countries that I have just mentioned. So as for ourselves, in the Asian region, we want to make sure that we would continue to base ourselves on leasing and increase profit thereby. But of course, we are making investment as well in China, Greater China, I mean, not just Mainland China, but we are making some investments. So we would, of course, foresee ourselves exiting from those businesses on the other hand as well. And whether we would be happy to be making a new investment in China, I think we would remain to be pretty cautious. But in Asia, as well as in Australia, we would -- we are very much looking forward to making new investments. So that's about it. I hope this answers your question. Thank you. This is Niwa from Citi. I have a question about M&A pipeline. According to the material used in the midterm announcement, for the second half of next year, you had JPY400 billion planned and the JPY300 billion, I think may be invested, but should we consider this pipeline still being built? Well, thankfully, we are getting more and more new deals, which means well, it's maybe lower than JPY300 billion, but it's rebuilding once again. We don't do everything and anything. We apply a cautious view, but also at the same time, we are adding more and more new deals into the pipeline, while applying a cautious view. As far as DHC is concerned, since it is a sizable investment and a certain number of people will be allocated and the management will be done also appropriately. That's the current situation. If you could comment -- DHC, I think this is a little bit different from your traditional investments. And using DHC as a trigger, do you think that will make a difference in terms of sourcing of deals and expanse of the deals or do you think it is basically the same as a traditional project? Can you maybe talk about the difference before and after DHC, if you can share some comments? Depending on the size, of course, the players differ in any market. And the several tens of billion was the size that we have been doing. And now we are doing one that is a little bit bigger. So it's not necessarily a question of whether there is a change. But anyway, would we do this? And if we're successful, maybe we will do more of those. And we want to continuously expand our business, and this is the first step towards that. That's how we see it. I am Okada from UBS Securities. I have one question. As you have mentioned earlier, the outlook for USA, I would like you to follow up a bit. So I know that you are becoming a little more stringent in the control of businesses. But the segment profit of JPY105 billion is expected as well. So this profit outlook and also the risk management, how do you strike the right balance between the two? So going forward, like PE credit, real estate, what is your idea in the effort that you'll be expecting in those areas? Please give us some more color. Yes, as I have mentioned, as of today, so the profit that has declined. We don't think the question, of course, you had asked is only, I think, justifiable because I think in two years, whether we will be able to recover back to JPY105 billion or not is to be questioned. We would not like to kind of changed the split. But if at all possible, we'd like to, of course, grow the businesses and whether we are going to give up on the businesses in the U.S., that is the answer to the question would be no. Although we will be become a little more stringent in terms of risk management, but we are continuing in the asset management businesses and the PE as well as credit and real estate businesses. So of course, making use of other people's capital and using the leverage, we would very much like to continue to generate profit. And we would remain – we would, of course, continue to evolve our strategy and the risk management on one hand. But even if you want to talk about asset management, we mean by broader sense of asset management. So making use of other people's capital in other words, or incorporating other people's capital, we would very much like to continue pursuing our strategy. So at this point in time, there is nothing that we will be able to kind of show as the evidence of the success of this strategy, but we would very much like to continue to pursue this way. Yes, thank you. In the beginning of the year, there was an obvious comment and then in August, it was basically reversed and in the second half, the sentiment was similar once again. And I know that you have seen some exits after a lot of the efforts having been made. From summer until now with regard to exits, is there any change in terms of your sense for these exits? Maybe you're not too optimistic yet, but you may be able to exit from some of the projects. Can you give me a sense of how you feel about the general direction of these exits? In this fiscal year, yes, there was a slowdown in the United States, as you know, and we had some investments on last year. We didn't really have to do anything and they basically sold one after the other, but unfortunately, within this fiscal year, the situation is very different. And other than that, for domestic real estate the situation continues to be positive. Domestic PE investments about how to increase the value and also who will be the potential buyers, we try to figure those things out, and we spend a certain amount of time on those. And I don't think that these situations have deteriorated that much and also aviation is coming back. It's recovering. So since general sense is quite positive, quite good. I understand that there may have been some concerns, but we will continue to work on our exits and we believe that we can do them. And in the next fiscal year as well, we can expect certain number of exits happening. And I would like to emphasize once again that capital recycling is what we do, we promote. So it's not just increasing the number of investments randomly. We continue to recycle to make ourselves stronger and more profitable. So we will continue to work on our exit plan, and we do not have any specific concerns about that right now. I hope that answers your question. And in the United States and also in Asia, you have some gain on valuation of the funds. And Asia is small, but I understand that the situation is improving. So in terms of gain on valuation, is there anything that we can hear from you today? Well, we're not doing the valuation of the funds ourselves, so we cannot really talk about the gain or positive aspects of that. But we do have some funds mostly overseas and we just received that assessment or evaluation and we just reflect that into numbers. But I don't think that would have a huge impact on our general performance. But looking at those numbers, maybe it's possible to talk about a certain trend, but it's not extremely positive, as negative, excuse me. Thank you. Thank you very much. [Operator Instructions] So there seems to be no more questions. We would like to end the Q&A session. So Yano is going to provide closing remarks. So once again, I would like to thank all of you to have joined us in this briefing session. So we did manage to generate some profit, a pretty good profit in the third quarter and going forward, we'd like to continue to further effort in building our profit more. So please continue to watch about the development of our businesses. And as of today, if there was to be any further questions, by all means, please contact our IR Department. We are happy to of course, answer your questions on an individual basis. With this, I would like to close, conclude today's conference. Thank you for your participation.

EarningCall_378

Good afternoon, and welcome to Enanta Pharmaceuticals Fiscal First Quarter Ended December 31, 2022 Financial Results Conference Call. At this time all participants are in a listen only mode. [Operator Instructions] Please be advised that today’s conference is being recorded. Thank you, operator, and thanks to everyone for joining us this afternoon. The news release with our fiscal first quarter 2023 financial results was issued this afternoon and is available on our website. On the call today are Dr. Jay Luly, President and Chief Executive Officer; Paul Mellett, our Chief Financial Officer; and other members of Enanta’s senior management team. Before we begin with our formal remarks, we want to remind you that we will be making forward-looking statements, which may include our plans and expectations with respect to our research and development pipeline and financial projections, all of which involve certain assumptions and risks beyond our control that could cause our actual developments and results to differ materially from those statements. A description of these risks is in our most recent Form 10-K and other periodic reports filed with the SEC. Enanta does not undertake any obligation to update any forward-looking statements made during this call. Thank you, Jennifer, and good afternoon, everyone. At Enanta, our mission continues to be to leverage our expertise in small molecule drugs to discover and develop groundbreaking medicines. Our fiscal first quarter of 2023 set up a strong data-rich year, positioning us to potentially drive value for our company as we advance our expanding pipeline. on our broad respiratory syncytial virus, or RSV, program as well as touch base on the rest of our pipeline. Beginning with our COVID-19 program, our lead asset is EDP-235, the clinical stage, once-daily, orally dosed inhibitor of the coronavirus 3CL protease, which is currently being evaluated in an ongoing Phase 2 study known as SPRINT. We are pleased to announce that the study has completed enrollment beyond the initial target. As a reminder, SPRINT is a randomized, double-blind, placebo-controlled Phase 2 clinical trial of EDP-235, and approximately, 200 non-hospitalized symptomatic adults with mild or moderate COVID-19, who were treated orally with 200 milligrams or 400 milligrams or placebo once daily for five days. SPRINT was designed to select a dose to move forward in development by evaluating the primary endpoint of safety and tolerability and key secondary objectives, including virologic endpoints and pharmacokinetics. Clinical symptoms and other clinical outcomes such as rebound will also be evaluated in more of an exploratory manner. We anticipate reporting top-line data from this study in May. Based on the study design and previous clinical data demonstrated in our Phase 1 study for EDP-235, we aim to achieve good safety, tolerability and pharmacokinetics to support once-daily dosing. While this study is not powered on any virologic measurement, we will be looking for trends in antiviral activity as well. As COVID-19 persists and variants that circumvent immunity continue to arise globally, we are encouraged that EDP-235 has demonstrated potent antiviral activity across all SARS-CoV-2 variants tested in vitro to date. We believe EDP-235 has potential to be conveniently prescribed and to treat a broader patient population as EDP-235 does not require ritonavir boosting with its associated drug-drug interactions. If supported by Phase 2 results, we plan to advance EDP-235 to a Phase 3 trial in the second half of this year. Beyond the positive Phase 1 results of EDP-235, we are also encouraged by the new positive preclinical in vivo data in a ferret model that we presented last month, which continues to add to the strong body of evidence supporting the potential of EDP-235. Findings of the study highlighted the robust antiviral treatment effect as the animals treated with EDP-235 at a rapid and sustained decline in viral load. Further results showed the ability of EDP-235 to prevent the transmission of COVID-19. When healthy animals were moved into housing with infected animals that were treated with EDP-235, they did not contract COVID-19. In contrast, when healthy animals were moved into housing with infected animals treated only with vehicle, they did become infected with COVID-19. We look forward to presenting the detailed findings of our Phase 1 study for EDP-235, the results of our ferret model study and two other preclinical posters at the International Conference on Antiviral Research, or ICAR, in March, along with preclinical data at the European Congress of Clinical Microbiology and Infectious Disease, or ECCMID, in April. Beyond EDP-235, we announced a new research program to develop inhibitors for SARS-CoV-2 papain-like protease or PLpro. We believe the addition of this program gives us multiple opportunities to combat COVID-19 that potentially these programs may work together. PLpro is another essential enzyme, which plays an important role in viral replication and in addition, acts to blunt the innate immune response. Inhibition of PLpro blocks viral replication and has the potential to alleviate the suppression of the immune response to SARS-CoV-2 infection. As this mechanism is distinct from 3CL protease inhibition, it has the potential to be used alone or in combination with 3CL protease inhibitors, such as EDP-235 or other compounds to provide a range of treatment regimens for different patient populations suffering from COVID-19. Our prototype inhibitors demonstrate nanomolar potency against the Omicron variant in both biochemical and cellular assays, and we continue to optimize inhibitors as we progress this program forward toward development candidate selection. Continuing with our industry-leading respiratory virology treatment portfolio, we are progressing our broad RSV program, which includes EDP-938, the most advanced and protein inhibitor in clinical development as well as EDP-323, our novel oral therapeutic targeting RSV L-protein RNA polymerase. Our goal is to develop an effective therapeutic for RSV that provides secure for the populations that are severely affected by this virus. EDP-938 is being evaluated in multiple Phase 2 clinical studies, including RSVHR, a Phase 2b study in adults with acute RSV infection who are at high risk of complications, including the elderly and/or those with congestive heart failure, COPD or asthma. RSVP it’s a Phase 2 study in hospitalized and non-hospitalized pediatric RSV patients and RSVTx, a Phase 2b study in adult hematopoietic cell transplant recipients with acute RSV infection and symptoms of upper respiratory tract infection. These three studies are expected to continue through 2023, and we’ll continue to monitor the RSV epidemiology to evaluate the impact on trial enrollment and timing for these data readouts. Also in RSV, last quarter, we announced the dosing of the first subject in the Phase 1 study of our L-protein inhibitor, EDP-323. This ongoing double-blind, placebo-controlled, first-in-human study is designed to enroll approximately 80 healthy subjects to evaluate the safety, tolerability and pharmacokinetics of orally administered single and multiple doses of EDP-323. We believe both EDP-938 and EDP-323 could serve as stand-alone treatments or be used in combination regimens to broaden the treatment window or addressable patient populations for RSV. We look forward to presenting preclinical pharmacokinetic data on EDP-323 at ECCMID and expect to report top-line Phase 1 data next quarter. Moving on to our respiratory discovery program. We’re excited to recently announce our novel broader spectrum antiviral research program targeting both RSV and human metapneumovirus, or hMPV, with a single agent. hMPV and RSV are similar viruses. Both are important causes of respiratory tract infections and are endemic globally, impacting several vulnerable populations, including children, the elderly, adults with underlying cardiopulmonary disease and those who are immune compromised. We are encouraged by preclinical findings in which our prototype dual inhibitor demonstrated potent nanomolar activity against multiple genotypes and strains of both viruses and a range of cell types. Further, our prototype dual inhibitor potently inhibited replication of both hMPV and RSV in a dose-dependent manner in respective mouse models demonstrated a significant reduction in viral load of both viruses. A dual inhibitor provides the potential for a broader spectrum antiviral that would allow respiratory infections diagnosed as either hMPV or RSV to be treated with a single agent. We continue to optimize our potent tool inhibitor and aim to select a clinical candidate in the fourth quarter of this year. Turning to hepatitis B. We are cognizant of the continued high unmet need for this disease as it is a global public health threat and the world’s most common serious liver infection, making it the primary cause of liver cancer. We are focused on identifying different mechanisms of action and alternative compounds to develop in combination with EDP-514, our potent core inhibitor, and an existing nucleoside reverse transcriptase inhibitor, which we believe can ultimately be important components of a successful combination regimen. Finally, I’d like to wrap up by highlighting our near-term milestones. Again, we are thrilled with the progress of EDP-235 for the treatment of COVID-19 and plan to announce top-line data from our Phase 2b study, SPRINT, in May and pending results initiate a Phase 3 study in the second half of this year. We plan to report top-line data from our Phase 1 study of EDP-323, our RSVL inhibitor, next quarter. And we look forward to presenting data on our RSV and COVID programs at the ICAR in March and ECCMID in April. Thank you, Jay. For the quarter, total revenue was $23.6 million and consisted primarily of $22.6 million of royalty revenue earned on AbbVie’s global MAVYRET net product sales. This compares to total revenue of $27.6 million for the same period in 2021. The decline is primarily a result of continued lower treated patient volumes due to the COVID pandemic. Royalty revenue was calculated on 50% of MAVYRET sales at a royalty rate for the quarter of 12% after adjustments for certain contractual discounts, which are now approximately 2% of AbbVie’s total reported HCV product sales. You can review our royalty schedule in our 2022 Form 10-K. Moving on to our expenses. For the three months ended December 31, 2022, research and development expenses totaled $40.9 million compared to $48.5 million for the same period in 2021. The decrease was primarily due to the timing of drug supply manufacturing and preclinical studies in the company’s virology program year-over-year. General and administrative expense for the quarter was $12.7 million compared to $9.5 million for the same period in 2021. This increase was primarily due to an increase in headcount and related stock-based compensation expense. per diluted common share compared to a net loss of $30.1 million or a loss of $1.48 per diluted common share for the corresponding period of 2021. Enanta ended the quarter with approximately $241.4 million in cash and marketable securities. We expect that our current cash, cash equivalents and short-term and long-term marketable securities as well as our ongoing royalty revenue will continue to be sufficient to meet the anticipated cash requirements of our existing business and development programs into the fourth fiscal quarter of 2024. Further financial details are available in our press release and will be available in our quarterly report on Form 10-Q when filed. Hi. This is Joe on for Brian. Thank you for taking my question. I just wanted to quickly ask you on your latest view on the COVID outlook? And what sort of evolving market opportunity you’re seeing in COVID? Yes, that’s my question. Thank you. Sure. Thank you. This is Jay. So regarding the outlook, it’s been certainly a rough few years in terms of the pandemic. And I think there’s a migration to the endemic phase of this. But we see it as a tremendous opportunity that will probably ultimately settle down to be something more than flu. And obviously, there’s several different angles you can think about playing with a product like EDP-235 over the longer term. You can think about high risk patient populations. You can think about standard risk patient populations. You can also think about possibilities and long COVID and also from a post-exposure prophylaxis perspective. And so all of these are potential avenues to build over time and to grow. But we don’t see this virus going away anytime soon if ever, and that it’s likely to persist in a very meaningful way in a public health perspective. So… Hi, this is Emma on for Yas. Thanks for taking our questions. We are wondering that based on your market research, how cumbersome is the return of your boost for paxlovid and what is the appetite among physicians for EDP-235 adoption? Thank you. Well, I think, ritonavir is definitely not a desirable, ultimately it adds complexity. You’re trying to treat a respiratory virus with a respiratory viral drug, a protease inhibitor, and you’re adding an HIV protease inhibitor just to boost the drug levels in the case of paxlovid. So it’s really the boosting agent that leads to many drug-drug interactions as it relates to ritonavir. Ritonavir also has a taste problem and we – paxlovid as it’s currently being administered is three pills in the morning, three pills in the later part of the day, and then four or five days. So it’s a 30 pills in total. The doses that we’re selecting in our SPRINT study for evaluation either of those we believe can ultimately be formulated into single tablet, which could be one pill once a day based on the pharmacokinetics that we’ve observed in Phase 1 healthy clinical trials. So, if we can achieve one pill once a day with a very potent and effective drug and not have a boosting agent that leads to lots of drug-drug interactions and complexities for physicians that’s an attractive product profile everywhere we’ve checked. Yes. We compile our next question. And I show next question comes from the line of Brian Skorney from Baird. Please go ahead. Hi, this is Luke on for Brian. Since SPRINT excludes elevated risk patients, would you have to do any additional safety work before going into a pivotal in a higher risk setting? Not necessarily. I think, certainly Pfizer went from Phase 1 healthies into high risk. I recognize that was at an earlier time. But we’re currently in discussions with regulatory agencies. But at this time, there’s no reason to suspect a different safety profile of the drug in that patient population. Hi. Thanks for taking the question. So maybe tagging on to some of the COVID questions. I was curious about your new PLpro mechanism antiviral. How do you expect that to fit into the treatment landscape in the future, especially when it’s possible there could be multiple 3CL protease inhibitors available assuming they get approved? Sure. Thanks, Roanna. So I think, Enanta when we go after a virus, we usually don’t sit tight with one mechanism, especially when it’s a new virus that no one has approved drugs for. So when we started working early on in the pandemic, we went after multiple mechanisms including 3CLpro, and PLpro. 3CLpro gave rise to our first candidate sooner than PLpro. But at the end of the day, no one’s really had the opportunity to study a PLpro in clinical trials. So whereas there may be multiple 3CLpros across the line, ultimately, again, we think the best product profile will win longer term. But we also wonder out loud, could a PLpro have other advantages over a 3CLpro. We know that PLpro, like 3CLpro is a critical enzyme and viral replication. So either protease inhibitors should be able to knock down the replication part of it. But PLpro also has a role in blunting the innate immune response of the host. And we wonder if there couldn’t be some extra impact that you could have in a treatment by having an PLpro inhibitor that not only shuts down replication, but may also block the suppression of that innate immune response. So in this sort of a situation, more drug choices are better than fewer. We don’t believe at this time that there’s any reason to believe that combination on top of a 3CLpro is necessary, but that might not always be the case. And also there may be special patient populations where you’ll want to have two drugs to try to help the person rather than just one. So for all these reasons and especially where we are and fully understanding this virus. It’s good to have multiple shots on goal and we think the PLpro is really interesting. We’ve got some great chemical matter and we’re pushing as hard as we can to bring that forward as a candidate. Hi, this is Amy on Akash. Thanks so much for taking our question. On the SPRINT trial, I know you indicated that it’s not powered to show viral load reduction, but would love to kind of hear any sort of color on what it is powered to show in terms of symptom benefit or any other endpoints that you think is relevant? And what are you specifically looking for in the data in order to move forward? And additionally, what are the big inflection points in your view where you’re looking to partner out the program ideally? Thanks so much. Yes. So I think all this sort of hangs together. The primary endpoint as we’ve disclosed previously is safety and tolerability. It was not powered on these other parameters. It certainly wasn’t powered on a symptomatic readout. But nonetheless, these are things that you look at as secondary endpoints to gather as much information as you can in terms of what factors – what symptoms might have been modulated the most in – with this current variant that the drug was tested against. So this is all important information to capture as you’re planning Phase 3. We’ll also be looking for trends and viral loads to help us select a dose. Typically with these protease inhibitors, you see – maybe about a log, you don’t see profound viral load drops the way these things are measured in these studies. But nonetheless with the trial that’s roughly around 200 patients we did over enroll the study. But I think hopefully it’s set up to give us what we need to know about safety and tolerability between doses, look for trends in the virology between the doses and anything else we can get out of this study is gravy, so to speak, as we’re planning Phase 3 studies. So this data is obviously what we’re trying to achieve in the SPRINT data and you indicated questions about what’s appropriate for a partner. Partners always have what they want to see, but suffice it to say, the data package that we’re putting together continues to build into something that’s very interesting and perhaps best in class. Hey, this is Matt on for Jay Olson as well. Thank you so much for taking our questions. So we were wondering for the hMPV/RSV dual-inhibitors, could you just talk about the potential utilization in the real world? How common, for example, is it for patients to have a co-infection and also how will the dual inhibitor impact EDP-938 and EDP-323 development? Really appreciate it. Thank you. Sure. Thanks for the question. So the dual inhibitor, to be clear, we’re not looking for co-infected patients, although they could exist. I think that would be a relatively rare thing. It might be more common to be infected with COVID in RSV or COVID in human metapneumo. But even that co-infection in these specific instances is probably rather rare. And so instead, the way we’re thinking about it is more of a broad spectrum antiviral one that we could use to treat either infections so that regardless of whether it was RSV or human metapneumo in the diagnosis, you could just use one drug to take care of both of them. RSV also a virus that most pediatricians can tell an RSV infection just based on bronchiolitis and other sorts of symptoms. And so, someday it might even be used to treat patients presumptively for those infections. And having the comfort that you could treat either RSV or human metapneumo would be a great advantage. I’ll kind of go back to my earlier point. When we get into an area, we don’t usually just pick on one mechanism for a drug or one drug class. We like coming forward really understanding especially in an area like RSV and human metapneumo, where there are no approved drugs. We want to have as many different mechanisms in classes that we can bring forward. Ultimately, there will be comparative data that we’ll have. We may elect to select them into different patient populations. And in some instances, there may be reasons to do combinations. You didn’t ask about our health protein inhibitor for RSV 323, but that’s another mechanism that we have in addition to 938. So we have a lot of optionality going forward. Thank you. And I show our next question comes from the line of Ed Arce from H.C. Wainwright & Co. Please go ahead. Hi, Jay. Thanks for taking our questions. Really just one on EDP-323 in RSV with data in second quarter, as you mentioned. Just wondering this study is obviously in human volunteers. So there’s really no opportunity yet for virological data. But I’m just wondering what kind of – what criteria are you looking at? How should we judge this early safety and PK study results? How would you judge it to move forward? And as you think about next steps, when do you think we could get initial efficacy data? Thanks. Thanks, Ed. Yes, so 323 data in Q2, it’s a standard Phase 1 in healthy trial. But the good news is, when it comes to virals, that tells you an awful lot and can, in fact, do a lot of de-risking of the asset, as you know. So, we’ll be looking at safety, PK, especially PK. Not that safety is not important, but PK is where you really dial in your dose selection for future studies. And there, we always aim for a once-daily dosing, that’s always our target. So, we hope to achieve once daily dosing that gives adequate trough level concentrations at the 24-hour time point to deliver good pressure on the virus in terms of multiples of the EC90. So if we can do all of that, that’s certainly what we’ve done with our other antivirals and our preclinical modeling suggests that we’ve picked doses to achieve that in this study. So, we’ll soon enough know the answer to that. And then assuming that the data are good, you can think about – probably, the quickest way to get any viral data would be to do a challenge study, which you can also use to check antiviral effect, you can look at symptoms, and you can also further would find any dose decisions that you might be wanting to make for other more advanced studies. So, I think that’s the broad layout for the year. Thank you. [Operator Instructions] And I show our next question comes from the line of Eric Joseph from JPMorgan. Please go ahead. Good evening. Thanks for taking the questions. Just a couple on 235 in COVID. I’m wondering if there’s a clear sense of the types of endpoints that would be needed to support registration for COVID antiviral. Just given where we are with the vaccine exposure and prior virus exposure, has there been any shift, I guess, from the precedent set by Paxlovid and Lagevrio? And then secondly, assuming compelling data from SPRINT, I just want to get a sense of the sequencing event of events from here between partnering and launching the Phase 3 study? And I guess specifically, whether your cash guidance through fourth quarter next year anticipates full execution of the Phase 3 trial, whether you could do it alone? Thanks for taking the questions. Yes. So, I think we’re setting ourselves up to collect SPRINT data, assuming it’s as expected, having discussions with the regulators to design that Phase 3 study. There’s lots of different possibilities in terms of how you could think about that in terms of end points. Maybe I’ll let Tara Kieffer here elaborate on that a little bit further, but with regards to partnering, will – that timing will be that timing. And I’m not going to co-mingle that with SPRINT Phase 3 start or data collection. So, we’ll give updates on each of those tracks as updates are relevant. From a cash perspective, we would position ourselves to be able to do that ourselves. Obviously, it depends a lot on what Phase 3 development plan you choose and how those Phase 3 designs are ultimately implemented in terms of trial size, et cetera. But right now, I think we feel reasonably good about that. So maybe I’ll turn the call off to Dr. Tara Kieffer here. She’s our Senior Vice President of New Product Strategy Development. We’ve been thinking a lot about Phase 3 stuff along with our clinical team about possible endpoints and so forth. Again, we will ultimately select it after discussions with the agency. So nothing that we’re going to declare today, but there’s different possibilities. Tara? Sure. Thanks, Jay. Hi Eric, thanks for the question. This is Tara. So, I think if you think about Phase 3 trials for COVID, there’s a number of different strategies that one could think about, including different patient populations. So a high-risk patient population, standard risk population. There are currently Phase 3 studies going on in both of those populations, also ones that have mixed populations. In terms of endpoints, there are studies looking at hospitalization and death. Obviously, the rates are lower than what they were at the peak of the pandemic with different variants coming along now. However, some of the strategies being used would include high-risk patients that really focus in on those – a subset that have a higher risk and really elevating that event rate. Other endpoints that are being used are looking at symptoms. So [indiscernible] has an ongoing Phase 3 trial now that’s looking at a symptom endpoint, and they had shown data from their other Phase 3 trials being run in Asia where they did see a significant effect on symptoms looking at a subset of five symptoms that were shown in their Phase 2b study to be more correlated with an effect. So, I think there’s a number of different strategies one can use. We’re obviously thinking about all of those, among others, and having discussions with regulatory agencies as we move forward to our next phase. Thank you. And I show our next question comes from the line of Roy Buchanan from JMP Securities. Please go ahead. Hey, thanks for taking the question. I guess one on 514. Any changes to your confidence in the capsid inhibitors? Doesn’t sound like it. Maybe more concretely, are you shifting to look more externally or internally versus your prior expectations, I guess, for partnering candidates? I’m just thinking of J&J’s comments around their hepatitis B program. GSK going into Phase 3 with just an ASO, and then any change to your thinking? Thanks. No change to the thinking. I think our core inhibitors are still an impactful class of HBV drug. I think, ultimately – whereas we’re doing a little bit internally, we’re looking externally at the landscape for other possible options. But I also think it’s important while we’re in sort of this phase to be thinking about other data sets that are going to be ultimately coming from others, which may inform potential other combination ingredients. And so I would say, we’re not in a hurry to push something ahead just to do it. We’re being very thoughtful and disciplined on this front. And until or unless we’ve come up with that solution, we’re not going to just push a dual-acting regimen forward in clinical development and spend that money and manpower on it. So, I think it’s going to be a little bit more watching and analyzing and a little bit of doing. Hi, this is Amy again. Thanks very much for taking our follow-up. Just wanted to get your thoughts on – so Pfizer recently made some interesting comments that competitor COVID antivirals won’t be on the market until around 2025, and they could show worse efficacy because of the lower event rate. Would love to get your thoughts on these comments. Well, it’s – anything is possible. I think, Paxlovid today, if you put it in a clinical trial, which show probably a lower event rate as well. But you – again, you can never know how to speculate on that. I think the variance continued to change. I think people will be looking at different things, but at the end of the day, we think you can show clinical significance and important patient populations and with an easier-to-use drug that doesn’t have some of the liabilities I mentioned earlier on the call. So either way, I think there’s going to be room for other drugs out there that are more conveniently dosed. Hey, this is Luke again. Just one more for us. On SPRINT criteria, is there any reason to expect meaningfully different antiviral or clinical impact in patients treated after five days of symptoms as opposed to someone who goes and then gets treated on day one? And is that a cross-section you’ll look at when you cut the data? We’ll have a little bit of a cut in terms of timing on that. I think it’s less than three days versus greater than three days up to five days. So, we’ll see what we see. In general, almost always, the earlier you treat is more optimal. But COVID has been a little bit more forgiving than some other viruses. So we’ll just wait and see. We’ll collect the data and look at it, and again, that will help inform how we progress. Hey, thanks for taking the follow-up. Jay you mentioned some combo trials that you’re tracking, data readouts that are coming up. Can you tell us what those are? Sure. Roy, hi it’s Tara. So we’ll certainly be looking at all the combination studies that are going on out there today. So that would include Roche’s larger trial that is looking at combinations that they have with their siRNA and immune modulators. Also [indiscernible] is running a number of trials now with their siRNA as well as looking at therapeutic vaccine. They’re also doing a trial with their monoclonal antibody combination and also one with interferon. And then they’re additionally looking at one with a TLR-8 from – that’s in combination with Gilead. Our Arbutus a couples ongoing. They have an siRNA in combination with interferon. So we’ll be looking at that trial as well. GSK obviously is moving forward with their ASO alone and in combination with Interferon. So we’ll be curious to see readouts for all of these trials. Thank you. That concludes our Q&A session. I show no further questions at this time. I’d like to call back over to Jennifer Viera for closing remarks. Thank you, operator, and thanks to everyone for joining us today. If you have additional questions, feel free to contact us by e-mail or call us at the office. Thanks, and have a good night. Bye-bye.

EarningCall_379

Greetings. Welcome to Tenable’s Q4 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, that this conference is being recorded. Thank you, operator and thank you all for joining us on today's conference call to discuss Tenable's fourth quarter and full year 2022 financial results. With me on the call today are Amit Yoran, our Chief Executive Officer; and Steve Vintz, our Chief Financial Officer. Prior to this call, we issued a press release announcing our financial results for the quarter and full year. You can find the press release on our IR website at tenable.com. Before we begin, let me remind you that we will make forward-looking statements during the course of this call, including statements relating to our guidance and expectations for the first quarter and full year 2023, growth and drivers in our business, changes in the threat landscape in the security industry and our competitive position in the market, growth in our customer demand for and adoption of our solutions; planned innovation and new products and services; and our expectations regarding long-term profitability and free cash flow. These forward-looking statements involve risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially from those anticipated by these statements. You should not rely upon forward-looking statements as a prediction of future events. Forward-looking statements represent our management's beliefs and assumptions only as of today and should not be considered representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. For a further discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our most recent annual report on Form 10-K and subsequent reports that we file with the SEC, which are available on the SEC website at sec.gov. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their closest GAAP equivalent. Our earnings release that we issued today includes GAAP to non-GAAP reconciliations for these measures and is also available on the Investor Relations section of our website. Thank you, Erin. Today, I'll discuss our financial performance, the strong traction we're seeing with Tenable One, and our growth beyond vulnerability management and exposure management. With that, let me first touch on our financial performance. In the fourth quarter, we delivered strong revenue growth at 24% year-over-year. In addition, non-GAAP income from operations was $19.9 million and unlevered free cash flow was $32.1 million, both above expectations. For the full year, our results were well above our initial expectations with full year CCB growth of 26% and $67.7 million in income from operations. Additionally, we had another strong quarter with large deals as we added 140 net new six-figure customers, which is a record for us and is up 40% year-over-year. Even more importantly, the number of six-figure deals accelerated throughout the year, further validating our corporate strategy and demonstration of the momentum we are building. As the market leader in vulnerability management, we're seeing great demand in the market, including new customer acquisition, renewals, and expansions. Our years of leadership in VM has put Tenable in a great position to target bigger, more strategic deals as customers continue to move beyond traditional VM to understand and reduce their cyber risk. We believe thesis driving the acceleration of six-figure deals. We had strong performance in OT, including a number of six-figure deals. This is an early stage market with tremendous opportunity, where we are now proving our ability to close larger transactions. We also saw particular strength in Tenable One, which I will discuss in more detail shortly. At Tenable, we continue to differentiate ourselves as a technology leader by continuing to prioritize investments in product innovation and go-to-market, including our partner ecosystem. Over the last several quarters, we have moved quickly to align our efforts where we see the greatest opportunities in the market. And as our Q4 results indicate, we are clearly seeing success. Our decision to focus our product and go-to-market efforts around unified platform is resonating in the market. We are incredibly excited by the traction we're seeing since launching Tenable One. Tenable One continues to see rapid adoption and represented mid-teens percentage of total new business in the quarter. Demand was broad-based as we saw healthy numbers of lands from new customers as well as upsell from existing customers across SC, IO, and NEXUS. And despite a tougher macro, we continue to see a material uplift with Tenable One relative to standalone VM. We're also excited to note that customers are allocating Tenable One licenses across more of their attack surface including their cloud infrastructure, truly leveraging the power of the platform. Selectively, including Tenable One, our exposure solutions now represent approximately 50% of our renewals and new business, up from 40% a year ago. We're able to leverage our leadership in VM for a natural upsell to Tenable One, making us more strategic in driving larger transactions. Tenable One brings a single unified view across VM, cloud security, active directory and identity and external attack surface management to deliver telling analytics. Threat actors don't limit their attacks to one silo of technology. They're looking for the right combination of vulnerabilities, misconfigurations, and account overprovisioning that will meet their objectives. Security teams have been operating on point products and specialized solutions, which created isolation within their operations. Tenable One enables collaboration across the entire security stack. It achieves us to enhanced analytics, asset inventory, and building Attack Path Analysis to determine which combinations of vulnerabilities, access and permissions, and misconfigurations could result in path from external points to sensitive internal targets. Leveraging these capabilities, we believe we offer the first platform to truly operationalize preventative security. Operationalizing preventative security has been an objective in the market for a long time. It's really hard to do and it requires a deep understanding of vulnerabilities, context and prioritization. It's our long history of understanding exposures at a very deep level that uniquely positions us to deliver on this objective. We believe this gives us an edge with our technology and also in helping our customers security teams operate more efficiently. Connecting related points across security issues enables our customers to have broader visibility into risk across siloed security functions. Additionally, in these market conditions, security teams need to do more with less. As Tenable One enables vendor consolidation, we are consistently attracting a more senior economic buyer, which is crucial as investments require more scrutiny. A great example of this is a win with a very large global technology and media company. They were going through a large digital transformation and they were looking at different vendors to secure their cloud, their external attack surface and their VM assets. Tenable One enabled them not only to consolidate vendors, but in doing so, also unified visibility across asset types. Years ago, we pioneered the concept of exposure management and set out a road map aligned with that vision. Tenable One leverages our leadership in VM and realizes the next great step in that vision for managing cyber exposure. Customers and industry analysts alike va lidate our VM leadership and the importance of cyber exposure. Gartner continues to talk about exposure management as a discipline, in particular, the importance of advancing a cyber exposure management program as critical to developing actionable security posture improvement plans. We believe their commentary aligns very well with the attributes of Tenable One. Additionally, IDC recently published their 2021 VM market share report, highlighting Tenable as the 2021 market share leader for the fourth year in a row. IDC added commentary around the importance of a holistic view and risk prioritization as the number of vulnerabilities is accelerating every year. As the leader in VM and now a platform-first company, we believe we've earned the trust of our customers to be the vendor of choice as they look to cover more of their attack surface. Since the release of Tenable One, we're seeing an immediate interest and adoption of Tenable One for cloud native use cases. Customers are looking to improve visibility into cloud assets, understand exposures and manage risks around this portion of their tax services. This provides a means to consistently enforce cloud security posture and compliance across multi-cloud and hybrid environments that is delivered in a single unified platform and is more cost effective and scalable than continued use of point provider tools. In fact, a great example of this was a Q4 upsell for Tenable One within a large aviation company. They save budget by converting from another cloud security product and instead expanded from Tenable.io to Tenable One. As we look to 2023, we will continue to focus on innovation, and we'll continue to increase our investment in quota capacity, enterprise customer support, customer experience, and our partner ecosystem. While making these investments, we're also delivering a strong annual cash flow guide for this year and reiterating our $240 million to $250 million in unlevered free cash flow target in 2024. Our ability to deliver profitable growth with investments in innovation, and distribution leaves me with great confidence that we will be able to execute on the opportunity in front of us. In short, we're incredibly proud of our ability to execute in this market and look forward to yet another successful year. Thanks Amit. We are pleased with our results for the fourth quarter, highlighted by better than expected growth and profitability due to strong customer demand. I will provide more commentary momentarily, but first, please note that all financial results we discuss today are non-GAAP financial measures with the exception of revenue. As Erin mentioned at the start of this call, GAAP to non-GAAP reconciliations may be found in our earnings release issued earlier today, which is posted on our website. Now, on to the results for the quarter. Calculated current billings, defined as the change in current deferred revenue plus revenue recognized in the quarter grew 23% year-over-year to $238.9 million and benefited from strength in vulnerability management and continued momentum of Tenable One, our exposure management platform. Underpinning our better than expected topline results is strong customer demand. Specifically, we added 571 new enterprise platform customers and 140 net new six-figure customers in Q4. While both metrics are exceptional, large deals, in particular, grew 40% year-over-year. The takeaway here is the investments we've made over the years to build a vast ecosystem of partners and extend our global reach allow us to effectively serve customers of all sizes in most major markets for traditional VM or increasingly for unified risk and exposure management. Our Tenable One platform also creates a compelling upsell path for our customers and is benefiting our dollar-based net expansion rate, which remained strong and was 117% in the quarter. While this expansion rate may fluctuate on a quarterly basis, we generally expect it to be within a 110% to 120% range. Revenue was $184.6 million, which represents 24% year-over-year growth. Revenue in the quarter exceeded the midpoint of our guided range by $3.6 million. Visibility remains strong as our percentage of recurring revenue was 95%, which is consistent with prior periods. I'll now turn to expenses, where we are demonstrating notable operating leverage while also continuing to prioritize investments in growth and innovation. I'll start with gross margin, which was 78.5%, a decrease from 81% last quarter. Gross margin for the full year was 80%. As anticipated, cost of revenue increased sequentially, primarily due to higher demand for our cloud-based products, including Tenable One, which was launched in the fourth quarter and includes Attack Path Analysis and external attack surface management. Looking ahead, we expect gross margins for the full year 2023 to be in the high 70% range with modestly improving margins throughout the year as adoption of Tenable One increases and we absorbed the initial costs related to our newer exposure management offerings. Sales and marketing expense was $78.3 million, which was up from $74.5 million last quarter. Sales and marketing expense as a percentage of revenue was 42% compared to 43% last quarter, reflecting greater efficiency in our go-to-market efforts. Sales and marketing expense reflects higher personnel costs, including payroll taxes as well as higher sales commissions and variable compensation attributed to our strong sales performance and higher renewal base in the quarter. For the full year, sales and marketing expense as a percentage of revenue was 44%. R&D expense was $28.7 million, which was up from $27.4 million last quarter. R&D expense as a percentage of revenue was 16% this quarter and last quarter. R&D expense increased sequentially primarily due to lower capitalized software development costs in Q4, subsequent to the launch of Tenable One. For the full year, R&D expense as a percentage of revenue was 16%. G&A expense was $17.9 million, which was up from $16.7 million last quarter. As a percentage of revenue, G&A expense was 10% this quarter and last quarter as well as for the full year. We will continue to make investments in G&A to support the growth and scale of our business. Income from operations was $19.9million, $4.4 million above the midpoint of our guidance range due to the better-than-expected top line results and greater operational efficiency in our business. Operating margin for the quarter was 11%, which was 220basis points better than the midpoint of our guidance. Operating margin for the year was 10%. The takeaway here is, even in a dynamic environment, we've been able to efficiently invest for growth and expand our operating margins by leveraging our VM market leadership, sizable customer base and broad exposure management platform. In terms of headcount, wended the year with 1,900 employees, which reflects a 2% reduction in force in the fourth quarter, resulting in $1.8 million of severance. By aligning our cost structure more closely with our investment priorities, we believe we are well-positioned as we enter 2023 to capitalize on the opportunities in front of us. All of this resulted in EPS in the fourth quarter of $0.12, which was approximately $0.05 better than the midpoint of our guided range. Now, let's turn to the balance sheet. We finished the quarter with $567.4 million in cash and short-term investments. Accounts receivable was $187.3 million and total deferred revenue was $664.6 million, including $502.1 million of current deferred revenue, which gives us a lot of visibility into revenue over the next 12 months. We generated $32.1 million of unlevered free cash flow during the quarter and $128.1 million for the full year, which is up from $95.2 million last year. With 95% recurring revenue, high gross margins and high renewal rates, we feel confident that we can continue to generate attractive levels of cash flow, while continuing to invest in the business. I will discuss cash flow in greater detail momentarily. With the results of the quarter behind us, I'd like to discuss our outlook for the first quarter and full year 2023. For the first quarter, we currently expect revenue to be in the range of $186 million to $188 million; non-GAAP income from operations to be in the range of $9 million to $10 million; non-GAAP net income to be in the range of $3 million to $4 million, assuming interest expense of $7.5 million and a provision for income taxes of $2.1 million; and non-GAAP diluted earnings per share to be in the range of $0.02 to $0.03 assuming 120 million fully diluted weighted average shares outstanding. And for the full year, we currently expect calculated current billings to be in the range of $915 million to $925 million, revenue to be in the range of $800 million to $810 million, non-GAAP income from operations to be in the range of $86 million to $91million, non-GAAP net income to be in the range of $63 million to $68 million, assuming interest expense of $31.3 million and a provision for income taxes of $9.3 million. Non-GAAP diluted earnings per share to be in the range of $0.52 to $0.56 and assuming 122 million fully diluted weighted average shares outstanding and unlevered free cash flow to be in the range of $175 million to $180 million. There are a few comments I want to make today that will provide important context to our guidance. First, we're delighted with our results for the quarter, which gives us a lot of confidence heading into 2023. We're beating the top and bottom-line, added hundreds of new customers and closed a record number of large deals in one of the most highly dynamic markets we see in many years. Our unified exposure platform, Tenable One, provides the security analytics and insights to help customers effectively assess risks across the enterprise by building better interlock across siloed security functions at a time when security teams are being asked to do more with less resources. And while pipeline continues to build, we are mindful of the current spending environment. Accordingly, our initial CCB guidance for the year reflects 18%to 19% growth, which we believe is appropriately cautious given the macro uncertainty. In terms of quarterly flow, we expect modest and lower year-over-year growth in the first half of the year due to our strong quarterly compares last year with modestly higher growth in the second half. In terms of profitability, we expect income from operations for the full year to grow approximately 30%, reflecting an 11% margin. We also expect to follow the same seasonal spending patterns as prior years with incremental investment -- and higher operating margins in the second half of the year. We're also excited to be hosting a live in-person sales kickoff in Q1 for the first time since the pandemic, which is a discrete expense that is reflected in our Q1 guide. With regard to cash flow, our unlevered free cash flow guidance for the full year represents 40% growth, resulting in a 22% margin, which is up from 19% last year. We expect unlevered free cash flow margin to generally ramp throughout the year, with Q3 as our typical seasonal high point. We're very pleased to provide an annual guide for unlevered free cash flow today. But please note that we do not plan to update our guide quarterly as the timing of collections and payments can vary from quarter-to-quarter. Our next update is expected to be midyear on our Q2 call. One final parting comment on cash flow. The strength of our business model enables us to generate this type of improvement while continuing to make strategic investments in innovation and go to market. We delivered better-than-expected and levered free cash flow in Q4. We are providing strong guide -- an initial guide, that is, to the year, and we are well on our way to achieving the $240 million to $250 million target for 2024. In summary, we have a lot of confidence in our ability to effectively grow and scale our business and drive higher levels of cash flow. Thanks Steve. We're very confident in our differentiated technology, our future, and our ability to deliver exceptional results even in a tough market. We hope to see many of you at the Morgan Stanley Conference in the upcoming weeks. Hey guys. It's [indiscernible] on for Hamza. Thanks for taking the question. Just wanted to hit on pipeline for the year ahead. Obviously, you've had a difficult macro situation. There's been some unevenness over last year in terms of deals closing on time, deals getting pushed. I'm just curious what you guys are seeing kind of for the year ahead? And then also just any incremental commentary you guys can provide around the federal opportunity? Thanks. Thanks. We're generally pleased with pipeline. I feel like we've gotten a pretty good rhythm, good understanding of customer buying behaviors over the last several quarters and able to invest where we see continued opportunities. So, prioritization of VM, especially in the enterprise market and candidly, our ability to move enterprise customers through the Tenable One machines as well. So, feel good about pipe. In terms of the federal space, I'd say it's -- very consistent with previous years in terms of seasonality. So, weighted in what's typically the third quarter, but we feel good about the momentum that we're building and the pipeline that we're building throughout the year, especially in the state and local markets as well. Thanks for taking my question and great quarter. Amit, I just want to drill down a little bit on Tenable One, massive new product cycle. Love to understand how customers are thinking about the attack surface management? And also talk about the price uplift. You've mentioned previously, 30% plus. Love to just understand a little bit more detail about how that's-- the go-to-market structure. I know you're doing that sales kickoff this year. So, 2023 could be a really goodyear for that? But any color you can provide would be really helpful. Thanks. Yes, I think directionally still looking at that 70%. So, we haven't updated that figure, but directionally consistent with what we've seen previously with Tenable One. And I'd say both the sales team and the customer base seems to be gravitating to it. It's a double-digit percentage of new sales and increasing high single-digit percentage of existing customers now on Tenable One. I think the message resonates. It makes sense. They can look at a more complete understanding of cyber exposure, a more complete perspective of risk, a much more compelling set of analytics, including attack path analytics and asset inventory types of things, which they haven't historically gotten with the vulnerability management program. The other piece is it allows us to do spend and vendor consolidation. So, by increasing their Tenable One spend to cover not only traditional VM, but also look at a cloud-based assets or also looking at their identity, we can offer them some volume-based pricing, which ends up being much more attractive than going to one vendor for VM, going to another vendor for external attack surface management, going to another vendor for cloud security. So, we're seeing great leverage in go-to-market function, and it really has been resonating with customers. We expect that trend to continue, if not accelerate. And Joe, this is Steve. As a matter of clarity, the uplift we're getting on Tenable One, we said in the past is 70%, this quarter was no different. So, we're getting a substantial uplift. We're transacting larger deals. It's one of the reasons why we're having great success adding lots of large customers. Great. And just one quick follow-up, Steve, just -- or Amit. OT is obviously a very big opportunity. I think -- I know we're early days, but -- and it feels to me to be greenfield. Can you just go through the competitive dynamics in some of these OT deals? And what inning are we in with regard to this OT opportunity? Yes, I'd say we're probably still -- we're probably in the second inning at this point. If you rewind the clock a couple of years as questions would come up about OT, what we'd say is we've entered some small procurements. We've entered pilot or Phase I deployments where they're looking at a couple of factories, a couple of facilities, trying to operationalize the data and the workflows that come along with the OT product. And over the last a couple of quarters, what we've said is we're seeing some follow-on deals, global types of deployments, six and seven-figure types of transactions. So, we're seeing that momentum build. I think we're still early in the market, and it's a market that doesn't move as fast as the IT market, but it's very deliberate, and I think the spending is very real. In terms of competitive dynamics and competitive landscape, I'd say we're predominantly competing against just a small number, two or three private pure-play-focused vendors in the OT space. We feel like our technology is compelling and really leads the market when it comes to looking at the converged IT/OT environment. So, if you look at a factory floor today or if you look at pipeline operations or other OT environments, they are exclusively OT. They have a bunch of IT systems, IT control systems in those factory floors as well. And so we're, I think, unique in our ability to deliver incredible insight for overall risk of facility, which would include both OT and IT, and we think it's a significant competitive advantage for us. Hi, good afternoon and thank you for taking the question. Maybe, Amit, just to kind of follow up on spending environment. Any incremental color you can -- or additional color you can provide in terms of maybe how you've seen customers react to macro headwinds in the past? And what's different now? Do they tend to maybe approach asset coverage a different way? And does that maybe impact your ability to expand on the asset coverage side? And maybe how is it -- are you seeing adoption of Tenable One and EP, does that insulate you somewhat from that kind of environment? Maybe if you could kind of touch on that a bit? Yes, Brian, great question. We had a very successful quarter from an expansion business perspective from a net dollar expansion business perspective. So, we are seeing customers expand both the number of assets we're covering for them as well as through Tenable One, in particular, seeing the different types of assets where they're allocating licenses to more cloud security, identity or other areas where we get smaller presence in previous periods. I think the sales team has gotten into a pretty good rhythm in terms of identifying how to identify opportunities, how to hunt through the budget and identify the new workflows in customer environments that are required in order to transact business. If you rewind the clock three quarters or so, we said, hey, we're seeing elongation of sales cycles. We're implementing more rigorous inspection, nitpick processes across our sales forecasting. And I think those are paying off. I think the sales team feels more confident in transacting business in this environment, tougher macro, and it's just the reality we're operating in. But I think we feel pretty good about both pipe and our ability to close transactions. Great. Thanks for taking my question. Could you speak to just how the quarter progressed, I guess, from a linearity standpoint. And to that end, Steve, maybe anecdotes around the different puts and takes regarding conservatism on the 2023 numbers, just what you discounted, what you took into effect there? Hi Rob, good questions there. First, I would say we had a strong finish to the quarter. We closed a lot of deals in December and especially the last couple of weeks. That's at our quarters continue to be very back-end loaded more so than what we typically see. I believe this is a consequence of the macro as customers continue to scrutinize budgets and evaluate spending priorities. We think cyber exposure fairs pretty well in this market, but increasingly, customers are waiting to see how their quarters play out before committing to a purchase. So, I think the takeaway here is that linearity is certainly a little more back-end loaded now than what we've seen in prior quarters. And in terms of our guide, our CCB guide, as we head into 2023, first, we have a much tougher compare, particularly in Q1 where we grew CCB 31% last year. We're assuming the macro will continue to be challenging and potentially even deteriorate further, and that's reflected in our guide. But overall, I think we're pleased with the progress on the quarter, adding lots of new customers, adding lots of large customers, pipeline levels are healthy. But I think we're trying to take a cautious approach here. As we said guidance initially out of the gate. And obviously, there's a lot of selling up in the year and -- we 'reencouraged with our progress to-date, and we'll have to see how the rest of the year plays out, but we feel very good about our business and have a lot of confidence in our ability to be successful in this dynamic environment. Hi, this is Justin Donati on for Andrew. Thank you for taking our questions. So, congrats on a good quarter. When you were talking about the pipeline, you specifically spoke about strength with your enterprise customers. Just wondering if you're seeing any difference in terms of buying behavior between your mid-market customers versus your enterprise customers? Thank you. No, I think we saw strength pretty much across the board, including in the in the mid-market customers as well. If anything, on the enterprise side, maybe just slightly smaller in the net new lands but continued health in the number of new lands and the expands and certainly strength in the mid-market as well. Great. And then just as a quick follow-up. You talked about your continued investments in your go-to-market. Just wondering what your plans are for sales hires in the coming year. And if you're expecting that to be more front-end loaded or you're taking a slightly more conservative approach this year? Well, first and foremost, we are planning to hire in 2023. And I think it's fair to say, adding more quota capacity. Our expectation is that we're going to add more quota capacity in 2023 than we did in 2022. We have a lot of confidence in our business. And investments are certainly a big part of that and obviously continue to double down on innovation and invest in product as well. We've been very active from a product perspective and bringing new products to market. We did talk a little bit about on the call the factors that kind of influenced the timing of those investments. First is hiring. We tend to front load are hiring early in the year. So, more of the hires will come online in the first half of the year and specifically with Q1. We also have a number of industry and other events in the first half of the year, such as our annual sales kickoff, which will be live in-person event this year, RSA and many others. So, clearly making a lot of investments. We're very pleased to be offering the guide in terms of operating margin and cash flow that we're providing today, and we have a lot of confidence in our ability to continue to drive further margin leverage. Hi guys. Thanks for taking the questions here. I did want to touch on the customer behavior. I know you answered some earlier questions with respect to enterprise versus mid-market and obviously, the strong expansion we've spoken to. But for sales cycles, and that's really what I'm driving out here with the customer behavior. Have they been relatively stable versus what we spoke about in Q3? Or have we seen any elongation in any way on that front? And maybe it would be helpful, too, if you could kind of pepper in any color when thinking about geographic theater. Mike, great to hear from you. We have not seen any elongation or any significant change in the sales cycle since what we spoke about in Q3 of last year. And I think that allows our sales team to just have continued confidence in their adjusted sales processes and forecasting methodology. In terms of geos, I think last year, we called out some any peculiar behaviors and geos. At this point, I think we're seeing fairly consistent performance across all major theaters in geos. That's great. And one more, if I could. But I did just want to ask about Q1, just given the fact that we're almost halfway through it already. Can you provide any additional color for how customers have put together their cybersecurity budgets as we think about calendar 2023? Obviously, we're all talking about the increased scrutiny here. But curious since cyber is perceived as being this more insulated sector, what are those customer conversations been like? And just a real quick housekeeping to tap on to the end of that. But Steve, I know you spoke about the annual sales kickoff in Q1 as being in person. Is there any way to quantify how much of an expense that item is are we talking about an incremental $2 million to $3 million? Or any color on both those fronts would be beneficial. Thank you. Yes, I'll provide a little bit of color here on both your questions and I think Amit will interject with maybe some color commentary on customer spending and budgets for 2023. First, with regard to -- I think your question was like how does it look here out of the gate. We're encouraged by what we saw in January. I'm very encouraged, but that's reflected in our outlook today, and obviously, March will be determinative given typical monthly flow for us. The other thing I'll say with regard to sales kickoff, the quantum of that investment is much larger than $2 million. We're talking north of $5 million. So it's a large discrete item. We're very pleased to be doing a live in-person sales kickoff this year for the first time since the pandemic and our sales team is really excited about it as well as our -- the rest of our company. Obviously, it's factored in our guidance and our guidance, we believe, is strong as a gate with regard to margins and cash flow and our expectation is that operating margins will improve throughout the year, consistent with what we've seen in prior years. Yes, I think the only thing I would add to it is that the VM market remains very healthy. We see customers continuing to expand their VM coverage. And we're also seeing great traction, especially with Tenable One around cloud security. We called out strength in our OT sales during the course of the quarter. So, customer budgets are there. I think to the extent that we can become a cost-effective vendor consolidation platform play for them. There's a lot of interest, a lot of strategic dialogue around that. And I think customers are very excited about some of the newer analytics that we've introduced with Tenable One. So, we look forward to updating you during the course of the year, but I feel like Tenable One looks like it will continue to play a larger and larger factor throughout the year and going into next year. That's great to hear. Good to see the profitability guide and the reiterated unlevered free cash flow guide when we think about calendar 2024 as well. I'll turn it over to my colleagues. Thank you. Okay. Great. Hey guys, thanks for taking my questions here. Amit, maybe just to start with you, and apologies if this has already been addressed. But I was wondering if you could just talk about how customers look at the ROI from a platform like Tenable One? It includes so much more kind of additional valuable product that lowers the risk profile, but I'm curious, when you talk to customers about Tenable One, how are they sort of thinking about ROI? Hey Saket, great question. There's a couple of obvious and a couple of nonobvious answers to it. I think the most obvious is just from a vendor consolidation cost reduction standpoint. So, if you're using Tenable for VM, let's say, a random example, you have 30,000 assets and now you want to look -- also look at your cloud security requirements, your Active Directory requirements. If you're going to a separate vendor, for those solutions, you're spending -- you need one through 10,000 on cloud assets and one through 8,000 on Active Directory in addition to the one through 30,000 on VMwares. If you're consolidating your spend with Tenable and Tenable One, you can buy a volume discount, it's one through 50,000 on Tenable One. And so the -- the leverage in budget and spend through vendor consolidation is very meaningful, which in today's macro environment and what's happening with Scrutineer budget, we think is compelling differentiation for us. The second is in the analytics. We simply are able to bring more analytics and unified analytics to the table than going to disparate vendors. So, for instance, building an asset inventory everywhere a particular piece of software exists across your environment -- anywhere vulnerability exists across your environment, whether it's on-prem, in cloud or other places, we think, is very compelling. Prioritizing what needs to be addressed, we think, can be a compelling differentiation. Looking at a top-top analytics to say, hey, what is the path what are the various paths of systems and vulnerabilities and users and permissions that could get me to this sensitive internal asset from my external attack surface from Internet-facing assets is a pretty compelling differentiator compared to buying individual and stove type solutions. So, we think both from a value and analytics standpoint as well as a vendor and cost consolidation standpoint, the platform approach to understanding the exposure and risk just makes sense. And that's why we're seeing both the sales team and customers really gravitate toward it. Got it. Got it. That makes a lot of sense. Steve, maybe for my follow-up for you. Again, apologies if this was talked about, but can we just talk a little bit about gross margins for 2023 that was down sequentially in Q4? I'm guessing that's from hosting costs, but curious how you think about that here in 2023 as Tenable One presumably becomes a bigger part of the business? Sure. Great question, Saket. The gross margin in the fourth quarter came in as expected and is impacted by the recent launch of some new products for us. One is ASM, which is a new use case. The cost of domain attribution is something we can leverage over time as we see higher penetration rates. Also with Tenable One, we have a more robust cyber asset inventory which is critical to supporting functionality such as Attack Path Analysis and Lumin Exposure View. So, these are new areas of innovation come with some initial semi-fixed costs that we expect to fully absorb over time. and that's certainly impacting gross margins. Overall, very pleased with gross margins, and we've said on the call that we expect gross margins to kind of stay in the high 70% range for 2023, and we expect gross margins to improve during the course of the year. Great. Thanks. My congratulations also on the strong close to the year. Amit, when you study your customer base, what percent do you believe will ultimately upgrade to Tenable One, while it's high single-digits of the base currently, where could that penetration go over the next couple of years had that should be a strong source of sustained growth? Yes, it's a great question. And I think, obviously, there's tremendous potential. We're putting a lot of focus on it as a company. The leading indicator for that would be our new sales. And what we're seeing is high teens percentage of new sales coming in on Tenable One. So, over time, as long as that continues to remain healthy, we would see a larger and larger percentage of customers moving to Tenable One, where it could go long-term remains to be seen, but we're pretty excited about the potential. Okay, great. And just a quick follow-up question. Any changes in the competitive environment entering 2023, whether your competitors potentially putting themselves up for sale? And you guys certainly have a lot of momentum with Tenable One. Just any change in the competitive environment that seems more favorable as you enter 2023? Yes, I mean, obviously, we wouldn't speculate about that, but I feel really good about the competitive environment. We are pretty consistent saying that we have exceptionally strong win rates especially in this market against our primary competitors. That remains -- those win rates remain exceptionally strong. And while we don't have a specific update to that, I'd say anecdotally, continues to climb in the sales team feels exceptionally confident going into any VM opportunity, but those are really ours to lose. And candidly, they feel like Tenable One gives them a very significant value differentiated capability to talk about as well. Hi, good afternoon and let me echo my congratulations as well. I wanted to maybe dig in a little bit into the Active Directory and identity products. Can you talk a little bit about what you're seeing in terms of demand there and maybe the potential for that to be a larger product set over time as well? Well, we think it's -- there's tremendous market potential there. As you know, Jonathan, Active Directory is target number one for hackers, whether it's a nation state adversary as we saw on the Mandiant breach or whether it's ransomware, where over 90% of ransomware is going directly after domain controllers and Active Directory. Active Directory is a trick and mess to deploy in any large environment and almost impossible to keep clean when you look at the number of pieces of software and the complexity of Active Directory, the number of pieces of software we should modify as they get installed into an enterprise environments. So, having a solution -- and most organizations don't have a solution in this area. The security teams know it's a big problem. They maybe do a consultant and an annual audit or assessment of their Active Directory environments, which is clearly not enough. So, we feel like there's tremendous market opportunity. The sales team has a lot of confidence in the Active Directory product and bringing it into customers. We had a great quarter with Active Directory in Q4. So, excited about the potential, both in 2023 as well as Active Directory playing an increasingly large role in Tenable One and some of the analytics that we're unlocking with Active Directory and identities. Great. And just as a follow-up for Steve. I think there was a small reduction in force. Can you maybe give us a little bit more detail on the risk and maybe what that means in terms of your margins, maybe where some of the cuts came from? Thank you. Yes, it was fairly broad across many functional departments, really with an eye with the improving operational efficiency and better aligning our cost base with the market opportunity that's in front of us. And we feel like we're in a great position this year to make investments, as Amit talked about earlier. Making investments in terms of product and adding lots of quota capacity. And then one of the comments I made earlier was our expectation is that we're going to have more quota capacity in 2023 than we did in 2022. Obviously, the demand environment remains highly dynamic, but we've done a good job over the years, balancing growth with profitability, driving margin leverage and achieving sustainable levels of growth. Hey guys. Thanks for taking my question. My first one is kind of high level. But the feedback from the channel, I guess, throughout last year on VM, I would say, has gotten incrementally worse each quarter. But if we look at your guys results, it sounds like you guys have almost gotten incrementally better, especially in regards to your six-figure adds. Could you maybe kind of just help us reconcile those data points? Yes, in terms of the channel checks, we don't -- I think this for you. We don't see it. Our channel partners remain very bullish on VM and very bullish about their ability to differentiate Tenable as the leading VM vendor and provider and feel bullish that their customers are looking to expand their VM capabilities and more -- as more and more executive questions are asked of security programs. Are we vulnerable, -- where are we vulnerable, are we exercising good standard of care? Are we patching our systems quickly enough? Are we being negligent, I think those -- answering those types of executive questions really comes from your VM program, not from your firewall, not from your endpoint or your logging solution. So, as more executives are asking questions of cyber, we feel like it bodes well for VM. We're seeing that in our results. We're seeing that in our conversations with customers. And Tenable One allows us to have even more strategic conversations across a broader set of asset types. So, we've remain committed to the VM and Cyber Exposure market. And I think given both our results and our confidence in what we're seeing in our own conversations with customers and channel partners, we will remain committed to and increasingly invest in that strategy. Yes. And the one thing that I'll add is, keep in mind that we transact sales in 160 countries. We have hundreds of channel partners and -- so I can't speak to the channel checks, but sometimes if you're talking to a partner or a contact that may only have a very specific view into our business or maybe even to the VM market. And also, our exposure solutions collectively represent about 50% of our total sales. So, over the years, we've done a really good job becoming more strategically relevant to our customers, broadening the focus and we're having success selling a platform and playing in larger market opportunities such as cloud security and even identity and security analytics, which are top spending priorities and pain points for our customers this year. Makes sense. And then just a quick follow-up. It sounds like you guys are definitely communicating that the initial CCB guidance for 2023 is in your opinion, de-risked I think you talked about that it assumes the macro actually gets worse. Is there anything else outside of that, that you can just quantify or take one level deeper in terms of what exactly inside the guide is more de-risked? Maybe expansion versus new business, where you expect NRR to kind of shake out? Anything else you can kind of talk to in the 2023 guide that should help us feel like those numbers are de-risked? Yes, we think our CCB guide for the year is good, but we described it as cautious. And we think that's the right approach to have in a market like this, that’s highly dynamic, right? Each quarter is different in its own right. And our expectation going into 2023 is that the macro will remain challenged and perhaps will even worsen the first half of the year. So, we want to be prepared for whatever comes our way. We've done a good job over the past several quarters. Really identifying opportunities where we have success, larger closing larger deals and some verticals are stronger than others, as we've talked about earlier, and tech was particularly strong for us, financial services, all of those. So, we have a good sense of what's working really well for us. I think with regard to the guide, I think we're just taking a more cautious approach, and we're assuming that the macro could potentially impact close rates. And maybe even renewal rates. But what I will say is that our renewal rates continue remain strong. Upsell was very strong in the quarter. We did add lots of large deals. But our expectation is that new lands, for new logos could be tougher to transact in 2023. Hey, thanks for taking my questions guys. Certainly, a lot of talk about Tenable One and good traction there. I think it was last quarter, maybe the quarter before you guys started talking about the sales force, really leading with that product as opposed to leading with VM. Just where are we in that evolution? I don't know if you can speak to maybe the percent of deals or cycles where your reps are leading with Tenable One as opposed to VM. But just how has that changed over the last six months? Yes, I think the sales team has a lot of confidence in the product, seeing the customer traction and the results that customers are experiencing with Tenable One gives them an increasing level of confidence. Today, it remains a teens percentage of new sales. But obviously, in the pipeline, pipeline is more heavily weighted towards Tenable One, and we expect that to continue to accelerate with sales kickoff and more training and more time and more differentiation. Got it. And then secondly, you talked about vendor consolidation playing out as a positive for you guys. I guess I'm also curious, there are some other kind of larger, broader cyber platforms out there that have grown in a VM product in the mix over the last couple of years. I'm curious if you're seeing vendor consolidation maybe hurt you in some cycles with some of those larger platforms out there throwing in the VM product. Yes, there's been a lot of vendors over the course of years, making a lot of noise about VM going back four, five-plus years, Tanium, CrowdStrike, Microsoft others. And what I would tell you is they make noise. We see them for a quarter or two and then very quickly their sales team understand that their products are inferior and they start gravitating to their core markets and candidly, where their companies are investing much more aggressively logging SIM and elsewhere. So, especially in a product like VMware independent audit is an important function and where we feel like we've got a quantitatively and qualitatively differentiated product and experience and understanding the enterprise. We almost never see those larger IT vendors participating and certainly never see them beyond a rule -- a first phase of competition. I guess the only other thing I would add to that is obviously, our footprint is broader than VM. So, if customers are really looking to understand Cyprus more broadly than even other solutions which offer VM capability are not really competitive. And our Cyber Exposure solutions now represent, as Steve said, 50% of our sales. Yes. Thank you very much. So, were there any call-outs on the geo side, EMEA, for example, growth here was decelerating in the last two quarters. You have a tough comp in Q1 in EMEA as well. Just any callouts on the geo side. No, I think on the geo side, what we just said earlier is that all theaters performed pretty much to expectations in both enterprise and commercial segments. So, felt good about the international markets and the balance of our international performance. Okay. And separately, you had a 2% headcount reduction in Q4, but -- and I think you said 1,900 employees for the end of the year. I think that's up 10% or so year-to-year. What's your expectation for A, headcount growth and B, quota-carrying salesperson growth in 2023? Sure. Well, we provide headcount at year-end following our Q4 results. So -- this is not a number we provide for the upcoming year as part of our annual guidance. But as we discussed earlier, we are hiring, and we're planning to make investments, most notably in product and go-to-market. In terms of quota capacity, we expect to add more quota capacity in 2023 than we did in 2022. Unequivocally, we have a lot of confidence based on the results of not only this quarter but the past couple of quarters. So we're adding lots of customers transacting lots of large deals. The takeaway here is the business climate is pretty and so we're constantly reassessing the investment priorities. But as we discussed layer, we're going to add headcount. Look, we're in the fortunate position to make these investments in 2023 because we grew our workforce very thoughtfully since the pandemic. Our workforce grew in total, 28% over the last three years, which puts us in a great position to invest this year while still delivering margin improvement. So, we think we're doing a good job aligning our cost base with the investment opportunities that are in front of us. And ladies and gentlemen, we have reached the end of the question-and-answer session. And this also concludes today's conference and you may disconnect your lines at this time. Thank you. have a good day.

EarningCall_380

Good morning, and welcome to Criteo's Fourth Quarter and Fiscal Year 2022 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After the prepared remarks, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. Good morning, everyone, and welcome to Criteo's fourth quarter and fiscal year 2022 earnings call. Joining us on the call today, Chief Executive Officer, Megan Clarken; and Chief Financial Officer, Sarah Glickman are going to share some prepared remarks. Todd Parsons, our Chief Product Officer will join us for the Q&A session. As usual, you will find our investor presentation on our Investor Relations website, as well as our prepared remarks and transcript after the call. Before we get started, I would like to remind you that our remarks will include forward-looking statements, which reflect Criteo's judgments, assumptions and analysis only as of today. Our actual results may differ materially from current expectations based on a number of factors affecting Criteo's business. Except as required by law, we do not undertake any obligation to update any forward-looking statements discussed today. For more information, please refer to the risk factors discussed in our earnings release as well as our most recent Forms 10-K and 10-Q filed with the SEC. We'll also discuss non-GAAP measures of our performance. Definitions and reconciliations to the most directly comparable GAAP metrics are included in our earnings release published today. Finally, unless otherwise stated, all growth comparisons made during this call are against the same period in the prior year. Thanks, Melanie, and good morning, everyone. It's been a few months now since we saw many of you at our Investor Day. The event gave us the opportunity to unpack our business, share more about the growth opportunity in front of us, and demonstrate how we've de-risked our business from a third-party cookie deprecation challenges facing the industry. I want to thank everyone who attended. And for those who weren't able to attend point you towards the webcast materials available on the Investors Section of our website. At our Investor Day, we explained the Commerce Media opportunity that we're focused on. Commerce Media is the fastest growing media channel today and an opportunity that Criteo is poised to capture. Today, we're recognized as a clear leader in Commerce Media and we believe we're in a unique position to lead this next wave of digital advertising. Criteo is the Commerce Media Platform for the open internet and the obvious choice to complement Amazon for brands looking to advertise to consumers at the digital point of sale across multiple Retail Media Networks. As we explained during our Investor Day event, retailers have been early adopters of Commerce Media and they refer to this as Retail Media. They are setting the scene. With their logged-in first-party data, their quality shopper audiences, along with our ability to provide real time closed-loop measurement, brands are moving ad budgets rapidly in their direction and Retail Media is expected to capture one in five digital ad dollars by next year. The first mover advantage we’ve built around Retail Media, the Retail network that it creates and the scale of valuable Commerce Audiences we can deliver to brands and agencies form the foundation of our strategy. Meaning to reach Commerce Audiences across the open internet is only possible with access to shopping data at scale, which comes with deep integrations and trusted relationships with the retailers. Retail Media is a powerful growth engine for us and our focus now is to accelerate. Over the past year, we've grown our client footprint to 175 retailers and close to 1,800 brands. No other player matches that footprint. We've only just begun. We’ve entered new retailer verticals, including delivery services, and new geographies, particularly in APAC. We're winning new clients at a rapid pace because we offer one integrated self-service platform for all ad formats and demand sources allowing retailers to manage their entire Retail Media business at scale. Over the past three months alone, we’ve won renewed or expanded our partnerships, with half of the Top 10 U.S. retailers. We continue to build long term relationships with our retailer clients, as evidenced by our multi-year partnership with Target's Roundel Retail Media network. And we're proud to play an increasingly important role in their overall growth strategy. We also expanded the scope of our partnership with Walmart to include multiple ad formats on-site and off-site in Mexico. Importantly, several large retailers including Lowe’s, recently dropped other providers to work with Criteo exclusively, as they continue to scale their Retail Media networks and look to our capabilities to help them to accelerate. In Q4, we also won new contracts with leading U.S. and European retailers in the grocery, ag retail and health and beauty sectors. In addition, we won our fourth retailer in Japan, where we're actively capitalizing on cross-selling opportunities. This momentum has carried into 2023 and we look forward to announcing some of our most recent exciting wins more formally over the coming weeks. Our success is evidence of our superior offering and our clients continue to inform our product roadmap as we're evolving our capabilities in lockstep with their needs. Our number one priority is to win with retailers to bring the best Retail Media solutions to them and to expand our leading position in Retail Media enablement and the acquisition of Commerce Audiences, the highest quality audiences on the Internet. With Retailers representing the large majority of our business, we have significant potential for growth within our existing client base alone. We have the potential to triple our Retail Media footprint by extending our Retail Media monetization solutions to our largest retailer clients that currently only use us for our performance marketing capabilities today. As those retailers extend into Retail Media, our platform is there for them. With our unique access to commerce data at scale, deep integration with retailers, differentiated technology, a world class team and R&D powerhouse. We've created a competitive differentiation in our business. In light of our growing momentum, we've now taken actions to accelerate our plans by shifting more highly experienced engineering resources, doubling the size of the existing team to concentrate on the rapid deployment and scale of our Commerce Max Demand Side Platform, or DSP, and to continue to bring more features and capabilities to market faster for our Retail Media clients. This includes leveraging our advanced commerce focused AI, our secret sauce to drive powerful performance capabilities across Retail Media. Our goal is to help retailers take further advantage of their media opportunity, and to solidify our leadership position for years to come. We have one of the largest concentrations of R&D talent in the AdTech industry aside from the walled garden platforms and we're continuously focused on ensuring proper resource and investment allocation to our priority growth areas. Thanks to our efforts to pivot our business towards these high growth areas. We ended the year with non-targeted solutions, sorry, non-retargeting solutions representing now close to half of our business in Q4 compared to 32% a year ago. This is an important milestone in our transformation and in line with what we said would we do. We're ready to take Criteo to the next level and we'll unlock further our massive $110 billion market opportunity. Now let me highlight some of our 2022 achievements, which puts us in a favorable position to gain share in 2023 and well into the future. What we've called our SAY/DO ratio remains extremely high. It shows how resilient we are and how much we can accomplish despite a challenging macro-economic and geopolitical backdrop. First, we're delivering on the promise of the Commerce Media Platform. We unveiled the full suite of Commerce Media Platform solutions and we soft launched our Commerce Max DSP, where our retail media and programmatic capabilities converge. Commerce Max is a game changer for brands and agencies. It gives them one entry point to access premium Retail Media inventory on-site and open internet supply off-site with closed-loop measurement, while leveraging unique first party audiences built on real shopping behaviors. Retailers are excited to adopt Commerce Max to increase their revenue and traffic. With Commerce Max they can best monetize on-site inventory and their valuable first-party data for on-site and off-site targeting and bring more shoppers to their sites. This creates a powerful flywheel between brands and retailers. Our successful market tests showed that integrated on-site and off-site campaigns in Commerce Max as a true full funnel strategy more than doubled conversion rates compared to on-site campaigns alone and drove an increase of close to 60% in revenue per shopper targeted during the campaigns. Our ambition is to become the Commerce Media DSP of choice for agencies and brands. And the feedback we've received to date gives us confidence in our ability to gain share. Overall, with our full funnel platform value proposition is increasingly resonating with the market. Today 35% of our live clients use more than one Criteo solution compared to 32% a year ago. We expect to continue to benefit from our integrated go-to-market strategy and increasing traction in upselling and cross selling our solutions to existing clients. This is especially true for Commerce Growth, our product line offering targeting and retargeting capabilities to acquire and retain consumers. With Commerce Growth, our business is evolving to capture incremental budgets and service an increasing number of clients in the easiest and most effective manner. Our unique ability to reach valuable Commerce Audiences at scale makes us an obvious choice for marketers looking to drive sales. Our AI engine leverages a combination of consumer interests, contextual data, and trillions of purchasing events to engage in-market shoppers and maximize advertising performance. Among others, Skyscanner now uses our suite of always-on acquisition and retention solutions to optimize how they engage with customers across the entire buying journey. Full-funnel activation with Skyscanner has more than tripled their media spend with us year-over-year, with new targeting or acquisition solutions now representing 30% of their investment. This is the Commerce Media effect. Our strategic partnership with Shopify also exemplifies how we intend to scale our solutions. We’re part of the Shopify Plus Technology Partner Program and Certified App Program, which simplifies and automates Shopify merchants' ability to leverage our acquisition and retention solutions. We saw a 36% increase in the number of new Shopify merchants using Criteo in 2022, compared to the number of merchants we added in 2021. We expect to continue to onboard more merchants and scale our partnership as we further enhance our self-service capabilities over the coming quarters. Shopify is a great partner of ours and we continuously explore growth opportunities with them. Second, our high SAY/DO ratio applies to our growing agency relationships. Agencies drove about two-thirds of our growth in media spend in 2022, excluding Iponweb. 34% of our media spend is now activated through agencies, compared to 29% a year ago. In addition to our global strategic partnership with GroupM, we’re excited to have signed a three-year partnership with another major holding agency in the U.S. to accelerate the demands of our Retail Media and Commerce Audiences. In addition, we are very pleased to have renewed and extended our global deal with Ascential and its world-class e-commerce businesses with a multi-year commitment. As part of our partnership, Ascential's advertising partners can now access advanced commerce insights and analytics in real-time, greatly enhancing their ability to drive performance. These agreements with major agencies reinforce our positioning as the Commerce Media Platform or Commerce Media partner of choice, and, we believe, we will drive further adoption of our multiple solutions at speed and at scale. In addition, we’re pleased with the traction of our independent agency programs, which is being rolled out. The program certifies and incentivizes independent agencies to offer our acquisition and retention solutions to their advertiser clients. Third, we successfully completed the acquisition of Iponweb and we’re rapidly integrating that business. On the demand side, we’ve fully integrated Iponweb’s Bidcore DSP into Commerce Max. On the supply side, we’ve quickly integrated our respective teams, centralized our product roadmap, and unified our commercial strategies. We’ve already merged our publisher footprints, bringing more high quality inventory for our demand partners and more value for our publishers. Combined with Iponweb, we added 150 new publishers in 2022, and we now have direct relationships with approximately 75% of the top 100 ComScore publishers in our largest markets, which, we believe, is instrumental in extending our first-party data integrations. We’re well on our way to realize our Commerce Media Platform ambitions, and we’ve de-risked our business away from third-party signal deprecation. We’re proud that our efforts are being recognized, as we were recently named one of the hottest AdTech companies by Insider. We’re also one of the few companies partnering closely with Google as part of the Privacy Sandbox. We’re not only collaborating with Google to improve the Sandbox APIs, but we’ll also be working together to develop specific use cases that we can bring to our clients. This puts us in pole position to deliver superior performance in the market when Google deprecates third-party cookies. As we enter 2023, we believe we’re best positioned to lead the market. At the core of our strategy, Retail Media remains a non-cyclical growth spot, primarily benefiting from trade marketing budgets shifting online to address consumers at the digital point of sales. In addition, we expect Commerce Audiences to continue to outpace the market as they remain the most valuable audiences to brands. We have an exciting path ahead of us and we’re laser focused on execution to capitalize on our significant long-term growth opportunities. We have a highly experienced senior leadership team, who is firing on all cylinders to achieve our ambitions. Our team has weathered and successfully navigated various economic cycles, and I am confident in our ability to deliver on our plans. Now let me provide a brief update on the latest trends we’re seeing in the macro-economic environment and our actions to adapt to this environment. As anticipated, we saw a more condensed holiday season in the fourth quarter compared to the prior year. As we enter 2023, our conversations with CMOs indicate delays in ad budgeting processes due to uncertainties regarding how inflation and interest rates will impact consumers this year, but marketers are not blindly cutting budgets. Ad budgets are under more scrutiny, forcing clients to optimize their spend. According to a recent survey we conducted across the U.S. and Europe, nearly two-thirds of senior media agency professionals believe newer digital channels like Retail Media will deliver a greater return on investment than search or social. Our Commerce Media Platform and our focus on performance position us to meet that need. Despite overall budget tightening, we continue to benefit from robust new business trends and high client retention close to 90%. Importantly, we’re focused on profitable growth and aligning our cost structure with our top-line in a slower growth economy. We believe this will allow us to emerge even stronger once economic uncertainty subsides. As part of our ongoing transformation, we are highly focused on allocating our resources to our growth areas, and we have and we will continue to take actions to right size our cost base. While there is lower visibility on near-term trends, the long-term opportunity for Criteo remains intact. The macro-economic environment changed significantly over the past 12 months, but our strategy has not. We’ve laid the foundation for the future, and we’re on our path to achieve our business ambitions which we laid out at our Investor Day. We’ve built incredible momentum that we expect will only continue in 2023 and beyond to drive long-term shareholder value. With that, I will now turn the call over to Sarah, who will provide more details on our financial results and our outlook. Thank you, Megan, and good morning, everyone. We continue to execute in a choppy environment, but we have a consistent track record of profitable growth and high free cash flow conversion coupled with a strong balance sheet and no debt. Starting with our financial highlights for 2022. Revenue was $2 billion and Contribution ex-TAC grew by 10% at constant currency to $928 million. As anticipated, this include $60 million of incremental signal loss impacts. This performance was despite significant headwinds from FX and the wind down of operations in Russia. In Retail Media, revenue was $202 million and Contribution ex-TAC was $161 million, up 33% year-over-year, as we continue to rapidly expand with our retailers. In Marketing Solutions, revenue was $1.8 billion and Contribution ex-TAC was $715 million with Commerce Audiences up 26% at constant currency offsetting lower Retargeting. We delivered an Adjusted EBITDA margin of 29%, including planned growth investments and the dilution from our Iponweb acquisition. We also delivered record free cash flow of $200 million and an adjusted EPS of $2.76, including five months of contribution from Iponweb. Turning to our fourth quarter performance. Revenue was $564 million and Contribution ex-TAC was $283 million. This includes a year-over-year headwind from weaker foreign currencies of $21 million. At constant currency, Q4 Contribution ex-TAC grew by 10.4%, on top of strong performance with 11% growth in Q4 2021. This includes organic Contribution ex-TAC down to minus 2% and the contribution from Iponweb. Our organic performance was driven by Marketing Solutions down 7% year-over-year, with lower Retargeting, down 13%, and Commerce Audiences, up 22%. This was partially offset by robust growth in Retail Media, up 23%. As expected, we continue to see a top-line shift away from legacy Retargeting. Retail Media, Commerce Audiences and Iponweb combined represented 47% of Contribution ex-TAC in our fourth quarter, up from 41% in Q3 and up from 32% in Q4 last year. Turning to our business segments. In Retail Media, revenue was $60 million and Contribution ex-TAC grew 23% at constant currency to $57 million, on top of strong growth last year. Our growth was primarily driven by our client base in the U.S., the UK and Germany, partially offset by France. Growth from existing clients remains strong with same-retailer Contribution ex-TAC retention at 122%, and we continue to scale by adding new retailers. We onboarded a 150 more brands in Q4 and saw increasing traction with our agency partners. Our 1,800 global brands are prioritizing Retail Media as a key channel for their investments, a trend we expect to continue. While there is caution on release of budgets overall, we see strong spend in health and beauty with lower spend for grocery. In Marketing Solutions, revenue was $471 million and Contribution ex-TAC was $193 million with strong growth in Commerce Audiences, offset by lower Retargeting. Retargeting was down 13% year-over-year, or down 7% when excluding the impact of the suspension of our Russia operations earlier this year and close to $10 million impact from the loss of signals. In the U.S., we had a solid holiday season around the traditional Cyber 6 peak with deceleration in December, while EMEA was softer during the Black Friday weekend with improving trends in December. Across all regions, retail spend, especially fashion and department stores was soft, while travel remained strong. We delivered strong growth in Commerce Audiences as clients transition to always-on audience strategies to acquire and retain customers with new business and cross-selling across our over 20,000 retailers and performance marketers. Iponweb was flat this quarter on a stand-alone basis, reflecting strong growth for our Supply Side Platform, or SSP, offset by softer media trading trends and traffic, particularly in December. We delivered an adjusted EBITDA of $104 million in Q4 2022. Non-GAAP operating expenses increased 2%, including targeted growth investments in sales, R&D, and product talent, partially offset by cost reduction actions as we reduced discretionary spending and paused most hires. We benefitted from lower bad debt expense as a result of strong cash collections. Moving down the P&L. Depreciation and amortization increased 26% in Q4 2022 and share-based compensation expense increased to $22 million, including $11 million related to treasury shares granted to Iponweb’s founder as part of the acquisition. Our income from operations was $49 million and our net income was $16 million in Q4 2022. Our weighted average diluted share count was 61.9 million. This resulted in diluted earnings per share of $0.25 and adjusted diluted EPS of $0.84 in Q4 2022. We canceled a total of 2.6 million shares in 2022. In an uncertain macro environment, we benefited from a strong financial position with solid cash generation and no long-term debt. We had about $835 million in total liquidity as of the end of December, which gives us significant financial flexibility to execute on our growth and capital allocation strategy. The primary goal of our capital allocation is to invest in high ROI organic investments and value-enhancing acquisitions and to return capital to shareholders via our share buyback program. In 2022, we repurchased 5.1 million shares at an average cost of $26.40 per share. In December, our Board of Directors authorized an extension of our share repurchase program from $280 million to $480 million. This demonstrates our confidence in our business strategy, financial strength, and our ongoing commitment to enhance shareholder value. Turning to our financial outlook, which reflects our expectations as of today, February 8, 2023. We remain cautious given the lower visibility on near-term trends and the volatile advertising environment. For 2023, we expect Contribution ex-TAC to grow high-single-digit to low double-digit year-over-year at constant currency. This assumes low-single digit organic growth and the full year impact from our acquisition of Iponweb. We expect stronger organic growth later in the year, as we move our Commerce Max DSP to general availability and scale newly signed retailer partnerships. We expect Contribution ex-TAC growth of approximately 30% for Retail Media, as we anticipate further share gains, and higher than the anticipated industry growth rates. For Commerce Audiences, we expect Contribution ex-TAC growth of approximately 20% as advertisers continue to shift more budgets. For Iponweb, Q1 and Q2 are seasonally low quarters in terms of Contribution ex-TAC, adjusted EBITDA and cash contribution, while Q4 is the strongest quarter. We will be closely monitoring market conditions and expect to provide updates as we progress through 2023. As part of our ongoing transformation, we are disciplined in strategically allocating our resources to higher growth areas while enabling productivity and cost efficiencies. We are executing on and contemplating cost actions that we expect to deliver total annualized savings of approximately 10% of our total cost base, or more than $60 million, while ensuring ROI investments for executing on our strategy. Given the slower macro environment and lower Retargeting, actions have already been taken with hiring freezes and reduction of external spend. Along with the rapid integration of Iponweb, we continue to right size our organization and optimize our operating model. This focus is to enable speed of new products to market and effective delivery for our broad client base. Overall, we anticipate an adjusted EBITDA margin of approximately 28% for 2023, in line with what we shared at our Investor Day, and including about 200 basis points of dilution from Iponweb. This includes the increased costs due to the full year impact of the Iponweb business. We expect to realize cost efficiencies over the course of the year, largely offsetting wage inflation and the annualized impact of our 2022 growth investments. We expect a normalized tax rate of 28% to 30%. We expect CapEx of about $90 million related to the planned renewals of our data centers as we transition to a more cost and energy efficient data center architecture, and we expect free cash flow conversion rate of about 45% of adjusted EBITDA. For modelling purposes, we assume a flat number of shares outstanding in 2023. For Q1 2023, we continue to be cautious given the impact of a slower macro environment on consumers, our clients, and more conservative ad budgets. Spend from large retailers and brands was lower in December, and this continued through their fiscal year end in January. While early days, we’re encouraged by new budget unlocks in February. Overall, we expect Q1 Contribution ex-TAC of $210 million to $216 million growing by 5% to 7% at constant currency. This assumes a mid-single digit organic decline and Iponweb inorganic growth in a seasonally low quarter. As a reminder, this laps a tough comp in Q1 2022 and includes the impact of the suspension of our Russia operations in late March 2022, impacting our growth by about 2 percentage points. Importantly, we expect Retail Media to continue to show robust growth despite the challenging macro environment. We estimate ForEx changes to drive a negative year-over-year impact of about $15 million to $20 million on Contribution ex-TAC in Q1. We expect adjusted EBITDA between $30 million and $32 million, reflecting low Q1 seasonality exacerbated by the dilution from Iponweb and some ongoing integration costs. The year-over-year comparison includes growth investments already taken in 2022, ahead of contemplated reductions. In closing, as a leader in Commerce and Retail Media, we believe we are well-positioned to deliver on our plans for growth, resilient performance, healthy profitability, and strong cash generation to drive shareholder value in 2023 and beyond. One comment before we begin Q&A. You may have seen recent speculation in the media related to a potential transaction involving Criteo. As a matter of policy we do not discuss rumors or speculation and we will not make any further comments on this. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Ygal Arounian of Citi. Please go ahead. Hey. Good morning, everyone. Thanks for taking the questions. I guess, a couple of Retail Media questions. Maybe first, just -- I'm looking at the guidance for the year where 2022 ended up, and the guidance for the year around 30% growth and looking at you’re -- the targets you set at the Investor Day, which are a little bit higher, 45% to 50% and understanding there's some FX this year and some macro challenges, but the office bridge (ph), how we get there and some improvements that get us through 30% of the targets that you set at the Investor Day? And then the second, maybe going into a little bit more detail, would love to understand maybe the Lowe’s news this quarter was a good example of some in-house that happens at Loew’s with that announcement. You sound like you want some business from a competitor that they were working with as well. Can you just help understand the puts and takes kind of what happened there? What those trends mean? Why Criteo took share kind of in that situation and to help tie that into the growth that you're expecting from Retail Media? Thanks. Yeah. Sorry. Good morning. I can take the first question. So we are very confident in our ambition that we set forth in the Investor Day that included $1.4 billion in Contribution ex-TAC and tripling the Retail Media business. For us, that long term opportunity for Criteo remains intact and the $110 billion firm, which includes $42 billion for Retail Media alone still remains intact. What we've done is, we've laid the foundation for the future. We have phenomenal wins and we continue to gain share in an area where the secular trend is to transition and move. Advertising dollars including trade advertising dollars over to Retail Media. So the guidance that we've given in 2023 is based on what we're seeing right now, which is some lower traffic overall, more conservative budgets, but we anticipate that that will be temporary in terms of the continuing advertising recession, if you will, in 2023 and that will continue to progress to more spend coming through the Commerce Max DSP as it comes to general availability in the summer. So that's the way that we've modeled our 2023 expectations and we continue to win new logos, we continue to drive much more business including new formats through our Retail Media business and we anticipate that we'll continue to be absolutely on track for our 2025 long term target. Hi, Ygal. I'll take the second piece, which is around the Lowe’s relationship. We're thrilled to have secure the Lowe’s contract and in fact be part of their future and the fact that they dropped out other partners to work with us in testament to the work that we do with them, the performance that we generate for them, the technology that we provide. They have increased internally their team that manage the selling, the sales to their brands. You can imagine I have a sales force already. And they've increased that to account for the growth themselves anticipate from Retail Media. And that we should expect from any large retailers that as Retail Media gets bigger for them or Criteo provides the technology, and a portion of the sales. They have an internal sales team and they have other capabilities that they'll continue to grow to be able to meet the growth of their overall Retail Media business. In terms of the actual pieces that we provide to Lowe’s. I'll have Todd just take you through a couple of highlights here. Yes. Thanks, Megan. I think what's important to emphasize here is that as these larger retail partners that we have are building entire businesses. We're helping them two ways. Obviously, what Meghan said, is really important. We're able to help them drive demand not just be a technology partner. From a pure technology perspective, we start with sponsored products, which is of course at the core our Retail Media solution. But we've done a ton of innovation that goes beyond that that helps Lowe's and other large partners see monetization growing for years. What we're doing with off-site is a really good example of that. And we're also doing a lot of product innovation with on-site formats and connecting the dots between these three areas in such a way that large retail partners can get performance from their networks. I think everybody on the call knows that our company is a performance company through and through from the start. So when we think about these things from a product perspective, we're not just rolling in features for Lowe's, but we're making sure they work better together, so they can grow revenue. Hey. Good morning. Thank you very much. Can we just maybe go through just the current environment? I think Q4 came in a bit better than you were expecting. And I appreciate the comments about December kind of tracking weaker and that's carrying through to January. But I guess can you maybe just describe how your conversations go with your agency partners and brands. Is it -- they're not giving you enough visibility kind of when you start the quarter, but as the quarter progresses, the conversations just get a little bit more solidify and budgets end up coming through. It's more of just like a wait and see, is that the kind of the dynamics you're seeing just bigger picture? That's the first one. And then on the second -- my second question is just on the Retail Media side. I would imagine that in this environment, budgets would shift more towards retail media, but Sarah to your point, traffic is down a bit consumers perhaps pulling back a little bit. I guess those dynamics, I assume get us to the 30% growth for the year. And is a key driver just more eyeballs on retailers' websites? Is that like the main driver that would kind of reaccelerate that growth? Thank you. Yeah. Hi, Mark. I mean, I think just a couple of comments here. First of all, when we look at Retail Media, we're talking about 33% year-over-year. And then that that was 23% in Q4 2022 that was an incredibly tough comp as well from the year before. What we're seeing in the discussions is that, the retailers most of the year end to January. Specifically, we saw this last year as well. The outlook tends to be more around this timeframe in February. The conversations are all very good conversations and the conversations with brands have been incredible. Brands absolutely want to ship more dollars over to Retail Media, but there is an overall portion. So I would say, we feel very, very good about the discussions we're having. We feel fantastic about our agency partnerships as well as Megan mentioned, we just signed a new U.S. Holdco (ph) deal as well. 34% of the Media Spend is coming from agencies. So when we look at our large retailers, even if they have ground teams. Yeah. Like, Lowe's, for example, have a large brand team. All the smaller brands in Retail that's coming to us and for the most part, when we look across our network of 175 retailers, brands with the agencies want to unlock that spend across our entire network. So we're seeing it win-win. Now, in some cases, we do everything for the retailer. We do it incredibly well. We get fantastic fulfillment. In other customers, we're more of the tech that enables all of that, that we benefit from what Todd talked about in terms of additional capabilities. And we're super excited at our customers those co-creating with us the Commerce Max DSP. We just did a design sprint last week and we got input from them at the beginning of the sprint and the end of the sprint. We're working hand in hand. So we feel good about the overall dynamics. There is caution as of now related to brand budgets that's across the board and we expect that that will continue to unlock as we partner with them and as more of these dollars, absolutely we expect to move to the Retail Media and Commerce Media space. Good morning, everyone. Thanks for taking the questions. I'm just wondering if you could provide an update on Commerce Max and some of the key gating factors you're working through there, to bring it to general availability later this year and sort of areas of strength and things you think still need to be improved in order to get to that point? And then in terms of just the full offering that you have for the company right now, obviously, you brought an Iponweb, you've used M&A as a tool to expand the capabilities of the company, leaving aside any specific rumors when you look at the offering that you have right now as a company. Are there specific capabilities that you think would be really additive that you're focused on bringing in whether that's building them organically, buying them or partnering to have them? Thanks so much. Yeah I can take that. How are you doing, Matt? So a couple of things here that you touched on. And it's first important to say that it's our goal to become the Commerce Media DSP of choice for our agencies and brands alike. So everything that we build product wise is really driven by that ambition. In terms of actually connecting the dots of that ambition to Commerce Max, which I think we've said we expect ETA on or around summertime. And that we've also been watching some great wins in testing. It's just important to say that from a feature perspective, there are a few things we're really concentrating on. The first of which is, we want to help agencies unify their planning and their spending, their buying across our entire network. With the fragmentation in Retail Media, that has become a bigger and bigger problem as the market develops. And we have the ability to solve that problem for our partners. Number two, I think going back to the performance topic that we hit on earlier because we're able to unify planning and buying across the network. We're also able to apply our legacy performance capabilities in new ways to help those agencies actually get performance for their brand partners and to help our retailers monetize more effectively as we said with Lowe's. So there are two things that I just would say, you should take away and one is, planning and buying more effectively across the network as a theme in MAX. And the second is, making sure that those plans and those buys not only can be measured in a closed-loop, but that they perform well for both partners, both demand and supply side partners. Thanks very much. Megan, one for you. If we saw 2022 as sort of a year of integration and product launches and you've obviously flagged the softer first half in ad spend, which we also see. But do you see ‘23 as a need to be a year of sales execution? And to make sure you monetize all the retailer inventory and keep up your targeting and so forth. And if that's the case, can you maybe rank what are the channels you're looking for growth, whether it's faster growth from the agencies, from retailer activations, from Shopify merchants, -- to get a sense of where you see that the growth resuming and coming from. Maybe a quick one for Sarah. You mentioned the cost cuts, but given the cash balance you've got, what speaks against sort of sustaining the investment in R&D and product development given the pipeline you've got and making sure that, that doesn't slip in terms of timescale? Thanks. Hi, Richard. Thanks for the question. In terms of 2022 being integration, I would say 2023 is about acceleration, is that we see the window of opportunity right now. So as I said in the opening comments, the shifting of more talent, doubling the size of our Retail Media team is front center for us to do that right now. So there's an acceleration there. There's also an acceleration in terms of go-to-market around retailers. So really making sure that we're -- as we've said before that we've just one or renewed or deep in relationships with five of the Top U.S. retailers is just testament to sort of activity that can see us doing, so really focused on the retailers. And then a strategic focus on the brands and the agencies really centered on lighting up Commerce Max. And Commerce Max is one of our acceleration efforts through the first half of this year because Commerce Max is where all of the Retail Media networks come together in front of the agency that they can buy it across networks, which doesn't exist today. So we've got this big window of opportunity in front of us. We're putting our foot down very hard on that accelerator and we're doing that through the first half of this year. Our transformation continues. The transformation started when I joined the company, it continues from a single point solution company to multi solution platform that provides our Commerce Media technologies and capabilities. And we need to continue that transformation through this year through next year and probably the year after. But this year is the year of acceleration. This is our time. Yeah. And just before I get to the R&D question, and just on Shopify, we increased the number of Shopify merchants by 36% in 2022 compared to ‘21. We're kind of early at the beginning of that. So we feel very good about the continuous focus on Shopify and Shopify like clients. So that's another big area of capability and focus for us. And for product and R&D, the first thing I'll talk about is the incredible interlocks that we do between our commercial teams, product teams and R&D. It's one process and it's focused on where the ROI is and where the dollars are. So that has been, I would say, an unlock in 2022, especially with [indiscernible] as well as the Iponweb team coming in, so we work hand in hand to really ensure that we're delivering and we're looking at proof of getting new features to our customers that they want and that they all use or drive revenue. And we are continuing to invest in those areas. We just announced a senior new hire in our product team. We've got incredible talent across the board in R&D, which is obviously now being turbocharged along with the Iponweb team as well. So it's a powerhouse. What we need to do is ensure that we continue to invest in that to unlock more capabilities faster and to continue to drive performance. So it's not a massive increase in investment that we need. It's ensuring that the powerhouse is 975 engineers in our company are really driving to ensure that they deliver not only for our existing clients, but for the new areas that they're focused on. Yeah. Hi. Good morning, everyone. Maybe an easy one for Sarah and then one for unless [indiscernible], Sarah. Megan, data privacy headwind, I think you called out – sorry, if I heard this wrong $10 million in 4Q, so I heard that. And for ‘23, what do you -- what are you assuming there? And then secondly, again, just kind of coming back and thinking about ‘23 and the linearity of the year. And my question here is, obviously comps will ease as we get through the year. But how are you thinking about macro? Are you assuming macro conditions hold throughout the year? Do you feel like that guide is officially conservative given that backdrop? And somewhat related to the prior question, one of the biggest upside potential drivers figure that we should be honed in on? Is it Commerce Max? Is it the Meta partnership? Is it Shopify? Is it other? You or an arch, what should we really looking at as potential upside drivers for ‘23? Thanks. Yeah. So first of all, on the single Lowe’s (ph), we had $60 million in 2022, of which $10 million related to Q4. That was largely for the Firefox and the Samsung of browsers as well as some explicit consent. We're expecting about $10 million for 2023 in a number that we've assumed, and we won't be tracking for that. The next future job would obviously Google, which we already talked about in Investor Day, and that won't impact 2023. In terms of the operational plan and the assumptions that we've taken, I mean, we're working day in, day out with our marketers and our retailers. And, yeah, they're cautious about spend. So we're assuming that there'll be growth in the second half as we come -- yes, we've got tough comps in Q1 and Q2. We're expecting the continuation of growth and we're expecting with the new capabilities that will ramp up in Q3, Q4. We're also an incredibly seasonal business and especially the Iponweb coming in as well that seasonality is a little bit more focused. So Q1 and Q2, we'll continue to see a slower growth environment with the macro and we anticipate Q3 and Q4 with new features, but also with just the tailwind of the secular trends of Retail Media and the highest seasonal patterns that we have been in especially in Q4 that will be where we see the growth drivers. So most of that is very similar to what we've seen in past years. And of course, there's been a lot of discussion, in industry around the reversion, [indiscernible] the more classic pounds precoated shopping. That being said, online traffic continues to grow and Retail Media budget continue to shift. I would just add one thing, the, -- because these things are all interconnected that that you mentioned to a degree, Matt. Adoption from a Retail Media perspective continued wins and actually more usage from those networks is something that we think a tremendous amount about because what -- the knock on effect of that, of course, is that we get the unlocks, the revenue unlocks and the long term growth that Retail Media as an opportunity overall provides. So for now, the idea of getting more adoption is really important. You mentioned Meta. I want to be really clear about that. There are great opportunities with Meta to add scale reach and possibly performance. We don't know as we go through, we're learning and experimenting with Meta as a partner, but to provide scale reach hopefully with performance to our Retail Media partners. So when you think about something like Meta, I would say, two things. one is, it's the biggest -- world's biggest logged-in audience. And with that, that provides the kind of scale for us to use, but especially as an extension of the work that we're doing with our retail partners. It also adds to what we're doing with Shopify Plus customers in our Performance business as we've talked about before. So I think you're talking about two different parts of the business there. Shopify, you're talking about our core business from buyer. Meta, you're talking about more than just a supplement that's something that can really add and accelerate our Retail business of the future. So there are two things there. Hopefully that helps. Yeah. Hi. This is Katy on for Doug. Thanks for taking the questions. Just a quick one on AI. It's obviously been getting a lot of attention in the past couple months. So can you just talk a little bit more about the ways in which Criteo's ad stack is already leveraging AI capabilities? And from an investment standpoint, is this a priority area for you guys? And how can you just better utilize some of these AI solutions going forward? And then secondly, just want to talk about CTV a little bit. In the recent partnership with Magnite. Can you just discuss some of the capabilities there? And how can you leverage your existing Ad solutions to augment your CTV offerings? And just like what are you embedding from this channel and your outlook for 2023? Thanks. Well, the reason I'm scratching is because [indiscernible] landed coming and so forth have really helped people understand better what Criteo has done with predictions using AI for years. So this is the first time that we can really provide in market examples that people understand about what we've been really good at, which is making a prediction about how it consumer is likely to choose a brand and buy something. Okay. So it's just important to say that the new libraries and the new applications that are out there are things that we have a very good understanding with and we look to incorporate stable diffusion as a good example of something we've been doing internally with damages for a while. Obviously, those applications are all only as good as the underlying collections of data that they read. And what's an important takeaway here is that our access to commerce data which is not in the public domain, is something that we use for making those productions. So yes, the AI in -- that is coming in the public sector and flocking on top of tax collections on the internet is useful. But only insofar as it can help extend the predictions we already make with Commerce Data. So that's really important. The second thing you asked, I think was about CTV. CTV is a really important one, but I'm sorry -- yeah, the Magnite relationship. And we're excited about the Magnite relationship first off because it gives us a great deal of scale to use CTV and experiment with CTV as part of a performance solution for retailers. So one of the issues for us is that CTV has been a little bit slower because it doesn't have a direct connection to a purchase. As some of the other channels do. So what Magnite does for us is it gives us great scale to start testing our performance thesis and tracking the purchase all the way from a retailer site that we work with, up to the living room where any one of us might be exposed to a brand for the first time. So I would say we're just opening that space, Magnite gives us scale to do that more quickly. And you'll see more from us as we learn how to make CTV perform for our retail partners. This concludes our question-and-answer session. I would like to turn the conference back over to Melanie Dambre for any closing remarks. Thank you, Megan, Sarah and Todd. This now concludes our call for today. Thanks everyone for joining. The IR team is available for any additional requests. We wish you all a great day.

EarningCall_381

Greetings. Welcome to Capri Holdings Limited Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. At this time, I'll now turn the conference over to Jennifer Davis, Vice President of Investor Relations. Ms. Davis, you may now begin. Good morning, everyone, and thank you for joining us on Capri Holdings Limited third quarter fiscal '23 conference call. With me this morning are Chairman and Chief Executive Officer, John Idol; and Chief Financial and Chief Operating Officer, Tom Edwards. Before we begin, let me remind you that certain statements made on today's call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those we expect. Those risks and uncertainties are described in today's press release and in the Company's SEC filings, which are available on the Company's website. Investors should not assume that these statements made during this call will remain operative at a later time, and the Company undertakes no obligation to update any information discussed on the call. Unless otherwise noted, all financial information on today's call will be presented on a non-GAAP basis. These non-GAAP measures exclude certain costs associated with COVID-19-related charges, the impact of the war in Ukraine, ERP implementation costs, Capri transformation costs, impairment charges, restructuring and other charges. To view the corresponding GAAP measures and related reconciliation, please view the earnings release posted on our website earlier today at capriholdings.com. Thank you, Jennifer, and good morning, everyone. Overall, our performance in the third quarter was more challenging than we anticipated. However, many aspects of our business performed well. In particular, we were pleased with the continued growth in our own retail channel across all three of our luxury houses. This is a testament to the strength of our powerful iconic brands: Versace, Jimmy Choo and Michael Kors as well as the success of our strategic initiatives. However, we were disappointed with the performance of our global wholesale revenue in the quarter. Additionally, revenue in Mainland China declined significantly due to the surge in COVID cases as the country reopened. Now turning to third quarter performance in more detail. Revenue decreased 6% on a reported basis and 1% in constant currency. Total company retail sales increased mid-single digits globally in constant currency. New customer acquisition was a key driver of growth as we added more than 12 million new names to our database versus the prior year. This is the largest year-over-year increase in our history. The growth in our own retail channel as well as our large and growing customer database demonstrates the strength and desirability of our brands. However, sales in our wholesale channel declined approximately 20%, driven largely by Michael Kors. Operating margin of 16.9% was below prior year. This reflected the sales mix shift between retail and wholesale, as well as increased marketing expense to support growth and build longer-term brand equity. As a result, earnings per share of $1.84 were below our expectations. Now looking at third quarter group revenue trends by geography. In the Americas, revenue decreased 4%, with mid-single-digit growth in retail, offset by significant declines in our wholesale channel. In EMEA, revenue decreased 2% on a reported basis, but increased 9% in constant currency. This was driven by strong retail revenue, partially offset by weaker trends in wholesale. In Asia, revenue decreased 20% on a reported basis and 8% in constant currency. This reflects strong results in Japan and Southeast Asia, offset by a nearly 40% decline in Mainland China. Moving to third quarter revenue trends by brand. Starting with Versace. Revenue decreased 1% on a reported basis but increased 11% in constant currency compared to prior year. Excluding Mainland China, revenue increased 21% in constant currency. We were pleased that revenue was better than anticipated and operating margin was in line with our expectations. Turning to product. Starting with accessories which are a key component of our growth strategy, Women's Accessories was the strongest performing category with sales in our retail channel up over 40% versus prior year. We were pleased with the response to our Greca Goddess pillar, which is continuing to gain traction. With our three pillars, La Medusa, Virtus and Greca Goddess, we are making significant progress in our goal to position Versace as a leading luxury leather house. Another component of our growth strategy is to expand footwear. Versace continued to gain authority as a women's luxury footwear brand as we expanded our core offerings, with the introduction of the pinpoint collection, a new range of statement pumps characterized by a curved metal stiletto heel. Men's and women's sneakers also performed well, driven by our Trigreca, Greca and Odessa styles. Moving to brand awareness and consumer engagement. Versace continued to deepen consumer desire through powerful storytelling. The holiday campaign was inspired by Versace's deep roots within the world of theater and the arts. Model Lily McMenamy embodied high Versace drama while highlighting holiday gift offerings. Our marketing initiatives continue to focus on Versace's Italian luxury heritage. This helped contribute to an over 40% increase year-over-year in Versace's global consumer database. Overall, we were pleased with the performance of Versace as we continue to execute our strategic initiatives. Looking forward, we remain confident in the luxury house's long-term growth potential as we reinforce Versace brand codes, significantly grow accessories and footwear as well as renovate our store fleet. Moving to Jimmy Choo. Revenue decreased 6% on a reported basis, but increased 3% in constant currency compared to prior year. Excluding Mainland China, revenue increased 10% in constant currency. While revenue was below our expectations, primarily impacted by China, operating margin was better than anticipated. Turning to product. Starting with accessories, which are a key component of our Go Strategy. Women's Accessories was the strongest performing category, with sales in our retail channel up high single digits versus prior year. Seasonal updates to our iconic Bon Bon and VARENNE styles performed exceptionally well. Women's footwear sales grew, driven by dress footwear styles as people engage in social activities, enjoyed special occasions and celebrated the holidays. Sneakers also performed well with positive consumer reaction to our new Diamond Maxi. During the third quarter, Jimmy Choo launched its successful capsule collaboration with Timberland. Sandra Choi partnered with New York Native Designer, Chanel Campbell of Harlem's Fashion row, to reimagine Timberland's iconic yellow boot. The collection celebrated urban glamour and the eclectisism of New York's dynamic community. This exciting collaboration generated over 50 million impressions across social media as well as strong product sell-throughs. Now turning to brand awareness and consumer engagement. For holiday, our campaign celebrated the playful energy of the party season in London's Claridge's Hotel, where Jimmy Choo designed the 2022 Christmas Tree. The unveiling of the Jimmy Choo Tree was attended by celebrities and friends of the house, including Iris Law, Sienna Miller and Daisy Lowe. Posts by attendees generated approximately 7 million impressions across social media. Our marketing initiatives continue to underpin our focus on glamour. This helped contribute to a 20% year-over-year increase in Jimmy Choo's global consumer database. Overall, we were pleased with the progress at Jimmy Choo as we continue to execute on our strategic initiatives. Looking forward, we remain confident in the luxury house's long-term growth potential as we reinforce Jimmy Choo's brand codes, significantly grow accessories and expand our casual footwear offering. Now turning to Michael Kors. Revenue decreased 7% on a reported basis and 4% in constant currency compared to prior year. We were pleased with the continued growth in our own retail channel with constant currency sales up low single digits despite greater declines in Mainland China. However, we were disappointed with Michael Kors' wholesale, which declined approximately 25% during the quarter. Operating margin was below prior year due to the sales mix shift between retail and wholesale as well as increased marketing expenses in our retail channel. To provide some additional color around wholesale, revenue at POS declined in the mid-teens as sales lag trends in our own retail channel. We had anticipated a sequential improvement at POS during the holiday shopping season, but that did not materialize. Therefore, we shipped less into the channel as we did not want to end up with excess inventory, which will result in additional markdowns. As you know, we have been elevating the Michael Kors brand and product. We believe our elevation strategy is working well, particularly in our own retail channel. We continue to believe that elevating Michael Kors is the right strategy for the brand. Now turning to product. In accessories, sales in our own retail channel increased low single digits globally. Consumers responded positively to core iconic collections, featuring Michael Kors Signature and hardware. We drove newness and excitement in Signature with seasonal updates featuring metallic logo prints. As a result, Signature represented approximately 55% of accessories sales during the quarter. Looking at footwear. We continue to believe we can significantly expand Michael Kors footwear to drive incremental revenue. Footwear sales in our retail channel increased low double digits as we delivered exciting fashion featuring iconic hardware branding elements and signature detailing. Men's remains one of the strongest performing categories in retail, and we remain enthusiastic about our opportunity to expand the accessories collection. Men's third quarter retail sales increased strong double digits globally, led by Signature product. In December, Michael Kors collaborated with Italian luxury sportswear brand, Ellesse, for a second time to create a sporty and glamorous ski capsule collection. The collaboration created energy and excitement, generating approximately 140 million impressions on social media as well as solid sell-throughs. Now turning to brand awareness and consumer engagement. For holiday, our consumer communication embodied Michael Kors Signature glamour and optimism, infused with the joy of the season. Bella Hadid captured the jet-set chic glamour of Michael's designs for the season's festivities. Additionally, in Asia, we amplified the campaign with renowned Chinese model, He Cong. Our marketing initiatives continued to underpin our jet-set storytelling. This helped contribute to a 17% year-over-year increase in Michael Kors global consumer database, demonstrating the strength and desirability of the brand. Overall, we were disappointed with the performance of Michael Kors in the third quarter. Given lower wholesale revenue, we recognize the need to reset our operating expense structure. We are beginning to take measures to better align operating expenses with the change in revenue by channel. Looking forward, we remain focused on our long-term growth initiatives to elevate the Michael Kors brand and reinforce our jet-set codes. We anticipate future growth, driven by our own retail channel, where we can leverage our brand momentum and personalized connections with consumers to drive revenue growth. Now looking ahead to the fourth quarter for Capri Holdings. We expect continued momentum in our own retail channel, driven by each of our brands strategic initiatives. However, in the wholesale channel, we now anticipate an even greater sequential decline relative to the third quarter. Due to weakness in our wholesale POS performance during the third quarter, which has continued into the fourth quarter, we are further reducing shipments into this channel. Now turning to fiscal '24 for Capri Holdings. We anticipate total revenue and earnings growth in the mid-single digits. In our own retail channel, we anticipate solid growth, driven by our strategic initiatives, client-telling and personalized strategies as well as a recovery in China as the country reopens. In the wholesale channel, we expect revenue to decline in the mid-teens with trends normalizing in the back half of the fiscal year. Looking forward, we remain focused on executing our strategic initiatives to drive sustainable future growth. Our three powerful iconic brands have enduring value and strong brand equity. We remain confident in our ability to achieve our long-term revenue and operating margin targets over time due to the resilience of the luxury industry, the strength of our portfolio and the talented group of employees executing our strategic initiatives. Before turning the call over to Tom, I would like to welcome Cedric Wilmotte as our new Chief Executive Officer of Michael Kors. Cedric has proven himself to be a versatile leader within our luxury fashion group, as President of Michael Kors EMEA for over 13 years, as well as the interim CEO of Versace for the last year and the COO of Versace currently. The Board, Michael and I are confident that Cedric's leadership will help to further accelerate Michael Kors strategic initiatives and brand momentum. Importantly, Cedric's appointment ensures that we have three experienced and talented CEOs at each of our luxury fashion houses. I am confident that we now have the right management team in place to execute our long-term strategic initiatives. Thank you, John, and good morning, everyone. Overall, we were disappointed in our performance in the third quarter. While we were pleased with the continued growth in our own retail channel across all three of our luxury houses, revenue in our wholesale channel declined significantly, which resulted in expense deleverage and a lower operating margin. Now turning to third quarter revenue in more detail. Total company revenue of $1.5 billion decreased 6% versus prior year and 1% in constant currency, which was below our expectations. Looking at revenue performance by brand, at Versace, revenue decreased 1% on a reported basis but increased 11% in constant currency compared to prior year. Global retail sales increased in the mid-single digits in constant currency. By geography, total revenue in the Americas decreased 4%. Revenue in EMEA increased 14% on a reported basis and 28% in constant currency. Revenue in Asia decreased 19% on a reported basis and 11% in constant currency, driven by greater declines in Mainland China. For Jimmy Choo, revenue decreased 6% on a reported basis but increased 3% in constant currency compared to prior year. Global retail sales increased low single digits in constant currency. By geography, total revenue in the Americas increased 6%. Revenue in EMEA increased 1% on a reported basis and 14% in constant currency. Revenue in Asia decreased 24% on a reported basis and 13% in constant currency driven by greater declines in Mainland China. At Michael Kors, revenue decreased 7% on a reported basis and 4% in constant currency compared to the prior year, impacted by the decline in wholesale. Looking at Michael Kors revenue by channel, global retail sales increased low single digits in constant currency. This was driven primarily by a double-digit increase in e-commerce sales, with e-commerce penetration increasing 300 basis points versus prior year. However, wholesale revenue declined approximately 25% compared to prior year. Turning to Michael Kors revenue by geography. Sales in the Americas decreased 5% driven by the decline in wholesale. Revenue in EMEA decreased 11% on a reported basis and 1% in constant currency, also driven by a decline in wholesale. Revenue in Asia decreased 18% on a reported basis and 5% in constant currency, driven by greater declines in Mainland China. Now looking at total company margin performance. Gross margin expanded 120 basis points to 66.3%, driven by moderating inbound transportation costs, price increases and channel mix. Operating expense as a percent of revenue was 49.4% compared to 42.8% last year, reflecting several factors primarily driven by the Michael Kors brand. First, the significant decline in wholesale revenue resulted in deleverage as the wholesale channel has a low variable cost structure. Second, as planned, we increased our marketing investments to support brand-building activities across the group. And third, e-commerce sales increased double digits, which resulted in higher variable costs. Due to the operating expense deleverage, total company operating margin declined to 16.9% compared to 22.3% last year and was below our expectations. At Versace, operating margin of 9.6% was in line with our expectations and compared to 12.7% last year. At Jimmy Choo, operating margin of 10.7% was ahead of our expectations and compared to 9% last year. And the Michael Kors operating margin of 22.9% was below our expectations and compared to 28.4% last year. Our tax rate for the quarter was 3% compared to last year's rate of 8.1%, primarily due to the release of a valuation allowance on U.K. deferred tax assets. Now turning to our balance sheet. We ended the quarter with cash of $281 million and debt of $1.54 billion, resulting in net debt of $1.26 billion. As part of our ongoing commitment to return cash to shareholders, we repurchased approximately $300 million worth of shares in the third quarter. Looking at inventory. We ended the quarter with $1.19 billion, a 21% increase over last year. This represents a sequential deceleration compared to the prior quarter. We continue to expect inventory levels at the end of the fourth quarter to be below prior year. Now turning to guidance. Looking at the fourth quarter, we are more cautious in our revenue outlook in the face of an increasingly uncertain macroeconomic environment. We now anticipate total company revenue of approximately $1.275 billion. This represents a decline of 15% on a reported basis, reflecting a mid-single-digit decline in retail. For wholesale, we had planned the channel down, but we are now planning it down further and forecast an approximate 35% decline. On a 52-week constant currency basis, total company revenue would be down 8%, including an increase in retail revenue in the mid-single digits. For fourth quarter revenue by brand, we forecast Versace revenue of approximately $280 million. This represents a decline of 11% on a reported basis with a low single-digit decline in retail and an approximate 30% decline in wholesale. On a constant currency basis, Versace revenue would be down 7%, including a low single-digit increase in retail revenue. As a reminder, Versace reports on a one-month lag, therefore, the significant decline in Mainland China in December will be included in the fourth quarter results. For Jimmy Choo, we forecast revenue of approximately $130 million. This represents a decline of 16% on a reported basis with a low double-digit decline in retail and an approximate 40% decline in wholesale. On a 52-week constant currency basis, Jimmy Choo revenue would be down 7%, including a low single-digit increase in retail revenue. For Michael Kors, we forecast revenue of approximately $865 million. This represents a decline of 15% on a reported basis with a mid-single-digit decline in retail and an approximate 35% decline in wholesale. On a 52-week constant currency basis, Michael Kors revenue would be down 5%, including a mid-single-digit increase in retail revenue. Now looking at operating margins. We anticipate fourth quarter operating margin of approximately 8.5%. This reflects continued gross margin expansion, offset by operating expense deleverage, primarily due to the sales mix shift between retail and wholesale. We expect this across all three brands. For Versace, we now anticipate an operating margin of approximately 10%. For Jimmy Choo, we now expect an operating margin in the negative mid-teens. And for Michael Kors, we now anticipate an operating margin in the mid-teens. Turning to our expectations around certain non-operating items. We forecast net interest expense of approximately $11 million. We expect an income tax benefit with a rate of approximately negative 20%, driven primarily by the resolution of an uncertain foreign tax position as well as anticipated mix of earnings in lower tax jurisdictions. We expect weighted average shares outstanding of approximately 126 million. As a result, we now anticipate diluted earnings per share of approximately $0.90 to $0.95. Now I would like to take a moment to share high-level thoughts around our preliminary expectations for fiscal '24. We are providing this outlook given the material change in wholesale trends. We currently expect fiscal '24 revenue of approximately $5.8 billion, a 4% increase versus fiscal '23, driven by continued growth in our own retail channels across all brands. We anticipate retail revenue will increase in the low double digits, primarily driven by growth in Asia as China reopens. Excluding Asia, we expect retail revenue to increase in the mid-single-digit range driven by our strategic initiatives. In the wholesale channel, we expect revenue to decline in the mid-teens range. Together with our partners across all three of our brands, we are taking a more cautious approach to planning the business due to the uncertain macroeconomic environment. We now anticipate wholesale penetration will decline from 27% of revenue in fiscal '23 to approximately 23% of revenue in fiscal '24. Now looking at our operating expenses. Because of the anticipated decline in wholesale revenue, we recognize the need to reset our expense structure. We plan to proactively manage expenses while also continuing to make strategic investments, particularly in marketing, to drive long-term growth. Looking at fiscal '24 operating margin. We expect modest expansion to 16.5%, reflecting gross margin expansion, partially offset by expense deleverage. We expect an effective tax rate in the mid-teens as well as higher interest expense, largely offset by lower share count. As a result, we anticipate EPS of approximately $6.40. Now, I would like to discuss our expectations regarding the cadence of fiscal '24 revenue and earnings between the first and second half of the year. Looking at revenue, in our own retail channel, we anticipate growth throughout the year. In wholesale, we expect significant declines in the first half, with trends normalizing in the back half of the year, as we anniversary the declines in fiscal '23. Relative to prior year, this will result in lower margins in the first half of fiscal '24, with margin expansion expected in the back half of the year. Looking at our expectations by brand. For Versace, we anticipate revenue of approximately $1.25 billion and an operating margin in the mid-teens range. For Jimmy Choo, we expect revenue of approximately $650 million and an operating margin in the high single-digit range. And for Michael Kors, we anticipate revenue of approximately $3.9 billion and an operating margin in the low 20% range. In conclusion, while we are disappointed with our third quarter results and our fourth quarter guidance, we remain optimistic about the long-term growth potential for Versace, Jimmy Choo and Michael Kors. Our powerful brands have enduring value and proven resilience, reinforcing our confidence in the ability to deliver strong revenue and earnings growth over time. Great. So John, maybe a couple of questions. First, larger picture, could you speak to overall category demand for accessories that you're seeing today, maybe relative to pre-holiday, if there's been any change? And then how best to explain the difference that you're seeing between direct-to-consumer and wholesale as it relates to the overall health of your brand portfolio? And do you believe the reset in revenues for next year appropriately covers you for nearly any scenario from a macro perspective? Thank you, Matt. So obviously, we are very disappointed with our third quarter results, mainly driven by the wholesale channel. We are pleased, as we said in our prepared remarks, with our own retail channel, which showed strength really across the globe with the exception of China, which had further declines than we had anticipated, and that was due to the reopening. And I think we have said that we had more stores shut down at certain points during the fourth quarter in China than we did during -- at any point during the pandemic. So that was quite difficult. And we have seen an uptick in the business there, especially in January. So, we're feeling strong and good about our own retail channel and how we're able to communicate and clientele and work directly with the consumer. And of course, you also saw that in our database growth, where we have the largest growth ever in the Company's history. And we've consistently grown the database at all three of those luxury brands every single quarter in the double-digit range. And I think that speaks to the strengths of the brands, the way the consumer is reacting to our strategic initiatives, and that's everything from the marketing to the actual product itself. And you saw in all three of our categories, we had growth in accessories. And so that really speaks to, I think, the strength of the category. I think you've also seen from many of the other reports that have happened with other luxury houses in the world, the category is strong. In terms of what happened in the wholesale category, and I'd say that's more of a North America issue where Europe performed better, although still not up to our anticipation, we have been -- and this is really more of a Michael Kors issue, we've been elevating the brand, both in positioning the way we're marketing it, the way that we have really elevated many of the products in terms of the quality, in terms of the design and in terms of the pricing. Pricing is up, on average, close to 25% since we started our price increases in 2019. I do think that the consumer was more cautious during the holiday season. We saw strong performance in our own stores through Black Friday, and then that kind of consisted right afterwards. We did not see the same rate pace and rate at the -- in particular, the North American wholesale channel. They have not -- that channel has not kept up the pace of the growth all throughout the year. We thought that part of that was an inventory issue, where we thought we -- if we could get in a better inventory position, which we did think we were in come the third quarter of the calendar year, as we had shipped, you saw in our first two quarters, had very strong wholesale shipments. And that was really to get our inventories back in line in that channel. And the performance just never came from that consumer. There is a possibility that the pricing increases that we've taken are impacting that channel differently than it's impacting our own channel. We have multiple tiers inside of our pricing. But all of our pricing has gone up. What we did see as a positive in both the North American and the European channels is where we had put our own selling staff back into the stores. We saw a fairly significant delta between the performance in those doors that had our own staffing in it and those doors that did not. And we intend on, as a part of our investment -- continued investment in the wholesale channel to take that level of staffing up. We talked about it once before. We said we'd see how that goes. And there's clearly been a positive result, especially in top-tier doors. So, we intend on continuing to invest in that. Again, in terms of category demand, we think the category continues to grow. I do have to say that the category was impacted across the department store channel, in particular, in North America. We saw it at all locations. So that was disappointing. We had expected that to really have an uptick, especially during the holiday season, and that unfortunately did not happen. And in terms of our forecast, Matt, look, all we can do is provide the best guidance. And I think we gave very fulsome guidance. We do believe that we're going to continue to see strength in our own retail channel. That seems to be consistent with what we see happening. We do think that the reopening of China, in particular, will add additional opportunity for revenue in our own retail channel. And we do see some small additional increase in the travel retail channel. Again, in particular, in Asia, we think that will rebound. So I think we're feeling comfortable with that. We've planned the business to be down quite significantly in the -- our fourth quarter and into the first quarter of next year for our quarters. And that's really to offset where we were restocking the wholesale channel. That's on a global basis. And we've planned for, again, a slightly higher decline in Q2. The back half of the year, we've planned it more or less flat, which will still be a stack year-on-year decline. And we've said wholesale would be down in the mid-teens. And by the way, that's across the group. That's just not Michael Kors. We're seeing our partners at multiple levels in the wholesale area be more conservative in their planning given some concerns around the consumer and how they might respond in general. So, I think we're taking a very prudent point of view. And then lastly, as Tom said in his prepared remarks, we're going to adjust our investments and our spend accordingly. The wholesale business for us was a profitable business and does not have a lot of fixed costs associated with it. So therefore, we'll have to make some adjustments inside of our own operations, and we're hard at work at that right now. So, I think the takeaway for us is we have three incredibly strong brands with Versace, with Jimmy Choo and Michael Kors. We believe that these are very strong brands, and we believe that our strategic initiatives are very, very solid. And we're going to stay true to those -- to that vision. And I think that worked for us as we went through COVID. And we're going to stay with that strategy as we go through this kind of change in how we're going to be running the business given a lower wholesale business that has lower associated costs up against it, and we'll continue to work our model accordingly. So thank you very much for that question, Matt. This is Warren Cheng on the line for Omar. I just wanted to dig in a little bit further on the 4Q sales guidance. It's a pretty big step down, even from the 3Q change. So just to clarify, is that all coming on the wholesale side? Or did you change the outlook on the retail side, too? And then also, just if I look geographically and focusing on China, I think we all understand what happened in December for China. But looking past December, have your expectations for China changed there versus three months ago? It's Tom here. Thanks for the question. And for Q4, we've really taken a more cautious outlook due to the increasingly uncertain macroeconomic environment and also, as John mentioned, inflation impacting consumer confidence. So what we've seen there is a big step down in wholesale for -- down 35% versus prior year, and Mainland China down 35%. So in total, if I do that on an absolute dollar basis, that's pretty much the whole reduction versus our prior year for the quarter. We still expect retail to grow mid-single digits. And this is a slight change in our China outlook because we do have opportunity next year, we believe, as they are reopening. However, as they've taken away all the restrictions, the COVID cases had surge that has created, I think, a near-term pullback in traffic and results. John and Tom, good to hear from you guys. I guess, John, if you could just clarify two quick questions on wholesale. So I believe, based on your answer to Matt, that you're kind of talking about next year, wholesale being basically down 30% in the first half and flat in the back half. But I think you said Q2 should be worse than Q1. If I heard that right, could you just clarify why that would be? And then just within the wholesale cost structure, obviously, it's a little out of whack because of the declines. How quickly do you think it will take -- how much time do you think it will take to kind of align the cost structure so that you feel like you're in a good position to go forward from a profitability perspective out of that channel? Sure, Ike. It's Tom here. I'll take those. So for wholesale, Q1, Q2 next year, so overall, as you mentioned, will be down 15% for the year. We expect declines in the first half as we are anniversary-ing the restocking in fiscal '23, and that's going to be more weighted to the first quarter. So, the first quarter in wholesale will be down more than the second quarter on a year-over-year basis. So hopefully, that answers the first question. And then in terms of aligning costs, as we mentioned, wholesale has a lower variable cost structure. And so we are working on a number of initiatives to reduce expenses, have embedded those into our guidance. And we're recalibrating the rate of spend across all our divisions and reducing non-revenue-generating expenses in corporate, for instance, and also a rigorous evaluation of other expenses not directly linked to consumer engagement and revenue and other areas that are driving the business. That said, we are going to continue to invest, particularly in marketing, but also in areas like e-commerce and digital that we know drive engagement and allow us to use that large database and growing database. And Ike, I want to clarify one thing, and I understand why you asked the question. So we are planning at retail, the business down with our partners across the group in the wholesale channel in the first half of calendar year and the back half of calendar year. So this is at retail sales, not wholesale, at retail. So it's POS. We are planning the business roughly flat. And there might be some exceptions to that, whether it's Jimmy Choo planned up slightly. But in terms of impacting the total company, we think that, that's the right way to view how what may happen with the consumer in the back half of the year. And we think that's prudent with Michael Kors, given that there was such a high decline in the channel during the back half of the year. I might add one other thing, too, in terms of color. We did not have that decline last year. So in calendar 2021, we actually had a very strong performance with the Michael Kors brand in the retail -- in the wholesale, in particular, department store channel. So this was -- as I said, this could be caused by some of the price increases that we've seen happen. We can't speak to what staffing levels were in the stores, et cetera. But we know where we put our own people in. We know in our own stores where we have our own teams in place, we are doing, I think, a very good job connecting with the consumer. We also know that when you have database grow the way that we saw -- and by the way, those are predominantly consumers who are actually purchasing from us. So usually, when the database is growing, they have made a purchase from us. So that shows us that there's tremendous interest in all three of these brands. And so again, we feel confident. And I know that it's not going to be easy for many of you on this call and people listening in given the step change in the wholesale business. But again, we continue to look at the strength and the power of these three houses. We're going to have to pivot a little more quickly than we had anticipated, because we always have wanted the wholesale business to get down to around 20% of the Company sales. This just happened a little faster than we would have anticipated. But I think we've shown we can be nimble and really move forward quickly. And so, I think you can expect to see some of the fruits of our initiatives around rebalancing certain costs and areas to happen relatively quickly. I wanted to focus on gross margin here. It appears to have held in quite nicely. Perhaps could you just share your observations on the promotional environment in the quarter as well as the assumptions you have embedded in a modest expansion guidance going forward? Thank you, Alex. I think the better news in our report was, first, our performance at our own retail stores; second, again, the database growth showing the health and the response of the consumer to our brands. And I think the gross margin also. We had a number of things that impacted the gross margin positively. Again, we've had this sequential price increase. We told you either two calls ago or last call, we are not going to be taking any more price increases. There's a little bit of it that will flow through in the first half of the year. And then we're stopping the price increases across the group. For the time being, we're going to take a pause. We also took a fairly significant price increases at Jimmy Choo and Versace as well. So we think we're in a good place in terms of where our pricing is right now. And part of that is reflecting in the gross margin. Tom will speak to some of the other areas that have also impacted it positively. So I think that you'll see two things next year. Again, you'll see a little bit of some of the freight and the benefit. That will start to show up a little bit more in next year. And secondly, there will be a channel mix. As retail becomes a bigger part, that will also show up in the gross margin. But let me have Tom speak to this year and next year. Sure. I'm happy to give you a little more color on Q3, and it's very similar trends for Q4. So as John mentioned, we did see moderating inbound freight costs. We benefited from the price increases that are still ongoing but will stop in the future, and the channel mix with a higher retail versus wholesale. We were not more promotional. But given the better inventory position compared to last year, we did have a more normalized level of promotional or markdown sales. And some additional headwinds included regional mix. As we've been saying over the past several quarters, Asia is a lower percentage of revenue and it's a higher margin as well as the stronger dollar, which has hurt us through the year on a margin perspective. But as we look at next year, retail will be a larger portion of the business. We expect a rebound in China, which will be a tailwind, and freight as well. This is in addition to the strategic initiatives on our brands, which, over the past several years, have driven significant improvements in gross margin across our brands, all of our brands. And wholesale, as John mentioned, in the first half, it's going to be a headwind because of deleverage with that low variable cost base. But as we normalize in the back half, those other areas will shine through. I might also add that we feel that FX will probably not be a headwind or a tailwind next year. We're expecting it to more or less normalize. And it will still be a headwind in the first two quarters. But then by the time we get to the back half of the year, it should be normalized or just a very minor tailwind. So hopefully, some of that noise will start to come out of the performance numbers. And as you know, it's been a significant headwind for us this year. Thank you, Alex. John, I know you mentioned pricing as a potential explanation of what could be driving additional weakness in wholesale. Along those lines, can you talk about the momentum that you're seeing across your business within various income demographic cohorts or price tiers of your product architecture? Is there any difference in sell-through trends or sell-out trends in your own retail business and outlet versus mainline stores, particularly in North America? Separately, you've had nice growth in your consumer database. Can you talked to the repeat purchase activity that you're seeing from customer cohorts that were acquired over the last few years that may be more priced sensitive? Thank you, Brooke. Brooke, the overall -- what's very interesting about our database and the consumer and the database, and we've actually reviewed this yesterday, we're still -- and this is also, in particular, to Michael Kors, we're still dealing with a fairly high income demographic in the Michael Kors database. And it hasn't changed a lot over the last five, six, seven years, which we think is a good sign. Where there's been a concern, does a lower income consumer be driven more towards the brand? And did we lose any brand equity with more higher-income consumer? And so far, that has not been the case. What's also interesting is while we do have crossover between the channels, between e-commerce and our stores, the crossover is not as great as we continued to anticipate. So the good news for us is -- and probably 60% of our database growth, and it's pretty consistent across the group, is coming through the e-commerce channel. It's not cannibalizing the store customers. So we think that's a very healthy mix. And you can see, as Tom mentioned, we significantly accelerated our marketing activities across all three of our houses during the quarter. And that was a very distinct decision on our part to do that. We knew that many of our competitors in Europe and North America would also be accelerating their spend. And we thought to be competitive from a mind share standpoint that we had to really make sure that our brands were shining through. And so the good news for that is these databases are getting so sizable that, in certain ways, some of our direct-to-consumer marketing costs may be coming down a little bit next year. And that's because we're going to be able to mine the existing databases. And we've seen an acceleration on repeat customers inside. We've been able to, really through our data analytics tactics, get those consumers lapsed and repeat to transact with us more regularly. So we feel that there is an opportunity for us to create some leverage in next year, given the size of the databases at all three of the companies and how we can start to leverage that. And again, we're still going to invest, as Tom said, in overall marketing across the group. We think that's one of the most important initiatives to be competitive again with the European luxury houses as well as the North American competitors who have very strong brand statements. So we have to continue to invest in that, and we're going to continue to invest in our stores, renovations, et cetera. And then lastly, we think that our clienteling initiatives, we're really going to step that up over the next two years. It's going to take us more time to get to a place where we feel that, that's going to be a competitive advantage for us, but it's, again, a very important part of our strategy across the group. Thank you very much, Brooke. Just a couple of quick ones. Curious if you can talk about transactions versus ticket within the DTC business that you saw in the quarter and what you expect going forward. Then free cash flow assumption for F '24 and then just China, the assumption in the first half or second half of '24. Paul, thank you. Paul, we really didn't see a lot of change in transaction or UPTs. So that wasn't an issue for us. We did see a small decline in the ticket, and that was really more of a result of -- we saw a shift to smaller -- to a return to smaller bags. And I would say, we saw that across the group, where there was much more cross bodies, small leather goods. We benefited, during COVID, over a lot of larger bags selling where people were needing to put more things in larger bags. And so, actual retail price of units was not down, but the actual transaction was slightly down, and that was more because of -- we've seen a very -- a double-digit increase in our small leather goods business, and we classify our cross bodies in that category, which really reflected, I think, people enjoying the holidays, going out and parting, dressing up. And so unit sales were slightly higher than actual retail performance, and that's driven by a lean-in by the consumer into that category of product. I'll turn over the cash flow to Tom. Sure. With regard to cash flow, you asked about last year, but just to comment on this year. We're at free cash flow of approximately 450 year-to-date, and our Q3 was even above that. So we had an incredibly strong cash flow quarter. We would anticipate next year that we'll have similar cash flows, that has always been a strength of the Company, that we're generating strong free cash flows across our brands. And our balance sheet is extremely strong. We noted in my prepared remarks, a net debt of $1.26 billion. And our leverage ratio is very solid and low. So we feel very comfortable with the strength of both our balance sheet and our cash flow, and we're using that to redeploy and purchase shares to return cash to shareholders. So when we look at our capital allocation priorities, still number one, invest in the business; number two remains returning cash to shareholders and then pay down debt, which we have done over time and managed very carefully. And as regards to China into fiscal '24, we expect it to grow at an outsized rate compared to the overall growth of retail. I think we had mentioned the retail business, we expect to be up double digits driven, first, by Asia, mainly reflecting China and excluding that, up mid-single digits across the remainder of the world. I apologize if I missed it. But John, we'd love to hear your opinion on whether you think the domestic department store weakness is more a broader consumer demand and traffic versus the stores' attempt to reduce their own inventory? So just trying to think through how big of an industry pressure point you think it might be and how long it might last? And then Tom, if I can, how are you thinking about the Michael Kors' EBIT margins versus the pre-pandemic to the earlier point about wholesale having little fixed costs and just any help on thinking through decremental margins on wholesale from the lower revenues. Simeon, number one, I want to say that our partners, both in North America and in Europe, have been terrific partners. So we worked very closely together all through the pandemic and exiting the pandemic. And the first half of this -- of last calendar year, we had tremendous difficulties filling the inventory needs of the department stores. And as I said to you, coming out of calendar 2021, we actually had a very strong holiday season with that channel, and we were depleted in inventories. And so we didn't really get caught up in terms of inventory at retail until almost August of this past year. The inventories got to retail. We did not see any type of a significant step change in the channels. And we were, as I said, very hopeful. And we did run some tests with additional staffing in the stores, which worked well for us. But we just didn't see the conversion with the consumer in that channel. I can't tell specifically whether it was our prices or not. But we just know the channel didn't deliver in our category and obviously, the biggest category being the accessories part of it. I don't know whether this is going to continue or not. We've seen a continuing weakness, as I've said, through January. So we've taken, again, a very prudent step. We do not want to put additional inventory into the channel to cause markdowns, which we think will cause brand erosion. And we've worked too hard to get ourselves to this point. We've said we would suffer the inventory declines if -- and the wholesale shipment declines if that meant preserving the brand, and I think we're going to continue to do that. We know that we're on the right track with elevating Michael Kors. We know we're on the right track with Versace. And I think you're going to see some very powerful things happen at Versace here momentarily. We've announced our fashion show on March 10 out in California, in Los Angeles. Our new CEO, Emmanuel Gintzburger, is hard at work, and he's making some incredible strides along with Donatella. And I think you're going to see a real step change in terms of what the product looks like, where we're going marketing-wise. So we're extremely enthusiastic about what's happening there. And Jimmy Choo has been on a pretty good trajectory through the year. And in fact, I do need to call out that Jimmy Choo did have a very strong retail performance during the holiday season. But our partners are very concerned about where the consumer is going to be next year and has taken a step change down, even with our performance on being conservative on inventory. And we're -- quite frankly, we're okay with that. We don't want to have excessive markdowns in these stores. We think that's the wrong place for us to end up. So, we have to be focused on. If you're going to believe in a luxury company and long-term brand health, then you've got to stay committed to what your strategy is. And I think ourselves and our management team are committed to that. So I'll turn it over to Tom. And Simeon, with regard to Michael Kors operating margin long term, we continue to believe in the mid-20% range operating margin goal for the Michael Kors brand. Near term, there's definitely a step change in the wholesale revenue. And we will adjust our cost structure to address that, and we've already begun to rebalance the cost base. As we look at '24, as I mentioned, in the first half, the wholesale declines will create deleverage. But then the initiatives, the growth in retail, China and Asia becoming a larger portion of the mix, again, as they recover and little freight tailwinds, we believe, along with our strategic initiatives, will get us back on that path. I'd like to thank everyone for joining our call this morning. Again, we are very disappointed in our results for the third quarter and our guidance for the fourth quarter. That being said, we believe in the strength of our three luxury houses. We believe that we have a very good plan for fiscal year '24 on a go-forward basis. That will continue to embrace and support the strength of each of these three phenomenal brands, and we believe that we will return to the type of growth that we expect in the future.

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Good afternoon, and welcome to the Universal Technical Institute First Quarter Fiscal 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. Hello and thank you for joining us. With me today are our CEO, Jerome Grant; and CFO, Troy Anderson. During the call today, we'll update you on our first quarter 2023 business highlights, financial results and vision for the future. Then we will open the call for your questions. Before we begin, we want to remind everyone that today's call will contain forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Please carefully review today's press release for additional information and important disclosures about forward-looking statements. Because forward-looking statements relate to the future, they're subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. As a reminder, relevant factors that could cause actual results to differ materially from the forward-looking statements are listed in the press release and our SEC filings, and the section entitled Forward-Looking Statements in today's press release also applies to everything discussed during this conference call. During today's call, we will refer to adjusted net income or loss, adjusted EBITDA and adjusted free cash flow, which are non-GAAP financial measures. Adjusted net income or loss is net income or loss, adjusted for items that affect trends and underlying performance from year-to-year and are not considered normal recurring operations, including the income tax effect on the adjustments utilizing the effective tax rate. Adjusted EBITDA is net income or loss before interest expense, interest income, income taxes, depreciation, amortization, adjusted for items not considered as part of the company's normal recurring operations, along with non-cash stock-based compensation expense. Adjusted free cash flow is net cash provided by or used in operating activities less capital expenditures, adjusted for items not considered as part of the company's normal recurring operations. Management internally uses adjusted net income or loss, adjusted EBITDA and adjusted free cash flow as performance measures and those figures will be discussed on today's call. As a reminder, we have provided reconciliations of these non-GAAP measurements to the most directly comparable GAAP financial measurements in today's press release. We encourage you to carefully review those reconciliations. Thank you, Matt. Good afternoon, everyone, and thank you all for joining us today. I'd like to begin by thanking our faculty, staff and students for their continued hard work and commitment during the quarter. Before we get in discussing any results for the quarter, I'd like to take a moment to orient you on our new multi-divisional reporting structure following the acquisition of Concorde Career Colleges in December. Along those lines, please also note that our results for the first quarter include one month of results for Concorde. Post acquisition, we now report our results in two business segments: UTI, which includes the transportation, skilled trades and energy offerings and Concorde, which is the acquired Concorde Healthcare Education business. You will see this reporting structure reflected in our press release and our 10-Q filings. Troy will get into more details around the financial results in a moment, but I'll provide a brief overview of some of the key updates across the two segments. Now let's turn our attention to the business. First, we're pleased with the results of both segments during the quarter, as each division performed in line with our expectations and reflect solid overall operating performance, diligent expense management and execution against our key priorities. Our consolidated first quarter revenue was $120 million, adjusted EBITDA of $14.4 million and new student starts were 2,310, all of which were consistent with our expectations for the quarter and our guidance for 2023. While there have not been significant changes to our business since we last spoke, just two months ago, our team has been busy as we focus on executing the initiatives currently in place. Within UTI, overall interest in our programs has continued to be strong. However, as we've noted previously, the dramatic chunk in inflation in the second half of our last fiscal year had a significant impact on our adult population. While the rate of inflation appears to be normalizing, which is encouraging, this continues to impact our prospective adult student population. We are, however, seeing signs of moderation in the levels of decline in this channel relative to what we experienced in the second half of the last fiscal year. We're optimistic that this improving trend will continue due to both stabilizing macro factors and more pointedly, the proactive actions we are taking internally to drive performance improvements across the activities that are within our control. And we continue refining our program offerings and identifying further opportunities to mitigate some of this impact. Examples of such actions we are taking, include establishing dedicated teams focused on supporting both local and relocating students for the adult channel, assisting prospective students through an enhanced call center team as well as continuing to refine our financial and overall support for both local and relocating students. Turning to our high school and military channels, as previously mentioned, over the last several quarters, we've been strategically investing in these channels, adding more admissions resources and enhancing our tools and processes to better serve these market segments. We're broadening our reach and more deeply penetrating the better performing markets with the intent of improving the overall performance of both of these channels. These initiatives and additional resources are now in place and operating well, and we expect that these actions will begin to yield improved performance over the coming quarters. As mentioned last quarter, we are initially targeting to launch 15 new programs, most of which came to us by way of the MIAT acquisition. Beginning in 2023 and continuing into 2024, with the first launch of wind and energy programs at our Rancho Cucamonga campus in the coming months. The programs remain on track to launch as planned, subject to regulatory approval, and we are encouraged by the level of interest we're seeing as we begin to more actively market these programs. These new programs will have a modest impact on student starts and revenue in fiscal 2023, and we expect that they will have a greater impact in fiscal 2024 and beyond. We continue to see enrollment growth at our new campuses in Austin, Texas and Miramar, Florida, which opened in May and August of last year, respectively. The two campuses now have over 650 students combined, and we remain optimistic that both markets will meet the expectations we have set before their openings. Moving to our Healthcare Education division, Concorde’s performance for December was in line with our expectations. The integration of Concorde continues to progress as planned since the acquisition closed on December 1 of last year, and has been great to meet and work with the Concorde students and staff over the last few months. We continue to see high levels of engagement and talent across the team and great enthusiasm for them with respect to being a key part of the strategic plan of our combined companies. Concorde also has a number of program expansions and new programs in the world, all of which will further broaden its educational offerings to provide promising career paths for students and provide workforce solutions to help meet the job demand needs across the healthcare industry. While we're focused on the integration of Concorde in fiscal 2023, our first priority is ensuring that this process is smooth and seamless from a student perspective, making sure that there are no disruption to Concorde's operations. Therefore, as we've indicated last quarter, our initial focus will be in critical areas to meet the requirements of being part of a public company, by financial reporting, interim controls, compliance and IT security. We intend to be cautious with broader integration activities and ensure that any steps we take will bolster operational efficiency, student experience and/or our financial performance. As for our 2023 guidance, the positive performance in the first quarter bolsters our confidence in delivering on our expectations for the full year. We are reiterating our full year guidance. Revenue from $595 million to $610 million, adjusted EBITDA from $58 million to $62 million, and total new student starts between 22,000 and 23,500. As a company, we are in a much different place than we were a year ago in terms of how we’re strategically approaching and executing through a fluid macro environment. As I noted earlier, we’ve taken several actions to mitigate the impact that specific economic headwinds like inflation are having on our student population. We expect gradual improvement in performance in the near-term with acceleration in the back half of the year as we begin to see the benefits of the initiatives we put into place. We believe that the continued growth from our expanded core business with the benefits we will see from strategic investments we’ve made and initiatives we have put into place will allow us to accomplish the objectives we have set for this year and set us up to drive further growth in 2024 and beyond. As a reminder, by delivering on our plans for fiscal 2023 and with the decisions we’ve made and the pieces we’ve put into place to date, we expect to deliver in excess of $700 million in revenue and adjusted EBITDA approaching $100 million in fiscal 2024. I’d now like to turn the call over to Troy to discuss our results from the quarter in more detail. Troy? Thank you, Jerome. We reported positive financial and operational performance during the quarter, delivering on our expectations for both the top and bottom lines and exceeding analyst expectations. Before I start, I will reiterate that all of our results, include Concorde for one month and unless stated otherwise the year-over-year comparisons are on an as reported basis. Thus, the prior period does not include Concorde. As we referenced on our last call when we set our guidance, and as Jerome indicated in his comments with the Concorde acquisition closed, we now have two reporting segments, UTI and Concorde in a corporate unallocated cost reporting unit. Jerome previously described the make of the two segments. The corporate unallocated costs reflects certain resources and third-party costs that are generally not directly controllable or in support of the segments. Moving to our performance in the quarter. As far as student metrics, total new student starts were 2,310. UTI starts were consistent with the prior year period and Concorde delivered 336 starts in December. Overall, UTI starts reflect growth in high school, offsetting a decline in military with adult roughly even versus the prior year. Concorde had one core program start in December. That’s a measurably lower start number than you’ll see in subsequent quarters. For reference, core starts occurred each month, and most quarters have one large clinical start with some smaller clinical starts in between. Revenue on a consolidated basis increased 14.2% versus the prior year quarter to $120 million, primarily driven by Concorde’s $14.4 million contribution. UTI’s revenue of $105.6 million was slightly above the prior year period with a 2% increase in average revenue per students offsetting a 1.6% decrease in average undergraduate full-time enrollment. Note for Concorde that December is one of the lowest revenue months of the year given seasonality and phasing of their clinical programs. The lower revenue had a negative impact on profitability in the month as well. Consolidated net income during the quarter was $2.6 million, and adjusted net income was $5.3 million, which is down approximately $10 million versus the prior year. The year-over-year decrease in adjusted net income was in line with our expectations as UTI produced exceptionally strong profitability in the prior year period, given timing and mix of revenue and cost. And the slower start growth in UTI’s adult channel in the back half of fiscal 2022 pressured revenue and thus profitability in the quarter. Other factors impacting profitability in the quarter included planned increases in expenses for UTI in corporate unallocated associated with the new campuses and programs launched last year, investments in the admissions channels and other areas as part of our growth and diversification strategy, a measurably higher effective tax rate due to the valuation allowance reversal last year and increased net interest expense. Finally, the lower profitability also reflects the negative contribution from Concorde for December. Diluted earnings per share was $0.02 in the quarter versus $0.25 in the prior year period. Total shares outstanding as of the end of the quarter were 33.925 million. Adjusted EBITDA was $14.4 million, down $6.2 million overall versus the prior year. UTI contributed $23.3 million in the quarter, which was partially offset by $8.8 million of corporate unallocated costs and a slight loss from Concorde. UTI decreased $5.3 million year-over-year, while corporate unallocated costs are up $0.8 million. With most of the same causals for both as I outlined for adjusted net income. Note, our adjustments are similar to prior quarters with the addition of stock-based compensation as I explained on our last call with our 2023 guidance. Moving to the balance sheet and cash flow. As of the end of the quarter, the company’s total available liquidity was $162.2 million, operating cash flow of $2.8 million, increased $0.3 million over the prior year and adjusted free cash flow of $2.6 million, improved $6.1 million versus the prior year, driven primarily by lower capital expenditures. CapEx in the quarter was $6.8 million, and mostly for UTI for the final phases of the build-outs of the new Austin, Texas, and Miramar, Florida campuses and the initial stages of this year’s new program rollouts. I also want to briefly recap the balance sheet impacts of the close of the Concorde acquisition. The base purchase price was $50 million. There were $1.3 million of net adjustments, total net cash consideration paid at $48.7 million. Additionally, Concorde had $31.8 million in cash on their balance sheet at the closing for a net cash outlay of approximately $17 million. In conjunction with the acquisition, we recorded goodwill of $10.1 million and intangible assets of $4.8 million. Currently, and as of the end of the quarter, we maintained the previously disclosed $90 million draw from the revolving credit facility, which we established in November of 2022. We also have used $1.8 million of revolver capacity for a letter of credit, leaving approximately $8 million of additional liquidity available to us. Please be sure to review our press release, financial supplement and investor presentation, which have all been updated for the most current consolidated and segment details about our actual results, our strategic roadmap and our guidance. We continue to make significant progress as we execute on our growth and diversification strategy and are building for the future of the company. We believe we have set ourselves up well to drive increased shareholder value in 2023 and beyond. And as Jerome stated, we are reiterating our fiscal 2023 guidance across all key metrics and continue to be confident about our 2024 expectations. I would also add that we don’t see any material change to our pacing expectations for 2023 with growth in new student starts, revenue and profitability all skewed to the back half of the year. With that, I want to thank our team, our students and our partners for their efforts and ongoing support, and again, welcome the Concorde team to the company. Thank you, Troy. To briefly summarize, we are pleased with the performance this quarter. Interest in our programs across transportation, skilled trades and energy, as well as healthcare remains high. The macro environment continues to create challenges for our adult job changing population, but we are taking proactive steps to mitigate these headwinds. Both UTI and Concorde are performing to our expectations, and therefore we’re reaffirming our guidance for the year and continue to see 2024 as a step change year for the company. And finally, while our primary focus this year will be on execution of our existing initiatives and effectively integrating Concorde, we will remain opportunistic and continue to research and explore new potential growth avenues as they arise. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Eric Martinuzzi with Lake Street. Please go ahead. Congratulations on the – I guess, one partial quarter for Concorde under your belt and one full one for UTI into the new fiscal year. It looks like good results. I’m curious to know just a couple of questions on Concorde. You’re two months in here in the ownership, you had talked about an expectation of 5% to 10% growth at Concorde on a 12-month pro forma basis. Is that still the assumption? Yes. Hi, Eric, it’s Troy and thanks for your comments and your question. Yes, I’d say, it’s – in the mid to upper-single digits on a like-for-like basis and everything has been proceeding as expected. Our engagement with them is very high, and we’re happy to have them part of the team. They’re performing well. Okay. And I noticed you didn’t include the new student starts at Concorde. Obviously, you didn’t own them in the month of December of 2021, but do you have that available? How does the 336 new students compared to the year prior? Okay. No problem. And then for the investments at UTI, obviously, we’ve got a couple of things we’re focused on the discretionary side. You’ve invested in advertising, you’ve invested in your admissions resources. Can you comment on those two areas? Are we getting the advertising we want at the price we want? Are we getting the admission resources at the campuses? Well, let me break it into two pieces. Number one, from a marketing standpoint, one of the comments we made was that interest remained quite high. We’re thrilled with the inquiry volume that we’ve seen to date coming in the right time frame from the right sources. So we think we’re getting the bang for the buck out of our marketing investments. As far as the admissions investments, much of that ramping up, whether it was adding additional resources to the high schools or in the military, all happen towards the end of the summer. And we see from leading indicators in terms of number of presentations and leads generate and things along that they’re operating quite well. So we’re feeling good about what we’ve done in those spaces. Okay. And then just on the UTI business, one of the major headwinds you had in 2022 – FY2022 was a double-digit decline in your new student starts for adult learners. I saw that that was – it looked like it was relatively flat. I think that was in Troy’s prepared remarks. What’s the expectation for 2023 for adult in student starts? Well, as we said when we started the year, we still believe that the adult channel will be down this year. As we said, as reported at the last half of last year, it was down significant double-digits due to the high inflationary period, et cetera, and those economic headwinds. We are seeing moderation in that, which is really great to see. It’s not down in that double-digit range anymore. But we’re not projecting that it will come back to a positive sense in 2023. But our expectations for the year, while we budgeted, what we’re projecting took into account that we believe that, that segment would still be down. Yes. And just a point of clarification, Eric, the financial supplement in the – roughly flat adult was all in, so that the double-digit decline was same-store. But when you put in MIAT and the new campuses and the like, it’s roughly flat. Yes. I’m glad you’ve reminded me of that. And then last question, we saw a pretty strong employment numbers in the most recent jobs reports. Those employment figures have been relatively encouraging. Are you seeing any change in kind of the pipeline just across the board on the adult side, the inflationary pressures, the employment environment, wage inflation? Some color there would be appreciated. Well, let me break that into three buckets. Number one, we are seeing moderation in the macro environment in terms of inflation, et cetera. We think that’s contributing to the uptake in the adult population. The second thing in terms of unemployment, I actually just looked it up this morning is that the – remember that population is 18 to 24 year-old male, and that’s been – that unemployment number has been on the rise over the last few months. I think it’s around 7.8% right now, which is actually higher than 2019 pre-pandemic levels. We don’t know if that will hold on. But – so I think we’re seeing some of the folks in our demographic are looking for more stable, long-term careers, and that’s affecting us as well. And then as we said in the statement, we’ve taken quite a few steps in terms of mitigation of the issues and to address it, whether it’s how we work with adult job changers through the enrollment process, setting up a call center to stay with them through that process, looking at how we can support those who need to relocate in an enhanced way. As you probably read out there, rent is up pretty significantly across the country in most of the major metropolitan areas. And so we’re working to bend a knee if it were to help people over the hump until they’re settled and both working and going to school in locations that they relocate to. So the combination of those three things, we think, is why we’re beginning to see that positive movement in the adult sector. Good afternoon, Troy and Jerome. Can we get a little more color on your high school recruiting pipeline and kind of your confidence level in being able to execute on that growth plan for the back half of the year? It’s a great question. I mean, we watch a lot of leading indicators when it comes to that right now. Most of the kids are making their decisions into February, March and April of what they’re going to do when they graduate in May, June or May and into late June on the East Coast. And number one, with more resources in there, we’re getting to more schools. And the indicator around that is the number of presentations we’re seeing. Our reps do presentations, which are digital and we can tell where they are and how many of those presentations are happening. And we’re great – it looks great from a presentation standpoint. And the corollary to that is the number of interested students they have in leads, which is on the rise as we would expect with the resources that we added. Okay. And then by the time we get to the next conference call, will you have a pretty good handle on what the enrollment looks like? Yes. Yes, we will. And again, you’re hitting right in the hot period here. There’s a lot of presentations that happened October, November, December, January as schools are helping their students think about what they’re going to do when they graduate in May and June. And so the setup is looking good. And you’re right in about three months, we’ll have a pretty clear picture of the pipeline of what’s coming through in high school. Okay. And just if you may, a little more clarity on kind of the slope of the decline in the same-store adult pipeline kind of where are we now versus three and six months ago in terms of the slope of the decline? Yes. Steve, this is Troy. We were seeing – it wasn’t consistent quarter-to-quarter, but in the back half of the year, we were about a 20% same-store decline. We saw some pressure in Q2 as well coming out of Omicron last winter, which seems like a long time ago. And we were single-digit – I’m sorry, for starts, we were in the teens, but enrollments, more importantly, because those starts are a function of enrollments that really happened in the prior quarter, which when we’re still seeing some of that elevated pressure. So enrollments were also down in that same range, 20-plus percent. And so the Q1 starts while they were better. Again, some of the mitigating actions, Jerome talked about helping, although maybe we didn’t have all the enrollments we wanted, we were help getting more students to start. So therefore, we saw some benefit on the start rate or the percentage year-over-year decline on starts, which we – those mitigations will help us as we continue to move forward. More importantly, the enrollments were more in the single digits of year-over-year decline, so a measurable improvement there. Now one quarter is not a trend. But again, we have a substantial number of mitigations that we’ve been working on and transformation within our admissions organization really across all three channels, but adult in particular, given the pressure that we saw there last year. So we’re encouraged by what we’re seeing, and we’re going to continue working at it. And as Jerome said, for the full year, we don’t expect growth out of that channel. We do expect to see some repair, improvement as we get into the back half of the year. But on a full year basis, we don’t expect to see growth there. Okay. And just to drill down on the first MIAT program and one of your legacy campuses. When do you expect that to begin enrolling students? Yes. So in Jerome’s remarks, he commented about we’re preparing to launch as soon as towards the end of Q2, if not early Q3. We are waiting regulatory approval for all of them, but we're moving forward as if we'll get the approvals in time, and we'll make adjustments as needed. That's not a process we control, but all of the applications are in, and they've been in for a good bit of time now. So we're starting to expect to see some movement there and then that will dictate the ultimate start dates. But we'll – we're moving forward to be ready to launch as quickly as we can late in Q2 or early Q3. That's the first program. The rest – yes, the rest of them are scheduled for Q4 and beyond. Hi, thank you for taking my questions. I wanted to kind of go back to the starts projections for the year. And I just wanted to understand, so the guidance that you've given for starts for fiscal 2023, if we kind of – if I take out the core UTI and MIAT of up around 5% plus starts year-on-year, how does – how are you building that? I mean, I know that it's back half – kind of back half loaded. So my question is, what is the composition of that given the fact that unemployment is still high in your demographic, but you are not – you're projecting an improvement in adults, but that's going to be flat. So the balance is coming – balance of the growth in starts is coming from high schoolers. And then military, given that it was kind of weaker in the first quarter, how does that shape up? And then a similar question on Concorde? Okay. Yes. Thanks, Raj. This is Troy. We do have a bridge in our investor presentations with the same material that we had last quarter with starts in revenue and adjusted EBITDA. High school and military will drive the bulk of the growth. That will ramp in the year. We are still ramping the new campuses that we launched last year. Military, we added reps in the first part really throughout Q1. So the benefit of that really has not been materialized yet in the numbers. And as you noted and we said in the past, it can be a little bit volatile quarter-to-quarter, just based on the flow of prospective students there. But having more reps in that space will certainly help as we get into the back half of the year and then the program expansions, again, we're pending regulatory approval there. But in our guidance, we're assuming a bit of a lift relative to those with a number of those programs launching in the fourth quarter. And of course, high school will contribute some to that just given the nature of the fourth quarter and that we'll have a number of high school students coming out, but adult will contribute to those program expansions as well. Right. So I see the bridge, Troy, and the bridge doesn't give numbers, but I just kind of wanted – I see that, if the core UTI and MIAT are going to be up 5%, you're saying that despite the unemployment situation staying bad for the adults, you see all these programs it's helping the – improving the decline on young adults and the balance is all coming from high school and military. And what is the – for the Concorde starts that you have in the year, what does that sort of represent in their year-on-year growth? Yes. I'll work it backwards. The Concorde is similar to the revenue question earlier is mid – to slightly up or mid-single-digit growth on a like-for-like basis, again, a partial year. So the 7,500 to 8,000 range that we're referencing there is representative of just having the 336 in December. So you'll see 2,000 plus the next two quarters and 3,000 in the fourth quarter. So those will ramp as well. The new campuses, don't forget, we didn't get a full high school benefit of the new campuses in 2022. Miramar first class was in August. So really, we missed the high school season for all intents and purposes for Miramar. So that alone would be a lift and Austin was again launched in May. So we really didn't get a chance to build as much of an enrollment book there as we would expect normally. So there's just a number of things as you think about 2023 versus 2022 that we either in-flight or not in place at all that are building this year. And again, the broader macro environment at least stabilizing, we're not economists. So we're not calling one way or the other, what direction it's going. But there's – people are looking for change. High school students need to figure out what the next step in their life is. And so there – the steady demand is there. The inquiry flow is there. Thank you. So on the interest that you – that Jerome was talking about, how does that compare to last year? And is that higher in any particular segment versus the other? Well, I mean, most of our – if you think about the way we drive lead generation, most of the lead generation for the high school market is driven by presentations done by the high school reps. So they aren't media-driven. Media-driven leads in the high school is a very small population of where they are and frankly, they tend to be students who are in class on their iPhones during the middle of a presentation that will click on our website, et cetera, along those lines. And so one of the things I said around that piece of lead generation was that our presentations and therefore, the leads associated with them are up nicely. We don't usually give out numbers for lead generation, but they're up nicely. And then also on the adult side, where it's primarily driven by media leads – we're seeing them go exactly the way we model them to get the outcome we're looking for. I say outcome in the adult market because as we've said before and what we said last year is, we don't think the adult market will be an increase on a same-store basis. It just won't be that 20% decline that Troy was talking about, and that's coming true. I think the difference between the third and fourth quarter of last year and the first quarter of this year are two of the other factors we talked about in the adult population, which was a conversion rate of those leads. So people going through the process of understanding, what's the commitment they make to us, what is the cost of the commitment, can we get them a job during school. And so we're seeing some improvement along those lines. And then the show rate, the number of people who trying to contract go through the financial aid process and then come to school on the first day. We're seeing some healthy improvement on our show rates as well from the adult population. And those are the signs that we're talking about of improvement of the behavior of those in that 20 to 25 age category. Got it. That's very helpful. Can you talk and I'll give any color on the cadence for second quarter, the March quarter, the seasonality in terms of – should we expect a similar sort of performance on starts? I mean, outside of the Concorde addition a much bigger addition? We expect some building as we get through the year. Again, the back half is really where you'll see a notable difference. And I'm speaking of the UTI business there. Again, Concorde with one month in the numbers is not going to be meaningful, comparison quarter-over-quarter. You'll see over probably roughly 2,000, it's not a little bit more for Concorde and then we should see some modest growth versus the flattish that we were for UTI in Q2. Got it. Got it. And then just lastly on the military, it seemed weak in the first quarter. Any sort of color there? It's the timing of the investment there. That channel is – again, it's more of a ground game like the high school channel. The difference is, typically, they're experienced military recruiters or who we hire as our recruiters. They have base access already, and they know where – who to talk to and where to go very quickly. It's just a matter of training them on our offerings. The high school ramp process is a little bit different. There's a lot more relationship building that occurs, especially if you hire somebody who's not been a recruiter in the space before. So really just – I think it's just a timing aspect predominantly relative to when we made the investment in those resources and then ramping up. We should see some improvement there. And as I mentioned earlier, there's just tends to be a little more volatility in that channel. It's just going to ebb and flow a little bit. It's roughly half of the people that we define that based upon their funding source, not necessarily that they're a direct transition out of the military. So somebody could be really an adult job changer who's been out of the military for a few years, they just have G.I. Bill benefits that they're leveraging for their education. So their dynamics is going to be more like the adult dynamics as far as their decision-making, but they have funding available to them, which makes it an easier decision for them versus the other half being a direct transition at the military. And again, that's more of an ebb and flow. It can be a little bit more of an elongated timeline. They're making plans ahead of their transition out of the military. There's other dynamics that come into play there. This concludes our question-and-answer session. I would like to turn the conference back over to Jerome Grant for any closing remarks. Thank you, Operator, and thank you, everyone, for joining us today. We look forward to speaking with you all in about three months and answering any questions you have between now and then. So thanks a lot for joining us, and have a great evening.

EarningCall_383

Good morning. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hamilton Lane Third Fiscal Quarter and Fiscal Year 2023 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to John Oh, Investor Relations Manager. Mr. Oh, you may begin. Thank you, Brent. Good morning, and welcome to the Hamilton Lane Q3 fiscal 2023 Earnings Call. Today, I will be joined by Mario Giannini, CEO; Erik Hirsch, Vice Chairman; and Atul Varma, CFO. Before we discuss the quarter's results, we want to remind you that we will be making forward-looking statements based on our current expectations for the business. These statements are subject to risks and uncertainties that may cause the actual results to differ materially. For a discussion of these risks, please review the risk factors included in the Hamilton Lane fiscal 2022 10-K and subsequent reports we file with the SEC. We will also be referring to non-GAAP measures that we view as important in assessing the performance of our business. Reconciliation of those non-GAAP measures to GAAP can be found in the earnings presentation materials made available on the Shareholders section of the Hamilton Lane website. Our detailed financial results will be made available when our 10-Q is filed. Please note that nothing on this call represents an offer to sell or a solicitation to purchase interest in any of Hamilton Lane's products. A portion of our presentation will mention an offering of new share classes of our private assets fund that is subject -- that is the subject of a registration statement filed with the Securities and Exchange Commission. The registration statement is not yet effective. We may not sell these securities until the registration statement is effective. This presentation is not an offer to sell or a solicitation of an offer to buy these securities in any jurisdiction where the offer for sale is not permitted. Beginning with the financial highlights, year-to-date, our management and advisory fee revenue grew by 20%, while our fee-related earnings grew by 11% versus the prior year. This translated into year-to-date GAAP EPS of $2.19 based on $78 million of GAAP net income and non-GAAP EPS of $2.38 based on $128 million of adjusted net income. We have also declared a dividend of $0.40 per share this quarter, which keeps us on track with a 14% increase over last fiscal year, equating to the targeted $1.60 per share for fiscal year 2023. Thanks, John, and good morning, everyone. Despite what continues to be a challenging market environment, we have posted another strong quarter of earnings and growth. We are executing well across the entirety of the business, and I remain proud of the effort put forth by the firm. Hamilton Lane continues to grow as evidenced by new office openings, 21 with new offices in Milan, Stockholm and with additional openings to come. Headcount expansion, nearly 600 employees and growing new product launches, our retail debt offering, HL scope as a recent example, and additional strategic investments and partnerships with leading technology platforms. Most recently, figure securitized [indiscernible] be net to assume that 2022 was a muted year for private market activity given the macro picture that overshadowed the year. The reality at Hamilton Lane is that we're as busy as we've ever been, particularly on the transaction side. Deal flow remained robust across the platform with secondary's direct equity and direct credit experiencing record years. We see this as a reflection of our scale, global presence and market reputation as a partner of choice. Taking a closer look at the data, the number of new primary funds coming into market in 2022 was down versus 2021. However, 2021 was a true outlier on fund volume. 2022 relative to 2020 was basically flat. Much of the decrease in 2022 was led by venturing growth equity strategies. Since 2015 and on a rolling three-year time frame, the capital collectively raised in buyout venture and growth has grown by nearly 13% on a compounded basis versus credit of less than 5% and real assets essentially down slightly. Buyout continues to represent the deepest segment of private markets with the capital raise in that strategy at least 3x larger than any other segment in private markets. Geographically, North America management continues to grow slightly faster relative to Europe and Asia, although all are continuing to grow. For Hamilton Lane, all three transactional areas, secondaries, direct equity and direct credit with this record deal flow. Each strategy saw more than a 15% increase in deal flow in 2022. Why is that? In a year where fundraising was challenged, [indiscernible] look to their most trusted partners for capital certainty to ensure the deals got done, particularly as prices for assets became increasingly more attractive. As we look forward to 2023, we believe continued volatility and uncertainty will create increasingly interesting investment opportunities. The data shows that private market performance tends to be at its greatest during level -- during periods of more volatile and negative public market returns. During the technology correction in 1992, 2000 and net again during the global financial crisis, have markets outperformed markets during those downturns and then throughout the result of recovery. While we don't present that, that will transpire in 2023, given our 30-year history in this asset class, we remain optimistic. Let me end this section with something we view as very important, both internally and externally. Earlier, I touched upon all the activity that transpired for our organization throughout 2022, and none of it would be accomplished without the tireless efforts of my colleagues. It is the people in our culture that sets us apart, and with that, I'm proud to share with you that Hamilton Lane has once again made a Best Place to Work in money management by pensions and investments. This is our 11th consecutive year winning this award, which we have won every year since the award was created. We are only one of five firms to accomplish this and the only alternative manager. To speak to the caliber of our employee base, we remain committed to fostering a strong culture of excellence and also striving to do the right thing for our clients and partners. Thank you, Mario, and good morning, everyone. I'll start with some results for the quarter. Our total asset footprint, which we define as the sum of our AUM, assets under management, and AUA, assets under advisement, stood at approximately $832 billion and represents a 2% decrease to our footprint year-over-year. AUM growth year-over-year, which was over $9 billion or 10%, came from both our specialized funds and customized separate accounts. AUA was down $29 billion or 4% year-over-year. As a reminder, AUA can fluctuate for a variety of reasons, but the revenue associated with AUA does not necessarily move in lockstep with those changes. This was true for this period, whereby despite a reduction in AUA, revenue actually increased. Moving on to our fee earning AUM. At quarter end, total fee earning AUM stood at $54.9 billion and grew $8.8 billion or 19% relative to the prior year, stemming from positive fund flows across both our specialized funds and our customized separate accounts. Taken separately, $4.7 billion of net earning AUM came from our customized separate accounts and over the same time period, $4.1 billion came from our specialized funds. Our blended fee rate across both customized separate account and specialized funds has recently been increasing over the past few quarters. This stems from the continuing shift in the mix of our fee-earning AUM towards higher fee rate specialized funds, most notably our Evergreen products. Moving to customized separate accounts flows. The earning AUM from our customized separate accounts stood at $33.1 billion, growing 17% over the past 12 months. We continue to see growth coming across type, size and geographic location of the clients. Over the last 12 months, more than 80% of the gross inflows into customized separate accounts came from our existing client base, which continues to be a steady source of growth for our separate account business. But again, despite a very large installed client base, we are continuing to drive 20% of new inflows from new relationships, something of which we are very proud. As for our specialized funds, growth here continues to be strong. Fee earning AUM from our specialized funds stood at $21.8 billion at quarter end. Over the past 12 months, we achieved positive net inflows of $4.1 billion, representing growth of 23% relative to the prior year period. This growth stemmed from additional closes for funds currently in market, robust investment activity and continued growth of our Evergreen platform. Let's now move to a few updates on fund closings, and then I'll wrap this section up and touch on our Evergreen platform. I'll start with our direct equity platform. During the quarter, we held the final close for our equity opportunities Fund V and raised over $2 billion of LP commitments. This marks the largest direct equity fund we've ever raised and represents over a 20% increase in fund size relative to the prior fund. Additionally, we recently announced that we've launched a digital token thether fund in partnership with securitized that allows individual investors access to equity opportunities V. This is part of our continued push into the retail space, affording investor's easy and efficient access with low investment minimums through the use of digital security technology. We are appreciative of all the support from our LPs, both new and existing with this fundraise and are excited about the investment opportunities we see ahead of us. Next up is our Impact Fund II. We continue to have success in building this new franchise and to date, have closed on nearly $250 million. At this size, we've now raised more than 250% of the amount of capital from our inaugural Impact Fund I, and we will continue raising capital into the second quarter of 2023. On the secondary side, fundraising for Secondary Fund VI continues to progress well. During the quarter, we held the third close for Secondary Fund VI at over $570 million, which now takes the total capital raise for the fund to over $1.6 billion. This close generated over $2 million in retro fees for the quarter. The fundraising pipeline is strong and deal flow is increasingly interesting. Secondary Fund VI will be in market into the fourth quarter of calendar 2023. Lastly, we continue to have success raising capital and other specialized funds that include white label programs, investor specific and regionally focused funds. Our quarterly results of specialized fund inflows include capital we are raising through these channels. I will wrap up now with a quick update on our retail Evergreen platform. As we've commented in prior calls, public market volatility and macroeconomic uncertainty has had some impact to flows for these products. That said, we remain encouraged with the results we continue to see each month. Throughout calendar '22, we witnessed 11 months of positive net flows, averaging over $70 million per month. In addition, as we discussed on our last call, we now have a senior credit offering, the Hamilton Lane Scope Fund, to add to our Evergreen suite of products. We seeded the fund initially with balance sheet capital and are now 4 months into raising external capital. We continue to seek out additional distribution channels here, and while still early days, we are pleased with the success so far. Overall, the aggregate AUM across the entire suite of Evergreen products now stands at over $3.2 billion. Thank you, Erik, and good morning, everyone. Year-to-date, we achieved strong growth in our business with management and advisory fees up 20% for the prior year period. Our specialized funds revenue increased by $36.2 million or 34% compared to the prior year. This was driven primarily by a $1.1 billion increase in fee earnings AUM in our Evergreen platform, over $1.6 billion raised through December at Secondary Fund and over $2 billion raise in total from limited partners [indiscernible] equity fund. [indiscernible] fees for the year were approximately $2.4 million, primarily from our direct equity fund versus minimal amount in the prior year period. As a reminder, investors that come into later closes during the fund raise, a retroactive fee of getting that funds [indiscernible]. We expect to generate additional revenue fees as we hold subsequent closes for Secondary Fund VI. Moving on to customized separate accounts. Revenue increased $11.9 million or 16% over the prior year period due to [indiscernible] from existing clients, the addition of several accounts and continued investment activity. Revenue from our advisory reporting and other offerings decreased $1.5 million compared to the prior year period due primarily due to a decrease in revenue from our distribution management business, partially offset by increases in fund reimbursement and reporting revenue. The final component of our revenue is incentive fees. Incentive fees year-to-date totaled $139.8 million. As we have detailed on prior calls, the increase in total incentive fees year-to-date coming the cash-option that a number for [indiscernible] in during the fiscal year. We view these results as refining and not indicative of the normalized [indiscernible] relative to our revenue. Let me now turn to some additional detail on our unrealized balance. The balance was down 11% from the prior year period, largely due to market valuations and having recognized $156.1 million of incentive fee during the last 12 months. The annualized carry balance outstanding was just under $1 billion. Moving to expenses. Total expenses increased $81.5 million compared with the prior year period. Total compensation and benefits increased by $64.2 million, driven primarily by compensation associated with the increase in incentive fees as well as continued headcount growth in the period. G&A expenses for the period increased $17.3 million, driven primarily by revenue-related expenses, such as third-party commissions and fund expenses as well as travel and contract expenses, which were very limited during COVID. Our fee-related earnings were up 11% on a year-to-date basis relative to the prior year period as a result of the management fee and AUM growth earlier. I'll wrap up here with some commentary on our balance sheet. Our largest assets continue to be our investments alongside our clients in our customized separate accounts and specialized funds. Over the long term, we view these investments as an important component for continued growth, and we'll continue to invest our balance sheet capital alongside our clients. Additionally, during the quarter, we made an adjustment to the carrying value of one of our strategic balance sheet investments, [indiscernible] investments. The adjustment is reflective of current market comp -- public market comps and broader macroeconomic environment. This, along with the market of one of our strategic technology investment, resulted in a $28 million impact on our income statement for the quarter. Lastly, in regard to liabilities, we continue to be [indiscernible]. I was hoping you could maybe comment a little bit on the fundraising backdrop. I think you were alluding to some broader challenges in the marketplace that we saw last year. But just given the turn of the calendar year here now about 6 weeks in to '23, just curious if you're seeing any sort of pickup for across the industry? Or do you think that may be more of a second half event for '23? And maybe you could also just comment around the different asset classes and channels as well just in terms of where you're seeing some relative strength versus softness. Sure. Michael, it's Mario. I would say that fundraising environment, as we said, continues to be challenging, but it's probably a little better than what you saw at the end of last year simply because, as you know, a lot of investors have calendar year allocation. So as the new calendar year start, they had a pickup in allocations and then begin investing more. But I also have to say that the public markets have been better, so the denominator effect that everyone talks about has either stabilized, or as I said, gotten a little better. And I think the other thing, as we've commented on before, what you are seeing and continue to see is that investors are not moving away from the private markets generally. You see almost no investors reducing allocation. You see many increasing. So I'm talking about increasing the ranges going forward. So while a challenging environment, I would say, a little better than late last year and continues to be positive for the private markets. n terms of specific areas, you've seen this in the press, there's still a great deal of interest in all of the different sub asset classes, whether it's credit or buyouts. I think venture continues to be a little challenging in terms of people not quite knowing where they want to be in that space right now and how marks are going to work in future fundraising environment. And then in terms of channels, I don't see any huge change in what's happened over the last couple of years. The institutional channels still want to do private markets, and we continue, as I said before, to maintain or increase allocations there. And even in the retail space, people continue to want to explore ways to get increased access to the private. The flows have slowed a little bit as you've seen with everyone in the retail space, but they're not leaving. They still continue to figure out how they want the allocation and what types of exposures that they want. Great. And just as a follow-up question. I think you mentioned 20% contribution to SMA capital coming from new customers. So I was hoping you could talk a little bit about the environment for new customers. What's the sort of profile of customers that you're finding out there? Any sort of color from geography or channel? And are these folks that are newer to the industry or do they have different providers in the past and they're switching? And if you could just remind us of the re-up rates on the existing customer set. Sure, Mike. It's Erik. I'll take that. I think the 80-20 ratio has been remarkably consistent for the past several years, which, as I noted, I think speaks to the power of the platform. The fact that our installed base is as big as it is to find 20% net new flows from new entities, I think, just continues to be a testament to both the platform and the team. I think the other nice theme here is, it's really diversified. It's not a central theme or a central idea. So we're getting growth across geographies. It's one of the reasons why we're continuing to open up new offices. We're getting it across different types of entities. So there's nothing I would point out there as being particularly noteworthy. Yes, certainly, some of that 20% is coming from people that are new to the asset class, and about 20% is coming from people switching service providers, and some of that 20% is people just getting to a point in the size and scale of their program that they feel like they need outside help and resources, and we're sort of fulfilling that. Re-up breaks across the existing customer base just continues to be very strong. So that has not altered at all despite the market environment. So I'll go yin and yang here. So on the 80% of the SMA contributions from your existing clients, I would love to dig a bit more into that customer base. So maybe how are you approaching growth of the 80%? And what are you seeing in terms of re-ups into existing products versus, say, the extension of investments into new SMAs and other products by this customer base? And ultimately, how much more money are these customers giving you over time with kind of each re-up and as they extend into other products? Sure, Ken. Thanks. It's Erik. I think a good way to think about this is that there's a couple of different growth channels there. So customer -- and as we've noted before, most people are beginning their separate account relationship small. No one is coming out of the gate and saying, I want to have 10% of my total asset base in a separate account or in this private market environment and then giving all of us that capital at once. So they're beginning to think about this as tranching. So they start off with an initial tranche and then they grow that tranche over time. So that growth is multifaceted. Growth path number one is that the tranche goes from being $1 to $2 because they're continuing to lean into the asset class or continuing to move towards their target rate. Their overall plan asset base could be growing. So that would be the simplest explanation, which is one becomes two. Another growth channel is that separate account a for that customer is focused on the buyout market, and then they decide that they want to add another separate account that's focused on the credit market. So that would be one becomes two by expanding the number of separate account relationships that, that customer has with us. Path number three is that they start off with a separate account and they're doing all of the non-transactional components of the business in that separate account, and then they decide to begin to add transactional exposure. And they do that by moving dollars into our specialized fund business. So there's lots of different ways that, that client, that relationship can expand, and we're experiencing all of those. So conceptually, it makes perfect sense. The explanation is very helpful. Any numbers you can put around it to help flesh out how each of those different, I guess, approaches are actually growing the business? We -- I mean they're all contributing to that. And I think what you see is that it varies by client, and it's not so much a type issue, it's a where are they from a maturity standpoint. So for that customer that is in the first, say, two or three years of their private market program, you're seeing a lot more of their growth coming from that separate account just growing because they're so under allocated to the asset class. But for them, they need to keep pushing more money because they're trying to reach a target. For the client who's at allocation and is looking to maintain, obviously, they have exits coming in realization. So they have to have some level of re-up just to maintain. But for them, they're becoming more opportunistic around how they're sort of thinking about dollars in this environment. So they might decide that today, secondaries look way more attractive to them relative to other opportunities. And so for them, you might be seeing growth because they're deciding to lean into a transactional environment that they have not done before. So I would say, it's really where are they in the maturity, what's happening in the environment, but all of those levers are continuing to get pulled today. Yes. I wonder, Atul, you were going a little fast there at the end on the investment write-down, and can you go through that again? It was -- what you wrote down and what you wrote up and then the net impact on your operating ANI somewhere around $0.40, if I have that right? Chris, let me take that. Yes. So the net write-down for the quarter is about $28 million that was saving [indiscernible] net operating line, and that includes 2 things or a couple of -- few things. So one is things that a write-down we mentioned, unrealized loss taken on the strategic relationship here at [indiscernible], that's one. But that's partially offset by some of the gains we have on some of our strategic technology investments. And so the net of that, it's the number that you will see going through a P&L on the net operating income line -- nonoperating [indiscernible]. I was just hoping you might be able to expand a bit on your outlook for expenses and FRE margin. I think in the past you've mentioned, you probably would expect limited margin expansion. Near term, so maybe you could just talk about some of the key areas that you're investing into. And I think you also mentioned that you're going to be looking to open some other offices around the world. So just curious if you can elaborate a little bit on that strategy? And any help to help quantify what sort of impact you're seeing on the business side from these office openings? Yes. Mike, it's Erik. I'll take that. So I think what you've seen is, we had -- the margins have really normalized kind of post that sort of COVID bump that we and others were experiencing. So you're back in a much more normal operating environment, travel, events. Compensation, I think, is remaining remarkably consistent. That ratio between kind of comp management fee has stayed very steady. Also if you look at comp, I mean management is doing a really good job here of -- despite, again, a challenging hiring market that you've heard from lots of other people of maintaining a good comp ratio. Comp is essentially moving directly in line with headcount, which is moving very much in line with overall revenue to the business. So I think all of that is sort of showing you good expense discipline, good continued investment in the business. I don't think you're hearing us or anyone say that in today's environment that you'd expect to see big margin expansion. Things are expensive, whether that's buying a plane ticket, hosting an event, having a meal, everything is expensive. And so I think the fact that we're maintaining margins where they are is again, a real focus on doing just that. On the office openings, this has been just part of our geographic expansion plan, and we want to be close to customers. We want to be close to prospects. We want to be close to transactions. And so today, that footprint continues to be well developed. We see there's more regions and more parts of the globe where we see interesting opportunities. We want to be there on the ground. I think we're very, very mindful of office openings coming with business. So I think when you look at our history, we have locked the [indiscernible] office openings over the years and that hasn't resulted in us sort of saying to you, well, we had to invest in that, and therefore, that was a big set back. Usually, we find that we're in that region prior to actually opening up the office, getting business in order to justify that physical presence there, and so I would expect that to continue in the future.

EarningCall_384

Good day, ladies and gentlemen. Thank you for standing by and welcome to the trivago Q4 Earnings Call 2022. At this time, all lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] I must advise you the call is being recorded today, Wednesday, the 8th of February 2023. We are pleased to be joined on the call today by Axel Hefer, trivago’s CEO and Managing Director; and Matthias Tillmann, trivago’s CFO and Managing Director. The following discussion including responses to your questions reflects management’s views as of today Wednesday, February 8, 2023, only. trivago does not undertake any obligation to update or revise this information. As always, some of the statements made on today’s call are forward-looking, typically preceded by words such as we expect, we believe, we anticipate, or similar statements. Please refer to the Q4 2022 operating and financial review and the company’s other filings with the SEC for information about factors which could cause trivago’s actual results to differ materially from these forward-looking statements. You will find reconciliations of non-GAAP measures to the most comparable GAAP measures discussed today in trivago’s operating and financial review, which is posted on the company’s IR website at ir.trivago.com. You are encouraged to periodically visit trivago’s Investor Relations site for important content. Finally, unless otherwise stated, all comparisons on this call will be against results for the comparable period of 2021. Thank you, everyone, for joining us for our Q4 earnings call today. 2022 was a very strong year for trivago. We saw leisure travel bouncing back as COVID restrictions were lifted around the globe. The pent-up demand was fueled by consumer savings during the pandemic and a strong desire to travel. As prices for accommodation continue to rise, consumers need to compare prices more to maximize their savings. We are therefore confident that the role of metasearch will become even more relevant this year. Moving forward, we are further developing and strengthening our core product and unique brand positioning. We're leveraging growth opportunities by offering travelers more direct access to hotels in addition to our traditional online travel agency offering. In Q4, we've run a new product design in five test markets, allowing us to generate valuable learnings in how to expose travelers to more prices and qualify their intent further before passing them on to our advertisers. In addition, we have established the building blocks of our direct hotel strategy, and we will build up those in 2023. And now more than 50% of direct hotel rate coverage, we are getting close to the next phase of our strategy, launching consumer-facing features around direct hotel access. Thank you, Axel and good morning everyone. As Axel said, we are very pleased with our Q4 and full year2022 financial results. Last year, our revenue increased by 48% year-over-year to €535 million, while our marketing efficiency, measured as return on advertising spend, improved eight percentage points to 164.4%. Due to the impairment charges recorded in the second and third quarters of 2022 totaling €184.6 million, we had a net loss of €127.2 million. The combination of greater marketing efficiency and continued cost discipline led to an increase in adjusted EBITDA, which excludes the effect of the impairment charge of 210% year-over-year, bringing a full year record for the company of €107.5 million. This is an increase of more than 50% relative to our most profitable year before the pandemic in 2019. And for the first time, we achieved an adjusted EBITDA margin of over 20%. Now, looking at the fourth quarter, our referral revenue grew 21% year-on-year, driven by continued higher ADRs, which led to an increase in overall average booking value. Other revenue declined by €2 million year-on-year to €3.4 million as we stopped certain B2B products like white label solutions and display ads as we mentioned during the summer. Net income decreased year-on-year by €4.8 million to €10.4 million. The decrease was mainly driven by the non-recurrence of a €12 million COVID-19 subsidy that we had received from the German government in the fourth quarter of 2021 and recognized as other income. Excluding this one-time subsidy payment, our net income increased by €7.2 million. Adjusted EBITDA also increased by 15% year-on-year to €22.6 million. In the following, I will give a bit more color on the drivers of our referral revenue development relative to 2019 levels for our three regional segments in the fourth quarter. Starting with developed Europe, qualified referrals were at 72% of 2019 levels, roughly at the same level as in the third quarter. Revenue per qualified referral recovered to 102% of 2019 levels as ADRs continue to be above 2019 levels and bidding levels of our partners reflected the increase in traffic quality. In Americas, qualified referrals relative to 2019 levels decreased slightly sequentially from 59% in the third quarter to 56% in the fourth quarter, primarily driven by qualified referral declines in Latin America, resulting mainly from a large-scale market test in Brazil that led to a significant decline in qualified referrals in that country. However, on the flip side, the click-to-book conversion increased significantly in Brazil, which had a positive impact on our revenue per qualified referral. Similar to Europe, revenue per qualified referral in Americas also benefited from continued high ADRs relative to 2019 levels. In addition, positive ForEx exchange and country mix effect were similar to what we already observed in the third quarter, leading to an overall increase of revenue per qualified referrals in America of 33% relative to 2019. Lastly, our segment Rest of World continues to be impacted by the war in Ukraine and the fact that China was still mostly closed during the quarter. Consequently, our qualified referrals remain significantly below2019 levels at 47%. While we do not operate a Chinese platform, we believe that the opening of China will have a positive impact on many agent platforms for us as it will be possible again to travel to China and Chinese travelers will increase the demand for hotel rooms in the region which we expect will be positive for ADRs. We already observed a positive impact from increasing ADRs in the fourth quarter and revenue per qualified referral improved sequentially from 91% of 2019 levels in Q3 to 94% in Q4. Moving on to advertising expenses. As we entered our low season quarter, we pulled back on advertising expenses in the fourth quarter relative to the third quarter as we have always done historically. Advertising expenses were 55.4% of referral revenue in the fourth quarter compared to 63.1% in the same period in 2019 as we continue to be disciplined with our marketing ROI targets and improved our marketing efficiency. Consequently, our return on advertising spend improved 22 percentage points in the fourth quarter relative to 2019 levels. However, contrary to last year, we started to run some brand TV campaigns in selected markets at the end of the quarter in anticipation of higher travel demand going into the new year and we continue to expect to increase our brand marketing investments in 2023 relative to 2022. I will now discuss our operational expenses, excluding advertising expenses relative to last year. In the fourth quarter, our operational expenses, including share-based compensation, decreased by €2.9 million by 8.6% compared to the same period in 2021. The main drivers for the decrease were lower other marketing expenses, lower share-based compensation expenses, and a decrease in depreciation. Other marketing expenses decreased as a result of lower TV production costs and lower commission fees for acquiring traffic as we started to sunset our white label product. The decrease in expenses was partly offset by an increase in IT-related costs, mainly due to setup fees for the onboarding of independent hotels and an increase in cloud costs as we made progress with our migration from data center to the cloud. As we have mentioned before, we expect to reduce our operating expenses in 2023 relative to 2022 despite the inflationary pressure, mainly through the headcount reduction we have done in the second half of 2022. We expect our quarterly operational expenses, excluding advertising expenses and excluding share-based compensation going forward to be roughly in line with what we have reported for this quarter. The strong operational performance in 2022 led to a significant increase in our cash, cash equivalents, and short-term investment position to €293.9 million as of December 31st, 2022 compared to €256.4 million at the beginning of the year. The increase of €37.5 million was mainly driven by strong operational results, which more than offset financing activities resulting from the repurchase of shares and penalty payments from the litigation Australia. Our liquidity position is stronger than ever, and we continue to be debt-free. As we expect to continue to generate positive free cash flows, we will continue to look at different ways to return capital to our shareholders in the future. Now, moving on to trends in January. As expected, year-on-year referral revenue growth was strong in January at over 30% as a result of continued robust travel demand trends and favorable comps due to corporate-related travel restrictions in January 2021. As in prior years, monetization levels decreased sequentially in January relative to December. And overall, we were at similar monetization levels as last year in January. However, as ADRs continue to be strong and booking conversions improved, our revenue per qualified referral increased year-over-year in January, more than qualified referrals. Developed Europe, in particular, benefiting from easier comps in Q1. And consequently, we saw a healthy increase in both qualified referrals and revenue per qualified referrals in January. We started to invest opportunistically in brand marketing also beyond TV advertisement. For example, we were the main partner of the Handball World Cup in Sweden and Poland, which we believe had a positive impact on our branded traffic in the Nordic region as well as core European markets like Germany, France, or Spain. We will continue to invest in brand activities and expect to be able to increase our brand marketing expenses in the coming months. In Americas, qualified referrals continue to be negatively impacted by the large-scale market test in Brazil. In Latin America, qualified referrals were down low double-digits, which was partly offset by a single-digit qualified referral increase in North America. Revenue per qualified referrals increased around 20% year-on-year in the segment, decelerating from the 44% year-on-year increase in the fourth quarter as positive foreign exchange and country mix effect and/or monetization were lower compared to Q4. In Rest of World, we have a single-digit increase in qualified referrals in January year-over-year, while revenue per qualified referrals increased significantly, driven by strong increases in booking conversion, average booking values and positive country mix effect. Consequently, referral revenue increased around 60% year-on-year. While the near-term macro outlook is still uncertain, the underlying trends remain unchanged. Travel demand continues to be robust, while ADRs continue to be at elevated levels. While we continue to see some changes in consumer behavior like shorter length of stay, more interest in cheaper destinations, or more clicks on lower hotel offers, we do not believe these trends change the overall picture. We believe that metasearch is well-positioned in this environment as consumers shift their focus to cost savings, and we will focus on improving the user experience and make it even easier for travelers to find great deals on our platforms. In summary, we are very pleased with our financial results in 2022 and the progress we have made with key strategic initiatives. We believe that we are well positioned to increase our investments into brand marketing, thereby driving further branded traffic growth and to execute on key strategic projects like increasing the coverage of independent hotels, while still expecting our full year 2023 adjusted EBITDA to exceed our pre-COVID adjusted EBITDA in 2019. The first question today comes from the line of Tom White from D.A. Davidson. Please go ahead, your line is now open. Hey, this is Wyatt Swanson on for Tom. Thanks for taking our questions. My first one is you mentioned the opportunity you see in operating travelers direct access to the hotel in addition to the traditional online travel agency offering. Can you talk a bit about what level of incremental investment might be required to roll this out globally in all your markets? Or is it more about just leveraging and deepening the existing relationships that trivago already has with the properties listed on your platform? Sure. So, there are basically two ways to connect an additional hotels. One is where we do have an existing connectivity, where we pay basically for the infrastructure already and where we need to onboard the hotels to the platform. So, that does not come at additional technology costs. The other one is what Matthias was talking about, our partnership with UBIO, where we do have ramp-up costs, and we do expect the cost to stay in line with what we have spent in Q4. And that investment will allow us to get to 80% coverage by end of the year. Great. Thank you. And then my second one. In terms of the significant decreases in qualified referrals in Americas, can you provide a bit more detail on the full market test in Brazil? What exactly were the changes you tested? Is the test going into full production? And will this drag on Americas QRs going forward? Yes. So, basically, we have done something that we have not done that often in the past. We've taken five markets and one of those markets being Brazil and rolled out a very different flow -- user flow in those markets to get learnings from more long-term user behavior. And what you see there is basically we are exposing users to a lot more different rate options. And by doing that, we qualify the users further, which basically means that they are not clicking out as quickly. But when they click out that they are more ready to book. And that's what we're saying so that has a negative impact on QRs and a positive impact on RPQRs, which is what you see on the overall Americas numbers. And just to add to that, in terms of impact on qualified referrals, I mean, I gave a bit color on January, where we did have a similar impact. But going forward, we might change the design of the test, et cetera. So, there might be a few changes, and that could lead to a change in clicker distribution again. So, it's not clear at this point how this will impact qualified referrals going forward in those test markets. Thank you. The next question today comes from the line of Jeremy [Indiscernible] from UBS. Please go ahead, your line is now open. Hey, good morning guys. I have two questions. The first is what impact might we see from the European DMA gatekeeper rules coming into effect this year? Do you have any early indications of how this will impact Google Travel or how it might impact trivago? And the second is, is the consumer trade-down behavior widening out, I believe you called out Europe specifically at our conference in December and in the 3Q call? Thank you. Yes, on the DMA, it's a bit too early to tell, to be honest. We do expect first effects in 2024, and it will depend very, very much on the approach of the commission and also then the reaction by Google. And -- yes, so, we don't really have a good prediction of what exactly the solution will be. What is clear is that it will lead to a more favorable competitive environment for us. How much better, again, is impossible to predict. And then on your second question, I mean, first of all, ADRs remain strong with click prices on our platform in all segments being roughly 20% higher than in 2019 in the fourth quarter. But as we mentioned last quarter, we are seeing consumer trading down by reducing the length of stay. We have seen that in all segments. In the fourth quarter, length of stay was roughly 5% below 2019 levels, which is an improvement in Europe compared to the third quarter, where that drop was higher, while length of stay was roughly flat relative to2019 levels in Americas in Q3. So, they are we now saw in Q4 that the number also dropped slightly. We also see that the typical seasonal increase in click prices towards the end of the year was less pronounced in Europe last year compared to 2019. And in all regions, the click out share on our platform for four and five-star hotels decreased slightly year-over-year. So, I guess, while we expect ADRs to remain strong, we are seeing some offsetting effect presumably as consumers are becoming more price conscious. Thank you. The next question today comes from the line of Doug Anmuth from JPMorgan. Please go ahead, your line is now open. Great. Thanks for taking my question. This is [Indiscernible] on for Doug. I have two. So, the first one, I mean, you're able to drive strong improvement in margins over the years. And it seems further expansion in margins is possible to in your comments around OpEx. But with that said, could you share your thoughts on where margins could go from here in the near-term? And then is the 25% the right long-term target? And I have a follow-up. Yes, sure. Hi [Indiscernible]. So, we mentioned in the past that our long-term EBITDA margin goal is to reach at least 20%, and we did reach that in 2022. And our goal is to grow the business sustainably from our post-pandemic revenue baseline, focusing on high-quality and repeat traffic. And that is more important to us than hitting 2019 revenue levels. And consequently, we will be -- but we will continue to be disciplined with our marketing investments. However, if we do see opportunities to invest to accelerate our growth profitably at the expense of short-term contribution, we will do that even if it means that our margin would temporarily go down. For 2023, we do expect to increase our brand marketing investments. As with the benefit of hindsight, we believe we could have invested more last year, in particular during the peak summer period and also because our own auction was strong. Having said that, while we do plan to ramp up our investments, we do not expect to go back to 2019 margins level, which were below 10% EBITDA margin. Got it. Okay. And then, I guess, as a follow-up. In terms of ADR, you talked about growth there still being strong. So, are you seeing any signs of that slowing down? And then -- and I guess with that, how do you think about ADRs going from here? Do you think this level of ADR is [Indiscernible]? You were breaking a little bit, but I think I got most of your questions. So, the question is if ADRs can be sustained at these levels. Obviously, it's difficult to say, and I'm speculating. But at least looking at the underlying dynamics, why ADRs are up, I think that there are good reasons why they will stay at current or similar levels. In particular, last year, in summer and the peak season, we have seen that supply was tight in certain destinations, in particular, popular holiday destinations. And the reason for the increase in ADRs were driven by a cost increase, and we still continue to see that there's labor shortage, energy prices are still higher than they were a year ago. And these cost drivers, I mean, if you can or if hotels can they pass it on to the consumer. And I would expect that to be the case going forward as well. So, -- the then related question is, will that drive a change in consumer behavior? And again, I cannot predict the future. But given what we have seen last year and also what we are seeing now in January, we do not see that overall demand is coming down. We do see some signs that people try to mitigate the effect, as we called out, but it's not that overall demand levels are lower because of that, at least from what we can see in our numbers. Does that answer your question? Thank you. The next question today comes from the line of Ron Josey from Citigroup. Please go ahead, your line is now open. Hi, this is Mike [Indiscernible] on for Ron. Thanks for taking our question. You mentioned potential uplift from the reopening in China. Can you maybe talk about any early benefits you might be seeing now that COVID restrictions have been lifted there? And could you maybe frame the size of the potential impact there as the recovery accelerates? Thank you. So, yes, absolutely. We don't operate a platform in China. So, the benefits that we are seeing and expecting are twofold. One is obviously more travel into China and particularly from Asia. And the other one is higher ADRs in Asia and in big western cities from outbound Chinese travelers. The latter we have not seen yet. Bute have seen a significant increase in searches and also bookings into China. The overall impact is difficult to quantify. We have still some travel restrictions in place in some markets into China. So, we do expect that trend to accelerate. But it is too early to tell and to quantify the exact effect for this year. Thank you. The next question today comes from the line of Kevin Kopelman from Cowen. Please go ahead, your line is now open. Great. Thanks so much. So, a couple of questions. First one, on the January metrics you gave, can you give us a sense of what those look like relative to 2019 for revenue specifically? Yes, I can give you a bit more color. However, I deliberately not comment on 2019 levels as it's been four years now, and we have rebased our revenue and trading at a different gross margin profile than before the pandemic. So, we think the year-over-year comparison is more meaningful, and that is how we look at our business now. But let me be a bit more specific with what we see year-over-year. As I said, demand continues to be robust. Qualified referrals increased by more than 10% year-on-year in Europe and around 5% in Rest of World, while qualified referrals decreased slightly year-on-year in Americas due to the decline in Latin America, which more than offset the increase in North America. Revenue per qualified referrals in Europe and Americas were up around 20% and slightly more in Europe than Americas and around 50% in Rest of World. And then one other thing to call out. I mean I mentioned that referral revenue was up more than 30% year-on-year globally. You should keep in mind that January was lower relative to February and March as a percentage of 2019 levels in 2021. So, everything else being equal, year-over-year revenue numbers for the quarter will be lower than the January figure just due to this comp effect. I hope this gives you a bit more color and helps to model the quarter for you. Yes, for sure. Thanks for that. And then just a different question. Could you talk about how bid intensity has trended on the platform, on average over kind of Q4, Q1 quarter-to-date? Thanks. Yes, sure. So, Q4 was very strong. I mean, so we've seen a high level of competition both on our platform, but also on other performance marketing platforms and channels that we engage in. And we've seen a seasonal decline in bid intensity, which is quite common from December into January. So, the current bidding -- current bid intensity is lower in January compared to what we've seen in Q4. Thank you. [Operator Instructions] The next question today comes from the line of Brian Fitzgerald from Wells Fargo. Please go ahead, your line is now open. Hi, this is [Indiscernible] for Brian. Thanks for taking our question. On your platform, we have a good mix of hotels and alternative accommodations. So, my question is, have you seen any divergence in the trends for traditional versus alternative so far in Q4 and in January this year? Sure. Yes. So, the click-out share of alternative accommodation had increased during the pandemic on our platform. But we called out already last quarter, and I think even before that it trended back to our mix that we had pre-pandemic. So, right now, it's roughly flat with 2019 levels, as city trip approach pre-pandemic levels as well in our travel type mix. And with travel recovering and in particular, city trips and international travel coming back, we have seen a reversal of the trend towards hotel, and that is not unexpected, to be honest. So, I think alternative accommodation has a meaningful share in our traffic mix and will stay relevant for our users going forward. However, key value proposition is the hotel price comparison and has a significantly higher share than alternative accommodation for us. There are no additional questions waiting at this time, so I'd like to pass the conference back over to Axel Hefer for any closing remarks. Please go ahead. Thank you for taking the time to participate in today's earnings call. We appreciate your continued interest. We are very proud of the operational results achieved this year and we are very excited by the year to come. Our continuous focus on price, combined with the positive start of our Hotel Direct strategy, is giving us confidence that we can better serve our users and reach more travelers in the years to come. Thank you very much and see you next quarter.

EarningCall_385

Hello everyone, and welcome to the Cineplex Inc. Fourth Quarter 2022 Earnings Conference Call. My name, Daisy, and I'll be your moderator for today. [Operator Instructions] I would now like to hand over to your host Mahsa Rejali, Executive Director, Corporate Development and Investor Relations to begin. So Mahsa, please go ahead. Good morning, and welcome. With me today is Ellis Jacob, our President and Chief Executive Officer; and Gord Nelson, our Chief Financial Officer. Before I turn over the call to Ellis, let me remind you that certain statements being made are forward-looking and subject to various risks and uncertainties. Such forward-looking statements are based on management's beliefs and assumptions regarding the information currently available. Actual results could differ materially from those expressed in the forward-looking statements. Factors that could results -- cause results to vary include, among other things, the negative impact of the COVID-19 pandemic, adverse factors generally encountered in the film exhibition industry, risks associated with other national and world events, discovery of undisclosed material liabilities and general economic conditions. Following today's remarks, we will close the call with our customary question-and-answer period. Thank you, Mahsa. Good morning, and welcome to our Q4 and year end 2022 conference call. We are glad you could join us today. Before we review the fourth quarter results, I'd like to address two important topics that I know are top-of-mind with our investors. Namely, the industry box office recovery and Cineplex strategies for continuing growth in the current economic environment. In assessing the future state of box office recovery, there are two primary drivers we are monitoring closely. First is consumer demand. And the second is content supply. We have been pleased to see demand for movie going increased as our theaters reopen. Looking back over the last year there are many examples that stand out, which demonstrate the resilience of movie-going. In May of last year Doctor Strange in the Multiverse of Madness delivered 75% more domestic box office revenue than the original release in 2016. Also in May, we saw Top Gun Maverick become the fifth highest domestic grossing film of all time after a remarkable 30-week run. Last July, Minions: The Rise of Gru set a record for largest fourth of July weekend in box office history and a few months later, Black Panther: Wakanda Forever broke the record for the highest-grossing November weekend of all time. And while negatively impacted by winter storms in North America during its opening weekend in December, Avatar: The Way of Water has since demonstrated its sting power. Avatar is now the fourth highest-grossing film of all-time crossing the $2 billion mark in global box office and still going strong and attracting audiences, as we speak. These record-breaking results and others like them over the past year demonstrate a point you hear me say on each and every one of these calls when there is compelling content consumer enthusiasm for theatrical movie-going is as strong as ever. Even more promising is that we continue to see significant growth in attendance for premium offerings even in the midst of recessionary concerns. This quarter, we delivered an all-time quarterly BPP of $13.06, an increase of 6.3% over the prior year. And a CPP of $8.93, an increase of 19.2% compared to Q4 2021. These results are further validation then when guests enter our theaters they treat themselves, the full escape our venues offer. Investments and premium experiences in our theaters continue to deliver returns as an impressive 50% of box office revenue in the fourth quarter was derived from premium formats. Not only is this a record for us, but it's also the highest percentage for any exhibitor North America, Avatar: The Way of Water is breaking records when it comes to premium experiences accounting for Cineplex's highest 4DX, Screen X and VIP Cinemas viewings in our history. Having said that, like our exhibition peers around the world, our business continues to be impacted by COVID-19-related production delays. Content supply, remains a near-term industry challenge. For example, both Aquaman and the Lost Kingdom and Shazam! Fury of the Gods were originally slated for the fourth quarter of 2022 but were moved into 2023. Such shifts and delays resulted in the overall volume of major releases in fourth quarter 2022, recovering to approximately 70% of the fourth quarter of 2019. These shifts also led to a fewer number of wide release titled in this quarter as compared to the fourth quarter of 2021, leading to lower year-over-year attendance. As we move forward however, we have full confidence in the ongoing recovery of content supply as COVID-19-related production delays subside. Studios are clearly recognizing the promotional and financial value of a theatrical release window. We are still the engine that drives the train and we are encouraged by recent large commitments from nontraditional studios. These commitments further validates the importance of the cinematic experience and the royalty theatrical exhibition plays in elevating content to its full financial potential. The remarkable performance of the horror film Smile proves exactly this point. Smile was originally slated for direct streaming, but instead was given an exclusive theatrical release. After nine weeks on the big screen, the film generated over $200 million at the global box office. As I referenced on our Q3 earnings call, last October we reached an agreement with Netflix for the theatrical release of Glass Onion: A Knives Out Mystery. The film performed extremely well and generated an estimated $15 million at domestic box office over a seven day period and fewer than 700 theaters, including ours. And just last week, Amazon announced the exclusive theatrical window for the release of the Ben Affleck and Matt Damon, Nike film, Air. These examples and others like them continue to highlight the power of theatrical exhibition in elevating the overall success of movie content. In addition to nontraditional studios, we're also broadening our content opportunities by expanding our distribution business, Cineplex Pictures. Last month, we announced a Canadian theatrical distribution agreement with Lionsgate for its 2023 film slate, which will bring 11 titles to the big screen and create additional distribution fees for Cineplex Pictures. We are excited to bring these titles to Canadian audiences, which include exciting titles like John Wick: Chapter 4, Are You There God? It's Me, Margaret, and Hunger Games: The Ballad of Songbirds and Snakes. This is an addition to the ongoing successful efforts we are seeing with alternative programming through Cineplex Events, as well as the growing importance of international film product to our business. Without a doubt Cineplex is an industry-leader in international cinema programing consistently over-indexing the North American market share, particularly with Bollywood product. Pathaan, the recent Bollywood feature in January of this year, generated the highest-ever opening weekend for a Bollywood title in North America and even outperformed Hollywood Avatar: The Way of Water then in it's six-week. Cineplex again took the number one position in North America with 27% of the market-share for this film and we continue to grow more than 3x the domestic average in our circuit. We also saw great success with the film, The Wandering Earth 2, which is now Cineplex's number one opening for a Mandarin language films. And of course, we were pleased to see RRR make Bollywood history as the first Indian feature film to be nominated for an Oscar outside of the international film category. The bottom line is that we are focused on expanding our content offerings to appeal to wider audiences and drive incremental attendance. While this doesn't fully close the content gap resulting from production delays, it gets us closer. This is particularly evident at Cineplex outperformed the fourth quarter North American box office recovery compared to 2019 levels by a notable 533 basis points. These results also benefited from our team's efforts to drive attendance through strategic marketing and loyalty initiatives. We will continue tapping into our rich customer data for personalized content engagement and targeted Cineplex offers. This allows us to introduce moviegoers to alternative content, up-selling campaigns to our premium experiences and do everything we can to ensure our guests always have a memorable escape when they're in our venues. Speaking of venues, this quarter we celebrated the grand opening of our first Cineplex Junxion location. This is a new concept for us that, features multiple entertainment options, including movies, gaming, live events and expanded food and beverage offerings all under one roof. Our first location Cineplex Junxion Kildonan opened to much fanfare in December in Winnipeg, Manitoba sorry, replacing an older theater. Junxion provides additional revenue per square foot by driving incremental attendance and spend from the expanded offerings. While it is still early days, Cineplex Junxion Kildonan is performing extremely well with metrics, exceeding our internal projections, which is welcome news as we work towards opening our second location in mid-2023. Our first Junxion location is a great example of asset optimization, a key focus for us in the current exhibition landscape. In addition to novel concepts like Junxion, we are also exploring other ways to optimize the results from exhibition footprint. We continue to advance our data analytics capabilities to increase operating efficiencies improved film bookings and enhance our marketing efforts. Overall, we remain disciplined and focused on maximizing the use of our square footage and resources driving attendance and effectively managing costs. Turning your attention to our fourth quarter results, despite the 10.1% year-over-year attendance decline, our revenue grew 16.7% to $350 million and adjusted EBITDA increased 54.5% to $31.2 million. Looking at our segmented results while exhibition performance, was impacted by the content supply challenges that I spoke to earlier, our diversified businesses delivered very strong fourth quarter results and continue being an important pillar in our growth. We are particularly pleased with our Amusement and Leisure segment, which continues to outperform pre-pandemic results on both the revenue and bottom line metrics. During the fourth quarter LBE same-store sales reach 2019 levels and P1AG same-store route revenue exceeded 2019 level. In addition to strong top line demand P1AG and LBE record quarterly EBITDA results showcase our team's ability to effectively manage costs. On the media side, we remain encouraged by strong signs of recovery for Cineplex Media and Cineplex Digital Media, both showing significant improvement in overall revenues for the quarter. With further content supply and mall traffic recovery underway. We expect further momentum in these divisions, moving forward. Overall, we are pleased with our fourth quarter results, which we believe illustrate the effectiveness of our strategies to manage the current fluid environment. Gord will speak to the numbers in more detail shortly. But before I pass things to him, I want to address the ongoing litigation with Cineworld. As you know Cineworld remains under Chapter 11 bankruptcy and we continue to work closely with our advisers to consider any value optimization opportunities. I have no further comment. But this remains an important priority for us. I'm pleased to present a condensed summary of the fourth quarter results for Cineplex Inc. Further reference, our financial statements and MD&A have been filed on SEDAR and are also available on our Investor Relations website at cineplex.com. Our MD&A and earnings press release includes a fulsome narrative on the operational results, so I will focus on highlighting and quantifying some of the key operating results. And provide commentary on our liquidity and outlook. As Ellis mentioned, we were pleased with our Q4 operating results, we reported adjusted EBITDA of $31.2 million. And although the Film Exhibition segment faced some film release schedule challenges, our diversified business model continues to deliver with our Amusement and Leisure business reporting its strongest quarterly adjusted EBITDA ever. For the fourth quarter, total revenues increased 16.7% to $350.1 million from $300 million in the prior year. Net income was positive $10.2 million as compared to a net loss of $21.8 million in the prior year. And adjusted EBITDA increased 54.5% to $31.2 million from $20.2 million in 2021. Film Exhibition and Content segment box office revenues were approximately 66% of the pre-pandemic period for 2019. And total segment revenues were approximately 75% of the pre-pandemic period. The Film Exhibition and Content segment adjusted EBITDA of $4.6 million, decreased from $9 million in the prior year, primarily related to the attendance decline which Ellis mentioned in his remarks. And this was due to fewer releases this quarter due to schedule shifts. On the media side of the business, we reported our fourth quarter Media segment revenue of $44.1 million as compared to $32.5 million in the prior year. The increase was primarily due to Cinema Media, revenue per patron increasing 25% to $3.33 from $2.42 in the prior year. Comparison to the pre-pandemic period our Media segment revenue was approximately 64% of our Q4, 2019 levels. But this was impacted by strong hardware sales in Q4, 2019 with one client in our digital place-based media business. If we excluded hardware sales, our overall Media segment revenue would be approximately 71% of Q4, 2019 levels. The results in our Cinema Media business are encouraging as we generated 72% of Q4, 2019 level with 55% of the attendance level. Our overall Q4, Media segment adjusted EBITDA increased to $29 million from $19.3 million in the prior year with segment margins increasing to 65.7% from 59.5%. As we continue to see growing traffic in our cinemas and in malls. We expect to see further recovery in our Media businesses. Our Amusement and Leisure segment had another incredible record breaking quarter. This business segment continues to outperform the pre-pandemic period on a top line and bottom line basis. Segment revenue increased to $71.8 million as compared to $51.2 million in the prior year, and segment EBITDA increased 70% to $13.7 million from $8.1 million in the prior year with combined margins of 19.1%, as compared to 15.8% in the prior year. Our Amusement and Leisure segment, total revenues exceeded pre-pandemic levels coming in at 115% of Q4 2019 levels. G&A expenses increased 2.5% to $16.2 million from $15.8 million in the prior year, primarily due to increased payroll costs as a result of a decrease in wage subsidies and increased costs related to certain digital and technology initiatives, partially offset by reduced litigation and advisory costs. These items are described in more detail in our MD&A. For the fourth quarter of 2022, we reported net CapEx of $20.5 million as compared to $4.4 million in the prior year. Included in the CapEx in the fourth quarter is approximately $4.4 million, related to the distribution of projection assets on the wind-up of CDCP. Full year 2022 CapEx came in at $53 million well below our earlier guidance as we responded to the shifting film slate. For 2023 and beyond, we will continue to be prudent with our growth initiatives. Our guidance for net CapEx for 2023 is reduced to approximately $60 million. Before discussing our liquidity position, I wanted to briefly touch on two additional items taxes and impairment reversals. First I want to remind you of the benefit of the tax asset that was derecognized during 2020 as a result of uncertainties related to the pandemic. As described in Note 8 of our year-end financial statements. We currently have non-capital losses totaling $436 million to utilize against future periods and as such, you should expect minimal cash taxes over the next two years. We continue to evaluate the recoverability of these deferred tax assets that will recognize such assets when and if appropriate. Second, in addition to the deferred tax assets as our business continues its recovery and return to profitability. The reversal or - the portion of previously recognized impairments may be appropriate. During the fourth quarter of 2022, we recognized a net reversal of previous impairments of long-lived assets of approximately $20 million. In other words, a pickup, primarily related to the LBE portfolio. This segment has been experiencing significant improvement in business volumes and operating results throughout 2022, and we - saw results approach or exceed pre-pandemic levels. I'd be happy to answer further questions about these items in the Q&A. However, I like to move on for the time-being and speak to our balance sheet in particular, our liquidity position. For Q4 2022, we reported net repayments, of $5 million under our credit facilities, which left us with $327 million drawn and approximately $204 million available under our credit facilities as at December 31, 2022. We resume financial covenant testing in Q4 and we are compliant under the two leverage covenants with total leverage at 3.69 as compared to a covenant of 3.75 times and senior leverage at 2.15 times as compared to a covenant of 2.75 times. During the fourth quarter, we approached the bank group and receive their support to extend the maturity of the credit facility by one year to November 13, 2024. This extension provides us with additional timing and flexibility during the current turbulent economic environment, as we look forward for opportunities relating to our capital structure and cost of capital. I would now like to address some macroeconomic factors in today's environment, including recessionary concerns, inflation and interest rates. With respect to any recessionary concerns in the economic outlook, it is important to note that the exhibition industry has fared extremely well during past recessionary cycles. Consumers' trade down their out-of-home experiences moviegoing becomes the affordable option. In fact during seven of the last nine recessionary periods box office revenues increased. As we contend with rates of inflation that haven't been seen in decades, it is important to understand the overall cost structure of an organization to way potential impacts. For Cineplex our top four cost categories make up approximately 75% of our overall costs. Film cost is approximately 25% of our overall costs and is 100% variable, based on the related box office revenues. Rents and occupancy-related costs represent approximately 20% of total costs and are typically contractual and fixed in nature. Payroll-related costs are approximately 20% of total costs, and are subject to wage markets and minimum wage impacts. Finally, food costs represent approximately 10% of our overall costs and this is a cost category that is impacted by inflationary pressures. As you can see our cost structure is not as significantly impacted by inflationary cost pressures, but to the extent that we do experience cost pressures that we cannot offset through other means. We are confident Cineplex can turn to pricing as others are doing. The last macroeconomic factor, I want to discuss is the interest rate environment we believe we are well-positioned in this regard. Cineplex is currently in an over-hedged position with our bank credit facility, we have hedges, totaling $450 million at fixed rates between 2.83% and 2.945% maturing between November 2023 and November 2025. In addition, our $250 million high-yield offering is fixed at 7.5% and our convertible debenture is fixed or 5.75%. As we look at our balance sheet to our capital allocation strategy is to remain focused on delevering and strengthening the balance sheet as we navigate towards our target leverage range of 2.5 times to three times. Since fully opening without restrictions in April 2022, we have generated positive addition adjusted free cash. We expect this trend to continue as business volumes increase. And during the next year or so, we will continue to define and move towards our optimal capital structure. So let's recap by segment. In the Exhibition segment product supply issues resulted in box office revenues at 66% of pre-pandemic levels and total revenues at 75% of pre-pandemic levels demonstrating the ability to drive more revenue off of our attendance base. Pre-pandemic this segment had an EBITDA margin of 14.8% in 2019. And given the high-cost structure of the segment, our EBITDA margin was 3.1% in a COVID and product supply challenged year in 2022. We continue to focus on revenue opportunities, such as our online booking fee and cost management, including our fixed costs and as product supply stabilizes. This segment will benefit in the future. In the Media segment, we achieved revenues excluding hardware - sales of approximately 72% of Q4 pre-pandemic levels and reported strong growth in Cinema Media revenue per patron. We are excited for this area as product supply stabilizes and attendance levels return, including continued mall traffic growth which approach 90% of pre-pandemic levels in Q4 despite the challenging influenza season. With the Media segments will fixed-cost base and annualized margins of approximately 55%, this segment is also poised to benefit from further recovery and contribute to overall EBITDA. And finally in the Amusement and Leisure segment, we are already exceeding pre-pandemic levels in revenue, EBITDA and segment margins, which were 19.1% in Q4. We look forward to continued success and growth in this segment. We're also being prudent in managing our CapEx. And as I mentioned earlier, we have reduced our guidance for 2023 CapEx to $60 million from $100 million and we'll focus on projects, delivering the highest and most immediate return. Our investment in the diversified business model is paying-off with the growth in the Amusement and Leisure segment, helping to offset the challenges and recovery in the Exhibition segment. And as Ellis mentioned, there's a lot for our Exhibition business to be excited about. Looking ahead, we remain optimistic about the future of our business. Our investment in diversification is paying-off as we continue to see growth and record results in our Amusement and Leisure businesses. We have high confidence in the ongoing recovery of content, volume and box office and our team's ability to capitalize on the opportunities that lay ahead. We are excited by the robust slate of blockbuster in international film product for 2023, and off to a great start to the year with January box office coming in at 88% of 2019 levels for the remainder of Q1, 2023, just to name a few. We have the following: Ant-Man and the Wasp: Quantumania which is releasing next week and the pre-sales results so far are fantastic. The Disney's Bollywood feature Selfiee, Screen six, Shazam Fury of the Gods, John Wick: Chapter 4 and for the remainder of the year, we have Super Mario Bros., Guardians of the Galaxy Volume 3, Fastec, The Little Mermaid, Spider-Man: Across the Spider-Verse, Indiana Jones 5 and the Dial of Destiny, Mission Impossible 7, Dead Reckoning - Part One, Dune Part 2, and Aquaman and the Lost Kingdom. In closing, we remain focus on maximizing value across all our businesses and driving shareholder returns. With the backdrop of recessionary concerns Cineplex is well-positioned to provide an affordable and compelling entertainment experience that can't be replicated at home, the consistent discipline we have placed on capital and cost management and revenue and margin generation will serve us well for years to come. That concludes our remarks, this morning and we would now like to turn the call over to the moderator for questions. Thank you. Thank you. [Operator Instructions] Our first question today comes from Derek Lessard from TD Securities. Derek, please go ahead. Your line is open. Yes, good morning, everyone. Glad to see some positive trends back in the business. My first question is, I was just curious as and Gord, you might have alluded to that in the pricing, but as you look out further on the box office and opportunities around pricing. I know it's difficult to balance. Just wondering if you think there's any opportunity to enhance the pricing model through things like dynamic pricing or through your loyalty program, just curious on your thoughts there? It's Ellis, and bottom line, as we mentioned in the script, we have basically provided our guests with so many different experiences, which, allows us to, you know, have different pricing levels and helped us drive our BPP higher. And we will continue to look at opportunities and we feel that it's really important for our guests to have that incremental benefit of coming out of their homes and experiencing something they cannot replicate. So we will continue to look at that. And from a pricing perspective, as you know, Cineplex was one of the first companies to introduce Tuesday pricing many, many years ago, and we continue to look at opportunities as it relates to pricing, you know with different age groups with different time of day and all kinds of opportunities that are available. Okay, thanks. And maybe just one last one from me, before I requeue Gord, you did talk about the reduced guidance on CapEx and it being limited high return projects. Maybe you could just add some color to what you're thinking is there maybe the split between - the, spend between theaters and Rec Rooms and other projects on the books? Sure, so we're going to - not broken it down various categories. Historically, so from a maintenance CapEx perspective I'm guiding you in sort of the range of $20 million to $25 million on an annual basis for growth in premiums. So that would include new locations as well as adding premium initiatives roughly in the $15 million to $20 million range. Our immediate business and it's primarily digital media, to the extent that we have new external customers. Somewhere in the $5 million to $10 million range P1AG very similar there's maintenance CapEx levels and this new customer CapEx costs in a range of $5 million to $10 million and Corp another roughly $5 million. So a range of between 50 and 70 and so say the midpoint guidance of 60. Yes, thank you for taking my questions. I have two questions for you guys. I wanted to just go back on Q4 in order to better understand and appreciate what could be ahead. By no means, this is Cineplex, Cineplex fall, but more of an industry situation where we saw a good difference and actual results versus initial expectations on the box office side. Due to some shifts in movie releases. Ellis when we look forward, how would you qualify, your optimism for 2023 in the context of these continuous push-outs of movie releases, as we saw in Q4? I'm just trying to make sure we remain grounded in our expectations. And make sure that we're aligned with - what's happening in terms of movie releases. And my second question is on BPP. So you had a very strong print on BPP. I wanted to understand a little bit. What drove that number, how much of the increase was due to Avatar versus other movies, just so that we can maybe model it properly, as we go back maybe to regular releases rather than a three-hour movie release like Avatar? Thank you. Yes so, on the question as it relates to product. When you look at the 2023 film slate it looks much stronger than the last three years. From an overall release perspective and also the blockbuster titles that are coming through. I still feel that it's going to take a year or two before we can get back to 2019 levels. But what we are seeing, as I mentioned in the script is these big titles are performing significantly stronger now compared to the original releases. And if that continues, we should have a strong year with less, blockbusters, but being able to deliver strong revenue as we move forward. The attendance will probably be impacted, but how significant that will be will depend on the results we see from some of the big movies that are coming out. So hopefully that answers your question. As we move into the second, third and fourth quarters. The other thing is we have done extremely well in international product and we feel that that's a good opportunity and we will. You know, continue to do that use our data use artificial intelligence to drive more people and more diverse guests into our theaters across Canada. And you saw in the first - month of January we came 88% of the 2019 numbers and Pathaan and The Wandering Earth II are both very big films for us and we did extremely well. And we are continuing to do that as we move forward and there's some other big Bollywood films expected for the balance of the year and also Mandarin, Arabic, Persian and other films Filipino films that we see doing very well for us moving forward. And Maher just you know, we do disclose in the box office revenue discussion in our MD&A, the percentage of box office in any given quarter that comes from premium product, and so this quarter, as I mentioned, it was 50% which showed that the audience, wanted to see sorry - Avatar and some of the other product in the premium offering. Now that compared to 47% last year and 41% for the full year. So - as we as you go in quarter-by-quarter as you'll see, through our disclosures the impacts, the premium mix is having on our overall BPP. All right, Gord, so I was just trying to figure out. With the mix as it is, how much of it was impacted by Avatar versus, are we seeing a steady increase in premium being sold across the board or it was mainly due to Avatar that - I'm trying to understand. Thank you. Our next question is from Adam Shine from National Bank Financial. Adam, your line is open. Please go ahead. Thanks a lot, good morning. So obviously good run through on the various segments, I don't want to free cash a lot of what was said Gord. But if we take some of what Ellis was talking about in terms of a revitalization of the box office evolving over the course of the next year or two and the extent of prudence in regards to stepping down on the CapEx, Gord for what you said. We saw you squeak by on the other covenant testing in the Q4, and certainly no changes in terms of amendments to the credit facility? So, can you speak just a little bit more in terms of perhaps how you see the early phase of Q1 unfolding Ellis, is talking about more products certainly coming post January. But in the meantime Avatar at least done its job to backfill January so, maybe touch on how you're looking at the positioning around the covenant particularly acknowledging the 25 deep stepped out, number one. And then perhaps number two. Partly related to that, there was a much bigger performance out of other and I know we don't want to fix it on that per se and part of that at least $5 billion related to the booking fee, but how should we think about the other line going forward, because you certainly seem to be getting incremental traction there, then even back in 2019? Thanks. Yes, so thanks Adam so. And I fully expect. The question about sort of what the EBITDA levels are that we would require in Q1 to sort of hit that test and so, in advance of getting that question. The amount is roughly about $36 million. We are very encouraged by the start of 2023, and we released our January box office results in today's press release at 88% of the 2019 levels. And as Ellis mentioned, we're encouraged by the product coming out and in particular for the remainder of the year. So at this juncture, we're encouraged by what we're seeing in January and are encouraged by the products for the rest of the year and then on your second question. Sorry, is other revenue, yes thanks. I'm just getting the reminder. So thanks so much. So in other revenue for the - and our focus is on to drive other streams of revenue for the organization. And - so elements you discussed the online booking fee Ellis discussed the events our Cineplex Pictures initiative. So I would say, if you were to look at. Where we were in Q4 of 2022, you know I looked back to the pre-pandemic period in Q4 of 2019. We're up right, roughly $14 million in those, those two periods. And it was roughly equally split increase between increases in the online booking fee. Additional margins on derived through scene and additional breakage revenue on our gift cards and corporate certificates coming out of the pandemic. Okay, but so Gord you did mention Cineplex Pictures, though, is that, is there something related to that, be it a distribution fee or something else that will be coming through other at some point going forward? Yes, yes, you will see that going forward and obviously we just initiated that just so there's very little come there now. Yes, the Lionsgate, the Lionsgate arrangement was announced in January. So what you saw Q4 was a very small in fact related to other films. Good morning, thanks for taking my questions. A couple from me, on the media side I think the Q4 margin was sort of particularly attractive. I think if you kind of back into it. I think, north of 70%. I know that even with some headwinds in the media, you seems to be sort of managing the cost. I was wondering if you can kind of give us a sense of what - what we should be looking for. As we look to kind of project that margin forward. And then in terms of ad trends Ellis or Gord, maybe just talk about what you're kind of getting in terms of feedback from the sales team and from clients recognizing the macro, but also sort of your sort of specific targeting capabilities. I'll leave it there? Okay, thanks so, Aravinda. I'll take the first question on the margins. And as we've described, historically, in particularly the cinema media advertising business is a very high margin business. In that segment, we do not - there no charge from the exhibition segment to the media segment for access to the theaters. So, on the increment you can imagine that the revenue, it's very accretive to the bottom line, because it's a relatively low fixed cost business. And the primarily the additional costs and any revenue generated its sales commissions. On the digital place-based media business, there is a technology component to it. There's licensing of technology. So it's a lower margin business then Cinema Media business, but we blend into the number that I described earlier, which is roughly about a 55%. More segment margin for the entire media segment. So as that volume grows in the future that has huge bottom line contributions to our overall results. And our window on the actual future as we look forward, the numbers are still, you know, very strong and our advertisers at the cinema level basically look at that as the best opportunity to get the message across. And on the Digital Media we've got mall traffic we're turning very close to pre-pandemic levels and it's a great way for our advertisers to get their messages across. So we feel even with the recessionary periods, we feel quite strong, that our business will continue to move forward. Thank you. And just a quick follow-up, I apologize if I missed something that was said earlier with respect to CPP given sort of inflationary conditions and sort of the execution that you've been able to deliver. Do you sort of see more kind of CPP level growth going into 2003? Do you think that's something as high as the levels are you do you feel that achievable? Sorry, as high as sort of the historic numbers is that you're asking about, we've seen over the last couple of years? Yes so, Aravinda. I want to just make a couple of comments on that. One is, in the pandemic. I think we all sort of noted and saw that there was an accelerated level of growth in CPP significantly the over levels that we had seen historically so in the mid-teens in certain quarters. At the time we had always said that level of growth. It's not necessarily achievable in a long-term basis. But what we are seeing is that, our customers that are coming in, they definitely want to deal and the overall experience and they want to spend at the concession stands. So now that we have returned and that a number of quarters backup. Sort of a more normalized kind of business without any operating restrictions is you would expect a more normalized level of growth going forward from CPP perspective. Yes, thanks. Thanks very much, and good morning and congrats on all the moving parts coming back to normal. Two from me one is, Gord, you alluded to the media revenue that you're generating, relative to the attendance for Cineplex Media. Can you just kind of remind us, obviously eyeballs equate the dollars, but what would you expect in terms of revenue uplift as attendance continues to build through 2023? And then second question. You highlight the defensibility of box office which I think we all fully acknowledge on the location-based entertainment and the amusement businesses. Can you just remind us what kind of cyclical exposure or sensitivity, from your perspective, these two businesses could have? Thank you. Sure, so on your first question is. I think one thing from our perspective the cinema advertising has and always will be a compelling medium for advertisers. And as we look forward as Ellis mentioned there's great traction. I mean on confidence employee scheme ads across our screen. The one thing is we're focused over the last number of years on. Our data capabilities and providing advertisers what they're looking for in terms of determining returns and the data related to some of what their campaigns, which is a really compelling and value-added offering that others don't do. We started to introduce and talk about the media - Cinema Media per patron. I'd like to highlight that. Our statistics tends to significantly outperform our peers in particular in the U.S. markets. And that has to do with some of the - the initiatives that we're undertaking to deliver more value and opportunities, the opportunities to our customers in the Cinema environment. And on your second question was related to kind of LBE and one thing I want to talk about is, particularly with respect to P1AG. Some of the seasonality with respect to P1AG and you need to - one thing to remember is that. Primarily related to amusement gaming the route business so this is where our equipment is in third-party venues drives a significant amount of the overall margin that's the higher margin component of the business, it performs stronger during sort of the Q2, Q3, summer months when students are off on school holiday. So when you look at cyclicality and seasonality. That's all trend and as you saw some of the higher margins in Q2 and Q3 in the LBE space. Once we hit the fourth quarter and this mix-shift and the product shift changes a little bit. It goes down, but we're still confident with the 15% to 17% overall blended EBITDA margin for the P1AG business on an annualized basis. So again, we're really pleased with the achievements that we did versus pre-pandemic period. Because if you remember, the business performs quite strong in the summer period, again very similar types of thoughts, it's holiday season. But also during Q4 and particular with the holiday parties and we do a significant amount of our business on corporate parties and events. And so, if you're looking at seasonality in the LBE business, it would be more heavily weighted to Q3 and Q4. Thank you. I would now like to pass back to Ellis for any closing remarks. As we have no further questions. Thank you, everyone for joining the call this morning. We look forward to speaking with you again in May for our first quarter 2023 results. Thanks again, and see you at the movies.

EarningCall_386

Good day, and welcome to the Cincinnati Financial Corporation Fourth Quarter and Full-Year 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. Hello. This is Dennis McDaniel at Cincinnati Financial. Thank you for joining us for our fourth quarter and full year 2022 earnings conference call. Late yesterday, we issued a news release on our results, along with our supplemental financial package, including our year-end investment portfolio. To find copies of any of these documents, please visit our investor website, cinfin.com/investors. The shortest route to the information is the quarterly results link in the navigation menu on the far left. On this call, you'll first hear from Chairman and Chief Executive Officer, Steve Johnston; and then from Executive Vice President and Chief Financial Officer, Mike Sewell. After their prepared remarks, investors participating on the call may ask questions. At that time, some responses may be made by others in the room with us, including President, Steve Spray, and Cincinnati Insurance's Chief Investment Officer, Steve Solaria, Chief Claims Officer, Mark Schambow, and Senior Vice President of Corporate Finance, Theresa Hoffer. First, please note that some of the matters to be discussed today are forward-looking. These forward-looking statements involve certain risks and uncertainties. With respect to these risks and uncertainties, we direct your attention to our news release and to our various filings with the SEC. Also, a reconciliation of non-GAAP measures was provided with the news release. Statutory accounting data is prepared in accordance with statutory accounting rules and therefore is not reconciled to GAAP. Good morning, and thank you for joining us today to hear more about our results. We see positive momentum in several areas and are bullish (ph) about our future prospects despite 2022 financial results that were somewhat below our expectations. Challenges during the year included elevated inflation and higher losses from natural catastrophe events for us and the property casualty industry, in addition to the market volatility affecting the valuation of investment portfolios. Our experience in managing adversity, coupled with the company's financial strength allows us to maintain a long-term view and supports our confidence as we execute our plans. Net income for the fourth quarter of 2022 was just over $1 billion, that's 31% or $457 million less than last year's outstanding fourth quarter, largely due to $307 million less benefit on an after-tax basis in the fair value of securities held in our equity portfolio. Non-GAAP operating income of $202 million for the fourth quarter was down $118 million from a year ago, including catastrophe losses that were $66 million higher on an after-tax basis. Our 94.9% fourth quarter property casualty combined ratio was 10.7 percentage points higher than the 84.2% for the fourth quarter of last year, which was amongst the best combined ratios we've ever recorded. We think longer-term comparisons are also important. On a current accident year basis, excluding catastrophe losses, our 90.2% combined ratio compares favorably with each of the five years prior to 2020 and was 1.5 percentage points better than the average for that period with each accident year measured as of the respective year-end. On a calendar year basis, our 2022 combined ratio experienced a larger negative impact from catastrophe losses than in 2021, as they increased 4.2 percentage points for the fourth quarter and 1.2 points for the year. Inflation also pressured our combined ratio throughout 2022, contributing to less favorable results for both the current accident year and for reserve development on prior accident years as we have increased reserves for estimated ultimate losses. We've responded with actions to improve underwriting selection and pricing, including premium rate increases and increased expectations by underwriters as they factor inflationary trends into areas such as risk selection criteria, pricing of policies and adjusting premium factors for changes in exposure. We believe we can successfully balance prudent underwriting and business growth to improve results next year with a 2023 GAAP combined ratio in the low to mid-90% range. We also believe our 2023 property casualty premium growth rate can be 8% or more. We recognize that weather and significant changes in industry market conditions that influence insurance policy pricing trends or some of the variables that will affect the property casualty results we ultimately report. In recent quarters, we've noted that commercial umbrella loss experience has been elevated. Although, still elevated in the fourth quarter, it was to a less degree than earlier in 2022. While recent profitability for our commercial umbrella business is not as strong as we previously estimated after strengthening reserves during 2020. The average combined ratio for the years 2018 through 2022 is still good, below 85% on a calendar year basis and below 90% on an accident year basis with development through year end 2022. Overall premium growth was very good and continues to incorporate pricing segmentation. Our underwriters work to retain and write more profitable accounts while also addressing ones that we determine have inadequate pricing. They do an excellent job serving Cincinnati Insurance appointed agencies that are outstanding at producing business for us. Consolidated property casualty net written premiums rose 10% for the fourth quarter and 13% for the full year 2022, that includes a 13% increase in fourth quarter renewal written premiums with a significant portion from higher levels of insured exposures as we factor in elevated inflation. In addition to exposures increases, our Commercial Lines Insurance segment continued to experience estimated average renewal price increases in the mid-single digit percentage range, higher than the third quarter. Our Excess and Surplus Lines Insurance segment continued in the high-single digit range. Personal lines average renewal price increases were at the high end of the low-single digits with both auto and homeowner higher than in the third quarter. As we previously disclosed, we expect premium rates for our personal auto line of business will continue to rise. Based on our rate filings that have averaged low double-digit rate increases for policies effective beginning January 1, 2023, we expect the full year 2023 personal auto written premium effect will be an average premium rate increase of approximately 10%. Policy retention rates improved from year end 2021 with our Commercial Lines segment moving higher in the upper 80% range. In our Personal Lines segment, rising to the low to mid-90% range. Moving on to highlight premium growth and profitability by Insurance segment. The Commercial Lines segment grew both fourth quarter and full year 2022 net written premiums 9%. Its combined ratio for both the quarter and full year 2022 was approximately 99%. That's above where we aim for and reflects elevated inflation effects and catastrophe losses that were higher than a year ago. For our personal lines segment, net written premium grew 16% for the quarter and 15% for the full year 2022, as we continued our planned expansion of high net worth business produced by our agencies. Its full year combined ratio was approximately 99% and reflected elevated inflation effects and is likewise above our near-term profit target. We have confidence that our proven long-term strategy and near-term actions we have taken will blend to improve results for both commercial and personal lines. Our Excess and Surplus Line segment finished the year with a 90.4% combined ratio, a good result, combined with 2022 net written premium growing 18%. Cincinnati Re and Cincinnati Global each had another year of healthy growth. Cincinnati Re grew full year 2022 net written premiums by 27% with a combined ratio of 97.4%. Cincinnati Global had a 2022 combined ratio of 88.9% with net written premiums growing 23%. Our life insurance subsidiary continued its good performance with full year 2022 net income of $66 million, up 50% from a year ago and term life insurance earned premiums grew by 5%. On January 1 of this year, we again renewed each of our primary property casualty treaties that transfer part of our risk to reinsurers. Our strong capital supports retaining additional risk and managing cost of rising reinsurance ceded premiums. For our per risk treaties, terms and conditions for 2023 are fairly similar to 2022, other than premium rate increases that averaged approximately 13%. The primary objective of our property casualty treaty -- catastrophe treaty is to protect our balance sheet. The treaty's main change this year is retaining a greater share of losses for layers of coverage than what was effect for 2022, while adding $92 million of coverage in a new layer between $900 million and $1.1 billion. In 2023, we'll retain all of the first $200 million of losses and the share of the next $900 million for a catastrophe event compared with 2022 when we retained the first $100 million and the share of the next $800 million. Should we experience a 2023 catastrophe event totaling $1.1 billion in losses, we'll retain $542 million compared with $499 million in 2022 for an event of that magnitude. We expect 2023 ceded premiums for these treaties in total to be approximately $130 million, approximately $16 million or 14% higher than the actual $114 million of ceded premiums for these treaties in 2022. Our investment department continued to perform quite well, and Mike will provide some details. Investments is another area where we like to keep an eye on longer-term trends. For example, for the five years ended with 2022, our equity portfolio, compound annual total shareholder return was 11.1%, 170 basis points better than the S&P 500 Index. I'll conclude with the value creation ratio, our primary measure of long-term financial performance. Net income before investment gains or losses contributed favorably to VCR 2.1% for the fourth quarter and 5.2% for the full year 2022. The contribution from valuation of our investment portfolio was mixed, 10.5% favorable for the quarter, but unfavorable by 19.4% for the year due to challenges for both the stock and bond markets. A positive VCR of 12.8% for the quarter improved our 2022 full year VCR to negative 14.6%. Although that's below our expectations for a typical year, the 11.2% annual average over the past five years is within our annual average target range of 10% to 13%. Thank you, Steve, and thanks to all of you for joining us today. Investment income continued to grow at an outstanding pace, up 12% for the fourth quarter and 9% for full year 2022 compared with the same periods of last year. Dividend income rose 7% for the quarter. Net equity securities purchased during 2022 totaled $36 million. Bond interest income was up 11% in the fourth quarter. The pretax average yield of 4.16% for the fixed maturity portfolio was 17 basis points higher than a year ago. The average pretax yield for the total of purchased taxable and tax-exempt bonds continue to rise to 5.01% during full year 2022. We continue to emphasize investing in fixed maturity securities with net purchases during the year totaling $788 million. Valuation changes for our investment portfolio during the fourth quarter of 2022 were favorable in aggregate for both our stock and bond holdings. The overall net gain for the quarter was nearly $1.3 billion before tax effects, including an additional $230 million of unrealized gains in our bond portfolio. At the end of 2022, total investment portfolio net appreciated value was approximately $4.7 billion. The equity portfolio was in a net gain position of $5.5 billion, while the fixed maturity portfolio was in a net loss position of $847 million. Cash flow, in addition to rising bond yields contributed to the 7% increase in interest income we reported for the year. Cash flow from operating activities for full year 2022 generated almost $2.1 billion, a record high amount, up 4% from a year ago. For the fourth quarter of this year, it rose 36%. Turning to expense management. Our objective is to appropriately balance expense control with continuing to make strategic investments in our business. The full year 2022 property casualty underwriting expense ratio was 0.2 percentage points lower than last year reflecting lower accruals for agency profit-sharing commissions. Regarding loss reserves, our approach remains consistent and target net amounts in the upper half of the actuarially estimated range of net loss and loss expense reserves. We have now had $34 million of net favorable development on prior accident years. As we do each quarter, we consider new information such as paid losses and case reserves and then updated estimated ultimate losses and loss expenses by accident year and line of business. During 2022, our net increase in the property casualty loss and loss expense reserves was $1.029 billion, a 15% increase from the net reserve balance at year end 2021. The IBNR portion of that reserve addition was $765 million a further indication of the quality of our balance sheet. For full year 2022, we experienced $159 million of property casualty net favorable reserve development on prior accident years that benefited the combined ratio by 2.3 percentage points. Of that $159 million in net favorable development, $25 million of the net unfavorable amount from our commercial casualty lines of business, including an unfavorable $41 million for commercial umbrella and a net favorable $16 million for other coverages included in commercial casualty. On an all-lines basis by accident year, net reserve development for the full year 2022 included favorable $96 million for 2021, favorable $124 million for 2020, unfavorable $72 million for 2019 and a favorable $11 million in aggregate for accident years prior to 2019. Our approach to capital management also remains consistent, and we repurchased shares that include maintenance intended to offset shares issued through equity compensation plans. We still believe we have plenty of flexibility and also believe that our financial strength is in great shape. During the fourth quarter of 2022, we repurchased just over 101,000 shares at an average price per share of $109.55. As in the past, I'll conclude with a summary of the fourth quarter contributions to book value per share. They represent the main drivers of our value creation ratio. Property casualty underwriting increased book value by $0.47. Life insurance operations increased book value $0.10. Investment income, other than life insurance and net of non-insurance items added $0.83. Net investment gains and losses for the fixed income portfolio increased book value per share by $1.14. Net investment gains and losses for the equity portfolio increased book value by $5.15. And we declared $0.69 per share in dividends to shareholders. The net effect was a book value increase of $7 per share during the fourth quarter to $67.01 per share. Thanks, Mike. We faced a number of challenges in 2022 and still recorded an underwriting profit for our insurance business. That result bolsters our belief that we'll see future benefits from our efforts to continually refine pricing precision and segmentation and our efforts to expand our geographic footprint and produce -- and product offerings. When you consider our financial strength, our experienced service-oriented associates and our Premier Agency force, I'm confident we'll be able to continue delivering shareholder value far into the future. Our Board of Directors shares that confidence and expressed it by increasing our quarterly cash dividend 9% last month, setting the stage for a 63 year of rising dividend payments. So that's not just paying the dividend for 63 straight years. That sets the stage for increasing the dividend for a 63 consecutive year. We believe that's a record that can only be matched by seven other publicly traded U.S. companies. As a reminder, with Mike and me today are Steve Spray, Steve Soloria, Marc Schambow and Theresa Hoffer. Cole, please open the call for questions. Thank you. And we will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from Paul Newsome with Piper Sandler. Please go ahead. Hello, Paul. Perhaps your line is muted. I was hoping you could give us a little bit more color on investment income, which given the higher interest rates, your view on how much the portfolio yield could improve over the course of the year? And any thoughts on changing or different -- the allocation that you've had the last many years here in terms of buys versus equities and what you're doing within those fixed income as well? Paul, this is Steve Soloria here. Just in terms of moving forward, the allocation will remain virtually the same. We've taken advantage of the increase in rates over the course of the year to our benefits. We'll continue to do so, but we'll try and maintain an even keel and stay disciplined in our allocation moving forward. In terms of last year, as mentioned previously, the aggregates or kind of blended rate for the year was about 5%. Comparing that year-over-year, a year ago, we were at about 3.5%. So we picked up about 150 basis points on purchases over the year. Looking forward, as the Fed begins to hopefully slow down the rate increases, we'll probably see a bit of a pullback in the purchase yield moving forward, but we think we've booked some pretty nice yields over the course of the year, which will benefit us for the next eight to 10 years. Maybe as a second question, can you give us some further thoughts on claims inflation for the commercial line side of the house. Obviously, social inflation is top of mind to everyone in the business. And do you think the uptick in what you're doing with pricing is sufficient to overcome what you perceive as the prospective inflation improves. Yeah. Thanks, Paul. This is Steve. And we do see the inflation. As we just mentioned, have had our reserves developed favorably now for 34 years. And as a part of that, we try to be very prospective as we look at how we set our reserves and our pricing and be very prudent about it. And we do think that we are in a position for our rates to keep pace and exceed inflation. And I think that comes from a combination of the pure net rates that our net rate increases I went over in my fixed part of the call here and also exposure increases that we're getting both in personal and commercial lines. So do you think the underlying claims inflation is essentially less than combination of the exposure benefit plus the pure rate or do you think it's actually even lower than the pure rate at this point? I think the combination of the two, they're both kind of intertwined in terms of the overall premium that we're able to charge. And the exposure base does contemplate to a certain degree, the inflation and building costs and so forth. Hey. Thanks. Good afternoon, everybody. This first question -- thank you for the commentary about the reinsurance renewals and I’ll limit, I need, I’ll need to kind of sit down and think through it on paper a bit more. So I'm asking this comes on the slide. But if I think back to historical guidance you've given us on the catastrophe load, I found back in '18, you kind of talked about 6 points to 7 points. Obviously, over the last few years, it's been, I think, directionally closer to 10, but it could be a bit off on the math. So kind of I guess, just given what the increased retentions and what way you just kind of discuss, should we become of splitting those two and thinking the new normal with what's going on in reinsurance is going to cause the catastrophe load to be kind of between the historical guidance and kind of what your last few years have been or just any help there would be great? Sure, Mike. This is Steve again. And I think what we really focus on is the loss ratio points. And what we've done really over a decade or more is to model all of our losses. And what we've been able to do is to push our accident year ex-cat down over a number of years. And that puts -- and then we also have grown our balance sheet significantly. And that puts us in a position, I think, that's enviable right now as reinsurance rates rise and that we can look at what we think we're getting in terms of price adequacy on our book, as well as protection of our balance sheet through our CAT program. And so while we don't give guidance on a cat loss ratio, I think that we do feel that we're in a good position in terms of the overall in managing both our accident year ex-cat showing 34 years of favorable reserve development and also managing our cat exposure across the company. Okay. That's I guess just then in the past, you've talked about the combined ratio target low to mid-90s. And also in the past, I'm talking about kind of 95 to 100. Is the -- just to be clear, is there is, one like more of a short-term versus a long-term target or has there anything changed given what's taking place with the insurance costs or maybe higher investment income is an offset to how you think about the mine ratio? You're right. Nothing has changed. The 95 to 100 is a longer-term target through all cycles in the low to mid-90s is what we're looking for in the shorter term for 2023. Okay. Got it. And just maybe sticking -- moving to the commercial side of the portfolio. It feels like there's -- on the commercial property side, you're readjusting exposure and you'll get in front of that in terms of pushing rate on the commercial property side to get in front of inflationary trends. You said on the commercial umbrella side, though, that things remain elevated, but not as elevated as kind of how you had re-upped your loss picks in previous quarters. Anything you've learned kind of over the last three months on the commercial umbrella side piece of the business that has given you insights into maybe kind of the need to just re-shift the portfolio or anything that's maybe been distinct to CINCI and maybe not just reflective of the overall industry's social inflationary issues? Yeah. Mike, Steve Spray. Great question. I really do think the driver is the elevated inflation effects that we're seeing. We look at -- as I've commented on the past, we look at every single large loss and just see if we can see any trends whatsoever, it still seems to be rather random in that umbrella excess line. Like we said last quarter, though, all hands on deck. The entire book needs rate. We are getting rate into the book to cover that inflation. But we underwrite every single risk on its own merits. And the vast, vast majority of the umbrella or excess policies we write. As a company, we write the underlying too. So we know the risk. We underwrite each risk, like I said, on its own merits, and we are looking at each risk, the pricing, the terms, conditions. We look at specific venues, specific fleets. So to determine how much capacity we want to put out there. So it's a -- and again, it's a risk by risk scenario that we do, but it needs -- the book needs of rate. Okay. And maybe lastly on growth and maybe sticking with commercial lines, thinking about the growth outlook you laid out in the prepared remarks. Is there anything incremental that's coming from any initiatives that you would want to call out? I believe there's a -- about a small commercial BOP initiative or I'm sure there's other initiatives too or is it really just mostly pushing exposure adjustments and maybe some pricing power through '23? I think it's -- again, Steve here, Mike. I think it's all of the above. I think it's exposure. I think it is rate. Steve alluded to, our retentions remain strong. You talked about our small business platform we call synergy that rollout is going extremely well. That's feedback from our agents, still pretty early in the game, but the rollout is going rapidly. We couldn't be happier with that. So we see a lot of good prospects there. Our E&S company continues to produce outstanding profitable results and strong growth. Personal lines, you see the growth there has been very, very strong as well, both on the high net worth and middle market. And I think we're confident and feel good that we're in a good position in personal lines and that we're a strong player, both middle market and now high net worth. High net worth is about 51% of our total premium. So the growth trajectory there has been extraordinary too. Yeah. Good morning. A couple of questions. First, this is just kind of a numbers question. The level of dividend income within total investment income was up a little bit in the quarter and also for the full year. Is there anything in particular that is driving that other than -- I mean, I don't think average corporate rate dividend increases have been as high as 12%, but maybe they are. Mark, this is Steve Solaria. We did have a couple of unique factors over the course of the year. We did have two companies pay special dividends. LyondellBasell paid on early in the year, which was about $5 million. And then in December, CME usually pays a special dividend, but the dividend that they paid this year was well in excess of what we had expected. So those two special dividends really, really factored into the increase in dividend income year-over-year. Okay. Thanks for that. And the second question, this is just a reiteration, I guess. Steven, I think it was in your comments talking about the reinsurance treaty, it's something and I'm just trying to write what I heard. So if you -- on a $1 billion of total losses, you would have $542 million of exposure in the new treaty versus $499 million. Is that -- that's $1 billion of aggregate losses or is that a single event loss? Yeah. No, good question, and I will clarify that a bit. So I wanted to make sure to kind of put things on an apples-to-apples comparison. So this year's program 2023 goes up to $1.1 billion. And so we have moved up a bit as our equity has grown, our GAAP equity has grown, our premium has grown, we feel we are in a position to move the program up a bit, but we wanted to buy more at the top end. So to put it kind of on an apples-to-apples basis, I used a hypothetical $1.1 billion loss for both years 2023 and 2022. And you're right on for the 2023 year, we would have $542 million of exposure. So that would include the $200 million up to the attachment point plus co-participations and that compares with $499 million for 2022 -- in the 2022 program. And then, again, just to clarify, that's on an aggregate basis for the full year or that's on a per event loss? Per event. Got it. So if there were $2 billion storms -- your two storms that cost Cincinnati Financial $1 billion in a year, then it would be double each of those respective figures, again, just for comparison. Right. Of course. Okay. All right. Thanks for that. And then another question just -- can you remind me within Cincinnati Re, what proportion of that business is property and property catastrophe oriented as compared to being specialty or liability lines? Yes. I have it. And you know it's interesting. We don't necessarily target a given percentage, but our 2022 full year in our inception to date are really pretty close. And for property, both from 2022 and inception to date, it's a little over 30% of the premium. For casualty, it's right in that 55% range. And for specialty, it's a little over 15% for the year in a little bit lower than that for the year-to-date, probably about 13%. So across time, it's been very consistent in that 30 plus range for property 53-ish for casualty and 15% or so for -- they didn't quite add up. I better make it get to 100%, so more like 30%, 55% and 15% across time. No. I think it's a little early on the January 1's, but -- it's one nice thing as buyers of reinsurance, we're seeing the cost go up. It's almost like a little bit of a hedge in that we have Cincinnati Re, we've got very talented people there, very experienced people, and you see that shining through in a market like this. And they are benefiting from the firming rates and firming terms and conditions that you read about. Good morning. I'm thinking about the guidance for 8% plus premium growth in 2023. Like we keep hearing about potential for a macro slowdown. I was just wondering if you could go over the macro assumptions that underpin that guidance. Yeah. That's a good point. At 13% for this year, that's the highest percentage growth in net rent premium we've had it since Insurance since 2001. And so we do recognize that there could be a slowdown. We're not predicting that necessarily or giving guidance on it, but it's possible as you point out, we want to be disciplined in our underwriting. Profit always comes first with us. And so our guidance is for a little bit less than what it was this year, but we are still very optimistic across all of our business areas in terms of the growth that we're seeing, the relationship we have with our agents, the technology we have, the models that we have, we feel very bullish about growth, but we did temper back a little bit from where we are for the full year, just to be cognizant of the points that you bring up, even though I wouldn't say that we're predicting it for sure. Thank you. And looking at the attritional loss ratios for commercial property and homeowners in the quarter, they were a bit improved versus the first nine months of the year. So I was just wondering, if there is any sort of change in trend regarding frequency or severity that you've observed for those lines or if this is just kind of normal variability just given the volatility of those lines can see? Grace, I'm sure there is some of that volatility that you can see, but I also know there's a lot of hard work that's been going on in addressing property. And it predates our addressing and say umbrella, for example. And it's nice to see the hard work of our underwriters and really everybody throughout the company chipping in here in terms of underwriting, loss control, pricing. And I do think it's paying off. And our next question will come from Mike Zaremski with BMO. Please go ahead. Hello, Mike. Perhaps your line is muted. Sorry. Thanks for seeking me in. So I’m just going back to thinking about the combined ratio goals for the company. Are there specific lines of business you'd like to call out and maybe they're obvious, maybe it's commercial casualty and commercial property both. But were there kind of the most wood to chop when we're thinking about improving the combined ratio in outer years? I guess when we look at the pricing disclosure that you offer us the mid-single digit plus numbers. The pricing, I guess, isn't at levels that are, I don't know, maybe I'm wrong, are like extremely high levels relative to inflationary levels. So just kind of curious where you feel you have the most wood to chop over the coming couple of years. Yeah. We haven't provided that any lower than at the company-wide level. And it's really because it's a big team effort. Every one of our operating areas is focused on profit improvement, and we're seeing it across the board from underwriting to claims to loss control in the pricing and underwriting part of it. We are reflecting on the property in the exposure, the increase in inflation. We are trying to reflect that. And we're also getting a pure net rate on top of that and really feel that with our accident year ex cat wood is and the underwriting that we're doing in terms of cat exposure and geographic diversification that we're in a good spot to hit the numbers that we gave in the comments. Okay. And just when we think about kind of trajectory of potential improvement, should we be kind of just keeping in mind that there's some element of multiyear policies or that are coming -- that are within the portfolio or comps there kind of getting easier or maybe there's less multiyear policies than there were in the past. Any nuances there we should be cognizant of? Thank you. Yeah, Mike, Steve Spray. And it kind of goes to your prior question, too, is those average for us, the as net rate change just doesn't tell the full story and the underwriters working with our agents in segmenting the book, the tools that they have in front of them to really focus on getting rate and terms, conditions on those policies, but we feel we are probably least adequate. And then also focusing on retention of the business that's so adequately priced. That's where the rubber is really meeting the road, and that segmentation is really helping to drive those results. Thanks. I'm going to try Mark's question from a slightly different perspective, if that's okay. Historically, Cincinnati has been a very methodical company. And I'm wondering now that you've got reinsurance and Lloyd's capabilities, is it reasonable to expect maybe faster reaction to take advantage of temporary opportunities like property cat seems to be this year? Yes, Meyer. That is an excellent point. And I think in both areas, I think particularly in Cincinnati Re, as they have been looking at these policies, both quantitatively and qualitatively on a one-by-one basis and are in a position to react quickly to these types of opportunities, and that was part of the strategic decision at the beginning. Hey, Meyer. I might -- this is Steve Spray, I might add, too, just because it's a great question. I think it's a great point. As our E&S company, CSU, founded and we started back in '08, gives us that kind of flexibility for our agents as well. And I think we've learned a lot as that has continued to grow to the point now where we're issuing homeowner business on an E&S basis and able to provide our agents and the policyholders they have that flexibility and capacity and solutions. And I think the same thing is going to happen for our agents as we go forward and give them -- what I'll call or I think we would call just that much more effective access to Lloyd's. So everything we develop as a company is focused on that agency strategy. And so bringing the agents more flexibility, more capabilities is certainly in the plans today and moving forward. Okay. Perfect. That's very helpful. Related question with regard to the agencies. One of the theories that's been banding around is that a lot of, let's say, regional or mutual companies don't necessarily have the capital seeing the property-related volatility that the reinsurance market is kind of forcing back to the primary carriers. And I was wondering, based on your conversations with agents, is that like a phenomenon that they're seeing? And is that underlie some of the growth expectations for '23? I think it is probably a little early to tell what the 1/1 (ph) renewals and then 4/1 and 6/1, how that's going to impact quite frankly, any carriers. I'd tell you, insurance is -- for us, insurance is a local business there, and there's a lot of great regional mutual companies out there that we compete with on a day-to-day basis. It's something we do think about, but not hearing a lot of feedback yet. We've seen -- anecdotally, we've seen a couple of instances where the reinsurance, either the lack of or the costs have put pressure on some maybe a little more regional carriers, but I think it's too early to tell what the full impact will be. It's certainly something that -- it's a great question, something that we're keeping our eye on. Okay. Fantastic. And one last question, if I can. I was just looking for a little more color on the reserve development, specifically within excess and surplus lines. Yeah. Great, Meyer. This is Mike Sewell. And let me start off, we're really proud of our 34 years of -- consecutive years of net favorable development. So I'm going to open up with that. But related to E&S, were you thinking about on a year-to-date basis or on a quarter basis, are you looking? So mostly, I guess, on the -- I'm going to call it volatility in that's the right word, but the quarterly number seaman awful lot. On that, so for the E&S business, let's say, for the quarter, we saw a $4 million of reserve strengthening. But on a year-to-date basis, it was $9 million of favorable development. Thinking about it on the year-to-date basis, it was really favorable for all the accident years except the more recent accident year '21. And so we did see favorable development for 2020, 2019, 2019 and before. What I would say is, we follow a consistent approach. I wouldn't look at one quarter, two quarters as a as a trend. So you'll see some things move. But we've got the same actuarial professionals that are doing the work. They're looking at how the case reserves develop, the paid losses other factors. And so we really just follow the great work that our actuaries do. And I think it's a pretty consistent approach. So I wouldn't necessarily look at it on a quarter-to-quarter basis and say that, that is some sort of a trend. And this will conclude our question-and-answer session. I'd like to turn the call back over to Steve Johnston for any closing remarks. Thank you, Cole. Excellent job, and thank you all for joining us today. We look forward to speaking with you again on our first quarter 2023 call. Have a great day.

EarningCall_387

Hello, and welcome to CDW Fourth Quarter 2022 Earnings Call. My name is Drew, and I will be your operator today. [Operator Instructions]. Thank you, Drew. Good morning, everyone. Joining me today to review our fourth quarter and full-year 2022 results are Chris Leahy, our President and Chief Executive Officer and Chair; and Al Miralles, our Chief Financial Officer. Our fourth quarter and full-year earnings release was distributed this morning and is available on our website, investor.cdw.com, along with supplemental slides that you can use to follow along during the call. I'd like to remind you that certain comments made in this presentation are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. Those statements are subject to risks and uncertainties that could cause actual results to differ materially. Additional information concerning these risks and uncertainties is contained in the earnings release and Form 8-K, we furnished to the SEC today and in the company's other filings with the SEC. CDW assumes no obligation to update the information presented during this webcast. Our presentation also includes certain non-GAAP financial measures, including non-GAAP operating income, non-GAAP operating income margin, non-GAAP net income and non-GAAP earnings per share. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation charts in the slides for today's webcast and in our earnings release and Form 8-K we furnished to the SEC today. Please note, all references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2021, unless otherwise indicated. Replay of this webcast will be posted to our website later today. I want to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the company. I'll begin our call with an overview of our fourth quarter and full-year performance and share some thoughts on our strategic progress and expectations for 2023. Then I'll hand it over to Al, who will take you through a more detailed review of the financials as well as our capital allocation strategy and outlook. We will move quickly through our prepared remarks to ensure we have plenty of time for questions. Our fourth quarter was an excellent example of the power of our business model when coupled with our broad and deep portfolio of technology solutions. In an extraordinary period of shifting customer priorities, we delivered record profitability. For the quarter, net sales were $5.4 billion, $100 million below 2021, and roughly flat on a constant currency basis. Non-GAAP operating income was $523 million, 23% above last year; and non-GAAP net income per share was $2.50, up 21% year-over-year, up 22% on a constant currency basis. These results were driven by the team's ability to pivot to meet customer priorities and capture high relevance, high growth opportunities. This led to excellent performance across services, cloud, security, and software. Performance that drove record profitability and exceptional outcome given market dynamics and an outcome that is a direct result of the investments we have made in solutions and services over the past several years. Simply put our ability to deliver outcomes across the full stack and full lifecycle of technology drove strong profit growth notwithstanding a meaningful decline in client devices. This quarter clearly demonstrates the power of our strategy when combined with the resiliency of our business model. So what happened to client devices this quarter? While we expected some level of contraction in client devices and accessories given the past two years of heavy investment, the magnitude of the decline in the fourth quarter was certainly steeper than anticipated. The primary driver was the K-12 market, which represented roughly half of the client device decline. We also saw a general moderation in client device demand across channels as economic uncertainty increased. As we always do, we stayed the course on our playbook and maintained our discipline with a focus on our customer and our value proposition. This discipline contributed to this quarter's excellent cash flows and strong economic returns. In Q4, the combination of lower transactional business and the team's success delivering on customer demand for solutions and services led to a meaningful shift in our sales mix. Let me put this in perspective for you. You've heard us speak over time about the impact of solutions mix and notably netted-down revenue streams on our financial results. As we have grown our netted-down revenue streams over time, total annual customer spend has consistently grown a few hundred basis points faster than net sales. In periods where we mix into more solutions business that nets down and mix out of client device business that fully shows up in net sales that growth rate spread will be wider. In Q4 an extreme mix shift took place. The result was meaningful customer spend growth significantly dampened net sales growth and very healthy gross margins that drove delivery of gross profit. Now let's turn briefly to the full-year results. 2022 was a year of financial performance underpinned by progress on our three-part strategy for growth. The first pillar of our strategy is to capture share and acquire new customers. One way we do this is through strategic acquisitions. The addition of Sirius is a great example of this. Sirius elevated and expanded our services capabilities providing an excellent cross-sell opportunity into our existing customer base. At the same time, Sirius customers represent excellent cross-sell opportunity given the broader CDW portfolio. The second pillar of our strategy is to enhance capabilities in high-growth solutions areas. Strategic coworker investments contributed to excellent solutions performance through 2022, with strong growth in cloud, security and network upgrades. The third pillar of our strategy is to expand services capabilities. As a key enabler of our value proposition, services are fundamental to our full stack, full lifecycle, full outcomes go-to-market approach. Services engagement solves critical customer problems and drive enduring customer relationships. In 2022, the team delivered more than 20% services growth across the business. No doubt, our acquisitions have accelerated our services breadth and depth and have been foundational to our success. 2022 was indeed a year of strategic performance across all three of our priorities. It was also a year of exceptional financial performance. The team delivered record results with constant currency net sales growth of 15% and each profit category down the P&L statement up 20% or more. Results enabled by ongoing investment in our three-part growth strategy, investments that have made us a vital technology partner, whether customers' priorities require transactional or highly complex solutions. You see the impact of these investments on our fourth quarter performance as the team pivoted to meet customer shifting priorities and advise, design and orchestrate full outcomes. Outcomes that deliver five key organizational benefits: innovation, lower cost, agility, risk mitigation, and enhanced experiences for customers and coworkers. Let's take a closer look at the fourth quarter. There were three main drivers of our fourth quarter results: our balanced portfolio of customer end markets, breadth of our product solutions and services portfolio, and relentless execution of our three-part strategy. First, the balanced portfolio of our diverse customer end markets. As you know, we have five U.S. sales channels: corporate, small business, healthcare, government and education. Each channel is a meaningful business on its own with annual sales ranging from $1.9 billion to over $10 billion over the last 12 months. Within each channel, teams are further segmented to focus on customer end markets, including geographies and verticals. We also have our UK and Canadian operations, which together delivered sales of US$2.9 billion. Our corporate team delivered another strong quarter with a 7% sales increase. The team helps customers accelerate implementation of priorities to automate tasks, detect fraud and enhance customer and employee experiences. This drove excellent cloud software and security results. Our ability to address priorities focused on application and network modernization and consumption-based data center solutions led to excellent services and net comp performance, each up double-digits. Economic uncertainty led customers to de-prioritize endpoint solutions, which resulted in a decline in client devices. Small business declined 13%. The team pivoted to help customers address priorities to maximize prior IT investments and identify savings opportunities to fund new and ongoing projects. At the same time, the team helped customers address mission-critical priorities around security and take advantage of the benefits of cloud, both with heightened urgency. Strong growth from security and cloud were balanced against the decline in client devices as customers put upgrades on hold awaiting greater clarity around the economy and employment plans. Strong results across healthcare and government cannot offset the decline in education driven by K-12 client device dynamics and public sales decreased 9% year-over-year. The healthcare team delivered another excellent quarter of robust growth, up 8%. Talent needs and data center projects remain key focus areas as customers increasingly thought technology solutions to address complex industry challenges. This drove excellent performance in NetComm, servers and services. Mission-critical investments to enhance patient care and experience continued with telehealth and telesitting driving excellent collaboration performance. Government grew double-digits, up 13.5%. Strong state and local sales growth continued, driven by customer adoption of IT strategies for hybrid cloud, as well as network modernization and Zero Trust security frameworks. Services increased more than 50%, as the team helps state and local municipalities address talent gaps through enhanced training as well as professional services engagements. Federal also continued to grow in the fourth quarter. The team's ability to help agencies achieve their priorities around data management drove excellent server and storage performance. For education, higher ed high single-digit sales growth was more than offset by declines in K-12 and overall sales decreased. Higher ed continued their success helping implement student success programs, which institutions use to promote enrollment. Our ability to help drive program elements that include improved security, campus connectivity as well as enhanced storm room experiences drove double-digit growth across cloud, NetComm, server, storage, software and security. For K-12, we expected a continuation of third quarter performance where sales were down low-double-digits but instead experienced a more significant decline with client device units down more than 68%. As we shared last quarter, K-12 customers continued to focus on digesting the past several years' investments and evaluating multi-year funding opportunities to ensure they are making the best decisions for the future. This quarter, as many schools achieved one-to-one student client device ratios, there was a significantly heightened focus on reevaluating plans, and demonstrating need for ECF awards. When the device per student ratio was below 1:1 demonstrating need was straightforward. Today, with device per student at or above the 1:1 ratio, demonstrating need is more complex. For example, articulating why new devices with higher processor capability are required to run more complex applications or provide greater security is just a more complicated discussion and takes more time and approval. This heightened focus led some customers to defer or retract awarded funding commitments in order to assess, reevaluate and potentially reapply under the third and final wave of ECF, which is scheduled to end December 31, 2023. For CDW, this equated to several hundred million dollars of CDW awarded funding commitments being pulled back. I should note that even with these dynamic variables in the K-12 client devices arena, the team successfully executed on infrastructure opportunities across services, NetComm and servers, leading to strong gross profit delivery. And just as we've been doing in past cycles with K-12, the team will be there for our customers to help them work through the challenges to achieve their mission-critical outcomes and efficiently utilize available funding mechanisms. Other, our combined UK and Canada results reflected broad-based and balanced performance in both regions in local currency. UK increased low-double-digits in local currency and Canada increased high-single-digits in local currency. These results continue to demonstrate the grit and resilience of our teams and the power of our investments to drive growth in these markets. As you can see, our diverse end markets are both a key strategic advantage and a driver of our differentiated performance. The second driver of our performance was the broad and deep portfolio. Our ability to address priorities across the entire IT continuum delivered high-single-digit growth across our solutions portfolio. U.S. hardware sales declined mid-teens. Within hardware, network modernization upgrades drove double-digit increases in NetComm. These excellent results were not enough to offset the decline in client devices and wraparound accessories. Supply conditions continued to improve across core transactional areas, while supply and solutions categories remained tight. Once again, we exited the quarter with an elevated backlog and extended lead times and solutions and notably in NetComm. We continue to expect this backlog to feather out over time. U.S. software sales increased 8%. Strength was broad-based as we continue to help customers manage data, enhance productivity and secure their IT environment with strong double-digit increases in operating systems, application suites and data management. Cloud remained an important driver of performance across the business and was a meaningful contributor to profitability. Once again, gross profit increased by double-digits. Compute database, storage, mobility and connectivity were key cloud workloads during the period. Security remains top of mind for our customers as cyber threats continue to emerge, evolve and increase. Our teams delivered excellent results as they continue to conduct vulnerability assessments, implement identity and access management solutions and provide training to our customers to help manage cloud deployments and enhance endpoint and application security. Services results were stellar again this quarter, up more than 20% with balanced performance across professional and managed services. Services are integral to today's complex technology solutions. Customers continue to lean into CDW as an extension of their own teams and leverage CDW services as part of their strategy. And that leads to the third driver of our performance this quarter, relentless execution of our three-part growth strategy. Clearly, investments in our customer-centric growth strategy contributed to our strong profitability this quarter. Investments in services and solutions have elevated our relevance to customers for the highest level it has ever been. Our rigorous strategic process that is designed to ensure we can serve customers across the full stack, full lifecycle has made us a vital technology partner, whether customers' priorities require transactional or highly complex solutions. And that leads us to our 2023 outlook. Our baseline view of the U.S. IT market in 2023 is for flattish growth, factoring in both expected mix and the level of overall economic uncertainty. Consistent with economic forecast, this outlook assumes stronger growth in the second half relative to the first half. We continue to target CDW market outperformance of between 200 basis points and 300 basis points. Our current view of the market recognizes we are operating under greater uncertainty as it incorporates the potential impact of some of our recent wildcards and indeed, most notably the economy. With thousands of sellers connecting with customers every day, we have a real-time pulse of the market. As we always do, we will provide an updated perspective on business conditions and refine our view of the market as we move through the year. In the meantime, we will continue to do what we do best, leverage our competitive advantages and out-execute the competition. Our fourth quarter results highlight that although we cannot definitively know where our customers will place their priorities; there are two things we know for sure. Technology will continue to be a critical driver of outcomes. And with our agility and broadened deep portfolio, we will be there to support our customers wherever their priorities now live. I'll start my prepared remarks with additional detail on the fourth quarter and full-year, move to capital allocation priorities and then finish up with our 2023 outlook. Turning to our fourth quarter P&L on Slide 8. Consolidated net sales were $5.4 billion, down 1.8% on a reported and an average daily sales basis. On a constant currency average daily sales basis, consolidated net sales declined 0.4%. Net sales were impacted by the significant change in client device demand during the quarter. With the decline in transactional products, there was a meaningful mix shift to solutions and services. Before moving down the rest of the P&L, I want to take a moment to talk about the impact of mixing into solutions and services on our results. Certain solutions such as Software-as-a-Service, software assurance and warranty solutions as well as aging commission fees generate meaningful customer spend but are recorded on a netted-down basis. Since we are not the primary obligor on these solutions, we record gross profit as our revenue. That is why you sometimes hear us refer to these netted-down revenues as 100% gross margin items. You certainly see the impact of this in both our net sales and our gross margin performance this quarter. As we continue to execute on our growth strategy and scale our solutions and services, we expect to continue to grow our netted-down revenue streams. All else equal, this mix dynamic will pressure net sales while remaining neutral to gross profit dollars and expanding gross margins. While much of what I've described is tied into the accounting treatment, it is also reflection of our success in the execution of our three-part strategy to capture share, enhance capabilities in high-growth solutions and expand services. The impact of this strategy was on full display this quarter as we experienced a significant mix shift out of client devices and into netted-down revenues, reflective of our customers' priorities. Returning to the P&L. Sequentially, net sales decreased 12.5% versus the third quarter. Fourth quarter sales historically decreased versus the third quarter but this quarter was exacerbated by the decline in demand for client devices. To dimensionalize the shortfall in net sales relative to our expectations, two-thirds of lower net sales were related to the public sector and driven primarily by K-12. In aggregate, solution categories delivered results above our expectations. Notwithstanding the noted mix shift of customer priorities, with respect to customer behavior, we did see increased scrutiny and deeper evaluation of projects and extra signatures increasingly required. In this environment, our sellers are staying close to their customers and working with their technical coworkers to help customers maximize return on investments. While we've not seen meaningful customer cancellations, we have seen some postponements and re-architecting on more complex hybrid cloud solutions as customers balance cost and utility. On the supply side, we saw similar conditions as in the third quarter with some improvement across categories but pockets of pressure remaining, especially in the solutions space. Our solutions backlog remains elevated versus historic levels and lead times are still extended. We expect our backlog to feather out over time as supply conditions ease, although not likely symmetrical across product categories. We continue to manage inventory strategically to support our customers through this still uncertain supply environment. And just like our customers in this environment, our team is diligently managing working capital as we seek to enable profitable growth while ensuring strong economic returns. Our coworkers delivered excellent profitability in the quarter. Gross profit was $1.2 billion, a year-over-year increase of 21.1%, lapping for the first time a one-month serious contribution in the fourth quarter of 2021. Gross profit margin was a record 21.7%, up 410 basis points versus last year and 190 basis points above our prior year quarter record. The year-over-year expansion in gross profit margin was driven by several factors. First, product margins benefited from both mix into complex hybrid cloud solutions and lower mix of transactional products. When we mix back into transactional products, we would expect for this benefit to moderate. Second, as we expected for the fourth quarter, a greater mix in the netted-down revenues. The category outpaced overall net sales growing 26% in Q4 2022 compared to the prior year quarter, primarily driven by Software-as-a-Service. And third, net sales contribution from high-margin services, which increased 28% in Q4 2022 compared to the prior year quarter with significant contribution from our recent acquisitions. Turning to SG&A on Slide 9. Non-GAAP SG&A totaled $658 million for the quarter. The year-over-year increase in non-GAAP SG&A was primarily due to higher payroll consistent with higher gross profit attainment and higher coworker count. SG&A declined by $26 million compared to the third quarter, reflecting the variable component of our compensation structure, which is principally tied to gross profit attainment. In this uncertain economic environment, we are also being mindful of our discretionary spending and our pace of our hiring. Coworker count at the end of the fourth quarter was nearly 15,100, up approximately 1,100 in the last year and essentially unchanged since the third quarter. Investments in our coworkers and in our strategy continue to be integral to our ability to outgrow the market profitably and sustainably. We are focused on disciplined and balanced investments that drive value. This is evidenced by our record profitability in the period. GAAP operating income was $447 million, up 31.6% compared to the prior year. Non-GAAP operating income was $523 million, up 23.2%. Non-GAAP operating income margin was a record 9.6%, up 190 basis points from the prior year and 80 basis points compared to the third quarter. Similar to the third quarter, this improvement was driven by a confluence of favorable factors within gross margin. Moving to Slide 10. Interest expense was $59 million. Higher interest expense compared to the prior year was primarily driven by the senior notes issued last year to fund the acquisition of Sirius. This level of interest expense was in line with our expectation for the quarter. Our GAAP effective tax rate, shown on Slide 11, was 24.7%. This resulted in fourth quarter tax expense of $94 million. To get to our non-GAAP effective tax rate, we adjust taxes consistent with non-GAAP net income add-backs, as shown on Slide 12. For the quarter, our non-GAAP effective tax rate was 25.2%, 30 basis points below our expected range of 25.5% to 26.5% due to lower state taxes as well as non-deductible items. As you can see on Slide 13, with fourth quarter weighted average diluted shares of $137 million, GAAP net income per diluted share was $2.09. Our non-GAAP net income was $343 million in the quarter, up 20% on a year-over-year basis. Non-GAAP net income per diluted share was $2.50, up 21%. Turning to full-year results on Slide 14 through 19. As Chris mentioned, 2022 performance reflected exceptional execution, relentless focus and a strategy that is working. Net sales were $23.7 billion, an increase of 14% on a reported and an average daily sales basis. On a constant currency average daily sales basis, full-year consolidated net sales grew 15.2%. On a combined constant currency basis, we estimate full-year sales increased 5%, below our prior expectation of 8.25% due to the moderation in IT market growth as well as a contraction in our premium in the fourth quarter. In 2022, software and services accounted for more than 40% of the total gross profit. Organic and inorganic investments in our services and solutions capabilities and a continued shift in the netted-down revenues are driving growth. Net income was $1.1 billion, and non-GAAP net income was $1.3 billion, up 19.9%. Non-GAAP net income per share was $9.79, up 22.9%. Moving ahead to Slide 20. At period end, cash and cash equivalents were $315 million and net debt was $5.6 billion. During the quarter, we reduced borrowings under our senior unsecured term loan by $200 million, consistent with our plan to reduce leverage. Liquidity remains strong with cash plus revolver availability of approximately $1.4 billion. Moving to Slide 21. The three-month average cash conversion cycle was 21 days, down three days from last year's fourth quarter, and within our range of high teens to low-20s, reflecting our continued diligent management of working capital. Our effective working capital management, along with strong growth in the business also drove excellent year-to-date free cash flow of $1.3 billion, as shown on Slide 22. For the quarter, we utilized cash consistent with our 2022 capital allocation objective, including returning $80 million to shareholders through dividends in addition to $200 million in debt repayment, which brings me to our capital allocation on Slide 23. Our execution remains consistent with objectives we communicated last quarter. For 2023, we're updating those objectives as follows: first, as always, increase the dividend in line with non-GAAP net income. Last November, we increased the dividend 18% to $2.36 annually. This increase demonstrates our confidence in the earnings power and cash flow generation of the business. Going forward, we'll continue to target a 25% payout ratio growing the dividend in line with earnings. Second, ensure we have the right capital structure in place with a targeted net leverage ratio. We ended the fourth quarter at 2.6x net leverage, down from 3.4x at the end of 2021, demonstrating strong growth in the business and excellent cash flow generation. As we expected and communicated during the third quarter call, 2.6x had us near the lower end of our 2022 targeted net leverage of 2.5x to 3x. For 2023 and beyond, our targeted net leverage ratio will be 2x to 3x, a range that is consistent with our commitment to an investment-grade capital structure and provides us with flexibility to proactively manage liquidity over time. Finally, we have successfully satisfied the commitments we made when we financed the acquisition of Sirius. As such, we are pleased to have reestablished our third and fourth capital allocation priorities of M&A, and share repurchases, respectively in 2023. For 2023, we will target returning 50% to 75% of free cash flow to investors through dividends and share repurchases. This is supported by the Board's authorization for a $750 million increase in the company's share repurchase programs. Moving to the outlook for 2023 on Slide 24. While we are cognizant of potential market variables as we look forward, we remain confident in our ability to execute, pivoted growth opportunities and outperform the broader market. While the overall IT market growth rate sentiment has been mixed, in the near-term, we continue to expect netted-down revenues will grow faster than other product and solution categories. With this in mind, we expect the IT market to be approximately flattish, reflecting our expectation of mix and the level of economic uncertainty. Currency is expected to be neutral for the full-year, with modest headwinds in the first half and modest tailwinds in the second half. This assumes an exchange rate of $1.24 to the British pound and $0.77 for the Canadian dollar in the first quarter. Moving down the P&L. We expect our full-year non-GAAP operating income margin to be in the mid to high 8% range. We expect full-year non-GAAP earnings per diluted share growth to be at the upper end of a mid-single-digit range in constant currency. Please remember, we hold ourselves accountable for delivering our financial outlook on a full-year constant currency basis. Additional modeling thoughts for annual depreciation and amortization, interest expense and the non-GAAP effective tax rate can be found on Slide 25. Moving to modeling thoughts for the first quarter related to average daily sales, we expect low-single-digit sequential growth from Q4 to Q1. This equates to a mid-single-digit percent year-over-year reported net sales decline for the fourth quarter. We anticipate continued strong gross profit margin and NGOI margin in the first quarter above the full-year 2022 levels for both but reflecting some moderation from what we experienced in Q4. And we expect first quarter non-GAAP earnings per diluted share to grow low-single-digits year-over-year. Finally, in line with the reevaluation of our capital priorities, we're adjusting our long-term rule of thumb for full-year free cash flow. In 2023, we expect full-year free cash flow to be within a range of 4% to 4.5% of net sales, up from our prior range of 3.75% to 4.25%. As you know, timing has a meaningful impact on free cash flow, and it may ebb and flow by quarter and across years. That concludes the financial summary. As always, we will provide updated views on the macro environment and our business on our future earnings calls. With that, I'll ask the operator to open up for questions. We'd ask each of you to limit your questions to one with a brief follow-up. Thank you. Yes. Thank you, and good morning, everyone. I was hoping to ask just questions regarding your take on the client device environment. Not a big surprise that it was down significantly, particularly in K-12. But could you talk about the commercial side of the business? It sounds like some customers are being more cautious on upgrades. What's your thought on the PC cycle on the commercial side of the business and how you see that playing out this year? Good morning, Matt. Yes. It's a good question. We have seen customers elongate the replacement cycle given the uncertain times. I mean you're seeing what we're seeing with hiring freezes and layoffs and things like that. So right now, there's just more pause than we had seen earlier in the year. Eventually, the benefit of enhanced productivity and security from the newer replacements will certainly drive a replacement cycle, but it's not happening right now with the level of uncertainty. Yes. Our forecast contemplates the environment to feel pretty much like it feels now. That's what we've reflected in the forecast. I mean we do expect the PC market to remain larger than it was pre-pandemic. But right now, our forecast reflects the current environment and the current temperature. Okay. And then in line with that, are you also seeing pricing pressure or ASP declines as memory and other component prices come down? And is that also going to be reflected in your business? Yes. Good morning, Matt. This is Al. We are not seeing -- I would say ASPs in the fourth quarter and ongoing continue to be really firm. And so that is not contemplated in our outlook. Hi, thank you for taking my questions. Chris, from the prepared remarks, I mean it's clear that client devices are weak and likely will remain weak in the near-term. But if we think about it, if SMB is really a bellwether for the macro economy, are you concerned that demand for advanced solutions or data center devices like servers and storage that demand can also moderate? So what have you assumed for sustainability of that demand through 2023? And I think in the prepared remarks, you guided for kind of the seasonality in this year to be skewed more to the second half versus the first half. So what are you expecting to be stronger in the second half of 2023? Good morning, Ruplu. Let me break that out. There are a couple of questions in there. Let me just start with the small business. And what I'd say on small business is the team is really executing well in a fairly cautious environment. And as I did mention, we are helping customers with priorities around infrastructure, networking, et cetera, primarily led by software and cloud. And of course, security is still top of mind. So what we're not seeing is a dampening in the small business of the need to modernize their infrastructure and maximize their prior investments. So we're seeing -- what I would say is continued steady demand from our small business customers for sure, with an emphasis again on cloud and security. In terms of the split, first half to second half of the year, I'm going to let Al address that in terms of the seasonality there. And then I think there was another question in there that you had, which was -- was there another question that you had? Or just the sustainability of demand for servers and storage and solutions throughout the year. I mean do you think that, that can be better in the second half? Or do you think it's a sense at this level throughout the year? Yes. Here's what I'd say. I think as we've said for a while now, technology has become more vital to every walk of life into competitive advantage into success, et cetera. And we believe it's going to probably be more resilient to a challenging economic environment. Equally, given our business model and the strength of our portfolio, our ability to capture opportunity in a more difficult environment is pretty strong. But our expectation is for a level of resiliency in the technology space. And good morning, Ruplu. On the -- on your question on seasonality, so first, just look, our outlook is based on the premise, we continue to see strength in software and services and lower growth in terms of hardware overall. With respect to the timing of that, first half, our typical seasonality would be first half 48, 49, we'd expect to maybe be slightly below that in the first half, and that's reflective of that continued slope towards more netted-down revenues and cloud, security, et cetera with the expectation that in the second half, you may see a pickup there, more on the client device. And so second half a bit stronger in terms of top-line impact, if you will. Ruplu, it's Chris again. I would just add -- let me just add that as we think about the customer behavior more recently, and a lot of folks have been talking about extra signatures, a little more scrutiny, et cetera. Yes, we have been seeing that. We haven't been seeing is a pullback -- wholesale pullback in projects. In fact, those infrastructure projects that we had talked about being delayed a little bit are actually coming to the forefront. Again, back to the technology being essential to all of our customer base. So we are seeing that resiliency as well. Got it. Thanks for the details there. Can I ask a follow-up? Al, I may have missed this, but on the call, did you mention what was netted-down items as a percent of gross profit in the fiscal 4Q? And sounded like that, that percent was unusually high in the quarter, and you expect that to moderate but your guide for next year for operating margin, I mean you're guiding it to be higher at mid to high-8% versus your original guide for this year was below 8%. So I guess my question to you would be what are you assuming for netted-down items as a percent of gross profit in 2023? And in general, can you help us parse out that year-on-year operating margin improvement? What are some of the factors that are driving the increase? And what are some of the headwinds year-on-year? Sure. So let me just start with the operating margin. So operating margin, I would most notably point to expectation that we would continue to be somewhat higher on gross margin in 2023 versus 2022. I certainly would not expect that those gross margins would match what we saw in Q4, which was really extraordinary. But I would just start from that square that somewhat higher gross margins in 2023 will certainly drive our NGOI margin, coupled with expectation we'd have some operating leverage there. To your original question on netted-down revenues for the quarter, you're right. Our prepared remarks noted that netted-down revenues grew 26% year-over-year. On a percentage of GP basis, Ruplu, that was 31% in the fourth quarter, so continue to be really strong. Yes. Hi, and thanks for taking my questions. I guess for the first one, in sort of the capital allocation priorities that you referenced in your prepared remarks, maybe we can sort of get a bit more color about how you're thinking about the M&A pipeline here? And sort of what are the focus areas, particularly as you look at sort of the changing mix of where customers are looking to spend? How are you thinking about the M&A pipeline and what are the focus areas for the company? And I have a follow-up, please. Let me just start, and then Chris can add on from an M&A perspective. So as you know, our capital priorities reopened both M&A and share repurchase. And the way that I would think about that, as I spoke to that range of our free cash flow of 50% to 75%, we would expect return to shareholders. So if you take the dividend, you can get a sense for what that range would look like. There is a range there because we view that as really optionality for us to tackle between what's going to drive the longest strategic value, including M&A as well as what's going to maximize shareholder return in the more near-term. And so look, both of those options and array of options are available to us. We're certainly back on the path of share repurchases, but M&A is also on horizon as well. Yes. And I would just add, we're never out of the market. We did have a pretty heavy year integrating Sirius, which is an incredibly successful and having an impact in the market. But we're always looking for organizations that can add capabilities in -- broadened capabilities, I should say, in high-growth, high relevance areas and also add scale to those practice areas that we've built if we can add scale at a faster pace, and we think about geography and our global presence. So we're always looking, and it's good to have a solid year of the Sirius integration behind us. Got it. Got it. And for my follow-up, I know you're all talking about sort of client devices being softer than expected. But I think you also mentioned on the flip side, solutions tracked much better than expected which, again, sort of is counter to the mixed impressions we get about enterprise spending. So maybe if you can sort of give us a bit more color on -- is that really solutions doing better than expected more of a supply dynamic where supply is easing up faster? Or are you seeing sort of upsized deals from your customers? Or is it really a strong run rate of orders that you continue to see on that front continued interest from customers? Just trying to sort of parse that out in terms of the backdrop of -- the macro backdrop that we have. Yes. No, it's a very fair question. And I would characterize it this way. We are seeing strong demand in the solutions space. And while we've had some supply feather out, I mean, where it's really moderated is on the client device space, some pockets in solutions but we're still carrying heavy backlog, particularly in NetComm. So the demand that you're seeing reflected in our performance is just that, it's demand, it's not a flow through of backlog. Thanks for taking my question. I have two as well. I guess, Chris, maybe to start with, you folks are talking about IT spend being flat in 2023. When I listen to IDC, Gartner, even some of your peers, they're all talking about IT spend being up about 3%, 4%. So from your perspective, where is the biggest delta here versus what you're talking about versus what maybe IDC Gartner and your peers are saying? And then how much of the delta do you think is perhaps conservatism and you can color where you're seeing that versus the netted-down revenue impact that you have? Good morning, Amit. Well, look, I wish I could say that it felt stronger out there. I really do, but that's not what the temperature is that we're feeling. So we build our expectations by listening to our customers. We've got thousands of sellers and technical advisers out there. And it's just the pulse that's coming back to us and looking at industry and partner data, we're feeling that it's going to be flattish. And then the 200 basis points to 300 basis points of premium that we always commit to would be on top of that. In terms of mix, I guess what I would say is we don't calculate in our customer spend versus net sales as an example. But of course, in this kind of environment, as we've explained, when you've got hardware that's more muted and you've got, in our case, netted-down solutions more heavily in the mix, you can expect more meaningful customer spend than the net sales line reflects. But that said, we are right now feeling flattish. Of course, we'll update you as we move through the year, but that's kind of where we feel right now. Got it. It always seems that you folks start to guide gross profit dollars growing at a premium to IT spend versus revenues given the way the mix is going up. That may be a discussion for a different day. But I do want to ask you a follow-up on the NetComm market. You talked about December quarter; I think it was up in that business. I'd love to get a sense, as you see supply starting to improve, especially on the NetComm side, are you seeing cancellations or deferrals happening over there? And then how do you think about NetComm into 2023 in this flat IT spend environment? Good morning, Amit. We are not seeing any level of cancellation or postponements there. The demand on NetComm, and you can see from our reported results, really, really strong. We're not getting a lot of help from a supply perspective, honestly. Extended lead times is still there. Our backlog has not moved substantially really -- our backlog has moved more in client, as Chris suggested, supply is still -- there's still friction there on the NetComm side, but that's notwithstanding really strong written demand. Great. Thank you. Good morning, guys. Yes, Chris, maybe a high-level question for you. And that's now that you have a year of Sirius under your belt, and that being one of the larger acquisitions CDW has done in the last handful of years. How do you think about doing more transformational deals going forward rather than tuck-in deals? And then does kind of the lower leverage targets that you guys communicated today -- is that because you want greater flexibility to do larger deals? I just want to kind of get a sense of how you're thinking about transformational deals because it does seem like Sirius has been a pretty significant success for you and what your appetite would be for those types of deals going forward? And then I have a follow-up. Yes. No, look, it's a great question, Erik, and it's all a matter of supply and demand, right? We're pretty particular in looking at organizations that really complement our suite of capabilities and/or scale them, along with the -- obviously, the financial return, but the fit in terms of culture. And I'll tell you, we've done eight over quarters and check, check, check. They've all been really outstanding. Now that said, there are companies out there that we think of and always reflecting on and some other larger transformational deal would certainly be something we'd consider. But it's a matter of finding them and making sure they're going to fit and provide the financial return. And you asked a question on the debt ratio, though, Al, did you want to tackle that? Sure. So Erik, obviously, we're within our stated range, and I noted that our new leverage range is 2x to 3x. So certainly, we have room in that regard. And I would say as we think about M&A, certainly, smaller bolt-on as we've certainly done plenty of. We can do that with free cash flow and with our existing net leverage capacity. As we think about things bigger, obviously, we're going to look at what's the best use of our capital, which could include taking on more debt and could include other avenues. I will just note that while our goal is to stay within that investment-grade capital structure. Certainly, from the rating agencies, we get some room there that if you do larger M&A and you go beyond that, you have a grace period, if you will, and you have time that you then get back into that range. So all of that would be contemplated in our calculus as we think about deals. Okay. Totally understand. And then, Chris, I'm not sure who wants to take this one. But generally, I think we've been hearing in the market kind of more weakness at the large enterprise level versus SMBs, your results would somewhat suggest the opposite with small business down versus the corporate business up. And so can you maybe just talk about some of the high-level trends you discussed in terms of extra signatures or deal downsizing, how that differs between the corporate business versus SMB business, if you are seeing any differences there? And again, same thing. I know we asked about pricing earlier on this call, but any difference in pricing between corporate versus SMB? And that's it for me. Thanks. Okay. Erik, yes, so differences between enterprise and SMB in terms of the process. I would say that the -- look, larger enterprises have a muscle for this and we're dealing with that muscle, and we know how to deal with the muscle. The smaller business, frankly, turn to us for cost evaluation as a trusted partner. And so in some ways, we actually play this avid role with them, which is how do you figure out, where you make adjustments in your technology roadmap to achieve the cost effectiveness. So in terms of the behavior itself, I'd say small and medium-sized businesses are being cautious. Enterprises have kind of kicked in their muscle and they're doing the analysis that they do. But all of that said, we do continue to feel strong demand across all of our segments. Even K-12 that we've talked about, that was a real dynamic in the quarter. We're still very successful with them with network modernization, all the things that have to support the client devices. It's the demand. Demand is okay right now. Thank you very much. I was wondering, can you talk a bit about working capital requirements as your model turns more and more to netted-down? I know this inventory levels came down quarter-over-quarter even with the shortfall in PCs and you've raised your target for free cash flow. So just how do you see your cash flow and balance sheet morphing over time? And then I have a follow-up. Thank you. Good morning, Shannon. So a few things. One, our -- we talked about our rule of thumb for free cash flow, and we raised that and I would say that's a reflection of our continued improvement and progress on really effectively managing working capital and also a somewhat of an effect or supported by the countercyclical nature of the business. So obviously, as this economic environment kind of moderates a bit, it actually helps from a cash flow perspective. So both of those things kind of in play. Your comment about netted-down or question about netted-down is a good one. It is a bit of a mathematical exercise. But just recall with our netted-down revenues, that while they show up in our net sales net, we're actually collecting gross dollars. So what that does from a cash conversion cycle perspective, it actually has the tendency to increase the DSO, increase DPO given the denominators and the numerator. So the way we think about that is really on a net basis. And can we continue to make progress within that band of high teens, low-20s on cash conversion. So all of those factors we consider as we're managing the business, including the puts and takes relative to our investments in inventory as well as how we manage AR and AP. So that's all part of really a dynamic operating model around working capital, and we're making really good progress on that front. Great. Thank you. And then can you talk a bit about demand you're seeing for Device-as-a-Service, Infrastructure-as-a-Service? It seems like in a challenged end market; maybe the ability to pay more ratably would be gaining some traction. But I'm just curious as what you're hearing maybe both from an enterprise standpoint as well as SMB. Thank you. Yes, Shannon, I'll take that. On the Infrastructure-as-a-Service, that is picking up. Our OEMs have been building that capability over time. And I'd say we've hit an inflection point where customers are eager to learn more and invest primarily enterprise, I would say, is a little stronger than the demand that we've seen in small business. On Device-as-a-Service that's a little more complicated because on the one hand, while it's an obvious of interest type solution. It's more complicated if it's either a lease or it's more complicated than that. And so it hasn't taken off to the extent that one would think, but may in the future. Thank you so much. I have a question on, there's been a lot of like government stimulus programs. I was wondering how you've been seeing those rollout develop; embrace any potential red taper slowdowns in them or accelerations of that? Thank you so much. Jim thanks for the question. Well, can I say they're rolling out as they typically do? And sometimes, that includes red tape and not all the things that you expect with government. I mean seriously, there's -- when we think about the federal budget that was passed, we're used to dealing with that, and we know where we can go find the funds. And I think that's been pretty kind of standard operating procedure, if you will. The Infrastructure Act is a little more to figure out where funds that can benefit our customers' vis-à-vis technology that's taking a little bit more time is what I'd say. But it's nothing that is daunting us or nothing that concerns us, frankly. Okay. And have you also been finding a lot of those new programs and systems have been kind of more on a higher-end service product offerings that you've had, say, today versus 5 or 10 years ago, meaning more like cloud and security and software solutions as opposed to more kind of plug-and-play hardware solutions? Yes. That's -- that's a great point. The ability to access that funding for more advanced solutions is absolutely there. There's more demand for that versus merely client devices, for example. That's a good point. Security, another one that you tends to thread through all of the funding mechanisms at this point. So yes, that's a good point. And the answer is yes. Good morning. Appreciate the opportunity. Chris, just looking at the hiring that you guys did over the year, 1,100 people through the first three quarters and then obviously, you guys were flat in the fourth quarter. I guess two things. One, is that kind of a testament to your thoughts on the overall market, perhaps weakening here as you guys went through the fourth quarter? And then what kind of people were you hiring during the year in order to meet your needs? Yes. Keith, good morning. As we've been doing over the last few years, we've really been targeting our hiring in a couple of areas. It was the high demand, high capability. So think about the sales organization, think about the practice areas like technical specialists and security and cloud, software, the spaces that we've talked about and really targeting those areas. Along with what I would say is technologists and digital specialists for our own evolution of our business. That's really where we've been focusing. In terms of as we come into the back half of the year, just consider that disciplined management of the business. As we look out at the economy, as we see what's happening, we're just being very disciplined in the way that we're approaching our own cost management. And you'll see that in some tempering in our hiring in the back half of the year. Great. I appreciate it. And then looking at your guide a little bit more, trying to unpack it. As you think about like the macro environment, are you expecting roughly a flat GDP? And where are you -- what kind of assumptions are you making for interest rates as you guys think about your guide? Yes. Good morning, Keith. I would say just in terms of broad macro GDP, yes, I'd say flat, maybe slightly down, if you will. And so you get your translation from an IT market perspective with all of the components that we talked about, both our mix and uncertainty as well. Interest rates -- look, I don't know if we have a formal market view on that. Certainly, we make sure that the posture of our capital structure is protecting against that. We do have largely a fixed rate capital structure but we do have a component of our debt that's term loan, that's adjustable rate. And so the way we think about that is the most effective way to manage our interest rate risk is where we see there's risk there that we might pay down that debt a bit faster. You saw that in the fourth quarter, and we'll continue to operate in that regard. And obviously, we think about that in the construct of our overall capital priorities. Okay. Thanks for squeezing me in. I wanted to ask on 2023 revenue growth guidance of 2% to 3%. I think it's a lower overall starting point than I can recall in many years. I know your split says the assumption is no market growth, but the largest global distributor just guided to double the growth rate that you're describing. So for investors that take this to mean that your share gain premium is effectively lowering inherently in this guidance, which is notable as we're shifting away from PCs. Maybe you could, Chris, opine on that market share premium piece as we move into a different environment from a mix perspective, away from transactional and towards solutions and tie in to your observations that you saw during Q4. Thanks. Thanks, Adam. Let me just -- let me start with our guide, when our guide is coming versus when some of the other observations about the outlook for the market came out a month or 1.5 months ago. And the pivot that we've talked about in Q4, we started to see more dramatically end of November and into December. So that might be having an impact on how -- on the discrepancies that you're hearing. In terms of the 200 basis points to 300 basis points and the validity of the 200 basis points to 300 basis points, I think that question was the one you were asking, we still view that as our target go get. As we mentioned, Adam, and this might be what you're getting underneath. But as we mentioned, as we think about 2023 and the dynamics that we've seen in the fourth quarter of 2022, continuing into 2023, namely for us, stronger growth in cloud and Software-as-a-Service and security and more muted hardware sales. That does mean that our customer spend will be more meaningfully greater than the number, I think you gave a 2.5% figure. It will be meaningfully greater than that number. So we would look at that outperformance as 200 basis points to 300 basis points plus, if I could put it that way. Okay. And maybe just a quick follow-up, Al, on the Q1 guidance. In years past, CDW would talk about seasonal being down high-single-digits sequentially, 7%, 8% down. Today you're guiding flat to low-single-digit growth sequentially. And as I think about the mix of the business, with Sirius being in there, I would think it would be even more seasonal to Q1 given the enterprise focus. So maybe just help me understand the change now to seasonality versus historically. Thank you. Sure. Thanks, Adam. Look, the most notable thing I would just say is the Q4 was a very extreme period. And so as we look at Q1, you're right, seasonally, we would typically say there would be a contraction to Q1. And I guess what you should take from that is, while thematically, we'd still expect this mix into netted-down and lower transactional, maybe not as extreme as what we saw in Q4 and therefore, with some of that balancing out, we'd expect that we'd have modest growth on the top-line in the first quarter. And then again, a little more modest in terms of the gross margin. So just really kind of a bit of a dampening effect of the extremity that we saw in Q4. Thank you, Drew. And let me close by recognizing the incredible dedication and hard work of our 15,100 coworkers around the globe. Your ongoing commitment to serving our customers is what makes us successful. And thank you to our customers for the privilege and opportunity to help you achieve your goals, and thank you to those listening for your time and continued interest in CDW. Al and I look forward to talk to you next quarter.

EarningCall_388

Hello and welcome to SelectQuote’s second quarter fiscal year 2023 earnings conference call. My name is Dru and I’ll be your operator today. If you would like to ask a question during today’s call, please press star followed by one. If you change your mind, please press star followed by two. Before we begin our call, I would like to mention that on our website, we have provided a slide presentation to help guide our discussion. After today’s call, a replay will also be available on our website. Joining me from the company, I have our Chief Executive Officer, Tim Danker, and our interim Chief Financial Officer, Ryan Clement. Following Tim and Ryan’s comments today, we will have a question and answer session. As referenced on Slide 2, during this call we will be discussing some non-GAAP financial measures. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release and investor presentation on our website. Finally, a reminder that certain statements made today may be forward-looking statements. These statements are made based upon management’s current expectations and beliefs concerning future events impacting the company and therefore involve a number of uncertainties and risks, including but not limited to those described in our earnings release, annual report on Form 10-K, quarterly report on Form 10-Q for the period ended December 31, 2022, and other filings with the SEC, therefore the actual results or operations or financial condition of the company could differ materially from those expressed or implied in our forward-looking statements. Good morning everyone and thanks for joining us. We’re pleased to share a strong set of results for our fiscal second quarter. As you know, we previewed our outperformance in a pre-announcement earlier this year. As we noted in that release and will speak to today, the most important takeaway is the tangible reinforcement we have observed in our strategic redesign. We firmly belief SelectQuote has optimized their senior segment to drive the right balance of profitability, cash efficiency and growth. Better yet, we believe the strategy is repeatable in a range of future Medicare Advantage seasons. We will speak to our observations and execution in AEP, but as you’ve seen from carriers and our peers, it was a successful season which certain benefited SelectQuote as well. That said, the majority of our outperformance was not simply market driven but was instead achieved through strategic changes we’ve made to our operations and the resulting efficiency of our agents and marketing. Overall, we’re very proud of our team and there’s a lot of excitement within the organization about the ability to leverage our strategy in the future. First, SelectQuote has now achieved four consecutive quarters of incremental improvement in the key performance indicators for our senior business. As we’ve said over the past year, we will not declare victory but instead strive to continue and accelerate this positive trend in the years ahead. What we can state definitively, though, is our conviction that this redesign strategy is the way to succeed in the future. For the fiscal second quarter, our strategy produced excellent results, specifically a 64% year-over-year growth in consolidated revenue and a $228 million year-over-year improvement in adjusted EBITDA, or $83 million excluding the negative adjustment for LTD taken in fiscal 2022. In our senior segment, revenue growth in AEP was stronger than originally expected based predominantly on higher volume of policies, which were well ahead of our projections based upon much stronger agent close rates. To be clear, SelectQuote did not buy additional growth but instead acquired leads according to plan and converted those leads at much improved close rates compared to previous seasons. As a result of higher volume, we grew faster on the top line, but the significant improvement in adjusted EBITDA and senior EBITDA margin of 37% for the quarter was really driven by expense efficiency, not volume growth. Additionally, we have observed stability and policyholder persistency thus far in AEP as LTDs came in above our expectations and our unchanged full-year $875 LTD forecast implies sequential improvement over the back half of the year. The annual renewal event has been similar to last year despite a much more favorable selling environment, this AEP from a policy feature perspective. We also continue to see improving trends on both policy approval rates and early life retention results, which we largely attribute to the enhancements we made to our sales and marketing strategy in the spring of 2022. Put simply, we’re increasingly confident in the visibility of policyholder persistency and our booked LTVs, which is another key requirement in our mission to deliver predictable profit and growth for our shareholders. Lastly on 2Q results, we had another strong quarter of growth in our healthcare services segment, which grew revenues and Select Rx members by $44 million and 411% respectively over the last year. As a strategic update, we’ve decided to slow member growth and prioritize profitability and cash flow given the positive feedback we’ve received from investors about our focus on margin stability and cash flow across the overall SelectQuote enterprise. To be clear, the growth opportunity for Select Rx remains massive and we intend to pursue that market in the future. We currently believe it’s prudent to prioritize operational efficiency and drive cash flow over volume and market share growth. Next, our results today and growing confidence in our strategy prompted a $20 million increase at the midpoint of our full year outlook for fiscal 2023 adjusted EBITDA compared to guidance introduced on our fiscal year end 2022 call. Specifically, we now expect adjusted EBITDA in a range of $5 million to $25 million based on a consolidated revenue range of $910 million to $960 million. The increase in our outlook is predominantly driven by our senior business, but you will note that the full EBITDA outperformance for the second quarter does not flow through the full year range. The key driver for that is our decision to pull forward core senior agent hiring for the 2024 season based on the success of our strategy. This will be a modest drag on our fourth quarter results compared to previous seasonality, but we believe it will be outweighed by the benefit in the 2024 selling season. Ryan will provide more detail on the cadence of our outlook, but beyond the benefit to 2024, our strategic intent is to make more and more SelectQuote’s offering a year-round business with reduced impact from Medicare Advantage seasonality. Lastly, it’s important to point out that our cash flow projections for 2023 are ahead of our internal forecasts and we’re increasingly confident in our ability to drive positive cash EBITDA for the full fiscal year 2023. Overall, we’re very pleased with the progress to date but remain committed to delivering continued improvement and believe we have the strategy and unique business model to continue our momentum into fiscal 2024 and beyond. With that, let’s turn to Slide 4, where I’ll provide more color on the AEP season and how SelectQuote succeeded strategically. As we noted over a year ago, our strategy for senior is now focused on unit-level profitability rather than growth, which we believe can be successful in a wide range of AEP environments. AS you’ve heard from carriers and will hear from us, this AEP was materially better from a selling perspective compared to a year ago. While a favorable AEP helped everyone this year, the major achievement in our senior EBITDA and margin expansion was driven more by our strategy to deploy a higher mix of tenured agents and supply them with more targeted, high quality leads - unit economics and cash flow over growth, to put it simply. As you can see in the diagrams on this page, our strategy worked extremely well across the two major input costs for our senior business: agent close rates and marketing or customer acquisition. First on agents, as you know, our strategy coming into this AEP season was to hire agents earlier and work with a higher mix of tenured core agents compared to flex agents. Specifically, the mix of core agents is over 70% this season compared to around 20% last season. In the past, core agents have had significantly higher close rates and policy productivity compared to flex agents, and this season that pattern held and actually improved. Agent close rates this AEP season were up 54% compared to last year. Again, to be clear, the improvement was predominantly driven by agent mix and lead quality compared to the plan design features in this AEP versus last, and while we focused on better quality this AEP, we believe there is still a significantly large market to grow our business in the future. This was evident even this AEP as our tenured agents drove higher close rates, which created more policy volume than expected on our budgeted marketing and lead spend. Now if we move down the page, you can see a significant reduction in our marketing cost per approved policy, which were down 50%. Much of this improvement is explained by the close rates of our agents, but SelectQuote also prioritized the most optimal marketing channels based on lead quality and cost. The end result was a strong senior EBITDA margin of 37% for the quarter and significantly improved cash efficiency in the policies book compared to recent years. Ryan will present views on each of those KPIs later in our remarks. Put bluntly, a strategic focus on operating leverage was exactly what our senior business needed, and we’re thrilled with the execution of our teams in the season thus far. If we turn to Slide 5, I’ll quickly review the key pillars of our strategy, especially for investors that are new to our story. To begin, the overarching goal for each of these pillars is to optimize unit and enterprise-level profitability and cash efficiency over growth. We’re a year-plus into the deployment of the strategy, and as you saw from our results this quarter, we believe there is significant upside potential to scale growth without sacrificing operating leverage. To start on the left side of the page, the first pillar in this strategy was to temper growth with the intention of significantly improving margins and cash flow for the volume of Medicare Advantage plans marketed and sold through our operation. As I just reviewed on the previous page, we were highly successful driving margin across both of our major operating expenses, agents and marketing. On this point, I would add just two things. First, we believe there’s more progress to be made, which we’ll highlight later as we talk a little about the year ahead. Second, I would also point out that our ability to drive margin is not entirely dependent upon agent and marketing efficiency. We’re focused across the organization to drive as much return and cash flow on costs as possible. We now move to the right. A related tenet of the strategy was to reduce operational risk, our cost leverage in our senior distribution business. The ultimate goal here is to reduce the variability in our results in a range of market scenarios or Medicare Advantage seasons. Ryan will provide more detail here as well, but we believe SelectQuote has improved considerably in three main ways thus far. First, the earlier on-boarding and higher mix of tenured agents improved throughput efficiency and marketing cost per approved policy. Second, overall costs, both fixed and variable, have improved this season, and lastly SelectQuote has become meaningfully more cash efficient and we are confident in our ability to grow positive cash EBITDA in fiscal ’23 and beyond. Next on the third pillar, we’ve talked for much of the last year about policyholder persistency and the lifetime value we book on policies sold. Similar to SelectQuote’s operating leverage one season to the next, we want investors and analysts to expect stability in LTV and, as a result, we took significant actions to right-size our assumptions a year ago. To review, those included an increase in our constraint from 6% to 15%. Additionally, the strategy to prioritize the best Medicare Advantage business has also improved observed policyholder persistency, and overall we’re pleased with the strong improvement in both approval rates and 90-day active rates thus far this season. To summarize, we believe we’ve taken significant action to minimize adjustments to previous cohorts, and we’re also seeing stabilization in policyholder behavior compared to the changes to the industry over the past few years. Lastly, while much of this quarter’s story is about the improvement in our senior Medicare Advantage business, SelectQuote continues to succeed in our healthcare services segment primarily driven by Select Rx. Ryan will provide detail here as well, but our Select Rx business grew members by about 20% over last quarter and 411% compared to a year ago. Currently, the platform has over 39,000 members, which is remarkable for a business that began less than two years ago. As mentioned before, in keeping with our company-wide goal to accelerate profitability and cash flow, we’ve made the decision to slow our growth in Select Rx members. As a reminder, the Select Rx business is very cash efficient compared to Medicare Advantage policies. The main takeaway here is that our healthcare services segment and Select Rx specifically are poised to be an increasing contributor to profitability and cash flow in the near future. For healthcare services, we continue to approach EBITDA breakeven by year end and we’re excited about the continued ramp in the years ahead. If we turn to Slide 6, let me give some more detail on how our strategy has improved our operating leverage and cash efficiency. First on the left-hand side of the page, you can see the significant improvement in our operating expense per approved policy, which includes the two major costs of our business, agents and marketing. As you can see, the aggregate impact was a 41% decline year-over-year, which drove the majority of our outperformance on EBITDA. While 41% is a significant number, it’s worth noting that last year was also meaningfully inefficient given the industry-wide challenges. That said, the important takeaway from both the year-over-year and LTM views is that our strategy is producing policies at a cost that drives very attractive returns and what we believe are sustainable margins. Additionally, we’re delivering the volume and returns on lower LTVs. Again, the confidence in our strategy is high and we’re excited about the leverage and stability that we can repeat and expand upon in future seasons. If we turn to the right side of the page, we want to emphasize that the story isn’t just about margin but also about cash efficiency, which Ryan will detail as well. In these charts, you can see the impact of both new carrier commission structures and the mix shift to more cash efficient policies. Specifically, SelectQuote receives 64% of the expected senior revenues in the first year. As Ryan will show in a few pages, this has accelerated our payback period to just over two years. For reference, this payback period is better than the projections we spoke about during our IPO and again on lower LTVs. It’s hard to overstate how meaningful that is for our business and combined with the leverage we can drive on the same marketing dollar with healthcare services, we’re very encouraged about the potential cash generation of our holistic platform. With that, let me hand the call over to Ryan to review our segment results and double-click on a few of the key takeaways from our execution over the quarter. Ryan? Thanks Tim. Let me begin with a quick review of our consolidated results, then I’ll review our segments and provide the detail for our senior business that Tim alluded to. Our consolidated results were quite strong with revenue totaling $319 million for the quarter, driving consolidated adjusted EBITDA of $64 million. Across the board, our results were ahead of expectations but most notably in our core senior division. As I’ll review in a moment, our healthcare services business weighed modestly on consolidated EBITDA with a drag of $9 million, but importantly the profit improvement was on a lower level of sequential revenue growth. We are pleased with the scale and remain on a path to approach breakeven by fiscal year-end. It is worth reminding investors and analysts that AEP is our heaviest cash use season. For context on our cash position, as of January 31 we had $96 million of cash-on-hand with zero drawn on our revolving credit line. This compares to a cash position of $36 million as of December 31, where we also had zero drawn on our revolving credit line. Most importantly from a capital and liquidity perspective, the business is in a significantly stronger position than it was a year ago, and we are well situated to drive continued growth in cash efficient profitability, which is certainly helpful when speaking with capital providers as we plan for the years ahead. With that overview, let me turn to Slide 7. Clearly we are very pleased with the outperformance produced in our core senior division through AEP. Senior revenue grew over 50% year-over-year to $224 million, and as I will detail on the next slide, we were able to drive that growth on a lower volume of approved policies booked in the quarter compared to last year. The primary driver here was twofold. From a volume perspective, as Tim mentioned, the close rate and cost efficiency we gained through our strategic redesign allowed us to on-board more policies than we originally intended. The 18% year-over-year reduction in policies this quarter put us well ahead of our original outlook for a 35% to 45% full year decline in MA policy volume. Now, the natural question is how we booked more revenue on lower volume with lower LTVs. The key driver, as you know, was the adjustment taken last year for lower persistency in legacy cohorts, and as Tim detailed, the more exciting result was the significant improvement in our profitability driven by our strategic redesign. SelectQuote delivered senior adjusted EBITDA of $84 million, which represents a 37% margin. Turning to Slide 8, let me review the KPIs of our senior MA business. On the left, our volume of approved Medicare Advantage policies declined 18% to 219,000. The decline, as Tim noted, was lower than our original plan given the strong agent close rates. Moving to the middle chart, we reiterate that SelectQuote is committed to driving profitability and cash return over growth. The better growth this season was again dictated by achievable returns and not by achievable or available volume. As you can see here, the recent quarter drove adjusted EBITDA margin in senior of 37%, which is actually better than historical peaks when adjusting for LTVs as we did over the past year or so. As noted before, we are achieving these margins based largely on strategic decisions to increase agent efficiency and drive optimal cost per policy. Which brings us to the chart on the right, where LTVs for the quarter were in line with our expectations of $870 and we remain confident in our full year expectations for fiscal 2023 LTVs to average $875. On the next page, I’ll provide more context on our comfort and strategic actions for LTV. If we turn to Slide 9, let us give some context on the driving factors behind LTV. For reference, I’ll group the impact into two categories. First are changes to LTV driven largely by strategic decisions we made in the season. The first factor in this category is carrier mix, where we sought to target the best quality volume. Without speaking to specific carriers, our work here was to rigorously review and prioritize observed persistency, so while the average LTV of the policies approved in AEP were lower, we believe the quality is much higher. Moving to the second driver, recall that we have a mix of our policies that come to us directly from carrier pods compared to our typical shopping environment. In this case, the benefit to SelectQuote is cash efficiency as the commission structure is more front end loaded and the cost to generate these policies is often lower. In the second category, we outlined three factors that we’d define as market or accounting level driven. First, industry commissions increased year-over-year, which drove a $6 tailwind for LTVs. Second, for observed market persistency, we saw a modest year-over-year improvement; in fact, observed LTVs came in ahead of expectations and our unchanged LTV forecast of $875 implies higher LTVs in the second half of 2023. Put another way, absent the strategic decisions and lag from accounting, our LTVs would have increased in 2Q. To be clear, we are not calling for a bottom or declaring victory on LTV, but in a season where policy features drove more shopping decisions, we are very encouraged by the stability we are seeing in the market. Lastly, as noted, our LTVs are accounted for based on a three-year look-back model which drove a modest but shrinking LTV headwind as persistency stabilizes, so again, without a major declaration on the future of LTVs, we would point out that market factors outside of our strategic decisions would have driven a modest increase in LTVs compared to last year, which we hope is helpful context for investors. If we now flip to Slide 10, let me provide one last piece of context about the strategic redesign of our senior MA business and our improvement in cash efficiency. In these charts, we break down the components and timing of the cost to produce policies and the same for the cash timing of the resulting revenues. As you can see in the stacked bars at left, it took the first year and first renewal just to cover the variable cost to produce those policies, then it took the second renewal and a significant portion of the remaining tail of renewals to cover our fixed costs. As we noted, 2021 was a challenging year, so clearly there was not much margin or cash efficiency in this cohort. Fast forward to our last 12 months, which include this AEP, and SelectQuote’s re-focus on a higher mix of tenured agents and targeted business in combination with more favorable commission timing has significantly improved margin and cash efficiency for senior. As you can see on the charts at right, despite lower LTVs, SelectQuote has been able to cover all variable costs with first-year cash, and essentially all costs, variable and fixed, by the second renewal. To put this a different way, we believe the cash breakeven improves in MA policy is now just over two years, which actually compares favorably to our expectations at IPO, which assumed higher LTVs than where we are operating and scaling against today. As Tim noted, we have high conviction that this strategy is repeatable and sustainable in a range of selling seasons. To that point, the last piece of data I would call your attention to is the percent of fixed cost relative to total revenue improved by more than 400 basis points, which gives us confidence in the sustainability of our strategy as we now have increasing control of our operating leverage. First on healthcare services, as Tim noted, we have shown dramatic growth in members for our Select Rx business. We know the market opportunity is significant for this business and believe our unique connectivity with this population of customers remains a competitive difference maker. We are also committed to near term profitability in this segment and as you can see on the right-hand chart, we made sequential improvement on adjusted EBITDA, which improved to a $9 million loss versus a $12 million loss in Q1. Lastly, as Tim mentioned, we will balance the growth opportunity with profitability in the near term but remain confident in approaching breakeven on adjusted EBITDA by fiscal year end, which positions us very well for healthcare services to be a more meaningful contributor to profit and cash efficiency in fiscal 2024. Now if we flip to Slide 12, I’ll briefly highlight that the strategic elements we discussed in senior are being applied across SelectQuote, and our strong results in life and auto and home exhibit that effort as well. While year-over-year revenue expanded more than 10% for these businesses, the more meaningful impact can be seen in the four-fold increase in our adjusted EBITDA over that period. Lastly, our full year adjusted EBITDA range is now $5 million to $25 million, which is $5 million higher at the bottom end of the range and also includes some of the strategic agent hiring drag expected in the fourth quarter as we prepare for the 2024 season. In summary, a good first half of 2023 and we look forward to sharing more about how SelectQuote can scale these results in the future. You had a nice improvement in revenue to CAC. How should we think about unit economics going forward given your renewed focus on profitability? Is that three times multiple the right multiple, or do you think we’re going to see some degradation there as you hire earlier for future AEPs? Yes Daniel, good morning, this is Tim. Great question. I’ll take that and see if Bill Grant, our COO also has some comments. But I would say overall, we’re very pleased with the progress we’ve made over the last four quarters. Certainly the AEP environment kind of accentuated those results, and we certainly believe the changes we’ve made across both marketing and our agent plan have really set us up for very durable results moving forward. We’re very proud of the 37% margins in senior and certainly we think this is indicative of a step function improvement in our model, and we certainly believe that is something that we can continue to focus on. As you can tell from the tone of the call, we’re very much focused on improving our unit margins, which we think we’ve done this quarter. I think our full year guide also implies improvements in our unit profitability and cash efficiency. Yes, just other than I think we feel optimistic to keep that gap moving in the right direction and that the market dynamics are such that we feel like we’re poised to do that, both with the global market as well as the positive changes that we’ve made internally in terms of how we’re appropriating the market. Yes, that makes sense. On liquidity, you’re ahead of expectations in terms of cash, but at least in my model, it seems like you’re going to need to fund yourself externally in some manner over the next year or two, whether that’s drawing on the revolver or new debt, etc. Can you just comment on your liquidity needs over the next year or so and how you intend to fund yourself in the near term? We are well ahead of our cash plan. As we alluded to, we had $36 million as of 12/31, nothing drawn on the revolver, and approaching $100 million at this point in the year, so we are well ahead. Obviously operational results put us in a great spot. We are actively in discussions with our lenders. That said, our current capital structure as it exists gives us adequate runway for the duration of calendar year 2023, so we’re in a great spot but we are actively engaging with our lenders on a more permanent solution with regard to the capital structure. Hey, thanks guys. Just a quick question on LTV dynamics that you mentioned on Slide 9. With strategic decision making and resulting shifts in carrier mix accounting for most of the year-over-year LTV decline, should we think about the current LTV in the $875 guidance as representing kind of a permanent re-basing, to a certain extent, versus year-ago levels? To follow that, where do we think LTV could go under the current strategy, and how should we think about the pacing of recovery given your methodology and as we move into next year? Thanks. We certainly wanted to provide increased transparency here on this particular slide that you’re referencing. LTV, clearly an important metric, not the only metric that’s out there. We are managing the business across broader policy economics. LTV is one of those factors, the cost to acquire the policy, approval rates, first year revenue re also other factors, so strategically, as we’ve mentioned, very focused on cash and profitability and prioritizing, really, kind of end-to-end total policy economics over just LTVs. Before Ryan speaks to LTVs, I do think it should be noted the significant progress we’ve made with respect to our operating cost per approved policy. We shared both results for the quarter-over-quarter and LTM basis that really have brought this down materially while we continue to work and improve LTVs. Yes, I guess the only thing I would add is LTVs did exceed our internal expectations for 2Q. We do still expect full year FY23 LTVs to come in north of or at $875, and furthermore continue to be encouraged by the trends we’re seeing with respect to retention and leading indicators. Just to reiterate, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. We have no further questions at this time, so I’ll hand you back over to Tim Danker, CEO for closing remarks. Thank you Dru. Well, thanks everyone for joining. We certainly look forward to seeing many of you at conferences on the road in the coming months. To conclude, we’re very pleased with the progress and proof points of our strategic redesign. While we’ve had success for four straight quarters now, we will continue to anchor our responsibility to delivering consistent results and profitable growth for shareholders. We’ll share more as the year progresses, but suffice it to say we have a lot to look forward to across all of our business lines. Again, we thank you for your participation. We look forward to speaking to you again next quarter. Have a good morning.

EarningCall_389

Greetings, and welcome to the Federal Realty Investment Trust Fourth Quarter 2022 Earnings Call. At this time all participants are in listen-only mode [Operator Instructions]. As a reminder, this conference is being recorded. Good afternoon. Thank you for joining us today for Federal Realty's Fourth Quarter 2022 Earnings Conference Call. Joining me on the call are Don Wood, Dan G., Jeff Berkes, Wendy Seher, Jan Sweetnam and Melissa Solis. They will be available to take your questions at the conclusion of our prepared remarks. A reminder that certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information as well as statements referring to expected or anticipated events or results, including guidance. Although Federal Realty believes that expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty's future operations and its actual performance may materially differ from the information in our forward-looking statements, and we can give no assurance that these expectations can be attained. The earnings release and supplemental reporting package that we issued this afternoon, our annual report on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial conditions and results of operations. Our conference call tonight will be limited to 60 minutes. [Operator Instructions] and with that, I will turn the call over to Don Wood to begin our discussion of our fourth quarter results. Don? Well, thanks, Leah, and good afternoon, everybody. We ended 2022 on a very strong note and reported FFO per share of $1.58 in the quarter and therefore, $6.32 for the full year, ahead of both internal and external consensus expectations and a precursor to the strong guidance that great real estate with class-leading demographics will allow us to forecast. We're more than a year ahead of where we thought we'd be in recovering from the depth of the pandemic in terms of leasing, occupancy and bottom line earnings. We executed a record 497 leases for over 2 million square feet of retail space in 2022, and the comparable deals were done at 6% more rent on a cash basis and 15% more rent on a straight-line basis than the leases that were expiring. We did that while simultaneously increasing our inherent contractual rent bumps to over 2.25% annually overall. And by the way, based on what we see looking forward into 2023, at this point, while I doubt that we'll do 497 leases again. I would expect a higher lease rollover percentage in 2023 as continued strong demand and inflationary pressures are helping negotiations. We leased up the portfolio at 94.5% at year-end compared with 93.6% a year before and still have room to further increase in 2023. Most importantly, that intensified focus we've been talking about over the last year or so, aimed at minimizing that difference between percent leased and percentage occupied, i.e., getting tenants rent paying more quickly. Well, it's working. While our percentage lease continues to grow, up 90 basis points in 2022, our percentage occupied is growing even faster, up 170 basis points in 2022, suggesting some of the quickest times between lease signing and rent paying in our history, a particularly impressive feat during the supply chain struggles of the past two years. So all of these things resulted in 2022 FFO per share of $6.32, 13.5% higher than the year before and right on top of our pre-pandemic record. I know you've heard me say it many times before, but it bears repeating. Demographics matter, especially in times of economic pressure, past cycles have convinced us that families simply have to have money to spend for retail real estate cash flow to grow. 68,000 households with annual average household incomes of $150 to $1,000 sit within 3 miles of federal centers. That's $10.2 billion of family income generated within a 3-mile radius, and more than half of those people have a 4-year college degree or better. I know no other significantly sized retail portfolio that can say that. So it's manifesting itself in a myriad of ways, including a wide variety of tenants who saw their sales exceed the percentage rent threshold in the lease in the fourth quarter. While not a huge absolute number, since we strive for strong fixed rent in our leases, the broad-based percentage rent contribution in the quarter, particularly among our restaurants and soft goods tenants over and above the fixed rent is notable and contributed an additional $0.02 per share compared with last year's fourth quarter and is a continuation of the trend that we've been seeing all year. Now as economic activity falls and higher interest rates affect everything from car loans to mortgage payments to deal underwriting, we would certainly expect to see a slowdown in consumer spending which very well may cause retailer reticence and a slowdown in the period. It hasn't happened so far. Leasing -- that kind of change is pretty obvious. But that's okay. This business remains more solid. And if history is any indication, federals real estate will outperform given that superior demographics, along with a very strong diversification of rent. No one tenant makes up more than 2.8% of our rental stream, and that tenant is TJX. To put a finer point on that, when you think about today's troubled tenants, Bed Bath, Party City, Rite Aid, Tuesday Morning and even Regal Cinemas, of which we have no exposure, all of them combined comprise less than 1% of our 2023 forecasted rental stream. Average in-place base rent at our 9 Bed Bath & Beyond and Buybuy Baby locations is $15 a full. Rental will be more than replaceable as we navigate through the expected bankruptcy process with. We continue to opportunistically prune the portfolio of non-core and slower-growing assets. And in the fourth quarter and the last few days of the third quarter, we sold three smaller properties, all in Maryland, for proceeds of about $135 million at a combined flat 5% cap rate: one, a legacy residential community from Federal's earliest days; the second a Federal developed residential building on excess land in Towson Maryland; and the third, one of our earliest small retail developments in Rockville Maryland. Those and earlier sale proceeds were reinvested into assets like Kingstown and the shops of Pembroke Gardens, which are generating better going-in yields and add significantly better growth process. The ability to sell non-core assets accretively is just one of the differentiating tools that we have to manage this company through economic cycles. And of course, you only need to look at the $600 million-plus construction and process number on the year-end balance sheet to identify a large source of future income, much of at least not yet reflected in the results. Okay. So that's about it for my prepared remarks this afternoon, so I'd like to leave you with one final thought before turning it over to Dan. The run-up in interest rates will surely pressure everybody's earnings to some extent in the years ahead, as included, beginning in 2023. Dan will go through the expected impact in a few minutes. But keep in mind that Federal has been around since 1962 and has raised its dividend every year since 1967. This business plan doesn't need money to be virtually free to thrive. It's proven that. In terms of 2023, know that significant incremental rent from contracts that are already in place, particularly where demand is strongest at our mixed-use operating properties like Assembly Row, Pike & Rose, Santana Row, Darian and CocoWalk, along with a full year of contributions from '22 acquisitions, will more than cover incremental interest and lead Federal to what we believe will be an all-time record earnings year in 2023 with sector-leading growth. Dan? Thank you, Don, and hello, everyone. Our reported FFO per share of $1.58 for the fourth quarter and $632 for the year were up 7.5% and 13.5%, respectively, versus 2021. For both periods, we're at the top of our previously increased guidance range. Primary drivers of the outperformance: acceleration in occupancy up to 92.8%, a gain of 70 basis points for the quarter and 170 basis points for the year. Other drivers: higher percentage rent, which more than doubled 2022 versus the previous year; and continued strength in consumer traffic at our mixed-use assets, driving marketing revenues higher. This was offset by higher property operating expenses and higher interest expense. Comparable growth, our GAAP-based metric for same-store in the fourth quarter and the full year came in at 5.4% and 7.7%, respectively, strong metrics despite the negative net impact of prior period rents and terms. On a same-store cash basis, we came in at what we believe to be a sector-leading 5.5% for the quarter and 8.5% for the year. Excluding the negative impacts of prior period rents and term fees, cash same-store growth was 7.8% and 10.8% for the fourth quarter and full year, respectively. For those analysts and investors to keep track, we had $1.1 million term fees for the fourth quarter against a 4Q '21 level of $1.7 million. Prior period rent contributions related to COVID-impacted negotiated yields were $2 million this fourth quarter versus $4 million in the fourth quarter of '21. Please note that in our investor presentation on our website, there are updated slides plus an appendix which provide all of these figures. Don already highlighted continued strength in leasing, but let me point out a few more statistics of note. The 94.5% and 92.8% in leased and occupied metrics represented growth of 90 basis points and 170 basis points, respectively, over 2021 and 20 and 70 basis points of sequential growth over the third quarter. We continue to see strength in our small shop leasing, which now stands at 90%, a level not seen since 2017, but still short of our targeted and historical peak levels. The 80 basis points of relative pickup in our SNO [ph] spread over the course of 2022 demonstrates our ability to get tenants open and rent paying. More upside to come in 2023 as we target an SNO spread at more typical levels of 100 to 125 basis points long term. I mentioned leasing activity has been strong to start 2023, and our pipeline of deals executed to date in the first quarter and those under executed LOI is in line so far with 2022's strong leasing volumes. Additionally, we remain optimistic so we can continue to drive favorable lease terms in 2023, including both strong lease rollover growth and sector-leading contractual rent forms. A big driver of our growth in 2022 was the continued stabilization of a large portion of our redevelopment and expansion pipeline. We expect that to be the case in 2023 as well. Having placed $800 million of projects into service in 2021 and 2022 at Assembly Row, Pike & Rose and CocoWalk, we saw a $24 million of incremental POI 2022. We expect another roughly $12 million of incremental POI in 2023, just from those 3 projects alone. The balance of our development pipeline now stands at roughly $730 million which will deliver incremental POI starting this year and continue for the next few years but is less than $300 million remaining to spend. Now to the balance sheet, a quick update on our liquidity position. We ended the year with $86 million of cash available and an undrawn $1.25 billion credit facility for a total liquidity in excess of $1.3 billion. Our leverage metrics continue to be strong. Fourth quarter annualized net debt to EBITDA is roughly 6 times. That metric is forecasted to improve over the course of 2023 as development POI comes online and occupancy drives higher. Again, our targeted level is in the mid -- is in the low to mid 5 times range. Fixed charge coverage was 3.7 times for the fourth quarter and 4 times for the full year. Now on to guidance. For 2023, we are introducing FFO guidance of $6.38 to $6.58 per share. This represents 2.5% growth at the midpoint $6.48 and 4% at the high end of the range. Despite the challenging capital markets environment and embedded headwinds, as promised, Federal will grow in 2023. This is driven by a comparable growth forecast of 2% to 4%. This assumes occupancy levels will increase from 92.8% at 12/31, up above 93% and by year-end 2023, although that progression will not be linear throughout the year. Additional contributions from our redevelopment and expansion pipeline will total $15 million to $18 million. For those modeling, let me direct you to our 8-K on Page 16 and 17 where we provide our forecast of stabilized POI and timing by projects. Accretion from our 2022 acquisitions being online for a full year will also contribute. Those $500-plus million 2022 acquisitions are expected to outperform our original underwriting by at least 50 basis points. This will be offset by lower prior period collections with a net 2022 level of $9 million that's expected to fall to a range of $4 million to $6 million in '23. And lower net term fees, we had $9.5 million in 2022 and forecast $5 million to $6 million in 2023, more in line with our historical averages. Despite over 100 basis points of headwinds, our comparable growth forecast is 2% to 4% for 2023. It would be 3% to 5% without the headwinds from prior period rents and term fees. Quarterly FFO cadence. We'll have one quarter being the weakest with sequential growth thereafter. Other assumptions include $175 million to $200 million of spend on redevelopment and expansions at our existing properties; $175 million to $225 million of common equity issued throughout the year, refinancing our $275 million of unsecured notes, which mature in June in the mid-5% range; G&A in the $52 million to $56 million range for the year; and capitalized interest for 2023 is estimated at $20 million to $22 million which includes the continued capitalization of interest at Santana West. Given our change in leasing strategy from a single tenant leasing approach to a multi-tenant building as we build out tenant floors and add tenant amenities. Dispositions completed in '22, contributed roughly $5 million of POI during the year. That POI will not be there in '23. We've assumed a credit reserve, excluding the impact of Bed Bath & Beyond of roughly 75 basis points. With respect to Bed Bath, we are adding another 25 to 60 basis points of reserve depending on the uncertain outcome with respect to this tenant. Please note, in 2023 and moving forward, we have less than 70 basis points of exposure at our Wynnewood location had a natural expiration in January 2023 and has not been on our '23 forecast since mid-last year. As is our custom, this guidance does not reflect any acquisitions or dispositions in 2023, except what has already been announced. We will adjust for those as we go given our opportunistic approach to both. This guidance also does not assume any tenants moving from a cash basis to accrual basis revenue recognition. Please note the expanded disclosure in our 8-K on Page 30 provides a detailed summary of this guidance. And before we go to Q&A, let me take a minute to highlight the strength the outperformance that our signature mixed-use retail assets demonstrated in 2022. The big four of Santana Row, Assembly Row, Pike & Rose and Bethesda Row, took a disproportionate hit during COVID, because of government shutdowns in their respective markets, but they now sit they finished 2022 at 99% leased. Reported retail sales were 15% to 20% higher than the prior year and are back up above pre-COVID levels. Consumer traffic was up 20% versus the prior year and 7% above pre COVID levels. Comparable retail POI at these assets were up 30% versus 2021 and over 6% above pre-COVID levels. Plus, we are forecasting comparable growth in retail POI for 2023 of 6% to 8% if these four assets given continued strength in leasing demand. The retail components of our mixed-use assets are unique and have driven and should continue to drive POI growth materially above that of a typical open-air shopping center, providing an additional point of differentiation between Federal and its peers. Further, our operational mixed-use capabilities in design, construction, leasing, operations are unrivaled and a unique competitive advantage moving forward in the continued evolution of open-air retail, capabilities that are applicable across our entire retail portfolio and a big reason why we expect that sector-leading retail growth for years to come. Good afternoon, and thanks for the time. Just curious on the total portfolio to one of your later comments in your prepared remarks where NOI sits relative to 2019 levels and when do you expect to get back to that. You kind of made the comment for the big four, but just curious on the broader sample set? We're back. Yes, we're, in fact, well above 2019 levels. So I know one that what Dan was just talking about was specifically with respect to the 4 mixed-use assets and for obvious reasons there. But the whole portfolio is on overall back above 2019. It's the higher interest expense that effectively brings us back down to about the same FFO but certainly, operationally, significantly above. Thank you. I just wondered if you could just give us what the drag will be on the increased interest expense of '23 versus '22? Okay. And then just real quick. Small shop was relatively flat sequentially, do you still see that as a major opportunity for growth on your POI? Yes. And Wendy, I don't know if you want to add to this or not, but I'm very, very positive about our small shop occupancy. And I think we're sitting there at 90% or so now, which is back to place that we haven't been for quite some time, and we're not done. We've got some more room to grow there. And I would add to that, there's a real sense of urgency on the leasing side overall, especially on the small shops. Through COVID, the weaker guys, as we know, have gone away and our small shops are thriving right now. Obviously, we're heading into maybe some headwinds, but some of the technologies and so forth that have come post COVID are really driving sales for a lot of the retailers, including the restaurants. Hey, good evening. Dan, I was hoping you can just touch on what would be driving you to either the bottom or top end of guidance this year? Look, I think a big variable is what happens to the Bed Bath bankruptcy. I think that probably at the top of the range, we'll expect to have a more normalized Chapter 11 where we expect to get a few boxes back whereas, if it's a liquidation, that will push us towards the bottom of the range. I think that's probably one of the bigger drivers that takes us either up or down. Thanks for the question. Maybe you can touch upon the transaction market and kind of what you're seeing from pricing or cap rates today. I don't know if there's a way to bifurcate between sort of your suburban open-air centers versus any color you can provide in lifestyle centers. That would be great. Thanks. Yes. Hey, Samir, it's Jeff. Not a lot of color because there's not a lot of transactions. We're always in the market looking for stuff regardless of what's going on, but there's just not a lot out there right now. I mean, if you want a data point, back in the day, when the market was active for the best grocery-anchored centers or maybe 100 to 150 basis point spread cap rate over the 10-year treasury. But we haven't seen many trades, and I don't expect to see a ton of trends this year. So kind of anybody's guess at this point. Good evening. Thanks a lot for taking my question. My question is on the comparable property growth guidance. Can you help reconcile kind of the moving pieces that generate your guidance of 2% to 4% growth in ex prior period; in terms of fees, 3% to 5% this year relative to last year. I see curious, you're expecting a little bit less occupancy growth and maybe walk through some of the other pieces. And then on capital interest, does that go from a potential headwind to tailwind this year? What are the implications for '24? Okay. Look, I think the building blocks that kind of are comparable is kind of a combination of things that get us there. I think we would expect I think contractual bumps, which continue to be kind of sector-leading, kind of north of 2.25% and include kind of some of the office. I think occupancy growth relative to where things were last year will add, I think, a good chunk of rollover because what's interesting is ours is a GAAP number, so the contractual rent bumps don't contribute as much. What really does is the rollover to rollover growth, which is the straight line rollover, which captures those rent bumps. And so that should be a big driver because of the progress we've made. And you've got residential. I think we'll continue to see percentage rent and parking. And then we mentioned the probably 100 to 130 basis points of credit reserve, then also about 100 basis points of term fee headwind and prior period rent headwind that gets us kind of to that midpoint of that metric. I just wanted to circle back up on the interest capitalization question. Dan, just two questions on this, basically. Just what guidance have been if you guys had burned or ceased capitalization on Santana West? And kind of from a timing perspective, even if there was no leasing, when would you have to just finally stop capitalizing there? And then just secondly, the strategy shift to the multi-tenant, are you -- what kind of demand are you guys seeing, if at all, in those smaller spaces? And are you guys gearing to build out suites or just trying to demise the space? No, it's a good question. Listen, the -- it became pretty clear. As you know, we worked hard to get a full building user at Santana West. We shifted to that strategy, we talked about a little bit last year, but we shifted to the strategy of building out the individual floors instead, that the accounting for that is to capitalize and continue to capitalize. But the reason for it, the business reason for that, is that we do see more demand in that 50,000 to 100,000 square foot user. There are tours that we're giving now. Obviously, you know what's going on with tech in Silicon Valley. So I certainly don't have anything great to say about the demonstrative progress there. But that building is getting a lot of looks. And so we're very hopeful that this strategy of looking for 100,000 square foot tenants rather than the full 350,000, 375,000 will be fruitful. It feels good that way. In terms of what that means on the accounting is you've got $250 million into a building at call it 5% or so a year of carry on that. And so that winds up continuing at this point to be on the balance sheet. And effectively at some point, it will wind up going through the P&L, but you can do the math on that. Good evening out there. So Don, I was intrigued by your comments on the Federal rent bumps and the superior long-term core growth profile of the portfolio. I remember while back you provide a buildup of what you thought the portfolio could do over a longer-term basis in terms of that core internally generated growth, I think it was like 3% to 4%, which included some of the bump spreads redevs. So I guess I was curious if you could give us an updated sense of what do you think the long-term core growth profile looks like now or could look like now with the improved bumps you're referencing as well as maybe factoring some of the various deal rent tailwinds coming online here… That's fair, Haendel. I mean the -- look, the business, the general business and the shopping center business, allows the portfolio to grow with common occupancy of a typical shopping center of 1.5% and 1.25%, what they do. We've been able to have long-term growth of 3%, 3.5%, something like that, on an occupancy neutral basis. I feel very good about that. And with respect to the comment I was making about the about the rent bumps, it's really -- we've talked about this in the past, a little bit of inflation is a really good thing in our business. So much inflation certainly isn't. But to the extent we get to a normalized level of inflation, it allows us to push more. And Wendy and that team is having success effectively with the ability of increasing or improving the economics for longer-term deals because inflation is real, and everybody knows it. You're not trying to push a noodle uphill. So that long-term growth rate of 3%, 3.5%, I feel very good about. Thanks. Guys, I appreciate you throwing out guidance that is a little bit more adventuresome than some of the your retail partner. And maybe if you can talk a little bit, as you know, not all space is created equal. And I know you've been saying that for a long time, Don. But one of the things that intrigued me about your portfolio and where I think people might be underestimating the growth potential, particularly in your small shop space because your rents are double your anchor tenants, you talked a little bit about your lease percentage. How much of that is occupied? How much more do you expect to gain in terms of lease growth in '23? And then maybe if you can -- if we walk through the elements of your growth for '23, you talked a little bit about -- Dan, you talked about the 2.25% fixed bumps, you have an element of leases that you signed in '23 that were -- where you got a partial year, and obviously, those are going to contribute in '23 as well. And then you got your SNO and you get your spreads. If you do the math, I mean, it looks like you're going to be well north of NOI growth, if I'm adding it up correctly. Yes. I appreciate the question, Floris. Look, we -- if you add all those things up, yes, it gets beyond the 4%, but then you apply a credit reserve, you've got some headwinds and so forth. And so look, we're hopeful that our 2% to 4% net comparable growth is a conservative estimate. And we hope that the strong rollover we're expecting in 2023, continued contractual rent bumps, continuing to be able to push occupancy, will continue to drive a strong core portfolio growth profile in 2023. But there are headwinds out there, and so the 2% to 4% reflects that. Everyone, good afternoon. Yes, so you mentioned earlier and obviously it's widely understood, with debt cost of capital elevated, what about tapping the equity markets as valuation here as the year recovers. I think there's $200 million issuance at the midpoint. But really, guys, it seems to match development spend. So I guess how do you view greater equity activity as a financing tool given the state of capital markets and as values recover? Thanks. Yes, Derek, let me start, and Dan will add to this. Look, there's a couple of principles involved here. So one is I never want to surprise our own so I never want a whole bunch of equity out there at any one time. I'd like to do it in conservative amounts as we go through a year. We opportunistically then obviously can turn that dial up or back based on where we believe value lies and what the uses are. The most important thing is what is the use for that money. And at the end of the day, to the extent we are very comfortable that we can use shareholder or debtholder proceeds to be able to create incremental value, that's what we will do. That's the driver always because we don't have to, to the extent we don't have those uses, and even the development pipeline that you know, it's far lower than it was, only a couple of hundred million dollars left spend at this point. So lots of flexibility. And that's what I always want to maintain with respect to the balance sheet here is the ability to kind of take advantage opportunistically of what's going on in the marketplace to create value. And I look at debt and equity similar to that. Hi, good afternoon. It's a question on lease spreads. Good to see the acceleration in the fourth quarter. How are you balancing higher lease spreads versus maybe higher bumps? And are you seeing any tenant push back in that conversations or tenants just saying we need the space and like the space, so we're going to accept the higher prices? Yes. Look, there is -- these are an amalgamation of a number of deals. In any particular quarter, you'll see some deals that have higher rollover, you'll see some that are more anchor related versus small shop related. There's a giant mix. I don't want you to look and say, I see a deceleration in leasing spreads in the fourth quarter. There's no trend there. The trend you should expect to see is actually higher rollovers in 2023 based on what we see in the pipeline. And that's simply an opportunistic notion of being able to understand what spaces are coming due, where the demand is for that space, and that's what's in the pipeline. And that's opportunistic based on what's happening there. But in every case, we're pushing for very high contractual bumps associated with those leases. So, in total, the economic contribution is greater. I don't want to just look at that lease rollover spread. I want to look at it holistically, in total, including the contractual bumps. And I think because demand is strong and continues to be strong, we found success in being able to push on both of those levers, particularly in the last couple of quarters. Hi, thank you. Good evening. Just a question on Santana West because it seems to be -- that seems to be the delta versus the Street. I think it was $0.20 is what you originally guided when you ceased capitalization. Now obviously, great to hear that there's work going on in demand. But I guess my question is, do you guys think that you were a little too conservative in ceasing capitalization? I understand that you stopped work on the project, but given markets are moving or fluid when it comes to leasing, do you think that maybe should have just left it as a capitalized project? I'm just wondering because all the other stuff that you guys are doing is great, but that capitalized interest seems to be the delta between the '23 outlook and where the Street is, so I'm just trying to understand. So, Alex, my point on that is the direct answer to your question is no, I don't think we are too conservative on that. I think your inherent premise and what you're saying is that the accounting drives the business decision. And it's exactly the opposite. It is the business decision with what -- with the strategy towards the building, that drives whatever the accounting is and frankly, we didn't even know the accounting when we first talked about how the -- how we were going to go after -- what tenant base we were going to go after once we lost the first couple of big building users. So, no, I don't think so, and the notion of looking at capitalized interest as a positive or negative thing with respect to '23, here's the fallacy in it. What we're laying out in '23, agree, does not have an impact from Santana West. What it does is show the impact of everything else in this company. And that's why that operating growth is coming through. That's why the bottom line is coming through. ideally, you will see, as we move forward, rent debt more than pay -- rent on Santana West that more than pays for the interest expense. But it's not like we're getting a benefit for that in '23. We simply don't have any impact of Santana West for '23. So just fundamentally, I think you're looking at it a little backwards. Hi. Good evening. Last time we spoke, I think office traffic at Santana Row was still down materially versus pre-pandemic. I don't remember the exact figures, but maybe in the neighborhood of 30% down. Has that changed at all? And at this point, what is your view of how those traffic patterns will look like in the midterm? Yes. Paulina, it's Jeff. And I think I understand your question. I think you're talking about the number of people that come to work every day, Monday through Friday, at the office buildings at Santana Row. I'll tell you two things about that. One, that's a small part of the traffic at Santana Row. Santana Row generates a ton of traffic over the year. And the primary reason people are coming there is to shop, eat and enjoy the property. The weekday traffic is building as well as return to office is ramping up in Silicon Valley. So, we do see that coming back and coming back strongly. But overall, that's a relatively small component. And like Dan said in his prepared remarks, traffic today at Santana Row is above what it was in 2019. So, we're in pretty good shape there, and I appreciate the question. Hi. I guess looking at the future phases at Assembly, Pike & Rose and Santana, whenever you think the time is right, how -- I guess, what's the time frame to reactivate those various phases in the project? That's a great question, Mike. And there's an important underlying assumption here. We love the development component of our business. And there are certainly times like now where we turn down that spigot and aren't comfortable to be able to start construction. But don't let that misinform you to believe that, capacity and the work that we do with our team, which stays together during down cycles here. Making its shovel ready to be able to activate quicker -- the idea is to be able to activate quicker than any of the competition. That's what we try to do. So, the ability to stay very tight on not only with our contractor, with pricing, with entitlements for future phases at places like Assembly, it's front of mind all the time. So, whatever is going on in the market, Mike, and I don't have a crystal ball with respect to '23 or '24 or '25, but I know we'll be back at it faster than most. And that's the key competitive standpoint in terms of the way we look at it. Thanks. Something I believe we’re at a point on Santana West. But from a business standpoint, I'm actually curious if you go multi-tenant. And I would guess that maybe prolongs the lease-up time frame. So even though you're capitalizing cost for longer, shouldn't the all-in cost expectation go up, therefore, the yield come down incrementally? I'm not sure if there's probably other variables to consider, but I was just curious if you can provide some color around that. Yes. No, it's a very fair question. I'm not sure it will take longer. And the reason is because we are building out the individual floors. So that work, effectively a year's worth of work here, is being done ahead of time. And so, on timing, I think feeling pretty good. In terms of the extra carry and potentially on cost, yes, I would expect those to be incrementally higher, but we also have benefits in terms of our base building and lots of other things that are reducing the cost of Santana West. And I guess the last point to really make just make sure you're not overemphasizing this one building that makes up 1.5 points -- 1.5% of the asset base of the company. And when you kind of sit back and you take like our entire office portfolio, they back out just Santana West, just alone, even our ongoing other buildings, which are under construction, in total, 92% leased. And if you knock out the one that's being built here at Pike & Rose, that's not finished yet, they're 97% leased. So, the product -- and this is really important, from a real estate person's perspective, the product is right all the way through, and it's a different product when it's attached the Santana Row, Assembly Row, Pike & Rose. Well, that's a good question, Craig. Well, look, there's a -- feels like there's going to be some increase in product out there, Craig, and some new product for us to look at. Expanding our base in Phoenix, I think, is going to be a big focus for us. But I feel pretty good that there's going to be some larger good product for us that we can buy accretively. So, nothing's set in stone, feet ready to go, and we'll see where it takes us. So just a couple of follow-up questions. One is on the disposition pipeline. I think you noted $350 million on the last call. Just curious if you're still pursuing the remainder of those transactions. Yes. Essentially, we got done, the one Rolling Wood, which was $68 million. We're still in process on about $130 million of additional acquisitions. We'll see if we get them over. And then I would say the balance, we determined that it didn't meet the timing parameters we needed or the pricing parameters, and we stayed disciplined and decided not to move forward. But there's a possibility. You bring those back later in the year when there's a more receptive capital markets environment. Okay. Great. And then on the resi occupancy, which fell quarter-over-quarter, was that because of the Rolling Wood sale? Or are there some other reasons for that? No. That's just timing a little bit. We're pushing hard on rate. And so, as turnouts come, we don't want to leave money on the table. So that balance between rate and occupancy is always -- it's always part of the formula. And we push just a bunch charter on rate. You'll see that come back in '23. Hi. Just curious if we should expect any action on the balance sheet in terms of your '24 expirations given you've got a couple of chunky pieces of debt coming due and kind of how you guys are maybe thinking about getting ahead of that? Yes. Look, I think we're going to look to be opportunistic like we always are. I think we're going to -- we created a significant amount of capacity to give us the flexibility to be opportunistic, completely undrawn on $1.25 billion will give us flexibility from a timing perspective. But we expect to access the bond markets throughout 2023 to address the maturities that we have, June maturity as well as the January '24 maturity. Thanks a lot for taking another one for me. The lease occupied spread compressed by 50 basis points down to 170 basis points. So, on the one hand, you're monetizing all the leasing that you're doing, but maybe on the other side, you're not -- there's maybe a little bit less benefit in the pipeline. Like how do you think about it? It seems like you've been very positive on being able to monetize it sooner, but just wanted to kind of get your thoughts on either side of that argument? Well, Michael, I want to make sure we agree on the premise. The lease percentage continues to get better, get higher. The primary thing there is that we continue to lease up the portfolio. We feel very good about that. Now that's a job of that leasing team, and that's working out pretty darn well. But the job of the tenant coordinators, the job of the construction people, the job is to get those tenants open. And frankly, that has just been as amazing as leasing is and leasing have record years. Tenant coordinators and that part of the construction of those spaces to get them open, is just stellar. And so, I hope when you look through what's important about leased versus occupied that, if you're in the middle of COVID, it's great to have a whole bunch of leasing done and not a bunch of sub open as it come back up. But to get to normalized operations, you want that as tight as you possibly can to be able to turn a contract into rent. So, I love where we are, in fact, because we're doing both increasing that lease and more than increasing that amount by occupancy. Yes. And just to add another thing that's not in that 170 basis points of signed and not open SNO is are non-comparable pool where we have an equivalent amount of POI that's expected to come on from what we're delivering stuff, buildings that are not yet placed into service, where we have leasing done, contracts leases that are done. And it's the equivalent of that same 170 basis point spread. So that's an added differentiator and an advantage that none of our peers have because they don't have the scale of that non-comparable pool. As there are no further questions at this time, I would like to turn the floor back over to Ms. Leah Brady for closing comments.

EarningCall_390

Hello and welcome to the Hillenbrand Q1 2023 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Sam Mynsberge, Vice President, Investor Relations. Please go ahead. Thank you, operator and good morning everyone. Welcome to Hillenbrand’s earnings call for the first quarter of 2023. I am joined by our President and CEO, Kim Ryan and our Senior Vice President and CFO, Bob VanHimbergen. I’d like to direct your attention to the supplemental slides posted on our IR website that will be referenced on today’s call. As a reminder, the Batesville segment has been classified as discontinued operations for all periods presented. Our commentary will be based on the performance of our continuing operations unless otherwise noted. Turning to Slide 3, a reminder that our comments may contain certain forward-looking statements that are subject to the Safe Harbor provisions of the securities laws. These statements are not guarantees of future performance and our actual results could differ materially. Also, during the course of this call, we will be discussing certain non-GAAP operating performance measures, including organic comparisons for our segments, which exclude the impact from acquisitions, divestitures and foreign currency exchange. I encourage you to review the appendix in Slide 3 of the presentation as well as our 10-Q, which can be found on our website, for a deeper discussion of non-GAAP information, forward-looking statements and the risk factors that could impact our actual results. Thank you, Sam and good morning everyone. Thanks for joining us today as we review results from our first quarter of fiscal 2023. Last week, we closed the sale of Batesville, completing our transformation into a pure-play industrial company. This transaction represents a significant milestone in Hillenbrand’s journey. First, it builds upon the momentum we created over the last 12 months with the strategic acquisitions we made in food and recycling. It also simplifies our portfolio to fully focus on our expertise in developing highly engineered, mission-critical industrial processing equipment and solutions for our customers. And finally, it positions Hillenbrand for long-term profitable growth through our leading brands and attractive end markets supported by secular growth trends. I want to thank our associates who have worked tirelessly towards the successful completion of this transaction. I spent 17 years in my career with the Batesville organization and I am confident that both companies are in a place of strength as we move forward to pursue our own unique opportunities to create value. We have built a strong foundation at Hillenbrand, in large part to the tenets of customer service, lean operations, talent development and responsible corporate citizenship instilled through Batesville’s legacy. I want to thank the entire Batesville team for their contributions. Now I will turn to our first quarter performance. Despite continued uncertainty impacting the broader global economy, we delivered a solid start to the fiscal year. Our first quarter revenue from continuing operations grew 16% compared to the prior year, driven by our recent acquisitions and healthy organic growth for our Advanced Process Solutions segment. In the quarter, we saw good demand for our newly acquired food and recycling businesses and we saw continued growth in our aftermarket business. Our backlog, which now includes LINXIS and Peerless, nearly $2 billion at the end of the quarter and our organic APS backlog remained at near record levels. Our APS project pipeline remains robust for our highly engineered equipment and solutions across our key growth platforms of durable plastics, recycling and food. Starting with our core plastics business, we continue to see strong demand in Asia and the Middle East, as polyolefin and engineered plastics customers are quoting projects at increasing output requirements to meet the growing global demand for durable plastics. This is a positive trend for us as we are a global leader in providing complete systems with high-output, high-quality capabilities. Turning to recycling, as we have discussed, we believe recycling will be a high-growth area for us. Since our acquisition of Herbold last year the pipeline of orders have been even better than we planned, with growing demand in North America, India and the Middle East. We are excited about the momentum in this area, which we aim to further bolster with our recycling innovation center in Germany, which will be completed in April of this year. Now to food, we had better-than-planned orders and revenue in the quarter, driven by solid demand across North America and Europe. Through the combination of our Coperion and LINXIS technologies, we are seeing increased quote opportunities as customers recognize the value of comprehensive solutions which we can now provide. We have been able to adapt certain feeding technologies that were historically used for our plastics applications to help increase share of wallet with existing LINXIS customers and have already seen success with this approach within the first few months of ownership. Finally, our integration program is proceeding well and we remain confident in the value creation we expect to achieve from the LINXIS, Peerless and Gabler acquisitions. While we are seeing solid momentum in our APS segment, the uncertainty of the macroeconomic environment continued to pose challenges for our MTS segment, which tends to be quicker turn and serves applications that are closer to the consumer. As discussed during last quarter’s call, we experienced customer decision delays that resulted in order softness as we entered the quarter. This trend continued through the quarter, and while we’re optimistically monitoring the reopening of China, we’ve not seen the order pipeline convert yet as sales representatives are just now beginning to travel inside China again to drive these project decisions. Additionally, while the supply chain and inflationary pressures have begun to ease, we continue to experience shortages for chips and other electronic components, which more heavily impacts our MTS segment. We remain focused on deploying the Hillenbrand operating model to prioritize critical investments, manage discretionary costs and drive operational efficiencies in response to the extended softness. Bob will address this further when he covers our results and full year outlook. Overall, we continue to see strong performance and outlook for our ATS segment, while remaining focused on managing through dynamic macro environment impacting our MTS segment. As we communicated at our Investor Day in December, our renewed strategy for the next chapter of our journey is to grow, enhance and optimize. We are excited about the opportunities to continue our momentum through the disciplined deployment of capital towards higher growth, high-return investments that will further position Hillenbrand for long-term shareholder value creation as a pure-play industrial leader. Lastly, before turning the call over to Bob, I’d like to quickly provide an update on sustainability. With the recent changes in our portfolio, we have revisited our materiality assessment to ensure that we advance our sustainability strategy with our stakeholders in mind, while also incorporating our new acquisitions and accounting for the Batesville divestiture. We plan to publish the results of our survey in our upcoming annual sustainability report later this year. With that, I will now turn the call over to Bob to provide more details on our financial performance and outlook. Thanks, Kim, and good morning, everyone. Turning to Slide 6, a few items to note throughout my section. As Sam mentioned, Batesville’s financial results are reported as discontinued operations for all periods presented. For today’s discussion and going forward, I’ll be reviewing our performance and providing guidance on a continuing operations basis only, unless otherwise noted. Results compared on an organic basis exclude the impacts of acquisitions and divestitures as well as foreign currency exchange. We believe these comparisons provide a clear assessment of our performance and you’ll find reconciliations of our GAAP and non-GAAP results in the appendix of the earnings slide deck. In our first quarter, we delivered revenue from continuing operations of $656 million, an increase of 16% compared to the prior year, primarily due to acquisitions, higher aftermarket revenue and favorable pricing. On an organic basis, revenue increased 4% year-over-year. Adjusted EBITDA from continuing operations of $101 million increased 13%. On an organic basis, adjusted EBITDA increased 3% as favorable pricing and productivity improvements were partially offset by cost inflation and strategic investments. Adjusted EBITDA margin of 15.4% decreased 40 basis points primarily due to the dilutive effect of price cost. We reported GAAP net income from continuing operations of $27 million or $0.35 per share, an increase of 21% compared to the prior year. Adjusted earnings per share from continuing operations of $0.70 increased $0.14 or 25% compared to the prior year, primarily due to pricing and productivity improvements, the impact of acquisitions, fewer shares outstanding and a lower tax rate. This was partially offset by inflation, unfavorable foreign currency exchange and higher interest expense. This performance was ahead of our expectations coming into the quarter, as our total adjusted EPS, included Batesville, of $1 was above our original guidance of $0.85 to $0.93. The adjusted effective tax rate in the quarter was 25% and or 520 basis points favorable to the prior year, primarily due to a discrete onetime impact from a tax incentive in China for high-technology companies. We anticipate our full year tax rate to remain in the range of 29% to 31%. Cash flow from operations represented a use of cash of $6 million in the quarter down approximately $26 million from the prior year, primarily due to unfavorable customer advances resulting from order softness within MTS, which was more significant than we expected. As Kim mentioned, we continue to experience pockets of supply chain challenges in the quarter, causing inventories to remain above optimal levels while also causing delays in achieving certain project milestones, which resulted in higher-than-planned unbilled AR. We remain confident in our ability to drive strong working capital fundamentals across the business, and we’re cautiously optimistic that the broader supply chain will continue to improve as we work through the balance of the year. With that, we anticipate stronger cash flow in the remaining quarters and expect our full year cash flow conversion to be approximately 80% to 85%. I highlight this includes approximately $20 million of onetime cash charges related to the divestiture of Batesville that do not qualify for discontinued operations reporting. Excluding these items, our full year conversion would be roughly 90% to 95%. Capital expenditures were $15 million in the quarter, which was in line with expectations. Now moving to segment performance, starting on APS on Slide 7. APS revenue of $430 million increased 30% compared to the prior year, driven by acquisitions, higher aftermarket revenue and favorable pricing. Organic revenue increased 5% year-over-year. Adjusted EBITDA of $71 million increased 31% year-over-year. On an organic basis, adjusted EBITDA increased 9% as favorable pricing and productivity improvements were partially offset by cost inflation and an increase in strategic investments. Adjusted EBITDA margin of 17.3% increased 10 basis points, while organic adjusted EBITDA margin of 18.1% improved 70 basis points. As a reminder, the recent acquisitions have margins that are below our legacy segment performance, but we fully anticipate bringing these margins in line over the next few years through the deployment of the Hillenbrand Operating Model to execute on operational improvements and achieve synergies. Backlog of $1.63 billion increased 23% compared to the prior year or 11% on an organic basis, driven by strong order volume for large plastic projects and aftermarket parts and service. As Kim mentioned, we continue to see a solid pipeline of demand in our key growth platforms of plastics, recycling and food, and are excited about the opportunities we are quoting through our enhanced customer offerings across these end markets. Turning to MTS on Slide 8, revenue of $243 million decreased 2% year-over-year, but increased 2% on an organic basis as favorable pricing and higher aftermarket parts and service revenue were partially offset by a decrease in hot runner sales. Adjusted EBITDA of $43 million decreased 17% compared to the prior year or 11% organically. Adjusted EBITDA margin of 17.7% decreased 310 basis points as inflation, unfavorable mix and reduced operating leverage on lower volume more than offset favorable pricing. Backlog of $334 million decreased 18% compared to the prior year and 8% sequentially, primarily due to the execution of existing backlog and a decrease in orders for injection molding and extrusion equipment. We anticipated customer delays in MTS as we enter the quarter, though these persisted to a greater extent than initially expected, particularly within our injection molding product line. We now expect this cost softness to persist for longer than initially anticipated, which is now reflected in the updated guidance I will discuss later in the presentation. As Kim mentioned, we are taking measures to curtail our discretionary spend and prioritize investments to help mitigate the current demand softness. Turning to the balance sheet on Slide 9. Net debt at the end of the first quarter was $1.7 billion, and net debt to pro forma adjusted EBITDA ratio was 2.9. At quarter end, we had liquidity of approximately $689 million, including $195 million in cash on hand and the remainder available under our revolving credit facility. With the sale of Batesville completed, we expect after-tax net proceeds of approximately $530 million, which we plan to use to reduce existing debt. which will result in pro forma net leverage of approximately 2.6x at the end of December 31. Turning to Slide 10. As many of you know, we have a strong track record of deleveraging acquisitions, and we expect to continue this track record as we move forward. Now moving to capital deployment priorities on Slide 11. As a pure-play industrial company, we will look to deploy capital to maximize shareholder value through attractive organic and inorganic growth opportunities, as well as returning cash to shareholders through opportunistic share repurchases and dividends. while continuing to target net leverage within the range of 1.7 to 2.7. Now let me conclude my prepared remarks with our updated outlook. Turning to Slide 12, with the divestiture of Batesville, we were moving $600 million to $610 million of annual revenue and $0.95 to $1 of annual adjusted earnings per share from our guidance model, which reflects Batesville’s previously expected financial contribution as well as the expected reduced interest expense from the planned paydown of debt with the net proceeds from the sale. With that, our previous guidance would have equated to a total annual revenue of approximately $2.7 billion to $2.8 billion, and adjusted earnings per share of $3.15 to $3.50 on a continuing operations basis. Now moving to Slide 13. Given recent developments, including a more favorable expected foreign currency impact, the addition of Peerless and the softer-than-expected performance in our MTS segment, we are updating our continuing operations guidance for the full year. As a result, our guidance now assumes slightly increased expected revenue of approximately $2.8 billion to $2.9 billion for the year, with adjusted earnings per share from continuing operations in the range of $3.25 to $3.55, reflecting year-over-year growth of 20% to 31% on a continuing operations basis. Now turning to the segments. For APS, we are increasing our expected annual revenue range from $1.78 billion to $1.83 billion, previously $1.66 billion to $1.74 billion. This change reflects a more favorable expected foreign currency impact, primarily due to the stronger euro, as well as the contribution from Peerless, which we closed at the beginning of December. Our assumption for underlying organic growth remains strong at approximately 10% to 13%. We are maintaining our expectations for adjusted EBITDA margin to be in the range of 19% to 20%, which reflects underlying organic margin expansion of 60 to 100 basis points. For MTS, we are reducing our expected annual revenue range to be $980 million to $1.02 billion, previously $1.02 billion to $1.06 billion. As a result of the lower anticipated volume, we are reducing our adjusted EBITDA margin expectations to be in the range of 19% to 20%, from our previous guide of 20% to 21%. With the recent changes to our portfolio and the ongoing macroeconomic uncertainty, we are providing a Q2 guidance range for adjusted earnings per share from continuing operations, which we expect to be $0.65 to $0.73, which is essentially flat to slightly ahead of the prior year, as EPS growth, including acquisitions, is expected to be mostly offset by continued softness within MTS, unfavorable foreign currency exchange and a higher tax rate. Please review Slide 13 for additional guidance assumptions. As we look forward to the balance of the year, we continue to see strong momentum in our APS segment. which is helping to mitigate the order softness we see within our MTS segment. Our recent acquisitions are off to a solid start and performing ahead of our expectations. Our teams have remained nimble despite the ongoing macroeconomic uncertainty, and I’m confident in our ability to continue to position Hillenbrand for further growth and shareholder value creation as a pure-play industrial company. Thanks, Bob. Before taking questions, I’ll end our presentation this morning with a few final remarks. Our strong backlog provides stability as we continue to navigate this challenging macro environment. And I remain confident in our proven track record of driving operational excellence through our organization, which is enabled by the dedication of our associates and the discipline instilled by the Hillenbrand Operating Model. Additionally, our recent acquisitions are off to a great start, and we remain committed to driving strong returns on these investments. The completion of the Batesville divestiture marks an important new chapter in our transformation journey. In my over 33 years at Hillenbrand, I’ve never been more excited for the future with our renewed focus and strategy to propel our growth as a pure-play global industrial leader. As discussed at our Investor Day, we’re well positioned to create value through our leading brands, serving large and growing end markets through our focus on highly profitable aftermarket growth and continuing to expand our capabilities through strategic M&A., by utilizing the Hillenbrand Operating Model to drive sustained operational improvements, productivity and synergies and by deploying capital towards high-return opportunities that we believe will maximize shareholder value. We remain committed to our purpose to shape what matters for tomorrow as we provide excellent opportunities for our associates, world-class product solutions and service to our customers, positive impact to our communities and a compelling value for our shareholders. Thanks for taking my questions, and all the detail, particularly as it relates to bridging the gap between the pro formas, very helpful. So maybe start with APS. You mentioned some of the regions, obviously, plastics remained strong, food, recycling. Just talk about where you’re seeing incremental strength both by region and end market. And maybe just the outlook for margins. Beyond the current guide, looking out over the next 1 to 2 years, do you see margins coming up as those acquired businesses layer in and you generate synergies? And talk about kind of aftermarket parts and how those trend as a percentage as well. I know it’s a mouthful, but digging into that a little deeper is really helpful. Thanks. Okay. Alright. So I’ll take kind of the demand and market base, and I’ll let Bob comment on the – how we’re layering those margins in. So from a demand standpoint, we continue to see overall stability. So let’s kind of look geographically. China reopening and now that they are through the Chinese New Year, the Lunar New Year, and resources are again able to travel in China that, that will, I think, be a positive momentum for us as we are allowed to get those projects we’ve been working on. Our sales and service representatives will be allowed to move around the country more freely to be able to continue to drive the project decisions on new capital, but also to implement service packages and commission the plants that we’ve been working on over the last couple of years in country, because that limiting of travel has been – has created some of the challenges that we’ve had in our rising AR that we commented on earlier. So as those resources are able to go and commission those plants, in China, we expect that, that will be a positive move forward for us. India, as – India and the Middle East, as we’ve commented, have been kind of areas of new demand geographically for the APS market. And those are projects that have been under discussion for some time but are beginning to move ahead in those two regions. We have footprint in each of those regions, both from a sales and service perspective and we are well positioned to be able to respond to customer needs there. The U.S. has been very stable. And in all of these markets where we’ve had capital implementations over the last few years, we’re beginning to see the service side of the equation begin to kick in. And as we’ve commented, we’ve seen good growth in our parts and service business, and that is also something that we’re really looking forward to over the next 12 months. So that’s what we see on the demand side for APS on the normal plastics business. On the food side, that business is primarily today and in U.S. and in Europe, and we’ve seen good demand in both of those areas, and we expect that to continue. The benefit of our acquisition with LINXIS is the long tenure and the quality of the brands that they have operating in that market, and the relationships that they have, both with local players and global multinational players that we continue to be able to work with them, and that will be a part of the value equation as we continue to cross-sell and be able to be more responsive with a broader portfolio that we can take into those markets. And on the recycling side, we’ve continued – as we commented, we’ve seen good demand in a variety of end markets there. And as a result of our presentations at K Show in October of this year and showcasing some of the more some solutions that we can now offer, we continue to be really encouraged about the demand we’re seeing and the quoting volume that we’re seeing in that business as well. Now I’ll let Bob hit margins. And so as we think about just EPS margins longer term, over the next couple of years, we do see margins continue to improve, really driven by a couple of things. First one would be the continued application of the operating model, and certainly turning into about 100 basis points of annual productivity improvement year-over-year. I’d say the other thing to highlight, with the acquisitions we’ve made in the last several months, those margin profiles were below what our segment level margins are. And so we do see those accreting up to our segment level margins, not only through the operating model and continue to drive some more synergies, but also the aftermarket mix, which, as you know, I think we stated, is in like the low 20s of the revenue profile. And for us, it’s in the 30%. So we will continue to see those I guess that the application of our aftermarket strategy to continue to move those margins up over time. Very helpful. Thank you. Maybe switching gears to MTS. It sounds like not quite yet, but I’m wondering if you’re seeing any pickup, if not in revenue, then maybe just in activity or inquiries following the lifting of COVID restrictions in China and, more recently, the passing of the Lunar New Year or is it still a little too early to tell? We are really just getting back into that market, when you consider the market opened up in kind of mid-December, but then there was obviously a very significant increase in the number of COVID cases there, followed by the Lunar New Year and the preparations that many were doing for that. So, we are getting back to the more broad-based travel. We are reenergized with the sales force out and working with customers on projects that have been somewhat delayed from a decision standpoint. So, we are seeing a lot of activity there yet. We haven’t seen those convert into orders yet. And – but we are anticipating that, that will begin to pick up. And we expect that market, which is one of our larger markets to – especially in our molding products business, we expect that to improve over the remainder of the year. We had initially anticipated that, that softness would last just the first half of the year. We expect that may last into the second half of the year, and that’s reflected in our guide. On the injection molding side, we continued to see a little bit of delay and some slowness in decision making in our North America market. But again, remember that one of our primary markets there is the India market that has been more stable. But we expect to see some improvement there over the back half of the year, just perhaps not on the original timeframe that we had anticipated. But a strong footprint in India and a leading position in India, we think will serve us well as that market begins to pick up on the MTS side. Great. And last from me, and I will jump back – jump out. But just talk about free cash flow, I appreciate the updated guide. It sounds like on an adjusted basis, it would be up in the 90%s range in terms of conversion. You still expect to trend back towards closer to 100% over time, and you still expect to exit fiscal ‘23 with net leverage kind of in the low-2s, excluding additional M&A. Yes. So, simple answer is yes to both of those, Dan. As I mentioned in the past at the Investor Day, over a trend, we will be at that 100% free cash flow conversion. In the quarter, we did see, obviously, the MTS order pressure come through. And obviously, that turned into some lower cash advances. But over time, we still see 100% free cash flow conversion, and certainly cash flow picking up starting in Q2 here, not only from maybe orders coming back a bit, but also just our continued inventory levels continuing to be reduced over time as supply chain continues to improve. And on your leverage question, yes, we do anticipate being that low-2s range as we continue to pay-down debt. And so our 80%, 85% reflects certainly some of the impact from – reflects some of the cash advances, but also it reflects the costs associated with the Batesville transaction, that won’t qualify as discontinued operations. Those are somewhat of a one-time cash impact that you will see in the year. I wanted to start by asking you about price realization in the quarter with respect to both businesses, how that progress trended throughout the quarter and where you were with respect to price-cost spread? Yes. So, throughout fiscal ‘22, we continued to improve our processes around pricing and price-cost through our global supply chain management team, and that continued through the quarter. I think I have mentioned in the past, our backlog was protected. And as we saw that execute, we continue to be price-cost covered in the quarter. We are slightly favorable in dollars, but still dilutive of about 10 basis points on our EBITDA margins because of price-cost. And so I would expect that trend to continue throughout the rest of the year. We will be favorable in dollars, but obviously dilutive on a margin percentage. Understood. Okay. Thank you for that. And then as a follow-up, I would also like to learn a little bit more about the supply chain impact and how that progressed as we stand today, with respect to both your ability to ship and generate sales as well as the impact on free cash flow and your outlook there. Yes. I would say – I will provide just a couple of comments. I mean on the free cash flow, it certainly impacted our ability to execute some orders. And so as supply chain is constrained, what happens is we are not able to hit certain billing milestones and that’s primarily on the APS side. But that – we saw that coming into the year, and so I would say those supply chain challenges are reflected in our free cash flow outlook. But I would say on a part, I mean we do see supply chain improving in certain areas. However, there are certain engineered products. And I would say the two things that have the longest lead times still would be gearboxes and motors, and some of those are up to a 52-week lead time. And so we have been building inventory over the last probably a year and placing orders on those to get ahead of that. And chips, I would say. So, those are a couple of areas where we have seen some delays and we haven’t really seen the improvement yet. I think it’s important to note that some of these systems that are engineered specifically on the APS side have very highly engineered components in them. There are only a few suppliers in the world that can meet the required specifications for those parts. And so the – working things through the supply chain when you are on a very limited supply base can take longer on items such as those. Just a little bit more color on the molding technology side of the business. It seems like the order intake was a little wider than you anticipated. Is that a function really of the geographic puts and takes that you kind of highlighted, or is there something else going on, on the customer level that we should be cognizant of? No. I think typically, when we – when there are concerns around slowdown, you typically see that in some of the short to mid-term projects because they can be – decisions can be delayed or stopped and started and you don’t have significant amounts of time that you lose. On very large-scale projects, we very typically see everyone investing through the cycle. Because when you are working on a 2-year or 3-year or 4-year project, you can’t try and hit the peaks and valleys, you have to – you continuously invest. But mid-term projects, short-term projects can be delayed when people have concerns around cash preservation or just kind of waiting to see what happens in the economy. So, we have seen that last a little longer than we would have anticipated, and we are responding to that. But the inquiries continue to be good. I wouldn’t say that it’s a geographic thing, save China. I think that the slowness we saw in China was absolutely isolated to some of the things going on around the zero COVID policy there in China, which is a large business for us in the MTS segment. But I would say, overall, I think this is just a general conservatism around making decisions and not wanting to start and stop projects, which obviously can drive up costs. So, rather delay the decision than start and stop something in the event that people need to slow down and preserve cash. Yes. And these short-cycle businesses, generally, I would characterize all the industrial businesses. Short-cycle businesses are first and first out. And the longer as you go out in duration, they enter the cycle later and come out later. Got it. And just on the sales synergies, you highlighted Peerless and LINXIS. Could you talk a little bit about the opportunity profile as far as sales synergies? And what do you think is a reasonable benefit from bringing your businesses in with those? So, yes, on the opportunity side, when – one of the things that we were really looking for was a place where we are going to be able to have kind of a one plus one equals three type of equation. And I think what LINXIS, what the LINXIS companies and Gabler and Herbold brought was extremely strong brands, great equipment providers. Periodically, they would sell those as subsystems, absolutely phenomenal customer relationships that have been built over long periods of time by – and great service that’s been delivered. But what we can add on the side from Coperion was a systems expertise and an ability to help augment their portfolio for things that they were previously buying out. And remember, the reason that the food market was particularly attractive or the recycling market is particularly attractive is because we have the capability to take our systems expertise, our highly engineered process knowledge and our products, which can be modified or reengineered to work in that market very effectively, bringing that together. And that is really something that we think is kind of a secret sauce to penetrating this market with broader facing systems, less things that have to be bought out and an ability to cross-sell among the two. We also think that our ability to create back office synergies and more efficient procurements and global supply chain processes to help support that group can also help influence the margin profiles that we are looking for as well as our operating model around aftermarket. Perfect. And what are those margin profile drivers, is the increase of aftermarket sales, bringing it from the low-20s to the 30s. Could you talk about the steps that you need to do to get to the 30% threshold and a reasonable timeline to get there? Yes. So, it’s – if you were to pull the playbook out on this and the steps that we have taken in our other businesses, it’s really around a couple of key steps. I mean we isolate that aftermarket business. And instead of kind of mixing it in with the capital business, we isolate it. We truly understand the profitability of that business. We named a leader that’s going to be focused on aftermarket. We put in process some disciplines around pricing, around proactive selling, around making sure that we have a clear vision of the installed base and that we understand where we are winning and where we have opportunities to improve share of wallet. And then it’s really just an execution of a very specific playbook that has been determined by really analyzing the information, identifying the opportunities and deploying dedicated resources that go – turn those opportunities into reality. I know it sounds very simple. It’s – when you are running a business, as I have done many times in my career, it’s easy to kind of lose sight of sometimes stepping back and seeing just a very specific playbook on how to go after that, can actually be really effective rather than trying to go after everything at once. And that has been successful in each of our businesses as we brought them into our operating model. Thank you. We reached the end of our question-and-answer session. I would like to turn the floor back over for any further or closing comments. Alright. Well, thank you everyone for joining us on the call today. We appreciate your ownership and your interest in Hillenbrand, and we look forward to talking to you again in May when we will report our fiscal second quarter results. We wish all of you a great day. 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_391

Good morning, ladies and gentlemen, and welcome to Siemens 2023 First Quarter Conference Call. As a reminder, the call is being recorded. Before we begin, I would like to draw your attention to the safe harbor statement on Page 2 of the Siemens presentation. This conference call may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties. At this time, I would like to turn the call over to your host today, Ms. Eva Scherer, Head of Investor Relations. Please go ahead, ma'am. Good morning, ladies and gentlemen, and welcome to our Q1 conference call. All Q1 documents were prereleased yesterday evening and can be also accessed on our IR website. I'm here today with our CEO, Roland Busch; and our CFO, Ralf Thomas, who will review the Q1 results. After the presentation, we will have time for Q&A. Please be aware that the Siemens AGM starts right after this call, and we must, therefore, limit the time of the call to 45 minutes. Thank you, Eva. Good morning, everyone, and thank you for joining us to discuss our first quarter results ahead of our virtual AGM. It was a very successful quarter, so let's begin with the key highlights right away. I'm very pleased with our flying start to fiscal 2023 in an economic environment that remains volatile. The impressive growth momentum of our business once again highlights the great trust our customers place in the relevance of our portfolio and our ability to perform. All our businesses seized market opportunities. They all benefit from a very robust investment demand for our offerings around electrification, automation, digitalization and sustainability. Orders at EUR 22.6 billion grew sequentially, and clearly exceed the revenue in all industrial businesses with an excellent book-to-bill of 1.25. Despite material negative currency effects, backlog remains at record level of EUR 102 billion, giving us very good visibility for the remaining fiscal year 2023. Key focus was and remains on diligent backlog execution supported by further easing of supply chain constraints. Our key goal is to shorten delivery times, and this led to a strong revenue growth of 8% to more than EUR 18 billion overall. It was driven by Digital Industries and Smart Infrastructure, each contributing an excellent 15% growth. Once again, Digital Industries automation business set the pace amongst its peers. We gained further market share, with revenue up by an impressive 23% based on excellent execution and improved component availability. As market opportunities are attractive and demand patterns favorable, our businesses gradually released targeted OpEx and CapEx investments, yet we continue to have a tight grip on investments through constantly calibrating forecast scenarios with the latest developments. Top line growth created substantial value, with Industrial Business profit of EUR 2.7 billion at its highest first quarter level ever. This led to a strong profit margin of 15.6%. On top of delivering on financial performance, we continue to make steady progress in executing our strategy. The closing of the Commercial Vehicles divestment, we took another step to simplify our portfolio. The formation of an integrated motors and large drive champion is making good progress, too. Digital business in the first quarter amounted to EUR 1.7 billion, and we are very confident that we will achieve double-digit growth in fiscal 2023. The SaaS transition in Digital Industries is fully on track, delivering annual recurring revenue growth of 14% in Q1, and Cloud ARR tripled versus prior year and rose to around EUR 650 million, now representing 18% share of total ARR. After our flying start to fiscal 2023, we will further leverage our exceptional order backlog, execution strength and the net positive economic equation. This gives us high confidence level despite a volatile environment. Driven by excellent operational performance, we raised our guidance for fiscal year 2023 for both revenue growth and earnings. We are now guiding for revenue growth in a range of 7% to 10%, up by 100 basis points, and raise the range for EPS, pre-PPA by 20 cents. And Ralf gives you more details later. Besides having confidence in our operational strength, I was also encouraged by our discussion on the World Economic Forum when looking further at longer-term perspectives. Many leaders showed a willingness to take action and drive change, and this is reinforced by public investment programs, be it decarbonization, resource efficiency or more resilient value chains through glocalization. These transformations will provide ample opportunities for Siemens across the board, and we are more strongly positioned than ever with our diversified global footprint to seize them. Here are the key numbers at a glance. Let me briefly touch on 2 more topics. Free cash flow, around EUR 100 million, was softer due to our substantial growth momentum and will strongly rebound throughout fiscal 2023. EPS pre-PPA came in at EUR 2.08 driven by excellent operational performance and including some headwind from an unpleasant surprise from our Siemens Energy stake. Looking further into our fiscal year 2023, our healthy order backlog continues to be a source of strength, visibility and resilience. It stands at EUR 102 billion. And considering negative currency impacts of EUR 4 billion on a comparable basis, our order backlog has increased further from already record levels. It gives us confidence to achieve our profitable growth targets with an even higher share of short-cycle products and systems compared to 3 months ago. Visibility in our short-cycle product businesses in Digital Industries and Smart Infrastructure for the remaining 9 months of fiscal 2023 is at unprecedented levels. The longer-term project and service backlog of Mobility and Healthineers comes with healthy gross margins. Our world-class supply chain teams continue to make a clear difference in a competitive environment, building on long-term trustful relationships with our suppliers and partners. This close collaboration currently matters most in industrial electronics, where supply is still tight. A strategic growth catalyst for all our businesses is achieving sustainability impact at our customers. Here, you can see great examples of how we bring our hardware, software, domain expertise and services together to create customer value. After an initial investment by Siemens Financial Services, the vertical farming company, 80 Acres Farms, entered a strategic partnership with Siemens to faster, more efficient and sustainable farming practices globally. Through close collaboration, we are enabling their digital transformation to optimize and scale up operations across their U.S.-based production farms. Digital Industries and Smart Infrastructure will jointly provide a comprehensive set of solutions. We are spanning from advanced industrial automation and digital twin software to intelligent facility and energy management. Let me highlight the largest order in the first quarter for a turnkey metro system linking Sydney in the new Western Sydney Airport. It's worth EUR 900 million, integrating fully automated driverless trains and a complete set of digital rail infrastructure. We will optimize operations across 15-year maintenance contracts based on our digital asset management solution, RailigentX, which is part of our Siemens accelerator digital business platform. These projects demonstrate how deeply embedded sustainability is in our offerings and how sustainability creates significant business momentum. Customer impact is our biggest lever for decarbonization and environmental protection. We will avoid 150 million tonnes of greenhouse gases for our customers through our products and solutions sold in fiscal year 2022. With the publication of the sustainability report last December, we announced new and more ambitious targets for our own decarbonization efforts and related investments. As a core action, we set ourselves the goal of reducing physical CO2 emissions by 55% by the end of fiscal year 2025, and by 90% by 2030. We know we can achieve this by expanding our best practices. One excellent blueprint of increasing production while, at the same time, lowering the environmental footprint is our automation products factory in Amberg. This team is at the forefront with brilliant ideas and was recognized by the World Economic Forum as a sustainability lighthouse factory. We see good progress with the strategic transition of our DI software PLM business towards software as a service. Let me highlight just a few data points. As I mentioned before, the transition is fully on track, with a share of cloud ARR at 18% of total ARR tripling year-over-year. Around 5,450 customers have signed on to the software-as-a-service business model, with an increasing share of small and medium enterprises and start-ups. And among them are around 70% new customers, underpinning our ambition to expand our existing customer base. Our intensified customer success management is bearing fruit. We see initial SaaS buyers placing follow-up orders by expanding numbers of users, functionality and additional applications. With that, over to you, Ralf, to give further details regarding our operational performance and the outlook for fiscal year 2023. Thank you, Roland, and good morning to everyone. Let me share further details regarding how we capitalized on the momentum we created with an outstanding start in the fiscal -- in the first quarter and our raised outlook for fiscal '23. In Digital Industries, we saw continued robust demand at high levels across our core end markets, leading to sequential order growth. Investment sentiment continues to be healthy, not only in discrete industries, including automotive, machine building and aerospace but also in hybrid verticals such as food and beverage or pharma. As expected and indicated before, we saw some adjustment in automation order patterns compared to the extraordinary prior year quarter. Orders were down 13%, still substantially exceeding revenue with a book-to-bill for DI overall at 1.24. Therefore, our record-high backlog in Digital Industries further increased to more than EUR 14 billion. Customer cancellations continue to be marginal. We expect more than EUR 10 billion of this record backlog to convert into revenue in fiscal '23, which gives us very good visibility and confidence for the remainder of the fiscal. Orders in discrete automation came back from very elevated levels, while process automation was close to prior year level. Software was modestly up with several larger deals in the PLM business. We anticipate the normalization of order patterns to continue during fiscal '23. We expect that this will lead to book-to-bill rates below 1, resulting in a gradual reduction of order backlog on easing supply chain challenges. Strong revenue conversion will ultimately lead back to healthier delivery times. Automation revenue rose 23% on broad-based strength. Supply chain constraints continue to ease, and the team, again, did an excellent job to run the factories at high utilization and optimized output. Still, we keep a close eye on potential disruptions from component availability and potential increased infection rates in China following Chinese New Year travels. Revenue in discrete automation was up a stunning 24%. Process automation is on a steady positive trajectory and achieved 14% revenue growth. Software was lower by 6% as expected, reflecting flat PLM revenue on ongoing momentum of our SaaS transition, while EDA recorded lower volumes from larger orders. Margin at 22.5% was outstanding driven by the automation businesses, while software, as expected, had a slower start into fiscal '23. Strong profit conversion across all automation businesses on high volumes and capacity utilization came with a very favorable mix on improved availability of components for high-margin products. Productivity gains and price increases from previous quarters, which materialized now through backlog conversion, enabled us to overcompensate cost inflation in the quarter. Effects from higher wages and cost dynamics making their way through the supply chain will increase over the next quarters, but we are well prepared and confident to keep the economic equation net positive throughout fiscal '23. Cloud investments accounted for EUR 67 million in the first quarter, equaling 130 basis points of margin impact on Digital Industries. We expect around EUR 300 million of cloud investments for fiscal '23 in total. Regarding free cash flow, Digital Industries had a softer start swinging back to a certain extent from an extraordinary fourth quarter, leading to a cash conversion rate on prior year level. Operating working capital increased on higher receivables due to high billings towards calendar year-end, and an intentional temporary buildup of inventories to safeguard revenue growth. We expect a material catch-up in cash generation beginning in the second quarter. Looking at our key vertical end markets for the next quarter, we expect continuing market growth momentum substantially driven by price inflation. We closely monitor the underlying real investment sentiment, which so far remain positive for our offerings. Yet we will remain alert in tracking the overall still ambiguous macroeconomic situation. And as Roland said before, we will continue to manage costs tightly with an empowered team close to their markets. Now let me give you the regional perspective on our excellent top line automation performance. As mentioned, automation orders were robust on a high level against very tough comps, which you can see on this slide as well. This was most notably visible in Europe compared to an exceptional first quarter in fiscal '22 of extraordinary pull-forward order levels. China orders rebounded from the softer fourth quarter, with massive sequential growth and only 7% decrease compared to peak orders 1 year ago. Outstanding double-digit revenue growth in automation was broad-based across regions. China delivered 17% revenue growth despite an infection wave in December. Germany, up by 16%, and Italy, up by 23%, show strength across the board while, in the U.S., both discrete and process automation increased double digit. As Roland said, our teams are well prepared and determined to leverage improved global component availability for stringent and optimized backlog conversion. Since Digital Industries achieved fantastic momentum in the first quarter which we expect to continue, we raise our guidance for revenue growth by 200 basis points to 12% to 15% for the full fiscal year '23. And we lift the profit guidance on the lower end by 1 percentage point towards 20% to 22%. From today's perspective, for the second quarter, we anticipate that DI will achieve revenue growth and profit margin towards the upper end of the raised corridors. Q2 will be again driven by strong backlog execution in automation. We expect the software business to show improved revenue growth on easy comps, while profitability will continue being impacted by SaaS transition and EDA orders, skewed rather towards the third and fourth quarter. For the second half of the year, we expect clear revenue growth acceleration and improving profitability in the software business. Smart Infrastructure achieved a truly outstanding first quarter performance. The team delivered excellent top line growth in robust end markets, boosting profitability to a quarterly all-time high. In total, orders were up 16%, driven most notably by 33% growth in the electrification business, fueled by larger projects with repeatable and scalable solutions such as in the semiconductor vertical and a strong base business. Buildings showed 13% growth, and electrical products was up 3%. Revenue growth reached 15%, with the largest contribution from the electrical product business up by 24%, and electrification up by 20%. The team, again, very successfully managed the supply chain. This was SI's best quarter ever, with a margin performance of 15.3%, up 270 basis points year-over-year. SI benefited from higher capacity utilization as well as ongoing structural cost improvements from our competitiveness program. Headwinds from material and other cost inflation were overcompensated by pricing actions and productivity. Positive currency effect contributed around 50 basis points to margin improvement. As with DI, SI allowed for temporarily higher inventory levels to safeguard growth momentum. On top, increased revenue at the end of the year has been driving up accounts receivables, resulting in weaker free cash flow for Q1. This will improve massively in the second quarter. As in Digital Industries end markets, we continue to see nominal growth in all key verticals, however, also substantially fueled by price inflation. We closely watch underlying trends and continue to see healthy demand with real-term growth in all major verticals. Both public institutions, such as universities and hospitals as well as commercial customers, invest in sustainability offerings such as energy efficiency and intelligent buildings. Further important verticals more related to renewable energy integration and IT infrastructure such as power distribution or data centers continue to show robust growth. Looking at the regional top line development, we saw strong order momentum everywhere except China, impacted by the recent pandemic way. Order growth in Germany benefited from a more technical effect of preponing service agreements, which are renewed every year into the first quarter, equaling around 27 percentage points which will reverse in the second quarter. The U.S. was the main growth engine, up by a remarkable 20%. Revenue increased broad-based, with the most impressive 25% growth again in the U.S., benefiting, for example, from strong data center business. Building on an outstanding start and ongoing momentum at Smart Infrastructure, we raised our guidance for revenue growth by 100 basis points to 9% to 12% and lift the profit guidance by 50 basis points to 13.5% to 14.5%. For the second quarter, we see the comparable revenue growth rates within our upgraded full year growth guidance strongly supported by order backlog. And we anticipate the second quarter margin to be in the raised margin corridor, too. Mobility started the year with a solid first quarter. Orders at EUR 3 billion included the mentioned major order win for the Sydney Metro project and led to a book-to-bill of 1.21. The backlog stands at EUR 36 billion with healthy gross margins, and our sales funnel looks very promising for the upcoming quarters across all business activities. Among others, we expect to book the recently announced large India locomotives orders for around EUR 3 billion in the second quarter. Revenue in Q1 was up 7% on double-digit growth in the rail infrastructure businesses while rolling stock was up moderately. Profitability at 8% was still impacted by suppliers' delays in delivering materials and components and a less favorable business mix with lower share of product business. This was largely offset by positive effects mainly related to the sale of inventories, which had previously been written down. Mobility had a soft start for free cash flow due to timing of large customer payment, which shifted into January. Therefore, we expect a material catch-up in the second quarter. Our assumption for revenue growth for Q2 is double digits due to a low basis of comparison from onetime Russia effect in the prior year's quarter. Second quarter margin is expected around the level of the first quarter, also depending on gradually easing material supply constraints. Let me keep the perspective on below. Industrial Business is crisp. More details are in the earnings bridge on Page 23 in the appendix. SFS delivered a solid quarter in line with expectations. Value creation at our portfolio companies continued with a gain of EUR 140 million from the Commercial Vehicles divestment. On top, we saw solid operational performance of the remaining businesses. The disappointing performance of our Siemens Energy investment led to a negative impact of EUR 187 million. In addition, Siemens Energy lowered its expectations regarding profit development for full fiscal year '23, which will be reflected in our equity result as well. Free cash flow performance in the first quarter reflects our strong growth momentum, which will continue throughout the year. Operating working capital was up, driven by inventories and accounts receivables, each increasing by around EUR 1 billion quarter-over-quarter. Due to our temporarily increased inventory levels, we are well positioned for the next quarters to execute our backlog diligently while we will, in turn, reduce our working capital gradually and drive our free cash flow accordingly. We expect a material catch-up in free cash flow performance already in the second quarter and another strong performance for full fiscal '23. With this tight grip on working capital, we are very confident to continue our deleveraging path driven by excellent cash conversion. Before I conclude with our outlook, I want to briefly recall Roland's backlog slide. We delivered very consistently on our commitment given in November and had a great first quarter. We built strong momentum to convert our backlog into revenue and drive profitability. Our visibility and confidence for the remainder of fiscal '23 has improved even further, with EUR 40 billion of expected revenue generation from a very strong backlog in the coming 3 quarters. Following the flying start into fiscal '23, we raised our guidance. On Siemens Group level, we now anticipate 7% to 10% comparable revenue growth, up by 100 basis points, and a book-to-bill ratio above 1. We expect profitable growth of our industrial businesses to drive basic EPS from net income before PPA accounting to a range of EUR 8.90 to EUR 9.40 in fiscal '23, up from the previous range of EUR 8.70 to EUR 9.20. This outlook excludes burdens from legal and regulatory measures and material impairment. Of course, we monitor macroeconomic volatility closely and will be able to act swiftly if need be. So in a nutshell, the course is set for cash excellence and outstanding value creation. Thank you, Ralf. We are now ready for Q&A. In order to provide as many of you as possible the opportunity to ask your questions, please limit yourself to one question per person. Operator, please open the Q&A now. It's really to understand the situation in Digital Industries in China. And in particular, I guess what I kind of want to know more about is, what areas in China, what end markets or what contracts are actually behind this big uplift? So if we look at last year's fiscal first quarter, your DI orders in China were plus 78%, so almost double, and this year, we haven't really come down very much. We're minus 7. So it's still a very, very robust picture. And it is, I would say, we don't know exactly, but several hundred million higher than where we were in '19 and '20. My question is, in that gap, in that delta, is there one end market or one factor that is driving your battery or EV or semis, were there historic EDA orders, how -- if we were to drill into that change, what is driving the change? Thank you, Ben. Very exciting question that we have been looking into consistently over the last couple of quarters. Let me give you a quick rundown. First and foremost, calling back our conversation in November, the sequential new orders in China were really impressively coming back in the first quarter. Compared to the levels of the fourth quarter, we almost doubled up. And as expected, there must have been also, let me call it, psychological patterns in the sales force's behavior. Maybe whatever the root cause was, we are where we committed ourselves to in the first quarter. Then looking into the different verticals and what has been the driving force, honestly, I wish there was one as you have been pointing out, but it wasn't. If you look into the market and into the new orders that we received, it's about twofold. On the one hand side, in absolute terms, from a materiality perspective, we continue in the high teens with machine tools in automotive. So strong, solid and material markets that we benefit from. Then there is also contribution from process industries and mining to a certain extent. But also verticals like batteries and food and beverage are contributing massively also clearly double digit, still on smaller scale but relevant on the growth path ahead of ourselves. So when you then look into the year-over-year relative growth, who has been the biggest contributors, I mean, there's definitely solar to mention on the SI side and mining, as I mentioned before, but also the petrochemicals from LDA are benefiting a lot. So it's really on a broad basis and not restricted to one industry only. Let me also just shed a quick word on the aftermath of the COVID wave and the expectations for Chinese New Year. I mean, first and foremost, the number of working days in January have been massively impacted by Chinese New Year. Last year, that was rather in February. This year, it was in January, and we still do see quite a meaningful print in, not audited yet, of course, and not fully consolidated, but a good guesstimate of what happened in January, which is still supporting a meaningful normalization as mentioned before. So I don't see any cliff or any other negative impact that would be indicating a massive change anytime soon. So luckily also, there is no new wave of COVID cases after the Chinese New Year traveling intensity in our workforce. At the moment, we don't see anything like that. And with more governmental stimulus programs in the pipeline and the opportunity to rebound the economy and consumer confidence, it's maybe also getting a bit better, but we don't want to speculate what we see. However, on a factual basis, that China's PMI in January was at 50.2. So the first time over and above 50 since middle of '22. And with that, I think we may say that we lift up our own expectations and to that what we have been pointing out to you when we discussed the guidance for fiscal year back in November. Can I actually zoom on the electrical products segment? I think you printed 24% organic revenue growth but only 3% order growth. So can I ask about the book-to-bill in the electrical products segment this quarter and, more generally speaking, your thoughts about the outlook for the business? Gael, I mean, first and foremost, it's a highly attractive market segment for us, and we have been definitely gaining momentum in that field. What we do see is that the growth momentum that has been generated is also supported by the key growth markets and is going to continue from today's perspective. I need to look up the book-to-bill. I will come to that later, but it's definitely over and above 1. We may see a normalization at the second half of the fiscal year in that field. But in general, book-to-bill, we had been discussing a bit in the fourth -- in the November disclosure process. I -- just to complete the picture, the book-to-bill for the first quarter was 1.14. As I said, that may moderate and normalize over the course of the fiscal year, but there's also a strong backlog supporting the quarters to come. In general, book-to-bill, as we have been guiding for Siemens grand total, it's going to be above 1. Obviously, we do expect a strong contribution from Mobility, as always, in that growing business, with also a very solid gross margin in the existing backlog. But having been giving you a bit of color in the last disclosure, I would like to update that a bit. I said it will be 90% plus for short-cycle business. And for DI in particular, from today's perspective, I think that 90% plus may approach 1 from the south, but obviously, the first quarter has been contributing a lot with 1.24 for DI and 1.31 for SI. For SI from today's perspective, I would expect book-to-bill above 1 for the full fiscal year. So I mentioned that a bit. I mean, first and foremost, we don't see any cancellations at the moment. It's completely immaterial, no change compared to that what we said before. The backlog is giving us quite some visibility. I do not see any channel stuffing or any artifacts out there that may be material in nature, but of course, as you know us, we are paranoid about looking into that matter. And therefore, if and when there would be a change of the scenery, we would, of course, directly react. At the moment, there is no sign of channel stuffing or any artifacts. However, as always, around Chinese New Year, you better wait for the actuals of the second quarter of our fiscal year second quarter before you conclude on matters. There is always also a bit of dancing around price change and the like. So wait for the second quarter before we can talk facts. But from today's perspective, no massive change or artifacts in the channels. I just wanted to dig in a little bit on the pricing developments across, I guess, particularly DI and SI in the Q1. And also, I guess, thoughts around pricing strategy for FY '23 as a whole, please. Yes. Thanks, Andrew, for that question. In the German call before, I already have been elaborating on that a little bit. The rationale is, as we shared with you, that we resolve what we call the economic equation with a net positive ideally in each and every quarter and, in particular, over the full cycle. What does that mean? Any kind of cost inflation, be it wages, be it material, be it anything else needs to be compensated by productivity measures and pricing power over the course of a cycle. Last year, first quarter, just looking back at that for a moment, we started with a slight net negative into the fiscal '22. At the end of the year, we turned it around into a net positive. And we now, first quarter fiscal '23, started with a net positive for both DI and SI. We are not trying to maximize pricing only because what we see is a massive demand at our customers for sustainability offerings that we have for digitalization and also for automation. And therefore, our prime target is to maximize growth -- profitable growth on the way forward. And therefore, we pretty much reflect the increase in wages, inflation on the wage side as a yardstick for that. So we do see then on a global basis between 4% and 6% for the full fiscal year for us as a global player, and we need to compensate that by pricing power and additional productivity gains. So far, that worked out very well. I also indicated that for the second half of the year, in particular, there may be a slight decrease in that net positive that we see on a percentage basis at the moment, but it will still be net positive. And if need be, we will have levers in our hand to make sure that we end up in the corridor. We expect to accomplish growth, profitable growth, winning market share and capitalizing on the huge momentum we have been creating over and above that of our peers is the key target that we are pursuing. Obviously, a good set of results. The question is on cash flow. I appreciate there's some cash to consume ahead of all this growth that's coming. But can you touch on what's happening on the prepayment side of things, please? And is there anything to read into the commentary around receivables, i.e., are there any concerns on the potential creditworthiness of any of your customers? And just thinking about Q2 in that regard, net debt to EBITDA in Q1 at 1.1x despite this soft cash print would imply you're going to start to continue deleveraging pretty quickly as the quarters roll by. So I'm curious to hear what the plans are to ensure that you don't delever too much further. Thanks, Phil, for those relevant questions. I mean you can imagine close to my heart. I mean, first and foremost, I think it was very meaningful, and we still consider this to be meaningful also on the way ahead to make sure that we are able to capitalize on the massive growth momentum that has been created would be completely naive to optimize inventories at the same point in time. So we deliberately allowed a meaningful temporary buildup of inventories to safeguard the top line for the quarters to come. That was, give or take, EUR 1 billion incremental increase December 31 over September 30. There is also a technical impact. And obviously, from accounts receivable, we accelerated growth in the last couple of weeks in the last quarter. So therefore, with the payment terms agreed upon, there's also a natural increase in accounts receivables. We double and triple and quadruple cross-check the validity of those accounts receivables. And also our customers, we are screening each and every of them as we always do. I do not see any change in that. In terms of payment behavior, I do not expect any massive change in pattern. From today's perspective, there is no data points for that at all. So that's pretty much rational and intended way forward. We will unwind the inventory levels over the course of the fiscal year. Again, there will be a first contribution in the second quarter because it's a delta quarter-over-quarter that matters, obviously. And with the payment -- large payments that we receive from customers when it comes to project business, you know that it's hard to predict whether you get the check on the last day of the quarter or early in the next quarter. So we are, I think, in a regular process in that regard. We received some of the payments that could have been coming and hitting our accounts in December and January from the Mobility perspective mainly. So that's ticked off, if you will. Leaves us with a huge expectation and ambition for the second quarter to start bouncing back. There will be a massive change in free cash flow and cash conversion, in particular, for SI and also for Mobility. You have heard pretty much the same from Siemens Healthineers already. So all the businesses are geared up for massive change on the cash conversion side in the second quarter. And that, again, will then start having impact on our industrial net debt over EBITDA. We have been giving ourselves a maximum of 1.5x, which we clearly have been beating. So we are better than that with 1.1. And over the course of the year, we expect further deleveraging for the second quarter, in particular. Bear in mind that there's going to be a dividend payment that is also on levels that are unprecedented so far. So from a deleveraging perspective, the focus will be on the second half of the fiscal year. Ralf, could I just qualify your answer to Ben earlier? Were you saying that Chinese daily order average in the start of the new quarter in automation was similar to the first quarter daily average? That was just a qualification. And my question is on portfolio. Following the capital raise at energy, could you talk about your ambitions on your remaining stake? Let me first qualify, James. What I said is quarter-over-quarter, you remember we had an intense discussion about the new orders from China in short-cycle business in the fourth quarter. And we had been expecting back in November, having about 5 weeks into the fiscal year back then, that there was a massive change back to normalization on prior levels. That has been taking place. What I said is we have been almost doubling up new orders for automation in China in the first quarter compared to the fourth quarter of last fiscal year. And then I have been changing perspectives and said in January, taking all the artifacts into consideration that come from a different allocation of Chinese New Year. Last year, that was mainly in February, starting 31st of January. This year, it was fully covered in January. So the number of working days and all the artifacts around Chinese New Year, trying to anticipate that in a meaningful way, what will be the final outcome for the first quarter. I said there is no cliff that I could see for the behavior in China on that one, but there is normalization. Normalization, if I may translate, that give or take something between 10% and 15%, I would still call normalization and not a cliff. So therefore, at the moment, I do not see any cliff on the new orders for short-cycle DI automation business in China with all the uncertainties around Chinese New Year and the like that I mentioned. Talking portfolio in the 35% shareholding of Siemens AG and Siemens Energy, we are boringly consistent on that matter from the very beginning. We said that we will not do anything that will -- may harm the newly listed company back then. There was an intent to start selling down our stakes during the first 12 to 18 months. If market conditions allow, I think you agree that wouldn't have been helpful for any participant. If we did back then at the moment, Siemens Energy is busy preparing or completing the purchase of Siemens Gamesa Renewable Energy shares. They are delisted at the moment, and I think Christian and Maria have been giving quite a reasonable overview about their intent, how to proceed. We respectfully look at that. And we are not in a hurry with anything, but what we absolutely endorse and believe in, this is a very, very meaningful asset when it comes to sustainability considerations in the long term, so therefore, there's an intrinsic value that goes far beyond than what we see at the moment. That's my personal view on matters. And with that having said, we are not in a hurry, but you should also bear in mind the 10% that we held after the listing in our Siemens pension fund has been sold down to less than 3% in the meanwhile without any noise and without harming any one of the stakeholders being affected. I think that was a meaningful way to get things done. And I would also think this is a meaningful way how to handle things the way forward. Thanks a lot to everyone for participating today. As always, the team and I are available for further questions. Have a wonderful day, and goodbye. Ladies and gentlemen, that will conclude today's conference, and you may now disconnect. Thank you for joining, and have a pleasant day. Goodbye.

EarningCall_392

Good afternoon, and welcome to Red Rock Resorts Fourth Quarter and Full Year 2022 Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Stephen Cootey, Executive Vice President, Chief Financial Officer and Treasurer of Red Rock Resorts. Please go ahead. Thank you, operator, and good afternoon, everyone. Thank you for joining us today for Red Rock Resorts' fourth quarter and full year 2022 earnings conference call. I'd like to remind everyone that our call today will include forward-looking statements under the Safe Harbor provisions of the United States federal securities laws. Developments and results may differ from those projected. During this call, we will also discuss non-GAAP financial measures. For definitions and complete reconciliation of these figures to GAAP, please refer to the financial tables in our earnings press release, Form 8-K and investor deck, which were filed this afternoon prior to the call. Also, please note that this call is being recorded. Before we get into any details, we are pleased and proud to say that our fourth quarter represented another strong quarter for the company by any measure. In terms of same store net revenue, we had the best fourth quarter in the history of our company, and in terms of adjusted EBITDA and adjusted EBITDA margin, this quarter represented our second best fourth quarter ever, only surpassed by last year's strong quarter. As we look at our results for the year in terms of same store revenue and adjusted EBITDA, we had the best year in the history of our company, while also achieving our second best adjusted EBITDA margin, only surpassed by last year's record high margin. To sum things up, despite facing challenges such as COVID-19 restrictions, historically high inflation and the disrupted supply chain, the company was able to generate record financial performance. This demonstrates the resilience of our business model, the sustainability of our margins and the ability of our management team to execute on our strategy even in an extremely challenging -- even in an extremely challenging macro environment. Now let's take a look at our fourth quarter and full year results. On a consolidated basis, our fourth quarter net revenue was $425.5 million, up $3.1 million from $422.4 million in the prior year's fourth quarter. Our adjusted EBITDA was $194.4 million, up 2.5% from $189.7 million in the prior year's fourth quarter. Our adjusted EBITDA margin was 45.7% for the quarter, an increase of 78 basis points from the prior year's fourth quarter. With respect to our Las Vegas operations, excluding the impact from our closed properties, our fourth quarter net revenue was $419.7 million, up 1.9% from $411.7 million in the prior year's fourth quarter. Our adjusted EBITDA was $206.9 million, down 1.1% from $209.3 million in the prior year's fourth quarter, and our adjusted EBITDA margin [Technical Difficulty] [Technical Difficulty] up 2.8% from $1.6 billion in the prior year. Our 2022 and -- full year adjusted EBITDA was $743.9 million, up $2.9 million from $741 million in the prior year. Our full year adjusted EBITDA margin was 44.7%, a decrease of 109 basis points from the prior year. With respect to our Las Vegas operations, excluding the impact from our foreclosed properties, our full year 2022 net revenue was $1.64 billion, up 4.7% from $1.57 billion in the prior year. Our full year 2022 adjusted EBITDA margin was $813.4 million, up 1% from $805.9 million in the prior year and our full year adjusted EBITDA margin was 49.7%, a decrease of 184 basis points from the prior year. As always, we continue to prioritize free cash flow, converting 55% of our adjusted EBITDA to operating free cash flow, generating $106.6 million or $1.03 per share. This brings our 2022 cumulative free cash flow generated by the company to $448.2 million or $4.31 per share with virtually every dollar either being reinvested into our long-term growth strategy or being returned to our stakeholders. Throughout the year and in the quarter, we remained operationally disciplined and stayed focused on our core local customers as well as continued to grow our regional and out-of-town customer base. When comparing our results to last year, we continue to see benefit from strong visitation in our regional and out-of-town customer segments. This strength coupled with strong spend per visit across our entire portfolio allowed us to enjoy near record revenue and profits across our gaming segments. The trends in the fourth quarter were similar to those we saw in our recent -- in our most recent quarters and have remained consistent so far this year. Turning to the non-gaming segments, we saw continued growth in food and beverage and hotel, as both segments delivered near record revenue and profitability in the fourth quarter, driven by higher occupancy in ADR across our hotel portfolio and higher average check across our food and beverage outlets. With regard to group sales the -- and catering business segments, the recovery of these business lines continued as we saw the fourth quarter represents the sixth consecutive quarter of double-digit year-over-year growth in this business line, and we continue to see our lead pipeline grow into 2023. On the expense side, we remain operationally disciplined and continue to look for ways to become more efficient, providing best-in-class wages and benefits to our team members and delivering best-in-class customer service to our guests. While 2022 posed certain economic challenges, such as inflation and higher interest rates, our constant focus on our core operations and our actions taken over the past two years have allowed us to generate strong adjusted EBITDA, maintain adjusted EBITDA margin and return over $1.1 billion in capital, over $10 per share to our shareholders since we reopened in June of 2020. And while we remain vigilant to macroeconomic trends, we will continue to stay disciplined and focused on executing and investing in our core strategy, including strategically expanding our footprint across the Las Vegas Valley and offering new amenities to our guests at existing locations. Last quarter, we saw the successful execution of the strategy to the openings of our high-limit slot room and Lotus of Siam at our Red Rock property. These amenities at Red Rock will soon be joined by the highly anticipated opening later this quarter of Naxos Taverna, a new restaurant concept focusing on coastal Greek seafood cuisine, and the Rouge Room, a sophisticated European-inspired cocktail lounge. Additionally, this quarter, we will be strategically expanding our company's footprint in the Downtown Las Vegas area to the opening of our Wildfire property on Fremont later this week. Now let's cover a few balance sheet and capital items. The company's cash and cash equivalents at the end of the fourth quarter was $117.3 million. The total principal amount of debt outstanding at quarter-end was $3 billion, resulting in net debt of $2.9 billion. As of the end of the fourth quarter, the company's net debt to EBITDA and interest covered ratios were 3.9x and 6.6x, respectively. As we have discussed on previous earnings calls, our leverage is expected to continue to trend upward as we complete the construction of our Durango project. Upon the completion of Durango, we expect leverage to begin to trending down towards our long-term leverage target of 3x net debt. On November 14, 2022, the company announced that its Board of Directors had declared a special cash dividend of $1.00 per Class A share. The special dividend was payable to shareholders of record on November 30 and was paid on December 9. The dividend reflects our Board and management team's continued confidence in our business model as we -- and our commitment to returning capital to our shareholders in addition to executing on our long-term growth strategy. When we combine our special dividend with our regularly declared fourth quarter dividend, we returned approximately $130 million to our shareholders in the fourth quarter and over $353 million for the full year of 2022. Also, during the fourth quarter, we made distributions of approximately $22.8 million to the LLC unitholders of Station Holdco, which included a distribution of approximately $13.1 million to Red Rock Resorts. The company used the distribution to make its fourth quarter estimated tax payment and to pay a portion of its previously declared special dividend of $1.00 per Class A common share. Capital spend for the fourth quarter was $130 million, which included approximately $108.4 million in investment capital, inclusive of our Durango project, as well as $21.6 million in maintenance capital. For the full year 2022, our capital spend was approximately $328.6 million, which includes $258.1 million in investment capital inclusive of our Durango project, as well as $70.5 million in maintenance capital. For the full year 2023, we currently expect to spend between $70 million and $90 million in maintenance capital, and an additional $550 million to $600 million in growth capital inclusive of our Durango project. Now let's provide an update on our development pipeline. Starting with our Durango development, as we mentioned before, we are extremely excited about this project, which is situated on a 50-acre site ideally located off the 215 Expressway in Durango Drive in the Southwest Las Vegas Valley. The project is located in the fastest-growing area in the Las Vegas Valley, with a very favorable demographic profile and no unrestricted gaming competitors within the five-mile radius of the project site. The project is progressing nicely, as we topped out in nearly October and expect to have the structure fully enclosed by mid-April. The project continues to remain on schedule with an anticipated opening in the fourth quarter of 2023. As mentioned on our prior earnings calls, we expect to spend approximately $750 million, which includes all design costs, construction, hard and soft costs, pre-open expenses and any financing costs associated with the project, and are currently operating under a guaranteed maximum price contract, which represents approximately 70% of the total project costs. As the project stands now, approximately 88% of the project, including the purchase of long-lead FF&E items has been secured. And as stated in previous calls, the company expects the return profile for this project to be consistent with past greenfield projects within our portfolio. As we've already mentioned, we are also very excited about the opening of Wildfire Fremont on February 10. This 21,000 square foot casino is the newest addition to our Wildfire gaming family that is conveniently located in the Downtown Las Vegas area. The casino will offer over 200 slot machines, STN Sports as well as two restaurant options to our guests. We're excited to be bringing our best-in-class service and amenities to the downtown area of Las Vegas and look forward to welcoming our first customer in the coming days. Turning now to North Fork. As we noted last quarter, after favorably resolving all its other litigation, the tribe has only one pending case in the California courts. As we have also noted last quarter, we do not believe that any decision by a California State Court could deprive North Fork of its ability to game on federal trust land. We continue to work with the tribe to progress our efforts with respect to this very attractive project, including working toward approval on a management agreement, continuing our work on development and design and having preliminary talks with prospective lending partners. We will continue to provide updates on the next quarter -- quarterly earnings call. Lastly, this quarter, you have seen our long-term development plan in action as we've been very busy upgrading our real estate portfolio. We purchased a 67-acre gaming site at Losee in the 215 Expressway in North Las Vegas for $55 million, and funded the purchase using a tax-efficient 1031 exchange as a result of successfully closing on our sale of 56.6-acre site north of Cactus and Las Vegas Boulevard for $60.8 million. Additionally, we sold 21 acres of excess land on our Durango project site for $23.8 million to a group of multifamily developers, which will bring additional visitation to our project at Durango. In total, we sold approximately 113 acres for $118 million in proceeds in 2022. And with the purchase of our Losee site and our earlier purchase south of Cactus and the Las Vegas Boulevard, we've substantially upgraded our pipeline of land held for development. With the completion of these transactions, our strategic landholdings amount to over 522 acres, a bulk of which will serve as the foundation for the future growth of the company. We are actively looking to divest or under contract on almost 120 acres of land as we continue to reposition and upgrade our real estate portfolios for the next chapter of growth at Station Casinos. Lastly, on February 7, 2022, the company announced that its Board of Directors had declared a cash dividend of $0.25 per common -- Class A common share payable to the first quarter of 2023. The dividend will be payable on March 31 to all shareholders of record as of the close of business on March 15. With our current best-in-class assets and locations, coupled with our development pipeline of seven-owned development sites located in the most desirable locations in the Las Vegas Valley, we have an unparalleled growth story that will allow us to double the size of our portfolio and position us to capitalize on the very favorable long-term demographic trends and high barriers to entry that characterize the Las Vegas locals market. While the macroeconomic environment through the year was challenging, our disciplined approach to running our business resulted in record high EBITDA and near record high EBITDA margin for 2022. As we begin 2023, we will remain vigilant to macroeconomic trends. We are confident in the resilience of our business model and our management team's ability to execute our long-term growth strategy and take a balanced approach to returning capital to our shareholders. As we do every quarter, we'd like to recognize and extend our thanks to all of our team members for their hard work. 2022 was a very challenging year, and our team members rose to the occasion as they always do. Our success starts with them, and because of them, our guests come back time and after time. We would again like to thank them for voting us top casino employer in the Las Vegas Valley for the second year in a row, and making us the employer of choice in Las Vegas Valley. And finally, special thanks goes out to all of our guests for their loyal support over the past 46 years. We will now begin the question-and-answer session. [Operator Instructions] First question today comes from Joe Greff with J.P. Morgan. Please go ahead. Hi, everybody. Looking back at the 4Q, casino revenues were down a little bit year-over-year and the non-casino revenues were up mid-single digit year-over-year. It's sort of similar to the 3Q. Can you talk about how your Las Vegas locals consumer is spending? What's driving that? And then, what are you seeing in the 1Q to-date? Well, thanks, Joe. Let's kind of take it from the top and look at casino revenues first. We continue to look at casino revenues as stable and healthy. When you look at the database, we see good signs of stability across the database. That's everything from the low end to the higher-end customer. We also see growth in the out-of-town market as well. So, we continue to offer good products in the slot machine realm and then also work on our table games. And we think that what you're seeing in casino revenues is stability and the opportunity to grow. When we switch gears and look at the non-gaming food and beverage and hotel revenues, we're seeing outsized growth from regional and out-of-town. So, when you look at all metrics, whether that's food and beverage, hotel, ancillary, entertainment options like bowling, solon and spa, all of them are up double digit, and we're really encouraged by that. And so, when we look forward into this year, we're seeing strength in all of those areas, specifically the return of convention guests and also strong catering revenues as we go forward. It's stable and consistent, Joe, I mean, as we talked about in the remarks. So, we like the position [as far as] (ph) at this point. Great. And then, my follow-up question is, maybe can you talk a little bit about how you're thinking about development, following Durango, how are you thinking about the timing of Inspirato, Skye Canyon and others? Specifically, I guess, what do you need to see in the locals market? What do you need to see in the ramp of Durango? And how do you factor in balance sheet considerations? Think we want to see continued stability in the Las Vegas market. Everything we see right now continues to back up with our long-term thesis of the macro environment with population migrating into Las Vegas, continue to grow limitations on supply where all the rooftops are being built, which is part of the thesis. Inspirato fits right into that. And basically, what we're doing is working on being in a position to have a ready-to-go project. But to green light the project, we're going to have to prove out Durango before we would green light it. That being said, we're very confident in Durango, its location, the product that we're going to build there. I think the market is going to really, really like what we're doing. So, we're excited about it. And once we believe that we have stability, whether it be over two, three, four quarters, we'll decide that based on the strength of the business. And Steve, you can address kind of where we are relative to the balance sheet, but we would expect with Durango opening to rapidly be deleveraging on the balance sheet. Yes. And to echo, Joe, what Frank said, I mean, we're moving forward the entitlement process across all of our development properties with the goal to have these all shovel-ready. And this just gives the team -- the management team maximum optionality [indiscernible] moving into, let's call it, the stability point of Durango to assess the macro environment, assess the balance sheet and our ability to generate return for our shareholders to determine the next project. And as Frank mentioned, the balance sheet is in good shape. We have a low -- very low cost of capital, no long-term maturities, we have plenty of liquidity to go around. So, we feel we can execute that strategy. And as I also mentioned in the remarks, the leverage will be trending upward as we go through Durango. This has been expected and I think well communicated to the Street. But as Frank alluded to, once Durango hits, we expect that leverage to come down and start moving slowly toward our long-term leverage target of 3x net. Hi, everybody. Thank you. Guys -- Steve, you kind of outlined the CapEx. I thought you said $256 million or something like that, that had been spent on Durango this year, and then, obviously, the bulk will be spent in 2023. I guess, my question is, it looks like embedded within the $550 million-$600 million growth CapEx seems to be $100-or-so-odd-million of other. I was just wondering how much of that relates to development activity of new stuff versus core reinvestment, new amenities at existing assets? Yes, I think if you just -- if you break that out and -- so, yes, Durango was probably about $230 million, let's call it, life-to-date. We have about $518 million to $520 million left to spend on Durango. We still have about $9 million of -- related to the opening of Fremont, which was -- is obviously committed, the project is opening up literally this week. The rest of the CapEx is related to strategic investments, mostly in our same store to improve the amenities and offerings to our existing customers. Got it. And then, just a follow-up. Historically speaking, if I'm correct or I should say the model I'm looking at is accurate, 1Q has historically been seasonally better in the locals market than 4Q from a revenue and EBITDA perspective. Is there anything different about the seasonality now or as we look into 2023 throughout the year that you would expect to see or anything that we need to be mindful of in terms of changing patterns or habits? No. I mean, you're spot on. Generally, Q1 is the strongest of the quarters in Las Vegas. I think last quarter, we saw probably a little bit flatter, if flatter in terms of what you'd expect in seasonality, but there's nothing in 2023 that would tell us that seasonality is not going to return. Hi, good afternoon, everyone. Thanks for taking my question. Just high level, you all have great insights on broader commercial real estate market and clearly with some of the land deals you guys have been pretty active there. Was kind of hoping for a little bit of color on just what you're seeing from maybe on the buy and sell side of some of that activity? Is there still meaningful continued interest in the Valley? Any changes in behavior from developers or how they're kind of looking at underwriting Las Vegas in the future? Yes, let's kind of take it through steps. So, we had quite a bit of landholding activity over the last year. So, we divested about 118 acres of land. We have about roughly 47 acres, 48 acres of land under contract and we have about 120 acres of land that is active. And so, we feel that the market still has steam and power to it. We still have expressions of interest and we are actively under contract on a majority of our land holdings that are up for sale. We still think that the price per acre in the Valley is strong and accretive to us continuing our strategy to improve our placement around the Valley. Great. Thanks very much. And maybe just as my follow-up, could you just touch on Wildfire Downtown a little bit more? I mean that's sort of a unique submarket. Kind of curious on how you're expecting it to look and feel relative to similar core local properties. Is it a little bit of a different customer base, or you're going to be pulling from a little bit more of the tourist base that ends up down there? Kind of how are you thinking about positioning that? I think first it's probably good to categorize the products that we have. So, we have big box products that are your typical products like Green Valley Ranch and Red Rock. And then, we have what's called small non-restricted. And these are a bit of a different format. They're a little bit more local in their radius of customer catchment. They're a little more convenient getting in and out, and they offer a little bit more of a personalized service than our big box operations. Yes. So, the quality is quite far the best on the Boulder Strip. And it does sit relatively close to Downtown. But we do think that it's going to be predominantly for folks in that neighborhood and we think that it's going to be something that's fresh and new on the Boulder Strip that we haven't seen in years. So, we're pretty excited about the opening. Hey, guys. Good afternoon. So, I wanted to ask about your older demographic and maybe if you saw any material changes in that customer over the past couple of months? And then, second part of that question is going to be, did you see any kinds of changes in that customer base in January? And the reason I ask is, just given the fact that a lot of those folks got a somewhat decent bump in their Social Security checks at the beginning of the year. I believe we might have lost our speakers. One moment while we reconnect. We've reconnected with our speakers, and thank you for your patience. Hey, Steve. If you could -- and it's not that we didn't like question, if you could just repeat the question and we'll roll back on. We had just little technical difficulty here. Sure. Yes, I thought you didn't like and just hung up on me. But -- so, thanks guys. So, I wanted to ask about your older demographic and if you saw any material changes in that customer over the past couple of months? And the second part of that question is, did you see any kinds of material changes in that customer base in January given the fact that, I think, a lot of those folks got a decent bump in their Social Security checks at the beginning of the year? Yes. Hi, Steve. This is Scott. Yes, specifically with the, let's call it, 55, 65-plus demographic, we're very encouraged. We're seeing good growth in that demographic. And I know we've talked in previous calls about them coming back into the fold. I think we can say with confidence that they are back and producing positive gains for us. So, we're really encouraged by that. And if you look at Las Vegas demographics and Las Vegas inbound resident profile, that age group profile not only is coming in at a greater capacity than other age groups to the tune of about 3.8 times the average, but also their average income is increasing quite a bit. So, we're encouraged by all of those and we're seeing that come through in the database. Okay. Thanks for that Scott. And then, Steve, as we think about margins for this year, anything you would call out there in terms of headwinds or tailwinds to the margin structure that we should be thinking about? And I don't know if you can help us with maybe how corporate costs will look this year and maybe interest as well? Yes. So, I mean, listen, I think, as you've seen, we've been pretty consistent with the margins, right? It's our tenth quarter in a row generating exceptional margin. And so, while we expect headwinds such as utilities, it has been consistent on our side and we expect that to be consistent on our side as we move into 2023. That said, the team is executing all sorts of challenging macroeconomic environments and there's nothing that would give us reason to believe we cannot maintain our margin into 2023. Well, the interest, I mean, the interest is going to depend. The interest costs are up. I would say that we're about 43% fixed. What that just means is every bump in interest 1% is about $17 million in interest expense. And as I mentioned, our interest expense should go up as we've alluded to before. I will be leveraging up as we go into Durango, but then interest expense is going to fall right down as we start deleveraging. Corporate, what you're seeing right now is pretty much a good run rate. And so, we'd expect that to remain consistent. Hey, guys. Actually, just following up, corporate was nicely ahead of us, G&A as well. Just curious if there are any call outs there? And how -- it sounds like that -- is that sustainable whatever you're doing? Yes. I think G&A, if you kind of dig in deep into G&A, we made -- our marketing and advertising is much more efficient year-over-year, as well as part of managing the -- as we say controllables, we were able to reduce costs in consulting and outside services for the quarter, which resulted in lower G&A, and we do feel that's sustainable. Got it. And then, just for my follow-up. Red Rock is obviously be concentrated in the Las Vegas locals market. Recognizing North Fork and all your land holdings in the pipeline, are there any scenarios that would find you extending more beyond Las Vegas? Look, we're always looking at opportunities evaluating them. And if it's something that we think makes sense for the company, for the shareholders, we would take a look at that. Hi, thanks. A couple of follow-ups. First on Durango, I know you've talked about this a little bit, but as you see the market continue to evolve, how do you think about the ramp of the property? And where growth will come from, if we think about new customers are growing the market versus any kind of cannibalization of other properties versus taking share from competitors? Yes. Hi, Steve, this is Scott. I think let's address ramp. Each property has its unique demographic profile and economic profile, but we expect Durango to ramp [Technical Difficulty] two-year period, if we look at historical ramps in the Valley. And we do find that we grow markets. So, what the demographics are today will grow as we bring those products online and bring those to the neighborhood. Also, as we look at new amenities and adjust the model of the property, we see upside there as well. And then, I think past that, we look at other opportunities in the Valley to grow once we get Durango up and operate. [Multiple Speakers]. Steve, I mean, we're talking about there's no competitor within the five-mile radius. And where this is the -- that Southwest Vegas is part of the Valley is where the fastest-growing demographic in the Valley. Fair enough. And then, second, just following up on the group and catering strength, clearly a very good calendar for the Strip in the year ahead with [ConAg] (ph) and Formula 1. Can you remind us what you typically see when ConAg hits and maybe even compare and contrast what that might look like for you all relative to what's going on with Formula 1 as you look ahead? Well, let's take a step back and maybe talk more broadly about what we're seeing in hotel sales pace, meaning that those are hotel rooms coming from events or group. We're seeing pretty strong increases as we look at the fourth quarter and look forward into 2023. We're looking at room night bookings in the 20 percentile increases and revenue up quite substantially. And then, when we look at the catering revenue that's on the books as a function of those hotel rooms, we're seeing quite substantial increases in catering revenue as well. So, when we look in our committed bookings throughout the rest of 2023, it's very encouraging. Hey, good afternoon, and thanks for taking my questions. I was hoping to get just some color on kind of the real-time trends that you're seeing in the residential real estate market? And to what extent does that -- helps that market impact the consumer psyche versus other metrics such as unemployment or income levels? In terms of the impact of the housing market, obviously, I mean, you're hard back to the 2007, 2008 kind of impact of the housing market. I just wanted to -- what's going on here from an economic perspective while you're seeing some prices down, you're also seeing transactions down, which is kind of -- and the housing market is actually fairly stable. And it's not a reiteration of what 2007, 2008 is. You have a lot of folks that are in fixed loans as opposed to variable rate loans like they were in the recession. And for the most folks, even despite maybe a slight priced downward, they're all positive equity. So, there's no reason to sell. And then, I think as Frank has always reiterated, from a housing perspective that we love the long-term demographic profile of Las Vegas and people continue to walk here, which drives demand for housing. So, I think, arguably from a housing perspective, it's -- we're undersupplied from actually the actual demand that is in need of housing. Although housing prices are down from where they were, they were really what I would consider to be an unsustainable peak. And so, what you've had as you guys talked about with increases in interest rates and things like that, you've just had a bit of a slowdown, but you still have a lot of people that have significant equity in their homes right now. It's not like I think in 2008, we were like 74% of the homes were underwater in equity. This is not what we're seeing right now. We're seeing a healthy slowdown or reduction from what I think was unsustainable. And people now valuing the loan as an asset, which allows them to have kind of more discretionary spend, which is not a bad thing. Right. Makes sense. And just for my follow-up, on the Native American fees, I think in the quarter, there's around $500 million of EBITDA. I mean since [indiscernible] closed, I think it was in the -- or the management contract ended in the first quarter, I think this was the biggest kind of line item that hit. I mean, what exactly was that? And should we be anticipating anything like that in 2023 as it relates to North Fork? No, that was a one-time settlement of an arbitration case and we do not expect that EBITDA to return in 2023. Good afternoon. Thanks for taking my question. Wanted to ask about the promotional environment, I guess, in the local region and then also for the out-of-towners. And if you've seen anything exorbitant from, I guess, your legacy competitors or, I guess, the newest competitor that's currently running the Palms? Thanks. Hi, Chad. It's Scott. Happy to report that marketing in the Valley remains rational and stable. So, it is very consistent with what we've reported in the past and it remains so. Great, thanks. And then, one, I guess, nuance question. I think in the past, we had thought that there were some local customers that would maybe drive an hour, hour and a half for a more value option. And we've seen some of those markets actually lose market share. I don't know if you have more value customers that historically left Clark County and kind of gone out to Laughlin. But do you have a sense just looking at your database if you are getting just higher frequency and more kind of allegiance to your product versus what you may have seen in the past? Our business has always been location, location, location, convenience, value and service. So, while there may be some people that are looking to go get a value weekend down in Laughlin, I don't believe that that's our core customer. I mean, our customers typically live within a three to a five-mile radius of our properties and they visit multiple times a week. And again, it's based on the quality of the facilities we have, the convenience of the facilities, the amenities, the team members, the service, recognition of the customer. So, I don't think we really see Laughlin as a competitor of ours. And to add to that, Frank, I think you see that most Las Vegas locals are spending more time in their local neighborhood properties like ours versus going to the Strip. So, the difference between five years ago and now is we're providing amenities that give -- that remove the reason for you to need to go to the Strip if you're a local resident. Hey, everyone. Thanks for taking my questions. Wanted to ask about a smaller piece of your kind of capital allocation that is on your kind of same store amenity upgrades across the portfolio that are pretty much been a pretty good core piece of your business. But I was wondering if you could kind of qualify or give some color on your kind of ROI expectations for those investments and where you see that stuff and some things have come online recently. And you've talked in your prepared remarks about recovery in non-gaming. I don't know if you'd venture a guess as to how much is being driven by your recent investments versus just broader recovery in the market, that would be helpful. I mean, well, John, I'm going to keep this a little bit high level rather than going into the returns of every single asset that we focus on. Amenities are our most recent additions to the Red Rock, right, with high-level table room, high-level slot room, we put in the casino bar, we also put in Lotus as I alluded to. We're also getting the Rouge Room and then our Greek restaurants opening up in the next couple of weeks. We're incredibly happy with the returns on those assets, which is why we've allocated that additional capital to strategic investments across the balance sheet. [indiscernible]. Got it. That's fair. Maybe one on wages and we kind of talked about it a little bit throughout the call, I think specifically about sort of security increase. But private payrolls, wages in Las Vegas are certainly outpacing a lot of other markets and the folks that are moving from California coming from high-income jurisdictions. At the same time, we still get the question about spend per visit being elevated relative to 2019. We talked about real estate. How important do you look at the wage growth side of things as a driver of the business? And if you think that's one of the reasons that the spend per visit that we're seeing is sustainable? Just maybe your thoughts on private wage growth in Las Vegas and its impact on your business? Yes, I can start and Steve can direct you towards the page. But in the investor deck, we have couple of slides on the average income of Las Vegas workers and incoming average income. And over the next five years, that looks really strong. And of course, the more money you make, the more discretionary income you have and we're starting to see those effects at the properties as well, bringing on new amenities that are incremental to just gaming and making our properties kind of local regional destination centers. Yes, I mean, John, this is all in the investor deck, but we've kind of showed you that average minimum wages from basically year-over-year Las Vegas probably one of the top cities in the Western United States growing 6.7%. And then, as Scott alluded to, from a personal income per capita, we're expected to grow almost 17% over the next five years. So, as migrants come in from wealthier areas of California, they're bringing with them higher disposable discretionary income. I think you're saying, our business model is built off people and disposable income. So that's a good thing for us. On top of the fact, we have a less promotional environment and we have significantly less incentive business. I mean, this is just focusing on core customer that wants to come to our facilities, because of our location, our amenities and our team members. So, we've gotten out of that promotional business that we ran back in 2019. So, you're naturally going to have a higher spend per visit, coupled along with people having more disposable income from higher ratio. Hi. Good afternoon. Thank you for taking my question. I wanted to first ask about ADR. I think looking at Las Vegas overall and your ADR in past few quarters, it's been significantly higher than pre-COVID levels. How sustainable do you think those are? And how might that be impacted if we go into a recession? I think as it relates to ADR, that's kind of a market-driven factor. So, we're very competitive. We shop -- and yield our rates and we hope to see increased upside in ADR. I do think that there is opportunity for us to grow occupancy. So, we're constantly looking at the mix of business between corporate [incentives] (ph) and sales rooms and casino room mix as well to maximize that occupancy. And then, certainly in light of any type of headwind, which we really don't see or foresee any of that coming in the near term, we have lots of different variable expense levers that we can deploy to continue to stay at high margins and high revenue within the hotel. Great. Thank you. And for my follow-up, I know in the past, you've said that you like owning your real estate versus renting. But with interest rate becoming more expensive, can we get your updated thoughts on owning versus leasing? Yeah. I mean, I think we like owning the real estate. Again, it doesn't mean we're beholden to holding it forever. We're going to what's right to the -- what's in the best interest of our shareholders over the long term, Cassandra, but keep looking back, owning the real estate provides max -- provide us maximum flexibility, including the ability to keep our employees through COVID... And including the ability to quickly delever like when Durango opens, the company is going to have significant free cash flow to deleverage its balance sheet. And we like that flexibility. That's right. And I think, as you know, we're also in the local business, where over 50% of our covers come more than 5 times a month. That means we've got to keep our amenities fresh. We've got to keep the places fresh. And owning that real estate allows Frank and Lorenzo and the team to focus long term on vacating those assets. This concludes our question-and-answer session. I would like to turn the conference back over to Stephen Cootey for any closing remarks. Thank you everyone for joining the call. I apologize for the technical glitch, and I look forward to seeing you in 90 days. Take care.

EarningCall_393

Good day, and thank you for standing by. Welcome to the Ingredion Incorporated Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Noah Weiss, Vice President of Investor Relations. Please go ahead. Good morning, and welcome to Ingredion's Fourth Quarter and Full Year 2022 Earnings Call. I'm Noah Weiss, Vice President of Investor Relations. On today's call are Jim Zallie, our President and CEO and Jim Gray, our Executive Vice President and CFO. The press release issued today and the presentation we will reference for the fourth quarter and full year results can be found on our website, ingredion.com, in the Investors section. As a reminder, our comments within this presentation may contain forward-looking statements. These statements are subject to various risks and uncertainties and include expectations and assumptions regarding the company's future operations and financial performance. Actual results could differ materially from these estimated in the forward-looking statements, and Ingredion assumes no obligation to update them in the future as or if circumstances change. Additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call or in this morning's press release could be found in the company's most recently filed annual report on Form 10-K and subsequent reports on Form 10-Q and 8-K. During this call, we also refer to certain non-GAAP financial measures, including adjusted earnings per share, adjusted operating income and adjusted effective tax rate, which are reconciled to U.S. GAAP measures in Note 2 non-GAAP information included in our press release and in today's presentation's appendix. Thank you, Noah, and good morning, everyone. I am pleased to report that for 2022, Ingredion delivered outstanding performance with top line and adjusted profit growth growing 15%. We finished the year with a strong fourth quarter with net sales up 13% and adjusted profit growth up 49%. Our teams demonstrated resilience and agility throughout 2022 as they overcame macroeconomic headwinds while executing against our driving growth roadmap while also expanding and transforming our solutions and opportunity set with customers. 2022 was yet another year of unexpected challenges that demonstrated the strength of our business model and the ability of our teams to anticipate and respond effectively. Our largest raw material input, corn was significantly impacted by both the Ukraine conflict and a drought in Europe. Yet despite those supply shocks, our team was able to secure raw material, keep our customers supplied as well as overcome unexpected raw material inflation. Also related to corn and energy, we expanded our hedging practices to mitigate profit volatility and an approach that we will continue to follow going forward. The strong demand we experienced last year, coupled with supply chain constraints, provided the opportunity to drive value creation from customer and product mix management, which was enabled by improving the terms of customer contracts. Furthermore, despite a significant strengthening of the U.S. dollar, and 2/3 of our sales being outside of the U.S., we successfully offset more than $200 million of foreign exchange headwinds. Lastly, I'm especially proud of the work our team did ramping up production and sales from our new Shandong facility despite countrywide COVID challenges. With expanded capacity for specialty modified starches, our business in China is well positioned for accelerated growth as the economy reopens. As we look to 2023, we are focused once again on addressing head on many of these same challenges, even as some begin to diminish. We will continue to utilize the levers available to us, whether it's the capacity expansions we've invested in for growth, pricing to offset inflation, operational efficiencies for cost reduction, or expanded risk management practices, all to deliver against our growth objectives. Turning to our performance. We finished the year strong, delivering record top line performance for the fourth quarter, with sales growing 13% and adjusted operating income increasing 49% or up 57% on a constant currency basis. For the full year, top line and adjusted operating income performance was also outstanding, both achieving 15% growth compared to the same period last year. These results were driven by robust performance across both core and specialty ingredients. Additionally, we continue to successfully offset higher raw material and logistics costs as well as significant foreign exchange impacts. Looking at the net sales performance in a little more detail. From a segment perspective, all 4 regions generated strong net sales for the full year and fourth quarter led by North and South America. Notably, on a constant currency basis, Asia Pacific and EMEA demonstrated considerable -- considerably stronger results. Turning now to our strategic pillars. During the fourth quarter and full year, our teams did an exceptional job of executing with agility across our 4 strategic pillars. Beginning with specialties growth. Last quarter, we updated you on the progress we are making to expand our starch-based texturizer network capacity to further enhance the resiliency of our global supply chain. Of the $160 million investment, I'm pleased to report that we have completed 1/3 of the capital installations. This strategic set of investments will provide headroom for growth. Reduce local delivery costs and improve service by shortening supply chains. Turning to commercial excellence. Our pricing centers of excellence, supported our sales teams to deliver $1.3 billion of net sales growth through pricing pass-through of input cost inflation and customer and product mix management. If we look at specialty ingredients more broadly, this business grew double digits, both for the quarter and full year. This sustained momentum continues to validate the significant ongoing investments we are making to transform our portfolio toward on-trend and more competitively differentiated and unique ingredient solutions. Against our all life sustainability goals. In the fourth quarter, we reached 47% sustainable sourcing of our 5 priority agricultural inputs, up from 33% last year. We are tracking well against our goal to achieve 100% sustainable sourcing for our 5 priority crops by 2025. We are equally excited about the potential to drive value creation from our third strategic pillar, cost competitiveness through operational excellence. We are holistically assessing how we buy, make and move our raw materials and finish products effectively to customers and at the lowest cost. In this regard, we are making investments to enhance supply chain connectivity and visibility and drive digital transformation of the factory floor. In addition, we are extending our global operating model to bring together our global procurement organization. This represents an opportunity to better leverage our global scale and build more value-creating supplier relationships. It is also noteworthy to highlight that once again, this past year, we deployed expanded raw material risk instruments to reduce cost volatility. This was also a contributor to our overall strong performance. Lastly, we continue to advance our purpose-driven and people-centric growth culture. We are pleased to have been recognized as a top employer in 5 Asia Pacific countries. And in early December, our 2030 emissions reduction targets were validated by SBTi. Let's now turn to the progress we are making within a couple of our specialty growth platforms and discuss how we are continuing to invest to lead in these growing markets. First, beginning with sugar reduction and specialty sweeteners. We delivered over $400 million in net sales with strong double-digit growth again in the quarter. PureCircle's talented go-to-market team delivered 14% net sales growth and positive operating income by volume and breakthrough product innovations. We are excited by the tremendous opportunities we see for our sugar reduction franchise worldwide. I'm also pleased to mention that we increased our ownership of the PureCircle business to 87% up from our original 75% stake. Turning now to our plant-based proteins business. Net sales for 2022 were $36 million, up 118% from the prior year period. Although sales doubled and our profitability slightly improved, we did not grow the top line nor reduced the operating losses as much as we had expected. Our South Sioux City facility is laser-focused on improved product quality attributes that we believe will appeal to broader market segments. We see exciting growth opportunities in fortified bakery, alternative dairy, sports nutrition and beverages. We continue to see the current $10 billion market for plant-based proteins, which is growing steadily at more than 6% per annum as an exciting growth opportunity. We remain committed to our strategy to execute upon a formulation approach towards structuring and fortifying plant-based foods with a leading portfolio of protein flowers, concentrates and isolates. A new highlight in specialties we wanted to mention is our expansion into pharmaceutical applications and investments in India. During the second half of the year, we made 2 acquisitions in India in the high-value pharma ingredient space with our Q3 purchase of Amishi and our quarter 4 acquisition of [indiscernible] These additions are part of our strategy to selectively expand our pharma ingredient portfolio and diversify into high-value nonfood adjacencies. Both acquisitions complement our existing global pharma footprint and add capabilities on the ground in India, which is one of the fastest-growing specialty pharma markets. We anticipate double-digit net sales growth and above average gross margins as we grow these 2 businesses. Now let me hand it over to Jim for the financial review, after which I'll make a few concluding remarks before we open it up for Q&A. Jim? Thank you, Jim, and good morning to everyone. Moving to our income statement. Net sales of approximately $2 billion were up 13% for the quarter versus prior year. Gross profit dollars and margins were higher year-over-year up 120 basis points from Q4 last year. Reported and adjusted operating income were $157 million and $168 million, respectively. Reported operating income was lower than adjusted primarily related to costs pertaining to the U.S.-based work stoppage at our Cedar Rapids facility. I'm happy to share that on January 22, we ratified our agreement with the union. We anticipate some costs related to the work stoppage in the first quarter of 2023, but not to the extent of prior quarters. Our fourth quarter reported and adjusted earnings per share were $1.71 and $1.65, respectively, for the period, up significantly from the prior year. Turning to our Q4 net sales bridge. We achieved strong price/mix of $336 million including the pass-through of higher corn and input costs. This was partially offset by foreign exchange impacts of $65 million and decreased sales volume of $39 million. Turning to the next slide. We highlight net sales drivers for the fourth quarter. Of note, foreign exchange was a minus 4% headwind in the quarter, with the most significant impacts in Asia Pacific and EMEA. It is worth noting that lower volumes were primarily driven by unique events within some countries. For example, within Asia Pacific, in Korea, the rapid increase in corn costs led to pricing events in the second half of the year, which impacted our core ingredients volume. Furthermore, Pakistan's macroeconomic challenges have led to overall softer demand. As we mentioned previously, the Ukraine-Russia war created a shortage in corn export supply. And consequently, prices rose globally soon after. Historically, in rising corn cost market cycles, our pricing has lagged the change in the cost of corn, and subsequently, our gross margin percentage has been compressed. Of note, even though corn costs increased 18% in the quarter based upon the index shown here, we were able to expand gross margins. This result is more evidence of the resiliency that we are building into our business processes and practices to flatten the impact of changing corn and co-product values throughout the year. Turning to our earnings bridge. On the left side of this slide, you can see the reconciliation from reported to adjusted earnings per share. On the right side, operationally, we saw an increase of $0.62 per share for the quarter. The increase was driven primarily by an operating margin increase of $0.82, partially offset by unfavorable foreign exchange of minus $0.10, and unfavorable volume of minus $0.09 per share. Moving to our nonoperational items. We had a decrease of $0.06 per share in the quarter. The decrease was primarily driven by higher financing costs of minus $0.15. Now let's move to a brief review of full year results. Net sales of almost $8 billion were up 15% versus prior year. Gross profit margin was 18.8%, down 50 basis points. Full year reported and adjusted operating incomes were $762 million and $787 million, respectively. Reported operating income was lower than adjusted operating income primarily due to restructuring and other costs. Our full year reported earnings per share was $7.34 and adjusted earnings per share was $7.45. Turning to our full year net sales bridge, 15% net sales growth has been driven by $1.3 billion of not only price pass-through but also improvements to our customer and product mix. Turning to the next slide. We highlight net sales drivers for the full year. Strong price mix of 19% was partially offset by minus 3% of FX and minus 1% of sales volume on a reported basis. When we adjust for the Argentina JV, net sales for South America would have a positive 2% contribution from sales volume. For the company, the volume contribution to net sales would improve to a positive 2%. Let me turn to a recap of full year regional performance and update you on specialty ingredients mix. North America net sales were up 19% when compared to the same period in 2021. The increase was driven by strong price mix where dynamic pricing and a richer contribution from specialty products helped to drive top line performance. North America operating income was $565 million, up 16% versus the prior year, driven by favorable price mix and expanded raw material risk management. In South America, comparable net sales were up 23% versus prior year. It is worth noting that specialty ingredients have grown significantly and now represent 22% of the region's net sales. South America operating income was $169 million, up 22%, which increases predominantly driven by favorable price mix, partially offset by higher corn and input costs. Moving to Asia Pacific. Net sales were up 11% for the full year and up 19% on a constant currency basis. Asia Pacific operating income was $93 million, up 7% versus prior year, with favorable price mix that was partially offset by foreign exchange impacts and higher input costs, notably in Korea. Excluding foreign exchange impacts, adjusted operating income was up 17% for the full year. In EMEA, net sales increased 11% for the full year and absent foreign exchange impacts, net sales were up 25%. EMEA operating income was $110 million for the full year, up 4% compared to the prior year due to favorability in Europe, which was partially offset by macroeconomic challenges in Pakistan and foreign exchange impacts across the region. Excluding foreign exchange impacts, adjusted operating income was up 19% for the full year. Of note, in a year witnessing significant price increases across both core and specialty products. The proportion of Specialty Ingredients net sales grew or held constant in all 4 regions. Turning to our earnings bridge. On the left side of the page, you can see the reconciliation from reported to adjusted. On the right side, operationally, we saw an increase of $1.12 per share for the full year. The increase was driven by margin improvement of $1.70, offset by foreign exchange of minus $0.33 and lower volumes of minus $0.23. Moving to our nonoperational items. We saw a decrease of $0.34 per share driven primarily by higher financing costs of minus $0.23 and a higher effective tax rate of minus $0.17 per share. Moving to cash flow. Full year cash from operations was $152 million. Our cash from operations has benefited from an increase in net income, which was more than offset by an increase in working capital investments. As even higher corn costs flowed through our financials beginning in Q1 2022, our working capital balances started to increase further as higher invoice prices pass through our accounts receivable and inflating corn costs were reflected in our inventory values. As we look to 2023, we expect higher invoice prices as we catch up in our contracted pricing with 2022's inflation. Net capital expenditures were $293 million and in line with our 2022 expectations for capital commitments. With respect to acquisitions. In the quarter, we acquired additional shares of PureCircle for minority shareholders for $6 million, taking our ownership to 87%. For the full year, we returned $288 million to Ingredion shareholders, paying $176 million in dividends and repurchasing $112 million of outstanding common shares. Now I'd like to introduce our 2023 outlook. We expect net sales to be up mid-double digits driven by strong price mix and volume growth. We expect reported and adjusted operating income to be up high single digits to low double digits compared to last year. 2023 financing costs are expected to be in the range of $106 million to $122 million, reflecting higher incremental borrowing costs. Our adjusted effective annual tax rate is anticipated to be between 26.5% and 28.5%. Cash flow from operations is expected to be in the range of $550 million to $650 million, which reflects an anticipated investment in working capital of approximately $200 million. Capital expenditures for the full year are expected to be approximately $300 million. We expect our full year 2023 reported and adjusted EPS to be in the range of $7.70 to $8.40. This excludes the impact of acquisition-related integration and restructuring costs as well as any potential impairment charges. We expect total diluted weighted average shares outstanding to be in the range of 66.5 million to 67.5 million for the year. In terms of our regional outlook. North America net sales are expected to be up 15% to 20%, driven by favorable price and customer mix. Operating income is expected to be up low double digits driven by favorable price mix, partially offset by higher input costs. For South America, we expect net sales to be up 5% to 10%, reflecting favorable price mix. South America operating income is expected to be up low single digits with favorable price mix mostly offsetting higher input costs. In Asia Pacific, we anticipate net sales to be up 10% to 15% versus the prior year. We expect operating income to be up mid-double digits driven by favorable price mix and PureCircle growth, partially offset by higher input costs. For EMEA, we expect net sales to be up 25% to 30%, and we expect operating income to be up mid-single digits, as we navigate foreign exchange impacts in Pakistan's economic uncertainty. Corporate costs are expected to be up low single digits. Thanks, Jim. I hope that our call today has been helpful in conveying the depth and breadth of Ingredion's achievements in 2022. As you heard, despite many challenges, we delivered very strong results. As I reflect on the past year and look forward to 2023, I'm confident that we are well positioned to continue to execute against our strategic pillars for growth. Our priorities will be to grow our specialty ingredients portfolio, drive plant-based protein sales, continued grind optimization and maximize value from finishing channels for core ingredients while also further mitigating profit volatility. And lastly, invest in R&D to drive innovation and digital capabilities to transform the supply chain and enhance the customer experience. In closing, we are confident that Ingredion is well positioned to continue to deliver sustainable growth and create value for our shareholders. Now let's open the call to questions. Operator? So I want to start with the guidance, the range of $7.70 to $8.40. Jim, could you talk a little bit about the elements that will create the variability in that range? How do we get to the top versus the bottom? And then also as a follow-up on guidance, what are you guys assuming with respect to FX? Yes. So what I would say is, as we look at the balance in relationship to some of the watch outs as well as the opportunities. On the watch out side, clearly, macroeconomic factors that could impact customer demand. That all being said, the products that we supply are very diversified and versatile and they typically perform very well during periods of recession and periods of economic growth. But that's something that obviously we would watch out for. If there was some sort of a very poor crop for corn once again in perhaps North America or in Europe, and then clearly, foreign exchange, continued perhaps devaluations, that would be some of the watch out. So on the opportunity side, if customer demand comes in stronger than planned, and we have either no recession or a mild economic downturn, then that would be an upside and accelerate cost optimization initiatives. We have some really, very active programs as we globalize our operating model, and I referenced global procurement. That is being aggressively stood up right now in our organization. We see a lot of opportunities there. If we can deliver on those sooner. That will be upside. And then better-than-planned plant-based protein sales commercialization there's a big lever there to be gained to drive accelerated sales development there. So Jim, do you want to add anything? Yes. I would just say that we still see year-over-year corn cost inflation. While we kind of try and help you with an index of what maybe CBOT looks like, the cost of corn that we incurred in the year in 2022 is still going up in a number of our countries. And then also, we still see some of -- typically, you would call it fixed cost, but those fixed costs have things like wage increases, we're still reconciling some of our energy increases as we turn over our hedges. And so those are built into an expectation around our COGS increases. And of course, if we get kind of more volume than we expect, we'd probably get favorable cost absorption. But right now, I think our guidance is kind of more conservative in how we look at volume and just anticipating that we're getting some COGS changes due to either the change in corn and/or some of the underlying rate increases we're seeing in some of our more manufacturing fixed costs. Okay. Great. My second question is related to the top line growth that you guys are discussing and in particular, what looks to be really strong pricing into 2023. My question is, it sounds like tighter industry capacities are driving stronger pricing, what do you think is the duration of that tight supply/demand backdrop for capacities across the industry? Is this something that is multiyear in nature? And I ask because it seems as though given all of the headwinds that you guys referenced for your business over the last several years, it very much feels like we might be on the path to kind of sustain earnings growth in this business as we come out of what has been a challenging last few years. And I'm curious to the level of visibility or confidence you guys feel to be relative to that characterization of the business. Yes. What I would say is that one of the big determinants of industry tightness is obviously grind utilization. And what we've indicated is that the fundamentals and market conditions, primarily in the United States are very favorable. And that is because grind utilization remains at very elevated levels, perhaps at almost historical high levels. And remember, we operate in this industry with heavy fixed assets that prevent -- provide barriers to entry and long lead times if anyone want to expand capacity, which we don't see. And what we're also seeing is increased demand for renewable feedstocks. And so that's creating, again, more demand for grind and thus affording opportunities for companies like ourselves to look at existing capacity to trade up through the finishing channels and downstream processes for more value-added offerings across both core and specialty. And I think you're seeing ingenuity at work and innovation at work across the industry as it relates to that with a finite amount of grind. And we're certainly doing that. We're certainly focused on driving the value creation from both core and specialties, and we're seeing opportunities to do so that we haven't seen these kind of conditions that allow us to get that kind of leverage from both aspects of our business. And I think others are equally adopting that approach. And it's one of the things that we feel very good about that our integration across both of those allow us to leverage the corn network and the procurement network for optimal efficiencies across both businesses. I guess if I just think about the 2023 guidance and I think the comments you made on volumes were fairly kind of keeping expectations restrained. If I was to think about the profit growth, especially in North America, just help me if you can dissect our break up the kind of pieces between just price cost or net price cost mix and kind of faster specialties growth and maybe some of the lower losses from plant protein and other investments? Or and any other productivity or other factors we should be thinking about just trying to make sure you can waterfall kind of the drivers of growth and think about where it's all coming from? Let me take a shot at just making a couple of points, and I'm going to turn it over to Jim. Obviously, our North America results, we're very pleased with. It was a highlight for the quarter. And the reason for that is, again, the performance of both our core business as well as specialties with specialties growing again, very strongly. And there is some excellent work being done on customer and product mix management, which allowed us to take the limited capacity and work to make sure that we are optimizing margins across both customers, and we've introduced something called profit velocity in relationship to our product line management initiatives as it relates to how do we make sure that we're optimizing our margins on a quantified -- on a limited asset base over a unit period of time. Given the constrained capacities that we're seeing in the industry. So I think you're seeing a combination of very good pricing centers of excellence at work. I think you're seeing excellent work on customer and product mix management and also profit velocity and product margin work as well. So it's a real team sport team effort across operations and the go-to-market teams, and I think they're working better than ever. And I think that's why we're very pleased with the results in quarter 4. Jim, do you want to add anything? Yes. Adam, I think in our full year guidance for North America, where operating income is up low double digits. Relative to pricing being up kind of up 15% to 20%. What's in that is very simply is that when we were entering 2022 and we had our contracts with customers, we were pretty expansive in hedge and corn. So our corn costs that we were past experiencing in 2022. We're probably a little bit less because we had hedged relative to where corn moved after the start of the Ukraine-Russia. Now as we roll over those hedges, we're looking at the elevated cost of the corn strip and where co-products are. There's just corn inflation that's built in, and that's been reflected in our pricing conversations with customers. And so we're going to see some COGS increases in North America, and that's really kind of, I think, beneath what we're sensing in terms of op income up low double digits versus the price and the customer mix. That's helpful. And I guess, it probably ties into that last point on the cash flow in the quarter, which came in I think, below where you had counted on a few months ago, and it seems like working capital was the big piece. Is it purely just higher corn and flowing through inventory, the hedging and then receivables because of the higher sales dollars and just the confidence that, that working capital headwind is not as significant and you got a better handle on it going into '23. Yes. I mean really, I think is -- obviously, we'll see a step-up in our invoice pricing here on Jan 1. So there will be a little bit more investment as we get into Q1, Q2 into accounts receivable. But I think we're finishing on driving that and replenishing some of our safety stock inventory all throughout 2022. And as we go into 2023, better able to -- we're in a really nice position, I think, relative to some of the past supply chain disruptions that we've had, we're just in a good spot going forward. So I don't see as much investment change in the cost of the value of our inventory. So I feel like we're in a little bit more controllable spot with regard to working capital. You already discussed a little bit about your COGS inflation for the year, but I'm hoping to put a finer point out of it or on it. Can you discuss broadly your expectation for price gains coming out of the contract season and compare that to your cost outlook for the year? And then I have a follow-up. Yes. As it relates to contracting and pricing. As we've guided for the year, we believe our net sales will be up mid-double digits again this year in comparison to last year with the majority of that increase coming from price mix, and that reflects the continued pass-through of inflation, again, as well as what I referenced earlier, the effective customer and product mix management. Jim, did you want to build on that? Yes. Cody, I mean I think we've referenced in terms of the year-over-year change in COGS is somewhat driven by inflation, probably more maybe 2/3 or 3/4. It's just going to be lapping some of our corn costs or our tapioca costs as we go from 1 year to the next, where we effectively hedged in 2022 and now we have to kind of replace both our desire to purchase corn or other raw materials, and then we're placing hedges against that. You also have the rollover energy costs, right? Those are all kind of expected. I think that what I would also just highlight is that with strong price mix, our volume, while positive, is -- I think we're taking a balanced approach towards volume. And so we're probably not getting as much of absorption of fixed costs that we would kind of anticipate if we were in a less inflationary environment globally. And so that's also part of our COGS change. The other thing that I would include would be and I probably should have mentioned this as perhaps an opportunity for 2023 is in quarter 4, we did have year-over-year improvements in gross margins. And one of the contributors to that was improving supply chain conditions, which we referenced. And so if that were to continue, and we are seeing some of those trends developing that's something that could be favorable for us as well. It certainly helped us to a degree in quarter 4, which allowed us to expand our year-over-year gross margins in the quarter. That's helpful. And then I just want to discuss South America a little bit because it came -- the top and bottom line came in weaker than we expected and below your full year guidance, what drove the shortfall? And then given other peers in the region noted slowing consumption trends, do you expect the segment to be softer going forward? Well, Cody, I don't -- that question to look exactly. But what we were seeing, I think, in terms of finishing in South America, overall, just the second half of the year finished nicely in terms of sales volume and then also just continue to really price through all of the FX impacts on our raw materials. So very -- I think very overall pleased with how we're looking at the businesses in Brazil, Colombia and as well as Peru. We're very -- we have a very kind of a maturing pricing center of excellence there, obviously, given the inflation that is evident in both Brazil as well as some of the other South American countries. So you need to be very agile in terms of how you're looking at the next 2 to 3 months at corn and/or cost of energy and pricing that through. So I mean I think I look back in South America had a tremendous year in terms of operating income growth. Another tremendous year on top of the 2 previous years of significant top and bottom line growth. And that's across the 3 regions, really Brazil continue to perform. The Indian region, Colombia had an exceptional year and also a very strong quarter. And even our Peru business had a very, very strong year. So we're very pleased actually with the performance in South America. I was hoping to get a little more color on the phasing for your 2023 quarterly. Are there any comparisons that are easier than the others? Or anything where the pricing lags? And then secondly, can you give us some examples of like what customer product mix management means like what you're actually able to do with your customers to, I guess, to trade them to higher margin products within your portfolio? Or what else could it involve. Yes. Given the OI growth that we experienced both in Q1 and Q2 of last year, I'm expecting kind of low to mid-single-digit OI growth in the first half of the year and then stronger growth in the second half. I think we really expect high single to low double-digit OI growth just for the full year, barring kind of any significant changes in the layout of our raw material costs, primarily outside of the U.S. And as it relates to customer and product mix management, specifically the conditions, as I referenced in the market over these last 2 years has allowed us to work with those customers that we believe are going to be the best strategic partners for us longer term. And we were forced and had to be more discerning in relationship to the products that we would be supplying to different customers that represented longer-term strategic growth opportunities. So through some really good work with customer profitability analysis, customer growth forecasts for the categories in which we are in and doing some really very good analysis and decision-making and intelligent decision-making. I think we have improved the profitability of our customer mix and done it in a way that we think aligns for better long-term strategic growth. The same in relationship to product mix management with product line managers that we invested in, in the business about 3 years ago, timed with our pricing centers of excellence. We complemented those teams with product line managers that are looking at profitability and again, introducing the concept of profit volatility, which is how much profit you can make on an asset in a given period of time you said volatile velocity... Sorry, profit velocity. Thank you, Jim, for correcting. But looking at that, so we can maximize the amount of profit on a particular unit operation in a given period of time. Hopefully, Rob, that gives you a little bit of color on how that's helped further improve our performance. Yes. And maybe a follow-up. Are you also walking away from certain customers as a result that were not profitable? And then maybe also, are your fill rates where you want them to be right now in terms of being able to supply demand? Yes. As it relates to having to be very critical in relationship to where we sold our products, for sure, we had to make some tough decisions over the last, say, 18 months. From a standpoint of how our operations are running and our fill rates, we're very pleased with that. And we do see upside there as our teams continue to -- we've identified constrained assets. We have programs in place to release capacity on each and every one of them. We've quantified the value at stake, and the teams have all of that as a go-get for this year. So again really good collaboration between our operations and our go-to-market teams in that regard across both core and specialty ingredients. So we're happy with the fill rates, but we see opportunities going forward. Just two quick ones. So one, and you've talked about it a little bit on the plant-based protein side, and there was a little softer than what you hoped for, for this year. But if we look into 2023, how should we think about the ultimate headwind also like framing it in between the relatively wide range for the segment of 50 million to 70 million, which both would be good growth rates, but what would you need to get this to, call it, operating profit breakeven versus it was still a loss in 2022? Yes. I'll make some comments just on the overall segment of plant-based proteins. And then I'll turn it over to Jim to take the last aspect of your question on getting to breakeven. So the way we're looking right now at the plant-based business, as with any fast growing and rapidly evolving category, consumer taste and preferences change. And as a result, we're seeing customer product quality requirements becoming more particular for different applications. Now that represents an opportunity for companies that can deliver against those quality attributes. And we're also seeing, and it's not a surprise that customers are being more prudent regarding new product launches in this current environment. We continue, though, to have a robust customer project pipeline and have sharpened our focus to target particular segments for growth. And we believe this focus is going to allow us to increase our sales growth, which will be the lever that we need to drive the fixed cost absorption and the incremental profitability. The plants are running well, and we have partnership, customer relationships to, again, deliver against their specifications as they introduce new products to consumers that are very particular in regards to what they're looking for in these different categories, whether it be alternative meat, alternative dairy, beverages, sports nutrition, et cetera. Jim, as far as the specific question on the threshold or leverage on the sales side. Do you want to take that? Yes. So Ben, I think within 2022, while we had a pretty significant operating loss, we improved upon that versus 2021. I think our expectation as we go into 2023 is to, again, just a modest improvement in that operating loss. And what we're really -- and that's sort of included in our guidance. What we're really looking for is as we go from that mid-30 million-ish sales and get into that more doubling range, we really start to then pivot in terms of our volume throughput on our 2 facilities. And that really then starts to -- the sales beyond that really start to really help us close down. We get enough contribution margin to cover our fixed costs. And so I think right now, we would be looking at taking all of '23, let's get the momentum behind the top line sales and all the success, I think we're seeing in the sampling and the product quality improvement and build that momentum into 2024 sales and then maybe more towards the end of '24, we'll be getting to somewhere where at least kind of cash breakeven. Okay. Perfect. And then capital allocation. I mean, obviously, you done a minor increase of your stake in PureCircle, and that obviously has been one of the very success story on growth. Would you consider buying the rest of it on because it seems like there's not much left over? Or how should we think about just like the focus between the balanced capital allocation, maybe adding something you already own now 87%, just to understand a little bit the M&A opportunities you might see out there? Yes. So within our agreement with the remaining shareholders, we have the rights to purchase the remaining 13% of PureCircle over the next 3 years. So we'll complete that and have 100% ownership of PureCircle by more towards 2025. It may happen sooner, but that's within our agreements. And as well -- and just in relationship to overall M&A, we continue to have a very active M&A pipeline, nurturing long-term relationships and that's part of our capital allocation strategy for sure. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Jim Zallie for closing remarks. All right. Thank you. And I'd like to thank everyone for joining us this morning. We look forward to seeing many of you at our upcoming investor events, and I want to thank everyone for your continued interest in Ingredion.

EarningCall_394

Good afternoon, and welcome to the Nabors Industries' Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded today. I would now like to turn the conference over to the William Conroy, Vice President of Corporate Development and Investor Relations. Please go ahead, sir. Good afternoon everyone. Thank you for joining Nabors' fourth quarter 2022 earnings conference call. Today, we will follow our customary format with Tony Petrello, our Chairman, President, and Chief Executive Officer; and William Restrepo, our Chief Financial Officer, providing their perspectives on the quarter’s results along with insights into our markets and how we expect Nabors to perform in these markets. In support of these remarks, a slide deck is available both as a download within the webcast and in the Investor Relations section of nabors.com. Instructions for the replay of this call are posted on the website as well. With us today, in addition to Tony, William and me, are other members of the senior management team. Since much of our commentary today will include forward expectations, they may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such forward-looking statements are subject to certain risks and uncertainties as disclosed by Nabors from time to time in our filings with the Securities and Exchange Commission. As a result of these factors, our actual results may vary materially from those indicated or implied by such forward-looking statements. Also, during the call, we may discuss certain non-GAAP financial measures. Such as net debt, adjusted operating income, adjusted EBITDA, and adjusted free cash flow. All references to EBITDA made by either Tony or William during their presentations, whether qualified by the word adjusted or otherwise, mean adjusted EBITDA as that term is defined on our website and in our earnings release. Likewise, unless the context clearly indicates otherwise, references to cash flow mean adjusted free cash flow as that non-GAAP measure is defined in our earnings release. We have posted to the Investor Relations section of our website a reconciliation of these non-GAAP financial measures to the most recently comparable GAAP measures. Good afternoon. Thank you for joining us as we present our results. We made several notable accomplishments during 2022, and the year culminated on a high note with an impressive fourth quarter performance. Each of the operating segments in our portfolio again performed well. Adjusted EBITDA in the fourth quarter totaled $230 million. This marks the third consecutive quarter of sequential EBITDA growth above 20%. Consolidated revenue increased 10% sequentially. Our global average rig count for the fourth quarter increased by 3.4 rigs. This growth was driven by increases in both US and International markets. Drilling Solutions EBITDA accelerated and exceeded $30 million. Combined, our Advanced Drilling Solutions and Rig Technologies segments accounted for over 16% of total EBITDA. This contribution is more than double their share back in 2020. In the fourth quarter, we again reduced net debt. Our net debt stands below $2.1 billion. I am pleased to report we again made progress on our five keys to excellence. These critical objectives comprising the investment thesis for Nabors include maintaining our leading performance in technology in the US market, expanding and enhancing our international business, advancing technology and innovation with demonstrated results, improving our capital structure, and finally, our commitment to sustainability and the energy transition. Let me update each of these, starting with our performance in the US. We averaged 95 rigs in the fourth quarter, up three from the third. The early margins in the Lower 48 stepped up very materially in the quarter. Our average daily margin grew by more than 30% to $14,600. When including the contribution from NDS, our margin is even higher. I'll discuss this in a few moments. As both the industry and Nabors rig counts rebounded in recent years, we purposely kept our contract duration short. This strategy has enabled us to realize pricing and margins that increasingly reflect the outstanding value we consistently deliver. We have added term to our Lower 48 backlog when we believe it is value enhancing. The Lower 48 market remains concentrated on the most capable rigs and premier field performance. Nabors' differentiated approach to this market includes best-in-class rig technology and the industry's broadest portfolio of advanced complementary solutions. Our vision of the rig as a platform for drilling and the delivery of related services has gained significant market traction. The value we generate from our technologies leads the industry. We will cover this in more detail in a few minutes. Now, I'll discuss our international business. Daily margins in this segment increased in the fourth quarter, reaching $14,900. Profitability improved in most of our markets. In Saudi Arabia, the better results reflect improved pricing on the recent contract renewals. Also in Saudi Arabia, SANAD deployed the second In-Kingdom newbuild rig in late December. At the same time, SANAD reactivated an additional existing rate. SANAD expects to deploy three additional newbuilds during the remainder of the year. Each newbuild will be contracted for a six-year initial term, followed by a full year renewal. Further, the newbuilds generated a whole cash-on-cash return on the newbuild CapEx, maintenance CapEx, and allocated G&A within the initial contract term. We expect additional awards at a cadence of five per year. Now, let's discuss our technology and innovation. Our focus areas include automation, digitalization, and robotization. Here at Nabors, we continually strive to push the envelope in terms of innovation and advanced technology. During the fourth quarter, we set a major industry milestone by deploying a first of its kind robotics module on an existing rig. RZR, as the module is known, will be a game changer on two important fronts. First, performance, robotization brings a step change improvement and consistent precision and control. Next, safety, RZR removes people from the most hazardous area of the rig, the red zone; and one last important point to make, RZR is modular, so it can be retrofitted onto existing drilling rigs whether Nabors' or a third-party. In the fourth quarter, Drilling Solutions EBITDA increased sequentially by 18%. Gross margin increased in the fourth quarter to a record 52.8%. This high margin, high free cash flow business, grew by more than 50%year-on-year. This is the type of growth we expect from a technology-centric business. We expect similar growth in 2023. Let me illustrate the value NDS generates. The combined average daily margin in the Lower 48 from our Drilling and Drilling Solutions to businesses was 7,372 in the fourth quarter. Of that, NDS contributed nearly $2,800 per day. That combined figure increased by 28% versus the third quarter. The typical Nabors rig in the Lower 48 runs about 6.5 NDS services. This penetration increased again in the fourth quarter. We have seen a consistent quarterly increase in the services count reflecting strong market adoption of the portfolio. Among automation and digital services, we saw a near doubling of SmartPLAN installations, and broad growth across the performance tools portfolio, including ROCKit, REVit and SmartDRILL. In the fourth quarter, NDS revenue on US third-party rigs grew by 10% versus the previous quarter. This market segment is a key focus area for NDS and we continue to increase penetration there. Next, let me update our progress to improve our capital structure. In 2022, we reduced net debt by $186 million. This improvement was driven primarily by excellent free cashflow resulting from the strong profitability of our operations, excellent working capital performance, and disciplined capital spending. We expect even greater improvement in 2023. I'll finish this part of the discussion with remarks on sustainability and the energy transition. As I have said previously, our three focus areas include reducing our own environmental footprint, capitalizing on adjacent opportunities, and investing strategically in leading edge companies with clear adjacencies to our core activity. Today, I will highlight several specific technology initiatives, which are currently underway. First is our PowerTAP module. This connects rigs to the grid. We have recently deployed 14 of these units, including multiple units on third-party rigs. Second, our SmartPOWER Advisory and Control system optimizes utilization of the engines and reduces emissions. This solution is currently installed on more than 75 rigs. Third, the nanO2 diesel fuel additive improves engine performance and reduces emissions. We have already successfully treated more than 10 million gallons of diesel to-date. I'm very enthusiastic about PowerFLOW, our energy storage system. This technology enables us to incorporate innovative storage solutions into our engine management systems. This technology uses super capacitors in place of lithium batteries. Our first unit is currently deployed on one of our rigs in the Bakken. We have expectations for very strong growth from these initiatives in 2023. Margins in this portfolio should be highly accretive to the company average over time. Now, I will spend a few moments on the macro environment. With the spot and future prices for WTI in the current range, we believe the outlook for continued increases in-drilling activity in Lower 48 is still constructive. We expect these increases to materialize as we move throughout the year. Several factors in the current macro environment could impact our outlook. Foremost among these is the possibility of a recession, which reduces the demand for oil. In the US, labor availability has begun to improve, in part from the easing of the pace of rig additions. As for the broader supply chain, inflation has declined in key areas, namely metals and metal subassemblies. That said, lead times for certain components remain extended. Our vertical integration and global supply chain continue to enable us to satisfy demands of customers. Notwithstanding these factors, energy commodity markets remain constructive, giving us confidence in our outlook through 2023. Next, I will spend a few moments on day rates. Our Lower 48 results demonstrate the unprecedented robust pricing environment. Average daily revenue in Lower 48 increased by more than $3,500 sequentially or 12% up to $32,700. We have recently signed contracts with revenue per day above $40,000, and that's before adding NDS content. We have a material portion of the fleet remaining repriced to the current market. Therefore, we expect daily revenue and margins to continue to climb. We and the Lower 48 industry have inventories of high-spec rigs, which can be reactivated. Importantly, the cost to reactivate these rigs is significant. For idle rigs, we received total reactivation spending of more than $2 million for the next seven or so units. For the following eight, that price tag moves up to about $6 million. We believe the Lower 48 drillers have a limited appetite to incur this level of expense speculatively. This puts a lid on the ready supply of additional rigs. In the international market, we see steady increases in activity across many of our major geographies. This increase in demand supports generally higher day rates and margin expansion. Once again, we surveyed the largest Lower 48 clients at the end of the fourth quarter. This group accounted for approximately 34% of working rig count. Our survey adjusted for one outlier in a special situation indicates essentially net flat activity for the group through the end of the first quarter. We believe this trend primarily reflects some weakness in natural gas prices. Despite the resulting market churn, we have been able to shift return rigs from gas to oil drilling. Further, inquiries for additional rigs in the Permian Basin have been increasing. These positive signals along with refreshed budgets and better availability of casing suggests potential growth in 2023. Operators in several of our existing international markets are indicating increases in their activity. We see potential opportunities to add rigs in multiple markets, both in the Middle East and Latin America. And we continue adding newbuilds in Saudi Arabia. SANAD has recently received awards for five more newbuilds, bringing the total so far to 10. These rigs are impactful. Of the initial five which were previously awarded, we expect to deploy the three remaining rigs at one per quarter beginning this quarter. The second five should roll out beginning as early as the end of 2023. We estimate each newbuild will generate annual EBITDA of approximately $10 million. With the first 10 awards in hand, SANAD is on the way to realizing EBITDA of more than $100 million per year from the newbuild program. Let me wrap-up my remarks with the following. We expect activity across our markets to increase this year. With our advanced portfolio of rigs, services and equipment, Nabors is ideally positioned to capitalize on this environment. Thank you, Tony. Fourth quarter results were significantly better than we anticipated. Both US and International segments experienced sustained pricing momentum and steady increases in rig count. NDS continued on its growth path with improving results across its business lines and Rig Tech had its best quarter in a long time with signs of strength across its portfolio of offerings. Although the first quarter is a bit shorter than the fourth, we continue to ride favorable trends and expect to deliver meaningful sequential EBITDA growth this quarter. Average pricing for our US fleet continues to expand. International rig count and pricing also continues to improve, and we expect NDS to provide further momentum to our total results in the first quarter. For the full year, 2022 revenue from operations was $2.7 billion. This compares to $2 billion for 2021, a 32%improvement year-over-year. All of our segments grew significantly during 2022, but Lower 48 drilling and NDS globally led the way with revenue increases of 78% and 41%, respectively. International Drilling 2022 revenue increased by 15%. We experienced an acceleration towards the end of last year and expect 2023 to deliver a similar year-on-year growth as our international markets appear to be picking up steam. For the fourth quarter of 2022, revenue from operations was $760 million compared to$684 million in the third quarter, a 10% improvement. US Drilling revenue increased by 12% to $333 million. Lower 48 revenue grew by almost 16%, reflecting higher rig count and an increase in daily revenue of over $3,500 or 12%. Average daily revenue reached $32,700 up from $29,200 in the third quarter, and we expect it to continue to increase over the coming quarters. Over the past year, day rate increases have accelerated as compared to the increases of the prior year. In the fourth quarter of 2021, leading edge revenue per day was in the low $20,000 range and we are now seeing contracts with revenue per day in the low $40,000s. We expect average pricing for our fleet to maintain its upward trajectory. And although leading-edge pricing has remained stable over the last few months, depending on the evolution of rig count over the next couple of quarters, leading-edge pricing could continue to expand. Despite the potential for further day rate increases, we believe we should return to our traditional long-term contract coverage in the Lower 48 of around 20% to 30%. Over the last few months, we have been more focused on adding more term onto our portfolio of contracts. Revenue from our International segment also increased to $380 million or about 4%for the quarter. The improvement was driven primarily by higher activity and improved day rates in Saudi Arabia and Colombia, as well as by our impactful Papua New Guinea rig going on full operating rate in November. Revenue from Drilling Solutions and Rig Technologies also grew sequentially by 15% and 24%, respectively, for this quarter, outpacing the brisk growth in growing rate revenue. Total adjusted EBITDA for the quarter was $230 million compared to $191 million in the third quarter, an increase of $39 million or 21%. EBITDA margins improved by almost 280 basis points to over 30%. That equates to incremental margins of over 59%. A $30 million increase in US Drilling EBITDA was driven by an improvement in Lower 48 drilling margins. Lower 48 drilling EBITDA rose by almost $33 million, a 37% improvement compared to the prior quarter, primarily related to sustained pricing increases. Average rig count in the Lower 48 increased to 95 rigs, up approximately three rigs from the third quarter. And daily margin came in at $14,600, up by almost $3,500 per day, a 31% increase. Daily operating expenses held steady around the $18,000 mark. At the end of the fourth quarter, Nabors' utilization of high-spec rigs was at 86%. South Texas and East Texas each had only one high-spec rig available. And in the Northeast, all nine of Nabors' high-spec rigs were working. We did see some weakness in gas markets with multiple rigs returned by smaller players. However, we were able to place these rigs expeditiously with other customers for predominantly oil-focused activity. Our rig count has held steady during the month of January. But given the continued uncertainty in the price of natural gas, we expect further churn during the remainder of the quarter. This has had an impact on our expectations for rig count growth in the first quarter. Consequently, we are currently projecting a rig count to increase by one rig versus the average of the fourth quarter. On the other hand, the pricing trends have continued to develop even stronger than we initially expected. We currently anticipate our daily gross margin to land between $16,100 and $16,300 in the first quarter. This is without the additional contribution from our solutions business. International met our expectations in terms of both rig count and margins. Our International segment delivered EBITDA of almost $89 million, an improvement of $2.9 million or 3.4% over third quarter results. International rig count improved with the deployment of the second newbuild rig and the reactivation of a legacy rig in Saudi Arabia, both late in the quarter as well as one more rig in Colombia. Gross margin increased by over $300 to $14,900 per day due to higher day rates related to contract extensions in Saudi Arabia and better cost performance in Latin America. Average rig count in the first quarter should improve by one to two rigs sequentially, reflecting a full quarter of operations from the recent start-ups. We now anticipate deploying the mix in Kingdom newbuild at the end of the first quarter with one additional rig scheduled for both the second and third quarters. We project international daily margins to be in line with the prior quarter. The Incremental rig count should offset the reduction in calendar days in the first quarter as compared to the fourth. Drilling Solutions continued making significant strides by delivering EBITDA of $30.3 million in the fourth quarter, up 18% sequentially. Gross margin for NDS was almost 53%. We continue to see additional improvements in both the domestic and international markets for all of our business lines. In the US, there has been ongoing success in growing our penetration of services and Nabors' rigs as well as on third-party rigs. Our Software and Digital Solutions continue to generate strong results. We expect first quarter EBITDA for Drilling Solutions to increase by approximately 6% over the fourth quarter level. NDS gross margin per day for the Lower 48 increased to about $2,800. When evaluating our Lower 48 business on a combined basis, looking at the contributions from both NDS and drilling, we achieved a gross margin of almost $17,400 per day, a sequential increase of almost $3,800. For the fourth quarter, Rig Technologies generated EBITDA of $7.6 million, a 57% increase. This improvement primarily reflected very strong aftermarket demand and higher capital equipment sales. For the first quarter, we expect Rig Tech EBITDA to be in line with the fourth quarter results. Adjusted free cash flow for the quarter reached $101 million compared to free cash flow of $35 million in the prior quarter. This result exceeded expectations by about $20 million, primarily on the better EBITDA, on somewhat lower capital expenditures and strong year end collections. For the full year 2022, Nabors generated free cash flow of $154 million, as we continued to deliver industry-leading results together with sustained cost and capital discipline. We expect first quarter free cash flow to be moderately positive. The first quarter forecast includes higher interest expense payments on our notes as more of these coupon payments fall in the first and third quarters. In addition, at the beginning of the year, we paid several large annual items such as property taxes, insurance premiums and employee bonuses. Capital expenditures in the fourth quarter were $103 million, including over $60 million for SANAD newbuilds. For the full year 2022, CapEx totaled $382 million, including $91 million for the SANAD newbuilds. Although we spent more than we had forecast on reactivating Lower 48 rigs, delays by the supplier for our SANAD newbuilds offset the incremental US CapEx. We are targeting capital expenditures of approximately$150 million in the first quarter including approximately $45 million for SANAD newbuilds. Our forecast capital spending for full year 2023 is approximately $490 million, including $180 million for the SANAD newbuilds. This SANAD investment will be funded from our joint venture's cash balances and its forecast operating cashflow generation. The increase in annual CapEx, excluding the Saudi newbuilds, mainly relates to the growth in average 2023 rig count over the prior year level. In the fourth quarter, net debt declined to less than $2.1 billion, driven by positive free cash flow. During the quarter, we retired $50 million of senior notes. In addition, our Saudi joint venture distributed a total of $20million to its partners. Given what we're seeing in our various markets globally, we maintain our targets for 2023. We expect to deliver EBITDA above $1 billion and free cash flow exceeding $400 million. Thank you, William. I will now conclude my remarks this afternoon. First, let me summarize our fourth quarter and 2022 highlights. Quarterly adjusted EBITDA increased sequentially by 21% and exceeded $700 million for the full year. In the quarter, we once again generated free cash flow, while reducing net debt. Net debt at the end of the year stood below the $2.1 billion level. Our Lower 48 daily margins reached a quarterly record with annual for a double-digit increase in the first quarter. And NDS annualized EBITDA exceeded $120 million in the fourth quarter. Credit must go to the Nabors team for its outstanding performance in 2022. The team stepped up to overcome the challenges worked by the large number of rig activations and persistent supply chain issues. Their efforts enabled us to make significant progress on our key focus areas. Looking ahead, we expect to improve further in 2023. In the Lower 48, our pricing and the value we provide to clients are better aligned than they have been in many years. With our current contract portfolio, we expect to realize higher average rig rates and margins progressively through the year. In our international segment, the combination of growing markets and the pending new build deployments in SANAD should lead to even better financial performance. In NDS, we remain focused on increasing penetration on Nabors' rigs and in the third-party market. The international business in NDS is gaining momentum. This combination could drive further growth in this high-margin, high-return segment. For the first time in several years, we expect a material contribution from Rig Technologies. The increase in industry activity is leading to growth in the aftermarket and we have high expectations for the energy transition initiatives. Building on our performance in 2022, we expect material improvements in our free cash flow and in our progress to reduce net debt. Our priority to delever has been successful so far, and there's more to come. I am proud of our accomplishments in 2022. I'm looking forward to reporting even better performance for 2023. That concludes our remarks on the fourth quarter and 2022. Thank you for your time and attention. With that, we will take your questions. Hey, good afternoon everyone. So, I wanted to expand on the gas markets first. I think that's where the biggest debate lies in the Lower 48. You talked about moving your rigs over to oil or based on some of your smaller customers dropping rigs with being able to be picked up by other larger customers. Can you maybe give us some color around how much lower the natural gas really have to get to see a meaningful drop in rigs? Just trying to understand the impact on both day rate and daily margins. What do we need to see, the draconian scenario, to see that day rate move down significantly because I think that's the big threat that's out there that investors are trying to assess? So, -- can you maybe expand a little bit more about how many rigs need to drop? What's your expectations? Do the rig players hold the line on pricing? I think it'd be helpful to get an understanding of the negative impact with gas markets. Okay, that's a pretty amorphous question -- or a difficult question, I would say. The -- I think obviously below two, look, it would be a problem. But you've also got to bear in mind a bit -- the gassy markets are not all homogeneous, I would say. So, for example, East Texas, there is churn there, and the operators are pushing forward their plans. Where we had some plans for people taking rigs in the first quarter, they are pushing them out to the second half of year waiting to see what happens. But in gassy players like Northeast, where it is virtually all gas, there the market hasn't been as sensitive, and -- in part because of the cost structure and in part -- we projected Nabors in part because of the quality of our rig fleet is up there. So, it's not all homogeneous, I would say. In South Texas, there has been churn in South Texas, in part because I think as it rolled the condensate down there -- but again, I think right now, what we've been trying to do is move the rigs from those plays to the oily customers. We have had some pickup of rigs in West Texas this quarter, for example. In West Texas, there is some churn as well. Even with the fluctuation in oil price in West Texas, I would say that those fluctuations are more in connection with the private operators, the smaller guys who come on to the market quickly and also exit quickly. So, there has been some of that. But by and large, we've been able to deal with all that. Okay, great. That's helpful. I just wanted to switch over to your repricing effect. You talked about repricing two-thirds of the fleet, obviously, a big pickup in the daily margins as expected for the first quarter. How much -- howling would it take to reprice your remaining third of your fleet when you talk about increasing day rates and daily margins through the year? Just give us some color on the cadence of where you expect this to go. And if everything was repriced what do we see on a daily rig revenue level? Is it in the high 30s, the low 40s? Just to give us an idea how we walk through the year and the power of repricing and a moderating rig activity would be helpful color? Sure. Well, I think I think in terms of time frame, we're looking at it over the next two quarters, ideally, we can affect the repricing of a large substantial portion of the fleet. In terms of actually coming out with a specific number, the distance between the 33 number that you saw that we exited the average width and the above 40 number that we're at now and where we land on that, hopefully, it's closer to the higher end of the range rather than the middle of the range, but it's going to be a function of how fast we can move and what the market is like. So, beyond that, I don't want to be more specific. All right. Thank you. Good to be back. So, -- yes, a lot of business momentum for sure, behind you. A lot of tailwinds, that's awesome. So, maybe my question here to be focused a little bit more now on the international side of the business. We've got these Saudi rigs that are coming on here for this year. You also mentioned opportunities in other areas of the Middle East and Latin America. So, maybe give us some context as to what kind of increase in activity you could expect outside of the SANAD joint venture? And you talked about some inflection in pricing there. Maybe give us some context on what the pricing looks like international versus US? Sure. Okay. Let me try to recap because it's a lot of ground to cover. Let me just reiterate Saudi Arabia so it's clear to everybody. The initial newbuild, the first one started in the third quarter, and then we had a second one in the fourth quarter. And then we said, we added an additional rig in -- late in the fourth quarter as well. And we're expecting another three of the newbuilds to go on the payroll during the first three quarters. So, that's where that stands. In addition, as we mentioned, it's another five awarded to bring the total awards to 10. But those five, -- being impactful for 2023. But away from Saudi Arabia, that's the interesting thing right now, I would say. I said, if you add up the Eastern Hemisphere and a bunch of countries -- four or five countries, we think we have about 37 tenders, mostly in MENA. And we have another four or five tenders in Argentina. And again, none of these numbers include-- Rigs. Yes. None of these numbers include the newbuilds in Saudi Arabia. And currently in the pipeline, in terms of committed incremental stuff, including what I just talked about, we have 5.5 rig years already -- we have visibility for that already for this year. So, I think it's a pretty full cadence of opportunity right now. In terms of margins, we said we're guiding the first quarter similar to the fourth quarter. But I think what's going to happen is all these incremental rigs are going to put us on the path -- they're accretive to existing day rates, existing margins. I think through the end of the year, it's going to put us on the path of a margin increase to $16,000, $17,000 by the end of 2023. So, I think there's just a lot of good stuff happening in international right now. Not to mention Nabors Drilling Solutions, which is expanding really fast in the international markets. We have talked about it in prior quarters about the international expansion for NDS and we're actually starting to see that now. I was just going to say, a follow-up on that, we have said, one of the things I'm really happy about, amongst those with NDS, 30% of their portfolio of revenue base now is coming from international. So, that reflects the fact that the push we're putting there as well to grow that part of the business. So, that's a deliberate part of our strategy. Okay, great. And then maybe a follow-up for William. I know you -- there's a reference in the press release as well as your commentary that you're going to reduce net debt from $2.1 billion to around $1.7 billion. Obviously, that's the same amount of free cash flow you're going to generate. So, are you actually going to reduce debt or just reduce the net debt? We're going to do both, Kurt. I think we obviously need to address 2023 and 2024 maturities and that's going to be done this year, of course, with the cash flow. We're also probably going to take care of the 2025 9%soon this year, and we can call those. And then we will use the rest of our cash flow also to start nicking away at the other 2025. So, debt is going to go down and net debt is going to go down as well. Hi, good morning and thanks for -- good afternoon and thanks for taking my questions. I just want to start on the Nabors Drilling Solutions. You mentioned the Nabors rigs, about 6.5 services per rig. Can you just talk a little bit more about the third-party rigs? What does the average rig look like in terms of is it an AC rig, an SCR rig, et cetera? And how many average services do you have on those rigs? And could you ultimately see that getting closer to that 6.5 number as well? Okay. So, with respect to third-parties, let me just first start and say that, like I mentioned, the good thing about NDS is it's becoming a balanced portfolio. Like I said, it's 70/30 split between USA and International. And in the US, I'd say 25% of our revenues coming from third-party rigs right now. So, -- and when you drive down, more than six are on Nabors rigs. In terms of third-party, I'll let Subodh answer that. Subodh? Thank you, Tony. So, the approach that we have is that we have more than 100 rigs that are running some element of NDS software, which is primarily focused on drilling optimization. And we have in mid to high teens third-party rigs that are running a full suite of our automation platform, SmartROS, which enables multiple smart products and any rig floor automation that we will come up with during 2023. So our portfolio in the US and international continues to grow based on both individual services that we can deploy in third-party rigs and the complete automation platform that can be deployed primarily on AC rigs. Yes. And what we're seeing, Keith, is that even for those people who have the AC rigs, their AC configurations aren't necessarily robust enough to handle the suite of products. And so we're in discussion with a number of contractors who are actually converting over to our SmartROS system, which gives them the robustness that they need to actually run this stuff. So, we have a conversion methodology that's very cost effective compared to anybody else's alternative out there in the marketplace and help them convert over to a platform that enables them to grow that part of their business. And here, I would say is -- the reason why we're doing this is Nabors recognizes with the number of rigs we have, we can't service the whole world here, obviously. So, that's why we're committed to making this technology available to on third-party rigs. And we're actually joining up with contractors on a cooperative basis not on a compensation base, even though we're -- we compete in some areas, operators, a lot of contractors recognize that since we've been down the path, why reinvent the wheel. And since we're willing to let them access the good stuff, that -- it's like a win-win proposition. So, that's the concept that we've accelerated on. That's what we're going to press forward both here in the US and internationally. And I think the bottom-line of all of this stuff is, as you can see from the numbers, the growth has been pretty dramatic. But most importantly, the cash conversion rate is one of the things I particularly like -- the cash conversion rate on NDS, to give you an idea, is 80% this year, 80%. Got it. That's very good color. Thanks for that. Just a follow-up on the international rig tenders. I think you said 37 tenders in MENA, another four to five-- Yes. Got it. So, the question is how many of those tenders and the success of those tenders are embedded, would you say, in the $1 billion plus guidance for 2023 and then the free cash flow guidance as well? Are those --like is it an incremental 37 rigs to what you're running now potentially? And then with that, there'd be some activation cost presumably and some cash component to that? Or maybe if you could just help us think through that a little bit more as well? That's a great question. In reality, what we have embedded is some growth that is already achieved, as Tony mentioned. So, that includes Saudi Arabia, the standard newbuilds plus a couple of other rigs that we've added in other places. So, that's already embedded. Those things are embedded. What is not embedded is any potential success on these tenders. And again, we're not handicapping anything. But in these types of businesses or these types of markets, the client tends to help significantly with the upgrade and recertification and mobilization costs. So we don't think that the impact on our cash flow on negative basis for reactivating these rigs should be significant. Thank you for taking my question. I have a question on SANAD. In terms of total capital spending, I understand $180 million is going to be for newbuilds. What's the total capital spend in SANAD for 2023? That's a great question. About $260 million. Saudi Arabia. That is for Saudi Arabia. A little bit of that will be incurred by Nabors itself. But yes, that's the Saudi Arabian CapEx, including those newbuilds. Okay. And then would it be fair to say that your guidance of $400 million plus free cash flow in 2023, all of that free cash flow will be generated outside of SANAD? Well, actually, SANAD will consume cash. So, the cash generation outside -- yes, of course, because they're building what? $180 million or $260 million total of CapEx or $240 million or so, I guess, is the internal for SANAD. It's more than the generation for SANAD from one year. However, outside SANAD, that cash consumption, which we think is going to be somewhere in the maybe $40 million range, is included in our consolidated number. That implies that the $400 million that I mentioned -- or more than $400 million that I mentioned is going to -- the piece that's outside of SANAD is going to be higher by about $40 million, $50 million. Okay, fair enough. Yes, what I was trying to understand is in third quarter, the cash on the balance sheet at SANAD was about $300 million. So, a substantial part of your $450 million kind of cash on the balance sheet was in SANAD. But given most of the free cash flow is going to be outside of SANAD next -- in 2023, your-- Yes. All of it and more. Yes, absolutely. So, your ability to pay down debt and on other good stuff that you can do, your flexibility improves considerably in 2023. That's correct. That's exactly right. You said it better than me, actually. The only thing I'd add to that is that as we get to steady state on the newbuilds with Saudi Arabia at the five cadence, there will be a point where that becomes self-sustaining as well because the cash from the rigs that are built online then start to underwrite the newbuilds and actually become accretive as well on a cash-on-cash basis. And that crossover point will come within two years or six -- something like less than that, maybe sooner. Yes, great. Looks like there are good days ahead. And -- so best of luck. Thank you very much for your answers. And with no remaining questions, this will conclude our question-and-answer session. I would like to turn the conference back over to William Conroy for closing remarks. Thank you all for joining us this afternoon. If you have any additional questions or want to follow-up, please contact us. Joe, we'll end the call there. Thank you very much.

EarningCall_395

Ladies and gentlemen, good morning. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the Spirit Airlines Fourth Quarter 2022 Earnings Conference Call. Today’s conference is being recorded. [Operator Instructions] Thank you. And I will now turn the conference over to DeAnne Gabel, Senior Director of Investor Relations. You may begin. Thank you, Abby and welcome, everyone to Spirit Airlines’ fourth quarter 2022 earnings call. This call is being recorded and simultaneously webcast. A replay of this call will be archived on our website for a minimum of 60 days. Presenting on today’s call are Ted Christie, Spirit’s Chief Executive Officer; Matt Klein, our Chief Commercial Officer; and Scott Haralson, our Chief Financial Officer. Also joining us in the room are other members of our senior leadership team. Today’s discussion contains forward-looking statements that are based on the company’s current expectations and are not a guarantee of future performance. There could be significant risks and uncertainties that cause actual results to differ materially from those contained in our forward-looking statements, including, but not limited to, various risks and uncertainties related to the acquisition of Spirit by JetBlue and other risk factors as discussed in our reports on file with the SEC. We undertake no duty to update any forward-looking statements, and investors should not place undue reliance on these forward-looking statements. In comparing results today, we will be adjusting all periods to exclude special items. For an explanation and reconciliation of these non-GAAP measures to GAAP, please refer to the reconciliation tables provided in our fourth quarter 2022 earnings release, a copy of which is available on our website. Thanks, DeAnne and thanks to everyone for joining us on the call today and a special thanks to everyone on the Spirit team. Together, we overcame many challenges throughout the year and thanks to our team members’ dedication, we made excellent progress on the steps necessary to return Spirit to sustained profitability. Demand was robust during 2022 and our team did a great job maximizing revenue production, including achieving another record for non-ticket revenue per segment. Operationally, the team delivered solid results with an overall mid-pack performance from both DOT on-time performance and completion factor despite our network being impacted by multiple weather events and infrastructure bottlenecks. We are positioned well to build upon our 2022 successes and I will share more about our 2023 goals before we get to Q&A. Before discussing our fourth quarter results just a quick update about the pending merger with JetBlue. We announced in December 2022 that Spirit and JetBlue had certified substantial compliance with the DOJ’s second request and are now waiting to see whether the DOJ filed suit to block the deal or allows us to proceed. We anticipate hearing from the DOJ in the next 30 days or so and that’s really all we have to say on that topic for now. Turning now to our fourth quarter 2022 performance, operationally, the quarter started off with the tail end of Hurricane Ian impacting our operations, followed by tropical storm Nicole and then by severe winter weather across the U.S. during the peak holidays. As a result of these weather events, we canceled over 1.5 percentage points of our anticipated fourth quarter capacity. The good news is that our team did a great job mitigating the down-line impact from these events and took excellent care of our guests. I am grateful for their efforts and I am honored to be part of the team. The revenue environment in the fourth quarter remained strong and total RASM for the quarter was up 17% as compared to the fourth quarter of 2019 on 22.7% more capacity, this was even stronger than we had anticipated. In fact, adjusting for capacity increases, our unit revenue performance was amongst the best in the industry compared to 2019. Costs also came in better than expected. And as a result, our adjusted operating income for the fourth quarter was $57.6 million, resulting in an adjusted operating margin of 4.1%. While our fourth quarter results were better than expected, we continue to face headwinds in returning to normalized margins and full utilization. As you may have seen in our release yesterday, we have once again trimmed our capacity expectations for 2023. Over the last 6 months, the GTF neo engine has experienced diminished service availability, an issue that has been steadily increasing over this period. This is not just a Spirit issue. Pratt & Whitney continues to struggle to support its worldwide fleet of neo aircraft as MRO capacity remains constrained and turnaround times for engines in the shop have been nearly 3x longer than the historical averages for CO engines. To put this in perspective, within a 2-week period, we went from having 2 A320neo aircraft parts without operable engines to having 7 A320neo aircraft sidelines due to these issues. When operating, the neo engine performance and fuel efficiency is great, but the engine’s time-on-wing performance has once again declined. We are working with Pratt & Whitney on finding a solution that will increase time on wing performance, but it is frustrating that this has become an issue again. In addition, we have been notified by Airbus that a number of our expected 2023 deliveries will be delayed until 2024, which may cascade some aircraft into 2025, all reducing the number of aircraft delivered from Airbus and our lessor partners by 7 shelves in 2023. In the fourth quarter of 2022, we made the decision to accelerate the retirement of our A319 fleet, which Scott will share more details about. We have had some good news. Florida operational constraints have been gradually improving. However, we will remain methodical and deliberate in building back Florida and relaxing the crew buffers that we have been forced to add until we have more confidence in the infrastructure that supports the airline industry. With that, I will hand it over to Matt and Scott to share additional details about our fourth quarter performance as well as some color around our first quarter outlook before I close with some thoughts on full year 2023. Matt, over to you. Thanks Ted. I also want to thank our Spirit family members for their contributions. Our Spirit family members are our greatest assets and thanks to their dedication and professionalism, Spirit is able to deliver the best value in the sky. For the fourth quarter of 2022, we will once again compare our results to 2019. But going forward into 2023, we will return to year-over-year comparisons. Turning now to our fourth quarter revenue performance, total revenue was $1.39 billion, up 43.5% compared to the fourth quarter 2019, the largest top line growth of the major U.S. carriers that have reported results thus far. Total RASM for the quarter was $0.1081, up 17% versus 2019, while we simultaneously increased our capacity nearly 23%. Demand was strong throughout the quarter, especially over the peak Christmas and New Year’s Day holiday period, which helped mitigate the revenue impact from weather-related flight cancellations during that time. Load factor was down 3.8 percentage points versus the fourth quarter of 2019. But as we explained last quarter, this is primarily because we are flying more on off-peak days and have less variability in the number of flights day-to-day at any given airport. We believe this better supports our operational reliability and is more likely to maximize earnings in this environment. On a per segment basis, total revenue per passenger increased to $136, a 23% increase compared to the fourth quarter 2019. Passenger revenue per segment increased 22% to $64 and non-ticket revenue per segment increased 23% to over $71. This was more than a $4 sequential increase in non-ticket revenue per passenger segment from the third quarter 2022 driven by strong take rates for ancillary services combined with the ongoing benefits of our revenue management initiatives. Looking ahead to first quarter 2023, January started off very strong due to the shift in peak holiday return traffic. However, demand over the Doctor Martin Luther King Jr. holiday weekend was a bit soft compared to historical periods. This softness was not surprising given that many schools had just gone back into session. President’s Day holiday weekend is shaping up very nicely and we are expecting to see continued strong demand trends over the spring break period. Our self-imposed constraints on Florida volume continue to carry a unit revenue penalty, but again, we are being purposely conservative when it comes to removing some buffers and restrictions that limit our level of operations there. We acknowledge that this strategy may have a slight downward pressure on load factor and unit revenue, but we are comfortable it is the right earnings decision in current circumstances. Taking all of this into account, we estimate total RASM for the first quarter of 2023 will be up 23% to 24.5% compared to the first quarter of 2022 on a capacity increase of 13.2%. As Ted commented, we have reduced our 2023 capacity plan. We now expect 2023 capacity to be up 19% to 22% compared to the full year 2022. Thanks, Matt. I will start with a brief overview of our fourth quarter financial performance and then spend some time explaining how we are thinking about the outlook for 2023. Our fourth quarter non-fuel operating costs came in better than expected, primarily due to lower airport rents and landing fees driven by favorable signatory adjustments. We had anticipated that as volume at airport stabilized, we would see a reversal of this pandemic-related increases in airport rents and landing fees due to share shifts. This anticipated reversal came largely in the form of billing true-ups or adjustments as opposed to reduced future rates. Fuel costs were up more than 100% compared to the fourth quarter of 2019 on about 20% more volume due to a 69% increase in the average fuel price per gallon, fuel prices have remained stubbornly high driven in large part by historically high refining margins, but the current curve does suggest jet fuel prices will move lower as we progress through the year. For the fourth quarter, we saw good improvement in adjusted operating income quarter-to-quarter, but operating margin was still well below what we believe our normalized operating margin will be once we reach full utilization. Total non-operating expense came in higher than previously estimated due to the periodic valuation of the derivative liability associated with the 2026 convertible notes being valued $4 million higher than it was on September 30, 2022. During the fourth quarter, we completed a private add-on offering of $600 million to the company’s 8% senior secured notes due 2025, bringing the aggregate principal amount of these senior secured notes outstanding to $1.1 billion. During the quarter, we also increased our commitment under our senior secured revolving credit facility by $60 million, bringing the total amount available under the facility to $300 million, none of which is drawn today. Liquidity at the end of 2022 was $1.8 billion, which includes unrestricted cash and cash equivalents, short-term investments and the $300 million of undrawn capacity under the revolving credit facility. We took delivery of 10 A320neo aircraft during the quarter, ending the period with 194 aircraft in the fleet. As announced last month, we signed an agreement to sell 29 of our unencumbered A319ceo aircraft. We expect to remove 14 of these aircraft from our operating fleet in 2023, with the remainder expected to be removed in 2024. We took an impairment charge in the fourth quarter of $334 million and the expected proceeds of the transaction over the next 2 years will be between $150 million and $200 million. Over the last year or so, we have been assessing our long-term plans for this A319ceo fleet, our oldest, least-efficient vintage of our A320 family aircraft. In the fourth quarter, we made the decision to accelerate the retirement of these aircraft. In our previous 2023 capacity guide, we had included some reduction in A319 flying so the impact of the 14 scheduled A319 removals in 2023 has a smaller impact than would otherwise be expected. We continue to view 2023 as a transition year. The objective of returning to full utilization is still primary. We have made the necessary internal investments to reach this objective. However, for all the reasons Ted listed, we are forced to be more conservative with our schedule planning than we otherwise would be. Given the modest buildup for the first half of 2023 will likely underutilize the fleet by about 10% that should improve to around 5% in Q3 and back to what we consider normal utilization levels in Q4. Matt mentioned the capacity plan for 2023 being up 19% to 22% versus 2022. This is about a 450 to 550 basis point reduction versus our previous plan. We estimate about 40% of this reduction is related to the diminished neo engine performance coupled with no or limited spare engine availability. We estimate about 30% is related to the Airbus delivery delays and about 20% driven by the accelerated retirement of our A319 aircraft. The remaining reduction is related to the continued buffers we have in place to support the operation due to continued industry infrastructure constraints. For 2023, we estimate total capital expenditures will be about $360 million. For some highlights here, approximately $150 million of this is related to the building of our new headquarter facility in Dania Beach, which we will occupy in the first quarter of 2024. $75 million is related to net pre-delivery deposits and about $30 million is related to the purchase of spare engines. Last month, our pilots ratified and amended collective bargaining agreement that provides significant pay increases and other enhanced benefits. We estimate the new rates and benefits drive an additional $180 million of wages, salaries and benefits expense for the full year of 2023 or about $40 million to $45 million a quarter with an additional onetime expense in the first quarter of about $10 million related to the revaluation of bank sick and vacation time. In total, we estimate the new contract adds about 4.5% increase to our 2023 CASM ex. For the first quarter 2023, we estimate our operating margin will range between negative 2% to negative 4%. This assumes total operating expenses of $1.39 billion to $1.4 billion and a fuel price per gallon assumption of $3.20. For the full year 2023, given expected utilization levels and the new pilot contract, we now expect our CASM actual will be in the high 6s. We also do expect to be profitable in all of the first quarter and profitable for the full year. Before I close, I want to thank the entire Spirit team. 2022 was a challenging year on many fronts for our team persevered and continued to set us up well for 2023. With that, I’ll turn it back over to Ted for closing remarks. Okay, Scott. Thanks for that brief overview. Now that 2022 is wrapped, we are excited to turn our attention to leveraging our strengths to make marked financial improvement in 2023. We are in a strong liquidity position to have minimal non-aircraft CapEx. We expect to produce solid EBITDA for full year 2023. In addition, we have the option to finance our new headquarters campus in Dania Beach, should we decide to do so. We are steadily building back to full utilization. And despite some unexpected setbacks with engine availability issues, we are on track to reach normalized utilization by the end of the year. However, our progress will be measured and intentional so we don’t overstress the surrounding infrastructure. As we move through the year, if we gain confidence in the surrounding infrastructure, we have the assets to move the needle on utilization a bit faster. While our new pilot contract does add unit cost and margin pressure, we do expect the new contract to have a favorable impact on our attrition rates. We take our first A321neo in the first quarter and a total of 10 in 2023, which over time will gradually increase our average gauge and naturally drive productivity. Adding A321neos and retiring the A319ceos will also improve fuel CASM, we estimate that, on average, an A321neo will produce 113 ASMs per gallon, while the retiring 319s on average produced 73 ASMs per gallon. We won’t get into the full benefit of these changes in 2023 as we are only retiring a portion of the 319 fleet in 2023 and are taking only a handful of A321neos this year, but fuel efficiency should steadily improve as we move through 2023. With utilization levels returning and fleet-related benefits on unit cost and fuel burn, we expect CASM and CASM ex will be lower in 2024 and than it will be in 2023. Demand for our product has remained strong. Our team continues to explore new ancillary opportunities, and we anticipate we will set another non-ticket revenue per segment record in 2023. Thank you. We are now ready to take questions from the analysts. We ask you limit yourself to one question with one related follow-up. Abby, we are ready to begin. Thank you. [Operator Instructions] And we will take our first question from Mike Linenberg with Deutsche Bank. Your line is open. Hey, good morning, everyone. Hey, I guess a quick one and a quick follow-up here. I guess to Matt, as you think about retiring these A319s, does it preclude you – and I guess – I appreciate the fuel efficiency, Ted that you spelled out comparing the A319s versus the A320neos. But does it preclude you from flying certain markets, whether they are experimental or maybe smaller or medium-sized markets with the bigger shelves, are you sort of pigeon hold into flying some of the biggest routes? Like what’s the loss there from your ability to develop new markets with no longer having the A319s? And did you ever consider maybe an A319neo? Hey, Mike, good morning. Yes, in terms of where we deploy the aircraft. Having the 319ceos retire does not stop our ability to grow or expand in any given route, even experimentally if we choose to do that. Really, what’s become easier and better to do over time with larger aircraft. As you can go in sort of day of week to certain places and test things out that way and then continue to grow off of that. And that’s not really brand new for us. We have done that in the past, and we would continue to do that. If we thought there are opportunities out there, that maybe can’t support daily right out of the gate, we would go on with day a week and then develop out from there, making sure that we’re still right in that decision. Hey, Mike, I’ll add another pile on to Matt’s comment. As we’ve been playing the fleet over the last sort of 5 to 10 years, we knew that the A320neo and its range capabilities would replace a good bit of the need for the 19ceo, given that, that was our long-haul fleet. And so as we’ve gotten bigger and bigger in our A320neos, we knew that would be a long-haul replacement for us, and the operating costs are pretty similar. So that was always going to be the case. So I think that’s where Matt and the network guys utilizing the neo where it should be placed. Okay. And then just on sort of related, as we think about the 19% to 22% growth in 2023, how much of that is actually gauge related versus maybe new markets? Or are you just filling in the frequency to drive to that higher utilization to get back to normalcy by year-end? Yes, most of the growth there is going to be coming as we look to continue to add frequencies in places where we’re already strong, the makeup of that growth is going to be less so from new routes and more likely going to be really continuing to a trend that we’ve had for the last few years, which is where we’re strong. We’re going to continue to accentuate those strengths, and we will continue to test out new places for us moving forward. Gauge does continue to slightly increase, as I think Ted said in his remarks. So we will see a little bit of gauge increase throughout the year. And then in terms of a lot of when the deliveries are coming, they are coming throughout the year. There are a bunch using that technical term, a bunch are coming near the end of the year. So a lot of deliveries come in the fourth quarter, and you’ll see a lot of that deployed into 2024, more so than 2023. So that’s a bit of the change in the capacity profile as well. I’d say – this is Ted and the last add-on to that is, obviously, utilization is increasing throughout the year. So that’s adding to the 19% to 22%. I would agree with Matt, gauge is the smallest component of it. I think it’s more of the aircraft deliveries and the utilization improvement that’s driving the capacity move. Hey, good morning, everybody. Quick one on pilots. As I recall, the contract had richer increases for first officers than for captains, which kind of seems sensible given the industry challenges right now. I know it’s very early, but have you seen any changes yet in the cadence of applications? And is the tempered 2023 growth rate have any specific assumptions in this regard, like an uptick in applicants? Or is the tempered growth solely a function of the aircraft issues that you spoke about? Good morning, Jamie. So as to the first question, it is too early to call it one way or the other. I mean, our pilots ratified this contract less than a month ago. So I think initial signs are positive, however, both as it relates to attrition and our continued throughput on new hires. So we feel like that will produce the kind of results we see. To the second question, the more muted growth rate has almost entirely everything to do with the fleet moves that Scott and both the neo issue, the Airbus delivery delays. Admittedly, the 319 retirement was different than our planned assumption, but that was going to happen eventually. So I think it’s more of that. I think we have adequate staffing and throughput to staff a bigger airline, which is why I said in my comments that if we start to feel more comfortable that ATC problems are getting resolved quicker, that we’re not seeing as much as many issues with catering trucks and fueling trucks and stuff like that, we could probably tick the growth up a little bit more, but we will wait to see that first. Got it. And second question, just because it’s generated some headlines, and I’m getting questions here. The estimate or your comment that you expect to hear from the DOJ in the next 30 days, is that a well-informed estimate on your part or something that specifically justice has guided you to? Not to guess on my part, just based on where we’ve seen the process goes. So I wouldn’t or so. I said or so because I mean it could be longer than that. But we’re into the process right now and have been working with the DOJ on making sure we satisfy the request and that sort of thing. So as we’ve laid out, I guess, JetBlue has been more specific in laying out the process. I think it’s consistent with their view on where things will go and still in line with what the timing estimates were that were given early on. Yes. I am good. Thanks for the time. You talked about time on wing, lower time on wing, that is a phrase you used at least 2 or 3x on the call. Can you speak a little bit more specifically what was the expectation in your planning in terms of cycles or years? And what is it that you’re realizing and who bears the higher cost there? So I’ll do my best to summarize I don’t have the specific data at hand. But when we purchased this engine and went through the RFP process to determine what the power plant was going to be on the neo. We made assumptions about time on wing between major shop visits and reliability, generally speaking, for unscheduled removals that were consistent assumptions with what we’ve experienced with our CO power. So with the V2500, what has been experienced with the other engine manufacturers kind of legacy power, that sort of thing. It’s fair to say that the teething issues have gone longer and deeper than any operator anticipated. I think that’s fair for the two manufacturers as well. So rather than it being 6 or 7 or 8 years between removals and shop visits, we’re seeing a considerable higher uptick in frequency. Just last year, I believe we removed 30-plus engines. And we’ve been operating this aircraft for about 6 years, of which the vast majority of them have delivered over the last two. So we’re still working through it. And obviously, there is warranty on the engines that’s part of our purchase agreement and that is – we’re satisfied with the cover there. And in constant discussions with proud on the best way to kind of like mitigate these problems and come up with a better solution. And they have been a willing partner. It’s just – I know it’s frustrating for both of us that we’re still here right now. That’s right. Right now, it is largely that. I mentioned that in a 2-week period, what happened to us right now, we just – we didn’t anticipate having that many aircraft without engines available, either spare engines or returns from the shop. And so we had to take utilization down as a result because those are impactful to fleet utilization. Got it. Got it. And then just on the Airbus delivery delays, can you speak to any penalties or credits related to that? Hey, Duane, this is Scott. So no, there are no penalties at this point. These are sort of excused delays with the supply chain issues that are happening around the world. Airbus is not immune. So at this point, no financial components associated. Hey, good morning, guys. Thanks. Going back to the script and the headwinds to normalized margins and the more conservative approach to schedules this year. With respect to the downward pressure on revenue that you referenced, how much downward pressure is reversed as you get back to normalized network planning and utilization? And I guess what’s the best way for investors to get comfortable with continued revenue execution? Hey, Dan, it’s Matt. I’ll take that. There is a couple of components that flow into that. One is, we continue to have on purpose. We’re still a little smaller fly into Florida than we would otherwise be. And then another thing, and this is the same trend that we saw in our schedule last quarter as well, which is just flying more off-peak days of week as well. And the reason why we’re doing that is largely to make sure we can maintain a reliable operation at our airports and for all of our crew and team members out there. So those two components combined add up to about 1.5 points in the first quarter is our expectation that we’re taking when we talk about unit revenue penalty. So last quarter, it was more than that. So as we move through the spring towards the summer, we should start to see some of that relax naturally as we would fly more off-peak days of the week, normally as we head towards the peak. And then the question will be is, as we operate through the spring and the summer, then we will know how things are going towards the fall. So it’s a little early for us to talk about the fall post summer to think about these kinds of impacts to get revenue in the network. But we’re confident that we’re building up. Ted mentioned our operation last year was Mid-Pac in both on-time performance and completion factor. We’re good with that. And as long as we can continue to maintain that, we will be able to keep loosening up these restrictions as the year progresses. I see. And then second question here. The normalized operations in the fourth quarter later this year, does that assume that Pratt & Whitney issues are resolved by then? And I guess just more broadly, if you could address SAVE’s cost structure today and to what extent the cost structure is a margin headwind in the next cycle? And with that, if it is – if it’s not, can pre-tax margins get back to where they have been historically or at least how should investors think about what a normalized margin should look like for Spirit? Hey Dan. So, as for the first half – this is Ted. We do make an assumption that we are going to be collectively with Pratt resolving the availability issue on the neo throughout the remainder of this year, such that by the time we hit the fourth quarter, we are able to support full utilization, which would include aircraft that are currently unable to be operated. So, there is an assumption in there, which obviously could change if we don’t get the mitigation efforts and the improvement that we are hoping for. But we will keep you posted on that throughout the year. And maybe, Scott, do you want to comment on CASM and margins? Yes. So, quickly on unit cost and maybe go forward views on unit cost margin, obviously the three components that we have talked about a lot and every airline has, which is aircraft – sorry, airport cost and labor costs, which make the majority of our move. And the biggest is obviously, labor. Labor accounts for probably north of 60% of our unit cost increase versus 2019. And the other is how we are sort of thinking about aircraft financing, which could be temporary or at least in this window has been primarily sale-leaseback financing and operating leases which is probably a 10-point to 15-point headwind on unit cost by itself. So, it’s aircraft rent, it’s labor, it’s airport costs, which has been the big mover for us. And so going forward, it’s about getting efficiency in the other parts of the business, getting back to full utilization or very close to it. But there are going to be other operating parameters that are going to be difficult for the industry. And we have talked about it, every airline has talked about the parameters operating today are different than what they were pre-COVID. So, it’s going to take a little more infrastructure to do that than it did in 2029, but we have put those investments in place. So, we expect full utilization to be a product that we will get to by the end of the year and into 2024. But I think the fundamental component about our margin production is still sort of mid-teens margins. We think that as the supply/demand impact is back to an equilibrium, fuel goes back to where it’s sort of been as an average, we expect us to produce mid-teens margins. So, I think that’s where we are thinking about the growth of the airline and all the components with it. So, I hope that helps. Thanks very much operator. Hi everybody. Thank you. So, my first question is with respect to your ancillaries. How are you thinking about I guess increasing them, I mean where do you – maybe that’s not the right question. Maybe it’s more like where do you think they can go? They seem pretty high now, but how high do you think they can go? Good morning. We – in terms of ancillaries, we are not going to plan to flag today and give a target as to where we think it can go specifically. I can tell you, as Ted mentioned, we expect to have another record this year. We continue to expect it to march upwards. We do continue to improve in terms of the way that we merchandise products, and making sure that everything continues to improve from a guest experience perspective in terms of getting through the purchase process. That’s not just on our website, but on our app as well. We also have what we believe to be, if not the largest, one of the largest reaches to third-parties in terms of selling our ancillary products now as well. So, that’s been beneficial from a distribution perspective. And even if guests aren’t purchasing ancillaries on their first contact with us, we do know that the more often that they see the products, if they are not frequent Spirit travelers, it leads to better take rates down the line for them as well before they get to the airport or before they board the aircraft. So, it’s about merchandising, distribution and also just continuing our ongoing improvements in revenue management strategy and the technologies that we are building to put in place to help us manage the products. Similar to the traditional revenue management of just the ticket in general, we continue to make strides with revenue management of the ancillaries as well. Okay. That’s hugely helpful. And then just for my follow-up question, it’s really just a clarification. On ASMs, I think you said – I am not sure who you or Scott said that they were mostly second half, right, weighted. You are seeing capacity increases in the second half of the year. So, are you assuming that the engine relief will be there by the summer months, or how should we think about that? Helane, this is Ted. Yes, we do have a back-end SKU delivery schedule with Airbus, which I think is what you are referring to, which affects ASM production, but doesn’t affect utilization because the airplanes aren’t there. What’s more impactful utilization is that the aircraft that have already been delivered and are not being operated because they are sitting on ground. Those are the engine issues. We do expect that by the fourth quarter, that will have a resolution to it. And we are working with Pratt on ways to mitigate the impacts throughout the course of the year. Obviously, if we are right, then we should land exactly where we expect. If we are wrong, then there will be potential utilization penalty in the fourth quarter. But right now, that’s our base case. Hey. Good morning. A couple of follow-up questions actually on the capacity growth. Wondering if you could kind of talk about stage versus departure, it seems like your stage length has come down quite a bit. I am just curious what’s driving that and if we should see this as a new level or how you can expect that to progress in 2023? Hey Savi, it’s Matt. So, in terms of stage, our stage is coming in slightly from where it had been. And really, without getting into all of the technical reasons behind that, just to know that some of the delays that we have seen, as Ted and Scott has mentioned, with not just deliveries, but some of the on-wing – time on wing engine issues with the neo has caused us to make some very, I would call it, close-in network changes that we weren’t anticipating. And without getting into all of the specifics about it, what’s ended up happening is we have ended up pulling some of the longer haul, which is making the stage look shorter than really we had initially intended it to be. So, we are taking all this into account. We now have a better view on what’s going on with the engine issues and the fleet plan overall, which has been moving a little bit over the last, say, six weeks to eight weeks or so. So, now they have a better handle on that. We will be able to think about the network more fully as we move through this year. All of that wrapped up to say we are aware of the stage number and where it’s at, and we anticipate it will lengthen out from here, but you will see that as we move through the year with the way that we think about the network. That will just get published as the schedules come out. That’s helpful. And if I might ask just on the peak versus off-peak demand trends, like – it seemed like in the fourth quarter, the off-peaks maybe were a bit stronger than you have seen in the past, and is that right? And are you seeing that trend continuing? And just as you kind of look at February, March, how does the off-peak and peak trends compared to what you saw in the fourth quarter? Yes. So, the off-peak in the fourth quarter was probably a little bit stronger than we are seeing here in the first quarter, but I am not talking that up to anything really other than some holiday shift things were dramatic. The Christmas and New Year’s period shifted by an entire week, which is not insignificant, and it just changes the way that everyone kind of thinks about off-peak travel after you come out of a peak. So, I am – definitely, the off-peaks are a little bit weaker right now than they were in the fourth quarter, but it’s not unexpected based on the holiday shifts, is the way I would say it. And the peaks that we are seeing as we move through the first quarter are strong. Every time we flowed out a little bit more inventory, if we see any kind of opportunity to drive some lower-yield demand, we are seeing that inventory gets snapped up right away. So, demand is strong. We anticipate this will not just push through spring break, but really head through the shoulder period in Q2 and really move into the summer well. We are not seeing any indications of any kind of falloff of demand. And this a little bit of off-peak happening right now is really a blip and not anything that I am concerned about. Hi. Good morning everybody and thanks for taking my question. Several of mine have been answered, but I did want to follow-up on the improvements you guys mentioned with extra crew and you mentioned you have got some infrastructure help those whether they are runway stuff is out of the way. And when I think about how well you guys handle the December storm. Could you kind of give us any color regarding what other strategies you may have employed such as maybe investments in flight op software or something along those lines? Sure, Stephen. So, over the course of last year, we did discuss a number of the initiatives that the company had launched since 2021 to improve reliability across the network. And obviously, some of those are notably our crew-related reliability items. We opened three new crew bases last year, which is a pretty significant move for us and has had the expected effect. We are more targeted with the buffers we use around the network, both crew-related buffers as well as aircraft time-related buffers. Matt mentioned that the network is more stable throughout the course of the week and throughout the course of the month. That is a reliability enhancer also. Most of our flying today comes from our lands and a crew base, which is a change in the network. And then we have deployed a number of initiatives around crew services that help our crew scheduling team react to and deal with interruption when it happens and our crews have noticed. They are able to get their issues resolved much faster, and that helps our crew scheduling team repair the network faster. So, those are all kind of like the lessons – we are not done, by the way. There is still quite a bit of work to be done to finalize where we want to land. But I would tell you that it was not a seamless operating fourth quarter. We had the late hurricane activity, the Winter Storm Elliott, it was messy. And we saw that across the industry, but I am proud of the way our network responded and our group responded. And I think that just gets further enhanced from here. Super. Appreciate that. And as my follow-up, just very quickly, when I think about you are soft on international flying, over the last 3 years to 4 years, Mexico’s practically hasn’t slowed down at all, never shutdown with the pandemic. Are you seeing any sort of shifts in terms of maybe one market growth moderating as it hits harder comps and other places starting to open up, or is it still about the same as it’s been in the last several quarters? Thank you. Yes. Stephen, it’s Matt. Our Latin America and Caribbean network continues to build well, continues to see strength. We have had – like any part of the network, there is always a route here or there that needs to be adjusted or re-timed. Generally speaking, I would tell you that some of the issues that we saw in the early part of last year, when it had to do with some of the international VFR routes. They have all recovered well. We had a strong holiday period. And we are anticipating, and expect to see a strong spring, spring break here as well as we head towards the summer. I don’t know specifically that I want to talk about headwinds that we may see on year-over-year comps. Right now, we are really focused on just the absolute and maximizing what we see out there. And when we talk about ancillary products and services, the take rates and the rates that we are seeing are – continue to do well and perform there. So, nothing that I would say is slowing down at this point. Hey. Thanks. Good morning. Your comment about being profitable for the year, can you just talk about the fuel and RASM assumptions you are assuming to get there? Hey Scott, so this is Scott. I will start on the fuel side. So, obviously, we pulled the fuel curve generally about a week or so in advance of the call. And so that – at that point, fuel was sitting in around, it was obviously higher in January, but the first quarter will be around $3.20, and it will decline through the year. Probably for the full year, we will be around $3 based on the fuel curve. So, that’s the basic assumption. I don’t know, Matt, do you want to talk about unit revenue for the year, but not really given the guide full year… Yes. We are not going to talk about the guide, Scott, for full year unit revenue or I am sure leave it at that. Okay. And then just – I think you had a comment that you think CASM will be lower in ‘24 if we take a step back, right, capacity is up 40% versus ‘19, CASM is up 25% or so, like – so what changes in ‘24 to sort of get the model working better again the way you would expect where there should be some sort of unit cost operating leverage? Yes. Scott, this is Scott again. So, I think the biggest lever is utilization. We are going to be increasing that through the year, and we will exit at about normal utilization levels, obviously, depending on where the engine reliability issue sets, but that’s the expectation. And if we do that for the full year, that alone mathematically will give us a push down. And we are obviously managing the P&L. So, we feel pretty optimistic about where sort of 2024 and beyond full run rate CASM ex will sit. And we have no further questions at this time. I will now turn the call back to DeAnne Gabel for closing remarks. No, Abby, I think we are done. But thank you so much everyone for joining us today and we will catch you all next time.

EarningCall_396

Good day, ladies and gentlemen, and thank you for standing-by. Welcome to the FirstService Corporation Fourth Quarter 2022, Earning Conference Call. Today’s call is being recorded. Legal counsel requires us to advise that the discussion scheduled to take place today may contain forward-looking statements that involve known and unknown risks and uncertainties. Actual results may be materially differ from any future results, performance, or achievements contemplated in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the company's annual information form as filed with the Canadian Securities Administrators and in the company's Annual Report on Form 40-F as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is February 07, 2023. Thank you, Howard. Good morning, everyone. Thank you for joining our fourth quarter and year-end conference call. Jeremy Rakusin, is on the line with me this morning. And I’ll open by saying that we are extremely proud with how we closed out the year. Our teams drove very strong top-line organic growth. It was our strongest growth quarter of the year. And importantly, we delivered even stronger growth at the EBITDA line. Our teams have been battling inflationary cost pressures and margin headwinds all year. The margin results for the quarter in large part, are credit to their year-long discipline around cost containment and incremental pricing initiative. We also benefited from operating leverage in our Brands division. Total revenues for the quarter were up 19% over the prior year with organic revenue growth an impressive 15%, boosted by particularly strong growth in our Brands division. EBITDA was up 23%, reflecting a margin of 10.1% versus 9.7% in the prior year. Looking at our divisional results. FirstService Residential revenues were up 9%, 8% organically. The organic growth was again driven by net new contract wins and was broad-based across North America with all of our regions showing solid gains. Just after year end, we are very pleased to announce two acquisitions for FirstService Residential in the New York City market. Tudor Realty Services and Charles H. Greenthal & Co. together add over 350 co-op and condominium properties to our New York City operations. The two marquee portfolios further extend our dominant leadership position in the market. We are excited to welcome the Tudor and Greenthal teams to the FirstService Residential family and look forward to working together to bring additional value to our new communities. Looking forward to 2023, we expect to show growth at FirstService Residential at or above 10%, very similar to what we experienced this year. With the organic growth at mid to high single-digit, this is our contractual recurring revenue model with only modest swings quarter-to-quarter as ancillary revenues fluctuate. Moving on to FirstService Brands. Revenues for the quarter were up 28%, with 75% of the growth coming organically. The impressive organic growth number was supported across the board by strong results at our Restoration Brands, Home Improvement Brands and Century Fire. Let me go through each. Starting with Restoration, which includes our results from Paul Davis and FirstOnSite. Revenues for the quarter were very strong, up about 30% from Q4 of 2021, split two-thirds organic growth and one-third from tuck under acquisitions over the last year. During the quarter, we generated about $85 million from Hurricanes Ian and Fiona, which compares to $40 million of revenue booked in the prior year quarter from storm activity, primarily Hurricane Ida. Organic growth, excluding named weather events was mid-single-digit. During the quarter, we completed two tuck-under acquisitions within restoration. One under FirstOnSite and one is part of Paul Davis Company owned platform. At FirstOnSite, we acquired emergency restoration, a regional provider of water mitigation and property restoration services in New Orleans. This is an important addition to our footprint that enhances our client coverage in a region that regularly gets hit with weather. And we're off to a great start with this new operation in terms of booking work and adding customers. At Paul Davis, we acquired our franchised operation serving the Salt Lake City in Las Vegas metropolitan areas. This business is one of the largest franchises in the Paul Davis network and the largest restoration company in Salt Lake City. We're excited to partner with Brandon Radmall and his team, and believe we have an opportunity to significantly grow these markets. We now own 14 operations within the aggregate network of 330 Paul Davis operations across North America. Looking forward in restoration, we're expecting a solid front half of the year. We're carrying a strong backlog into Q1, both from Hurricane Ian and Winter Storm Elliott, which hit the last week of December. Elliott was highly unusual in its scope, stretching from the Great Lakes area down to the Mexico border. About 60% of the North American population faced some sort of winter weather advisory or temperature warning. Many of our branches in the U.S. and Canada saw a spike in activity, primarily relating to wind damage and water damage from burst pipes. Our pipeline is up about 25% compared to last year, which will provide a boost for us the next couple of quarters. We expect to show year-over-year revenue growth of about 20% over the first six months weighted towards Q1. It's difficult to estimate how quickly we can work through the backlog and where exactly the revenue will fall. Suffice to say, we're off to a strong start in restoration and we will provide more visibility at each quarter end. Moving that to our home improvement brands including California Closets, CertaPro Painters, Floor Coverings International and period of post home inspection. As a group, these brands were up about 10% against a strong Q4 from 2021 that was up 30% over the year prior. December weather impacted our ability to complete as much work as we expected, and our revenues reflected as much. We fell a bit short of our internal estimates. All that work now flows into January, and we will make it up. Looking forward, we expect continued growth in 2023, at this point, we estimate growth at a high single digit level against a very strong 2022. The macro environment is mixed. Home sales are down significantly, while home prices and home equity levels are holding. In general, we're facing modest headwinds in home improvement, but our teams feel strongly, we will battle through and continue to grow. The markets are very large. The work is there and we have the teams and brand strength to secure it. During the quarter, we've further expanded our company owned operations at California Closets with the acquisition of our franchise territory in Portland, Oregon, adding a market with significant future growth potential. We now own 21 of the 80 California Closet locations, which account for about 50% of system-wide sales. Now under Century Fire, which had a very impressive fourth quarter, up almost 30% from the prior year with over 20% organic growth. All aspects of Century Service offering, including sprinkler and alarm installation, service inspection and repair and national accounts showed strong momentum in the quarter. Bid activity and backlogs remain very strong and while we do start bumping up against big comparative quarters, we still expect to generate double digit growth at Century this coming year. Before I pass on to Jeremy, I want to reiterate how pleased we are with our finish to the year and our 2022 full year performance. Again, this year we generated in and around 10% of organic growth, which is a true credit to our teams and their ability to consistently take share. Thank you, Scott. Good morning everyone. And Scott just highlighted, we are pleased with our 2022 financial results, culminating in a particularly strong fourth quarter to cap off the year. I will first summarize our consolidated performance for the quarter and full year, and subsequently provide more segmented detail within our two divisions. During our Q4, we delivered consolidated revenues totaling $1.02 billion and adjusted EBITDA of $102.5 million up to 19% and 23% respectively with our margin increasing by 40 basis points to 10.1%. For the full year, consolidated revenues were $3.75 billion, a 15% increase year-over-year. Adjusted EBITDA came in at $351.7 million, up 7% over the prior year and yielding a 9.4% margin compared to 10.1% in 2021. In terms of our net earnings in the fourth quarter, adjusted EPS came in at $1.22, up a $0.01 versus last year's fourth quarter. For the full year, we reported adjusted EPS of $4.24 down from $4.57 in 2021. Two items negatively impacting our year-over-year earnings per share performance were non-operating one-time gains in the prior year 2021, and higher interest costs in 2022. As discussed on last year's Q4 '21 call, we reported during that quarter a gain on sale of a building and then earlier in 2021, we also realized gain on sale from a non-core business. These two gains resulted in other income of almost $20 million pre-tax with an aggregate $0.33 positive impact to earnings per share in 2021. And in 2022, the higher interest rate environment and our larger average debt levels triggered a $9 million increase in interest costs compared to the prior year, a headwind of $0.15 to our earnings per share. Note that these comments on our adjusted EBITDA and adjusted EPS results respectively reflect adjustments to GAAP operating earnings and GAAP EPS, which are disclosed in this morning's press release, and are consistent with our approach in prior periods. Now I will provide additional commentary on our division results for both the fourth quarter and full year. At FirstService Residential, for the fourth quarter, revenues were $442 million up 9% versus the prior year period. And the division reported EBITDA of $38.1 million up 7% quarter-over-quarter. We saw our margin for the quarter coming at 8.6% slightly lower than the 8.8% margin in Q4 2021. For the full year, revenues increased by 12% over 2021, including 8% organic growth, yielding an 8% increase in annual EBITDA. We are very pleased with this profitability profile, particularly in the face of a significant decline in home resale activity in the latter part of the year, which drives higher margin, transfer and disclosure ancillary revenue. FirstService Residential will tend to generate 9% to 10% annual margins and typically be towards the upper half of this band, with revenue mix and seasonality factors driving where we ultimately land in any given reporting period. We finished the year with a 9.5% EBITDA margin, so right down the middle of our typical range. And our margin outlook for 2023 is expected to be within the same vicinity. Now into FirstService Brands. In the fourth quarter, the division recorded revenues of $578 million, a 28% increase, and EBITDA was up a similar 27% to $67.4 million with our margin at 11.7%, relatively in line with Q4 2021. For the full year, top-line performance was very strong with 19% total revenue growth including 11% organic growth. Our annual EBITDA grew 4% and yielded a 9.9% margin versus the prior year of 11.3%. We spoke in earlier quarters during 2022 about the year-over-year decline in Brand division margins being a function of FirstOnSite restoration, ongoing platform investments combined with mild weather. In the current fourth quarter, with the benefit of Hurricanes Ian and Fiona, FirstOnSite performed at a better margin than prior sequential quarters, contributing to the inline Q4 margin performance for the division. Finally, to close off my commentary on the P&L, we reported lower corporate costs in both the fourth quarter and for the year, compared to prior 2021 period. The biggest driver was lower incentive compensation for our corporate executive management and employee teams, reflecting alignment with more tempered earnings performance for the year. Turning now to a few perspectives on our cash flow and capital deployment. For the fourth quarter, cash flow from operations before working capital was $86 million, up 30% and after working capital delivered $54 million, an increase of almost 70% over the prior year period. We incurred $22 million of capital expenditures during Q4 resulting in a full year CapEx total of $78 million, which came in lower than our most recently indicated target of $85 million. We expect 2023 capital expenditures to be higher at approximately $100 million, which includes a significant FirstService Residential office move that was deferred from 2022. Excluding the spending for that move, our consolidated CapEx would come in at roughly $80 million, which would be in the circle of our typical 2% of revenues and 20% of EBITDA thresholds. The fourth quarter also saw a resumption of strong tuck-under acquisition activity after a couple of quiet quarters. We deployed approximately $45 million of acquisition capital during Q4, and as you heard from Scott, our recent transactions span across various of our brands within both divisions and will drive incremental revenue growth into 2023. We are an organic growth company first and foremost, and we clearly see the opportunities for each of our businesses to extend their track record of winning share and growing at healthy rates for many years. And so, we continue to prioritize our capital deployment towards organic as well as strategic acquisition growth initiatives. At the same time, our ability to consistently deliver earnings and cash flow, which compound over time, provides us with capacity to also incrementally return capital to our shareholders. Yesterday, we continued this trend with the approval of an 11% dividend increase to $0.90 per share annually in U.S. dollars up from the prior $0.81. We have now more than doubled our annual distribution with dividend hikes of 10% plus over the past eight consecutive years. Our 2022 year-end balance sheet remains strong in every respect, we closed out the year with just under $600 million of net debt and our leverage at 1.6 times net debt to adjusted EBITDA. Modestly up from 1.4 times at 2021 year, but still at a very conservative level. Our liquidity sample at $520 million reflecting significant cash on hand and capacity under our revolving bank credit lines. We also have master shelf facilities with our longstanding senior note holders, which we put in place during 2022, providing additional sources of debt financing and where we can potentially term out fixed rate debt tranches as market conditions and our capital requirements dictate. Looking forward and synthesizing some of the segmented indicators you have heard from Scott and me. On a consolidated basis, we expect to deliver top line growth for 2023 in the 10% range with a healthy mid-single digit plus percentage contribution from organic growth. This annual outlook is currently skewed with higher growth in the front part of the year, given the year-over-year weather patterns and backlogs in our restoration operations. Our consolidated EBITDA margin for the full year should be relatively in line to modestly better than 2022. We see Q1 consolidated margins coming in roughly flat to prior year with margin improvement in the brands division on the back of heightened restoration activity offset by the residential division's tough comparison against higher home retail activity in Q1 ‘22. We see potential for modest year-over-year consolidated margin improvement during the middle of the year, assuming continued top-line momentum with our brands. [Operator Instructions] Our first question or comment, comes from the line of Stephen MacLeod from BMO. Steve MacLeod, your line is open. Great. Thank you, good morning guys. Just a couple questions, just on the restoration business and some of the strength you saw in Q4. Thank you for quantifying it at roughly $85 million. I know some of that is expected to flow into Q1 and maybe Q2 as well, but I was just wondering if you could give us a sense of sort of how much business is left in that backlog? It's a number that evolves every day as we add new businesses, the scope of our job’s changes. So, it's not a number. We're not going to be providing the backlog number every quarter. Steve, I'm going to give you some sense for our expectation in the coming quarters in terms of what we can complete and convert to revenue and so we expect to be up in the first six months, about 20%, as I said in my prepared comments. A lot of this work we are now into the reconstruction phase of our Ian work, and there are logistics around that, including permitting, which could lead to delays and supply chain issues, which could lead to delays. So, it's tough to pin Q1 revenues, and the amount of the backlog that will be converted in Q1. Okay, that make sense, thanks for that color. And then, just on the home improvement business, clearly, holding in quite well and expected to hold in quite well, even up against a strong last year period. Given the macro backdrop, I'm just curious are there any -- could you give a little bit of color around like are you seeing more macro sensitivity in different brands versus others as you kind of roll into 2023? They're moving in sync, I would say. We did have a fall off at the end of the year in terms of legion activity, but it's bounced back in the last several weeks. And so, while the activity levels are down from a year ago, they're still at a healthy level. And if the leads hold where they are today, we certainly have the activity to hit our growth goals this year. Our next question, or comment comes from the line Stephen Sheldon from William Blair. Mr. Sheldon your line is now open. Thanks. Nice results here. Appreciate all the commentary on 2023, I think -- resi the growth expectations there, stand out a little bit. I think you're talking about organic growth in 2023, being a little higher than normal. I think you said mid to high single-digit versus 3% to 5% that you have talked about historically. So, can you just give more detail about what's driving that? Is that more about strong contract wins you talked about recently? Or is it still kind of more just a flow through and pricing increases that you’re driving from wage inflation? Just any detail there. And would you expect a normalization back to that 3% to 5% as we look beyond 2023? The increase from 3% to 5% to say 5% to 7% or 5% to 8% is certainly some of that is price, Stephen. We are getting 2% to 3% I think we have said the last few quarters and that's still where we are and that seems to have lifted us to hitting that at least that mid-single-digit more consistently. And we are winning business and holding our retention. And those are the two key variables in this business, keeping your accounts and adding new ones. And so, the teams are very focused on that. And I would say, in the last -- '22 was strong in that regard, which should carry forward into this year. Whether we will see it come back in '24? Too early to say. But, if we can grow organically in this business at 5% long-term, we'll take it. Got it. Great to hear. And just as we think about our models, interest expense took a step up this quarter, I guess probably reflective of the floating rate debt. But just given where things are now. Is that 4Q interest expense came in at $9 million, is that a good run rate to assume as we think about 2023 at this point? Yes. Steven, I think it's a good number. It really depends on how much capital we deploy and where debt levels go. But interest rates kind of running in for us blended at 5.5%, 6%. And I think as you asked, the exit rate from Q4 annualized would be a good figure. Thank you. Our next question or comment comes from the line of Daryl Young from TD Securities. Mr. Young, your line is now open. Hey, good morning, guys. Just a question around the Restoration platform. I think you said, excluding storm activity, you were running at mid-single-digit organic growth in the quarter. It's very healthy, but it is a bit of a deceleration I think from sort of 10% organic growth recently. So, is there anything to make of that? Or I guess also should we look at some of the investments you are making today as potentially allowing you to re-accelerate into high single-digits or low double-digit organically in restoration? Yes, Darryl. We grew 10% for the year organically, if you -- ex-storms. And I think that's a good number for this business. In Q4, I think the mobilization around Ian and Fiona and prioritizing our accounts in an event that was sizable as that was, probably did detract a little bit from our growth within -- across North America out of our branches because of the resources that were deployed to that event, but 10% is I think a better number long term for this business. Okay, great. And then with respect to Century Fire, what percentage of that growth or work would relate to clients that you have as restoration clients as well? I guess I'm just trying to fair it out if there's a lot of cross-sell happening that's helping to supercharge the growth there, because it's been very impressive. No, nothing material. I mean, it's not even a stat we follow. It's a discreet business and while they have collaborated around national accounts, it's not a material cross-sell. Yes. Just to finish, as I said in my prepared comments, they just -- they're driving really in all aspects of the business right now, and we expect to see it continuing to ‘23. [Operator Instructions] Our next question or comment comes from the line of Mr. Frederic Bastien from Raymond James. Mr. Bastien your line is open. Hi, good morning guys. I appreciate it's difficult to call out the restoration volumes you're going to get from the weather events, but when referencing the 20% growth we need -- we don't really have the revenue base from which to extrapolate the actual amount of the revenues you're going to get. So -- and I kind of recall last maybe six months ago talking about restoration being now like 800 million to 900 million buck’s revenue business. Is that kind of the ballpark that we're still at given the recent acquisitions? Okay. And then, so that 20% growth, would apply that to half of that 800 million to 900 million bucks, is that correct? Okay. Just wanted to double check. Cool. Thanks for that. Working capital, obviously with the restoration activities and the growth of that particular business you've been investing in working capital, how should we think about deployment of working capital in 2023? I've made the point before, Frederick that, your restoration has changed the working capital profile and it does, we've got great clients that will pay, but it takes time as these projects work through, and it's on the back of insurance carrier coverage. So, it's hard to dictate the timing of when we're going to start to see positive working capital swings. Although in Q4, I think you could see that it was a lot better than Q3 where we were in the mobilization phase. I think, you got to take a multi-year view on working capital usage across our businesses, and I think, because of the moving parts and the seasonality, and I think 2% of revenues, 20% of EBITDA on a multi-year or protracted period measurement basis is the way to look at it. And looking at pre-cash over conversion before working capital is something that I would kind of emphasize and to take out the volatile swings on working capital. Okay, thanks. Just housekeeping for me, last few ones, what tax rate should we be working with and similarly non-controlling interest as a percentage of after pre-tax profit? Just that percentage number would be useful? Tax rate we see for ‘23, in around 26%, so a little bit higher. We were at 25% in 2022. And non-controlling interest share of earnings 6% to 7% is a good number. Sort of where we came out in the middle of that for ‘22. I'm showing no additional questions in the queue at this time. I'd like to turn to conference back over to Mr. Patterson for any closing remarks. Thank you everyone for joining this morning and we look forward to reporting on our Q1 towards the end of April. Have a great day. Ladies and gentlemen, this concludes the fourth quarter investors conference call. Thank you for your participation and have a great day.

EarningCall_397

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to TFI International's Fourth Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Callers will be limited to one question and a follow-up. Again, that's one question and a follow-up, so that we can get to as many callers as possible. Further instruction for entering the queue will be provided at that time. Please be advised that this conference call will contain statements that are forward-looking in nature and subject to a number of risks and uncertainties that could cause actual results to differ materially. Also, I would like to remind everyone that this conference call is being recorded on Monday, February 06, 2023. I will now turn the call over to Alain Bedard, Chairman, President and Chief Executive Officer of TFI International. Please go ahead, sir. Well, thank you, operator, for the introduction, and thank you, everyone, for joining us this afternoon. Today, after the market close, we released our fourth quarter 2022 results, which capped a successful year for TFI International. Despite obvious macro-related topline headwinds, we generated increased operating income versus the year-ago quarter. We expanded our overall operating margin by more than 200 basis points. And we produced free cash flow of $188 million, which is 56% higher than the year-ago quarter. For the full-year, we produced adjusted diluted earnings per share of just over $8, an increase of 53% over the prior year. We also generated full-year free cash flow of $881 million, up 26%, despite our calculation fully reflecting higher working capital on the order of $147 million associated with higher fuel costs. We view our robust free cash flow as especially important during times of uncertainty, affording us the flexibility to capitalize on market turbulence through strategic investment. Our adjusted net income expanded to $152 million, up from $149 million, while our adjusted diluted EPS climbed the full 10% to $1.72 despite a foreign exchange headwind of $0.09. Perhaps more important, the $188 million in free cash flow that were produced was up [sharply] from $121 million the prior year, further enhancing our flexibility to strategically deploy capital into acquisition and return the excess to shareholders when possible, which is, as I mentioned, are two of the overreaching principle. Let's now review the performance of our four businesses segments, all of which generated strong return on invested capital and three of which were able to grow operating income and expand margins despite economic conditions. Beginning with P&C. This business represents 8% of our segment revenue before fuel surcharge. During the quarter, we saw a continuation of the more sluggish volume from the third quarter. As a result, revenue before fuel surcharge was down 14% year-over-year and volume 6%. Our operating income of $38 million was up slightly over the prior year. Similarly, our return on invested capital was a 32.5%. Next is our LTL, which is 44% of segment revenue before fuel surcharge, $721 million of revenue before fuel surcharge was down 12% and volume down 19%. Operating income was $88 million, down 15%. But with the margin up by only 40 basis points despite the deleveraging caused by lower revenue. Again, deeper on the LTL, Canadian revenue before fuel surcharge was up 15%, and yet we achieved a notable improvement in adjusted operating ratio, which came in at 75.3%. This was 300 basis point improvement over the prior year, reflecting what we believe is the best-in-class performance. In addition, return on invested capital for Canadian LTL was 24%. Turning to the U.S. LTL. Revenue before fuel surcharge was [up] 12% despite meaningful volume headwinds. As we continue to refine this business following the acquisition of TForce Freight, our adjusted operating ratio was 90.4% relative to 89.4% a year earlier, which is an okay result given seasonality, weaker volumes and the overhead costs related to our transition services agreement. However, I'm pleased to report that as of last week, the finance module of the transition agreement is behind us, with the financial system migration completed successfully as of last week. More broadly, the stability in margin in the face of volume pressure across the industry reflects our [pricing] focus and the real progress we are making on the cost side where we see some opportunity ahead. Return on invested capital for U.S. LTL was 23.8%. Let's move on to Truckload, which is 25% of our segment revenue before fuel surcharge, reflecting our sales on the CFI business. I mentioned earlier, our focus quarter revenue before fuel surcharge was $403 million as compared to $506 million a year earlier. Most impressively, despite the sale of our truckload operating income managed to grow 16% to $72 million. We now view our Truckload segment as more resilient during the volatile market conditions following the sale of CFI assets last year, which ended our exposure to the U.S. dry van market. Within Truckload, our specialized operation held revenue before fuel surcharge nearly flat at $325 million, benefiting from our diversity and exposure to high-end battery market and favorable niche, including the industrial end market. More important to us, our adjusted operating ratio managed to improve to an 87.4%, while our specialized truckload return on invested capital came in at 13.4%. Specialized Truckload is an area where the self-help nature of our opportunity is readily apparent. As for our Canadian-based conventional truckload, we are able to catalyze on TFI diversity and the relative strength of the Canadian market which add pockets of strength this quarter with growth of 7% in revenue before fuel surcharge to $79 million. We also remain focused on network density and cost control, where we were able to produce an adjusted operating ratio of 81.1%, although this was helped by a gain on sales of real estate of $15 million. So our return on invested capital was 21.3%. Wrapping up our review of business segment. Logistics represent 23% of segment revenue before fuel surcharge. Revenue before fuel surcharge at $376 million was up 12% year-over-year, which was slightly impacted by foreign exchange as much as our revenue this quarter. However, our operating income climbed 4% to $34 million as we successfully contained operating expenses. That equates to an operating margin of 9.1%, up a healthy 100 basis points, and our return on invested capital was 21.9%. Turning to our balance sheet. TFI International ended the year with a funded debt to adjusted EBITDA ratio of just under one, and our debt is almost entirely at fixed rate as a weighted average cost of less than 3.5. Our strong capital position benefited from the 56% increase in free cash flow that I mentioned at the outset of the call, and permits us to strategically invest in the business while also returning capital to our shareholders whenever possible, as I also mentioned. During the fourth quarter, we strategically allocated capital towards three tuck-ins acquisition and have completed one in January. Further, our pipeline of further tuck-ins is large with the majority of the anticipated closing expected to take place in the first half of the year. We also announced that our Board of Directors approved a US$0.35 quarterly dividend. That's an increase of 30% over the previous quarterly dividend, reflecting the ongoing success of our business and our continued favorable prospect for generating cash. Also, during the quarter, we repurchased approximately 900,000 shares for about $83 million. I'll conclude with our outlook for the new year. We currently expect $7.50 to $7.60 of earnings per share in 2023. We also anticipate free cash flow of more than $800 million, which is based on net CapEx of between $250 million to $275 million. So Alain, I just want to follow-up on the guidance. I think you said $7.50 to $7.60, so a pretty tight range. But maybe if you can just walk us through the different businesses and thoughts on revenue and margins for the businesses within the guidance, that would be great. Yes. Yes, that's a very good question. So what we're seeing so far is that on the LTL side, we see still some pressure Q1, Q2 of 2023, softer volume, both on the U.S. and Canadian side. The Canadian side were mostly affected in our intermodal division because we're competing with one of our fierce competition there, dealing – using CP. Us, we're mostly CN, and this guy is very aggressive. So that's really the big pressure on volume for us on the Canadian LTL side. On the U.S. LTL, we believe that we're going to go through a soft patch Q1, Q2. Now the benefit of that is that gives us a chance to be more focused on our cost, reducing our cost with the renewal of our fleet, reducing the number of miles, et cetera, et cetera. So the LTL, okay, we believe that if you look at the year, we should do probably a little bit less in Q1, Q2, but a little bit better in Q3 and Q4. Also, the TSA that we have with UPS is slowly going away, replacing with our own costs. So that should also be a tailwind for TForce Freight going forward into 2023. So U.S., Canadian LTL, about stable, right? P&C, we're doing a fantastic job over there in Canada, but we need some growth. I mean, we've been down, okay, for the last, I would say, 18 months, okay. Since the B2C, okay, has dropped, okay, with the e-commerce, I mean, we're having a tough time competing with the competition that's owned by the Canadian government there in Canada. So really, our goal there is to keep some organic growth because like you said, we're down about 6% in volume. Now that being said, we're making some major investment in Edmonton during 2023 to be up and running into a new sorting facility. We just finished Winnipeg, so we got a lot of good things on the go there to keep our costs down and do even a better job on the cost control. Truckload side, we believe that this is going to be some major improvement. The fact that now TA, our dedicated business is now much better run that has ever been run. I mean, I was just looking at our month of January, and we're heading in the right direction. So I believe that our truckload. And even if you look at our Q4, you see some improvement, slight improvement year-over-year. And there I continue to think that we're going to do way better than last year. Logistics, I mean, the market fell out for us on the logistics side, but we protect our margins. So our margin is about 9%. So when you do all this sum up, okay, like always, Scott, we're very conservative. We could have said, guys, maybe we'll beat $8, but we're not going to say that. Now, I mean, we have only one-month down, right? So this is why we're coming out with something that, I think, is conservative and reasonable. And if things get better after Q1, for sure, we'll update you guys on the guidance. Okay. And then just on the guidance, can you just clarify, is there anything in there for buybacks or M&A in the guide? And how you're thinking about the M&A environment right now? No. There's nothing there in terms of M&A or buyback. So we believe that we will close about $300 million of M&A deals between now and the end of June, okay? So our guys have been very active, okay, in all sectors, I would say. And I've always said, you're buying bad news, you're selling good news. And right now, for the last, I would say, eight, nine months, about trade recession and all this, it's been bad news. And you've got a lot of guys that are tired, right. So it creates an opportunity for us. Our leverage is less than one, like I said on the tax there. So we are very well positioned. So for us, nice tuck-in, US$300 million to US$400 million. For sure, that's going to get done in 2023. But this is not part of that guidance. Great. Hey, Alain, and David. Can we maybe just follow on that outlook a little bit more? It seemed like at U.S., LTL tonnage decelerated or declined at an accelerating pace. Maybe talk about your thoughts on the volume side and what to expect at LTL and throw in margin thoughts, too. Yes. So you know what, Ken, I mean, when we bought this company, UPS Freight, a third of the volume didn't make any sense for us. It didn't fit at all. So we got rid of a lot of that. But we're not done, right? Now if you look year-over-year, we're down about 19%, 20% in volume now. Some of that is market. If you look at some of my peers, good peers, I mean those guys are down 5%, 6%, 8%, right. Us, we're down 19%. So the reason being is that we had a lot of freight that did not fit the operation. So during the course of 2023, the plan is that we're going to grow up organically slowly, okay, by about 5% versus where we're at today. So let's say, today, we're doing about 23,000, 24,000 shipments a day in first month of the year, January. The plan right now sits at about 25,000 by the end of the year, okay? So I mean it's not a very tall order for our sales department because don't forget, when we bought the company, we were at 32,000 shipments a day, right. So now we're down to 23,000, 22,000, 23,000, 24,000. So it's – we took a hell of a beating, but we had to. We had to get rid of that freight that didn't fit. And we also lost some business because of the softness of the market, right. But we believe that the first six months are going to be maybe soft, but things will start to get better in Q3 than Q4. So it's not a big improvement in terms of volume, but it takes time. It takes time. And we're really busy working on our costs. We we're getting – all of the trucks that we've ordered that were always late, late, late, now, I would say, since the end of November, I mean, we're just getting flooded with all these new trucks that we have to get in the network, sell the old one, improve the MPG, save money on the maintenance and all that. So this is going to come, okay, towards 2023. But in terms of volume, I mean, our sales team have a lot of work to do there. Just to clarify, I don't know, did you throw in a cost estimate for that, for what, I don't know, whatever the last piece of the UPS to put that in perspective. And then my follow-up question was on truckload. It sounded like you might have mentioned freight heading in the right direction. Maybe just expand on that if this is chewing up inventories and we're starting to see a turn? Or maybe is there any sign of a floor? Yes. So to answer your first part of the question, I mean, we had to spend a ton of money for the transition, okay, of the financial system from UPS to us, right? As a matter of fact, I mean, we were paying $600,000 a month, okay, for the financial service of UPS, number one. Number two is we also had to pay for them to provide us the information to be able to transition. A huge expense. So I would say that probably Q3 and into Q4, all these transition costs, you're talking maybe $15 million in there of additional cost to do all this transition. Now we still have to do the transition of the HR, okay, which is April, May. We still have to transition the fleet, okay. Sometimes in the fall of 2023. And then we're just going to be left with the IT late into 2023, early into 2024. So all these costs will – because we have like double cost right now because we have to do it ourselves. They are still doing it for us. And so that's why we feel pretty good that even with the 25,000 shipments a day, I mean, we'll be able to position this company pretty well with cost reduction into the new year, 2023. Now in terms of the truckload, again, my comment is really because now we are exposed in the U.S. in the dedicated truckload, okay. So with all these sales that we've done with CFI and Sexton and all that, the dry van is gone. So now we're focused only on dedicated truckload. And we're doing really, really well. So for sure, revenue has dropped okay. But now we make money on every account. If you remember, when we bought UPS, their Truckload division, we were losing like $4 million or $5 million a quarter with these guys. I'm talking about 18 months ago when we bought the company. And now that's not the case at all. I mean, this company, if you look at what we know, so far, in 2023, it is going to run better than a 90 OR. We're going to be the 90 OR in that U.S. truckload dedicated specialized business that we own now. Good. I just want to turn back to acquisitions. I noted that you have broken investments out of other assets in your balance sheet. And you put a footnote there indicating that you own about 4% of ArcBest. And that seems like more of a strategic rather than passive investment. Just wondering if you could share any color on what your intentions are with regards to that investment? Well, we really like this company. So when we talk about the investment that we've done is we believe that now just to talk about it, so it was the right thing to do for us to really disclose that, okay. Now in terms of what do we want to do, we would like to have some discussions, some very positive discussion down the road, okay, with these guys, this management team because we believe, being a unionized carrier like they are, I mean there are some things that we could work together and improve, okay, over time. I mean, it's just – once in a while, we can invest in a public company, one of our peers. They're not the only one where we're having some discussion, okay, in terms of what we could do to improve our company and their companies. So we're having discussions with other peers in terms of the real estate, what kind of discussion we can have. As we know, we have a very large portfolio of real estate within TForce Freight that a lot of it is unused. So what kind of discussion can we have with these guys? That is really the intention behind all of that. Okay. A lot of follow-ups I could do on that one, but let's put that one on hold for now. And just on – in terms of your outlook now. And you mentioned with your guidance, I got the sense that really my question is what kind of economic scenario are you assuming when you give that guidance? And I get the sense that you're assuming based on what you said in your divisional response, some weakness in the first half and perhaps some strength in the back half. So are you price – is there a recession in those numbers, and that's what we should frame that disclosure around? Or yes, just a little bit of color on the outlook? Yes. Well, Walter, I mean, I'm listening to all the different players in our industry, and I think that everybody has the same kind of feeling, which may be wrong, right? But what we believe is that Q1 and Q2 is going to be soft, and then things will get better. This is based on what we're hearing from the economy, the economy [indiscernible] et cetera, et cetera. But who knows, right? So this is why we're going ahead with a very conservative, okay, kind of forecast, right. Now if I look at my month of January, okay, I feel pretty good versus our forecast. So I mean, one month is not a year, okay. But I think that we're on the right track. We're very well positioned. I think we're going to do better at TForce Freight down the road, not so much in volume, okay, early in the year. But in terms of controlling our costs better, doing a better job, getting rid of a lot of these transition costs and excess staff that we had to have to do the transition. But now once that we do all of these transition in 2023, we should see a major reduction in our costs over there. So we feel that it's reasonable. It's fair. It's a little bit less than what we've accomplished in 2022. We did $8. We think that now CFI has gone, CFI was contributing about, I don't know, like $40 million of net earnings last year, okay, so they're gone. But we have a lot of M&A on the go. All these guys slowly should replace the CFI investment that we have there and probably do better than when we used to own CFI in terms of return on invested capital and profitability. So we're conservative, Walter. We've always been like that. We'd like to under promise and over deliver, right? Thanks. Good evening, Alain. Alain, can I just – I mean, you gave us a little bit of detail on the kind of what you're thinking of ArcBest. But can you confirm that if you had any discussions with them or had any engagement with the Board anything on them? No, no, no engagement whatsoever. I mean, it's just – what we're trying to do is to have some discussion on the business, okay. Like I said, down the road, we would like to talk because we have a lot of expenses that we could reduce if we would work together with them. And also with the other unionized carrier, right, another of our peers. So it's just, guys, can we make things better for both companies, right. That is really the nominal goal for what we're doing. That's the most I could say right now. Got it. Understood. And maybe for my follow-up, you've said a couple of times that you believe your guidance is conservative. And clearly, you guys have a very strong track record of beating by a long way. At the same time, at the top of the Q&A, you kind of laid out a whole list of items to be concerned about or that can be a headwind. I'm just trying to get a sense of, when you kind of put these two things together, kind of do you feel like you’ve said its not comfortable bar here and kind of what are the moving parts like? Or do you feel like the macro really needs to come your way in the back half of the year to kind of drop this guide? Ravi, we're very early in the game. We have only one, one down. So this is why what we look at right now is that competition, volume, I mean it's not as good as it was in 2022. So this is why we're cautious, okay? We believe that things will get better, okay, during the course of the year. But so far, I mean, we see in some market, some of our peers panicking, lowering rate. Like if you look at our P&C, our average revenue per shipment is down because of competition, okay? If you look at our Canadian LTL, we have some pressure from some of our peers. So this is why we're looking at that. I would say things will get better. But right now, I think that we have to be conservative. That's the way we look at it. Yes. Hi. I just wanted to get back to the LTL. A couple of things on volumes but down 19%. How much of that – is there a way to get a sense of how much of that is macro versus the ongoing culling because I thought you were sort of winding down on that? And then secondly, talk a little bit about the price strategy on LTL. Are you seeing the core price? Are you seeing some of those competitive pressures? Because I think yields ex-fuel were perhaps not quite as high as some of your peers. So I'm just sort of curious what's going on with core LTL U.S. pricing? Thanks. Yes. So in terms of pricing, I mean, for sure, some of my peers are ex-fuel plus 5, plus 6. We're plus 4, okay. So we're not doing as well as the other guys. But don't forget, we're new to the game. We have a reputation that is not as good as maybe some of my peers. So our sales team have some difficulties some time to get more money from the customer. The service also is – when we took on the company, I mean, the service was maybe not AAA. So we're still working on improving our service. So in terms of pricing, I don't see too big of an issue. In terms of volume, okay, I said it earlier. When we bought this company, a third of the volume did not fit at all. I mean it was – so we would have to go from, let's say, 32,000 shipments down to 20,000 shipments. I mean, we can't do that. I mean, so we went down big time, like 19%, okay. Some of it is the softness of the market, okay, like everybody else of my peers, except maybe for one that I've seen so far, everybody is down a few points, 6%, 7%, 8%. We're down more than that. Why? Because we got rid of a lot of that freight that did not fit our network at all, right. Now that's why I'm saying, if you look at our forecast part of our discussion in terms of guidance, we believe that we're going to get back on average, okay, in the latter part of the year, towards the 25,000 shipments, maybe 26,000 shipments, whereas right now, we sit at 23,000 shipments, okay. Now for sure, this is February, January, February, it's not the best quarter, but we're still very low, and we're still like 16% less than last year in February so far, right? So we're still lapping freight that we were hauling last year that did not fit that we got rid of was a little bit of the softness in the market like all of our peers. Good afternoon. My first question is on the competition you referenced on your prepared remarks with respect to a Canadian LTL Carrier that supports CP Rail and you guys are more on the CN side. I'm just trying to understand, if they are supporting CP and you guys are into CN, what exactly is causing the competitive pressures from those guys? It's very simple. I mean, this peer, okay, has got a sweet deal with one railroad, which us, we don't have, right? And now this guy is taking advantage of that to be more aggressive in the market. So us, we're protecting our margins. So we have to let go some volume. Plus also, like in the U.S., there's also a little bit of a softness in the market, right? Okay. That makes sense. So just leveraging that kind of deal and protection they have, okay. Now with respect to the trends in the U.S., you spoke about some of the volume trends in LTL and some of the trends in the truckload. If you compare the Canadian and the U.S. marketplace today, clearly, the U.S. consumer spending has taken a hit and the rates are still going up. There the Bank of Canada is talking about slowing down here in Canada. Is there any major difference you are noticing in the freight trends or the volume trends, especially between Canada and the U.S.? Yes. That's – if we look at our Canadian operation, the big difference is probably the Canadian economy could do whatever it wants. We don't control that. But one thing we control is our costs, and we're very efficient, lean and mean and hands on. In the U.S., we're not as sharp. I mean, we're new to the game on the U.S. LTL. We're beefing up the team. We're investing a lot in information, tools and all of that. But this is why we're not as good as some of my peers, okay. So if there's a fluctuation in the market, sometimes in Canada, we're very, very active, okay. In the U.S., we're still too slow, in my mind. So if you look at my Q3 and my Q4, I'm disappointed a little bit in a sense that we were too slow to adjust ourselves, okay, in our U.S. LTL versus the drop in volume to adjust our labor force, et cetera, et cetera. Now the excuse is, well, you know what, Alain, the way we do it is that we do it from top down versus in Canada, our approach has always been from bottom up. So it's the terminal managers that manage the labor force, not the guy at that office. So it's a change in culture that we're doing over there. And that helps you when the market is getting to a soft patch that you can react way faster. So if you look at one of my peers in the U.S. LTL, the volume was down, let's say, 8%, but EPS was up 9%. So that's the kind of company that is really sharp and the guy hand's on and fast. If you look at what we're doing in Canada, so let's say, on the Canadian LTL, our revenue is down, okay, but our OR is also down, right, because we're sharp. We're on the ball, et cetera, et cetera. So this is when we look at what's going on – on the market, the biggest important thing for us is to accelerate the decision-making in the U.S. based on changing conditions, right. Just to go back to TForce Freight, you mentioned all the initiatives that you've laid out in terms of the system migration. But maybe you can talk about the workforce productivity because it sounded like it was being put into place last quarter, maybe it didn't come through this quarter as well as you might have hoped. But when you get out three or four quarters from now, would you think the run rate OR margin is going to be – as you have visibility to a lot of the self-help even if the macro doesn't come through as you might hope? Yes. Well, our goal, Brian, is to get to an 80 OR right. And we said it from day one. We believe that this company could get there. Now listen, 2023, start is difficult. We're investing in equipment and technology and all that. But it's also a big question about the style, the management style. Like I was just explaining, how fast can you start moving and make the decision. So we're making a lot of changes with Paul and the team there to be fast to adjust ourselves because like I said, we could have done, in my mind, a better job of controlling our cost – labor costs. I'm talking about in Q3 and in Q4, okay. Now that being said, we've implemented the new tools, new information so that the guys could start doing a job much faster, but that will take time and that takes education. So can we do better than a 90 OR in, let's say, in Q4 of 2023? I think so. I think that with all the cars that we're going to be shedding, okay, will help us get closer to maybe a 87 in 2023, maybe an 88, all the admin cars that we have to get rid of because we have way too many cost right now because we're going to a transition agreement and all that. So we're paying on one side with the transition agreement, and we're paying on the other side because we had to hire people and train them that for them to be able to do the job once we run away from UPS. So this is all going on into 2023. So that's why we feel good that by the end of this year, the contribution of TForce Freight is going to be better than just a 10-point of OE. Okay. Thank you for all that. And as a follow-up, I know you said you can't give too much information on ArcBest and what we might do it at this point. But maybe you can just maybe put some general thoughts around that? Would that be some sort of joint venture in the U.S.? It's a little hard to figure out what that might be. So any thoughts on your actions or potential there would be helpful? Yes. Well, Brian, I think I've said enough on that. I don't want to say more. It's very early in this kind of process right now, right. So I think that I've said probably even more than I should have said on that. We believe that this is a good company, okay. And if we work together, like we do with a lot of our peers because we make some deals, Brian, with nonunion carriers on the real estate side, okay. We're having some discussion with nonunion carrier with on different aspects of business. Us, what we're trying to do is what we're doing in Canada. So as an example, in Canada, I work with – we work with Mullen, one of my peers. So it's not – oh, no, no, no, you can't work with this guys company. No. So this is something that we're trying to do on the U.S. side with this company and others to the benefit of our employees, customer and shareholder, if we can. I wanted to talk a little bit about what your customers are telling you about inventory levels? And when do you think that they're going to be sort of appropriately rightsized to start seeing some more growth going forward? Still high. It's still high. I mean because of all this mess in the supply chain, so what do you do? I mean, you need two, you order four because you're afraid that you'll get only one. So I mean – and then whoops, stuff starts to come in, everybody is busy, but then everybody has got too much. So that takes time, okay, to go through all this supply that there's too many. Now depending on who you talk to, it's the end of Q1, it could be the end of Q2. But for sure, it's going to happen in 2023. Okay. That's good color. I wanted to talk a little bit about the P&C side. Could you break down what's going on between B2C and B2B? And where you think the trends are going to run as we move throughout 2023? Yes. So during COVID, I mean, our B2C went as high as about 40% of our revenue. And we were growing big time, okay, at the time. I'm going back to 2021. 2021 was a big growth year for us. And then things start to slow down in 2022 early in the year. And now our B2C is really like probably like more 15% to 20%. So that was replaced by B2B, okay, where our profitability has always been a little bit better than B2C because B2C is more difficult to get density, right? Because on average, one stop is one package. So this is what we're going through right now. But we could do, I think, a better job in terms of organic growth. So this is why our focus over the last, I would say, six months, six months of 2022 and into 2023, Bob and the team, their goal is really to start growing organically again. Now we're fighting competition there. And some of my peers are not about making money. So that is a little bit the difficulty that Bob and his team have is that we're competing with some of our peers that they don't really care if they make 5%, 10% or 20% because they're owned by the Canadian government. Yes. Thanks, Alain. I wanted to see if you could clarify a little bit your comment on U.S. LTL operating ratio. I think you said like 87, 88, but I didn't know if that was a view on full-year 2023, what would be thinking about? You also kind of mentioned sub-90 for 4Q. So just wanted to see if you could revisit that and make sure I understand what the comment was? Yes. Very good, Tom. So what I'm saying is that I think that by the end, okay, of 2023 Q4, okay, hopefully, we get to an 87 or an 88 OR TForce Freight. Why is that? Because our volumes should start to pick up again, okay, number one. Number two is we're shedding a lot of cost through the TSA. TSA, day one was costing us on a yearly basis, $72 million, okay. So just the finance portion was about $7 million or $8 million. But over and above that cost is we're stuck with trying to build a team that's going to replace what UPS is doing, right? So it's – all these costs are slowly getting rid of. And now that's why I believe that if everything that we're doing works according to our plan is that we should end up this year on an 87, not for the year, but for the fourth quarter of 87. And so should we think about – like seasonality would suggest, normally, 4Q is not as good as 2Q, 3Q, but it sounds like you have things that might kind of overcome the seasonality. Should we think about kind of sequential improvement 2Q, 3Q, 4Q? Or is that the wrong way to look at it? Well, I think the best way to look at it, Tom, is that right now, we're a 90 OR in Q4, and we should be an 87 OR in 2023. Yes. Okay. That's great. Thank you for that. I guess going back to the topic of acquisitions, you've got a lot of visibility and conviction on small carrier acquisitions, the 300 million tuck-ins you mentioned. And you said you want to kind of buy when things are bad. Are things bad for big targets as well? Like do you think you – are you optimistic about larger acquisition potential? Or is that tougher to say? You know what, Tom, the problem with something big, it takes a long, long time. You do something small, let's say, $100 million, $200 million, $300 million revenue, you could do that fast, let's say, within three months, it's done. When you look at something of size, let's say, over $1 billion in revenue, $2 billion revenue, I mean, this takes a lot of time, a lot of convincing, a lot of discussion. And like I said, the first answer from the target, my experience always, no. No, we don't do that. Why would you do that? I mean, so it takes time. It takes a lot of discussion. So this is why, as I said, on average, we do something upsize every three years, three, four years, right. So last time we did something upsize was year and a half ago with UPS. So maybe we could get something done in late 2023, but I think it's going to be more like in 2024. So are things going to get better in 2024? Probably, right? So you're buying bad news, you're selling good news. So this is not going to apply in 2024, but that takes so long to do something upsize, my experience. If I could just go back to – I mean you talked about maybe your U.S. LTL segment, maybe just reacting slower than what you typically see in Canada. You talked about some of the system transitions. The one that you just completed a week ago, like is that enough for them to tighten up that feedback loop? Or would you need to get to that HR rollover before you start driving better productivity. No. I think that now, okay, with the financial tools that we have in place and the education and the training and the tools and all of that, I mean, we're well positioned now to start doing what we're supposed to do is manage costs at the terminal level, right. So in Canada, every terminal that we manage has a P&L. So we know what's going on. We don't have that at TForce Freight today, right. So the manager is not responsible for all the costs. He doesn't know. He's got no financial information. So now that we are running on TFI financial, now we are in a position to slowly implement that at the terminal level so that our guys could start managing the business the way it should be managed at the terminal, managing the cost and understanding what's going on, and understanding that your labor cost per shipment, your target is, let's say, $40, not $50, but $40, right. Right now, we're starting to implement those kinds of targets, targets in dollar, right. So we manage dollars. We don't manage stop per hours or pounds on the dock or things like that. We educate our guys to manage dollars because that's what we bring to the bank. Right. That makes a ton of sense, and it sounds like maybe harvesting those benefits in the near future here. Maybe just on the longer-term U.S. LTL OR target, let’s say 80% to 85% in the next couple of years here. Does that require you to get back to 30,000 shipments a day? I understand the need to kind of find the freight that fits. But do you need to get back to the absolute volume numbers that you inherited when you acquired this business to hit the margin targets or 25,000 shipments a day, you can hit the margins you need to hit? Yes, yes. No, No, the OR – I mean, we have a lot of fixed costs, okay, Kevin, I agree with you. But we're going to start shedding those fixed costs to bring this company lean and mean. That will take time. I mean, it's not going to happen. Now we could get to an 80%, 85% OR within two years at 25,000 shipments. Why? Because we're working at the same time on fixed costs. So we are leasing doors, leasing yards, selling real estate, selling trucks. I'll give you an example, I mean, the fleet that we have right now. Remember, the first day, they were talking about plans for 2023. They were talking about 4,200 trucks. Now we're running about 3,500, 3,600 trucks, right. So we're doing more with less slowly. And like I was explaining, the day we started moving the management of cost at the terminal level. I mean we will see a major, major improvement in terms of cost because that's the role of this manager. He's got to manage his people, he's going to manage his cost. And he's going to manage his equipment. One of the first thing that we've done in 2022 is all the real estate has been leased right now to the operating company. And in 2023, all the truck and trailers in 2023 are being leased to the operating company now. So the manager now sees a rent cost for his real estate. He see a rent cost – or he will see a rent cost for his fleet equipment. And we know by experience that this is really a major high opener for a manager that's qualified. Now if you have a manager, that's not good, well, he's not going to be able to do the job and we'll just have to replace this guy over time. Hey, how you doing? So I wanted to ask you about the – I wanted to ask you about the $800 million free cash flow target. How do you think about the resiliency of that figure? So it's obviously a pretty material step up from a couple of years ago. I think in a softer environment, it's certainly a good – a very good result, I think we would characterize it as. And especially given some of the investments that you're talking about, whether it's kind of the working capital drag that you saw last year or some of these investments that you're making on the IT side. Do you think we should think about that $800 million free cash flow figure as a floor for cash generation from the business going forward? And kind of where do you get confidence in that number? Yes. I think so, Ari, I think so. Don't forget that in 2023, we're still doing major investment, not normal for TForce Freight, right. Because this fleet was abandoned for years and years and years. And by the end of 2023, the average age of our fleet in the U.S. LTL is going to be normal. So we're going to be running like a 4-year old fleet versus a 7.5-year-old fleet like when we bought the company. So this takes that into account, okay. So by the end of 2023, we should be probably more into a normal kind of environment. So if you remember what I've said in the tax is we're going to do net CapEx of between 250 to 275. So we feel about that this 800 is still very conservative, based on what we know so far. Got it. So in a more normalized environment, Alain, how should we think about what that number could look like? If you get rid of some of these economic headwinds, you get rid of some of this IT spending, you get some rid of kind of the fleet replacement or excess costs associated with kind of bringing down the fleet age, how should we think about kind of what that number looks like on a more normalized basis? Between $800 million and $1 billion should be the normal. Now you got to be careful about inflation on the cost of CapEx. So if inflation kills me by about 10%, so on $300 million, that's $30 million. But this is – I would say that between $800 million to $1 billion is the normal range of free cash flow for TFI going forward. Got it. That's super helpful. And then I wanted to ask, obviously, especially in Canada, it was a little bit of a challenging winter in terms of December in Q4. You mentioned some encouraging trends that you're seeing in January. I was hoping you could both address kind of to what extent weather impacted fourth quarter results? And then also, what is it that you're seeing in January that you said you're kind of encouraged by? Yes. Yes. Well, we had some issues also with the weather in January. I mean we had a major storm in Toronto, a major storm in the U.S., too. But this is winter. I mean it happens every year. Now one of the good thing, though, is that it's been a warm winter so far, right? If you look at January and December, to a certain degree, December wasn't so bad. But even January was very warm, warmer than normal, right. So that helps us a little bit. Now I feel good when I look at our actual results for the month of January is that a lot of what we anticipated as being dark and very soft is not happening. So I would say that we're probably a little bit ahead of the plan so far. So far, so good. So it's normal. We should be ahead of the plan because every year, we have to beat the plan, right? So I just have really one question. I was hoping maybe you could talk a little bit more about, I guess, the outlook for the Logistics segment. Just what you're seeing there and maybe specifically on the last-mile operations, how are things going there? Last mile, Cameron, in Canada are doing really, really well. I mean our operation is second to none. We are – we went through a soft patch in 2022 because we've lost the largest E-tailer in North America, our friend at Amazon, I would say that. But so we had to recoup all that volume with other customers. So we are starting to see some organic growth in 2023 in our Canadian operation. On our U.S. operation, our revenue is about flat, okay. So we've done a little bit of an M&A on the medical side in the U.S. in Q1 in January as a matter of fact. So that's going to – with this M&A, we are now organically, including this M&A, ahead of last year. And we're going in the U.S. to a transition again, okay. That's been going on for years and years where we're replacing average account by better account, right. So we've not been growing the topline that much, but we've been growing the bottom line every year-over-year. So that will continue. So we feel pretty good. Now the big hit that we had in our logistics in Q4 is really coming from TFWW, which is our logistics arm in the U.S. And that was because the LTL really dropped like a rock in, I would say, November and December with these guys. And if you look at one of my peers that came out with their numbers, I mean, it was like a very difficult quarters for them, right? So if you look at another of my peers that came out, I mean, last week, their logistics also is a 2% bottom line operation. So I mean, as we're coming out with a nine, so there's not that many guys that can run a logistics operation with a 9 or a 91 OR. No, no. So Q1, I think that it's going to be an uphill battle on the revenue side, okay. But we're holding firm on our profitability. And I think that, overall, if you look at 2023, I think 2023 will do better in 2023 than we did in 2022 overall in terms of dollars of OE for the logistics. Yes. Just in terms of M&A or strategic investment, we know about the – we are aware about the opportunity to really increase density as part of your U.S. LTL business. But would you be willing to increase significantly the size of your logistics business, Alain? Well, it depends, right. It depends. So we bought TFWW about two years ago because we saw that there was a lot of positive with this company because they have a lot of market intelligence on the market. So that was a nice acquisition for us. It really was a good fit. So I'm not saying no to something of size, but we're always very careful about what we do in the logistics sector because we don't want to be stuck with some of the guys like on the tech sector where you buy something, doesn't make any money and you pay a fortune for it. Okay. And in the LTL business, there's always a question mark around the unionized workforce with the pension stuff. Have you seen a big change on the structural side from a pension deficit standpoint where maybe some interesting takeover targets are maybe more attractive? Have you seen a big change with respect to the way a pension deficit is structured? Well, a few years ago, the federal government in the U.S. came in and supported the union carriers that had a specific – two of my peers that are unionized are a part of that. We are not part of that. I mean us, what we got from UPS in terms of pension is really we have a stand-alone pension plan for our employees. So we're not part of that group of company that has some issues with the deficit on the pension plan. Now I mean, every situation has got to be looked at. Us, we like to do a deal friendly. We don't – we're not a big fan of doing a enough style kind of transaction. So every time we do a deal is always – I've never done a deal style anyway because I mean – so these kinds of discussions, like I was saying, with a target of size, this really takes a lot of time, a lot of discussion, a lot of convincing because a lot of people like to buy, not that many people like to sell. Because when you sell, you lose revenue, you lose some profit, and then you have to find something else to do. So us like, for example, we sold CFI to Heartland. Great transaction for the buyer. But now us, okay, fine, we got cash in the bank, but we got to find something. What are we going to do with this capital down? Well, the idea is to do better than the CFI asset when we used to own it, but we have to find it. So we're doing a lot of these small tuck-ins right now. But the big whale, okay, is – it's in sight, we're trying, but we didn't catch it yet. Thank you. Thanks for taking my question, Alain. I’m going to turn to P&C for a minute. You've talked about having to face a not-for-profit competitor there and the challenges that, that brings. And yet that business, I mean, you've done great things with that business. I mean, really growth maybe has been challenging, but the returns have actually been very good. What does stepping up or putting your foot on the gas for growth, what does that look like then given this environment? And I guess, given that competitor, sort of how should that look? And what's the execution required there? Yes. Well, that's a very good question. When I'm talking to Bob and the team there, I mean, our focus is we're having our team focus on try to get more business from existing customers because some customers they split the business between, let's say, us and one of my peers, right? So it could be 50-50. It could be – let's say, us, we have 70, and some of our peers have 30. But sometimes, we have 20% and my peers have 80%. So can you guys sit down with this customer and try to get the 20 up to 50, right? So that's what we're trying to do, not necessarily try to get new customers in the door. Yes, if we could find a good one, so be it. But what the focus has always been, guys, in order to create more density, you need more freight per stop, right? That's always been TFI's goal. Get more freight per stop, and don't travel miles just for the pleasure of running a truck. So this is the – the mission that we have with our team there in Canada is that, guys, we're running a fantastic operation. I mean 20, 20, 20 OE, 20% OE, who's doing that? I mean Wow, this is great. Well, we just have to do more, right. So let's grow with our existing customers. The ones that are giving us only 20% of the business, can we get 40%? Can we get 50%? That's going to be really the goal for us. Now for sure, we have some capacity issue. Like, for example, we're building a new hub in Edmonton. I mean this is going to start this summer. So Edmonton, for us, even if we want to grow Edmonton, it's going to be difficult, but we opened up Calgary, new hub in Calgary two years ago. We just opened up Winnipeg last fall. So that helps us creating or getting rid of a bottleneck, okay, or old terminals with old technology, okay, where you bring more volume in, but you don't have good costs, but now with new terminal, new technology, new conveyors, you can bring more volume in. So this is what the goal is, to keep polishing that diamond and try to get the diamond a little bit bigger. Okay. That's helpful. My follow-up question, looking at the intermodal business, and you touched on some of the challenges there related to a peer. If I think longer term on intermodal, is the potential for a migration of some of the over-the-road volume back towards intermodal, is that a challenge for TFI as you look at over the next couple of years? Or could that be an opportunity for you? It's really a challenge because what we put on the rail is it's always a relationship between cost and service. So I mean, you can't really – when you have a customer that wants really a AAA kind of service, you can't take the risk of the rail because rail service is – it seems okay, but even more so in the winter, there's always avalanche or things like that, or it's so cold that they have to reduce the speed. They have to reduce the length of the convoy, et cetera, et cetera. So what we're doing us is really to try to keep what's over the road, okay, highly profitable because we make way more money with our freight over the road than versus the rail stuff, the intermodal stuff. And then when a customer wants to have a better deal, wants to save money, okay, not so picky about service then, okay, we'll fight and we'll bring this guy to our rail operation, our intermodal operation. That is really the play, okay, that we have on the Canadian side. So it's really a two split kind of an operation. So you got TST Overland that runs road. You got TForce Freight Canada that runs road, but then you got Vitran and Clarke that runs rail. Well, thank you very much, operator, and I very much appreciate everyone joining the call today. I hope you have a wonderful evening, and please don't hesitate to reach out if you have additional questions, and we appreciate your interest in TFI International. So thank you again, and have a great evening. Bye.

EarningCall_398

Welcome to the Fiserv Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer session begins following the presentation. As a reminder, today's call is being recorded. Thank you and good morning. With me today on the call are Frank Bisignano, our Chairman, President and Chief Executive Officer; and Bob Hau, our Chief Financial Officer. Our earnings release and supplemental materials for the quarter and full year are available on the Investor Relations section of fiserv.com. Please refer to these materials for an explanation of the non-GAAP financial measures discussed on this call, along with a reconciliation of those measures to the nearest applicable GAAP measures. Unless otherwise stated, performance references are year-over-year comparisons. Our remarks today will include forward-looking statements about, among other matters, expected operating and financial results and strategic initiatives. Forward-looking statements may differ materially from actual results and are subject to a number of risks and uncertainties. You should refer to our earnings release for a discussion of these risk factors. Thank you, Julie. And thank you all for joining us today to discuss the strong ending to a pivotal year at Fiserv. 2022 marked a year of great progress for us with better-than-expected growth against the challenging backdrop. The integration of First Data and Fiserv wrapped up in the first half and we are entering 2023 with a focus on growth and operational excellence to drive quality and productivity to the next level. We laid out a plan for our merchant segment that includes extending Clover's leadership and are on pace to achieve our 2025 objectives. We won awards for our new enterprise omnichannel solution, Carat, and continue to roll out this unified commerce platform with a leading number of value-added services. In payments, we completed the three major credit issuer implementations and followed them up with two major new wins in the fourth quarter. And we advanced our core banking cloud roadmap for new and existing clients with the acquisition and integration of Finxact. Through all of that, we navigated the return to office and are seeing a boost in productivity as our employees come back together many in new state-of-the-art facilities. We head into 2023 as a unified company that's better than the sum of its parts. One with faster growth and deeper investment that still holds a tradition of strong operating leverage, high recurring revenue, and value-accretive capital allocation. Our progress over the last two years is undeniable after consecutive years of 11% organic revenue growth, 370 basis points of total adjusted operating margin improvement, and over $5 billion in share repurchases. We delivered on our guidance with a steep ramp in the fourth quarter with 12% organic revenue growth, 360 basis points of adjusted operating margin improvement and adjusted earnings per share of $1.91. This led to 2022 results within the guidance range, which we raised twice last year despite unexpected FX headwinds. For the year, organic revenue growth was 11%. Adjusted operating margin expanded 120 basis points to 35.1%, and adjusted EPS was $6.49, up 16%. Free cash flow conversion was 84% as we continued to invest for growth. Each of our operating segments recorded strong performance, led by merchant acceptance, with organic revenue growth of 16% and 17% in the quarter and year, respectively. Our Clover and Carat operating systems are driving segment growth well above pre-pandemic levels. Our newer products, such as Data-as-a-Service, Pay by Bank, disbursements and EBT online widen the value proposition to clients and bolster our strong positioning in card and non-card payments. Expanded ISV and direct sales channels extend outreach to merchants and help us capture more of the value in each transaction. Payments and network revenue had a superb year of growth, up 10% organically in the fourth quarter and 9% for the year, above our medium-term guidance range. Performance was led by implementations of three top 25 credit issuing customers and continued growth with existing customers. We followed this up with two major new credit wins in the fourth quarter, with Target, one of the largest retailers in the world and with Desjardins, the largest credit union consortium in Canada and the fourth largest card issuer. We are very excited to bring one of the world's largest retailers onto our platform, and we're pleased to expand our geographic reach in Canada with Desjardins. It is another example of a major in-house card issuer, partnering with us to achieve industry-leading capability and it's our first connection with a major Canadian issuer, giving us important scale in the key market. We've already begun working with both clients and anticipate revenue starting in 2024. In fintech, we delivered 8% organic revenue growth in the quarter, rebounding from third quarter, as expected. For the full year, we generated 5% organic growth at the midpoint of our medium-term guidance. Core wins were robust over the last several quarters and continue to go live, adding to an already strong recurring revenue base in this segment. Interest in Finxact is exceeding our expectations and we're excited to extend our leadership in cloud core banking by going live with digital bank Cello. We continue to believe we have the most clients in production in the cloud. We are carrying this positive momentum forward into 2023. This year, we expect organic revenue growth of 7% to 9%, adjusted operating margin expansion above 125 basis points and adjusted earnings per share of $7.25 to $7.40, which assumes a mild recession in the US. Our guidance reflects internal confidence in the face of external uncertainty. This confidence is built on the strength of our unparalleled client base, our industry leading distribution, a broad and growing product portfolio and our best-in-class management team. We have the revenue base, the profit-driven cash flow and sturdy balance sheet that should sustain us through a tougher economy. It's times like these that make it good to be an industry leader that continues to invest in new and innovative products. Nowhere was this strong positioning more evident then in the many noteworthy contract extension and product additions signed with existing clients in the fourth quarter. These wins are a reflection of four factors; first, our list of clients is vast, high quality and full of opportunity and our relationships with them are deep; second, we have the broadest portfolio of solutions supporting both growth and operating efficiency for our clients; third, our client-first relationship model is off to a strong start; and fourth, our vision for the cross-sell opportunity between Fiserv and First Data offerings has become reality. The promise of the merger is being realized. Synergies are apparent, for example, between acquiring an core banking and embedded finance and card issuing services across multiple verticals. In merchant acceptance, for example, we expanded our global relationship with ExxonMobil. This energy giant will move to the Carat platform to support its retail utilizations in the US and Canada with gateway acquiring and fraud security services. We also renewed Carat's contract, were one of the largest beauty retailers in the US and added network tokens to their e-commerce system to help increase authorizations, reduce cost and limit fraud. And a major restaurant operator will extend our merchant acquiring and prepaid business to more of its brands in the Payments and Network segment in addition to the significant Target and Desjardin wins, we expanded our existing relationship with the State of California. After a successful rollout of the middle-class tax refund program in the fourth quarter, we were awarded another prepaid mandate supporting California's unemployment and related insurance programs. This, along with disbursement support for the Comptroller's Office announced in October represents longer term recurring work for the state and marks our leadership in payments for the government vertical. We also signed a large e-commerce payments company for debit network services. This client will enable our Star and Excel networks for its millions of merchants as an alternative to the larger debit networks. And in Fintech, as a proof point of our deep relationships, ability to cross-sell products and seize synergy from our merger, we continue to add solutions for Webster Bank since its merger with Sterling National Bank earlier this year. In addition to the account processing win we announced in the third quarter, we've now added the Optus platform and ATM services to the growing list of solutions we provide. Similarly, Bethpage Federal Credit Union has also added several of our payments products to its existing core banking platform. In keeping with the emerging trend of core modernization, Innovation Credit Union of Canada will be the latest client to move from a licensed solution of DNA to a hosted version in the Microsoft Azure cloud. This is one of a couple of dozen DNA customers migrating to the cloud for more flexibility and resilience in their infrastructure. It highlights the modern architecture of DNA, Fiserv's experience in the cloud, and further migration from license to ASP revenue. Outside the US, we made important progress in EMEA, adding Absa Bank in Mauritius as a client of our Internet gateway. This will allow Absa clients to tap into the fast-growing e-commerce segment in Africa and grow with key corporate clients that are active in this well-known tourist destination. It also opens the door for us to enter eight other countries in Sub-Sahara Africa, where Absa operates today. In Latin America, we extended a large bank acquiring relationship to include several more countries. And in APAC, we in India's Tata Motors for loan processing and attained a major payment institution license in Singapore. This will allow us to expand beyond merchant acquiring into domestic and cross-border money transfer services, a market that has $180 billion of payment flow. A key to our new and follow-on wins is the significant investment we have made to bring new product to market, increase our value to existing customers, open the door to new customers, and grow our TAM. Let me recap just a few of our innovation and advancements this year, starting with merchants. In the SMB space, we serve small businesses wherever they want to conduct business. Through cloud-based operating systems like Clover, through our channel partners, including ISVs, banks and ISOs and on platforms that act as payment facilitators or PayFac. At Clover, we integrated the BentoBox acquisition into the Clover platform to add more e-commerce and digital capability to our offerings in the restaurant vertical. Catering services and hotel restaurants are emerging sub-verticals for us now, and we know that when Bento and Clover are sold together, we see an over three times increase in average revenue per user. We also rolled out lower course hardware and partnered with major providers of retail technology to offer web and point-of-sale inventory solutions to this large SMB vertical. We've begun migrating merchants from our existing Internet gateway to a new Clover gateway, where they can more easily access our full suite of value-added services. This positions Clover to compete more for card-not-present business this year from a position of strength. Value-added services penetration, an important driver of Clover growth and ARPU, reached 16% in the quarter from 13% a year earlier. One example is Clover Capital, a product we continue to invest in, is growing rapidly and favorably impacting customer attrition in the SMB segment. In the ISV channel, we've added 174 ISV partners this year and continue to benefit from the high growth and lower customer acquisition costs of this go-to-market approach. Since our acquisition of NetPay, we continue to build PayFac, marketplace and software platform solutions, including real-time boarding, underwriting and split pay services. In the quarter, Fiserv continued to expand and deepen our platform integrations with partners that include PayPal, offering our customers more flexibility in their service offerings. We look forward to exploring other integrations with current and future partners while expanding our capabilities across this market. Carat, our leading enterprise omnichannel solution, continues to expand its capabilities, including payout choice and flexibility. With the introduction of several products this year, including digital checks, prepaid cards and crypto wallets, followed by our multi-purse wallet, a white-label solution that holds multiple sources of value, including loyalty and prepaid. We continue to onboard large merchants for Pay by Bank, which lowers the cost of acceptance for merchants and is an easy way for consumers to earn rewards. And we have seen a strong early uptake in our new Data-as-a-Service offering, partnering with Snowflake. It enables our merchant customers to access their payments data in near real time to better informed business decisions. We also have a growing number of financial institutions lined up to pilot our Open Data solution offered in partnership with Snowflake. Open Data enables near real-time access to data across customers, accounts and activities, bringing relevant insights to support strategic decisions. In Payments and Network, our strong growth in issuer solutions can be traced directly to the investments we've made in our operating platform, Optis. This includes a robust set of APIs, AI-based fraud management, cardholder experience technology via the Ondot acquisition, integrated output solutions plus ongoing cloud enablement of key features. We have multiple payment innovations underway to take advantage of emerging trends such as real-time payments. The clearinghouse RTP network, Zelle and Fednav, all work differently than legacy networks, creating demand for an end-to-end solutions provider. We are leveraging the Fiserv NOW network to be just that this year. In fintech, we've been taking an open-source approach to serving our clients. We've pre-integrated third-party digital solutions into many of our cores and made these solutions discoverable to clients via our app marketplace. We've also made our platform attractive to the developer community by exposing our micro-service APIs through our developer studio. Building on its Webby Award last year, this product won a DEVIE award from DeveloperWeek in January for best innovation and financial services. With these advancements, we are driving Fiserv to become the destination of choice for embedded finance, integrating card issuing and processing, merchant and core banking capabilities for a variety of nontraditional providers, including retailers, QSRs, payback and government entities. Another highlight of 2022 was the Finxact acquisition, our new cloud-native banking solution, which we've been integrating with our existing digital surrounds selling to our existing clients as an innovation platform or a side car core and winning new logo sales. Our pipeline is particularly active with pioneering digital banks and big issuers entering the banking market via embedded finance. Finxact offers them faster time to market, greater flexibility and scalability and the largest product portfolio available, making it an ideal way to conceptualize, create and launch new banking products. With all of this new product development and the client wins that validate, I hope you'll see why we remain enthusiastic for 2023. Thank you, Frank and good morning everyone. If you're following along on our slides, I'll cover additional detail on total company and segment performance, starting with our financial metrics and trends on slide four. Fourth quarter and full year results reflected our focus on delivering on our commitments with momentum in all three business segments. Total company organic revenue growth was 12% in the quarter with ongoing strength in merchant acceptance, further growth in our Payments and Network segment and a rebound in the Fintech segment as previewed on our last earnings call. For the full year, total company organic revenue grew 11%, in line with the higher guidance we provided 90 days ago. This performance was led by the Merchant Acceptance segment, which grew 17%. Fourth quarter total company adjusted revenue grew 8% to $4.4 billion and adjusted operating income grew 20% to $1.7 billion, resulting in adjusted operating margin of 39.2%, an increase of 360 basis points versus the prior year and a sequential improvement of 400 basis points. As we anticipated, four factors drove this margin improvement; first, the final ramp-down of integration expenses and resulting productivity benefits; second, operating leverage on increased revenue and improved inflation comparisons; third, actions taken late in the third quarter and fourth quarter to tighten spending in light of the uncertain macroeconomic conditions across the globe; and finally, the divesture of our Korea business and two small low-margin nonstrategic units. As expected, the fourth quarter performance brought the full year adjusted operating margin to 35.1%, an increase of 120 basis points over 2021. Fourth quarter adjusted earnings per share increased 22% to $1.91 compared to $1.57 in the prior year. Full year adjusted earnings per share increased 16% and to $6.49. Volume, productivity, and operating performance more than offset the foreign exchange headwind of $0.25 for the full year. This was much higher than the $0.11 assumed in our guidance at the start of the year. Free cash flow came in at $1.4 billion for the quarter and $3.5 billion for the full year. Free cash flow conversion was a strong 115% of adjusted net income for this quarter. For the full year, free cash flow conversion was 84%, roughly in line with our expectations for approximately 85%, with a slight increase in accounts receivable on some slower collections. Now, looking to our segment results, starting on slide six. Organic revenue growth in the Merchant Acceptance segment was a healthy 16% in the quarter and 17% for the full year, well ahead of our medium term segment guidance of 9% to 12%. Adjusted revenue growth was 9% in the quarter and 13% for the full year. This is well ahead of the 11.5% annual growth rate needed to achieve our Merchant Acceptance segment revenue outlook of $10 billion by 2025, as laid out in our March 2022 Investor call. As we've said, we grow and create value in three ways; first, attracting more merchants to our operating systems, our Clover active merchant count grew 9% in 2022. Second, expanding our merchant relationships, the adoption of more value-added software and services, Clover VaaS penetration reached 16% in the quarter, up 13% from last year; and third, by growing with our existing customer base, our average revenue per Clover merchant expanded 12% in 2022. In the quarter, merchant volume and transactions grew 6% and 3%, respectively. For the year, they grew 10% and 6%, excluding the loss of our processing client in mid-2021. Volume in local currency was up 8% for the quarter and 12% for the year, excluding the client loss. This is in line with our typical spread relative to the card networks. Factors that drove faster revenue growth include value-added services, new payment flows and value-based pricing. Turning to our merchant operating systems, Clover and Carat. We continue to post robust growth, and we’re on track for $3.5 billion in Clover revenue by 2025, as presented at our Merchant Investor Call this past March. Clover revenue grew 23% in the fourth quarter on payment volume growth of 16%. For the full year, Clover revenue was up 25%. We posted above-average growth in Clover Capital, Clover Software and Marketplace SaaS. Clover Connect for ISVs continues to post very strong revenue growth and added 48 ISV partners in the quarter, totaling 174 for the full year. Carat, our enterprise omnichannel solution also had a strong quarter, with revenue growing at 15%. For the year, Carat revenue grew 18% on important new client wins and enhancements for existing clients. This includes our new client experience portals, which improve service and access to data, while positioning us to sell more products, from Data-as-a-Service to fraud services, to emerging flows. In 2023, we will complete the build-out of our single orchestration layer known as Commerce Hub, which will allow our clients to more seamlessly integrate with the breadth and depth of our products and services and enhance our e-commerce capabilities. Adjusted operating income in the Merchant Acceptance segment increased 22% to $648 million in the quarter, with margin up 350 basis points to 34.8%. Full year adjusted operating income improved 16% to $2.3 billion and margin grew 100 basis points to 31.8%. The improvement in both periods was led by operating leverage and productivity. We completed the acquisition of Merchant One in late December, folding in this long-term Fiserv customer. This should enhance our direct merchant acquisition capabilities, extend the reach of our Clover product line and create cost synergies. We also acquired Yacare late in the quarter, expanding our capabilities in Argentina by enabling us to bring our QR code payment acceptance to our merchants there. We stand to rapidly become a significant QR code provider, as we get this technology into customers' hands. Looking into 2023. In January, overall volume growth was stronger than volume growth in December. This is partly attributable to an easier year-over-year comparison, but also indicates the ongoing strength of the consumer and the Fiserv brand. Turning to slide seven. On the Payments and Network segment. Organic revenue grew 10% in the quarter. This growth was enabled by a variety of drivers across our business lines. Our North American credit active accounts on file grew 17%, driven by both new business onboarding and a favorable credit environment. The California Middle-class Tax refund program was also an important contributor to revenue during the quarter. While the revenue is mostly one-time in nature, we've signed two additional contracts with the state that will bring in recurring revenue in 2023 and beyond. Full year organic revenue growth of 9% was above the upper end of our medium-term outlook range of 5% to 8%. Fourth quarter adjusted operating income for the segment was up 14% to $811 million, and margin was up 230 basis points to 48.5%, driven by strong operating leverage. For the full year, adjusted operating income was up 10% to $2.8 billion and margin expanded 120 basis points to 45.3%. Moving to slide 8. In the Financial Technology segment, we posted 8% organic revenue growth for the quarter and 5% for the full year right in the middle of our 46% medium-term guidance range. The rebound in nonrecurring revenue portions of this business: license, professional services and termination fees, was a meaningful contributor to growth in the fourth quarter as we expected after those revenue slowed in the third quarter. Meanwhile, customer momentum continues, and we had 14 core wins in the quarter, including eight competitive takeaways. Over the last three years, we have 155 core wins and a healthy backlog of implementations that offer solid visibility to revenue for 2023. Adjusted operating income was up 18% in the quarter to $340 million, and up 7% to $1.2 billion for the full year. Adjusted operating margin in the segment increased 400 basis points to 41.3% in the quarter, helped by higher periodic revenue and productivity. Full year margin increased 70 basis points to 36.5%. The corporate adjusted operating loss was $88 million in the quarter, slightly improved from the first half run rate and $444 million for the full year. The adjusted effective tax rate in the quarter was 19.3% and was 19.6% for the full year, in line with our expectations. We expect 2023's adjusted effective tax rate will be approximately 20% for the full year. Total debt outstanding was $21.4 billion on December 31st. The debt to adjusted EBITDA ratio dropped another one-tenth of a turn to 2.8 times, within our target leverage of being below three times in the second half of the year. We have approximately 19% of our debt in variable rate instruments. During the quarter, we repurchased $750 million of our stock, bringing our total 2022 share repurchase to $2.5 billion and $5 billion over the last 24 months. We had 17 million shares remaining authorized for repurchase at the end of the quarter. Our long-standing capital allocation strategy will continue into 2023, defined by a strong balance sheet, share repurchases in complementary and innovative acquisitions. As we look through the mixed indicators on the 2023 economy, we are taking a measured approach to our outlook and assume a mild consumer spending recession, lower inflation and higher interest rates. As Frank said earlier, we expect organic revenue growth of 7% to 9%, in line with our medium-term guidance with adjusted operating margin expansion of at least 125 basis points. This translates into adjusted earnings per share of $7.25 to $7.40 and or 12% to 14% growth over 2022 and would represent our 38th consecutive year of double-digit adjusted EPS growth. This strong operating performance in a weaker economic environment reflects our continued investment in growth opportunities at a time when others may be cutting back. We are redirecting our free cash flow guidance toward dollars instead of conversion, since this aligns more directly with how we run our business. We estimate approximately $3.8 billion of free cash flow for 2023. In the past two years, we increased our level of investment in growth initiatives, and it led to back-to-back years of accelerated 11% organic revenue growth. We see tremendous opportunity to do the same this year to invest in our growth platforms and continue to grow faster than our markets. We retain our focus on long-term free cash flow as a driver of long-term value for our shareholders. Thanks, Bob. In the quarter, Fiserv provided back to business grants to 13 veteran and military spouse business owners through our partnerships in Atlanta. We also launched back to business in New Jersey, committing $1 million to small local minority-owned businesses. For the year, we awarded 241 such grants in total. The CDP published our GHG emissions results for 2021. They improved from the prior year, in part because of the COVID shutdowns. We are encouraged by the future direction of our program since receiving LEED Gold status for our 1 Broadway space, awaiting LEED Platinum status for our new technology innovation center in Berkeley Heights, and pursuing LEAD Gold for offices in Milwaukee and Dublin, Ireland. Overall, I am excited about what the next five years can bring for Fiserv. We are off to a great start in 2023. Having just been recognized as the world's most admired company by Fortune Magazine for the 12th time in 15 years. I'm especially proud about two most admired attributes, innovation and financial soundness, two particularly important qualities in the current environment. We delivered beyond expectations in the past year, and that was not by chance. It was the result of specific actions and thoughtful investment. The groundwork is laid for more strong performance to come; leading products, bigger TAM, expanding geographies better service and streamlined modern technology are in our grasp. The years I've spent at highly successful businesses have taught me that our reach must exceed our grasp. There is always room for improvement. So my leadership in him and I are focused on driving greater productivity and better processes this year in the quest for operational excellence. I'm confident in our more than 40,000 Fiserv associates around the world, you come prepared to meet our high bar every day, and I thank you for all you do. Thank you. We would now like to open the phone lines for question. [Operator Instructions] Our first question comes from Tien-Tsin Huang from JPMorgan. Please go ahead. Hi, thanks. Good morning. Solid results here. One question. I'll ask Frank, if you don't mind. You spent some time talking about how Fiserv is better than the sum of the parts with the cross-selling and the synergies, et cetera. Has your thinking on synergy contribution to growth changed at all in the last year or two? Any way to size that in terms of contribution to growth maybe for fiscal 2023 or the mid-term outlook in general? Thanks. Well, I think if you look at this year's growth rate, obviously, at 11%, we can fill the power of the franchise coming together, right? And, obviously, I like to step back on that question a little bit, too. Remember, we announced merger, maybe top 10 mergers in a year in 2019, and then we had a pandemic. And that definitely did not accelerate our ability to see clients sell, get in front on offerings. We managed through it. We saw the tools available. But I think today, when you look through the company, the opportunities are larger than we thought. Remember, we said we're going to stop really talking about the synergy number. We put a bow on it. We closed out M&I and then continue to still working. But I think embedded in what you see in our growth rate, and what we believe the promise was, is much larger. And I think it will continue. It's just natural cross-sell now, but it's bringing -- we love talking about merchant acquiring and core banking another than the asset of those banks. We like to think about the opportunities that we've got it by taking out larger capabilities across the company and delivering more product to the government vertical, you see the things that we're doing that neither company did before, but the two together did. And I'd say I simply always think that this is a completely different company fundamentally in its fourth year, a new company where we took the two growth rates and exceeded either one, and we'll do that for the rest of our life and with the exception of a pandemic. So I think it's bigger than we ever thought. And I think you'll continue to see it, and it definitely had an effect and dense effect of the difference in the growth rate. So we see the two combined companies and then from what we originally announced, and how it shows up in today's numbers. So thanks for asking that. It really does matter a lot. It's really, we are getting the benefits of what we told all we do, and it's better than we thought. Hey, good morning. Thanks for taking my question. Frank, another one for you as well. I was hoping to follow up on the growth in payments and networks and specifically, the 17% growth in North America credit account growth. I think this is several quarters in a row now, you guys have highlighted mid-teens growth there, and then you highlighted two additional wins. Can you just elaborate a little bit on what is going on in the credit issuer processing space? Like, you guys have a ton of momentum here right now. So kind of what's changed and what's driving that really strong momentum. Thank you. Yes. I think, as you've watched the evolution over time, I start with -- we love operating systems. We love our platform systems. And the investments that we made in Optis through the cycle, really has benefited us in the client's office. And I think it's the full enterprise capability that we bring. I think it's a single platform that we bring, its the modernization of the platform that we did over the past few years. And I think, we came and talked at 2020 Investor Day about the three large wins that were in the top 25. And then, we continue to add. If you remember, I've said to many, I believe, that we did think those three top wins were a very, very, very one-time unique situation. But we came back and said over the past year, we want as much as those three and then we followed on with these two wins that we're pretty darn proud of, on the rate card of Target and Desjardins. These are long-term big decisions for these issuers, long-term relationships. And I think the team has done an unbelievable job building out the platform, building out the capabilities, all the way from loyalty to use their interfaces. And so, I think, the fruits of this labor continue to come through. And that will be a ramp like the last one. Yes. Hey, guys. Great job. And, I guess, my question, within the Acceptance segment, the gap between revenue growth and volume growth was pretty massive. It was 10%, which might be the biggest we've ever seen potentially. Is that the mix of SMBs, like you're actually seeing SMBs really good? Is it just more products sold the Clover? You talked about that. Is it pricing? Maybe talk a little bit about that? And then is that sustainable through 2023? Yes, Dave, it's Bob. Thanks for the question. The answer to your question is, yes, it was those items. Obviously, we're continuing to see great growth in the business. We've talked about the key drivers of growth, getting more merchants, selling more to merchants, the value-added sales. You saw our penetration rate go up in Clover. We continue to build out our direct sales channel. The integration of Bento into the Clover solution significantly increases the ARPU. And then, we saw some benefit of value-based pricing, so kind of across the board doing very well. And that's both in the SMB as well as in the enterprise markets for us. Am I going to suggest we'll continue that 10% every quarter going forward? No, I wouldn't lay that out, but we see tremendous opportunity for continued growth. We call you back to our March investor call that we had on the merchant business. We think this is a $10 billion business in 2025 and 2022; the first year on that journey was right on track. Hi. Thanks for taking my question. Can you comment on growth in different geographies? I know Europe had seen some weakness previously. Where are you seeing the more robust growth across the globe versus some weakness? Yeah, Ramsey, definitely seeing some very nice growth across our three international regions. They are all practical purposes almost double, maybe a little bit better than double our US growth rate, continue to see tremendous contribution. The fastest growing region for us is certainly LatAm with good growth in Brazil and Argentina, particularly in the merchant space, but also seeing some nice traction and our credit issuing capability across the regions. We talked about expanding our reach with a large bank growing our reach in a number of countries in Latin America this past quarter. Seeing good growth in APAC both of those obviously smaller than our footprint in EMEA. But even in EMEA, we're seeing good growth, particularly in the issuer space. So all three regions contributing to the growth. And in total, our international business growing almost double the rate of our domestic US business. Great. Thank you for taking the question. Since distribution is one of your major advantages and super important to the Clover growth algorithm, you mentioned some of the various channels you have, the bank channel, direct sales, ISVs, ISOs. I was wondering if you could just give us an update on the mix in terms of where most of the new growth adds are coming from? And as a very brief follow-up, if you could give us an update on the US versus international mix for Clover? Yeah, Tim, I think the simplest way to tee that up is we're seeing actually growth across those channels. There are some ebbs and flows as you go quarter-to-quarter, et cetera. But broadly, we continue to sign more banks and get more merchants through that bank channel. We continue to build out our direct sales force, ISO is obviously -- our partner channel is obviously quite significant. ISV, our Clover Connect solution for our ISV partners is still adding ISVs in a meaningful way. We talked about some of those numbers in our prepared remarks. So the benefit for us is the broad distribution channel isn't that one is growing faster than the other and they're offsetting each other. It's that we just have a broad reach and we can grow across the board. And overall, Clover continues to grow. You heard us quote 25% growth in 2022, nicely on our path to our $3.5 billion plus goal for 2025. And international is certainly part of that. In 2023, we'll continue to get some nice growth there, in particular with the Deutsche Bank joint venture now live and beginning to provide some growth for us. Hi, guys. Nice job this quarter. I just want to look at the -- Frank, when you look at the strategy for the merchant growth to continue and you see how strong some of the assets like Clover and Caret have been. Maybe talk to us about the next couple of years of your view of what could drive that growth to continue at, what seems to be above industry levels. And it looks like you mentioned services and value added, but it looks like pricing probably played a part as well in the merchant revenue growth rate. Is that continuing? Last one is just for Bob on the segment growth rates. What are you guys thinking about for the year ahead in terms of merchant or really all three segments embedded in the guide? Thanks, guys. Let me take the first part. First of all, on all the indicators that we talked about in March relative to our merchant business, we see that as visibly as we saw it back in March, the opportunity. I do think, this is about an operating system. It's about platforms. And with that software capability that we bring, obviously, value-added services changes, our growth rate. As I said on this call, I think that we've made a big point of getting off of yield. And as I hope you could see we did get off of it, because we were going a different direction. We just think that ultimately, we're going to bring more product in and the mix of our business is different. I think when you take a look at this business, when you're running it the way we do, when you're bringing more stickiness, more clients, limiting attrition through those value-added services, you also have pricing opportunity and we definitely have value-based pricing that is not having any effect on our attrition rate, because we're really delivering multiple products into the clients. That's why we think a lot about ARPU and LTV around these. So it will be continue to invest in value-added services. We love distribution partners. We love them. We love direct sales. And our distribution partners, I think we have the largest sales force of agents out there. I think our retail ISO business, you remember, when we say ISO in that dimension, I'm really talking about retail ISO way more than wholesale, which we really highlighted more in the processing space. So vision to invest in software, continue to drive software sales, continue to grow distribution, continue to grow our own direct distribution and obviously, drive to $10 billion, which is clearly in sight and the other indicators we talked about. And Darrin, in terms of the 2023 outlook by segment, you heard the full year we expect to be kind of in the 7% to 9% range. The baseline does assume a mild consumer recession, which obviously will impact our Merchant segment more than our Payments and Fintech that tend to be more high recurring revenue. I would say that our Merchant business will probably be at the top end, maybe above the top end of our 9% to 12% medium-term guidance. In our Fintech space, we did 5% in 2022. I'd expect that to continue to be in our range of 4% to 6% that we provided for medium-term guidance. And in the payment space, which was 9% in 2022, actually above our guidance range. I think we'll be at the top half of our medium-term range of the 5% to 8% as we exit 2023. Hi, guys, good morning, and congrats on the solid results here. Frank, I just want to ask you about the mild recession that you're expecting. Are you seeing any signs of that today, or are you just reading the tea leaves? And maybe you can talk about the timing of the potential recession as you see it? Well, first of all, I'm not calling for a mild recession. That's in our baseline, right? I thought I'd be very clear on that. And I mean there are plenty of people, including Bob that would say statistically, we already have seen our recession given the contraction in GDP we saw last year. But I would treat it like we built that into our baseline. And to the extent that doesn't happen, we have expectations on the high end at minimum is how I would think about that. I mean, I think we're not right now feeling that element. So it was not a forecast that recession as much as a planning baseline to consider all scenarios. And Bryan, I'd add, obviously, it's, what, February 7th. January came in well, good. There is certainly some benefit of comparisons January last year. We were actually coming back out of COVID in a couple of spots. And so it's a little bit easier that will moderate a bit as we go through February and March, but things seem to be generally holding. And if you listen to the talking heads on TV or read Wall Street Journal or FT or whatever, there's more folks now talking about maybe not a recession. We think the baseline is a slowing of the GDP, and that's obviously, US -- 84% of our revenue is US based. Obviously, Europe, particularly in the UK and Germany are seeing a tougher economic environment. Who knows what happens with China. And for us, China directly isn't an issue, but the implications, particularly in APAC. So we think it's appropriate prudence to have that baked in. And it's tough to know whether we'll have a mild recession let alone when. But right now, things are holding. Thank you. Good morning. With fourth quarter organic revenue growth of 12%, well above your midterm guide and annual guide for next year of 7% to 9%, how should we think through the cadence of organic revenue growth and margin expansion, thinking through the higher supply chain and wage inflation you had in the first two to three quarters of last year, combined with any callouts on periodic revenue comparisons. Yes, Dave, in port element, I think that the easiest way to think about this. So maybe the most straightforward way to think about that is to look at some of the ebbs and flows that we had in 2022. Obviously, fourth quarter margin came in quite strong. Inflation eased as we ended the second half of the year. So it's a different comparison point. Margins will expand better in the first half, first 90 -- excuse me, first nine months of 2023 than they did in 2022 because of that timing. Certainly, from a periodic revenue standpoint or a non-recurring revenue standpoint, Q3 of 2023 will be against a much easier compare, which was 1% in Q3 of 2022 that jumped to 8%. So you'll see variations like that. I don't necessarily see anything in 2023s results hat's going to drive great variation. So it's more against the comparisons. Of course, other than broad economy and that manageable timing of when a recession might actually hit. But given that, it is expected to be mild. You're not going to see shocks like we did in 2020 in second quarter when the world just shut down, knock on wood. Well, I'd like to thank everybody for your attention today. Please feel free to reach out to our Investor Relations team with any questions, and have a great day, and thank you for your time. Thank you all for participating in the Fiserv fourth quarter 2020 earnings conference call. That concludes the call for today. Please disconnect at this time, and have a great rest of your day.

EarningCall_399

Good morning and welcome to the Kyndryl Fiscal Third Quarter 2023 Earnings Conference Call. Currently, all callers have been placed in a listen only mode. And following management's prepared remarks, the call will be open for your questions. [Operator Instructions]. Please be advised that today’s call is being recorded. I would now like to turn the call over to Lori Chaitman, Global Head of Investor Relations at Kyndryl. Thank you. You may begin. Good morning, everyone and welcome to Kyndryl’s earnings call for the quarter ended December 31, 2022, the third quarter of our fiscal year. Before we begin I'd like to remind you that our remarks today will include forward-looking statements. These statements speak only to our expectations as of today. For more details on some of these risks, please see the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2021. Kyndryl does not update forward-looking statements and disclaims any obligation to do so. In today's remarks, we will also refer to certain non-GAAP financial measures. Corresponding GAAP measures and a reconciliation of non-GAAP measures to GAAP measures for historical periods are provided in the presentation materials for today's event, which are available on our website at investor.kyndryl.com. With me here today are Kyndryl's Chairman and Chief Executive Officer, Martin Schroeter; and Kyndryl's Chief Financial Officer, David Wyshner. Following our prepared remarks, we will hold a Q&A session. I'd now like to now turn the call over to Martin. Martin? Thank you Lori and thanks to each of you for joining us today. Kyndryl is continuing to drive progress both as the world’s leading provider of IT infrastructure services and as an independent public company. On today’s call, I will update you on our strategy and the meaningful progress we have made on our 3A's initiatives, alliances, advanced delivery and accounts. David will then provide you with a more detailed review of our financial results and discuss our full year 2023 outlook. Our transformation is well underway and I'm proud of what our teams have accomplished. The essential non-discretionary nature of our business provides our revenue streams with some natural insulation to macro factors. As a result, demand for our services remain stable across the markets we serve. Equally important and independent of the broader economy, our continued execution on our 3A's is delivering the benefits we need to strengthen our overall business performance and drive us to profitable growth. Our continued progress combined with the nature of our business should ultimately allow us to regularly return capital to shareholders. I'll circle back on this topic in a few minutes. It's been about 15 months since we became an independent company and the world's largest pure play IT infrastructure services provider. We employ nearly 90,000 people, we operate in over 60 countries, and we serve thousands of customers. We address a large and growing market through our array of practices and services offerings. With 30 years of mission critical experience, we have unmatched technical expertise in managing complex hybrid IT environments for large organizations. And in our business, scale matters. It gives us the ability to invest in leading technology, advanced delivery and automation, enabling us to expand our competitive advantage as well as our comparative advantage over insourced infrastructure management. In this environment, we've been successfully executing our 3A initiatives to drive business performance and we're on track to deliver on our fiscal 2023 milestones. As a reminder, we provided targets of $1 billion in signings tied to hyper scalar alliances this fiscal year, 200 million in annualized cost savings from advanced delivery by fiscal year end, and 200 million of annualized pretax benefit from our accounts initiative. And our transformation work will not be done after this fiscal year. Over the next few years, we expect these initiatives to generate $1.6 billion in annual benefits. In the first nine months of this fiscal year, we generated 750 million hyperscaler signings, putting us right on track to achieve our $1 billion year one target for our alliances initiative. The number of customer contracts that now include a hyperscaler related component has tripled since the start of our fiscal year. We've also continued to increase our hyperscaler certifications on top of our existing IBM cloud certifications to nearly 32,000, a 98% increase from a year ago. Our Advanced Delivery initiative has freed up over 4500 delivery professionals this year to backfill attrition or address new revenue opportunities. At the same time, it's generating annualized savings of more than 225 million, surpassing already our 200 million fiscal 2023 year-end objective. And in our accounts initiative, we're addressing elements of our business with substandard margins. In many cases, we're driving margin growth by expanding the scope of work and optimizing our cost base through automation and greater standardization. We're now realizing pretax benefits of more than 130 million a year and progressing towards our 200 million a year year-end run rate goal. Similar to last quarter, I want to share some customer success stories that demonstrate our team's execution on our 3As. The underlying theme among these examples is that the combination of our broader ecosystem and expanded capabilities is resonating with our customers and providing Kyndryl with new revenue streams and higher margin opportunities. Through our alliances initiative, we want a new relationship valued at $170 million to provide Kyndryl Consult Services and migrate workloads to a modern hybrid cloud infrastructure for a company in the services industry. Additionally, with an insurance company who's been a long term customer of ours, we've expanded our scope of work to include cloud migration and hyperscaler services in order to accelerate their digital transformation and drive efficiencies. And for an industrial manufacturer, we're integrating our customer’s IT operations into a hyperscaler ecosystem. In Advanced Delivery, we've increased resiliency by more than 75% for a global consumer products company, enhancing system stability and availability. For an industrial company, we've created an opportunity to generate approximately 15 million incremental annual revenue by expanding the scope of work to include network and edge automation. And for a global energy company, we reduced our staffing by 24% and increased system stability through automation and new ways of working. In Accounts for a large transportation company, we're increasing our gross margin by 50 percentage points by rescoping our contract to those areas that make economic sense for us. This new contract will add $14 million in gross profit over the next five years. With the leading manufacturer, we extended our contract with a 25 percentage point increase in gross margin through delivery efficiencies, automation, and changes in scope. And for a major technology company, we renegotiated specific elements of our contract prior to expiration to bring more flexibility to both our customer and Kyndryl. In the process, we're realizing an increase in gross profit of more than $25 million over the life of the previous contract. Many of us at Kyndryl are regularly engaged with CEO's and CIO's of large organizations, which gives us insight into the technology challenges they face and the opportunities they see. This helps shape our view of the market and how we can evolve to meet our customer’s needs and objectives. Here's what we're hearing. From financial institutions to manufacturers to transportation providers, virtually all firms operating at scale also need to be technology driven companies relying on IT infrastructure to operate and go to market. Hybrid IT environments will continue to be the norm for most large organizations, and putting the right workload on the right platform will provide ongoing opportunities for cloud migration and optimization. While enterprises are continuing to modernize their IT estates, many have already tackled the simplest transitions as it relates to cloud migration. As a result, their progress increasingly relies on complex optimization work in order to advance enterprise innovation. Cyber threats are proliferating and cyber hygiene and resiliency are as important as ever to companies and their boards. 5G, AI, and data optimization are evolving in ways that will likely drive technological development and investment for the remainder of this decade. This includes both the machine learning associated with managed infrastructure services and companies operational and go to market use of AI. Organizations are looking to better tailor their employees tech experiences in order to drive productivity and engagement. And lastly, companies are optimizing automating and engaging with service providers to save money in today's more restrained economic environment. Each of these trends plays to our strengths. They present Kyndryl with opportunities in both managed services and advisory work and position us for sustainable profitable growth. We are working with our customers around the world to address these macro trends through our practices, through our scale and established presence in lower cost markets, through innovation driven by Kyndryl Bridge, Kyndryl Vital and Kyndryl Consult, and through our global alliances with leading technology companies. We are very excited about how technology is evolving and the role Kyndryl is playing in that evolution. As I mentioned, our alliances are an important element of our business transformation. With our freedom of action as an independent company, we've built an ecosystem that is more relevant to our customers and allows us to provide higher value services that we weren't able to provide before. Our long standing relationship with IBM continues to be important, but so are our significantly expanded top tier alliances with Microsoft, AWS, Google, Cisco, Dell, Oracle, Red Hat, SAP, VMware and many others. We're building on these relationships and seizing new growth opportunities often with our existing customers. Over the last year, we've co-created and launched new capabilities with our alliance partners and doubled our hyperscaler related deal pipeline. In November, we hosted our first ever Alliance Leadership Summit where our senior leaders and our alliance partners engaged in collaborative discussions to accelerate joint go to market strategies and joint business outcomes. Our customer base and our credibility with our customers make us a highly sought after partner and we've chosen our technology alliances intentionally. This past quarter we expanded our relationship with AWS to support their new security solution tailored for industry and company specific needs. To accelerate cloud transformation projects, we're helping our customers leverage our relationship with Microsoft and Dell to implement and manage integrated hybrid cloud solutions. And we've been collaborating with Intel to design and implement private 5G networks for joint customers. In recent months, we've also given our customers and our alliance partners more clarity on how we'll collaborate and surface innovation. We branded these efforts Kyndryl Bridge, Kyndryl Vital and Kyndryl Consult. Kyndryl Bridge, our open integration platform is at the core of our technology strategy and transforming the way that we deliver our services. It'll enable -- it enables us to scale modern systems, management capabilities, integrating operational data, our intellectual property, our solution and partner offerings and insights through integrated AI operations. As a result, Kyndryl Bridge is how we help our customers manage modernization across their complex global IT estates. Since their launch in late September, we've already on boarded nearly 500 customer accounts to integrated AI Ops that are at the core of Kyndryl Bridge. Kyndryl Vital redefines how we engage with customers and co-create innovative solutions through a design led approach. Our ability to be an objective expert across an array of technologies allows us to advise and collaborate with customers in ways we could not when we were in IBM captive. And our vital methodology provides the foundation for a personalized result oriented environment to solve and create solutions in an easy to consume way. And Kyndryl Consult ties it all together, using Bridge and Vital to highlight our capabilities and our differentiation as we provide our customers with ways to handle their most vaccine technology challenges and make it easier for them to do business with us. Year-to-date, Kyndryl Consult signings have increased 32% in constant currency compared to the prior year period and they now account for approximately 12% of our revenue. With Bridge, Vital and Consult, customers are telling us that Kyndryl is showing up differently for them. This is creating opportunities for us to capture some of the larger addressable market now available to us and to grow our share of wallet with our customers. When I look back on Kyndryl's transformation to date, 2022 was a period of transition and building as we began to rewire our new firm. With that strong foundation, our progress continues. We're building a purpose driven company and committed to being a strong corporate citizen. In December, we announced our long-term target to reduce our overall carbon emissions to net zero by 2040 and committed to at least a 50% reduction by 2030 following science based frameworks. Our decarbonization plan aligns with our business strategies because we see opportunities to consolidate our legacy real estate and data center footprint as well as our supply chain to more sustainable infrastructures. 2023 will be a year of acceleration. We will continue to execute our strategy to drive profitable growth. We expect to make significant progress on our 3As initiatives as this is our fastest path to growing our business and delivering more value to our customers, employees, and shareholders. We will lean into the opportunities associated with the tougher macro climate and company’s enhanced focus on managing cost which aligns with what we do. And we'll continue to operate with our new mission, serving our customers in what we call the Kyndryl way, being restless, empathetic and devoted in our pursuit of operational, strategic, and financial progress. Looking beyond 2023, when most if not all of our separation related expenses and costs are behind us, we'll be driving our business towards sustainable revenue growth, significant margin expansion, and meaningful cash flow growth. We are committed to maintaining a strong investment grade balance sheet and we'll seek opportunities to further strengthen our credit profile. Given the nature of our business and once we've made clear progress in strengthening our margins, we'd expect to be in a position to ask our Board to evaluate returning capital to shareholders. We have the right strategy in place to do this and I'm confident we have the right leadership, talent, knowhow and partnerships to execute and transform our business. Now with that, I'll hand over to David to take you through our results and our outlook. Thanks, Martin and hello everyone. Today I'd like to discuss our quarterly results, our balance sheet and liquidity, the importance of our 3As initiatives and our outlook. Our financial results for the quarter ended December 31, our fiscal third quarter reflect progress on our top line growth efforts, external factors such as currency movements, and sequential margin expansion. In the quarter, we generated revenue of $4.3 billion, which represents a 2% increase in constant currency from our Pro Forma results a year ago, led by 19% growth in Kyndryl Consult and increased seasonal factors this year, including amounts related to customer contracts with minimum annual revenue commitments and seasonal variances in volumes. Demand for our services has remained resilient amid increased global macro uncertainty. Kyndryl Consult signings and revenue were both at record levels with Consult representing 20% of our total signings and 12% of our total revenue. Consult signings translate into revenue at a faster pace, given that they're more in-year project-based work compared to our longer-term managed services activities. Adjusted EBITDA in the quarter was $580 million. This represents an adjusted EBITDA margin of 13.5%. The year-over-year decline in our adjusted EBITDA margin compared to Pro Forma 2021 results was primarily due to currency, partially offset by higher revenue and benefits from our 3As. Adjusted pretax loss was $4 million. Currency movements had a negative year-over-year impact of $90 million on adjusted pretax income. As we've mentioned before, currency is having a significant impact on us because we have dollar-denominated costs in our global operations in addition to having international earnings. And our currency hedges in various contractual protections haven't fully offset the effects of the unprecedented dollar strengthening that occurred in 2022. Higher revenue and progress on our 3As helped to offset currency impacts and inflationary cost pressures. Among our geographic segments, we delivered year-over-year constant currency Pro Forma revenue growth in three of our four segments, and our strongest margins were again in Japan and the United States. Changes in exchange rates and how various IBM-related costs are impacting each of our segments under our commercial agreement with IBM complicate year-over-year margin comparisons by segment. We address our customers' needs not only through our geographic operating segments, but also through our six global practices: cloud, applications, data and AI, security and resiliency, network and edge, digital workplace, and core enterprise. Our business mix continues to evolve to reflect demand, with most of our signings, including Kyndryl Consult signings, coming from cloud, apps, data and AI, security and other growth areas. In short, if it weren't for currency movements this quarter, we'd be reporting year-over-year revenue growth and positive pretax margins. On a reported basis, however, currency is masking the operational progress we're making. And as I mentioned, while there's still significant macro uncertainty, we continue to see broad-based demand for digital transformation and infrastructure services. Turning to our cash flow and balance sheet, we generated adjusted free cash flow of $407 million in the nine months ended December 31. We've provided a bridge from our adjusted pretax loss to our free cash flow so far this year. Our gross capital expenditures have been $711 million year-to-date, and we've received $20 million of proceeds from asset dispositions. Our CAPEX has been somewhat front-loaded this fiscal year. Working capital is contributing to cash flow as we've stepped up our management of both receivables and payables globally. Our financial position remains strong. Our cash balance at December 31 was $2 billion. This is above the September 30 level despite our anticipated but significant use of cash for transaction-related payments in the quarter. Our cash balance, combined with available debt capacity under committed borrowing facilities, gave us more than $5 billion of liquidity at quarter end. Our debt maturities are well laddered from late 2024 to 2041. We had no borrowings outstanding under our revolving credit facility, and our net debt at quarter end was $1.2 billion. As a result, our net leverage sits well within our target range. We are rated investment grade by Moody's, Fitch and S&P, and we're happy to have the overhang associated with IBM's sale of its retained stake in Kyndryl behind us. On the topic of capital allocation, our top priorities are to maintain strong liquidity, remain investment grade, and reinvest in our business. As we've said before, we view being investment grade as a commercial imperative given the importance of this to our customers, many of whom operate in regulated industries. We're using the free cash flow we're generating this year to fund spin-related cash outlays, including required systems migrations. As Martin indicated, Kyndryl's business characteristics, combined with the contributions that we expect from our 3A initiatives over the medium term, should allow us to expand our margins, and that ultimately should allow us and our Board to consider regularly returning capital to shareholders, all while remaining investment grade. For fiscal year 2023, we're raising our revenue outlook and reaffirming our margin outlook from what we provided last quarter. We're increasing our constant currency and revenue growth outlook by 0.5 point to reflect the strength we saw in the third quarter and growth in Kyndryl Consult. And we're increasing our reported revenue outlook that will also reflect currency movements. On a reported basis, currency is impacting our top line by more than 7 points year-over-year, and we're now projecting fiscal 2023 revenue of $16.8 billion to $17 billion, which compares to our previous guidance of $16.3 billion to $16.5 billion. Currency movements have impacted our projected adjusted pretax margin by roughly 150 basis points year-over-year. As we head into our fiscal fourth quarter, we're driving operational progress to mitigate external headwinds. On the positive side, and importantly, we continue to grow the P&L benefits that our 3A initiatives are providing, and we're managing costs carefully. On the flip side, currency and energy cost pressures remain, the seasonal uplift in revenue we had in Q3 won't repeat in Q4, and our IBM software costs increased with the start of the new calendar year. In aggregate, these items point us toward the midpoint of our full year guidance. Our focus is on delivering the benefits we anticipated from our 3A initiatives, while we invest to drive innovation and future growth. From a cash flow perspective, we're now projecting roughly $800 million of gross capital expenditures in fiscal 2023 compared to about $900 million of depreciation expense. For us, the March quarter is a seasonally soft period for cash flow, driven by the combination of earnings seasonality and required annual software licenses and other prepayments. Looking ahead, we plan to provide full year fiscal 2024 earnings guidance when we announce our full year fiscal 2023 results in May. Over the medium term, we remain committed to returning to sustained revenue growth by calendar 2025, delivering significant margin expansion and driving free cash flow growth. We also expect to mitigate the effects of recent currency movements over time, even if exchange rates don't revert back towards historical norms. We have a solid game plan to drive our strategic progress and this game plan starts with the steps we've already taken to expand our technology partnerships and with the meaningful initiatives we're implementing this year. As Martin mentioned, we continue to progress on our 3As initiatives. Our momentum supports our expectation that our Alliances initiative will drive signings, revenue and over time, roughly $200 million in annual pretax income. Our Advanced Delivery initiative will drive cost savings, equating over time to roughly $600 million in annual pretax income. And our Accounts initiative will drive annual pretax income of $800 million. We're also driving growth in Kyndryl Consult and among our global practices, which is incremental to the benefits coming from our 3As initiative, and we see opportunities to control expenses throughout our business. We expect that these efforts over time will contribute roughly $400 million in annual pretax income. As part of these efforts and with the restrictions in the employee matters agreement related to our spin having expired, we can and will look at potential actions to reduce our expense base and foster increased productivity. In total, the magnitude of the earnings growth opportunity we're tackling is tremendous, relative to our current margins. Progress on our 3A will therefore, be a central source of value creation for Kyndryl. And for any investors who have been following the Kyndryl story, I've included an updated version of a slide we first published in May. It's a slide that provides a breakdown between our margin-challenged focus accounts and the rest of our business. As you will recall, our aggregate results obscure the fact that within Kyndryl, we started with a strong $10 billion business, which we refer to as a blueprint for how we want to operate. This blueprint consists of accounts that represent about 60% of our revenue, generate average gross margins north of 20%, and reflect our ability to get paid appropriately for the mission-critical services we provide. Our other roughly $8 billion of focused accounts revenue generates virtually no gross margin and after SG&A expenses is losing money. Our accounts initiative is all about the opportunity to make our focus accounts look more like the majority blueprint of our business over time by addressing elements of our customer relationships that generate substandard margins. Over time, if we close even half of the gross margin gap between our focus accounts and our blueprint accounts, we will generate the $800 million in incremental earnings that we've targeted from these accounts. That's why our accounts initiative is a major priority and a major opportunity for us. To realize this opportunity, we're paying close attention to the margins on signings for both our focus accounts and our blueprint accounts. Since the beginning of our fiscal year, the overall expected gross margin on our signings has been in the low to mid-20s, which means that the pretax margin has been in the mid to high single digits. The December quarter was a continuation of that favorable trend. We're achieving this exactly as we've intended and as you'd probably expect. In our Blueprint accounts, we're delivering increases in expected margins of 1 point or 2. In our Focus account signings, we're dramatically changing our margin profile with the average gross margin moving to the low to mid 20s, which is within a few points of where Blueprint accounts operate. In short, our strategy is driving the results we've targeted. What that also means is that if our P&L for the next few quarters reflected only our recently signed deals, we'd be operating at mid to high single-digit adjusted pretax margins. But because of the prevalence of multiyear contracts in our business, most of our revenue is still coming from lower-margin pre-spin legacy signings. As a result, in our aggregate numbers, you can't immediately see the benefits of a higher margins at which we're now pricing contracts. But that will change with time as our business mix increasingly tilt towards more post payment contracts. In closing, as an independent company, we're solidifying our position as a cost-effective gold standard provider of essential IT services. We're signing new contracts at higher projected margins, and we're executing on the strategies and initiatives that will drive longer-term progress, future growth, and stronger earnings in our business. With that, Martin and I would be pleased to take your questions. Hey, thanks so much. Good morning. I want to ask on the signings front, maybe you were just commenting on that, the signings were ahead of our expectations here. So can you maybe just elaborate on the better margin profile of the deals. So I know that David just went through some of that but I’m just asking because we get questions from investors all the time about clients focusing on cost cutting, so what does mean for pricing, etcetera but it sounds like you’re getting better pricing and better delivery, so can you just square that for us? Thanks. Sure, Tien-Tsin. That’s exactly right. On the signings that we have there were $3 billion of signings in the quarter. We’re seeing a mix that’s similar to our overall business. So far this year roughly 60% of our signings have been in Blueprint accounts, about 40% in Focus accounts. And what we’re -- what we’re, as I mentioned, what we’re doing is keeping the Blueprint accounts similar to where they’ve been, maybe up a point or two and really driving major progress on the Focus accounts. And the way we’re getting there is by running the plays, as we’ve called them, that we want to have to make our Focus accounts better. It can involve expanding the scope of relationships, having more Consult business associated with them. Sometimes taking elements of scope out that aren’t economic or that won’t be economic for us. As well as adjusting pricing to get there. And then the combination of those actions is producing exactly the sort of impacts we want to have on the margins associated with these accounts. In fact, one of the things we’re looking at and tracking internally is how much year one gross margin and how much aggregate gross profit we’re signing on our -- on the new contracts that we bring into the fold and add to our backlog. And we’re really excited about the gross margin and the gross profit that we’re adding with our sales and renewal activities. Alright, great. And thanks for going through that. Maybe my follow-up I’ll ask on the outlook. You did raise your revenue outlook by $500 million, the margins are the same. How much of the raise in the revenue was from upside to the third quarter versus a raise in the outlook, I heard Consult was doing quite well. And maybe just any comments on gross margin, which was quite strong in the third quarter. Curious of your thinking on gross margin in the fourth or ahead has changed, I know it takes time to feather in the gross margin changes from signings, but figured I’d ask it up front here? Thanks. Yes, when you look at the revenue raise, the constant currency revenue increase is about a half a point at the low end and the high end and the mid-point. So, the majority of the increase is in the absolute dollar forecasted revenue is due to currency, but we’re seeing about a half-a-point increase due to operational activity. I would say a fair amount of that was in the third quarter, but the Consult piece we expect to play out and favorably influence the fourth quarter as well. The Consult signings have been really strong this year and that should benefit us in the fourth quarter and even as we turn the page into fiscal 2024. I think the margin elements associated with the -- with the signings that we’ve had will come in over time. Some of the Consult business is, it tends to turn into revenues faster. And those margins will come through. On the flip side, when we extend a managed services contract sometimes that actually has 6 or 12 months to run on the preexisting contract. And that’s often the piece where it’s hardest for us to increase the pricing. We end up focusing on the pricing over the duration of the contract extension. So, if we have to sort of continue or near continue the pricing that’s already in place, we’ll end up getting some more of the aggregate margin in the later years or the non-first year of the -- of that contract extension. And that’s really why the margin improvement associated with signings layers over time. The other thing Tien-Tsin, thanks for joining this morning. I will add to David’s comment at a high level. I think what to me is particularly encouraging and I have been very impressed with how much this team has gotten done in a short period of time, we have brought high value offerings to market that really reflect where our customers want to take us, where they want us to help them. And so, what you are seeing here is a lot of momentum on the signings line because of the role we play in these environments combined with the work this team has done in creating high value offerings in the practices that we are taking to market. So this as David said, well these show up in the P&L over time but this momentum is continuing to build as we get ready to get back consistent revenue growth and as David pointed out, if just had in the P&L what we signed now we would already be at -- what we recently signed, we would already be at a really good profit margin relative to today. So, a lot of what you are seeing is the result of a team working very quickly given the role we play in our customer’s environments, very quickly to retool, bring to market higher value offerings that make us a solid part of our customer’s future. And that momentum I expect will continue. Hi, good morning. Nice results here. Martin, in your prepared remarks at the beginning you had said something to the effect of the business being naturally insulated to macro factors. Given the macros were topical, I was hoping you could elaborate on that comment? Sure, sure Jamie. So look, the role we play in our customer’s environments running mission critical systems does naturally insulate us from sort of the highs and lows if you will of a lot of economic activity at the end of the day business. And remember we serve the most important companies on their most important mission critical processes. These businesses have to stay and run their infrastructure seven days a week, 24 hours a day. That is the nature of what we do. And so while customers may have a different view of their economic situation going forward, they still have to run their infrastructure, and in fact as the economies, volatility -- as our customer start to plan for that volatility we sit right at the sort of the heart and the center of how they can be helped most because they look to us to help them become more efficient, they look to us to help them optimize, all of which helps them deal with the economic realities of their customers, their end users, or the markets in which they operate. So, we have a natural insulation because of what we do and really, I think a really positive way for us, we tend to thrive in environments where they get really focused on optimizing, they get really focused on productivity because that is what we do for a living. So, this is a good environment, a good demand environment for us, stable because of what we do today but a set of capabilities and offerings that can help them navigate what could be a more volatile economic environment. Got it. And then for my follow-up, David, this Slide 18 is really quite innovative. And it's really a good practice. So this is the one where you're talking about Blueprints versus the Focus accounts. And I apologize, I don't know this if you disclosed it, but what percentage now of the Focus accounts have you remediated and tried to reprice? And -- or if you have not disclosed it, is it possible through the disclosures you have to back into it in some way? Thank you. Sure. Thanks for the comments on Slide 18. I think it's really an important one. And what we really wanted to highlight, one of the things we really wanted to highlight on this call was the real progress we're making in signing or extending Focus accounts, amending those relationships, in a way that is substantially changing the profitability of Focus accounts and will substantially change it going forward. I think it's a really important proof point of execution by our team on the strategy we laid out. The way I would think about Focus accounts is that a lot of these are multiyear managed services relationships and working through the portfolio of most of the Focus accounts is going to be a four-year exercise, I think, with maybe a little bit of a tale of a few longer-term accounts that are on there. And we're nine months into that four-year exercise. So that would -- the math associated with that would be 20-ish percent. I think there are two additional things going on. First, the first few months of that, it's a ramp-up period associated with it. And as a result, we may not have had a full nine months of progress there. On the flip side, we are finding opportunities to make progress on Focus accounts even before they come up for renewal by adding scope, by adding consult business in there, and that's going to be helpful to us. And I think that puts us in a position where, over the next 12 months, the opportunity in front of us is to make ideally an outsized amount of progress relative to the overall four-year play that we're going to have. Good morning guys, great quarter. Just talking about the Focus accounts and the Blueprint accounts, I actually was wondering if you could give some color on the specific markets, if that is one of the areas we could talk about, where the Focus accounts are somewhat like -- where they're kind of growing, because when I look at your EBITDA margin, U.S. is in a good shape, it's the principal markets that need a little bit of margin expansion. So would your Focus accounts be in those markets or would that be a thing for later? Yeah hi, Divya. Thanks for calling. Look, the Focus accounts are kind of spread around the world. There's not one location where I'd say that we have the most or the few as it is. It is pretty well spread. So we have opportunity in each of the markets to improve our margin profile. Now having said that, with them spread, we do have a slightly disproportionate share in Europe, which is what you -- which was a big part of what sits in those primary markets. So slightly more, but nothing that says we don't have opportunity everywhere. As for sort of the other view of markets, there's obviously a geographic view, right, the country view. But the other side of this, and David talked about this, I thought quite well, the offerings we're bringing in are reflective now of the value we're creating in spaces like cloud management, in spaces like security and resiliency, in spaces like data applications in AI. So the country is pretty spread slightly disproportionately, heavier in Europe and other places. But what we're bringing into these relationships in this -- in a hybrid cloud world, is around the places our customers are going. And now we're getting paid quite well for the value we're creating in, again, data and AI, security and resiliency, etcetera, etcetera, etcetera. So hopefully that adds a little color for you. That's helpful. We look forward to the progress. If I can shift some gears here and ask a question on your overall debt profile and your expected leverage levels, that would be helpful here? Sure. Our net debt right now is around $1.2 billion, a combination of $3.2 billion of debt, minus $2 billion of cash on the balance sheet. And as we think about it, we really -- we'd like to keep our net leverage in a range of zero to one times EBITDA. We're well within that range right now, and we think that's appropriate for the business, particularly now -- during a period of time, while our margins are still a bit challenged and where we need to make progress. So we've been targeting zero to one times leverage and remaining investment grade and continuing to improve our credit profile over time is very important to us. Thanks Divya. Alright. Let me -- sorry, operator. Let me just thank everybody for joining us today. As you can tell, I hope from our prepared remarks as well as from the Q&A, we've made an enormous amount of progress in a relatively short period of time, both with the 3A initiative as well as what we've talked about as well in -- for the last year, the plus-plus, which is getting our consulting business to grow much, much faster, which is being successful and focusing, obviously, on expense management as we retool how we do our work and put contemporary systems and contemporary tools in place. So I feel as confident as I ever have, given all the progress we've made. We are all excited about the opportunity we see ahead. And the role we play in the world in serving our customers' mission-critical systems is one that, regardless of the economic environment, is one that is going to need Kyndryl. So we're excited about the future. Again, thanks for calling. And operator, I'll turn it back to you. This concludes today's Kyndryl third quarter 2023 earnings call and webcast. You may disconnect your lines at this time, and have a wonderful day.